Strategic commercial interventions: exit strategy principles

3. Key aspects of a good Exit Strategy

There are a number of elements that should be considered when developing an exit strategy, including:

• Timing
  • The exit / divestment strategy should be part of the thinking at the initial intervention phase, with consideration given to the reasons for providing financial support and what SG is looking to achieve from the intervention.
  • This should then be regularly reviewed as part of the ongoing management and monitoring of the asset.
  • Sponsor teams will need to consider appropriate timing in the context of original or revised objectives being met, the stability of the business, and the readiness of the market for repatriation of the business.
  • External advisors can help to support this decision making by assessing business profitability and testing the market for potential interested parties.
• Alignment with objectives
  • Sponsor teams should be clear on the initial rationale for public sector ownership or financial support provided to a business, and this should be reviewed at regular intervals against measurable indicators to determine if the rationale is still applicable. When the objectives have been progressed or met then the focus can be pivoted towards planning for divestment / exit.
  • Setting clearly defined SMART objectives on day one is important as this will allow for periodic reviews to measure whether objectives have been met or not. If the original objectives are no longer fit for purpose they should be refreshed and updated with further guidance on objective setting available in the SMART Objectives guidance note.
  • Monitoring agreed KPIs as part of the objective setting exercise is an important step in the consideration of divestment and ultimately in development of the overarching rationale for exit.
  • This should be considered as part of the Monitoring process as highlighted within the Monitoring Framework. Examples of key metrics, that once met / addressed, will assist in determining if it is an appropriate time to consider an exit are:
    • SG’s original policy rationale has been met e.g. job preservation;
    • Stable management;
    • Positive profit generation and cashflow;
    • Continued commercial growth;
    • Market stability and private sector interest.
  • Similarly, the following principles may also be included as drivers for an exit / divestment:
    • To expose the company to the rigour and competition from the market or scrutiny from shareholders for the overall benefit of the company. Whilst lightening the fiscal burden for SG and SG expenditure, divestment may also have the potential to improve the service the company delivers and enhance commercial efficiency.
    • Attracting foreign and strategic investment.
• Tracking objectives - Benefits Realisation
  • Defining objectives as early in the intervention process as possible helps ensure all parties are working towards the same outcome. A strategy developed at the outset of an intervention is also easier to monitor.
  • Once objectives are set they, and the intended benefits, should be tracked as part of the Benefits Realisation Management process. For context, benefits are defined as the measurable improvements from change, which are perceived as positive by one or more stakeholders and contribute to organisational objectives^[3], while Benefits Management provides a structured approach for the identification, appraisal, planning, tracking and realisation of benefits^[4].
• Divestment assessment
  • To make an informed decision on divestment, we may consider undertaking:
    • An evaluation of the divestment’s proposed objectives.
      • This would involve ex-ante (based on projections) consideration of the impact of proposed divestment on the company, the Scottish market, the Scottish economy, VfM analysis, risks assessments on policy objectives, transfer of liabilities and any remaining residual liabilities for ministers. It should also help assess long-term impacts and whether exiting could undermine long-term SG strategic objectives such as regional development or achieving net-zero targets.
    • Competition assessments.
      • Evaluating the market structure and the degree of competition to determine if exposure to competition can support better outcomes or even determine if proposed divestment could result in the optimum outcome. Also this assessment evaluates whether SG’s intervention has had any anti-competitive effects, whether any such effects are inevitable or the policy objectives could be achieved in a less distortive way and how to assess the costs of such distortions to enable SG to make an informed policy choice about divesture. A competition assessment toolkit and guidance can be found here.
• Consideration of available options
  • Sponsor teams should be aware of the suite of potential options available as part of the overall consideration of an exit strategy. Further detail on these options is provided in section 4 below.
• Considering the risks
  • It is not always possible to predict the exit route at the time of the initial investment, and consideration should be given to exploring more than one exit strategy option at that stage.
  • While most exit strategy options will be based on opportunities, mitigating risks is equally important and therefore also need to be factored in to the overall thinking at this juncture.
• Valuation of asset
  • Understanding the value of an asset is crucial as part of an exit strategy and will be determined by a number of factors including the profitability of the business, the product / service it provides, the market conditions and its future prospects.
  • Financial specialists should be sought to assist in examining a business to determine a fair value using different methods according to the industry sector the business operates within.
• Flexibility and contingency planning
  • Due to the ever-changing nature of business interventions, a well-designed exit strategy should be flexible enough to accommodate unforeseen circumstances that may arise at either the business, market or government.
• Legal and regulatory considerations
  • Sponsor teams should consult SGLD and Subsidy Control to consider whether there are any potential barriers to exiting or divesting a business, for example in relation to the transfer of contracts, any requirement for sectoral approvals if operating in a regulated sector, or if the exit has an impact on national security.
  • Teams should also review any agreements or commitments made during the initial support to avoid breaches of contract.
  • In a sale scenario, sponsor teams would also be required to work at pace with the business to ensure that relevant documents are available in the sales data room.
• Preparation for exit
  • As part of the development of an exit strategy for an asset it is prudent to consider what, if any, steps are required to prepare a business for divestment. This will be linked to the assessment against the intervention objectives but could include steps such as restructuring the asset’s balance sheet to ensure it is fit for repatriation to the private sector or to make it more appealing to potential purchasers.
• Post exit conditions
  • Where applicable, consideration should be given to the need for certain conditions to be in place post exit. For example, linking back to wider SG objectives, conditions imposed around ensuring employment numbers are maintained, future investment is made in a business, or progress towards green objectives is made.