Entrepreneurs tend to have one thing in common when starting out and that is turning an idea into a success. What they seldom consider is an exit strategy.
Vinay Naidoo, head of corporate finance at Pierian SA, says that generally entrepreneurs forget that they cannot run the business indefinitely, in some case hindering their entrepreneurial abilities by becoming more and more stuck in the daily activities.
“This can lead to lost opportunities by not anticipating ‘what is next?’” adds Naidoo.
Six ways to exit
He says that there are six main options available to business owners to exit, these include:
1. Liquidation simply requires closing the doors, selling the assets and paying the creditors.
It is quick and easy and requires no effort. The downside is that no value is placed on client lists, reputation, intellectual property, etc. and the business ceases to exist anymore. This method is usually a last resort for business, particularly businesses with no planning or preparation for their future.
2. A succession plan is important for owner-managed businesses because they are faced with many questions such as:
- Have you decided who you are going to leave the business to?
- Will the business be able to sustain your family as your family grows?
- How long are you going to continue working in the business?
- Have you prepared for taxation issues that will occur when the business is transferred to the new owners?
- Have you developed a leader to take over your position?
A plan should be developed to address these questions and to mitigate future squabbling over the business or to identify holes in the strategy, such as the children not willing to take over the reins.
3. A management buyout involves management taking over ownership of the business.
This has its advantages, including less detailed due diligence process as the new owners were already directly involved in the business. The price negotiations will also be tougher for the same reason.
The management team taking over the business must have the ability to drive the business in order for them to take over.
This sort of management team creates value in the business as the business is be able to run without the owner being involved in the daily activities, thus freeing up the owner to look at opportunities in the market.
4. The sale to a strategic acquirer will ultimately leave you with the highest private sale value because the strategic buyer has the goal of creating synergies between the businesses.
The whole is greater than the sum of its parts or 2 + 2 =5. The creation of synergy can come through many forms; creating efficiency, increasing revenues, reducing costs, etc.
The strategic buyer will require a rigorous due diligence to ensure the existence of these potential synergies and identify potential risk areas.
5. The private equity option will usually involve the sale of portion of the business to the private equity fund.
The private equity fund may have other enterprises in their portfolio and synergies can exist between them thus making the acquisition very lucrative. There is the upside of keeping a portion of the equity and growing with the fund and releasing the benefits the fund can provide.
The private equity fund will itself have an exit strategy for their investment in the business, as the fund will have an investment period.
The private equity fund can also be an equity partner for a MBO or a strategic buyer. The price negotiation will be tough because the model will be much more profitable with a buy low sell high strategy for its equity investments.
6. The initial public offering method will generally provide the highest price for the business, as the equity becomes more liquid and the business is more transparent.
This method also provide you ownership but at lower levels, with most of the equity entering the public market. The business will also be under the scrutiny of investors and every move will watched and reflected in the share price.
There is a lot of work to be done to get the business to stage of a public listing and meeting the listing requirements.
Given these various options, says Naidoo, it is clear that a plan is required to answer the following questions:
- What is next?
- What is the time frame?
- Is the business prepared for sale?
- How much will this cost?
- Is the business creating value?
- What is the value of the business?
- Where are the risk areas?
“We as a society tend not to plan for the future and somehow believe that things will remain the same forever or that things will just sort it selves out,” he adds.