Heading for the Exit – Best outcomes for your business

Exiting a private equity funding cycle is the point where the interests of the two parties can diverge. Therefore, it’s vital that as a PE-backed CEO you prepare for and execute the exit process as smoothly and successfully as possible. Peter Taylor (Co-founder and former Managing Partner of Duke Street, a leading private equity firm) and Giles Derry (former CEO of Blackrock Expert Services) have navigated many such exits and share their insights in our latest blog.

In this article you’ll discover:

  1. What the typical exit sequence looks like
  2. How to manage exit sequencing
  3. What exiting the private equity fund means for your business

Exit timings are ultimately based on judgement calls – your investors will typically be looking to make two to three times their money over a three to five year horizon. But, if the business is performing well ahead of plan, this could be reassessed. Do they bank the money now or hold on for a couple more years in the hope of a better return? As a CEO with skin in the game, it’s essential to communicate with your investors and influence an exit that delivers the best outcome for you and all your stakeholders.

Defining the typical exit sequence

In practical terms, exit timings are influenced by a number of factors, categorised in two ways:

  1. Bottom-up. Performance. There are two key considerations here:
    1. External market conditions (liquidity, debt capacity, economic conditions, cyclical activity, sector performance, multiples being delivered by competitors, regulatory changes etc.)
    2. Company measures and performance of the business against the investment thesis (sales, EBITDA, cash flow generation, position against competitors etc.)
  2. Top-down. Fund dynamics. Where you are in the funding cycle matters. Generally PE houses will raise funds for a 10-year cycle, with investment in the first five years and realisation in the second half. Remember that PE houses typically deploy 75% of their fund before they can move onto the next, which will also influence their thinking about exit sequencing.

Giles explains that, fundamentally,

Investors are rational individuals and aim to maximise their returns at any one point. So, there’s a constant balance between value now, and value in the future. It is basically the classic fear and greed payoff.

Giles Derry

Managing exit sequencing effectively

When it comes to preparing the business to get the best deal at exit, Giles and Peter recommend CEOs give due consideration to the following matters ahead of exit:

  • Leave enough growth in the plan to attract the next buyer
  • Align the management team’s expectations – are you hoping for a trade buyer or a second PE investor?
  • Structure the top team to focus not only on the imminent exit, but also the next one
  • Create a KPI dashboard that reflects the successes you want to feature in the sales memorandum
  • Develop relationships with potential buyers – building trust and identifying preferred partners takes time and effort. But Giles knows that it’s worth the effort as

“It’ll lead to a better outcome in terms of pricing and deal structure most of the time because they’ll feel a little bit more confident in accommodating specific pricing or deal needs if they understand and trust the team”

Giles Derry

Exit sequencing – getting the best for the business

Developing meaningful relationships with potential buyers well ahead of the planned exit will go a very long way to ensuring you get the best deal. It’s vital that you have a view on what your preferred outcome is, as your approach as CEO will be different depending on whether you are courting private equity funding or a trade buyer.

If you are pursuing PE funding, Giles recommends using management advisors to help make sure your preferred houses are still there at the final negotiation stage. Be open with your favourites but don’t get too attached – PE houses can often drop out of the auction process and there’s no room for emotion in exit deals. Understanding the natural rhythm of the deal process from the perspective of your PE investors is also beneficial in getting the best for your business – sharing problems and understanding their issues engenders trust.

In the end, successful exit sequencing means identifying your preferred exit route and building a clear and compelling story around it. As CEO you can make it happen, don’t just let it happen to you.

This blog covers best business outcomes, however it’s also crucial to secure a good personal outcome when it comes to management equity.
In the following guide by Stuart Coventry, the CEO of Jamieson Corporate Finance, we cover what a fair management equity deal looks like. Fill in the form to gain access.


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