From start to finish: exit planning in a challenging environment
EMERGING GROWTH INSIGHTS AND THE FAST 50
Katherine Fish, Director, EGC Tax
Kiren Asad, Partner, EGC Corporate Finance Lead and Fast 50 Lead
Adam Ray, Partner, Equity Capital Markets
High-growth businesses, especially those with institutional funders, know the importance of having an exit strategy in place early. While IPOs have long been seen as an ultimate ambition of a successful exit, recent difficult economic conditions have led to a record low of companies coming to public markets – both in the UK and globally. This has led to businesses and VC investors exploring other exit options. From private equity deals to M&A, companies are finding new and alternative ways to achieve their exit goals.
While IPOs have long been seen as an ultimate ambition of a successful exit, recent difficult economic conditions have led to a record low of companies coming to public markets.
Below we summarise trends and practical considerations across three key paths to exit:
1. IPO trends and considerations
It’s no secret that public markets have been disrupted by macroeconomic shocks and volatility, leading to fewer companies seeking to go public over the last 12 months. Behind the scenes, many businesses continue to work towards an IPO exit in the next year or two to capitalise on IPO windows re-opening. Private equity firms are also increasingly considering IPO exits for their largest portfolio businesses, as funding for successive secondary sales becomes harder to secure.
No matter the market conditions, one thing remains true for all successful IPOs: it is crucial to begin preparing at least 12-24 months ahead of the target listing date. This will allow you the time to prepare and consider key topics such as equity story, financial and legal datasets, governance, tax structure, and resourcing requirements.
Additionally, choosing the right market for listing is vital, as the requirements to list vary across capital markets. Whichever jurisdiction you decide to list in, the underlying attributes driving valuation will include a proven business model, market growth opportunity, high-quality assets, durability, and an accomplished management team. Furthermore, it will take your business ample time to get this right and achieve a successful IPO.
2. M&A trends and considerations
Having an exit strategy beyond just an IPO is equally important, especially in today’s challenging market conditions. A well-rounded path to exit gives founders and management teams a roadmap to follow and pivot when needed.
Exit options for high-growth companies and their investors were relatively straightforward for many years - most companies either went public or were acquired. The menu of possible options has significantly expanded over the last couple of years as direct listings have also become tested-and-proven pathways to the public markets, alongside M&A and secondary sales that have opened additional liquidity options for employees and investors.
According to Beauhurst, just 215 UK high-growth companies have gone public since 2012 versus close to 5,000 companies that have been acquired over the same period, highlighting that entrepreneurial successes don’t always end with an IPO.1 From the investors we speak with, an M&A exit can be just as valuable.
3. Dual-track process
Against this backdrop, running a dual-track exit process is becoming increasingly popular. This allows companies to pursue an IPO and M&A exit simultaneously, maximising their flexibility and responsiveness to market appetite.
No matter the market conditions, one thing remains true for all successful IPOs: it is crucial to begin preparing at least 12-24 months ahead of the target listing date.
A dual-track process does bring additional workstreams and demands on management time. Careful planning and execution are therefore essential to make sure you have adequate bandwidth to run both processes successfully and access the benefits of a dual-track.
Once a transaction - of any kind - is in motion, tax can become surprisingly emotive. All eyes are keenly focused on post-tax proceeds. CFOs can quickly find themselves deep in unfamiliar waters of personal and shareholder taxes - potentially across numerous jurisdictions - and expected to know the answers.
Different types of exits come with different tax complexities. Private equity deals often include a level of reinvestment by management shareholders into the new group, along with the issue of “sweet equity”. Trade deals often have a deferred consideration component. The commercial terms of these features can impact the tax treatment, making it essential to get ahead of the expected shareholder tax position to set the commercial parameters for the deal.
No matter the path to exit a business chooses, CFOs will also have to consider issues such as vesting of options (including whether options will actually vest), tax consequences of shareholder reinvestment, and the potential for income tax to arise on proceeds. By preparing ahead of time, CFOs and businesses can equip themselves to navigate the tax landscape and ensure a successful transaction.
In today’s dynamic and ever-changing market conditions, it’s more important than ever to consider all exit options closely. To ensure a successful exit, it’s essential to align your expectations and timetables with those of your investors. By taking these steps, you can ensure a smooth and successful exit.
With so many complexities involved, it’s never too early to start planning your resources and building relationships with advisors to manage the process effectively. Get in touch with any of the team below if you’d like to discuss further.
FOOTNOTE
1 The UK’s Most Successful VC-Backed Exits, 2022
