As a business owner, you’ll have likely thought about possible exit routes and how you’ll realise your investment. You may already have been approached by a private equity house or a larger corporate looking to acquire your IP, but you could be unsure which is the best approach to take to achieve your goals. This article will cover the pros and cons of four different exit approaches: strategic buyer (trade sale), private equity, management buyout and an IPO. Every business, founder and market is completely different, so consider your options in the context of your own situation and how you’ll satisfy each of your objectives.

Trade sale/strategic buyer

A trade sale is a popular form of exit, which involves selling your business to another business. The acquiring company, known as a trade acquirer or buyer, will usually operate in a similar sector and see potential synergies with your business – and often believe the acquisition will result in a 1+1=3 benefit. 

The pros of a trade sale

Due to these potential synergies, a trade buyer will often pay above market rate to obtain your business, which ultimately puts more money in your back pocket. If there are multiple interested parties, competitive tension can drive the price upwards. Of all exit routes, a trade sale provides the greatest amount of liquidity, as a buyer will usually acquire 100% of the business, allowing you to walk away completely. 

The potential buyer will often be knowledgeable about your business (usually having known of it or researched it before making an approach), which ultimately can reduce the requirements for due diligence. The buyer may also have reserves of cash available to make the purchase, reducing any need for debt facilities to be obtained prior to the sale.

Potential drawbacks of a trade sale

With a trade sale, you’ll need to open your accounts and business manual to an external party, which can be unnerving and risks a potential leakage of value IP to a competitor or supplier. Drawbacks from a trade sale will also be felt post acquisition. While this may not affect you as the exiting shareholder, there could be implications for employees. They could be dissatisfied with the new culture or operations of the acquirer and ultimately leave the business shortly afterwards. Staff members may also be let go as part of the acquisition if their job could be performed by someone else in the acquirer’s business. Ultimately, you may feel a sense of responsibility to ensure they are looked after once you have exited.

Management buyout (“MBO”)

A management buyout is an acquisition process in which an individual or a team who are already involved with the business purchase the equity off the existing shareholders, usually the founder. The purchase of these shares is often financed through external sources such as bank debt or private equity.  

The pros of a management buyout

Instead of spending time, money and effort marketing your business to find a suitable third-party purchaser, your buyer is already on your doorstep. Founders and the incumbent management team may also strive towards an MBO as it reduces the opportunity for valuable trade secrets to be leaked, in the worst case, to competitors.

And the potential drawbacks of an MBO

An MBO can have a lower valuation in comparison to a trade sale. As mentioned previously, a trade buyer will pay over and above for synergies, but these are not available given that the business is being purchased by someone internally. 

Additionally, while your management team will know the business and market, they may not possess the skills to be a ‘business owner’ (though it is difficult to quantify exactly what is required to be a good business owner).

Private Equity 

While a trade sale or an MBO usually involves selling 100% of your business, a private equity transaction will allow you to realise some value but still have a stake in the business and an involvement in its future. It will also allow you to realise additional value further down the line from a secondary sale. Private equity firms often look for a return within 3 – 5 years and can take a majority or minority stake in your business.  

The pros of a private equity sale

Taking cash off the table can be liberating for you as a founder, as you can address any short-term personal finance needs such as paying off a mortgage or financing school tuition fees. From a business perspective, private equity investment provides not only capital but expert advice on how to advance your company strategically, operationally and financially. As well as providing advice, private equity firms have deep pockets for funding acquisitions, helping to provide inorganic growth. 

The drawbacks of a private equity sale

A private equity sale gives investors a considerable amount of control over the running of the business. They’ll have influence over key strategic decisions and can often enforce drag along rights (selling the business without your permission). 

The due diligence process is even more rigorous than a trade sale as the private equity firm will look to turn over every stone possible. The private equity house will also need to see how they are going achieve a return on their investment, which means you’ll need to provide business plans and a financial model demonstrating this, requiring time and money.

An Initial Public Offering (IPO): what does this entail?

If you’re considering an IPO to exit your business, then consider yourself very lucky! It is a rare form of exit for many founders/entrepreneurs and requires the business to be of a sufficient size. Going public can be a proud moment for a founder and should be celebrated as a triumph of business success. This form of exit can be extremely lucrative for senior management, who may have foregone a market salary and 9-5 daily hours for many years. 

While Jordan Belfort in the Wolf of Wall Street made Steve Maddens IPO an exciting process, it is in fact the opposite. Getting your business ready for an IPO is an expensive and regulatory heavy process which can take between 12-18 months to complete. The business will need to introduce several changes into its governance and operational processes to be able to be listed, which takes a lot of energy and time away from board members who’ll simultaneously have to continue to run the company.

Which route is best for you?

All founders, businesses and markets are different so it’s important to consider all available exit routes and which will best fit your current personal and business situation. Do you have a strong management team in place? Would you like to continue to see the business grow and take part in a secondary exit? How quickly are you looking to exit the business? Your answers to these questions will provide some clarity over which route you should consider.

You can also speak to your advisors about the process and which route they believe to be in the best interests for you and your business.

Find out more about what to expect when exiting your business

Click below to view the rest of the articles in our series 'Selling your business: how to plan your exit strategy' to find out the essential elements you'll need to consider when planning for a successful exit.

 Plan your exit strategy