Keeping your exit strategies in sight
Wednesday March 30, 2016,
7 min Read
At the onset of a business, exit strategies often go overlooked by most of the entrepreneurs. It is natural to follow your dream without worrying about walking out of it someday. However, many a times, business owners exit their business for some reasons. Every entrepreneur's journey is very personal, with some turning their company from a startup into a major corporation, and others exiting their company at a teenage stage.
Whatever be the reason to exit, planning the exit options well in advance credits an entrepreneur with foresight, landing the entrepreneur with not only the most rewarding deal but also making the entire exit process smooth sailing, especially in light of the lengthy processes, internal as well as external, and various financial, legal and operational commitments. After all, nobody likes to be haunted by the ghosts of their past!
The “ideal” exit option for any entrepreneur would depend upon the reason for which such entrepreneur has decided to call it quits. For example, the entrepreneur (i) may be toying with a new venture idea (Rakesh Malhotra sold 74 per cent in Luminous Power Technology to Schneider Electric for Rs 1,400 crore in order to start a Venture capital fund - Ncubate Capital that Invested in technology (Nevis Networks) and consumer-driven businesses), or (ii) may have lost interest in his business, or (iii) may not wish to call the shots anymore, but at the same time stay connected with the business, or (iv) may have personal reasons such as illness, age, or family factors, or (v) may be facing losses in the business, including burning out due to intense competition (Aprameya Radhakrishnan and Raghunandan G sold Taxi for sure to Ola as they were burning out cash to compete with local rival Ola.).
Whatever be the reason for exit, it may be a complicated process that can be made smoother and less chaotic by being aware of all the formalities involved, especially the legal ones. The legal formalities vary according to the way one chooses to exit.
Evaluating your options
Depending on the objective, an entrepreneur may consider one of the following exits (partial exits included):
100 per cent stake sale
A cent percent stake sale is all about getting return on your investment. It can be considered as the most viable option for an exit. A strategic sale may yield a much higher selling price depending on the valuation of the company. It serves two purposes – (i) getting an exit, and (ii) getting a return on investment (money lies in turning your business into a highly valuable company with high sales and brand value and selling the company at the right time!).
However, in the event, the entrepreneur is not the 100 per cent stakeholder but a majority stakeholder, and wishes to exit his company. Any sale from such entrepreneur would be, inter alia, subject to contractual arrangements he may have entered with the other members of his company and lenders (if any) of the company. This would include provisions like a right of first refusal, right of first offer, tag/co-sale rights, drag rights, veto rights, change in control of the company, change in the shareholding of the company, transfer to competitors, etc. An early and thorough planning and knowledge of these provisions would prove valuable here.
The first thing a potential buyer would undertake is a due diligence of the company involving all the aspects of the business (Yes it is an overwhelming process!). Having the information and relevant documents ready would help the entrepreneur identify any issue that may hamper the sale.
Furthermore, considering that the business was being run by the entrepreneur from ground up, he/she may be required to give extensive representations and warranties relating to his/her company and the business, to the potential buyer. From a legal perspective, it would be pertinent to thoroughly understand each of these representations and warranties and the extent of indemnities, if any, and accordingly provide adequate disclosures with respect to such representations and warranties.
To avoid some of the complications such as the long process of due diligence and may be even giving of extensive representations and warranties, the entrepreneur may consider passing on the ownership of the company to a family member or friend. However, while this family and friend option may help preserve the business to the liking of the entrepreneur and may not involve the lengthy processes, the same may not be a financially viable option.
Non-compete would usually be sought from an entrepreneur under such exits, that is, post the sell out the entrepreneur may be restricted from undertaking a similar venture or conduct similar business.
Partial exit – staying associated with the company
It is often stressful to run a company and perpetually remain exposed to the associated business risks. In such cases, one may consider remaining associated with the company (even after selling it off), by being part of its management or otherwise being a key managerial person or an advisor, etc. This option helps the entrepreneur to exit the company, yet stay a part of the company. However, this would also depend on the negotiations with the potential buyer.
In contrast with the above strategy, an entrepreneur can handover the management and control of the company to a third party and/or other shareholders of the company and continue to be a shareholder of the company. This way, while he participates in the profits of the company, he will not be a part of the day to day affairs of the company (Mukesh Bansal quit Flipkart but he is still a shareholder of the company).
Selling of an undertaking
Where an entrepreneur is facing a financial crunch, he may, instead of a complete sale of his business, consider demerging or hiving-off a division or undertaking of his business. This form of corporate restructuring is often undertaken to raise capital or for increasing profits through cost-reduction or for efficient functioning. An approval from the other shareholders would be required.
Once again, a due diligence exercise would be a major part of the deal. Sale of an undertaking can take place on "as is where is basis", that is the purchaser buys the assets of the undertaking along with all its liabilities as on day of the purchase. However, there can be other arrangements with respect to the assets and liabilities of the undertaking.
Closing down the business
Closing down of a business involves winding up of business – either voluntarily or compulsorily.
Voluntary winding up takes place when an entrepreneur wants to close down the business. Whatever be the rationale behind closing one’s business, it is always better to keep oneself within the legal parameters and focus on minimising the losses. It involves, amongst others, the following: (i) having consensus with other shareholders/investors, (ii) filing for appointing a liquidator, (iii) circulating in the Official Gazette about the business being voluntarily wound up, (iv) cancelling the business registration/licenses, (v) closing tax accounts with the appropriate government authorities, (vi) shutting payroll accounts, (vii) ensuring all the final returns and amounts owed, are paid.
It is important that the creditors and all the statutory dues and taxes of the company are paid off in priority. The remainder of the proceeds, if any, then gets distributed amongst the shareholders.
When the debts in the company start to run so high that none of the exit strategies can be worked out positively, the last resort is filing for bankruptcy. The proposed Insolvency and Bankruptcy bill, 2015, will be instrumental in letting an entrepreneur take the plunge without any fear. The earlier bankruptcy laws were not well defined or structured under one act. The proposed bill stipulates well-defined timelines. The insolvency process is to be completed within 180 days, with one extension of up to 90 days in exceptional cases.
While no entrepreneur starts a business in order to liquidate it or exit it someday, there is no harm in being prepared for one. An exit strategy is as important as any other business strategy and an entrepreneur must, as such, always "Keep his exit strategies in sight".
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)