Preface

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. Private equity 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 private equity firm may not sell all the shares it holds. In the case of a flotation, private equity 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.

Trade sale
The sale of your company’s shares to another company, perhaps in the same industry sector.

The majority of exits are achieved through a trade sale. This often brings a higher valuation to the company being sold than a full stock market quotation, because the acquirer actually needs the company to supplement its own business area, unlike a public shareholder.

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 Inland Revenue and professional accounting and tax advice is essential before choosing this route.

Refinancing
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 private equity investors may need an exit.

Flotation
To obtain a quotation or IPO on a stock exchange, such as the Official List of the London Stock Exchange, AIM or NASDAQ (USA).

A stock market quotation has various advantages and disadvantages for the entrepreneur (see box over).

Involuntary exit
Where the company goes into receivership or liquidation.

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.
  

For partial disposals and certain exits it is often necessary to arrive at a mutually acceptable valuation of the company. The BVCA has produced guidelines that address the bases and methodologies to be used for valuing private equity investments although these are aimed principally at private equity fund managers, to provide consistency and commonality of valuation standards amongst funds, largely for fund performance measurement purposes. For guidance on valuing your company prior to initial private equity investment, see page 31.

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