How To Plan For Your Company’s Exit Strategy

Among the most important strategic decisions that a start-up organization needs to make is working out its exit, as this is what lets a business and its founders to accomplish its end goal… a successful, lucrative and painless market exit.

So when is it a good opportunity for an organization to begin planning its exit strategy? It is never too early to begin, for understanding about your possible exit options and their likelihood could greatly influence your company’s new product development, IT, personnel and product positioning resolutions. These decisions can greatly affect the M&A appeal of your business since M&A suitors place great importance on organizations that do not present major software or platform integration concerns, those that have comparable company cultures, and those that foster an environment where it will be effortless to integrate into their IT infrastructure and product line-ups.

The first step in formulating your company exit strategy is to isolate the various exit avenues. The most typical exit avenues are summed up below:

Initial Public Offering (IPO). You can offer to sell your company through the stock market in an initial public offering. If profitable, this route will produce the largest dollar payout on average of any exit strategy. On the other hand, it is really costly to facilitate an IPO, and you can effortlessly shell out half-a-million dollars on attorney and accountant fees and there is no assurance that the price tag arrived via an IPO will be a worthwhile one.

The truth is that there were only 96 US IPOs in 2010 and only 41 the year before that, so the chances of exiting in via this method is extremely low. In the technology sector, market estimates indicate that only 0.01% of technology firms successfully exit the market by means of an IPO. IPO market activity has been on the rise during the last year, so this is becoming a more relevant option compared to 2007 and 2008, but activity is still a very small portion of what it used to be in the mid-90s.

Strategic Acquisition. You sell your business to a strategic acquirer, who pays a huge premium for your company – generally more than 5 times the revenues of the previous twelve months.

Strategic acquisitions normally are driven by one of the following two factors :

1. An organization has designed and patented game changing technology that would appreciably accelerate the acquirer’s business strategy and/or

2.  The danger of a competitor acquiring a start-up’s technology is too risky for the strategic acquirer to take.

Being purchased by a strategic acquirer is the second most profitable exit strategy. Just like an IPO, it is very uncommon for a technology company to exit via a strategic acquisition. Classic illustrations of these circumstances include Google’s acquisition of YouTube or Amazon’s acquisition of Zappos.

Acquisition. You sell your company to a non-strategic acquirer who will pay a smaller premium, market value or marginally under market value to acquire your organization. This method ties with the 3^rd most profitable exit strategy. PricewaterhouseCoopers noted that there were  4,251 global M&A transactions in 2010 and Reuters reported that over 400 of these deals were venture backed acquisition exits, the biggest number since records began in 1985.

Merger. You sign an agreement with another organization to combine all or a portion of your organization with theirs in return for stock or stock and cash in a newly formed organization or division of an organization. Some classic merger examples are Google’s merger with Admob and Southwest’s merger with AirTran. This method is tied for the 3^rd most profitable exit strategy. One disadvantage to this technique is that it doesn’t automatically liquidate your business, but it does provide you with marketable stock that could be sold. Merger exits are not as common as acquisition exits.

Buyout. You offer to sell your organization to an employee or someone outside of your business via a private sales transaction. This can be someone inside the organization or someone outside the organization. The price paid can vary from substantially above market value to under market value.

Reverse Merger.  Your business acquires a public shell company that is no longer active, but remains listed on a public stock exchange.  In doing so, your company transforms into a public company with stock that you can sell on the open market to convert some or all of your equity into cash. From a structural point of view, reverse mergers are cheap, fairly simple, and quick to implement.  On the other hand, realistically, it’s extremely unlikely that an organization will be able to bring significant market interest or high valuations via the reverse merger route if the company’s performance is not solid enough to justify an IPO, strategic acquisition or merger. Another downside of this route is that the newly formed company also restrains itself with added regulatory compliance responsibilities that will increase its overall costs of operation and lower its competitiveness in the market. Thus, this is generally an inadvisable strategy.

Financial Sponsor Sale. One of the more common exit strategies is a financial sale to a private equity or holding company that plans to restructure the company and/or re-position the company to strengthen its performance and ready it for a strategic acquisition or an IPO. Most financial buyers will shell out between 1 to 3 times the previous year’s income which makes this a rather attractive exit strategy.

Now that you know the potential exit options, you are ready to start thinking about and preparing your company’s exit strategy.

Brandon Hickie joined OpenView Venture Partners as an Analyst in January 2011.

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