The Exit Blueprint

A frequent founder’s dilemma often is: what is the exit plan? Many business owners tend to be reactive when it comes to an exit. Triggers such as unsolicited offers, personal circumstances, or financial pressures often prompt action. However, by the time these events occur, it is frequently too late to fully optimize the business’s value and maximize the sale price. As such, what to do?

To take an analogy, when a homeowner prepares to sell their house, there is a detailed process of preparation – repainting, cleaning, remodeling, and hiring experts – all aimed at enhancing the property’s value.

Since you can only sell your business once, having a well-thought-out exit plan is essential to maximize the return on your investment and hard work.

The purpose of this article is therefore to explore a list of considerations that are key for any prospective seller to work through with their legal counsel and financial advisor before selling their business.

Buyer Types 

There are generally three types of buyers: individual, financial, and strategic. Understanding the motivations of each type is crucial for a successful transaction. Collaborating with an expert to identify potential buyers – and what they will seek during the exit process – is essential.

Mergers and acquisitions (M&A) often resemble relationships, and some of the most successful “premium” deals occur with acquirers who already have some familiarity with the seller. Therefore, it is important to identify potential buyers early and explore potential opportunities to engage with them or establish commercial or strategic partnerships. Again, engaging an expert early on can provide substantial value, as they can help identify potential buyers and facilitate key introductions.

The Different Type Of Exits 

Several exit opportunities exist, and as such, it is important to understand the various transaction types. For example, a full buyout will mean that at the time of exit, you will retain no further ownership in the company. However, a majority buyout allows the acquirer to obtain more than 50 percent of the business but not all of it, enabling a seller to roll some equity into the ongoing entity. At the end of the day, exit types and structures are often dependent on the type of buyer.

It is crucial to determine what is most important to you as a seller at the time of exit. Are you looking to fully divest and secure cash immediately? Do you want to retain equity and potentially benefit from a future exit opportunity, often referred to as a “second bite at the apple”? Or are you open to tying future value to the company’s performance to capture additional upside? Your answers to these questions will significantly influence the decisions you make during the exit process.

Pre-sale Organization 

Our first recommendation is to conduct an internal company review before engaging with a prospective buyer to ensure that the entity is structured in the most efficient and attractive way. For instance, one needs to figure out what the shareholder composition is, and, in particular, if there are any minority shareholders who could prove problematic during a sale process, and, ultimately, delay or otherwise cause issue with a sale.

In such circumstances, we advise an internal reorganization is undertaken pre-transaction leaving a cleaner shareholder register. While a pre-deal reorganization will incur some upfront costs, legal fees during the transaction will likely be reduced, and the package offered to the prospective buyer would be much more attractive, potentially resulting in a healthier purchase price.

Structuring The Sale

Before going to market, a seller should determine the most appropriate structure for the sale of their business. Firstly, it should be determined whether the sale should be conducted by way of a share sale or asset sale.

A share sale is the most common sale structure whereby, ordinarily, a buyer acquires 100 percent of the company’s share capital, thereby becoming the new shareholder, and the business continues as normal, with minimal disruption to its operations during the transaction.

In an asset sale, the company sells only certain assets and associated liabilities (as the case may be) to a buyer, and the seller remains the shareholder of the company after the transaction is completed.

The main benefit of conducting a share sale for the seller is to secure a clean break from the business with all company assets and liabilities transferring by virtue of the sale of shares to the buyer. However, on the reverse, it will therefore be crucial that the seller ensures that the target company is as well organized as possible i.e. the shareholder arrangements are “vanilla,” all material contracts associated with the business are not subject to change control provisions that would be triggered by a share sale of the company, that any litigation, disputes or regulatory compliance issues are insofar as possible settled.

Failure to undertake these processes can lead to unnecessary indemnities having to be granted, retentions on consideration paid, or price chips. Whilst certain issues cannot be entirely eliminated, we regularly see issues occur that could have been alleviated with some pre-sale due diligence and associated reorganization.

