Preparing for an exit should always be part of your game plan. You’ll want the process to be as smooth as possible, whether you have made a conscious decision to exit your business or an opportunity has presented itself that you want to explore further.
Assemble your team
You can’t do it alone. Put the right team in place to lead the three phases of an exit: preparation, negotiation and execution. Your team will be a mix of individuals, from both within the business and external advisors you engage, who have detailed knowledge of your business and what else you might be hoping to achieve from the exit.
• CEO and Directors: the board of directors of your company will evaluate and be asked to approve the final deal so they should be involved at the beginning of an exit process and be kept updated with developments. The CEO will generally lead the company’s deal team and ultimately be responsible for getting any director and shareholder approvals for the deal.
• Management and Employees: are needed to help with due diligence and providing insight which will feed into the transaction documents. You should consider keeping this group as small as possible in the initial stage of an exit for two reasons: to limit the number of employees who are aware that a process is under way and to shield them from exposure to a buyer (who may be a competitor).
• Lawyers: focus on the sale documentation (negotiating, drafting, and often actioning them after they are signed) but will also advise on the overall structure and terms of the exit.
• Accountants: responsible for accounting and tax issues arising out of the exit.
• Business Brokers and Investment Bankers: depending on the size of your business, these advisors bring their market knowledge to help you decide on the value of your business and seek out potential buyers to get you the best deal.
As we have mentioned earlier (please see I have my company. Now what?) it is never too early to prepare for a potential exit. In addition to checking your documentation is in order and can be accessed quickly (please see What is a due diligence questionnaire? for examples of the types of documents a potential investor or buyer will want to see), there are a few items which may benefit from a little spring cleaning:
• Capitalisation table: Does it reflect the current ownership and option position (including, any SAFEs or KISSes)?
If you’d like to know more, please see What is a Capitalisation Table and why do I need one? for information on preparing and maintaining your company’s capitalisation table.
• Licences, registrations, permits and filings: Are these all current and does your business hold all the ones you need to operate in all the jurisdictions you do business? Have you complied with all tax filing requirements?
• Financial statements and audit reports: If you don’t have audited financial statements, it is worth asking your financial advisers whether you should get an audit done for the exit process: it may give a potential buyer more confidence in your numbers.
• Corporate governance: Are all your company records up-to-date and reflect all major events in the life of your company? Do the records include the appointment of all the directors and officers of the company and resignation letters from those individuals who no longer hold those positions with the company?
• Contracts: Are all your material arrangements documented and have those contracts been signed?
• Potential speed bumps and road blocks: Identify areas that may impact your deal timeline or cause concern for a potential buyer. Do any of your material contracts have change of control or assignment provisions that mean your counterparty (e.g. shareholders, banks or other lenders, customers, suppliers) must approve the transaction before it can be completed?
Make a plan
An exit process needs a good road map and your core team should draft one at the outset. Some of the things you will want to consider include:
• End goal: What are the ultimate objectives for the exit? Are the shareholders aligned in what they want from the transaction?
• Structure: How will you structure the transaction to meet the objectives of the sellers?
• Whole or partial exit: Will the shareholders sell their entire stake in the company? Or are they looking to sell only a portion of their shareholding?
• Consideration: How do the shareholders want to be paid for their stakes in the company? Do they want to receive cash? Are they interested in taking a stake in the buyer’s company?
• Management and Employees: Will any of the founders and/or management team stay in the business? Does the buyer want them to remain in the business? As a seller, if you are only partially exiting the company, are there any key personnel you need to remain in the business to ensure its continued success?
• Fit: Do your objectives align with those of the potential buyer of your business?