Exit Strategies don’t have to be complicated

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With the economy picking up from the global downturn, business owners who have weathered the financial storm have come out on the other side with businesses which are much more robust, and are now in a position to achieve successful exits from their businesses. Having a clear exit strategy doesn’t have to be complicated and it will define the key stages of the sale process.

 

Share or asset sale?

The first distinction to make is whether the shares in the company are to be sold or simply certain assets.

With a company limited by shares, the individual shareholders of the company can choose to sell their shareholdings or the company itself may simply choose to sell some or all of its assets.

 

When purchasing the assets of a company, you can pick and choose which assets to buy, specifically excluding any liabilities. Conversely, buying all the shares in a company will result in any liabilities and obligations remaining with the company, whether you know about them or not. You may however, be able to negotiate the exclusion of certain company liabilities in the share purchase agreement.

Due Diligence

As a buyer, it is important, whether on a share or an asset sale, to know as much as possible about the business you are purchasing. This means instructing lawyers, accountants and any other relevant experts to review any documentation relating to the target business or company.

The due diligence review is usually instigated by the prospective buyer sending a due diligence questionnaire to the seller or his lawyers with numerous questions around the business’ performance, its contracts, its relationship with its employees, its intellectual property and any litigation it is involved in. The seller will provide replies and documentation to the buyer and his team who will then look through and review each document in turn, looking out for any points of concern.

In certain circumstances it may be appropriate to request an indemnity to cover a specific liability uncovered during the due diligence process.

Negotiations and process

Negotiations often start with the buyer and seller entering into “Heads of Terms”. These are important as they outline the agreed terms between the parties which will then be transposed into a formal agreement for the purchase of the business or company.  They are usually non-binding, save for certain exceptions and often include “lock-out” provisions which prevent a party from negotiating a better deal with a third party for a certain period, and restrictive covenants to ensure that if the deal does not proceed, each party cannot poach any of the other party’s employees.

The next stage is for the lawyers to draft an agreement incorporating the terms which the parties have agreed, including how the purchase price is to be paid (whether all up front or deferred for example).

This agreement will be legally binding and will usually include certain warranties and indemnities which the seller will give the buyer about the business. The warranties are essentially statements which will give the buyer a right to sue the seller for breach of contract if they prove to be untrue. For example, the seller may warrant that there is no litigation affecting any intellectual property is owned by the company.

The agreement will also include certain limits on the seller’s liability so that the seller can be certain of his maximum exposure for a successful claim against him by the buyer under the agreement. The seller will also have a chance to inform the buyer of any matter which may conflict with or contradict any of the warranties in a disclosure letter. Generally, a buyer will not be able to claim against the seller for a breach of a warranty if the matter giving rise to the breach has been fairly disclosed in the disclosure letter.

Other strategies

Selling your company or business is just one way of achieving an exit but this may not be the right decision for you. If your business is not achieving the growth you would want, you may wish to consider entering into a joint venture or collaboration with like-minded businesses with expertise in different but complementary areas.

This could provide you with access to an entirely new client base in order to expand and grow your business. It may also be a good idea to think about whether any existing shareholders’ agreement has adequate protections for the shareholders on exit. Many companies will draft these early on and they may no longer be appropriate for your business today.

 

Maung Aye, Senior Associate

Mackrell Turner Garrett

maung.aye@mackrell.com

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