EXIT STRATEGIES

Exit Strategies

Exit Strategies

Introduction

Businesses have a life cycle. They are formed; they grow; and they mature. And, although there is no predetermined end to the life of a business, many businesses ultimately experience a transitional phase through a change in ownership, a divestiture, a merger, an acquisition or a public offering. Such transactions are opportunities to generate enormous value for companies and their owners. While the current market has proven to be a tougher market than years past, with smaller pools of available buyers, increased levels of market due diligence, and limitations on the availability of public debt and equity capital, it is clear that preparation and value generation from deals has never been more important.

Exit Strategies

Various exit structures exist to help companies achieve their priority objectives as they enter a transitional phase. Depending on the exit structure and approach taken, the regulatory, tax and reporting requirements of each alternative can significantly vary and may have different timelines for completion. Challenges will always exist with corporate exit strategies, but with the right understanding, strategic planning, and managing of priorities, companies assessing exit strategies in today's difficult market can achieve their goals and maximize deal value.

Carving out a business— financially and operationally

Many exit strategies involve a piece of the company rather than the entire company. Such a transaction is often referred to as a “carve-out.” Although there is no official legal or accounting definition for a carveout business, the term commonly refers to the separate financial and operational presentation of a component of an entity, subsidiary, or operating unit, which may or may not be a separate legal entity. Information and operations for such a presentation is derived or “carved-out” from a larger entity or parent company. Carve-outs may consist of subsidiaries, segments, business units, or lesser components, such as product lines of a business. A carve-out business needs to be separated from the seller's existing operational and financial infrastructure. Often, the business may need to function as a standalone entity post-close, especially in transactions involving a financial buyer, such as a private equity fund. Consequently, the operational separation and transition service arrangements between the buyer and the seller that will exist subsequent to deal closing are critical components of any exit strategy involving a carve-out (Schipper and Smith, 2000).

Additionally, standalone financial statements for the carve-out business may be a due diligence request; appear in a securities offering memorandum; be used to comply with regulatory reporting obligations, such the Securities and Exchange Commission's (SEC) requirements for significant acquisitions; or otherwise be required to complete a deal. The preparation of carve-out financial statements is among the more challenging financial reporting exercises an entity can undertake. Accordingly, the need for such information should be evaluated early in any deal involving a carve-out, so as not to derail anticipated timelines.

Taxes upon exit

As discussed further below, companies must consider a number of key tax issues in connection with any exit strategy. By engaging in up-front tax planning, a divesting entity is ...