5. Maturity

Many firms eventually mature, in the sense that they focus on managing their core business efficiently and gradually run out of sizeable new investment opportunities. In these firms, the operating cash flows from the core business will, at least for a certain period, exceed the investment needs, so that the resulting free cash flows are positive. Put differently, these firms, in principle, no longer require external financing but can return money to investors instead.

  

In the context of equity financing, the firm's payout policy and potential liquidity and control considerations become crucial:

  • Payout policy: How much money should be returned to shareholders? And how should that money be returned (e.g., dividends or share buybacks)? The module Payout Policy deals extensively with these questions and presents a structured approach for managers to find the right balance between reinvesting and distributing cash.
     
  • Liquidity: Additional shareholders may want to exit their investment. Especially firms that have teamed up with professional investors (VCs or private equity) will have to find a way to secure that liquidity. As we discuss in the module Deal Structuring, professional investors generally insist on specific exit rights. Therefore, the question is generally not if there will be a liquidity event, but how that liquidity event will take place. 
     
  • Control: This will often also give rise to a discussion about who should be in control of the firm, especially if the firm remains privately held.
     
    • Many professional investors will push for a sale of the company to a strategic buyer (e.g., a competitor or another player in the firm's value chain). As we briefly discuss in the module on Valuation Multiples, strategic buyers tend to pay the highest acquisition prices because of expected synergies from the deal (synergy premium). The following section on the Financing of M&A Transactions takes a closer look at these issues.
       
    • Alternatively, the firm could become an attractive target for a (leveraged) buyout. In such a transaction, a new management team acquires the company, often backed with private equity and substantial debt financing to restructure the business, return it to a path of growth, or make it ready for takeover by a strategic buyer.

  

In the context of debt financing, mature firms can continue to calibrate their capital structure to find the right balance between debt and equity financing. As we discuss in great detail in the module Capital Structure Decisions, this trade-off includes considerations such as tax savings, agency problems, ownership dilution, and risk allocation.