Preparing for an Exit Transaction
Initial public offerings are becoming less common as startup founders are starting to look to exit their companies through acquisitions or asset sales. If a merger, acquisition, or asset sale seems likely for your business, it’s never too early to start preparing. It might take weeks or even months to properly position your business to reduce potential liability in a sale. The following is a list of eight ways to get ready for an exit event:
Hire a Lawyer
You will need a lawyer to properly prepare for a seamless exit transaction and the sooner you hire one, the better. Prior to starting negotiations with a prospective buyer, concentrating on corporate administration can help you make a strong first impression, remove the distraction of legal issues that must be addressed during negotiations, and eventually lower any potential risk.
Optimize your accounting and financial reporting processes
Your company’s financial statements should demonstrate how successfully you have built your enterprise. With the help of your accountant and other advisors, make sure your financial statements are organized and represent the reputable image you want to project. Review your accounting controls and practices, and make any suggested modifications.
Evaluate your contracts with clients and vendors
Some contracts have provisions that limit or outright forbid assigning them to another company. This can complicate, delay, and even endanger exit transactions if they are not effectively detected and managed. Before beginning negotiations, have a corporate attorney check your contracts for any potential roadblocks and come up with solutions.
Organize your Cap Table and related documents
The Cap Table for your firm is one of the most important documents for an exit transaction. Your company’s Cap Table must appropriately reflect the ownership of your business. The documentation of that ownership must be thorough and include all of the contracts governing the issuance of common and preferred stock, the grant of stock options and warrants, the issuance of SAFEs and convertible notes, as well as all board and stockholder resolutions approving such transactions. Before starting talks to sell your business, look over and organize these records.
Evaluate your exposure to potential liability
Every company has unpaid liabilities. The owners of your business will likely have to assume any debts that are ambiguous or incorrectly reported. Outstanding liabilities should not have a negative effect on exit transactions if they are properly reported. Try to limit the possible exposure of outstanding liabilities as much as you can to reduce the risk to you and your shareholders. Before starting negotiations, try to settle any outstanding debts. Gather the pertinent information for all other outstanding liabilities and be prepared to discuss any developments with the prospective buyer.
Protect your intellectual property
Nearly all of a company’s worth is tied to its technology. Ensure that any innovations have been safeguarded through the filing of patents and that your business has adequate proof of ownership. A corporate attorney can assist in ensuring that IP has been adequately safeguarded.
Protecting the privacy of customers and employees
Your company will need to be increasingly cautious with sensitive personal data as US and international privacy rules become more stringent over time. Personal information about your clients and employees should be digitally secured at least to meet the industry norm. Data protection policies should be thoroughly written, strictly adhered to, and continuously improved. A corporate lawyer can help you determine if your business complies with the law as it currently stands and help you evolve with changes in the future.
Know who has the authority to prevent the transaction
A sale or other exit transaction could be stopped by shareholders, creditors, landlords, and other parties. These parties can typically be persuaded to approve your deal, but this authority also gives you the ability to demand concessions from them. A corporation lawyer can assist in identifying each potential party with such authority and can determine what may be done to stop such parties from interfering with your exit transaction.
