Almost from the very beginning, some entrepreneurs know what the ultimate goal for their company will be—an IPO or a strategic acquisition, for instance. Others do not think about their exit strategy until much later, when they are considering succession planning or the need for additional liquidity. However, the most successful exits require considerable planning. The sooner you start, the more rewarding your eventual exit is likely to be. In fact, you already may have started without even realizing it. Many of the steps involved—including creating an independent board, upgrading financial reporting systems and controls, exploring growth through internal operations, and fine-tuning your company’s strategy—are the same ones required to build a successful company.
Before you can choose your exit strategy, it is important to understand the basic characteristics of each option.
In an IPO (or initial public offering), you sell a portion of your company in the public markets. You and your management team typically remain in place for a period of years, and your company continues to operate much as it has in the past. However, your company will be subject to additional regulations, such as Sarbanes-Oxley requirements, and Wall Street analysts and institutional investors will scrutinize your quarterly performance.
In a strategic acquisition, by contrast, another company purchases your business, either with cash or stock in the acquiring company or with some combination of stock and cash. The acquirer may—or may not—retain you and your management team, and may—or may not—make substantial changes in your company’s operations, staff, and business lines.
You also may decide to sell your company to the next generation of managers through what is known as a management buyout. This type of transaction is usually financed through some combination of debt and/or private equity investment, with the debt collateralized by the assets of the company. It provides immediate liquidity to the owner and early shareholders, and allows the company to continue as a private enterprise.
As you evaluate these three options, work through the following eight steps:
Step 1: Consider your future role in the business
Part of your decision will depend on whether or not you want to continue to manage your business. In an IPO or a management buyout, you and your team will play much the same roles before and after the transaction. In a strategic acquisition, however, the acquirer may replace you and your team with its own people. A strategic acquisition can be an excellent solution for companies that are struggling with succession-planning issues, while an IPO or a management buyout will work more effectively for teams that want to stay in charge.
Step 2: Evaluate your liquidity needs
Many business owners view their exit strategy as a chance to reap the benefits of their hard work and to increase their personal liquidity. However, not all exit strategies work equally well in this respect. In an IPO, for instance, your shares will likely be subject to a share lock-up agreement, which means you will not be able to sell your shares—even after the IPO—for a period of time, typically six months. A strategic acquisition will often generate an immediate cash payment, thereby increasing owner liquidity. Sometimes, however, the final price is not determined until the end of an earn-out period, which can last several years. In a management buyout, the original owners also generally will receive liquidity over a period of time.
Step 3: Think about your company’s future growth potential
Perhaps you do not require immediate liquidity but want to participate in your company’s future growth potential. In this scenario, you will want to choose an exit strategy that allows you to retain an ownership interest. An IPO allows you to keep a substantial interest in the company, as well as to time the ultimate disposition of your shares to meet your own personal needs. A management buyout also will allow for continued participation in a company’s growth. However, an acquisition will generally eliminate, or at least greatly reduce, your ownership interest in your company, as well as your ability to influence its future direction and performance.
Step 4: Consider the impact of Sarbanes-Oxley
Taking a company public now entails meeting the costly, and somewhat bureaucratic requirements of Sarbanes-Oxley. Many private companies begin working toward these standards early on—establishing an independent board, arranging for an independent audit, and upgrading their systems and reporting to required levels. Meeting these standards not only will allow your company to go public, but also may increase its attractiveness to strategic buyers.
Step 5: Assess market conditions
Demand for companies like yours—among both institutional investors and strategic buyers—also will have an impact on your exit strategy. Talk with your private equity partner, as well as with any commercial lenders, investment bankers, or other financial professionals, about trends in the marketplace. Are significant numbers of IPOs being completed? Are companies in certain industries or of certain sizes more attractive to investors? What kind of M&A activity has your industry experienced, and who are the key buyers?
Step 6: Network with investors and potential buyers
Make sure that you have made contact with as many investors and potential buyers as possible, reaching out through key contacts like your private equity firm, your banker, and any investment banks with which you have dealt. This will raise your profile in the industry—and may create opportunities for an effective exit.
Step 7: Consider a dual-track approach
Marketing your company to investors requires a slightly different approach than presenting to potential strategic buyers. Public market investors generally want to understand your company as a whole—what your main businesses are, what your prospects for growth are—while strategic buyers may be more interested in specific parts of your company that are complementary. Even though your pitch may be slightly different, you may wish to pursue both types of exits at the same time. This way, you can capitalize on the most attractive opportunity, whether it comes from the public markets or a strategic buyer.
Step 8: Evaluate your options
Once you know whether your company will be attractive to institutional investors—or whether strategic buyers are actively looking for companies like yours—consider the eight steps listed above, as well as the price. Then consult with your investors and your senior management team so you can make the right decision for everyone involved: you, your company, your employees, and your customers.
Exit strategy checklist:
1. Understand your reasons for seeking liquidity.
2. Determine your future role in the business.
3. Evaluate your liquidity needs.
4. Decide if you want to participate in future growth.
5. Take steps to meet Sarbanes-Oxley requirements.
6. Fine-tune your presentation to investors and buyers.
7. Network with investors and buyers.
8. Choose the right strategy.