There is “no one size fits all” when it comes to exiting a business. Founders and investors will have different timelines and goals in mind when formulating their own strategies. The one thing they have in common is that they will be looking for an exit at some point.
We’ve summarised the methods founders generally consider when contemplating an exit. It is intended as an overview only: developing a strategy and structuring an exit is complex. You will need your team of legal, tax and commercial advisors on board to best navigate your exit from the business.
• Share Sale: A buyer purchases shares from the shareholders in your company. The company continues to exist (as does its operations, contracts, employees etc) with new owners in place. Unless you have pooled your shareholders in a holding company, share sales are easier where there is a small number of shareholders because, if the entire company is being sold, some or all of the shareholders may need to be involved in negotiating the terms of the sale documentation.
• Asset Sale: A buyer purchases some of your company’s assets. Your company continues to exist and may continue to operate after the sale of those assets. An asset sale gives a buyer the flexibility to select only the assets it wants to buy and leaves anything unwanted (including liabilities) behind with your company. This may allow you to achieve a better price for those assets than if the buyer purchases the company as a whole. If your company has multiple business lines, it can be impractical or time consuming to separate the sale assets from those your company will retain (e.g. agreements providing services to the company which are shared between several business lines). An asset sale may also trigger restrictive clauses in some of your company’s agreements (e.g. a sale of a material asset or substantial portion of assets may require the counterparty’s prior consent).
• Acquihire: Acquihiring has recently received a lot of attention. It is common in Silicon Valley and occurs when the buyer is more interested in the company’s team than it is in the products or services it sells: the most valuable part of the company is its team. Employees are transferred to the buyer (often receiving significant bonuses for doing so) and the selling company’s products and services operations are closed down. From a legal point-of-view, an Acquihire is an acquisition so it may be structured in one of the usual forms (i.e. share sale, asset sale, merger).
• Merger: Two companies are combined into a single company. Companies laws and regulations will prescribe various methods but the most common process is where the buyer creates a new wholly-owned subsidiary that will merge directly with your company. After the merger is completed, that subsidiary “disappears” and no longer exists as a separate legal entity and your company survives in its place. The buyer will then own 100% of your company (i.e. the “surviving company as your company’s shareholders will exit and be paid for their shares. The merger process may also trigger restrictive clauses in some of your company’s agreements (e.g. restrictions on assignment of an agreement). We sometimes see “sale” transactions being described as “mergers” for publicity purposes.
Raising more capital from VCs or private equity firms (“PE firms”) may no longer be a suitable method for a mature and established company. This is where an IPO (or “Initial Public Offering”) comes into play. An IPO is when a company starts floating its shares on a stock exchange, in the process selling a considerable percentage of its shares to institutional and non-institutional investors. Globally, startups are now taking longer to IPO, most probably because there is a large amount of capital available in the market from VCs, PE firms and other institutional investors.
Not every company needs to sell itself to a bigger company to give a return to its founders, employees and investors. If your company has a proven business model and scale, you could instead choose to reinvest your profits in the company and remain independent. Or you can distribute some of the profits to your investors as a dividend, giving them some intermediate return on their investments. The compliance requirements and other obligations that come with exposure to the public markets (i.e. listing on a stock exchange) may not be something you are interested in.
Not all companies are as successful as others and some find themselves running out of cash. Or perhaps you have shifted your focus to another new venture and simply want to “shut up shop”. If the board of directors decides to wind up a company there are various ways to achieve this from an unofficial process to initiating liquidation proceedings. The approach taken will depend primarily on the financial position of the company and whether a bank or other secured creditor has the right to the company’s assets (e.g. foreclose, power of sale). The company may take an informal approach and sell its assets, make staff redundant and shut down any remaining operations without going through a formal legal process to end its existence. On the other hand, laws and regulations set out pre-insolvency “rescue regimes” and other formal bankruptcy processes which the company may follow. You will need advice from corporate and insolvency experts when making winding up or insolvency decisions.