Hidden Capital in M&A Transactions

Most business owners are clear on what happens when they sell their business. They get paid cash and/or stock (also known as “capital” or “proceeds”) in exchange for selling the assets and stock in their business.

At Vaughan Capital Advisors (“VCA”) we believe that selling a middle-market company can create several additional forms of capital other than the obvious financial proceeds received when the deal closes. Among other forms of capital, our customers experience the benefits of Confidence Capital, Professional Capital and Psychological Capital. We call these forms of capital “Hidden Capital in M&A Transactions”. The creation of Hidden Capital depends on who you sell your company to, how the deal is structured and how you add value to the acquirer’s organization once the deal is closed.

Confidence Capital

One of the first forms of hidden capital is Confidence Capital. Confidence Capital comes with the satisfaction of proving that you can build a valuable company and from capturing that value in an M&A exit. These two results generate tremendous self-confidence which you can uses as fuel for your future accomplishments.

Similarly, the psychological place you occupy in the minds of your peers and competitors will undergo a meaningful transformation. The players in your industry, both large and small, assign considerable value to one’s ability build, run and sell a company. Among other things, you will have an opportunity to have more effective interactions with buyers, suppliers, competitors and peers. They are aware, and therefore you should be aware, that your intuition, planning, judgement and communication has the proven ability to create value. As a result professional status has elevated and more powerful results are available to you.

Professional Capital

In most middle-market transactions, the executives in the acquired company will have a role within the acquiring company once the deal closes. Your role within the acquiring company will most likely provide you with an opportunity to expand your rolodex to include powerful professionals within market-leading, global companies. The executives within many of the companies that VCA has advised on sell-side M&A transactions often go from being well-respected regional executives before their companies are sold to having day-to-day interactions with the most powerful executives within the acquiring company, and the companies with whom the acquirer does business. In several years, perhaps at the end of your earnout, these relationships will serve as invaluable Professional Capital as you embark on starting or acquiring your next company.

Psychological Capital

Most of VCA’s customers rely on their business to support growing families, make mortgage payments, care for aging parents, and to pay for private schools and college tuition, vacations and country club memberships.

The day VCA closes a transaction, we are accustomed to hearing a large “exhale” from our customers. Why? Because they now have the peace of mind of knowing they can take care of the needs of their family and comfortably support their lifestyle choices, or Psychological Capital.

Psychological Capital may be the most valuable form hidden capital. Knowing that the people closest to you are taken care of frees you up to take on the challenge of building value within the acquiring company, or in the new company you create or acquire.