316 8 Exit: Introduction
Exit from the perspective of the firm, exit as an investment. From the perspec-
tive of the firm, returning funds to investors can be regarded as an investment. If
given the choice, the firm would not make payments to its shareholders and other
investors just to make them richer. The firm would make those payments if it
made commercial sense to the firm itself.
Generally, the allocation of value generated by the firm is part of the manage-
ment of agency relationships between the firm as principal and its stakeholders as
agents (Volume I). Payments should preferably be made to each stakeholder cate-
gory according to their relative importance to the firm and, in particular, the objec-
tive of the long-term survival of the firm.
Exit, cash flow, risk, agency, information. From the perspective of a non-
financial firm raising the funding, the exit of an investor or the making of pay-
ments to investors can influence the firm in many ways. Exit can influence cash
flow, risk, agency, and information.
Exit can influence the firm’s funding mix and the cost of funding. Exit typically
gives rise to risks that relate to liquidity, leverage, and access to funding.
Investors have an important role as sources of funding and providers of ancil-
lary services. The exit of one or more investors can change the firm’s agency rela-
tionships and agent mix.
For example, the question of exit is important from a corporate governance per-
spective. It goes without saying that it can change the firm’s share ownership and
control structure. Furthermore, exit can influence the firm’s counterparty risks.
The counterparty risks relating to the firm’s remaining or new investors might not
be the same after the exit of some investors.
Exit can signal something to the firm’s investors, stakeholders, contract parties,
customers, and market participants, and influence their behaviour. As exit can give
rise to risks even in this respect, the firm should also manage exit as part of the
management of the firm’s outgoing information flows.
8.2 Exit from the Perspective of the Investor
There are general forms of exit that can be used in most investment transactions
and particular exit forms that are, to a large extent, dependent on the type of in-
vestment. The general forms of exit include the following.
Sale to a third party. First, an investor can sell its claims to a third party. A
shareholder can exit the firm by selling the firm’s shares to someone else, and a
creditor can sell the firm’s debts to someone else. The sale of claims by one inves-
tor to another will not influence the firm’s assets directly. It can nevertheless in-
fluence the firm and its assets in other ways (see below).
Cash payments by the firm. Second, the firm can make cash payments to the in-
vestor. If the investment is a loan, the firm is expected to fulfil its contractual ob-
ligations under the loan agreement. If the investor has invested in shares issued by
the firm, there are legal constraints on whether and how the firm may buy them
from the investor (share buy-backs), withdraw them, or make other distributions.