Exit Strategies for business owners include a plan, that is executed by a business owner, trader, private equity investor or a venture capitalist to offload their investment in businesses, generally after a specific investment horizon. When the founder wants to reduce or liquidate his/her stake in a business and, if the business is successful, make a substantial profit. This EXIT can take several different forms. In this article, I am going to explain the basics of a few exit options available to business owners which are most common in today’s world.
1. Going Public – Initial Public Offering (IPO):
This is one of the most common exit strategies. An Initial Public Offering refers to the process of offering shares of a private corporation to the general public investors for the first time. It is a transformative, momentous but complicated process, where these shares are listed on recognized stock exchanges, where the owners, private equity and venture capital firms sell their initial ownership in lieu of a win-win situation.
An IPO is generally regulated by the Securities and Exchange Commission (SEC) in the United States of America and the Canadian Securities Administrators (CSA) in Canada.
2. Going Public – Special-Purpose Acquisition Company (SPAC) & Capital Pool Company (CPC):
A SPAC (also known as “blank check company) is a shell corporation listed on the stock exchange for the purpose of a Reverse Merger. The “Special Purpose” is to only raise funds through public investors in across the stock exchanges without conducting commercial business activities. Generally, through the Reverse Merger, the SPAC acquires the target companies (in a period of 2 years) and then return the funds to investors post acquisition. For the target company acquired, the SPAC eliminates the complexities of an IPO and pre-IPO investigations. For the investor, there is an embedded element of trust since the deals and functioning of the company is public knowledge, this is due to the SPAC being listed on the stock exchange and regulated by the respective governing authorities.
The Capital Pool Company (CPC) is a unique Canadian invention that supports earlier stage private companies to complete a go public transaction. A Qualifying Transaction is effectively a reverse takeover of a CPC by an operating business that will access the capital, shareholders and expertise of the CPC to complete a listing on the TSX Venture Exchange or Toronto Stock Exchange.
3. Acquisition (M&A) – Strategic Buyer:
In this exit strategy, a Strategic Buyer purchases the shares of the investor in the company looking to exit. It is a comfortable approach for the investors selling their stake. As for the buyer, investing in such a company leads to synergistic gains and integration to achieve a competitive advantage. To compensate for such gains, a strategic buyer may purchase the shares at a premium over the intrinsic value.
The selling business could be a strategic fit for the enterprise or a competitor who may want to eliminate the competition. This is a good option for an already existing company who wants to expand for variety of reasons and sees an opportunity for growth. This could include geographical expansion, increasing technical capabilities, acquiring customers, or talent among other things. Generally during such acquisitions, the selling business owner is offered a position with the new company.
4. Acquisition (M&A) – Financial Buyer:
Like a Strategic Buyer, one of the other exit strategies for business owners and current investors looking to exit can sell their stake to financial buyers. Private Equity firms, such as Columbia Pacific Capital Partners (CPCP) bring more than just capital. PE firms typically also add value by bringing other resources to help grow the business. The current management may choose to continue running the business or transition out post transaction. If the management continues, they get a second bite of the apple after a few years when they exit. The fundamental difference in this transaction being, a Financial Buyer purchases shares in such investment opportunities and forecasts appreciation in the value of such investments irrespective of synergies. The focus is on generating revenues and creating economies of scale in the company invested.
5. Management or Employee Buyout:
Here, the management team or a group of employees pool resources to acquire all or a part of the company. This is one of the best options for owners who don’t have a candidate for succession or who want to preserve the corporate culture of the business.
Liquidation is the least favorable among the other exit strategies for business owners we discussed. The assets of the company are liquidated through a piece-meal distribution. Such liquidations take place when the investors and promotors are not able to run the business successfully.
This section of the website sets out a variety of materials relating to the investment banking and private equity to be used for educational and non-commercial purposes only; the author(s) of the blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a professional and use your own good judgement before choosing to act on any information included in the blog. If you choose to rely on the materials, you do so entirely at your own risk. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any division of Columbia Pacific Capital Partners Inc. (CPCP)
Share this Post