Most entrepreneurs look to start a business as a way to achieve generational wealth. This means building an enterprise to ensure the financial future of heirs, family and employees. In a less-seen and spoken way, many entrepreneurs build a business with the long-term goal of exiting the business one day.
Exiting a business can happen in many ways. It can be done through a merger, acquisition or in a worst-case scenario, it can mean shutting the business down forever. For small to medium-sized enterprise (SME) owners who are considering an exit, you will need to develop a robust exit strategy.
In this article, we look at what exits are, the different types of exits, and the various exit strategies SMEs can use.
What is a Business Exit?
A business exit is a strategic plan for an owner or investor to sell, transfer, or close their ownership stake in a company. It is used to monetise the investment, retire, or move on to new ventures.
Types of Business Exits
Selecting the appropriate exit route depends on several factors, including growth trajectory, sector dynamics, capital requirements, and shareholder alignment. Below are the most common strategies.
Initial Public Offering (IPO)
An IPO involves listing a company on a public stock exchange, allowing shares to be sold to institutional and retail investors.
Advantages:
IPOs can unlock significant capital, enhance brand visibility, and provide liquidity for early investors. They also position companies for long-term expansion through access to public markets.
Disadvantages:
The process is resource-intensive and requires strict regulatory compliance, strong governance structures, and consistent financial performance. Founders may also face pressure to prioritise short-term earnings over long-term strategy.
Mergers and Acquisitions (M&A)
Mergers and acquisitions remain the most common exit strategy, particularly for fintech and Software-as-a-Service companies. In this scenario, a larger company acquires the startup to enhance capabilities, enter new markets, or access proprietary technology.
Advantages:
M&A transactions can provide immediate liquidity and access to larger customer bases. They are often faster and less complex than IPOs.
Disadvantages:
Integration risks, potential cultural clashes, and regulatory approvals can delay or diminish value. There is also the possibility of redundancies and talent attrition post-acquisition.
Strategic Buyer Sales
A strategic sale involves selling to an industry player that sees direct value in the SME’s product, service, or market position.
Advantages:
Strategic buyers often pay a premium due to synergies, making this one of the most lucrative exit routes. Transactions can also be executed relatively quickly.
Disadvantages:
Founders typically relinquish control, and the business’s original vision may be altered. Employee restructuring is also common.
Management Buyout (MBO)
An MBO is when the existing management team purchases the business from the founders or investors.
Advantages:
MBOs ensure operational continuity and can preserve company culture. They are particularly effective where strong internal leadership exists.
Disadvantages:
Financing the buyout can be complex, and returns may be more modest compared to other exit routes. The process can also be time-consuming.
Aqui-hire
An acqui-hire focuses on acquiring a company primarily for its talent rather than its product or revenue. This is quite common in tech startups.
Advantages:
This provides a soft landing for founders and employees, particularly in highly competitive talent markets. It also reduces hiring costs for the acquiring company.
Disadvantages:
The company’s product may be discontinued, and long-term value creation is limited. Cultural integration challenges are common.
Liquidation
Liquidation is the process of shutting down a company and converting its assets into cash to pay creditors and, where possible, investors.
Advantages:
It allows founders to settle outstanding obligations and formally close the business.
Disadvantages:
Liquidation typically results in significant financial losses, job losses, and minimal returns for shareholders.
Developing a Business Exit Plan
Your business exit plan needs to be a structured, long-term process aimed at maximising value while ensuring a seamless transition. Use the following framework to develop your exit plan.
1. Define Goals and Timeline
You will need to clarify your financial needs for retirement, desired level of involvement after the exit and legacy goals. Additionally, you will need to determine when you are exiting, whether in 1–2 years or 5–10 years. Early planning allows time to boost profitability.
When setting your goals and timeline, consider the 5 D’s: Death, Disability, Divorce, Disagreement, or Distress, which often necessitate emergency exit planning.
2. Evaluate and Prepare the Business (Value Acceleration)
In this step, you will need to obtain an independent, realistic valuation of your business to avoid overestimation and understand market worth. Ensure you have 3-5 years of clean, audited financial statements and that key personnel can manage operations without you to reduce buyer risk.
3. Choose Your Exit Strategy
Here, you will need to decide how you want to exit the business. This could be selling to a third-party, family succession, liquidation or a management buyout. The exit strategy you pick will help develop a robust exit plan that considers all factors.
4. Assemble an Advisory Team
If you are exiting your business, you will need an advisory team. Your advisory team will help you minimise taxes and risks, structure the deal for maximum net proceeds, find quality buyers and handle all legal documents and the due diligence process.
5. Execute the Transition
In the final part, you will need to prioritise due diligence preparation by organising all contracts, customer data and legal documents. Make sure all these are up to date and factual. Secondly, you must communicate with all stakeholders such as employees, customers and suppliers to prevent any operational disruptions.
Once you have implemented your plan, you can begin negotiating terms and securing your sale.
Examples of Exits in South Africa
Below are some examples of different exits that have happened in South Africa.
- Nedbank’s acquisition of iKhokha: Nedbank completed its full acquisition of iKhokha for approximately R1,65 billion. The move aimed to enhance Nedbank’s SME offering while allowing iKhokha to maintain operational independence.
- TymeBank buying Retail Capital: Digital bank TymeBank acquired Retail Capital for R1,5 billion. Notably, Retail Capital founder Karl Westvig later became CEO of TymeBank – an uncommon but strategically significant outcome in exit transactions.
- Xero’s acquisition of Syft Analytics: New Zealand-based Xero completed the acquisition of South African startup Syft Analytics for up to $70 million (R1,26 billion). The deal reflects increasing demand for data-driven financial tools among SMEs.
