Selling your company is just one way to achieve an exit. What are the other options?
Mergers & Acquisitions make up the vast majority of exits and often occur before Series B funding rounds. In its simplest form, an acquisition will involve another company buying the shares in the target company. In a share sale and purchase, the only asset that changes hands is the shares in the company and all other assets and liabilities remain the property of the company itself. The buyer will usually want to do due diligence into matters that might affect the value of the company – hence the need to have your house in order well in advance.
Most buyers want to take a company free of any warrants, options or convertible equities that have been granted. This normally means that these instruments will need to be cancelled or exercised immediately prior to the sale and any tax consequences dealt with.
Alternatively, a buyer can buy the assets used to run a ‘business’ and leave the ‘company’ behind. Put simply, individual assets of the business will be transferred to the buyer together with the goodwill of the business whilst the liabilities will generally be left behind in the ‘shell’ of the company structure which remains in the hands of the seller. After completion, the buyer will be able to carry on the business in succession to the seller. The seller will usually then wind up the company. Share sales are generally much simpler than asset sales and are the most common M&A structure.
A Management Buy-out is where the existing management of a company buy the company from its existing owner. This will usually be done in conjunction with financial (and often managerial) backing from a private equity fund who will subscribe for shares in the company in return for their investment. Typically, a private equity investor will aim to rapidly grow the company with a timeline at the end of which they will aim to sell. The management team will also subscribe for shares and will usually be subject to provisions, such as ‘bad leaver’ and ‘drag and tag along’ provisions, that will tie them into the business and penalise them for exiting early.
For all M&A transactions, there will be a due diligence process where confidential information will necessarily be passed to the buyer so that they can assess the value and liabilities in the company. It is therefore essential to know that the buyer is seriously committed to the deal and is not a time waster or, worse still, an unscrupulous competitor seeking to obtain trade secrets for the benefit of its own business. A well drafted Non-Disclosure Agreement can provide some protection and should be entered into before discussions begin. This should aim to control the distribution and return of information/documents between the parties and state that the information provided is not warranted to be true. In conjunction with this, the sharing of information should be carefully controlled.
An ‘initial public offering’ or IPO is the process of becoming a public company and offering your shares to the ‘public’ at large (but usually large institutional investors) by listing shares on a stock exchange.
This is a high profile event and is a way of gaining an injection of cash into a company. This cash can be used by the company to expand, either through acquisitions of other businesses or organic growth, or to pay off existing debt. Generally, a company will gain many new shareholders as a result of a flotation, and these new shareholders will be a potential source of future funding for the company.
Listing on one of the larger stock exchanges, such as the Main Market of the London Stock Exchange will result in external regulatory requirements that can be burdensome. There are other markets such as the Alternative Investment Market, or AIM, which is a smaller secondary market designed to meet the needs of smaller, growing companies which require a more flexible regulatory regime.
Where a traditional exit is not an option, there are a number of insolvency related processes available including liquidation, winding up and administration. These processes are different and the choice would depend on the situation of the company but will involve the distribution of company assets to the shareholders and creditors.