Business Exit Strategies Part I: IPOs and Mergers and Acquisitions

What business exit strategies have you considered? Everything comes to an end eventually and businesses are no exception to that rule.  The eventual end to your business (or to your involvement with your business) is inevitable. This may be due to your retirement, your sale of the business or your death.  Given that this is the case, it is advisable to make a plan that covers how you would like to dissolve your business or pass your business on to new leadership.

Important questions should be answered in your “exit plan”, include:

  • How long before you take your exit? 
  • How much money, if any, do you plan to make personally when you exit?
  • What would the transition period look like?
  • Will your business continue under new ownership or dissolve after you leave?

There are a number of ways to prepare your company for your exit.  In this first part of the series, we explore putting your business on a stock market or selling your business to be merged into another business or family of businesses.

Exit by Initial Public Offering

In an initial public offering, a business is placed on the stock market for its shares to be bought and sold by brokers on behalf of the general public. This business exit option can be very lucrative for an entrepreneur and thus many businesses view this as a preferred option in the long run.  However, initial public offerings (IPOs) are exceedingly rare and can be difficult to orchestrate.  In fact, less than 1% of companies registered in Florida will ever list on the stock market and, at the writing of this article, less than 4,000 companies in the US are publicly traded.

The reason why IPOs are so rare is that conditions need to be just right for a stock listing to be carried out successfully.  First of all, the business must be doing well with prospects to do even better in the future. Doing well is usually defined as being profitable with future prospects of profitability being even higher than current prospects.  Secondly, the public must view your company and its industry as highly appealing.  That means that people must feel motivated to buy shares of your company due to its popularity as an investment.  This usually calls for a large marketing and public relations budget designed to make the shares of your company attractive to the right type of investor.  Finally, your company must be compliant with all federal regulations intended for stock market listed or publicly traded companies.  These regulations can be onerous and include the publication of a prospectus and other “listing documents” at the time of the initial offering.  In addition, periodic reports will need to be filed with the federal securities exchange commission and you will need to comply with stricter state-level guidelines and regulations as well.

“The eventual end to your business (or to your involvement with your business) is inevitable.” 

Therefore, even if your business is doing exceptionally well, it might not qualify as a good candidate for an IPO for a number of other reasons.  That said, if the business does qualify for an initial public offering and it successfully manages to list at a good value, an IPO can be the most profitable exit strategy available to a business.

Exit by Merger and/or Acquisition

Another potentially lucrative option for discontinuing your involvement in a business is selling it to another business or merging it with another business.  There are clear advantages over the option of an IPO. These include much less regulation, the chance to negotiate to sell your business for more than the industry valuation average and a higher likelihood of success.  

There are also several different versions of a merger and acquisitions (M&A) exit.  For example, M&A may include more than simply selling your business to an outsider.  There is the possibility that you and or your staff can remain in a “job” at the new company after the sale or merger.  This is sometimes called an “acquihire” M&A option and it protects the jobs in place at your current company – perhaps even your role will be preserved to a certain extent if you still want it.  

This flexibility and potential income to you as the business owner makes M&A an attractive option for many business owners.  However, small and medium-sized businesses should beware of the odds: only around 20% of businesses listed for sale are actually sold or merged with other businesses.  Another area that businesses should be mindful of when selling is cost.  Preparing a company for sale could be very costly. Depending on the complexity of the due diligence process, this might even extend into the range of cost of preparing for an IPO. Much of this cost will be incurred whether or not the business is successfully sold – so there is some risk involved.

Your Legacy

Whether or not a business transitions to its next phase via an IPO or an M&A process, it needs to be noted that some or much of the original owner’s legacy will be lost.  Businesses that bring on new leadership and governance may do away with the procedures, values and mission statements that have taken your company from its inception to where it is today.  Moving on from your business comes with the acceptance that this is an inevitable part of “saying goodbye”.  It may even be true to some extent if you remain as part of the new organization but relinquish part of your authority to affect change.

The Importance of Legal Counsel

Should you consider an IPO or M&A process as your exit strategy it is paramount that you retain experienced legal counsel to represent you.  In the case of an IPO, you would require an attorney with extensive corporate experience that led the drafting, review and publication of your IPO prospectus and the filing of SEC documents.  For M&A, your attorney should be well-versed in business brokerage, ownership structures and business law.  Your counterparts in either process will be represented by competent legal counsels all looking out for their interests, so it is important that you are also prepared legally to participate as an equal as you consider the future direction of your business.

Explore other business exit strategies in Part II and Part III of this series.

South Florida Law

The business attorneys at South Florida Law, PLLC are experienced in drafting and reviewing documents for corporate and business matters – and do so with the best interests of your business in mind.  We also have extensive experience in advising on corporate and business exit strategies for those looking to sell or dispose of their stake in a business. As a boutique law firm, we offer the advantage of partner-level involvement at every step in the M&A and IPO process.  This small firm attention to detail is coupled with big firm resources that rival those with much larger offices in the legal industry.

Planning to sell your business or list your business on a stock exchange?  Have a requirement for a lawyer with M&A and IPO experience?  Reach out to South Florida Law today via our contact form or by calling (954) 900-8885.

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