Pre-exit strategy: sell your business in stages

As an entrepreneur, it may be worth considering selling the business in stages rather than all at once. This is known as a ‘pre-exit’, and it is one of the most flexible forms of business exit strategy available to owners today. A part of the value is realised now, whilst you continue to run the business as normal until it is sold in full. A pre-exit is a good option if you wish to spread the risk, continue to grow the business or maximise your return.

What is a pre-exit?

In short, a pre-exit is a sale in stages. During the first stage, the owner sells 100% of their existing shares to an investor but reinvests part of the purchase price back into shares in the company. They can then secure (cash in) the funds released. Over a period of five to seven years on average, the owner and the investor work together to grow the organisation, after which the business is sold in full. In this second sale, the owner benefits a second time if the value of the business has increased.

As a founder exit strategy, a pre-exit is appealing precisely because it is gradual: you release capital now without having to hand over the reins overnight. During this growth period, the owner continues to run the business as usual and is supported by the investor. The investor contributes ideas, offers valuable input and can facilitate further growth by providing additional capital.

When is a pre-exit worthwhile as a business exit strategy?

• Risk diversification
  Value can fluctuate significantly. This is not only down to the company’s profitability, but also to the economic climate and the willingness of potential buyers to purchase. If your capital is entirely tied up in the business, this entails risks during difficult times. With a pre-exit, you diversify the risk by ‘cashing in’ on part of the value in advance.

• Financing
  Financing is a key reason for opting for a pre-exit. If an entrepreneur approaches a bank for a loan, which they then pay out to themselves as a dividend, the application is often rejected. This is because there are many conditions attached to such a dividend payment, and the bank may become suspicious of the entrepreneur’s motives. It is a different story when an investor becomes a shareholder and thus joins the company. This investor brings in equity capital and believes in the business. This gives the bank the confidence to grant a loan.

• Growth
  Thanks to the investor’s contribution of capital and expertise, it is possible to enable the business to grow further. This increases its value, meaning the business will fetch a higher price in the event of a full sale.

• Bringing in missing expertise
  Attracting an investor can also be useful for bringing in expertise that the owner lacks. This expertise may be valuable or even essential for accelerating the company’s growth. Examples include new technologies or opportunities for expansion abroad.

The benefits of a pre-exit

• Part of the business’s assets is safeguarded
• The owner can work alongside the investor to grow the business at their own pace
• The owner continues to run the business and can get used to the idea of selling it
• The investor brings expertise, a network and capital to the business, which promotes its growth
• Access to credit is easier, which helps to optimise returns

When is a pre-exit suitable?

A pre-exit is suitable if the owner is not yet ready for a full sale but does wish to realise part of the value. It is also a good alternative to a full sale if the business is dependent on the owner or if the owner still enjoys running the business too much.

Exit readiness matters here: for a successful pre-exit, it is important that the business is running smoothly, is of sufficient size and has the potential to grow. Furthermore, it is essential that the owner and the investor are a good fit and share the same objectives. Assessing your exit readiness early helps you judge whether a staged pre-exit or a full sale suits you best.

When is a pre-exit not suitable?

In a pre-exit, the investor gains full insight into the business. If this is not desirable, a pre-exit is less suitable. It is also important that the investor and the owner share the same vision. If, after a period of growth, the owner wishes to continue running the business whilst the investor wishes to sell, a problem arises. In such cases, the owner may be able to buy back the investor’s shareholding.

Why engage BrightOrange for a pre-exit?

The specialists at BrightOrange are happy to guide you through a pre-exit for your business. Choosing the right founder exit strategy and the right investor who fits your company and adds the most value, makes all the difference. Thanks to our extensive network and years of experience, we can provide you with excellent support in this regard.

Wondering whether a pre-exit is suitable for your business? Please feel free to contact us.