Essential legal considerations when exiting a business
Any business that looks to be sold will have personal and financial consequences which need to be thought of well in advance. The exit plan will require careful planning and the legal implications fully considered before taking such an important decision.
If looking for investment, it is not only key to have an exit plan for the investors? money but also yourself as founders. That way the investors understands your goals to ensure they are aligned with you. Here are just some of the legal considerations to be aware of:
A business exit plan is very important as decisions will need to be made with the plan in mind. The key to a successful exit will depend on how well prepared the business is and how much it can add to its market value.
The options on exit are abundant so thinking about this from the beginning will benefit the seller. The right exit plan will therefore depend on what the outcome the seller wants to achieve.
One of the areas which I advise clients on when considering an exit plan is to think about the tax implications. It would be right to seek tax advice at the outset so you understand how you may want to structure the business.
Key to any decision when it concerns tax implications would be to know whether, there would be any tax exemptions or tax reliefs available. Always seek independent tax advice at the earliest opportunity.
Buyers will also want to scrutinise the financial position of the business. Sellers should therefore be prepared to provide audited and/ or unaudited financial statements. These statements may go back a number of years and will depend on the buyer and what their advisors ask.
Remember, financial statements are only a fraction of what may be asked for so be prepared. Your accountant should be able to prepare these statements for you.
The shareholders agreement needs to be in place at the start and his should enable the smooth exit. Think about tag? and drag? along clauses; an agreement on how the business is to be valued; and what happens in the event if you want to leave or you get an offer to be bought out?
To avoid any potential delays later, it is important that all contracts are carefully reviewed to ensure that any actions that are needed in the clauses are addressed and noted. A lot of business will have loan agreements and these will have to be reviewed too.
Loan agreements tend to have clauses which may trigger certain provisions such as early repayment penalties in the event the business is sold.
A potential buyer will want to see evidence of ownership of all assets that are being transferred as part of the sale. Assets will include any intellectual property which the business owns and if it doesnt, it may be a deal breaker for a potential buyer that the intellectual property is assigned over.
There may be tax and other implications when transferring assets, so an accountant should be consulted to advise on this.
As part of any sale or investment documentation, you can expect a series of warranties (promises), that you have to make to the purchaser/ investor about the state of your business.
These warranties are designed to enable the investor/purchaser to be able to bring a claim more easily, in key risk areas, and avoid taking on liability for retrospective mistakes. These warranties are usually made by the seller/founder personally so should be taken very seriously.
Karen Holden is an award-winning solicitor and founder of A City Law Firm (ACLF), the go-to lawyers for entrepreneurs, startups, scale-ups, those seeking investment. In addition to being very successful lawyers for businesses , ICOs and family law, ACLF are now the UK's leading LGBT law firm and surrogacy specialists. Karen is a regular media commentator, panellist and event speaker.
Selling a business is possibly the single most important decision that a business owner will need to take. With substantial personal and financial consequences, the journey towards the exit should be meticulously planned and all legal implications considered. more»