Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally

This is part 17 of a 17-part series on global expansion. You can find the full list below this article.

There is going to come a point in time in your business where you will have fulfilled your north star goals (i.e. you have achieved global domination). Before you even get started with entering a new market, you’ll want to ask yourself what you’ll want to do next when time comes. 

Most business owners think of their exit strategy as their payday. A lot of money has gone into growing the business and even though the company can be profitable, that doesn’t always mean that owners are receiving a significant salary. 

There are two options that most business owners choose: sell (a portion or all of) the business or create new north star goals. 

Sell the business

When you sell your company, you can do a public sale or a private sale.

One thing to keep in mind is that even though companies sell all or a portion of their business, that doesn’t necessarily mean that they can no longer continue working at the company. “Exit strategy” therefore does not equal “leaving”. It just means that the ownership has changed, and depending on whether the investors are silent or active, the dynamics of the company could shift, as a result, be it in the direction, strategy, or management of the company.

Here are the three different kinds of sales and what drives companies and their owners to select each:

Initial Public Offering (IPO)

An Initial Public Offering, more commonly known as IPO, is when a private company offers shares on a public market (such as the New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Australia Stock Exchange, etc.) that individuals, investment firms and institutions can invest in. Companies that choose the IPO route will go through a (lengthy and costly) due diligence and registration process during which they have an investment bank create the IPO prospectus, evaluate the market, gauge demand and set the IPO price and date for the shares that will be offered on the public market.

One of the benefits of going for an IPO is that your business can work with more cash from independent investors. Even though private businesses can be profitable, it’s not uncommon for them to have cash flow challenges. Having the public invest in stocks is a great way for companies to be able to do more with their current resources, including raising capital to fund further expansion.

The trade-off for doing an IPO, however, is that all of your financial data will become public information. During the pre-IPO process, your company will be subject to a rigorous due diligence process undertaken by lawyers, accountants, tax advisors and IPO underwriters. It is fundamental that a company prepares well in advance for this exercise and intense scrutiny, as issues at this stage could set the company back months in the IPO process and even have a negative effect on the company’s valuation!  

In order to prepare fully for this due diligence exercise, a company should formalize, review, and critically self-assess its adherence to professional standards, policies and procedures and its application of any governance and control framework. Having an appropriate operating model and being fully compliant with all tax filings and transfer pricing rules is also key to surviving any pre-IPO tax due diligence and mitigating any associated risks.

Successful IPOs are ones where companies have a significant following in the financial community as well as by consumers with an international brand presence. It is costly to hire an investment bank and other advisors to facilitate your IPO, so you want to make sure that you are ready from a due diligence perspective, make sure the timing is right from a market perspective and that you also have enough public interest worthy of pursuing this option.

Trade Sale

A trade sale is a private sale of your company to an individual, entity or investment group.
Most business owners who opt for a trade sale are those who are looking to move on from the business and hand over complete ownership of the company.

Companies that get sold do not necessarily have to be in great standing; oftentimes, they are companies that have a great product or service with an infrastructure in place, with potential for restructuring and growth. This tends to happen in family owned enterprises when moving to a new generation whose heart is not in the business and they want to cash out and use or invest the money elsewhere. The business probably has potential but needs new passionate owners to realize this potential.

Passionate and strategic buyers are typically people who are interested in making improvements to the company and fueling its growth so that they receive a financial return when they’re ready to exit themselves. Think of it like flipping a house – you find a house with great potential, fix it up, and then sell it at a higher price.

Alternatively, companies that are acquired by entities are those that might have a complementary product or service that could be beneficial to the entity – like how Facebook bought Instagram which had alternative and complementary features that they could enhance and combine with Facebook’s social media offerings to better execute on their strategy and align on their north star goals.

Partial Sale

A partial sale of a company is another private shift in ownership.

This is typically an option that startups opt for when working with Venture Capitalists; they sell equity in order to raise money to fund business growth. A partial sale allows them to continue to control most of the strategy and development of the business while having the cash to support its expansion. This is typically done by selling newly issued shares of the business so as not to create a tax event for current shareholders.

What to consider before you sell

There are a couple of things you’ll need to think of if you want to sell your company (whether through a private trade sale or publically via an IPO) in the future.

What does a buyer look for in a company? In order to be attractive to buyers, your business should have a number of attributes including, but not limited to, a strong product or service, a strong management team, a stable internal structure, reliable processes, financials and governance. And definitely no skeletons in the closet!

Pre-sale, a business should be focusing on preparing itself for an independent due-diligence exercise (which is similar but usually less stringent to the pre-IPO exercise mentioned above). This will allow it to identify, qualify and quantify any areas of risk which may be relevant for the terms and conditions of the sale. Any risks identified should be addressed or appropriately justified. Potential buyers and investors are going to be assessing how much risk they are going to take on by investing in or buying your company, so you’ll need to make sure your business is in good standing and in the best condition to attract the highest sale price. What that means is you might need to be ready to ensure all financial, tax and legal compliance obligations (for the business and its employees) have been met and that any associated risks have been mitigated.

And the other thing you’ll need to consider is the difference between “ownership” and “management control”. In some cases, the management control of the strategy and growth of an organization could remain with the original owners as they have retained majority ownership through a partial sale. But in other cases, investors may negotiate to have more leverage over how the business is run and have to influence over the strategy and direction of the business. These intricacies all need to be dealt with in the sale negotiations and embedded contractually.

What that means for your organization is that when a sale happens, there may be an organizational change that requires careful change management. Employees might get shifted around, some may quit and need to be replaced, and individuals need to be in alignment with any new direction and strategy.

Create a new north star

If you’ve accomplished the goals that you set out for your business, you could always decide to create a new set of goals. Depending on the company, a new north star could be anything from creating new products and services to sell to their market, moving to a servitization model (selling a service outcome which incorporates or is supported by a product which is also sold), entering a new jurisdiction, or continuing the business while setting up an entirely new business venture.

Want to talk through your options to strategize the right move for you? We’ve got the know-how to help you plan your ending before your beginning. Reach out to us here.

Special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.

International Business Expansion Series

This article is part 17 of a 17-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad, from strategy to execution to management:

Strategy Phase

1. The #1 Thing that Companies Need for a Successful Expansion Abroad
2. The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
3. How to James Bond Your Profit Margin with Location Analysis 
4. How to WIN in a New Market with These 6 Models of Execution 
5. Lost in Translation: How Culture Can Impact Your Business Expansion
6. Show me the money: How to Fund Your Business Expansion Abroad

Execution Phase

1. Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy 
2. Avoid Being Taxed: How Tweaking the Structure of Your Organization Can Protect Your Bottom Line
3. Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally 
4. 5 Reasons Why You Should Customize Your Technology for Your International Expansion
5. Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications
6. Landlocked: How your Transaction Flows can Impact Your Access to Funds
7. 5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad

Management Phase

1. “Health Checks”: Your Ticket to Building a Sustainable International Business
2. How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
3. Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad 
4. Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally