Private-Company CEOs Make Serious Plans to Monetize the Value of Their Business

PricewaterhouseCoopers' Private Company Trendsetter Barometer tracks the business issues and standard industry practices of leading, privately-held U.S. businesses. It incorporates the views of 251 executives (CEOs/CFOs): 151 from companies in the product sector and 100 in the service sector, averaging $191.2 million in revenue/sales, and including large, $300M plus private companies.

Apr 07, 2010, 08:00 ET from PricewaterhouseCoopers

NEW YORK, April 7 /PRNewswire/ -- As the economy continues to recover, approximately 72 percent of CEOs interviewed for PricewaterhouseCoopers' Private Company Trendsetter Barometer survey have plans to monetize the value of their business, many of which are developing plans to exit their businesses over the next 5 years.

Overall, 46 percent of Trendsetter CEOs plan to monetize their business with the intention of a sale -- either to another company/strategic buyer (41 percent) or to a private equity firm/financial buyer (24 percent).  The second major pathway, cited by 36 percent, involves a transition to a family member (21 percent), a management buyout (12 percent) or an ESOP (10 percent).  

In terms of a sale, small companies (less than $100M annual revenue) greatly outpace large companies ($100M annual revenue or greater) at 60 percent versus 24 percent, respectively. Additionally, small companies also outpace their larger counterparts with plans to sell the business to family members, management buyout or an employee stock ownership plan (ESOP) at 45 percent versus only 21 percent, respectively. Interestingly, only four percent of all companies plan to monetize their businesses through an initial public offering (IPO).

"The number of small business owners planning to monetize the value of the business through a sale is another positive indicator for future M&A activity," says Ken Esch, partner with PricewaterhouseCoopers Private Company Services practice. "However, many expect there will need to be a further thawing of the credit markets before we begin to see transactions close."

The time frame for monetizing the value of their business is reasonably short-term: 38 percent over the next 5 years and 36 percent in 6 years or longer.  One-quarter were not sure or not reported.

Why Companies Are Monetizing

Interestingly, 66 percent of leading private-company CEOs planning to monetize their business over the next five years cite their primary reason as a desire to diversify their own net worth and create liquidity. Only 28 percent cite their primary reason as financial difficulties, while another 43 percent identified a want, or need, to retire. More small firms cite retirement as a primary reason (59 percent versus 11 percent).

Merger and Acquisition Plans Get Serious

Concurrently, 21 percent of private companies surveyed reported serious plans to make business acquisitions or mergers over the next 12-24 months. Larger businesses outpace smaller companies in citing M&A plans (24 percent versus 18 percent, respectively). The 60 percent of companies who reported they are not seeking a merger or acquisition over the next 12-24 months primarily cite their reasoning as being comfortable with their current internal growth (57 percent).

"The survey responses indicate there may be an increase in strategic acquisitions by larger companies, which is a positive force in the M&A market when coupled with sellers looking to monetize their business," adds Esch. "Now that the economy seems to have stabilized, strategic buyers are looking at this as an opportunity to expand geographically or to increase their portfolio of products or services."

The majority of companies planning a merger or acquisition over the next 12-24 months have identified achieving greater market share or dominance as their primary goal (79 percent). Entry into a new market and gaining economies of scale followed at 60 percent and 51 percent, respectively. Interestingly, only 32 percent of these companies cite sharing rising costs or expenses as a primary reason, and of those companies who are not planning any merger or acquisition activity, only one-third (32 percent) identified capital constraints as a primary issue.

Over the next 12-24 months, 30 percent of these leading privately-held businesses seriously plan to complete alliances (14 percent), joint ventures (6 percent) or both (9 percent). Similar to those companies planning mergers or acquisitions, a primary reason for seeking alliances and/or joint ventures is new market or business entry (76 percent) and extending customer base (65 percent).

"In addition to strategic acquisitions, many companies are looking to alliances or joint ventures as a way to accelerate revenue growth," adds Esch. "Alliances and joint ventures also provide companies a way to access high-growth markets, such as China, Brazil, India or Russia, where they don't have much experience doing business."

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