What an exit clause means in practice
In practice, an exit clause sets out which events give a right or an obligation to sell shares, and on what terms. It can concern a sale to an outside party, changes of ownership or goals being reached that trigger an exit.
The clause serves as a framework for how a sale is to be carried out, which protects both the seller and the remaining owners from uncertainty and arbitrary decisions.
Common forms of exit clauses
Exit clauses can be drafted in different ways depending on the company's structure and the owners' intentions.
- Rules on when shares may be sold to an outside buyer
- Provisions on a joint sale of the company
- Time-based conditions that govern when an exit is possible
- Links to valuation models or price levels
- Interaction with drag-along or tag-along clauses
When these parts are clearly defined, a shared understanding is created of how the ownership is to be ended or changed over time.
When exit clauses become crucial
Worth bearing in mind
Exit clauses become especially important in companies with several owners whose time horizons, goals and appetite for risk may differ. In such situations, unclear rules on sales can lead to deadlocks that hinder both investments and future deals.
Regulating the exit right from the start creates predictability for all parties. This makes the company more attractive to investors and simplifies future changes of ownership.
Frequently asked questions
What is the purpose of an exit clause?
To create clear rules for how owners can leave the company and how a sale is to be carried out.
Where are exit clauses normally set out?
They are usually set out in a shareholders' agreement and sometimes in separate agreements between owners.
Are exit clauses common in unlisted companies?
Yes, they are very common, since ownership is often more concentrated and trading limited.
Can an exit clause force an owner to sell?
Yes, depending on how they are drafted, some exit clauses can create an obligation to sell.
How do exit clauses affect the value of the shares?
Clear exit rules can increase attractiveness and reduce risk, which in some cases has a positive effect on the valuation.