Luke Davis, CEO of IW Capital, discusses the importance of having a plan and the main routes to achieving exits.
In 2020 over 800,000 businesses were founded as millions found themselves on furlough and with time on their hands to pursue projects and side hustles to their ultimate potential. At the other end of the market, 2021 has so far been a bumper year for IPOs, Mergers and Acquisitions and private equity as larger businesses take advantage of buoyant investor sentiment and deflated company values.
These two factors feed into the recent rise in the start up to sell up economy, many of the firms started over the last few years have been started purely with the goal to sell, either for financial independence or to fund another project. This has also been fuelled by the spree of acquisitions from the tech giants such as Amazon, who over the last year have bought, to name a few, startups such as Selz, Wickr, Art19 and Perpule.
Successful business models at any stage will likely contain a strong exit strategy, whether it be a sale, merger or, if the business is very successful, an eventual IPO. It can be difficult, however, for founders to think about the end of their involvement in a business they have just started, but it is hugely important.
Luke Davis, CEO of IW Capital has complied aguide for business owners to prepare for an exit:
When starting a business it can be counter-intuitive to start by thinking about the end, or at least the end for you. But it is incredibly important not only for your own life and business plan but also for potential investors, who will also need an exit in order to achieve a return on their investment, stock picks can outperform the market. The process will also help identify potential rivals – or buyers – as well as previous routes to success. If you have no plan to leave you may not ever need to exit, but it still pays to have a plan.
An acquisition is perhaps one of the simplest and easiest to understand forms of exit. The acquisition of a private company is normally completed on friendly terms and will often come from a larger rival in the industry of the acquired business. A good example of this was Facebook’s acquisition of Instagram in 2012, when Instagram had just 13 employees but sold for $1 billion just two years after being founded in 2010. Try to identify rivals in your sector who could be potential buyers and what it would take to sell-up to them. An acquisition is also a good route for entrepreneurs who are not looking for much continued involvement in the company, although each deal is different.
Merging with a rival company or a firm in a different industry can provide a great option for business owners who, perhaps, are not ready to fully step away from the business. It also often greatly increases the value of the company and so can be popular with investors. M&A deals are generally a better way to raise capital to pay investors or fund a future venture for an entrepreneur and tend to result in less involvement going forward for the founder.
An IPO or Initial Public Offering is a way for a private business to go public and make shares available to be bought or sold on the stock market. Founders will often sell a portion of their shares while existing investors normally have the option of selling their holding – to achieve a return – or to hold on to them in the hopes of higher future returns. The founder will play a pivotal role in the process and, crucially, deciding on a valuation for the company. The founder will also likely play a big role in the company’s future and investors may insist on their continued involvement. It does, however, offer a way to cash-in on the success of the company by selling shares on the stock exchange.
A private sale
A private sale, or sale to a friendly buyer, involves selling the business to someone you know personally, whether that be a family member – normally children – a friend or a co-founder. This exit strategy can be beneficial to smaller firms and has the added advantage of potentially keeping the business in the family or within your circle of friends. It does, however, mean that sales and sale prices can be less objective – it’s difficult to play hardball with family when negotiating a price.
Ultimately, an exit is a complicated process that differs for every founder and investor but it is key to make plans and have open and frank discussions with any key stakeholders, especially shareholders or early backers who are looking for a return on their risk.