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 doesn’t, 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.
Expect to see warranties and indemnities being sought on a Company’s GDPR compliance by both purchasers and investors alike.
Due diligence and GDPR
Expect to see specific and enhanced due diligence being conducted by purchasers and investors in respect of GDPR compliance.
This is likely to involve an extensive review of all third parties who process any of your data, an audit of all your policies and documented consents, a forensic examination of your internal systems/security and a review of any breaches (however minor) and how you have dealt with them. So even if you have ill-advisedly ignored GDPR, any potential purchaser or investor will not.
In conclusion, every business will have different legal issues to be addressed when looking to exit and having a team of expert advisors such as a commercial lawyer and accountant will ensure the sale process runs smoothly as possibly, without delay and avoiding the risk of any deal falling through.
Think about the overall picture from the beginning and what your long term goals are and build those into your corporate documents from the start.
Karen Holden is an award-winning solicitor and founder of A City Law Firm
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