Exit strategies for SME entrepreneurs

The Business Line, April 2, 2012

Several patterns that were common only among large corporates in the past are now distinctly visible among SMEs; adopting a profitable exit strategy from business is one such clearly emerging pattern. Indian entrepreneurs today are a lot more open to exit their business, unlike their counterparts in the previous generations. This is probably due to less emotional attachment and more commercial orientation in their decision-making. The most common motivations for exit from business and popular exit strategies are discussed here.

MOTIVATION FOR EXIT

The most common motivation for business exit by SME entrepreneurs is to make it big by joining hands with a large corporate, and thereby leave a larger legacy. Several entrepreneurs face significant challenges to scale up because of insufficient resources to meet growing funding needs in line with growth in business. The result is stagnation in business, forcing entrepreneurs to look for a larger strategic partner to grow. Another motivation prevalent for business exit is the threat of long-term survival due to consolidation of the industry, with the entry of bigger players. The branded consumer goods sector in India is a classic example, where smaller regional brands have exited to MNC players, in the consolidation process. Company-specific issues, such as ‘no clear succession plan' or ‘financial distress' are some reasons for entrepreneurs to exit their business.

EXIT STRATEGIES

The most common exit strategy for SMEs is outright sale of the business to a large corporate. In India, a few hundreds of such transactions happen in a year, though scope exists for a significantly larger number. Sale of majority stake to a large corporate to infuse capital and continuing to manage the operations is also reasonably popular. A common misconception among SMEs is to perceive the Initial Public Offer as an exit strategy; in reality, it is just the first step for a long-drawn phase of growth and maturity for an enterprise. Buyouts by Private Equity Investors is in the nascent stage in India, but significant interest exists among global investors to enter this segment in the coming years. Another unique exit strategy, particularly popular in principal cities, is the retention of land and sale of assets / business, as land value has yielded immense results for many mid-size companies, far in excess of profits from their core business.

SECTORS WITNESSING ACTION

The outright acquisition route has become very common among consumer products — white goods, electrical appliances, consumer financial services are all attracting buyers from Europe, Japan and US, besides large Indian corporates, as a ready client base and channel network help the acquirers jumpstart their business. Some niche sectors such as industrial valves and cranes, small regional branded products, logistics and engineering services are also witnessing significant interest from buyers.