What are the common reasons for a shareholder to request a buyout?

Investors and founders must navigate a delicate relationship to enable each other to drive their company to greater heights and create value for everyone involved. Both parties can embark on this journey only when they have shared goals and confidence in each other’s abilities and qualities.

However, investors must eventually end their journey with their portfolio companies. Their reasons for requesting a buyout could be strategic or personal. Some may need liquidity. Some may want to explore other opportunities, and others may think it’s time to hang up their boots for good.

Understanding the motivations behind shareholder requests for buyouts is crucial for maintaining healthy investor relations and ensuring smooth transitions when paths diverge.

In this article, we will explore the different reasons shareholders request a buyout and how you can arrange a buyout. Read on to know more!

Investors reeling for liquidity

Bain & Company reported that the global buyout-backed exit value has declined by 66% from 2021 to 2023. Difficulties in making exits has made investors apprehensive of making new investments. The focus is completely on ensuring exits. This is backed by the fact that 26% of the dry powder in 2023 is at least 4 years old. This figure was only 19% in 2020.

From 2022 to 2023, there was an 83% increase in the average size of buyout funds closed globally, however, the number of buyout funds closed globally fell by 38%.

However, there is some respite for investors. Although the private equity capital raised in 2023 was the lowest since 2018, buyout funds raised 18% more capital from the previous year.

Why do shareholders request buyouts?

Some of the reasons why shareholders can request buyouts are:

Preference for short-term investments

Startup founders must understand that not all investors have the desire or the capacity to stay invested up to or beyond the eventual listing. Take angel investors for example. Many angel investors are successful professionals in their late 30s to early 40s. They seek opportunities in the field in which they have built their career. Some may value strong leadership teams and some may prefer investing in startups with clear market potential. A common trait among these angel investors is their preference for exiting in the next funding round.

Although such investors have a considerable risk appetite, when compared to private equity firms and venture capitalists, they have limited funds and must liquidate their investments regularly.

Attractive acquisition offers

Angel investors are also likely to request buyouts when a startup is being acquired. The acquiring company may be happy to oblige since it will gain even more control over the business. In some cases, founders would like to retain a certain number of shares post-acquisition. So, founders, too, could make offers when a company gets acquired.

Emergencies

As mentioned earlier, angel investors have limited funds. Typically, by the time an investor thinks of angel investing, they already have a portfolio of low-risk investments, their insurance cover is sufficient and they have a significant emergency fund. However, life is unpredictable and issues like declining health and family emergencies could prompt such shareholders to request buyouts.

Succession planning

As shareholders head into their twilight years, they must give serious thought to succession planning. Whether they can simply transfer shares to their dependents will depend on the abilities of their dependents and their own role in the invested company.

Shareholders can either take an active or inactive role. An active shareholder could be someone with a considerable equity stake and a proven business acumen. For instance, a startup operating in a heavily regulated industry may receive valuable insights from a shareholder who used to be a high-ranking government officer.

When active shareholders want to transfer their wealth, if the dependent is not capable or not mature yet, they may request a buyout.

On the other hand, inactive shareholders may decide to transfer their equity stake as is.

Desire to reinvest funds in other opportunities

Venture capital firms and private equity funds must generate a certain level of returns for their investors. They also have a mandate not to take on more risk than what is prescribed. So, such investors cannot stay invested in a mature startup that has realized most of its growth potential.

Thus, these professionally managed funds prefer to invest in startups at specific stages and exit when returns at that level can no longer be expected.

Additionally, if there are concerns about future profitability or business underperformance, the risk of staying invested in the startup may go beyond the prescribed levels. In such cases, professionally managed funds may be required to exit.

Differences in ethical codes

Startup investors will often invest in a company because of its potential social impact or impact on climate change. While such shareholders desire healthy returns, they place equal importance on the values of the business.

So, if they feel that a company is making an unnecessary compromise on its values to earn profits, such shareholders will request a buyout.

There was a possibility of something like this happening at Zipcar, a startup founded by Robin Chase and Antje Danielson. The founders met at their kids’ kindergarten. Chase was an MIT business school graduate and Danielson was a geochemist. Their interests aligned since Chase wanted to pursue entrepreneurial ambitions and Danielson wanted to make some real-world impact.

They came up with a ride-sharing idea that blossomed into a platform with almost 1 million members across Europe and the US. Chase finally had the opportunity to lead a stellar startup and Danielson could contribute to reducing emissions.

However, as the company scaled new heights, the differences in motivations, work culture, and opinions on company direction caused the founders to drift apart. In 2001, Danielson left Zipcar. Although she remained a shareholder until the acquisition in 2013, it would not have been strange for her to request a buyout in any of the earlier funding rounds.

Loss of faith in the leadership or strategic direction

An investor needs to be able to trust the board of directors and the top executives. Individuals in leadership roles must exhibit strategic vision, strong decision-making, transparency and accountability, adaptability, a competitive spirit, and diplomatic communication. Such qualities are necessary to guide the company through a competitive landscape and create value for shareholders.

Hence, if an investor loses faith in the directors or top executives, they may request buyouts.

In some cases, shareholders may feel that the leadership is being too adventurous or too prude in its strategy. This may also trigger buyout requests from shareholders.

A famous example of shareholders losing confidence in leadership would be when, in 2014, some top shareholders of Yahoo requested AOL’s CEO to explore a merger and run the combined entity. During this period, Yahoo was led by Marissa Mayer who came in as a CEO at a difficult time for the company.

Before Mayer came in, the shareholders had grown weary of former leaders who dismissed a lucrative $47.5 billion acquisition bid from Microsoft and being unable to challenge Facebook with Flickr among various other mishaps.

At one point in 2008, Carl Icahn had led a revolt against Jerry Yang, the then Yahoo CEO, over missing out on the acquisition bid from Microsoft.

Over the course of her tenure, from 2012 to 2017, Mayer came under fire for poor deal-making, inadequate leadership skills, absence of strategic vision, and failure to adapt to Yahoo’s work culture.

How to arrange buyouts for shareholders?

The most straightforward way to arrange a buyout for shareholders would be buybacks where the company offers to buy shares from investors at a premium. In management buyouts (MBOs), the founding team or management team could purchase shareholders’ stakes to gain full ownership and control over the company.

In acquisitions and funding rounds, the incoming investors may offer to buy off the stakes of existing investors.

When liquidity is low in a market, founders may ask a major investor to issue a tender offer for buying stakes from smaller investors. Recently, Sequoia, a major investor in Stripe, offered to buy up to $861 million worth of shares in Stripe.

To know how startups are offering exits to shareholders in a dry IPO market, take a look at this article.

Secure the perfect deal with Eqvista!

Shareholders may seek buyouts for various reasons, ranging from personal to strategic. Liquidity needs, attractive acquisition offers, or personal emergencies often drive these decisions. Some investors exit as part of succession planning, especially when nearing retirement. As companies evolve, they may no longer align with an investor’s risk profile or values, prompting buyout requests. In some cases, loss of confidence in company leadership can also lead to shareholder exits.

To accommodate these scenarios, buyouts can be arranged through methods like management buyouts (MBOs) or share buybacks. Regardless of the motivation, navigating a buyout process requires careful consideration.

Obtaining an unbiased and accurate valuation is crucial when involved in a buyout. Professional valuations help formulate defensible offers, ensure fair treatment, and facilitate smoother negotiations. This is where partnering with valuation experts like Eqvista can be invaluable.

Our team of NACVA-certified valuation analysts has supported the valuation needs of more than 15,000 companies with comprehensive and impartial assessments. Contact us to know more!