The six ways that entrepreneurs can make successful exits.
It is crucial for entrepreneurs to structure an effective exit strategy for their business. Currently, there are six ways that entrepreneurs can make successful exits.
- Succession
- Management Buyouts
- Corporate Buyouts
- Sale of Shares
- Merger of Equals
- Sale of Business
Succession:
- Succession is perhaps the most common exit plan that we hear from our business-owner clients.
- The plan is simple – build or inherit a successful business, include your children inthe operation, train them up and, hey presto!
- In truth, this exit plan is perhaps the riskiest and requires careful planning and legal strategy.
Management buyouts:
- A management buyout is a transaction where a company’s management team purchases the assets and operations of the business theymanage.
- As the current generation of business owners is ageing, it is a particularly good strategy to pivot to for those unfortunate owners who end up with uncooperative successors.
Corporate buyouts:
- A corporate buyout is a transaction that involves the sale of a company to another company that is usually a larger corporate entity.
- It is not unheard of for business owners to align their exit strategy to a potential buyout by a major corporate actor either seeking diversification,consolidation, or transformation.
- One of the legal concerns with such transactions is that the business owner usually needs to stay on asa minority shareholder or a director, or in a management position, which can lead to strategic conflicts.
Sale of Shares:
- Investors and business owners often have differing levels of commitment to the business.
- The problem arises where one or more co-foundersor investors wants to exercise their exit strategy and sell their shares but the remaining partners.
- In this scenario, a well-drafted Founders Agreement, Shareholders Agreement, and Memorandum of Incorporation could be the only thing that stands in the way of a bitter civil war.
Merger of Equals:
This is usually a strategic way to grow two businesses that are both small enterprises (and sometimes that are in competition with each other) by joining forces to increase profits either by acquiring more market share through the mergeror by exploiting efficiencies to cut costs.
There are ways to structure such transactions to enable the shareholders to see some returns out of the transition into the new entity.
Sale of Business:
- Where the entrepreneur decides to divest all or asignificant portion of the assets of a business, including equipment, customer contracts, employees, and goodwill.
- In all these scenarios, it is prudent to get the right legal counsel at the very outset of the process to ensure that the exit—strategy related interests are clearly declared and negotiated upfront.
- Codifying such interests in the appropriate document – beit a Founders Agreement, Shareholders Agreement, and/or Share Sale Agreement – is crucial to ensure that there is a meeting of the minds between co-founders and early-stage investors.
