Exit

What it means

An exit is the moment a founder or investor sells their stake in a company and turns the investment into cash. For a venture capital investor the exit is the goal from day one; for a founder it is often the culmination of years of work or a way to pass the business on.

The most common forms are a sale to a strategic buyer from the same sector, a sale to a financial investor or fund, a management buy-out, a buy-back by the other shareholders and, for large companies, a stock market listing. In family businesses handing over to the next generation is often the alternative.

The outcome of an exit depends on the valuation and the deal structure. Besides the price, what matters is how much is paid up front and how much later through an earn-out, what warranties the seller gives and whether they must stay on for a while.

How it works in practice

Preparing for an exit takes years. The buyer carries out due diligence on the books, tax, contracts, staff and intellectual property. Every loose end lowers the price or leads to part of it being held back. We recommend tidying up the business continuously, not only when a buyer appears.

For tax there is a difference between selling a stake and selling the business or its assets. For an individual, the gain on selling a stake is taxed as other income with possible exemptions, and selling through a holding company follows other rules. The deal structure should be worked out with an adviser in advance.

With several shareholders, the agreements on selling are decisive. Tag-along and drag-along clauses determine whether the majority can force the minority to sell and whether the minority can join a sale on the same terms.

What to watch out for

The most common problem is a business that depends on its owner. If all customer relationships, know-how and decisions rest on one person, the buyer pays less or insists the owner stays for years. Delegation and documented processes raise the value.

The second risk lies in the warranties and representations in the sale agreement. The seller is liable for what they stated about the business and, if tax arrears or disputes come to light later, repays part of the price. Precise representations and capped liability matter as much as the price itself.