Starting with the end in mind - exit strategy for small & medium sized business
It is not common when starting a business to think of how to end it in a legal manner without too many complications. However, this is a key issue when starting a business. Investors nowadays find proposals attractive when they provide for an exit strategy.
There are several exit strategies available for business starters. The Initial Public Offering (IPO) or “going public” which was the trend several years ago, is one of the most popular. These days most companies do not find this appealing anymore as the procedure is too tedious. The company has to meet certain infrastructure requirements, resulting in high costs and a lot of effort.
The exit strategy should also plan for making a profit even, hence, the better exit strategy is to sell the company.
The current trend for mid-size businesses is to sell the company after three to five years. With this purpose in mind, a checklist should be kept from the inception of the venture.
Checklist for exit strategy
1. Proper and up-to-date documentation.
Keep all relevant documents even if not certain they will be required upon exit. Be aware that in selling the company, a third party investigates in the Due Diligence (DD) phase of the sale. Due Diligence is an investigation made whenever there is a potential acquirer or equity sponsor.
There are documents that might need to be inspected in this phase. Certain documents are traced and checked. The company must be ready to withstand any due diligence investigation so as not to discourage investors.
Written agreements must be kept recorded and available. Examples of these written agreements are statutory corporate documents. Also important are those documents related to registration of intellectual property rights. Remember that intellectual property rights are a crucial part of the business. Documents related to it must be properly recorded and kept up to date as well.
2. Keeping Confidentiality.
The scenario in the DD phase is this: the potential acquirer asks a broad range of questions involving company details. It is best to have a Non-Disclosure Agreement with the acquirer so as to prevent disadvantageous leaking of confidential information pertaining to the company.
3. Make use of Letters of Intent.
Also known as “term sheet”, Letter of Intent (LOI) outlines the agreement of the parties before the sale or investment agreement is finalized. In the letter of intent, clarify the key points and structure the deal, maximizing the strategic advantage. The idea always is to make the transaction tempting to the other party.
4. Strategies in Negotiation of purchase price and terms of deal.
After the DD phase, the parties usually reach an agreement on the purchase price and terms of the sale. This is the time when negotiation skills play an important role. Focus the skills on the key points of the deal, like the earn-out terms, or restriction terms, and the like. After a successful negotiation, the parties come up with the Sale and Purchase Agreement (SPA).
This SPA is a document representing the mutual consensus on the offer of both parties. This results from the commercial and pricing negotiations. Thus, it is important before signing the SPA, to see through the terms of the acquisition agreement. Ensure that in the SPA, the real agreement of the parties is reflected.
Following this checklist makes a company prepared for its exit. In planning the exit and executing it properly later, the company does not risk its stock value. At best, a good exit strategy helps the company to increase the value of the business.
What Should I Do Next?
Contact us if you would like further legal advice on an amicable exit process that you think should be taken at the end. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.