Many shareholders in private companies are not aware of the various ways in which they can dispose of their shares. Some will think that their only option is to sell via a ‘trade sale’. Others will be aware of the possibility of a management buyout and some people will have considered flotation. The market for shares in private companies can be limited, so being aware of the ways in which an exit can be achieved is an important part of planning your exit strategy. This article considers the options available.
A sale to a third party on the open market is the method of disposal most shareholders owners think of when they consider an exit and it is still the way many companies are sold.
A trade buyer (who could be a supplier, competitor, customer or new entrant) will often be prepared to pay more than an equity investor or management team due to the synergies and other benefits it can derive from the acquisition.
Buyout by Private Equity
Private equity buyouts involve a private equity fund acquiring the company. The private equity fund will often allow management to invest alongside the fund and may also bring in external funding from a bank.
A management buyout (or MBO) is a form of buyout where management acquires the company, but usually with one or both of private equity backing or bank funding. This option is often available when a major shareholder wishes to leave and the next tier of management has the confidence to take the business forward.
Where not all shareholders wish to exit, a share buyback may be appropriate, particularly if the other shareholders do not wish a third party to be involved in the company. Under a share buyback, the company can purchase the shares itself, funded by a bank, existing cash or the proceeds of a fresh issue of shares, subject always to meeting certain conditions under the Companies Act 2006. A buyback can be a way of avoiding a third party gaining an interest in the company and, in addition, the remaining shareholders do not necessarily have to part with any money.
Many private companies do not consider flotation to be a realistic exit route, believing the requirements of the London Stock Exchange’s main market to be too strict. However, there are other options such as AIM and the ISDX Growth market where the rules are more relaxed than those for the main market.
A flotation is best considered as a multi-staged exit strategy, involving an initial sale of equity to the public followed by the opportunity to sell further tranches of equity into a much more liquid market and at, hopefully, ever-increasing prices. An immediate sale of newly listed shares will not usually be possible. However, flotation can be a high reward strategy and if you have a profitable company with strong growth potential you should give it serious consideration.
What is the right option for me?
When choosing the exit strategy that is best for you and your company:
- Analyse the reasons why you wish to exit and what your preferred timeframe might be.
- Consider personal as well as business and commercial reasons.
- Obtain professional advice at an early stage to ensure your deal is structured correctly, your business is ready for the stringent due diligence process it will be put through during an exit, you get the best tax treatment and are generally well prepared for the exit process.
Doing all of these things will help you to maximise your return from your chosen exit route and make the process as smooth as possible.