Built to Last or Built to Flip?

Is your business built to last or built to flip?  No question influences your business strategy more than this one.  There is no right answer — either strategy is fine.  However, making sure that you have alignment throughout your organization on this question is very important, particularly when taking on an investor.  Most private equity owners intend to only hold investments for three to five years.  In fact, Pitchbook is reporting that hold periods for private equity investments have reach an all-time high of 5.4 years in 2013.  This is most likely due to the difficulty in finding exits for companies bought in 2005 through 2008 which represent the bulk of the companies now owned by private equity, according to Pitchbook.

Median Hold Time (Years) for Private Equity Investments

Here are some high-level differences in strategy and structure between the two options: building your company to last or building your company to flip.  My investment fund, Greybull Stewardship, is built to finance companies that are built to last.  We have developed our structure and strategy to support companies that would prefer to be built to last.

Built to Last or Built to Flip?

 

Build to Last

Build to Flip

Customers & Revenue

Revenue always critical, but more willing to “fire” customers that are not aligned with the company

Any and all revenue is good revenue as long as it contributes margin; little consideration of any other factors

Costs

Willing to do what makes sense over a longer term time horizon

Shorter time horizon for payback

Growth Rate

Fast growth is good, but more willing to forego growth for long-term sustainability

Faster the better

Employee Equity

Will orient employee equity and profit-sharing to long-term value creation and balance near-term and long-term gains

Will focus employee attention on an exit with tools such as stock options that really only have value upon an exit

Ownership

Finding sources of long-term or permanent capital aligned with long-term value creation; Greybull Stewardship is one option

Private Equity or Venture Capital

Culture

Willing to establish more unique cultures that reinforce competitive advantages

Only what’s needed to attract new employees

Employee Development

Preference to promote from within b/c have time

Bring in outsiders who can contribute quickly

Tax Structure

More likely to earn financial returns from a combination of ongoing profits and maybe eventual exit; leads owners to select single tax of flow through entities (S Corps or LLC’s) for tax efficiency

C Corps are the usual choice to make gains be capital gains at a lower tax rate

Debt

Prudent use of debt to avoid debt-created problems

Tempted to maximize debt and minimize equity to maximize returns

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