Key Concepts in Evaluating Exit Strategies
There are essentially three different types of exit strategies: 1, an all cash sale of the company; 2, an M&A exit that offers a publicly tradable security in exchange for the equity of the company being sold—which is nearly the same as an all cash offer; and 3, securities in a private company or securities that are otherwise restricted from an immediate liquidity value.
All Cash Offers are relatively easy to assess. Since the value of the business is offered in complete liquid value you know exactly what the business is being valued at. The same is true with businesses that are liquidated through a publicly traded security, since you know the security is trading for x and you are receiving a certain number of securities, offering the securities on the closing date to the market will provide a complete liquid value.
When selling your business in exchange for securities that are not publicly traded or that have some sort of restrictions, it is much more difficult to evaluate the value you are or will be receiving for your business. In such circumstances you need to understand the quantitative and qualitative aspects involved with the transaction. You will want to ensure that the resulting business will have a strong balance sheet and that the financials will work out logically. You will also want to know that the business model and concepts are clear and logical. Do your research to make sure the business you will own will hold its value until the time you can liquidate your assets in the company.
In these situations we highly recommend that you remain involved with the management team and that you ensure your voice is heard durring the key decision making points to ensure that if you mis-valued the business then you mis-valued it in your favor. If you have to take on such additional risks make sure the risks are in your favor increasing your liquidity value.
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