01 Venture capital exit strategy
After a decade in academic research, you’ve isolated a particular strain of lactobacilli that boosts the body’s immune system, potentially providing a prophylactic treatment against certain cancers.
You set up with help from a university business incubator fund; the research and development needed now comes at a high cost, but the returns could be enormous. You turn to a group of venture capital investors, who not only took a large stake in exchange for their multi-million investment, but also sourced a new chief executive, who had extensive experience in the commercialisation of new medical technologies.
“Venture capitalists are often looking for that kind of ‘unicorn’ business,” says Clinton Lee, founder of business broker The Exit Firm. “These funds are very specific; they want to invest where there is the potential for big returns. Many of their investments will crash and burn, but the superstars will repay their effort a hundredfold.”
02 Management buy-in exit strategy
It took you 35 years to build your pet food and accessories business. The company is known for its excellent treatment of staff; it regularly features in The Sunday Times Best Companies to Work For list, and has an enviable record in staff retention. Many of the senior management team have come up through the company’s well-developed training scheme.
You would like to retire, but are worried outside buyers might change the corporate culture. Fortunately, your management team is prepared to start the process of a management buy-in (MBI).
“Many owner-managers are suspicious of private equity, which can aggressively manage a business,” says Lord Leigh of Hurley, senior partner at Cavendish, which has advised on around 600 company sales. “The primary driver in any exit strategy is to ask what do you want? To take money out or to grow the business? To continue to run it or hand it over to external shareholders?”
An MBI offers continuity of management and, depending on your need to take money out of the business, can be structured financially to suit both sides. Critically, you trust your team to preserve the corporate culture you have so painstakingly built up.
03 Trade sale exit strategy
Your small but dynamic distribution business is thriving, partly due to your excellent IT skills, and creative use of big data and analytics. But you are struggling to get to the next level in such a cut-throat industry.
After extensive talks, you sell to a larger competitor that is weak on IT, but has money and resources; the deal is contingent on you being appointed head of IT, where your skills can turbo-charge the new enlarged business.
“Most large businesses are very good at taking small and medium-sized enterprises and growing them,” says Cavendish’s Lord Leigh. “Many companies go to a first meeting with a potential trade buyer expecting to sell themselves, only to find the possible buyer is selling to them.”
Trade sales are often the best way to release cash, but depend on finding the right synergies. It could be complementary products, it could be pricing benefits, it could be management skills, but it must be a deal of mutual benefit.
04 Private equity exit strategy
You’ve created a premium drinks mixer, served in all five-star hotels and restaurants in the UK. It has a good brand name and you’ve created quite a buzz, but there are a limited number of outlets that fit with the brand and pricing.
The next stage is to take it international, but you don’t have the capital to build the new greenfield unit that would be needed to meet increased production demands. You start talking to private equity, with a view to harnessing their contacts and resources.
“Private equity firms are offering money, but also their skills and connections,” says Andrew Boyle, chief executive of LGB & Co, a corporate finance and investment services company. “For a business to be for sale, there has to be a challenge to be met. It may be succession planning, it may be improving the management team, it may be a need for new thinking, but you need to identify and make a virtue of the problems you face.”
Private equity is often the best route for ambitious smaller businesses wanting to go global. Private equity firms will be buying into strong management teams with a clear business vision.
05 Stock market launch exit strategy
Given that renewable energy is one of the fastest growing industries, you are confident that your solar power company is going places. Turnover has been growing steadily, but you really need to raise the public profile as well as boost your capital.
You have the management skills and track record to take this company forward and certainly don’t want to step down yet, though it would be handy to crystallise some of your investment. Now you have a professional corporate governance team in place, there’s no reason not to go for an initial public offering (IPO).
“Size is factor for an IPO; you have to be big enough to give international investors the right liquidity and to attract coverage from analysts,” says Jonny Crane, partner at 3i Private Equity. “We’re all about helping business to grow internationally and look to hold investments for around three to five years. Part of our investment process is thinking about the future exit strategy.”
Having the potential for an IPO could attract private equity at an earlier stage of corporate development. IPOs can be costly, but can be the best route for fundraising and a quick exit further down the line.