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How to de-risk your position

People talk a lot about risk, particularly in the business world. I had an early lesson in risk-taking when I worked for a bookmaker while I was at university. Taking in bets, you assess your own position all the time, weighing up how much you stand to win or lose depending on the performance of a horse in a race. If the risk gets too high, you act to limit your exposure.

Parallels can be drawn with how business owners feel about Brexit. Anxiety about how the economy and trade may be affected has many entrepreneurs considering their own circumstances. Many will be thinking about how much they have tied up in their business, and, if things change, whether they’ll be able to get that wealth out. It’s no surprise some are thinking about de-risking their position to give themselves more flexibility.

How can you de-risk?

What can entrepreneurs do to protect themselves? One option is to slow down the growth of your business and put plans for reinvestment on hold. You can instead opt to pay yourself a special dividend. But there’s risk here. There could be a negative impact on the business’s later worth. By thinking short-term and taking profits out as dividends, you may free up cash today, but you’re potentially capping long-term capital value.

Sometimes, founders decide to de-risk their position completely by selling their business. In this situation, I would always ask the fundamental question: “Why do you want to sell?” If they feel they’ve had enough, it’s valid to want to sell up. Maybe there’s an enormous amount of money on the table, and it’s hard to refuse such an offer. An entrepreneur might realise he or she has reached a ceiling in terms of their ability to grow the company. Some founders may admit their business hasn’t grown as they’d hoped, so they want to cut their losses, and take some reward for the effort they’ve put in.

But, ask yourself this: are you still passionate about the business you’ve built? Are you considering a sale because you think it’s the only way to free up capital to secure your position? Then, pause for a minute. Because there is an alternative.

Replacement capital

It’s not possible to eliminate risk completely from your life, but you can arrange to have a level that’s comfortable for you. And selling a stake in your business can allow you to make your personal position more secure, whilst allowing your company to grow. Replacement capital is the amount a private equity firm will pay for a stake in a business, while still leaving the founder with equity that’s valuable too. For many, it can be the best of both worlds – putting money in the bank for personal use, while still pursuing ambitious plans for the company.

When we talk to entrepreneurs about the idea of a replacement capital deal, many aren’t aware it’s possible to sell a stake rather than the entire operation. And that if they do it comes with a partner with contacts, access to great networks and new recruits, plus experience of the challenges of growing a business. An investor can help to take away some of the day-to-day headaches, while introducing new insight, expertise, and talent into a team. Founders can become bogged down by management issues, but often they rediscover the enjoyment of running their company once they gain the support of a valuable partner.

Learning by example

With our experience of working with more than 100 companies, there are plenty of examples where we’ve helped owners de-risk their personal position, while still growing their company. Take Wiggle, the online cycling retailer. The founders Harvey Jones and Mitch Dall were ambitious for the business, but also wanted to realise some of the value in it. Livingbridge took a minority stake, bolstered the management team to support Harvey and Mitch as the business grew, and helped fund overseas expansion. Turnover increased from £11 million in 2006 to £87 million five years later, with the company becoming a leading online cycling and tri-sports retailer in the UK, as well as selling all over the world.

De-risking by selling a stake in your business can encourage risk-taking. You can take money out to do whatever you wish – pursue other investments, pay off the mortgage, put cash aside for your kids or pension. But you can also afford to be bolder in the business, since you’re more secure personally, and have the support of a well-resourced and experienced backer behind you.

The right investor will help you look at the business differently. They might introduce you to opportunities you hadn’t considered before. Having a partner alongside you who’s ambitious for the business means you can keep focused on continuing to grow it. And, the goal? To substantially increase the value of the company over the next few years so that you when you think about selling a further stake - or the company as a whole - you are in a strong position to do so.

The risk of not considering replacement capital is selling your business too early and failing to optimise the value you’ve created. Working together with the right investor can drive a company’s growth and future potential, and could be a great opportunity both personally and professionally. And that’s a gamble many business owners think is well worth taking.

 

If you would like to know more about how we can help business owners de-risk please contact investments@livingbridge.com