Understanding Exit Options

There comes a time in a business’s life cycle when it needs to start considering its exit options. A business exit strategy is a strategic plan spearheaded by the company leadership to sell the ownership or transition the company into its next phase through family succession. Companies that are funded by private equity will usually consider exit options before entering a funding agreement.

Having an exit strategy provides business owners and investors with a way to liquidate their stake in the company, either limiting their losses or extracting profit. It’s vital to understand exit options if your company is transitioning from private investment to its next stage or if your company is entering into a private equity funding arrangement.

CFOs are increasingly taking a leadership role in navigating exit options for their companies. These financial executives are uniquely positioned to engage with stakeholders and have a financial and strategic overview of the company and its future direction.

At FD Capital, we’re a specialist financial recruitment agency that can help your company understand its exit options by recruiting a specialist CFO or FD. We’re exploring the different exit options that are available for your company when planning the next stage of its life cycle. Start developing your exit strategy by recruiting a CFO or FD today by contacting our team at recruitment@fdcapital.co.uk.

The Different Business Exit Options

There is a range of popular business exit options that a CEO, CFO, and FD can choose between when navigating their company to the next stage of its life cycle. Some of these exit options include:

• Employee stock ownership plan (ESOP)
• Merger and acquisitions (M&A deals)
• Family ownership succession
• Initial Public Offering (IPO)
• Management buyouts
• External sale

Merger and Acquisitions

A merger or acquisition is often the most ideal exit option for companies, particularly those led by an entrepreneur or that are still in the start-up stage. The company is sold to another company or organisation that is seeking to expand its market share or global reach. Some companies enter an M&A deal to acquire talent, products, or infrastructure.

There are four types of acquisitions that a company can explore:

• Conglomerate: a parent company purchases another company in a different sector or industry, potentially in an unrelated business to their main organisation.
• Congeneric: a parent company purchases another company in the same industry or a related niche to expand its market share, product range, or global presence.
• Horizontal: a parent company purchases a competitor within their industry that sits at the same point in the product or service supply chain.
• Vertical: a parent company purchases a company that is either upstream or downstream on the supply chain compared to them.

An acquisition is the ideal exit strategy for most companies as it enables the CEO and CFO to set their terms and control the price negotiations for the company sale. Companies that can gather interest from multiple organisations will be able to drive up their asking price accordingly for a more profitable exit.

The main drawback of an acquisition is the time and cost involved. A part-time CFO can prepare your company for exploring an M&A and handle the exit and transition.

Family Succession

A less common exit option for business is a family succession or legacy exit. These profitable businesses are kept within the family. While it may seem that this is straightforward, the company will still need to put an exit strategy in place to ensure a smooth transition.

A family succession strategy is preferable in some scenarios where the individual has a good understanding of the company and is already involved to some degree. They can be trained up to take on the role over several years and the outgoing CEO may remain involved in a consulting or advisor capacity.

While this exit option may seem desirable, multi-generation family businesses are not as common as in the past – particularly where the younger generation does not have the skills or experience for the role. Blurring the lines between professional and personal relationships may add more stress than exploring other potential exit options.

Acquihires

One of the more uncommon exit options is known as ‘acquihires’. It’s when a company is acquired solely for its talent by an organisation that is searching for skilled employees, often within a niche. This type of exit strategy is ideal for companies that have invested in their human capital and can negotiate stronger acquisition terms as a result. Acquihires also guarantee your employees have continued employment.

However, acquihire acquisitions can be challenging and costly. These acquisitions are usually funded by a mixture of cash and equity. Facebook acquired Instagram and WhatsApp in 2012 and 2014 respectively with a mixture of cash and stock.

If the company is purchased by a publicly traded organisation, it produces a liquidity event that enables investors and founders to cash out of the company accordingly. These liquidity events don’t have the same flexibility when the organisation is purchased by a private company for a clean exit through stocks.

Management and Employee Buyouts

A management buyout is an option where employees working within the company transition into leadership and more senior roles. This type of exit strategy is ideal as these individuals are already familiar with the company culture and operation.

MBO exits are a popular option in private companies where the existing owner is looking to retire or where a larger corporation wants to sell a division of its company that is no longer part of its main segment. MBOs are typically financed through debt and equity, including through private equity firms and traditional financial institutions.

MBOs can create a positive momentum for employees who find themselves taking on a leadership role, however, they do create a higher risk of potential loss. An MBO creates a smoother handover process compared to when a third party is involved and places the company in the hands of individuals experienced with working within the organisation. Potential drawbacks include a lack of managers being ready to step up and the potential for negative push-back from managerial changes.

Initial Public Offering (IPO)

An IPO business exit is when a company goes public, selling shares of the company as stock. IPOs can be lucrative for founders and entrepreneurs; however, they are challenging to navigate. Most companies will spend two to three years preparing for an IPO. Issues such as regulatory costs, public scrutiny, and governance may lead a company to decide it is better off remaining in the private sector.

