Chapter 7 - Start Up Exits
IN THIS LESSON
Two Ways Out
Investors will naturally want their money back, plus a sizable return on their initial investment. For them to get it, there needs to be an exit – either (1) an acquisition by another company at a price above the original cost of the shares, or (2) an initial public offering (IPO).
In general, it is more likely that your company will be acquired than you are meeting all the conditions to qualify for an IPO, but you never know. Your company may be one of the lucky ones to reach the stage where it makes sense to do an IPO. But even if it doesn’t, you can do very well by your company being acquired for a large sum of money. Yes, your hard work would pay off and you’d be able to oversee a positive pay-out to your investors. Happy investors, happy life!
The following are definitions of the two ways to exit:
Acquisition
An acquisition is when a company buys most or all the shares of another company to gain control of the other company. By acquiring more than 50% of a company’s shares, the acquiring company gains the authority to make decisions about the newly acquired company without the approval of the company’s shareholders.
Companies acquire other companies for many reasons, including:
Expand market presence and geographical diversification.
Reduce costs.
Expand product line.
Enter a new market more quickly.
Gain control of innovation / new technology
Decrease competition.
Gain expertise of the team of people
Access to a broader installed base of customers
IPO (Initial Public Offering)
An IPO is the process of selling shares for the very first time in a private company to the public. This is a way to raise money to help the business grow. This is a path for investors to exit some or all their ownership by selling shares. Usually, the company that is doing the IPO brings in an underwriting firm or an investment bank. They help determine the number of shares, the price of the shares, the type of shares and the timing.
The public is not able to buy stock in a private company until the stock is offers to the public. But once a company goes public, it is traded on a stock exchange, and virtually anyone can buy shares. It’s prestigious, but it’s not easy to get listed. Usually, only a private company that has strong financials, a sound business model and sustainable profitability can qualify for an IPO. Keep in mind that public companies must adhere to lots of strict regulations and requirements, including the reporting of auditable financial and accounting information each quarter.
Whatever your exit strategy is, your investors may be very patient and give you many years to grow the business, but most of them want to make a profit within a reasonable timeframe (usually within 10 years). This is why you will need your exit plan squared out.