It is understandable that an investor will eventually try to find ways to exit any investment and therefore it is logical to keep in mind this objective as the project is progressing. This will hopefully improve the outcome and thus the return on the investment. The top exit strategy and the right purchaser for the business can be determined based on the goals and objectives that are set by the investors. Few of the most widespread exit strategies are as follows:
* Sale of shares to a third party (Full or partial): In this strategy the investors make the outright sale to the third party. The third party can be a strategic buyer or a financial buyer. Strategic buyers are those who look for companies that will create synergies with their existing business, while financial buyers are those that are primarily interested in the company’s return of equity and the cashflows. Selling the business to a third party provides an opportunity for the investors of a privately held business to diversify from a concentration of their wealth tied up in the business.
* Employee stock ownership plan (ESOP): In this strategy the company founders sells the shares to an employee’s retirement trust but still manages the business. The proceeds received from selling of the investment, if properly reinvested can avoid capital gains taxes indefinitely. ESOP is often considered a hybrid exit strategy and is very complex. However, it can be an effective strategy to produce liquidity and address key succession and employee issues proposed by an owner or group of shareholders.
* An initial public offering (IPO): In this strategy, a private company offers its shares for sale to the general public for the first time. Mostly companies who are seeking funding to expand their operations adopt this strategy. While under the right circumstances “going public” may be attractive. However, the costs of an IPO are high and sellers rarely have as much control after the transaction as they expect.
To identify the potential buyer for your investment it is necessary that the objectives and priorities are properly considered. The investors should consider both business and personal and both financial (liquidity, sale price, taxation/estate planning) and non-financial (succession, legacy and reputation, employee and stakeholder concerns, family dynamics, and other special interests) aspects for selling the business. The right buyer is often the one who will attach the optimal value to your business.
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