Exit Strategies for An Investment

Exit strategies differ depending on the size of the company, the sector in which the company operates and the stage of the company’s development. The experience of the investment manager and his network of contacts will help him to achieve the best possible exit for him and his own shareholders as well as for the other shareholders in the company, first among which are you and your team.

Planning an exit route should not be interpreted as a lack of interest in the company nor as a sign that the investment was only motivated by the desire for short-term profits. The goal of the investor is to help create or develop a business that will alow him to dispose easily of part of his equity stake.

There are five different ways in which a private equity investor can exit from an investment.

1. Trade Sale

A trade sale, also referred to as M&A(Mergers & Acquisitions), of privately held company equity is the most popular type of exit strategy and refers to the sale of company shares to industrial investors. Large and small companies often complement each other and an alliance between them allows one of them to secure a strategic advantage or complete its own business activities. A buyer is therefore often willing to pay a Premium to acquire a complementary business.

The trade sale is agreed in private and makes both the buyer and the seller less vulnerable to the external pressures of a stock market flotation. It is often adviseable to keep the transaction a closely guarded secret because clients, suppliers and employees may interpret a trade sale negatively. These negative signals become even stronger if the negotiations fall.

An auction sale is the one exception to this secrecy rule. When the seller’s reputation is not at stake and if the operation is guaranteed to succeed because the company is very well positioned, an auction may be organised by specialist investment bankers. Potential buyers are subject to strict procedures and timings to ensure genuine competition between them. At the end of the process, the highest bidder wins. In this way, the price is maximised and the time taken to complete the sale is minimized.

2. Entrepreneur Repurchase

The repurchase of a company by its management team is becoming more and more successful as an exit strategy. It is a very attractive exit for both the investment manager and the company’s management team if the company can guarantee regular cash flows and can mobilise sufficient loans. The accounting and fiscal aspects of this exit need to be studied very carefully.

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3. Sale of The Investment to Another Financial Purchaser

One financial investor may sell his equity stake to another one when the company has reached the stage of development initially envisaged or when the current development of the company no longer corresponds to the investment criteria of the original fund. This can also ocur if the financial support required to maintain the company’s development has exceeded the capacity of the fund. Equally, the fund itself could be winding up and may need to dispose of its final invesment to satisfy its investors and to adhere to its own terms and regulations.

This strategy has the advantage of enabling an exit when the team does not want a trade sale or a stock market flotation.

4. Initial Public Offering

A stock market flotation may be the most spectacular exit, but it is far from being the most widely used, even in stock market booms.

A stock market flotation should correspond with a genuine wish to make the company more dynamic over the long term and to profit from the growth possibilities offered by a stock market.

5. Liquidation

This is obviously the least favourable option and occurs when the efforts of the head of the company and the investors to save the company have not succeeded.

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