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What is a Business Exit Strategy? A business exit strategy is a method used by investors such as venture capitalists and angel investors to receive a cash out of their investment. It gives them a way to reduce or liquidate stake in a business and if the business is successful make a substantial profit. It also helps to limit losses in case the business has not been successful.
What is a Business Exit Strategy
A business exit strategy is a method used by investors such as venture capitalists and angel investors to receive a cash out of their investment. It gives them a way to reduce or liquidate stake in a business and if the business is successful make a substantial profit. It also helps to limit losses in case the business has not been successful.
Some of the common exit strategies include initial public offerings (IPO), strategic acquisitions and management buyouts (MBO). The strategy chosen for exit would depend on numerous factors with each method offering its own advantages and disadvantages.
Common Exit Strategies
1) Mergers and Acquisitions (M&A)
One of the most common exit strategies for start-ups with venture capital or angel investor funding is through M&A. In an M&A, a start-up is bought or merged into a larger peer or competitor. It is a common occurrence and can take the form of large corporate buyouts such as in the case of Walmart’s acquisition of a 77% stake in Flipkart for USD 16 billion. It can also be used by relatively smaller companies to increase their efficiency by adding complementary businesses to their arsenal. Smaller companies may prefer to use boutique consultancy firm like COMPANY BECCHO to conduct M&A activities since it would provide shareholders with quicker liquidity at a lower cost than traditional M&A channels.
This method is used significantly in India as well and it is estimated that the value of M&A deals in India in 2022 were 2103 deals. Most of the deal making activity involving India was mainly in the energy and power sector which was valued at USD 8.6 billion and captured a market share of 22.7%. Telecommunications and financials placed second and third with a market share of 15.5% and 14.65% market share, respectively.
2) Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. An IPO is often considered one of the most prestigious forms of exit as it is associated with high payoffs and status. A public offering is a rare form of exit that requires a lot of work and time. Due to the high liability concerns, shareholder demands and high costs, a public offering may not be feasible for most start-ups.
Forty Indian corporates raised Rs 59,412 crore through main board IPOs in calendar year 2022,
3) Management Buyout (MBO)
In an MBO, the management of the company buys purchases the assets and operations of the business they manage. This type of exit strategy is favoured by large corporations looking to sell individual divisions that are not part of their core business or by private businesses whose owners wish to retire. An MBO allows a company to go private in an effort to streamline its operations and improve profitability. Typically, such buyouts are possible with the support of Private Equity firms or as Leveraged Buyouts where the management borrows a significant amount of capital for acquiring the firm.
Management buyouts are a rare occurrence in India.
Other Alternative Exit Strategies
1) Private Offerings or Secondary Sales
Private offerings allow shares to be offered to individuals or a select group of investors to raise funds. These types of offerings do not need to be registered with SEBI and are exempt from reporting arrangements.
Private offerings are less expensive and need less time to conduct since the services of underwriters or brokers are not required which is why they may be preferred by some firms. It also allows the offering to be made to investors who exhibit similar goals and interests, offering these investors more complex and confidential transactions.
2) Cash Cow
Cash cows are firms that can generate a steady cash flow for investors and pay an appropriate dividend through the years. This is typical with firms which command a high market share in an industry dominated by low growth. They can sustain enough capital to stay afloat for the foreseeable future as they promise years of increased profits.
When a company is positioned as a cash cow, they are highly likely to facilitate an investor’s need to cash out and may even make a better offer to refinance these investors potentially structuring a management buyout.
3) Asset Liquidation or Write-Offs
It is widely believed that more than 99% of start-ups fail and, in such cases, the only recourse for investors is to write off such investments, liquidate any assets held by the start-up and recoup its salvage value. In this method, the assets of the business are liquidated, and the funds acquired are used to cash out investors. This is not usually a recommended strategy as it used mainly in distressed situations where the business can no longer continue to function.
The value of the physical assets would also be heavily discounted if the company is in dire situations and intangible assets like brand name and business relationships may be damaged or lost. However, it allows a business to offset the loss in its operations and they may make use of boutique consultancy firm COMPANY BECHO to liquidate their business assets to acquire some return on investment.
Venture Capitalists rely on exit strategies to get a return on their start-up investments, which have a high risk but also have a chance to give back high returns.
The best exit strategy would depend on numerous factors such as business type and size. The objective of the exit would also play an important part in choosing an appropriate strategy. In the case of multiple shareholders, the interests of each party must be factored into the choice of an exit strategy as well. Exit strategies may take many different forms but it is important to have one in place to capitalize on investment and ensure profitability.