The rate of return expecte d at exit is highly dependent on the type of exit
chosen. With the latest data, shorter-term returns are still very skew ed by the
late 1990s boom in new ventures and the severe market corrections of 2000
and 2001. Still, 10- and 20-year returns are highly indicative of the impac t of
exit type (Figure 7.1).
In the longer term, businesses showing sufficient growth potential to
attract venture capital still show the highest return, though private place-
ments, buyouts, and refinancing deals narrow the gap over time.
Providing realistic exit strategies improves credibility with investors and
helps to reassure them about their opportunity to receive their desired
return. Realistic is the key word here, however. ‘‘We plan to IPO in 5
years’’ is not realistic for most companies and usually does not portray a
well-thought-out analysis of the company’s future prospects.
1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
All Venture
All Private Equity
Private Equity Return % by Type, End 2001
Figure 7.1 Private equity return percentage by type, end 2l. From the NVCA
website, http:
232 Exit Strategies
While companies that can achieve the rapid growth and attractive returns
required for an IPO are rare, many business plans written to attract outside
investment still project an IPO within about 5 years as the liquidity event in
their exit strategy. Far more likely is exit through acquisition. Forecasting an
acquisition forces the en trepreneur to identify likely acquirers and explain
the value added to these acquirers.
In an article in,
David Newton suggests that the four
basic categories of exit strategi es besides the IPO are, in order of occurrence:
. acquisition by a strategic buyer
. earn-out (buyout) by management team
. debt-equity swap (conversion of business debt to equity)
. merger with a similar firm
Let us discuss these before moving on to other options.
The term ‘‘acquisition’’ generally implies a sale to a ‘‘strategic buyer,’’
typically one involved in the same industry as the venture, such as a large
supplier, distributor, or major competitor. This is to distinguish it from a sale
to a ‘‘financial’’ buyer, generally not in the same industry, who purchases the
venture for its investment value. In an acquisition, target firm shareholders
can receive cash for their shares, they can exchange their stock for stock in the
acquirer, or they can receive cash or stock for the assets of the company.
When an acquirer purchases the equity of a company, the buyer assumes
both the assets and the liabilities of the target company. In a purchase of assets
only, the price can be relatively lower because the purchaser does not have to
assume the liabi lities of the target firm; this is particularly appropriate where
the acquired firm has the potential for significant legal liabilities. The higher
equity purchase price will provide the entrepreneur with some cash to pay off
the known liabilities, so that the net effect should generally be similar.
In a stock for stock exchange, shares are exchanged based on some
pre-acquisition ratio of value between the two companies. For example, if
Target Firm has a valuation of $15 million and Behemoth has a valuation of
$450 million, shares of Target Firm would be exchanged in proportion to a
30 to 1 ratio—adjusted for differences in the number of shares outstanding.
The advantag e of a stock for stock exchange is that the transaction is not
taxable to the entrepreneur. This advantage may be complicated by any
‘‘vesting schedule’’ under which the entrepreneur holds stock options in the
Exit Strategies 233

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