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Guide to exit strategies

Guide to exit strategies

Many entrepreneurs will not want to run their business indefinitely. At some point they will want to sell the company and move on to another project, retire, or go back to being an employee. The route to this, involving selling the company, is called an ‘exit strategy.’ There are a variety of different exit strategies. Knowing which one is most suitable for your company can help ensure you get the best possible price and the smoothest sale.

Waiting for the end

Many entrepreneurs think about exit strategies at some point, and it’s wise to do so. But some feel that the only possible type of exit is being approached with an offer, and that doing the approach yourself can come across as a weakness and devalue your company. But this is not the case. Exits can take a long time; business owners that realise this and take steps to bolster the company’s value, and then look personally for exit possibilities, increase their chances of getting a good deal.

Types of exit strategy

Initial public offering (IPO)

Taking a company to an initial public offering is also known as ‘going public,’ and involves selling shares in the company on public stock markets. If you have the growth and potential to go public, the rewards can be considerable, and there’s the chance to stay as a senior director after the IPO for a number of years. There are additional requirements when operating as a public company, many of which can be hard to deal with, such as close and intense scrutiny from investment analysts. IPOs will only be suitable for high-growth companies; you should seek professional advice before even considering an IPO.

Strategic acquisition

Strategic acquisitions involved your company being ‘acquired’ by another, normally larger company. The price is paid using either cash, or stock in the acquiring company, or a combination of the two. The company, since they will be buying the entire company, will gain complete control over the firm and so will be able to replace you and the rest of the management team, and make substantial changes to how the business is run. This won’t always happen, however; they may wish to keep you on if they feel you are particularly skilful. This option appeals to many entrepreneurs because they often walk away with a lump sum of cash in their pocket.

Management buyout

Selling the company to new directors is also a popular exit strategy, known as a management buyout. Typically the finance will come from private equity and debt, which is beneficial to the incumbent owners because they receive liquidity immediately. Management buyouts are often smoother transitions than other forms of exit strategies; the employees and company are less affected, the shareholders and incumbent owners receive cash and may be able to retain some shares, and company is run under the ownership of the new managers.

Choosing the right exit strategy

Choosing the exit strategy that best suits your business can be difficult; you need to ask some searching questions. You should also consider if an exit is the right strategy; often the selling price is less than you expect, and you may be better continuing to run the business (or hiring an experienced manager) if your main goal is secure a regular income for life without working for other people. Staying small and not aggressively pursuing growth can be the best way to achieve this.

If you do want to sell your company, there are a number of questions you must ask:

Do I want to receive cash for my business and do I want it quickly?

A significant proportion of business owners sell their businesses because they want cash in their pockets. In this case the best choice is probably an acquisition, as you’re more likely to receive cash quickly (although there can still be a delay due to due diligence or earn-out periods, where certain targets must be met). IPOs have stringent rules and may require, for example, you to hang onto company stock for a set period of time, so they are not good choices if you are looking for hard cash.

Do I still want to be involved in the business?

Some business owners are happy to sell the business and forget about it; others may feel more emotional involvement, and will want to stay on in an advisory or managerial position. IPOs and management buyouts will typically result in you staying on in similar roles, but an acquiring company is likely to replace you, and your management team. Obviously, if you are struggling to continue to run the business, an acquisition is in your interests.

How much potential does your company have?

There’s not much worse than selling your company for what you think is a fair deal only to find out that in a few years’ time you could have sold it for much more. This is why it’s important to consider how much potential your business has. Is it meeting growth expectations? Are you regularly receiving large orders? Acquisitions will generally eliminate all or most of your involvement – and ownership – in the company, while management buyouts and IPOs will leave you with some control of the company, and also shares which could increase in value.


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20 January 2023 | Marketing
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