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Exit strategies

Definition of topic exit strategies

Exit strategy, exit route, exit plan or strategic withdrawal is a method that lets the owners of a business to turn their share of a company into cash. An exit strategy is usually a vital part of a business plan that investors require. When investors are investing in private companies, it can be difficult for them to trade their share as the company is private. Investors will eventually want to trade their illiquid assets, their shares, into a more liquid asset, such as cash.

Types of exit strategies

There are eight basic types of exit strategies: ^[1]

• Family successsion: Transferring the company to a family member.
• Management buyout (MBO): Sale to the managers or employees of the company.
• Management buyin (MBI): Sale to managers that do currently not work for the company.
• IPO: A company offers a share of it to the public.
• Franchising: Franchising the business operations and later on selling the franchisor business.
• Acquisition by another company: Another company that buys out and acquires the other.
• Merger with another company: Two or more companies are joined together. The companies are more valuable as combined than they would be without the merge.
• Liquidation: The company ends its operations. The assets of the company are distributed to the shareholders.

Relevance to software business

Even some of the Web 2.0 companies have difficulties in defining their exit strategy. A plan to sell the company to another company, such as Google, might be a beneficial plan, but not a realistic one. ^[2]

A merger with another software company as an exit strategy can have several advantages. One key advantage is that the companies can make better use of their assets. A merger can also be beneficial in the sense that it creates stability and profitability. Mergers tend to also bring in many new key customers. It is also typical for software companies to engage in an alliance if both have software products or services that complement each others. ^[3]

Depending on the market condition, an IPO typically captures the best liquidity and valuation. It is a good way to raise working capital for business development and to achive liquidity for equity holders. An advantage is also that after an IPO, the publicly traded shares can also be used as a currency to do acquisitions. ^[3]

Example of the phenomena

A good example of a software company that managed to make a successfull IPO is NetSuite. NetSuite managed to double what the original forecasts predicted for the price of a share. ^[4]

Theoretical approaches

The use of different exit strategies in software companies could be investigated with the use of empirical research methods. Software companies could be analyzed by conducting interviews and later on comparing if their exit strategy has succeeded.

Currently interesting research questions

• How often does the planned exit strategy succeed?
• How can software companies take advante of IPOs in order to sustain growth?
• Are the employees of a company aware of the company's exit strategy?

Related Readings

• HAWKEY, J., 2002. Exit Strategy Planning: Grooming Your Business for Sale or Succession, Gower Publishing Limited, pp. 36-42

Links to related articles

• Liquidity of a software firm
• Software startup acquisitions

See also

• Wikipedia article on Exit strategies
• Wikipedia article on Initial public offering
• Wikipedia article on Mergers and acquisitions
• Entrepreneur.com: Exit Strategies for Your Business

References

1. ↑ J. Hawkey, "Exit Strategy Planning: Grooming Your Business for Sale or Succession," Gower Publishing Limited, 2002.
2. ↑ C. Aleo-Carreira, "Exit Strategy: Why Does Every Web 2.0 Company Have Only One?", profy.com, 2008.
3. ↑ ^{3.0 3.1} S. D. Ybanez, "Growth strategies: how software start-ups can leverage alliances, acquisitions, IPOs and venture capital", Massachusetts Institute of Technology, 2007.
4. ↑ C. Barker, "NetSuite IPO: Shares hit double the forecast price", ZDNet.co.uk, 2007.