Choosing precisely when and how to pull out of an investment is one of the most important decisions an investor has to make.
The company should ideally have made enough profit to make the original investment worthwhile, but still be an attractive prospect to the next buyer. Things are not made easier by changing stock market fashions, which rule out flotation for all but the whizziest, high-tech ventures.
The best time to think about selling an investment is before buying it, according to Martyn Pilley, corporate finance director at RSM Robson Rhodes. `Unless it’s a family business, the fundamental strategy has to include an exit,’ he says. `You can’t just wait for an offer to come through the letterbox.’
Whether the company is owned by a management team or venture capital company, the current owners should always keep in mind the next set of owners. If the company can be made more attractive by making a new product, then investment in that product is likely to be money well spent. And if potential investors are looking for a company with European links, then making an acquisition on the continent could be the way to go.
Ten years ago, investors in a medium-sized industrial company with a good product range would naturally consider the stock market as a way to divest. But the minimum worthwhile size of a public company has gone up at the same time as traditional engineering has become less popular.
Michael Davy, director of venture capital house NatWest Equity Partners, says: `In the mid-1990s, we were able to float Cortworth, the specialist engineering company, for £65m. Now, the minimum for a company without big growth potential is £200m, perhaps up to £500m.’
Venture capitalists unable to sell their investments to the stock exchange are starting to sell them to each other. This is partly because they have more funds and partly because there is less suspicion on the part of investors that they are being sold a company which is past its best.
So why sell up if the company is worth holding on to? `Venture capital funds have a limited life, typically around 10 years. The money comes from investors who will generally want their money back within 10 years or so.’
The most common way out for investors is simply to sell the company to another in the same industry. But where there might have been 10 potential UK buyers a few years ago there are now probably just two or three. US companies have been snapping up underpriced UK engineering firms and other countries are starting to move into the frame.
Sukhbinder Heer, corporate finance partner at Robson Rhodes, says: `A lot of European companies are looking at buying capacity in the UK. And I think we will start to see more investment from the Far East as their economies recover.’
A typical private investment in a company lasts about 3-5 years, but circumstances can mean that it is better to hang on longer. Sometimes there is just more money to be made by not selling.
In those circumstances, Heer advises owners not to panic. `The best thing to do in that case is obtain a partial realisation of the company’s value by taking out dividends each year,’ he says.