When starting a business, the last thing on many people’ minds is what to do when the business comes to an “end”. But the truth is that planning an exit strategy for investors should be one of the first things to consider when creating a start-up. But what does such a strategy consist of?
Exit strategies are the options a company has to allow investors to recover their investment plus a capital gain. Exit strategies are plans executed by company owners and investors to liquidate their position in a financial asset when certain criteria are met. Through exit strategies, investors have the option of divesting from a company while generating a profit or limiting losses in the event that the investment has not been profitable. An exit plan is the way in which an investor plans to realise his investment strategy through a sale to a third party.
A company without an exit plan will not be optimising returns for its investors.
When an investor decides to invest in a company, they do so mainly because they expect to recover their contribution plus profits within a specific time frame. It is clear that the investor will be concerned about Exit before investing in a company and will be aware of the different Exit options available to it.
The investors can also use an exit strategy to “cash out” their investment. Therefore, before investing, it is advisable for the investor to establish exit bands to either maximise gains or, where appropriate, minimise losses.
A good exit plan undoubtedly optimises the entire investment process by helping to reduce the risk involved, thus facilitating the recovery of the investment.
Not every investment strategy necessarily leads to an EXIT
Just as not all companies need to raise money from investors, not all companies need to be sold to a larger company. Companies that establish a solid business model can choose to remain independent and reinvest their profits. In this way, when the company is sufficiently strong it can make the decision to distribute dividends each year as a way of remunerating its shareholders.
What Exit options are available to investors?
As in all aspects of business, planning is essential. The investor must anticipate the market as far as possible.Therefore, as a first step, it is advisable to define a long-term business model, as Exit’s strategy may change depending on this.
The planning of different future scenarios is important not only to attract more investors also to carry out the right strategy. It is important to put in place an exit strategy for investors.
There are various exit options for investors as well as for entrepreneurs and business owners. The main options for a successful exit are described below, but it is also important to note that there are also exit strategies to minimise losses.
Acquisition by another company
One of the objectives of start-ups is to sell to a larger start-up in order to make a profit. These exits will bring in profits that will allow entrepreneurs and investors to realise the expected capital gains. In this sense, the acquisition may come from a national or international competitor or from a company seeking to diversify its activities. As a general rule, payment for the acquisition is usually made in cash, but there are cases where the acquiring company may offer shares as a form of payment, especially if they are being listed.
Merger with another company
Along the same lines as the previous option, there is the merger with another company as one of the market leaders. In this option, there may be no opportunity for investors for a real Exit by receiving shares in the company resulting from the merger. However, mergers are done to take advantage of synergies such as technology, branding and the markets of the two companies. This would be a clear value creation for the investors of both companies.
MBO or management buy-out transaction
In the case of MBO, Managing Buy Out, the management and/or the founders themselves buy back the shares at multiples over the acquisition price that are favourable to the investors. In most cases, this acquisition needs external financial support, usually from private equity. In this respect, three parties are particularly relevant in the development of an MBO: the management team, the divesting shareholder and the venture capital firm (or the financial partner in question).
Private Equity or Venture Capital Acquisition
In this case, a stake in the company can be sold to a Venture Capital (VC) or Private Equity fund. A VC may be interested if there are obvious synergies with other companies in their portfolio or if the expected return on investment is lucrative in their eyes. What if they can grow the company exponentially and take it public in 2-3 years?
Exit to capital markets
High-growth SMEs and high-growth start-ups have as an exit option for investors, an exit to alternative capital markets (BME Growth, Euronext…).
Through an Initial Public Offering (IPO) in which part of the capital is offered to the public in the form of shares. This option improves access to liquidity. It provides an exit strategy for existing investors; where in many cases they can decide the timing of their exit to maximise their capital gains… which are after all their remuneration for the risks taken. This option is increasingly growing in Europe and Fellow Funders is supporting many SMEs to take the plunge.
The Guide to Listed Markets for SMEs: an accessible and real alternative financing option
In this regard, the Capital Markets division of Fellow Funders has launched the essential guide together with the Colegio de Economista, Cepyme and MBE called Guide to Listed Markets for SMEs. It aims to guide SMEs in obtaining alternative financing to traditional bank financing and to give greater visibility to the financial markets.
The number of companies listed on the alternative stock market in Spain (115 companies) is 70% lower than the average for European countries (384 companies). This is a real opportunity for many Spanish SMEs and start-ups to take the plunge.
For this purpose, Fellow Funders offers free of charge to those individuals or SMEs who want to learn about the accessible and real option of alternative financing and also an Exit strategy for their investors.