Preparing for an Exit: IPO, Acquisition or Merger

Exit Strategy #1: IPO

An initial public offering (IPO) involves selling company shares to the public through a stock exchange. While this is potentially one of the most lucrative exit strategies, it can also be among the thorniest: Not every IPO is approved. Fewer still become viable in terms of public interest. 

Successfully navigating this approach requires considerable work. You’ll likely need to not only leave your family behind to travel frequently to investor roadshows and field tough questions about how the IPO will create value for shareholders, but also collect reams of documents and financial data for the compliance and auditing processes required by the SEC and IRS. In the end, you may perhaps need to hire outside professionals and consultants who possess a holistic understanding of your industry, business and audience.

Still, going public is strongly alluring because of the upsides. There’s the potential to raise a significant level of funding very quickly because of so many new investors. In addition to the prestige that comes from being listed on a stock exchange, money from the IPO can be used to expand the company or strengthen current operations. The process also generates a lot of publicity, which attracts new talent.

Think of this exit strategy as a marathon, not a sprint.

Exit Strategy #2: Acquisition

In an acquisition, another business purchases your company. The upside? You get to negotiate acceptable terms — including a price that you believe reflects the true value of your business.

To prepare, collect information that addresses potential questions and concerns another organization may have about your company. Plan to emphasize competitive assets such as employees, brand equity and intellectual property.

Of course, you’ll want to research all potential buyers so you can effectively “interview” them as well and determine if they have a compatible philosophy and values. After all the work you put into building it, you want to make sure your company — and its employees — continue to thrive after you’ve left.

Exit Strategy #3: Merger

In a merger, two companies — usually seeking the synergies that frequently result from adding skills or other assets that complement existing ones — fuse operations into a single business entity. The old entities often dissolve and then combine into a new structure. This involves stricter legal requirements than an acquisition.

Before agreeing to a merger, be sure you’ve been given access to full documentation on the other company including financials, targets, customers, prospects and strategies. Also do your own due diligence to ensure both companies will benefit.

With a merger, it’s important to watch out for your current employees, whether that means securing them continued employment or some type of buyout package. As part of the planning process, ramp up communications with your employees to prepare them for the changes ahead. Be as transparent and clear as possible in explaining what is happening and why. Frequently touch base through different channels to explain each stage in the merger process, what it may mean for them and their careers, and how they have a role in making it successful.

Steps Toward an Exit

As part of the planning process, ramp up communications with your employees to prepare them for the changes ahead. Be as transparent and clear as possible in explaining what is happening and why. Frequently touch base through different channels to explain each stage in the merger process, what it may mean for their careers and how they have a role in making it successful.

Timing is critical in everything you do. You don’t want to start preparing the books too early, but you also want organized documentation ready and available when it’s time to exit. Entrepreneurs who have been through the exit process recommend beginning to organize financials at least two years in advance. If you use financial software from the dawn of your business, this should be easy to do.

There are many moving parts when you execute any exit strategy. You’ll need to have a plan in place to help with the transition for the new owners, employees and customers. Existing contracts, strategies and relationships need to be managed and shared.  

Key Points to Remember

Work to maintain a competitive edge from the beginning, staying two to three steps ahead of the competition. Investors look for companies that “punch above their weight” in their space. Keep the idea of an exit in the back of your mind while cultivating your business and the relationships tied to it.

Develop a network of trusted advisors in your industry including a close-knit team of experts, such as an attorney, accountant and banker, who can help you more seamlessly implement your exit strategy when the time comes. Remember your employees and integrate their future well-being into the process. Consider where you’ve been, where you are, and where you hope to be — and then choose the exit strategy that best addresses all three.