When the time comes for a company to consider an exit strategy, there are two primary options available: selling the company or going public. Both routes offer unique benefits and challenges, and the decision will depend on the company’s goals, market conditions, and the preferences of its shareholders. Understanding the nuances of each option is critical to making the best decision.
This guide will walk you through the processes, advantages, and disadvantages of both selling your company and going public, helping you decide which path aligns with your company’s long-term vision.
Selling Your Company
The Process
Selling your company requires strategic preparation, and the process typically unfolds in several key steps:
Due Diligence Review
The first step is conducting a due diligence review. This involves examining the company’s operations, financials, and legal standing to identify and address potential red flags that could deter potential acquirers. This review also helps the advisory team fully understand the business to effectively position it during negotiations.
Determining Ideal Acquirer and Sale Structure
Next, the company works with its advisor to identify the best-fit acquirer and determine the optimal sale structure. Factors such as cash vs. stock payments, upfront vs. deferred payments, and earn-outs are evaluated to structure a deal that maximizes shareholder value.
Valuation Analysis
Setting a realistic valuation is essential. This is typically based on revenue or EBITDA multiples of comparable companies in the same industry. The valuation provides a target acquisition price for negotiations.
Acquirer Outreach
Once the valuation and sale structure are established, the advisory team will begin reaching out to potential acquirers. Calls and meetings will be arranged to explore interest and align goals between the seller and the acquirer.
Negotiation and Transaction Management
The advisory team manages negotiations, ensuring that the company is not undervalued and that the terms of the deal are fair. This helps the company secure the best possible outcome while mitigating risks.
Working with an advisor whose interests align with the company, rather than the acquirers or capital partners, is essential to navigating this process successfully.
Advantages of Selling Your Company
Lower Costs: The M&A process is generally less expensive than the public offering process.
Immediate Liquidity: Acquisitions often provide a significant portion of the payment in cash upfront, offering immediate financial benefits to shareholders.
Disadvantages of Selling Your Company
Employment Obligations: Key employees are often required to stay with the company post-sale to ensure a smooth transition, which may limit their flexibility.
Lower Valuation Multiples: Acquisitions generally yield lower valuation multiples compared to public companies.
Missed Post-Sale Growth Opportunities: Shareholders cannot capitalize on potential post-sale value increases since they no longer own the company.
Going Public
The Process
Taking a company public is a more complex process than selling, but it comes with unique benefits. Here’s an overview of the key steps involved:
Due Diligence Review
The first step in preparing for a public offering is conducting a due diligence review. This process helps identify and resolve any potential issues that could arise during the public offering and provides a comprehensive understanding of the company’s financials and operations.
Financial Model Preparation
A detailed financial model is created to project future growth and support valuation discussions. Investment banks will use this model to stress test the company’s financials and determine an appropriate valuation.
Selecting an Investment Bank
Once due diligence and financial modeling are complete, the company is introduced to potential investment banks. The chosen investment bank will act as the underwriter for the public offering, raising the necessary capital to fund the business.
Bridge Financing (if needed)
Before initiating the public offering, some companies may secure bridge financing, often in the form of convertible notes, to maintain operations and growth during the preparation phase.
Public Offering and Advisory Support
Throughout the public offering, the advisory team assists the company, ensuring the transaction is structured favorably and that the company’s interests are prioritized.
Advantages of Going Public
Higher Valuations: Public companies typically command higher valuations compared to those sold through acquisitions.
Capitalizing on Post-Offering Growth: Shareholders can benefit from the appreciation in the company’s value after going public, creating opportunities for wealth accumulation.
Disadvantages of Going Public
Higher Costs: The IPO process tends to be more expensive than selling the company, including fees for legal, accounting, and underwriting services.
Resale Restrictions: Shareholders may face restrictions on selling their shares for a period after the public offering, limiting immediate liquidity.
Choosing the Right Exit Strategy
Ultimately, the decision between selling your company and going public depends on your long-term goals, growth strategy, and current market conditions. Selling may be a better fit if your priority is immediate liquidity and a streamlined process, while going public can offer higher valuations and long-term growth potential.
Both processes are complex and require expert guidance to achieve the best results. Whether you’re considering an acquisition or an IPO, working with a trusted advisor who prioritizes your company’s success can help you navigate the complexities and ensure a favorable outcome. At ClearThink Capital, we specialize in guiding companies through both M&A transactions and public offerings. Contact us today to explore the best exit strategy for your business.