Sunday, April 1, 2012

Exit Strategies for SME Entrepreneurs


Exit Strategies for SME Entrepreneurs

Several trends that were observed only among large corporates in the past are now distinctly visible among SMEs; adopting profitable exit strategy from business is one such clearly emerging trend. Indian entrepreneurs today are lot more open to exit their business, unlike their counterparts in the previous generations. This is probably due to less emotional attachment and lot 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 lack of own 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 threat of long term survival due to consolidation of the industry with entry of bigger players. 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 absence of a clear succession plan or financial distress are other frequently observed 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 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 nascent stage in India, but significant interest exist among global investors to enter this segment in the coming years.  Another unique exit strategy, particularly popular in principal cities, is 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 significant 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 ready client base and channel network help the acquirers jumpstart their business. Other niche sectors such as industrial valves and cranes, small regional branded products, logistics and engineering services are also witnessing significant interest from buyers.   

N. Muthuraman is ex-Director Ratings, CRISIL and Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm.

This is the blog of the Print Version published in Business Line dated 2nd April 2012\

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