Preparing for an Exit Transaction: Eight Things to Remember

AdobeStock_83043455-300x200For many California businesses, initial public offerings are a thing of the past.  Founders of many startups now look to exit through acquisitions or asset sales. If you’re considering a merger, acquisition, or asset sale, don’t wait to prepare until you accept an offer. Properly preparing your company to minimize potential liability in a sale can take weeks or even months. Here are eight ways to prepare for an exit event in California:

  1. Consult a Corporate Attorney Now

 An experienced corporate lawyer can help you clear the way for a smooth exit transaction.  Focusing on corporate housekeeping before you enter into negotiations with a potential buyer can help to create a compelling first impression, eliminate the distraction of legal concerns that need to be addressed during negotiations, and ultimately reduce your potential liability.

  1. Tighten Up your Financial Statements and Accounting Procedures

 You’ve successfully built your business, and your company’s financial statements should tell the story of that success.  Work with your accountant and other financial advisors to ensure that your financial statements are buttoned down and reflect the professional image you want to present.  Review your accounting controls and procedures and incorporate any recommended changes.

  1. Review Your Customer and Supplier Agreements

 Many contracts contain clauses restricting or even prohibiting the assignment of those contracts to another company.  If such restrictions are not identified and managed properly, they can complicate, delay and even potentially torpedo exit transactions.  Have a corporate attorney review your contracts to identify potential obstacles and devise strategies to address those obstacles before entering into sale negotiations.

  1. Clean Up your Cap Table and Supporting Documentation

 Few records are as critical to an exit transaction as your company’s Cap Table.  It is critical that your company’s Cap Table accurately represent the ownership of your company.  It is also critical that you comprehensively document that ownership, including all of the agreements governing issuances of common and preferred stock, grants of stock options and warrants, SAFEs and convertible notes, and also including all board and stockholder resolutions approving such transactions.  Review and clean up these records before entering into negotiations to sell your business.

  1. Review your Potential Liability Exposure

 Every business has outstanding liabilities.  Buyers will likely force your company’s owners to bear the risk of uncertain or improperly documented liabilities.  If properly documented, outstanding liabilities should not negatively impact exit transactions.    To minimize the risk to you and your shareholders, do what you can to minimize the potential exposure of outstanding liabilities. Where possible, resolve outstanding liabilities before entering into sale negotiations.  For all other outstanding liabilities, gather the relevant facts and be ready to speak to them with the potential buyer.  Keep abreast of all developments, and be ready to work with your attorney to describe such liabilities in the disclosure schedules.

  1. Protect your Intellectual Property

 For many companies, the value lies almost exclusively in its technology.  Confirm that you have protected that technology through patent and other intellectual property filings, and that the company has satisfactory documentation of its ownership of its technology.  A corporate attorney can help to confirm that these issues have been properly addressed before you enter into negotiations to sell your business.

  1. Secure Personal Data of Customers and Employees

 As US and International privacy laws strengthen over time, your business will need to be more and more careful with sensitive personal data. Your employees’ and customers’ personal information should be digitally secured to an extent at least as secure as the standard in your industry.  Data protection policies should be accurately documented and vigorously followed, and should evolve over time.  Consult with a corporate attorney to confirm that your company is in compliance with current law and is ready to comply with proposed changes to the law.

  1. Identify Anyone with the Power to Block the Transaction

Shareholders, creditors, landlords and other parties may have the power to block a sale or other exit transaction.  These parties can generally be convinced to allow your deal to go through, but with this power comes the power to extract concessions.  A corporate attorney can help to identify each party that might hold such power, and see what can be done to prevent such parties from disrupting your exit transaction.

To schedule your seller liability and M&A legal consultation, call Structure Law Group, LLP’s experienced San Jose business lawyers today at 408-441-7500 or contact us online.