What Does Exit Channels Mean?
Exit channels refer to the various methods available to an entrepreneur who is seeking to monetize his/her investment in a company. Not all exit channels available work for everyone. Some may require that the entrepreneur stay employed with the business post-transaction to help it transition, while other exit channels may require a complete changeover after the deal is done which may be too severe for the entrepreneur and the employees. Therefore, the exit channel selected must be the one that provides a liquidity event, but also matches the needs and wants of the entrepreneur.
Divestopedia Explains Exit Channels
While there are several exit channels available, most private companies are too small to access all of them. In reality, most private companies only have the following exit channels available to them:
- Initial public offering (IPO) — The shares of the business are offered to the public, and the original owner may choose to sell his or hers in the public market, post-IPO. This exit channel may only be desirable for larger companies since the cost of going public is high and the subsequent reporting and corporate governance requirements are significant. An IPO is only be worthwhile if the company is large and profitable enough to generate a high valuation premium.
- Sale to a strategic buyer — The business is sold to a buyer who is in your same industry (potentially a competitor), or a buyer who wishes to enter the industry via acquisition. This is a viable exit channel for entrepreneurs as well as private equity, since strategic acquirers will be interested in companies of all sizes. The key benefits include a higher purchase price and a quicker exit, while the drawback is the amount of post-transaction change that may be imposed to realize on synergies.
- Sale to a financial buyer — The business is sold to a private equity firm who stays invested anywhere between five to 10 years and assists with capital, connections and management support. The key benefit is a slower change post-transaction since the private equity firm may not immediately have the resources to make significant change. The drawbacks are that the purchase price may be lower and the entrepreneur may be asked to stay longer with the business.
- Auction sale — For capital-intensive businesses, the best exit channel might be to liquidate the capital assets in an auction. This is the least desirable exit channel since the seller realizes no goodwill on the sale of the assets and also ends up closing its doors, laying off employees in the process. This approach usually happens because the business will not sell as a going concern, or if the business is in financial duress and its bankers require the auction.