What are the different types of Exits?
So you have reached a point where you want to reap some of the hard-earned efforts you have put into what has been your dream as a business founder, and you’re deciding to Exit. Regardless of the type of Exit you are looking to go through; you probably have a lot going on your mind. From deciding on the right buyer, the ideal deal, the timing, the legal & financial jargon, the expenses you may have to incur and not to mention the changes that will most likely impact your team during this transition. So what exactly is an “Exit Strategy”, and what are the different Exit strategies available to you as a business owner or founder?
An Exit strategy for a business “is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company”. Exit strategies allow business owners to reduce or liquidate their stake in their business and make a hefty profit if the company is successful. In simpler terms, an Exit strategy is your plan for what will happen when you want to leave your business. The strategy explains how you want to transition and outlines a guide similar to how your business plan is written for when you started the business. Your decision to Exit does not mean your business is losing or there is an imminent threat or disaster at bay; the opposite is, in fact, true- some business owners enter a business with a plan to Exist after a certain period and reap the benefits.
Exit strategies should be implemented at the very start of your business planning process, and a forecasted scheme should be outlined for all possible outcomes. There are 8 types of Exit strategies that a business owner can look to choose from depending on their financial situation and their needs from the Exit.
1.Merger and acquisition (M&A deals)
Considered the most popular strategy, M&As are specifically more attractive for startups & entrepreneurs. In this strategy, your business is either purchased by another business/investor or merged (becomes part of) with another company that shares similar goals and values. It can be processed through cash, equity swap or a mix of both. There are many reasons behind using this option, such as geographic expansion, gaining new talent, acquiring new product line or infrastructure or ridding yourself of competition. One of the significant advantages of M&As is room for negotiable pricing of the sale, which cannot be found in an IPO; for example, which valuates your business based on the industry. Still, the process can take a long time and easily fall out.
2. Initial Public Offering (IPO)
An IPO exit entails that you will be taking your business public and selling shares as stocks to shareholders. IPOs are the dream for many entrepreneurs to one day sell their business for a considerable profit to the public; however, within the world of small companies and startups, especially in our region), this method is not suitable for everyone as it requires multiple conditions. In addition, the high regulatory burdens and massive pressure from shareholders make staying private much more enticing. There is also the danger of evaluating your business if it is not found appealing to the public. Yet if you meet the conditions for an IPO, the skies are the limit in terms of gains.
3. Family succession
If you want to keep the business “in the family,” this is the ideal exit strategy for you. It can mean transitioning the company to a sibling, spouse, child or relative. It can be an attractive option for many because it allows you to take time to groom the next leader and avoid outside interference. Still, as a business owner, you need to remember who would be the best person for the job, not just who is next in line.
This option is usually chosen for a business taking a massive fall. You are choosing to close your business and sell all assets in this option. The cash earned from the sale of the business must be used to pay off outstanding debts. It may seem grim, but for some, it is the start of a new journey.
Selling your stake to a partner or investor
This option is only viable if you are not the sole owner of your business. In this case, you sell off your stake in the business to another partner or investor. The term ‘business as usual” is often used to describe this strategy.
6. Management and employee buyouts (MBO)
In this strategy, the people who are already working for you may be able to buy your company from you and transition from senior roles to leadership. Since they are already familiar with your business, they will be highly capable of running it when it’s sold to them. This strategy can result in a smoother and more loyal transition, in addition to having more flexibility in your involvement post-sale
7. Take part in an Acquihires.
In this strategy, a company is bought mainly to gain human talent. This can highly benefit skilled employees because they will be favourably looked after the business is sold. It differs from a typical acquisition because it’s based on the business talent at its core.
8. Declaring Bankruptcy
This is the only strategy that does not need a plan. If you are a small business or startup, you cannot plan for this type of exit strategy; you would have to be forced upon it when things go wrong. Like with all businesses, there is always a risk of bankruptcy when things take a terrible turn, but it does not mean the end of the journey for you as a business owner; it is a way to help relieve you of your business debts. With bankruptcy, your assets are seized, which would impact your credit, and you will need to understand fully, based on the market you are in, what other penalties may be at risk.
While this list outlines the basic well-known types of exits there more sophisttecated formats of exits stratgies such as SPAC (Special Purpose Acquisition Company) a relatively new exit strategy. SPAC is a company created to raise funds through an IPO to acquire another company and take it public. A group of investors forms a SPAC called sponsors, and it has a specific period of time to find a target company to acquire, while the funds are placed in an inters-bearing trust account. SPAC must also be registered within the relative Securities and Exchange Commission (SEC), based on its operating market. Currently, it’s more popular in the United States. If a target company for acquisition is not found within the set time period, the SPAC has to be liquidated, and the funds returned to investors. Thereare also LBO models ( leveraged buyout), this includes an acuqstion of another company using a loan. The axquring company takes the loan to meet the cost of acquisition for the company being acquiered. The assets of both the acquiring company and the company being acquierd are used as collaterals for the loan.
Regardless of your chosen strategy, there is no one-size-fits-all model, and you cannot look at success stories and then match them to yوour own when it comes to exit strategies. It would help if you decided which strategy is best for you, which will be determined by several factors which may change over time. The best you can do is to start planning early on which strategy is best for you at different stages of your business life cycle.
Look for our next article to help you decide on which strategy to choose based on specific questions you need to be asking yourself before choosing a strategy:
- Why are you pursuing the Exit (what is your goal from the exit strategy)?
- Who will be impacted by the exit strategy?
- How involved do you want to be after the exit strategy?
- What are your financial goals?
- Do you know what you are doing or need a sell-side advisory?
- Investopedia, Adam Hayes, March 2020
- Anasandra.com, Types of Exit Stratgies