Blog

Among the most important strategic choices that a start-up business makes is formulating its exit, as this is what lets a company and its founders to achieve its end goal… a productive, profitable 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 start, for finding out about your possible exit options and their likelihood could drastically influence your company’s new product development, IT, personnel and product positioning decisions. These decisions can greatly affect the M&A attraction of your company since M&A suitors place great importance on companies that do not present major software or platform integration concerns, those that have comparable company cultures, and those that foster an atmosphere where it will be effortless to integrate into their IT infrastructure and product line-ups.

The first step in planning your company exit strategy is to identify the existing exit avenues. The most common exit avenues are summed up below:

Initial Public Offering (IPO). You can sell your business by way of the stock market in an initial public offering. If successful, this route will produce the largest dollar payout on average of any exit strategy. On the other hand, it is really expensive to expedite an IPO, and you can effortlessly invest half-a-million dollars on attorney and accountant fees and there is no guarantee that the value arrived via an IPO will be a profitable one.

The truth is that there were only 96 US IPOs in 2010 and only 41 the previous year, so the probability of exiting in this manner is quite low. In the technology sector, market estimates show that only 0.01% of technology firms successfully exit the market through an IPO. IPO market activity has been on the rise during the last year, so this is becoming a more appropriate option compared to 2007 and 2008, but activity is still a very small portion of what it was in the mid-90s.

Strategic Acquisition. You offer to unload your company to a strategic acquirer, who pays a substantial premium for your company – typically greater than 5 times the revenues of the past year.

Strategic acquisitions generally 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 on.

Being bought 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 this scenario include Google’s acquisition of YouTube or Amazon’s acquisition of Zappos.

Acquisition. You sell your business to a non-strategic acquirer who will pay a smaller premium, market value or marginally below market value to come into possession your organization. This approach is tied for the 3^rd most profitable exit strategy. PricewaterhouseCoopers noted that there were  4,251 global M&A transactions in 2010 and Reuters noted that more than 400 of these transactions were venture backed acquisition exits, the biggest number since records began in 1985.

Merger. You strike a deal with another company to combine all or part of your company with theirs in exchange for stock or stock and cash in a brand new company or division of a business. Some classic merger examples are Google’s merger with Admob and Southwest’s merger with AirTran. This method ties with the 3^rd most profitable exit strategy. One disadvantage to this method is that it does not necessarily liquidate your business, but it does present you with marketable stock that could be sold. Merger exits are not as typical as acquisition exits.

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

Reverse Merger.  Your business comes into posession of a public shell organization that isn’t active any longer, but remains listed on a public stock exchange.  By doing so, your business becomes a public company with stock that you can offer on the open market to convert some or all of your equity into cash. From a structural perspective, reverse mergers are inexpensive, relatively straightforward, and quick to execute.  On the other hand, realistically, it’s very unlikely that an organization will be able to bring considerable market interest or high valuations by means of the reverse merger route if the company’s performance isn’t solid enough to justify an IPO, strategic acquisition or merger. Another downside of this route is that the newly formed company likewise restrains itself with extra regulatory compliance responsibilities that will drive up 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 involves a financial sale to a private equity or holding company that plans to restructure the company and/or re-position it to strengthen its performance and ready it for a strategic acquisition or an IPO. Most financial buyers will pay between 1 to 3 times the previous 12 months of revenue which makes this a rather appealing exit strategy.

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

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

Related articles

• Real Entrepreneurs Exit If Their Startup Goes Public (startupprofessionals.com)
• Exit Planning Strategies That Entrepreneurs Should Keep In Mind (businessinsider.com)
• Selling A Business: Summer Groundwork (dohertyassoc.com)
• Why Biopharma Start-Ups Should Think M&A, Not IPO (blogs.wsj.com)
• Mythbuster: Tech IPOs take just as long as life sciences IPOs (finance.fortune.cnn.com)

Related posts:

1. Cloud Computing Options
2. Understanding Website Marketing