Exit strategy : The Big4
When a company or an entrepreneur wants to prepare an exit, several aspects should be taken into consideration. We will focus on what we can name the four pillars of the Exit Strategy, which are timing, type, structure, and optimization.
Let’s have a SOTT analysis of your exit, even it’s the sign of the time let’s analyze if it’s your time to exit. We will process a general way and in the next article, we will focus on the China aspects of this analysis.
STRUCTURE:
One of the key questions is to analyze if the actual structuration makes sense for the future buyer but also if it makes sense for you to sell it. Just like a second-hand car, the way you have been treating your car all these years will have an impact on the valuation at the time you will exit.
Adequate structure for a future buyer is a must to have. Do you have a holding to manage your activities? How do the state can intervene in the valuation based on my company structure?… all these questions are fundamental.
Fiscal company process between companies in a group, but also with suppliers or customers. How is your fiscal scheme optimized? Which impact on your EBITDA?
Fiscal Individual scheme gives you a vision of how you will be fiscally treated after your exit. Because selling 10 or 15 years of hard work and be highly taxed based on a bad structuration can generate a high level of frustration.
OPTIMISATION:
One of the purposes of an exit strategy is to optimized the company activity.
Value optimization will be highly related to your business model and in which sector of the industry you are involved in. For example, a communication agency still involved in paper has less leverage in term of valuation than a digital communication agency.
Measure of performance during the past 2-3 years will be an indicator of potential growth and a valuable metric to define the future of the company and future value for the buyer. In another word, performance should be optimized years before an exit.
Financial optimization is vital! If financial statements are healthy and in good order, it will be seen as a sign of structuration and give the perception to be easier to integrate or develop. But having clear and understandable financial statements needs optimization of the process, at the accounting level, and control.
TYPE OF EXIT:
The more elaborate the exit strategy is, the longer it will take to finalize. Also, all the types of exit strategy are not relevant depending on kinds of business sizes or industries. Let’s see below the main ones:
Financial divestiture includes investment by a fund directly, or in collaboration with financial institutions as we can find with an LBO. Other possibilities can be seen as the acquisition through a SPAC or a SPV, but the most recognized is the IPO (initial public offering).
Corporate divestiture can take different forms. Some companies can acquire for financial synergy, operational synergy, portfolio synergy, or purely for financial perspective purposes. It can also be for a strategic reason to create growth to cover financial needs or prepare a future IPO.
Family divestiture is in a simpler term the way to pass the business down to family or heirs. It can be done entirely or partially depending on the level of control the actual management wants to keep. It can also be partially hybrid with a part transferred to family and another part sold to a financial buyer.
Management buyout can be seen in an industry without a very high growth rate. The purpose is to have the management team acquire the company.
TIMING:
As always, time is the key! It should be the right time to sell and also find a buyer who wants to acquire at this time. The Art of M&A professionals is to determine the right time and right people to be able to have a smooth deal.
When to exit is regularly overlooked by sellers as they don’t plan but wait for the opportunity. In this area, opportunities don’t come without clear preparation. Also, the company has a proper evolution and this evolution can miss the alignment of interest of a potential buyer.
Time scheduled before an exit, will depend on the level of preparation of a company. But anyone who prepares an exit should be aware that it takes at least 9 months to sell an activity, so if the company needs to restructure or optimize some aspects of the company it should be thought in advance.
Sector boom and bust is also important to anticipate to be able to have a fruitful exit. If the industry you are in starts to decay it’s not a positive sign for selling. A boom in your industry if you prepared the right changes at the right time can be a clear factor that will increase your multiple.
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