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Gavin Gibbons

Home » The Drawbacks Of SPACs As Your Exit Strategy

The Drawbacks Of SPACs As Your Exit Strategy

Taking an operating company public can deliver a strong valuation and provide a range of other significant benefits, but the landscape has shifted in the last few years.

Special purpose acquisition companies (SPACs) became a popular option for experienced management teams seeking to take companies public. The SPAC route – compared to a traditional IPO – offered to drastically reduce the timeframe to become a public company and cost less in the process.

The sole purpose of a SPAC is to raise capital via an IPO, with the objective of acquiring the operating company afterwards. So the operating company becomes a publicly traded entity without as much drama involved.

Sounds great, but there are drawbacks with SPACs:

> Public Appetite

The SPAC boom of 2020/21 is waning. Risk appetite has declined, meaning valuations have disappointed some. And investors have a ‘get-out’ clause for each IPO, prompting a house of cards scenario.

> Preparation

The operating company’s management team will need to focus on being ready to operate as a public company within three to five months of signing a letter of intent. This can be a distraction.

> Costs

Direct and indirect costs are still significant. Investment banking fees, new staff for compliance, ongoing public reporting requirements can all add up.

> Loss of Control

Once public, the share price and business strategy are largely beyond your control. For hands-on SME owners used to doing things their own way, this loss of control can be tough to swallow.

> Compliance

The fact is that many SMEs aren’t equipped for the level of scrutiny involved in being a public company at all. Failure to get this right can sink valuations.

Now, there are other neat alternatives to SPACs, in order to become a public company. I will save that for another post, but it’s worth outlining some of the other more obvious options for exiting a business, with less hassle…

✔️ Trade sale to a strategic buyer or private equity firm. It can be much more profitable and far less trouble.

✔️ Recapitalisation to free up some equity while retaining control of your company.

✔️ Private equity secondaries to sell your shares instantly without going public.

✔️ Management buyouts (MBOs) led by your current management team.

Each exit path has unique trade-offs for business owners. So what’s the right path for your business?

#sme #business #ukbusiness #exitlaunchpad #M&A #mergers #acquisitions