Partial exits are an ideal solution for your business if you handle it with due care and get the balance right.
You may be considering a partial exit if you want to step back from the business but want to benefit from future growth. It could work for you if:
- You think the business would be better served under different management
- You want to move on to a different role or start a new business
- You want to de-risk
- You have personal finance reasons e.g. paying off a mortgage
- You’re planning your retirement
What partial exit routes are there?
Here are a few different methods of carrying out a partial exit.
Recapitalisation of the business
This is when the company changes the proportions of its debt or equity.
A sale of stocks, shares or bonds to pre-selected investors and institutions rather than on the open market. For companies seeking to raise capital for expansion.
Brewdog went down this route. They raised £39.33m on Crowdcube through equity and bonds. TSG Consumer Partners, a leading growth fund, invested £213m for a 22 per cent stake in the company. This put £100m into the business for its growth, with a further £100m paid to Brewdog’s founders. A substantial £13m went into buying back shares from early crowdfunding investors. These investors could invest 15 per cent of their shareholding (a maximum of 40 shares).
>See also: BrewDog is raising equity its own way
This is when large companies develop, sponsor or invest in start-up companies to develop innovative products and/or services. They normally take a minority stake.
With an IPO, you list the company on the stock exchange. A fraction of the company is sold – between 25 per cent and 50 per cent. When the company is listed and traded publicly, private equity firms exit the company by slowly unwinding the remaining ownership stake of the business.
Why should I consider a partial exit?
One upshot is that you can introduce new people with fresh ideas to decision-making roles, but the business can still take advantage of your knowledge and expertise.
“[Partial exits] allow the founder to address skills shortages and attract investment either from external sources such as private equity or existing management (or a blend of both),” said Paul Tyrer, a partner in the corporate team at SAS Daniels LLP. “Typically, partial exits work well where the business owner is an expert in his own technical field but maybe lacks the necessary sales skills, funds or commercial acumen to drive the business forward.”
He adds that these exits enable rapid growth in ambitious companies which are capital hungry – partial exits can help to support buy-and-build strategies.
“In the case of private equity investment, they will also introduce experienced ‘Dragons’ in the form of professional investors who are battle-hardened and used to delivering on ambitious business growth plans,” he said. Having an investor on board in your business also gives you access to advice and insight beyond their financial input.
Having a lot of wealth in an illiquid asset is limiting. A partial exit takes some money off the table, freeing you up to take financial risk when you still have regular outgoings.
What about the downsides?
Private equity funding means that there’d be a transfer of partial control to the investor. This could risk further disruption to the business if that investor wants to exit five years down the line – or even sooner.
It won’t necessarily be a smooth transition either, potentially taking six months or more. That’s on top of your normal daily workload.
What’s more, the due diligence procedure is tougher than it is with trade sales; private equity investors sometimes seek financial due diligence and legal due diligence. They also need to know that they’ll get a decent return on investment and this pressure to meet a certain return could force your business to grow too quickly.
In the past, partial exits have had a reputation of being used to fund a lifestyle business. This is to say that you’d be on the beach more than in the boardroom.
What do I need to know before I go ahead with a partial exit?
It’s imperative that everything’s in order before you proceed. “When we’re helping prepare a business for something like this, we’ll basically prepare a catalogue of every part of their history, something that’s cohesive and can be picked up by anyone who wants to review and understand everything the business has done,” said Andy Hodgetts, director of corporate finance at Buzzacott.
“They will want to understand how you’ll grow the business, to see projections, and a plan for how your team makes that happen. It’s about having a story that’s underpinned by numbers and plans ready to go, one that spells out things such as acquisitions, new product lines or winning new customers.”
Establishing the correct structure from the outset and being on the same page as the investor is just as important.
“A shared exit strategy should be agreed from the outset and topics within the investment agreement such as dividend policy, good and bad leaver provisions, restrictive covenants, drag and tag rights and future funding,” said Tyrer. “These are usually debated at length as part of the deal process. It is vital that business owners ensure they retain an experienced professional team to guide them through the transaction.”
The rise of partial exits
Partial exits have become a lot more common in the past decade. They weren’t a preferred method of exit for private equity houses, according to Hodgetts. The old way of thinking was that if a business owner wanted to do a partial exit, they wouldn’t be as incentivised to grow the business. However, the opposite has proved to be true. These days, a partial exit is seen as a viable long-term strategy rather than just focusing on short-term value.
The attitude among entrepreneurs has changed too. “If you go back decades, founders would hold onto a business until retirement age before selling it, whereas today you see more serial entrepreneurs who may set up several businesses in their lifetime. So, the partial exit has become a very attractive middle ground,” said Hodgetts.