The Southeast Asia (SEA) startup landscape has witnessed some successful initial public offerings (IPOs) recently, including the Indonesian e-commerce shopping platform Bukalapak, and the Vietnamese data-driven loyalty platform Society Pass. Some are also actively eyeing IPOs, including Traveloka, VNG, Tiki, aCommerce and more. Sizable mergers and acquisitions (M&A) also attract a lot of attention in this space, including Intuit’s acquisition of TradeGecko, and Aviva’s merger with SingLife.
This highlights the potential of high-value exits for investors who are doubling down on the region’s startup development.
But IPO is rare, and it only works for businesses having a proven track record of growth. That’s why it is crucial to understand different types of exits — liquidity events — that investors or founders utilise to liquidate their financial position or assets, raise more capital for business growth, or even limit losses of non-performing investments or unprofitable businesses.
Different types of investors may prefer different methods of payouts.
After deploying an exit strategy successfully, the buyer takes over the business in exchange for cash or stock, and key executives and personnel from the firm frequently remain on for a period of time in order to cash out and vest their shares. In some cases, founders will continue running the company with public status.
For venture capitalists, exits allow them to return the financing to their Limited Partners (LPs) with a much higher return on investment. Seed investments are the riskiest type but the return on investment can even reach 100x for a single deal. Series A investors shoot for a smaller multiple at 10x to 15x, while later-stage investors aim for 3x to 5x in return.
Below is the list of eight ways that current shareholders of private companies can look into for an exit:
- Merger and Acquisitions
- Management and employee buyout
- Selling stake to a partner or investor
- Family succession
Merger and Acquisitions
Mergers and acquisitions (M&A) is an exit strategy for any firm looking to sell its business and especially appealing to startups and entrepreneurs. An acquisition happens when one firm buys another entirely; while a merger is the tie-up of two businesses to establish a new legal entity under a single corporate name.
The process of M&A comprises numerous stages and can take anywhere from six months to several years to finalise.
Proper deal structure is considered one of the most difficult aspects of the M&A process. Many factors are taken into account, including antitrust laws, securities rules, corporate law, competing bids, tax ramifications, accounting concerns, and market circumstances.
This leads to a downturn that M&A may be time-consuming and costly, and regularly fail. Whereas, M&A has the advantage that business owners can keep pricing negotiations under their control and establish their own terms.
Acquihires are a type of exit strategy in which a corporation purchases a company in order to acquire its skilled staff.
In contrast to other exit strategies, an acquihire focuses on the founders and their team rather than the startup’s business model or assets. The acquisition price is frequently determined by the worth of the team to the purchaser.
In terms of the company’s employees, they might make use of this exit strategy type to ensure that they will be looked for in the long term. However, this, like other purchases, maybe a difficult and expensive process.
Initial public offering (IPO), or going public, is known as the process of a private firm offering its shares for sale on a stock exchange. It enables a startup to raise capital from the public and allows current private shareholders to monetise their previous investments.
A private firm seeking an IPO must not only prepare for a massive increase in public scrutiny but also file a mountain of paperwork and financial reports to satisfy the regulatory requirements such as a preliminary prospectus. This is oftentimes a complex, time-consuming process that most businesses find difficult to handle on their own.
Therefore, a company potential for an IPO has to record favourable growth and positive financial results. It will also hire an investment bank to underwrite the IPO as well as perform due diligence before the public listing. The two will then set an initial share price and a date for its securities to be traded publicly on the stock market. Institutional investors such as pension funds, endowments, or foundations can meet with the startup and buy initial blocks of shares prior to the public sale.
Since most companies struggle with the IPO, merging with a special purpose acquisition company (SPAC) is among the top priorities for a startup looking for an alternate exit strategy. In 2020, gross profits from SPAC deals were roughly six times higher than that of 2019.
SPAC is a publicly listed “blank check” corporation founded for the purpose of merging with or acquiring private firms. Investors, who are also known as sponsors in SPACs, can include a wide spectrum of people, including firm founders, top executives, and venture capitalists.
After the transaction, the target company will be listed on a stock exchange, which transfers the burden of the IPO process to the original SPAC.
Management and employee buyout
A management and employee buyout (MEBO) is a corporate restructuring strategy whereby both a management buyout (MBO) and an employee buyout (EBO) buy out a company in order to consolidate ownership among a small number of shareholders.
MBO is a transaction in which the management team of a firm buys the assets and operations of the company they run. Meanwhile, EBO is a restructuring method in which employees purchase majority ownership of their own company.
MEBOs are typically used to privatise a publicly listed company. Besides, they can also be used as a way for venture capitalists or other shareholders in an existing private company to depart.
This exit strategy often boosts a firm’s productivity since it may provide extra job security for employees, prompting them to put more effort to improve the company’s profitability.
Selling stake to a partner or investor
This type of exit strategy is characterised as a ‘friendly buyer’ since founders are likely to sell their stock to someone they know, trust, or work with.
The buyers are partners or venture capitalists, who will remain the company’s operations as normal even when the previous shareholders are completely out of the business.
However, it is not always an easy feat to find a “buyer” and may deprive you of any involvement within the company’s management or decision-making process afterwards. Moreover, it often causes ripples when the negotiation does not satisfy both ends of the spectrum.
The family succession exit plan entails handing over the business to a kid or another relative at a specific time.
Different from other departure strategies, this one does not engage third parties and is said to be one of the easiest and most easy solutions when done correctly.
Though it is a tempting option for individuals who wish to keep their company in their family long term, choosing or qualifying a capable person for the position requires the owner to keep a sharp eye on the successor.
Following the completion of familial succession, ex-founders are able to maintain strong ties to the company as advisors or consultants.
However, during the process, the members may experience emotional, financial, and overall stress.
Liquidation is the process of closing a firm by selling all of its assets, especially when it performs poor over a long period of time and could not deploy any other exit strategies. However, this strategy is not preferred in the startup space because most tech companies rely on their software without significant physical assets.
When the company is liquidated, the worth of present clients will not be recognised in its sale. Therefore, to maximise earnings, owners are advised to restructure the business for the acquisition of the entire firm rather than liquidation.
This kind of exit strategy might be easier and quicker to implement than other options. Yet, it is unlikely to be a lucrative exit strategy.
Bankruptcy happens when a firm’s business model is proven unprofitable and the debts are significantly more than the assets. It is an extreme exit plan that employs a legal mechanism for liquidating a business and paying off debt.
Declaring bankruptcy does not ensure that all of the company’s obligations will be forgiven. It is, however, takes little paperwork, quick, and helps the company to rebuild its credit.
Alternatives to bankruptcy include debt negotiation, operational improvements, and business turnaround and restructuring.
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