As an entrepreneur setting up and growing a business, thinking about an exit strategy might be the furthest thing from your mind in those early growth years. But at some stage, it might be appropriate or even necessary to sell all or part of the business to ensure its future growth or to enable it to spread its wings and grow into new markets or geographies.
There are plenty of reasons to sell a business and serial entrepreneurs may have the benefit of having gone through the process in a previous life, but there are others who may be looking at the pros and cons and wondering when the best time to ‘exit’ is and what sort of sale would best suit their business.
At Crowdcube we are in the fortunate position of seeing some businesses that have funded on the platform go on to exit through acquisition, including Camden Town Brewery, E-Car Club and Wool and the Gang. For our investors, an exit is a result as it’s when they see a return on their original investment.
E-Car Club was the first example of an exit following a successful crowdfunding campaign, with Europcar going on to buy the company lock, stock and barrel. The timing was right for that particular business at that particular time. The company was looking for more money to help grow the idea and develop in other markets, but the sale has also enabled Andrew Wordsworth, the founder, to continue to build his Sustainable Ventures business, which helps fund, grow and support other sustainable businesses.
A trade sale like Camden Town Brewery, which was bought by AB InBev, a global giant in the brewing world and the makers of major brands like Budweiser, is an attractive option for many. Having large corporations in your sector, whether that’s brewing, fashion or car rentals, helps if you are looking to sell the business. However, it’s important to stress that Camden Town Brewery created a strong niche brand that helped differentiate it in a busy market and made it stand out from the crowd, which made it more attractive to a large firm like AB InBev.
For companies looking to become an acquisition target, one piece of advice worth stressing is to make sure your IP (intellectual property) is in order and that you own the rights to that IP. This applies to any business of course, but particularly so for tech startups and those developing particularly innovative technologies that may well become an attractive acquisition target for the likes of Google or Amazon in three or five years’ time.
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One option for a growing business is to go out and actively bring a strategic investor on board, whether the company does this itself, or involves a third party, like Ernst and Young for example, who will come in and help ‘match’ the company with a suitor. Over time this type of investor may become more closely involved in the business, either through additional financial investment or on a more personal level as a mentor perhaps. Either way, they are likely to become more aligned with the company’s objectives, potentially paving the way for an exit.
The benefit of this approach is that the investor knows the business much better having come on board at a relatively early stage of its development and understands the future direction. The potential downside is that as a growing business you lock yourself into such a relationship but the investor pulls out or decides not to buy you out later on.
IPOs are also an option for a smaller number of businesses further down the line and have the benefit of raising money (by selling shares to the public in an initial public offering) that allow you to pay off any liabilities or help fund expansion or product development. While they have become less popular in uncertain economic times, IPOs can also generate huge amounts of publicity – Snap (formerly Snapchat) is a good recent example although many reported it as a flop. An IPO should certainly be approached with caution. The cost can be high for a start, and you also enter a new world as a public company complete with different sets of rules and requirements such as financial reporting.
Small and growing businesses shouldn’t always see exits as clear-cut though. There are other routes to consider, such as a partial exit through secondary liquidity, something we recently pioneered on the platform, and we are starting to see this gain momentum among growth companies in particular.
Fast growing food and drinks brand, Brewdog, which raised a total of £13.13m on Crowdcube via both equity and bonds, is a good example. TSG Consumer Partners, one of the leading growth funds, recently invested £213m for a 22% stake in the company. This investment will see £100m put into the business to fund its growth, with a further £100m paid to co-founders James Watt and Martin Dickie and £13m will go to buy-back shares from early crowdfunding investors. These investors will be able to sell 15% of their shareholding (max 40 shares). The deal is designed to deliver long-term capital.
A partial exit like this enables entrepreneurs to still be part of a business that they have nurtured and grown, but with a secondary share sale, they can take some money off the table and be rewarded for years of hard work and sacrifice. The benefits are obvious; as a business owner, you are still very much involved in the firm, but have a level of security and can enjoy the fruits of your labour.
For those looking for an exit strategy now or further down the line, make sure you understand all of the choices available to you and consider what is best for you and your business.