Exiting a business that you have created can be daunting and can often come with many mixed emotions. Strategically planning your exit will help avoid making common mistakes. Getting legal help is also incredibly important. It is imperative to have critically thought through all processes and all possible outcomes…
This week Dynamic Business asked experts what founders should avoid when exiting a business and the best way to strategically plan an exit.
Jane Garber Rosenzwieg, Commercial and Franchise Lawyer, Gable Lawyers:
When setting up a business, the founders must ensure that their business and / or personal assets are protectedfrom any possible future financial setbacks, any disagreements within the business or family or from any business failure.
Assets can be protected in various ways, depending on whether these assets are tangible and intangible assets. Tangible assets, such as office furniture or fitout, can be protected by taking out a relevant insurance policy. In turn, intangible assets, such as designs, trademarks or patents, can be protected via a registration process.
- INITIAL STRUCTURING AND EXIT STRATEGIES
Prior to starting any business, the appropriate structure must be chosen. There are a number of structures which can be utilised by business owners in Australia and the correct structure can ensure that the assets of the business owners are protected, personal liability is limited and they are able to stream business income to more than one individual. The most common structures used by business owners in Australia are corporate and trust structures.
Once the right structure is set up to operate the business, then a shareholders’ or partnership agreement must be put in place covering how each party can exit the business and how the business assets are to be split up in the future in case of death or illness of one of the parties.
- INSURANCE
In any business, various insurance policies should be taken out to protect all tangible assets of the business, which can be destroyed. Insurance can also protect the financial position of a business covering any business interruption or personal liability or other claims being made against the business.
Therefore, every business should take out public and product liability insurance, workers compensation insurance, business interruption and key person insurance. Such policies would minimise any potential strain on the business in the event of any unforeseen circumstances occurring including death of any of the founders.
- WILL
Every business owner should have a valid and current will, which reflects the asset distribution and what happens to their share of the business in the event of death. The will should be updated as new assets or businesses are acquired. The will should also be updated upon a marriage taking place, as marriage nullifies any will put in place prior to it.
- LEGAL AND FINANCIAL ADVICE
All business owners should ensure to obtain legal and financial advice to ensure asset ownership and business structure affords appropriate protections.
Sharon Williams, CEO and founder, Taurus Marketing:
When founders exit a business, I suggest they avoid a lack of communication and remain transparent, accurately key messaged and ethical to the company and brand (they built) and the industry. Founders may choose to move on or be put in a position where it is best they leave, so the reality is often a situation that is not easy and steeped in emotion. However, there is always a best way to proceed for the best outcome. People tend to stay in a relationship with you and support you, if you take them on a journey. Many founders have moved on with grace. Some haven’t. Trying to cover the situation up creates disappointment and unnecessary stress and fallout for all concerned. So, I would suggest being open about plans to suppliers, stakeholders, staff, customers and influencers and tell a story that leaves all intact. One of the worst scenarios is when founders leave disgruntled and make it known.
Darren Sommers, Principal Lawyer, KHQ Lawyers:
At the very least, getting the right legal and taxation advice is critical. It’s easy to blow years of hard work by not giving proper and due consideration to any deal, which can be all too common if founders are exhausted and are desperate to get out. You must fully understand the deal. What are you obligated for? What are you entitled to?
It’s critical to examine the net figure, not the price. Be aware of any adjustments, and equally, any deferred payments. This is clearly where the right advice is critical. Also, it’s important to have realistic price expectations and don’t think the sale will happen overnight. You might want it to, but it’s never realistic.
Prepare to be doing two jobs for a while – running your business and managing the transaction process. It may be get harder before it gets easier. And also, highly important – look after your personal life. What are you going to do after the sale? Are you really ready? Have a plan in place for future YOU!
Chris Richardson, Associate Partner, Crowe Horwath/Findex:
- Not knowing what you really want. Too many founders get excited about the idea of cashing-in and retiring early, and they don’t look ahead and ask, “how much do I need to retire?” Or, more importantly, “what will I do for the rest of my life?” Make sure you have a clear understanding of why you’re selling, so you don’t make a decision you’ll regret.
- Poor record keeping. Prospective buyers will spend extensive time and effort reviewing your businesses financial performance. Inadequate records will increase the risk to the buyer and lower your sale price. Make sure your house is in order before you consider selling!
- Not getting professional advice. Engaging with an experienced accountant is essential. They can help you value your business, provide structuring advice, identify potential tax issues, and support you throughout the whole process to achieve the best outcome for you.
Sameer Kassam, Partner, CharterNet:
When exiting a business, founders should in particular avoid prohibitive earn-out clauses. Most purchasers will look to ‘lock in’ the founders for a number of years following the transaction to ensure handover and continuity, however, in our experience earn-outs in most cases don’t end up being paid at all. If an earn-out is part of the deal, the factors that allow for the earn-out to be paid must be solely things the founder can control e.g. staying with the purchaser for X number of years, as opposed to say guaranteeing a level of profitability.
Ideally, the founder should get paid as much as they can upfront but if there HAS to be an earn-out, then make sure you as the founder have absolute control over whether or not the earn-out will be paid.
