There’s no one-size-fits-all approach to selling a company. Business owners and entrepreneurs have different reasons for exiting the business – they might be retiring, looking to diversify their assets or want to pursue newer, and perhaps more exciting opportunities.
Find out more about the two common exit strategies business owners and entrepreneurs consider when selling up.
The IPO exit strategy
An IPO, or initial public offering, is the process of selling an equity stake (shares) of a private company to the general public in exchange for cash. This is also known as “going public”. It offers a way for business owners to raise money to fund future growth, or the chance to exit their investment and realise profits.
Typically, the process of taking a company through an IPO is split into seven stages.
- Select an underwriter – companies will need to choose an investment bank to underwrite the IPO – they advise on how to take the company public and act as a guarantor for any unsold shares.
- Due diligence check – the process of assessing the company to highlight potential business risks.
- Submit regulatory fillings – various documentation and paperwork is required by the regulator e.g. a letter of intent or prospectus.
- Promote the IPO – an opportunity to sell the investment offering to institutional investors to generate interest and gauge the demand for the shares.
- Valuation – providing the IPO is approved by the regulator, the price of the shares is set. The valuation will depend on investor demand and the strength of the company’s financial position.
- Offer period – the process of selling the shares begins, where investors can purchase the shares prior to floating on the stock market. This is known as “getting in on the ground floor”, or the primary market.
- Shares go public – the first day of trading on the stock market, or the secondary market, where investors can meet (electronically) to buy and sell the shares freely.
Business owners and entrepreneurs will need to consider the costs associated with an IPO. Investment banks charge an underwriting fee for taking the company public –which can make up a big chunk of the overall costs – ranging from an average of 4%-7% of IPO proceeds. Deliveroo, the British food delivery company, underwent an IPO in 2021, racking up a bill of $57 million to the banks involved in the listing.
As you can see, IPOs aren’t straight forward. There are several hoops for business owners to jump through before they can liquidate part, or all, of their stake in the business. It takes time, and founders will often have restrictions on selling their own shares for a set period of time after the company goes public. The time it takes to go from private to public varies between six months to one year, depending on the number of factors involved.
The IPO process can be so complex, costly, and challenging that only 20% of them are successful.
The trade sale exit strategy
A trade sale is a type of acquisition where one company is sold to another, typically operating within the same industry or sector.
This type of sale is one of the quickest ways to realise the market value for a business, with less obstacles to climb in comparison to an IPO. A trade sale is generally for the full sale of the business, so it’s better suited to business owners who are looking to sell-out entirely in one fell swoop.
Business brokers and acquisition intermediaries are normally the first port of call to help execute a trade sale. They’ll have a bank of contacts, including other brokers in different areas, to find a potential buyer. It’s like appointing an estate agent to advertise and sell your home. A trade sale can complete in a matter of weeks or months if the right buyer is found and negotiations go well.
What makes a company attractive to trade buyers?
Ultimately, trade buyers or equity-backed companies are looking to expand their market share and gain a competitive advantage. Strong business performance, an established market share, with strong brand and reputation are the types of attributes and characteristics potential buyers are hunting for.
Preparing a well-scripted selling memorandum is an important way to spread the word about your business and advertise its unique selling points to a prospective buyer.
The bottom line
Understanding your motivations for selling up and the financial positioning of the company will often sign post the right route to follow. There are lots of other types of exit strategy aside from IPOs and trade sells, including family successions and management buyouts.
The key part to any type of business exit is to have a strategy in place well ahead of time. Ensuring your business is transaction-ready for a potential buyer could not only make the company more valuable, but also improve the organisation and performance of the business in the meantime.
You can find out more about exit strategies, and recent acquisition trends in the UK market, by downloading our free report on business exits.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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