Exit Options for Investors

Realising the investment

Many business owners and shareholder management teams are looking at some point to sell their investment or seek a stock market listing in order to realise a capital gain. Venture capital firms usually also require an exit route in order to realise a return on their investments. The time frame from investment to exit can be as little as two years or as much as ten or more years. At the time of exit, the venture capital firm may not sell all the shares it holds. In the case of a flotation, venture capital firms are likely to continue to hold the newly quoted shares for a year or more.

The options

The five main exit options are listed below. If you are considering any of these, you will need the specialist advice of experienced professional advisers many of whom are associate members of the IVCA.

Trade sale

The sale of your company’s shares to another company, perhaps in the same industry sector. Since the dotcom crash, the majority of venture capital exits have been achieved through trade sales. This can bring a higher valuation to the company being sold than a full stock market quotation, if the acquirer actually needs the company to supplement its own business area. But depending on the type of company seeking a listing on a stock exchange this may bring a higher valuation if it is creating a new industry. Venture capital firms tend to favour the trade sale exit route over an IPO because they can realize their investment in cash or cash and shares where the shares can be sold for cash. With an IPO the venture capital firms may not be able to actually sell their shares for some time (the so-called “lock up” period). This also applies to the entrepreneur, founder or shareholder management team.

Repurchase

The repurchase of the private equity investors’ shares by the company and/or its management. To repurchase shares you and your advisers will need to consult the Companies Act, which governs the conditions of this exit option. Advance clearance from the Revenue Commissioners and professional accounting and tax advice is essential before choosing this route.

Secondary Purchase

The purchase of the private equity investors’ or others’ shareholdings by another investment institution. This type of exit may be most suitable for a company that is not yet willing or ready for flotation or trade sale, but whose venture capital investors may need an exit.

Flotation

To obtain a quotation or IPO on a stock exchange, such as the ISEQ, Official List of the London Stock Exchange, AIM or NASDAQ (USA). Going for an IPO or flotation has various attractions for the entrepreneur or shareholder management team, particularly when they wish to carry on with their involvement in the business, but there are also several disadvantages to be aware of. The various advantages and disadvantages of going public are summarised in the table below. Also do not underestimate the amount of time that it takes to go through the flotation process. Whilst you are dealing with the investment bankers, the venture capital firms, various sets of lawyers and accountants, endless prospectus drafting meetings, warranties and indemnities etc you also have to continue to run and grow your business. It is important not to take your eye off the ball during the arduous process. Expect to spend more of your time and that of your management team on the flotation than you did in raising venture capital. Following flotation you will also need to take the time to deal with investor relations including spending time with the press.

Involuntary exit

Where the company goes into receivership or liquidation.

Going public

Advantages

  • Realisation of some or all of the owner’s capital.
  • Finance available for expansion.
  • Marketable shares available for acquisitions.
  • Enhanced status and public awareness.
  • Increased employee motivation via share incentive schemes.

Disadvantages

  • Possible loss of control.
  • Requirement to reveal all price sensitive information, which may also be of interest to your competitors.
  • Unwelcome bids.
  • Continuing obligations – costs and management time incurred.
  • Increased scrutiny from shareholders and media.
  • Perceived emphasis on short-term profits and dividend performance.
  • The cost.

Valuing the investment on exit

For partial disposals and certain exits it is often necessary to arrive at a mutually acceptable valuation of the company. The “International Private Equity and Venture Capital Valuation Guidelines”, jointly prepared and endorsed by the IVCA, the EVCA and many other national private equity and venture capital associations, address the bases and methodologies to be used for valuing private equity and venture capital investments. These guidelines are aimed principally at private equity and venture capital fund managers, to provide consistency and commonality of valuation standards amongst funds, largely for fund performance measurement purposes.

These guidelines can be accessed here