South Carolina BAR Journal
SC Lawyer, March 2011, #5.
Selling the Business: Preparing for and Implementing a Client's Exit Strategy
South Carolina LawyerMarch 2011Selling the Business: Preparing for and Implementing a Client's Exit Strategy By Clifford J. LawrenceIntroduction
There comes a time in the life cycle of any business where the current owners decide it is time to sell. In fact, selling a company is the most common exit strategy for the owners of a business. The owners may need liquidity, be concerned about the future of their company or its industry, believe they have taken their company as far as they can, or simply want to do something else.
The owner's principal interest in selling the business usually is to maximize the value he or she receives when the business is sold. In order to maximize this value, the owner should begin planning for the sale many years before a desired sale date. Even if a business owner has no intention to sell the business, he or she should still develop a workable exit strategy. If a business needs to be sold suddenly due to some unforeseen circumstance, such as the death or incapacity of the owner, a workable exit strategy will avoid a poorly planned sale that must be executed quickly at a significant discount.
This article will discuss how a lawyer should advise a client to prepare for the sale of a business. The article will then discuss the common steps a lawyer will address in negotiating the sale of a client's business, including important provisions to include in a letter of intent and the actual purchase agreement.
The exit strategy
The exit strategy primarily involves four components: ensuring business continuity, removing impediments to a sale, assessing the value and improving financial results, and creating relationships with potential strategic buyers.
Ensuring business continuity
Ensuring business continuity involves making sure the assets of the company can be successfully transferred to a buyer and that the buyer will realize the same or greater value from these assets than the current owner. A good starting point is to review and analyze the company's material contracts, licenses and permits. A lawyer should determine whether these can be transferred to a new owner and under what circumstances.
Buyers usually prefer to buy the assets of a business in order to avoid assuming the business's unknown liabilities. This can create problems with many contracts as it is common for contracts to contain a no assignment provision that would prevent the contract from being assigned in an asset sale. Some no assignment provisions go so far as to define any significant transfer of ownership, including by way of merger or stock purchase, to constitute a prohibited assignment. Often these restrictive provisions are included in contracts simply as "boilerplate" without much thought to how they will negatively affect a potential sale. Usually these provisions can be negotiated so that they do not apply to a "merger, acquisition, or sale of all or substantially all of the company's assets." If the company's contracts are reviewed and analyzed several years before a sale, there should be many opportunities to renegotiate a problematic no assignment provision.
If the company has key relationships with certain customers or vendors, it should solidify these relationships with multiyear contracts that renew automatically. If the company is in a regulated industry and relies on certain government permits or licenses, it should determine when and under what circumstances these can be transferred.
Likely the company's employees play a significant role in its value. Ensuring that these employees are willing to continue with a new owner is important. One way to accomplish this is to plan to pay retention bonuses or develop some other bonus system that incentivizes employees to remain with the business for a certain period of time. Often a prospective buyer will expect to see that the company has a noncompetition, nondisclosure and inventions assignment agreement with each key employee. Having a noncompetition agreement in place may reduce the likelihood that a key employee will leave at the time of sale...