The pre-exit: How everybody wins twice

With a lot of ‘dry powder’ available by private equity firms, a relatively new type of M&A transaction is gaining popularity in The Netherlands and Europe’s midmarket; the entrepreneurial pre-exit. This type of transaction provides serious business opportunities for financial and legal advisors to benefit from long-term relationships with clients and create recurring business for several years.

What is a pre-exit?

During a pre-exit transaction, the sale of a company is completed in two separate stages over a time horizon of typically five to seven years. During the first stage, all shares of the target company are sold to a newly founded holding entity (hereafter: “Newco”). About half of the transaction value is funded by both the investor and the seller, often the founder(s) of the company, as the seller is required to co-invest in Newco and stays committed to the business for a pre-agreed period. The remainder of the transaction value is funded through external financing (bank). Typically, this stage of the transaction is structured in a way that either the investor or the seller has a substantial minority or a slight majority ownership stake in Newco, hence, in the initial target company.

After several years of collaborative efforts by the new investor and the seller to accelerate growth through value-enhancing initiatives, the second stage will take place. During this stage, 100% of shares in Newco are sold to a third party, either another financial investor or a strategic buyer. In other terms, a full exit will take place. The process of a pre-exit is illustrated below.

The pre-exit offers an interesting alternative for entrepreneurs who wish to monetize part of their company value today, yet still, want to be involved in the business in a more strategic and/or advisory role. Investors welcome the pre-exit not only because they can benefit from the combined expertise of buyer and seller, but more importantly, it limits risks and allows for mutual alignment of interests of all shareholders when taking the business to the next phase of sustainable growth. A win-win.

Would you like to know more about the pre-exit transaction structure and what added value it can bring to you? Contact one of the Marktlink M&A specialists!