IPOs have the potential to be the most profitable exit option – although it comes at a price. Stockholders bring with them heightened scrutiny and the need to navigate regulatory bodies while considering the company’s public image. Due diligence is a significant factor in the preparation for IPO with companies often recruiting a CFO to oversee the work.

It’s an ideal time for founders and private investors to cash out of a company and exit when it transitions from being private to launching an IPO. Some investors may decide to hold onto all or part of their shares in the company when it goes public.

Investor Exits

Most exit strategies focus on private investors, rather than the founders or leadership team. Listing at IPO or entering a merger or acquisition are two of the preferred exit options for investors. CFOs will work to produce a positive investor story that delivers a successful exit for the existing investors, enhances the company’s reputation, and encourages future investment.

Four of the most popular investor exit options include:

1. Initial Public Offering (IPO): the company’s current investors exit when the company enters the public market through an IPO – initial public offering. Previous investors sell their equity in the company for a profit and may decide between a partial or full exit.
2. Share sale: private investors may choose to exit the company by selling their shares to a third party. This exit option is usually the preferred choice for angel investors, who sell their equity to venture capitalists or private equity firms. Most investors in this exit strategy will expect a hands-on approach with the new investors lined up before they make their exit.
3. Management buy-out: private investors can also choose to exit the company by selling their equity to another party, including back to the company. Management buy-outs involve the company’s managing team purchasing the equity or assets from the investor. Larger companies typically choose this option, or it is used when there is a significant amount of capital involved.
4. Trade buy-out sale: private investors may exit the company when it has been developed to a sizeable market share that will attract a larger organisation to purchase it or gain the attention of larger investment firms.

How Companies Prepare for Exits

CFOs may take the lead on the company’s exit strategy with most spending two to three years preparing for a successful exit, usually to maximise the company’s valuation through growth creation. They want to create an engaging investor story by achieving their KPIs and showcasing a sound financial structure.

Financial executives will choose from several strategies and options when preparing for an exit, including:

1. Getting accounts in order

The company will need its financial accounts in order prior to an exit. Accurate accounting is the best way of guaranteeing that the company receives a fair valuation to ensure investors and stakeholders can make an informed decision.

This strategy usually requires FDs and CFOs to start working two to three-years prior to the desired exit, particularly if the financial accounting and larger systems need to be overhauled. A two to three year time frame also gives companies a window to focus on value creation to increase their profitability. Companies with sound financial reporting are seen as more credible and attractive to potential investors.

2. Value creation in SMEs

The same two to three-year timeframe provides CFOs and the company’s leadership team to double down on value creation and internal investment before the acquisition, IPO, or private sale. A senior financial executive will be required to guide this strategy, including investing in AI and automation to relieve labour-intensive tasks and provide real-time data. A CFO or FD will provide a high-level view of the company’s finances with an unbiased assessment of its current position and realistic expectations for its future.

3. Setting exit objectives

Value maximisation is a major objective for companies when choosing their exit options. However, it is easy for financial departments to become solely focused on value creation above all else. Companies should step back and assess their long-term goals as they enter the next phase of their life cycle, whether as a public company or with a new investor type.

Determining the final objective will allow CFOs to work backwards to determine what else needs to be done – such as putting systems in place to ensure confidentiality and adapting the company culture if required. It will ensure that the company leadership team has the right resources and talent to deliver on the exit strategy.

4. Investor story and sales pitch

The company needs an engaging investor story with a sales pitch that showcases its potential and future growth plans. The company must consider the investor story of the exiting party as this will impact their reputation and either attract or defer future investors. A charismatic CFO will create a positive narrative and accurately translate the company’s financial position and forecasting to investors and stakeholders who aren’t financially fluent to ensure they are accurately informed.

5. Guideline on business valuation

A business exit strategy requires guidelines on the business valuation to ensure that the company is not under or over-valued. CFOs will work to identify the company’s financial position and potential value-creation opportunities to determine a realistic business valuation. These guidelines will enable the company to decide early whether it wants to continue with its current exit strategy or delay it to focus on improving the company’s value and profitability for a higher valuation in the future.

Recruiting a CFO or FD for Exit Planning

Prepare your company for a successful exit by recruiting a specialist CFO or FD to oversee the process. FD Capital is uniquely positioned to help your company with its business exit preparation by recruiting an FD or CFO with industry-specific knowledge and a proven track record of delivering on IPO or working with private equity. Find out how our team can help with your business exit strategy by contacting us at recruitment@fdcapital.co.uk.

Adrian Lawrence

Adrian Lawrence FCA with over 25 years of experience as a finance leader and a Chartered Accountant,  BSc graduate from Queen Mary College, University of London.

I help my clients achieve their growth and success goals by delivering value and results in areas such as Financial Modelling, Finance Raising, M&A, Due Diligence, cash flow management, and reporting. I am passionate about supporting SMEs and entrepreneurs with reliable and professional Chief Financial Officer or Finance Director services.