An exit strategy is a way of exiting a company or a project in such a way that the owner, or investor, sells their shares for maximum possible value. An individual who owns a company, or owns shares in a company, might want to plan and consider an exit strategy for a number of reasons:
- The owner, or investor, might want to move onto other projects, or simply retire
- The individual may wish to cash out of a successful business once it has reached its profit objective in order to effectively cash in on their dedication and commitment over the years (the individual might be a full shareholder or an equity investor, for example)
- The owner might strategically decide to sell a portion of their shares to allow other individuals, who perhaps have more experience of owning similar companies, to invest, provide their expertise, and take the company to the next level of development
The most common exit strategies are:
This typically involves an individual selling their company to a larger company or an individual buyer (a trade sale), or two companies merging together (a synergy). The first option is beneficial to a large company because it allows them to expand their brand and increase their revenue without launching a new product or service from scratch. The latter option is beneficial when the acquirer company and the target company are similar in nature (e.g. they specialise in the same products or services).
Management buy-in (MBI)
This involves an individual, or a group, buying into another business. The purchase of the business will be partially funded by a bank or venture capital organisation, alongside the individual’s own capital. However, external organisations would typically only fund a management buy-in if the individual has some experience of managing a large company. In MBIs, outside investors purchase the company and they usually retain the original management team. This method is an exit strategy for the current owner(s) of a company.
Management buy-out (MBO)
This occurs when a management team buys a company which they already work for. This is appealing to the management team, as they become the owners of the company, rather than the employees. Like an MBI, it can be an exit strategy for the owner(s) of the company. Raising the money necessary may be difficult for the management team, and they may need to source alternative funding options. It is common for private equity investors to offer funding to the management team and take a stake in the target entity.
Initial Public Offering (IPO)
This is the first sale of stock, specifically equity, by a company to the public stock exchange. This method is not always the most beneficial; if a target company is fairly new, it might be difficult for them to raise awareness and raise financing on the public market.
A partial exit occurs when an individual decides to only sell part of their company, allowing them to operate and run the business with a reduced shareholding. This is an increasingly favourable option; it allows the individual to still generate an income from the company’s revenue, without bearing the sole responsibility of the company. The company may also benefit from bringing in a new shareholder with new ideas and experiences.
The M&A industry within the UK has experienced a boom in activity year-on-year, with record levels of deals being completed in 2015. 6,532 acquisitions were completed in 2015, a rise of almost 40% since 2011. This suggests that in recent years, owners of UK companies have been increasingly aware of the exit strategies available, and many have employed exit strategies in order to secure the future of their companies.
An exit strategy is a positive plan which centres around making the best of an individual’s assets, by making sure they achieve their maximum possible value, and providing the best possible future for the company. An exit strategy should always be planned well in advance in order to make way for a smooth and successful transition.