For SME investors, having a well-defined exit strategy is crucial to maximize the return on their investment or minimize losses if conditions change, which is very common in times like these. That's why it's essential to have a roadmap that sets out exit strategies for SME investors based on several scenarios.
Exit strategies include setting specific objectives or milestones, seizing M&A opportunities, going public, or selling to existing or outside partners. Each strategy has its own characteristics, and choosing the most suitable one will depend on the context and the specific circumstances of the SME and the investor.
Below are the 5 most common exit strategies for SME investors:
Objective-based strategy
Based on a roadmap, the investor defines the milestones to reach in order to realize a return on their investment. Let's say it's a private equity fund. The average time horizon for holding a stake in the SME is usually around 10 years. During the first five, the fund meets its capital calls, and the following years are for gradually divesting and realizing its return.
To set this plan, due diligence needs to be carried out beforehand to understand the company's financial position. Based on that assessment, the investor must estimate how long it will take to maximize their investment.
M&A strategy
Another strategy that an SME investor can consider, plan for, and even actively pursue is one involving an M&A process. If the SME they've invested in has strong performance and potential, other companies may decide to acquire it and/or merge with it. In this scenario, the investor can follow several strategies.
The first would be a passive strategy, in which the investor learns of the M&A offer and then decides to sell their stake to the new partners at a price that meets their expectations or is in line with the company's valuation. In this case, it's essential to know what the company is worth based on its financial position and future projections — only then can a sound exit price be negotiated.
A more active strategy is one in which the investor drives the M&A process, looking for new strategic or financial partners. In this case, in addition to setting the price for exiting and selling their stake to the new owners, they can also negotiate some kind of management fee.
IPO strategy
Once the regulatory requirements have been met, the shareholders enter a negotiation phase to decide what percentage of the company will be offered for sale on the market and at what price. When the market is receptive to new public offerings, the IPO goes ahead.
In this transaction, the investor can choose to sell their stake before the company goes public, either to the existing owners or to new owners interested in buying into the company, such as investment funds or other investors. Alternatively, they can choose to receive the equivalent in shares and sell them on the market later.
Selling to existing partners
Selling a stake in the SME to existing partners involves testing internal interest, then negotiating terms while making sure the SME's valuation is realistic.
This exit is a simple, fast strategy compared with the previous ones, and it ensures continuity of the company's ownership and management on current terms.
Selling to strategic or financial buyers
Selling the stake to other companies or to a financial institution requires more thorough work to identify the most suitable profiles for strategic and/or financial reasons.
The negotiation is tough and, once again, a sound valuation of the SME's assets is needed to negotiate the price.
If you're an investor considering an exit, it's a good idea to work with an advisor who specializes in this type of transaction to guide you through the steps and help you find a buyer.
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