EXIT STRATEGIES

By

RAJEEV ROY
Associate Professor & NEN Faculty Leader XIMB

Chapter Objectives
• To understand the importance of an exit strategy • To appreciate the significance of planning ahead for a sale • To list the factors to be considered for preparing a business for a sale • To discuss the issue of communicating your intention to sell to employees • To debate the merits of financing the sale of your business • To analyse the sale process, in a step wise manner • To discuss the benefits of an IPO • To list the responsibilities that comes with public listing • To understand the process of listing a share
© Rajeev Roy, XIMB Entrepreneurship Oxford University Press, 2008

Reasons for Exit
• • • • • • • • Lack of profits Loss of interest Future prospects Dissolved partnership Growth prospects Other opportunities Personal reasons Favourable economic conditions
Entrepreneurship Oxford University Press, 2008

© Rajeev Roy, XIMB

Long Term Preparation
• • • • • • • Focus: Large customer base Diversified customer base Regulatory compliances Land documents Contracts Management
Entrepreneurship Oxford University Press, 2008

© Rajeev Roy, XIMB

Short Term Preparation
• • • • • • • Valuation Update books Supporting documents Take tax advice Get a team in place Continue business as usual First impressions
Entrepreneurship Oxford University Press, 2008

© Rajeev Roy, XIMB

Seller Financing
Benefits to seller: • The buyer may be prepared for a higher price on such terms • It assures the buyer that the seller is convinced of the long term viability of the business • The seller gets further profits by way of the interest on the investment • This may be a good way to profitably park funds for a while
© Rajeev Roy, XIMB

Risks to seller: • Business may fail before the buyer makes full repayment • The buyer may decide not to make any further payments • The seller might get persuaded to participate in the business as well

Entrepreneurship Oxford University Press, 2008

Benefits to buyer: • It is an easy and readymade source of debt finance • It might be easier to deal with the ex-owner than to deal with any other commercial borrower • The seller may be persuaded to offer guidance and direction
© Rajeev Roy, XIMB

Risk to buyer: • There may be a lot of interference from the seller. • The buyer may end up paying much more than the fair value of the business.

Entrepreneurship Oxford University Press, 2008

The Sale Process
• • • • • • • Authorisation from partners/directors Get legal or accounting team in place Review records and identify issues List assets and liabilities Draw up the agreement Finalise the deal Transfer the assets
Entrepreneurship Oxford University Press, 2008

© Rajeev Roy, XIMB

Benefits of an IPO
• • • • • Access to risk capital Increased public image Stock options Facilitates M & A activity Liquidation

© Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Responsibilities on Getting Listed
• • • • Sharing corporate control Sharing financial gain Managing shareholder value Sharing strategic information through periodic reporting

© Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Issuing an IPO
• • • • Choose investment banker. Select underwriter for the issue File registration document with the exchange Come out with a ‘red herring’ prospectus indicating initial price range • Go on a road show • Set final offer price • Get listed on appointed date

© Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Listing Norms at BSE
• The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and • The minimum issue size shall be Rs. 3 crores; and • The minimum market capitalization of the Company shall be Rs. 5 crores (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and • The minimum income/turnover of the Company should be Rs. 3 crores in each of the preceding three 12months period; and • The minimum number of public shareholders after the issue shall be 1000. • A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers
© Rajeev Roy, XIMB Entrepreneurship Oxford University Press, 2008

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