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Exit strategies for businesses

Legal Review by Charles Lucas & Marshall

Rupert Wright

Rupert Wright

Successful exits require substantial planning and there are various options.

The options depend on the business being transferred, the personal circumstances of the seller and current market conditions.

Two possible options are extraction of monies from the company and also liquidation. Pulling out money from the company may have negative tax implications.

For example, a high salary is taxed as ordinary income while acquisitions could bring money in the form of capital gains. This has to be carefully considered with the company’s accountants.

A liquidation might be a waste since only the market value of the company’s assets can be obtained. Also, goodwill can be lost.

An initial public offering as an option is not usually viable for a small business, since they are rare.

One further option is for a friendly buyout.

This can be advantageous since less due diligence is required and the buyer will want to preserve key parts of the business. If management buys the business, they have a commitment to make it work.

If a friendly buyer cannot be found, a sale to a third party will need to be considered.

A sale of shares is normally advantageous to the seller but a buyer, particularly if they are in a position to dictate the terms, may insist on a sale of assets which means that the buyer can cherry pick certain assets in the business.

If a sale can be negotiated with a third party, a non-disclosure agreement will need to be entered into at an early stage to avoid third parties or competitors using, for its own purpose, details of the seller’s business and its clients, if the third party later withdraws.

Both parties will need to negotiate heads of terms, giving exclusivity to the buyer for a period of time and setting out the main terms which will be non-binding at this stage.

The buyer will need to investigate the company and various due diligence matters will need to be considered.

This will mean that the seller should at an early stage ensure that due diligence matters are satisfied prior to sale.

The buyer will also require various warranties and limitation to these warranties will need to be negotiated by the seller at an early stage. Also the buyer will require a taxation deed of indemnity to be entered into.

The seller will need to provide a letter of disclosure ensuring that the buyer has details of relevant matters so that any claim on the warranties is limited by those matters disclosed prior to completion.

Also, patent and trademark issues may need to be considered to ensure that they are in place and have not expired.

In summary, exit strategies need to be planned very carefully and sellers should approach their tax advisers and their lawyers at an early stage in order to plan a successful exit strategy.

For further information contact Rupert Wright, a solicitor in the commercial services team, on 01635 917495 or email rupertwright@coffinmew.co.uk

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