Newcastle Consolidation
If a small company has real growth potential and is willing to join others and become one of several participants in a much larger organization, the fifth way of selling the company that involves consolidation and selling it to a large corporation or the public masses, should be considered.
Consolidation means merging the small company with other companies in the same industry sector, and most times same sub sector, to become a larger organization. As a larger corporation, with more revenue, earnings, capital access, and skilled management, the organization has greater growth potential. As a consolidation, the small businesses become more appealing to the public masses and a greater acquisition target of large corporations. The size as measured in revenue and EBITDA, management team expertise, and growth potential of the corporation (referred to as “Critical Mass”) matters as they create value. The greater the consolidated corporation’s value the higher market value and share price. How large the consolidated corporation can become in the future with an influx of new capital and management team members will also determine value.
A Newcastle Consolidation requires several small companies to exchange their stock for cash, stock and/or promissory notes. The stock small business owners receive is securities of the consolidated corporation. The consolidation takes place at a single merger closing event; thereby instantly creating a large corporation consisting of the combined revenues, profits, management and employees of several small companies. Each small company becomes a wholly-owned subsidiary of the large corporation. The consolidated corporation becomes a holding company of the small companies. With Critical Mass post consolidation, the consolidated corporation instantly has greater value. The holding corporation’s securities as formed by Newcastle may be publicly registered at consolidation or soon thereafter, -- creating even greater value.
Consolidation, however, requires integrating several small companies into a “well oiled” corporate machine. This means continuity among levels of management, agreement on “best practices”, policies and procedures, implementation of processes, systems, and technology, agreement on strategic plans for growth, and leadership at all levels of the organization. The entrepreneurs participate in the selection of the new, skilled management of the holding company, a lean executive team that has large corporate management expertise and “Wall Street” credentials. These professional leaders mentor the small business owners through the change and integration…transforming there business from an entrepreneur’s to a corporate culture. The success of consolidation largely depends on the success of entrepreneurs’ transformation to the corporate culture. Once this can be achieved, the successfully integrated corporation attains even greater value…as it is positioned for development, growth and synergistic expansion. The result…perceived value by the market, public, and large corporate buyers.
As a member of a large consolidated corporation, entrepreneurs can receive a much greater price for their company. Generally speaking, by being a constituent of a large consolidated corporation, a small company owner can command 3 to 5 times the value achievable in selling through the first through fourth exit strategies simply because it has greater Critical Mass as a wholly-owned subsidiary of the large consolidated corporation. The Critical Mass is key to creating value and becoming an acquisition target of a large corporate buyer. If the consolidation becomes a public corporation, a small company owner may achieve even higher value…as much as 5 to 12 times more. In addition, small company owners can become semi-liquid by borrowing against their public stock and liquidate their position over time thereby benefiting from a tax planning perspective.
Through a Newcastle Consolidation, the owner of a small company may earn more stock in the consolidated corporation over time and achieve greater returns. As the small company’s revenue grows and is shared with the consolidated holding corporation and as the entire enterprise’s value increases, the small business owner and employees earn additional equity in the organization according to a performance-based “earn out” formula and stock options. This causes the small business owners and their employees to remain active and committed to increase the consolidation’s value over the long term. Based on this commitment, market makers feel confident that the consolidated small businesses will have incentive to grow revenues and enhance relationships with customers and suppliers…the basis of driving financial performance and creating value.