A benefit of conducting an asset sale is that the seller can choose certain company assets to sell, and others to retain. This can be an attractive proposition for a buyer who wishes to cherry-pick only certain assets to complement its existing business. An asset sale poses less risk for the buyer who can select which parts of the business to buy, including which liabilities to assume, and, consequently, resulting in a less invasive due diligence process, which means less time and expense spent in negotiating complex warranty and indemnity protection in the asset purchase agreement.

However, there is likely to be disruption in the business as different parts of the company are transferred. For example, company clients will not automatically transfer, and therefore will need to be individually negotiated with each third party by the buyer.

Another consideration is whether to conduct a private bilateral sale or an auction. This decision depends on a number of factors such as the type of business being sold, the type of shareholder( s), confidentiality concerns, timescales, market conditions, and, most importantly, the depth of the pool of potential buyers.

Structuring a sale by way of an auction may achieve a more competitive price for a seller, where there are several parties interested in acquiring the business. Another benefit for the seller is that they are more in control of how due diligence is conducted and the terms upon which the sale is made. This is often due to the purchasers conceding to more seller-friendly terms in the transaction documents as part of their bid submission.

However, an auction can be more time-consuming and costly, as well as cause disruption to normal business operations. Furthermore, if the auction is unsuccessful, this information will be made public, which could cause difficulties with selling the business at a later date.

Engaging with a legal team when considering the deal structure will assist in determining the most efficient and beneficial sale option.

Preparation For Disclosure

A significant part of a transaction consists of the due diligence phase, and we recommend that the seller is prepared as early as possible to reduce the associated time and costs.

The due diligence process involves the seller making available company documents for the buyer to inspect and raise inquiries in relation to, the findings of which will influence the drafting of the transaction documents, and, often, the final purchase price.

We recommend that any seller carries out an internal review of company documents to ensure everything that a buyer would expect to see as part of its due diligence is in place, and to identify any potential issues that could be mitigated pre-transaction.

Documents that buyers will expect to see as part of a legal due diligence process include corporate documentation such as articles of association, trade licenses etc., customer agreements, supplier agreements, terms and conditions, employee agreements, property documentation, financing arrangements, and any information relating to litigation.

Organizing company documents early on into easy-to-navigate folders will significantly decrease the time spent attempting to do the same when uploading the documents to the data room.

Gaps in documentation being identified early on provides the seller with ample opportunity to put matters in order before a buyer can use it as an opportunity to seek protection in the share purchase agreement, or to reduce the purchase price.

We often see, for example, businesses with longstanding customer relationships operated on a course of business basis without proper documentation. While this arrangement might have worked with a customer for many years, a buyer, with no relationship with such customer, would want to see full contractual terms in place. If the customer is of reasonable significance to the business and its value, then we recommend that the seller enters into a contractual arrangement with the customer that will provide a buyer with comfort that this relationship will continue post-sale.

Conducting this internal due diligence process provides the seller with an opportunity to anticipate and mitigate any potential issues that a buyer may uncover during the due diligence phase.

Transaction Documentation 

A major role that a seller’s lawyers will fulfill in the transaction process is drafting the transaction documents and handling negotiations with the buyer’s lawyers. Involving lawyers during the above-mentioned stages will provide the lawyers with a deeper insight into the inner workings of the seller’s business, and enable them to prepare the transaction documents in a more bespoke and efficient manner.

Transaction documents are ordinarily prepared by the buyer’s lawyers during the due diligence phase, and they consist of the share purchase agreement or asset purchase agreement, the disclosure letter, and ancillary documents such as a transitional services agreement, share transfer instrument, or any other documents as may be required for the particular deal.

There are three additional documents that are often overlooked and should be prepared in advance of the main suite of transaction documents mentioned above. We advise entering into non-disclosure agreements and exclusivity agreements when starting discussions with prospective buyers to ensure that any interested parties are bound by confidentiality during their review of company documents and time spent liaising with them is limited to move the process along.

Furthermore, once talks with potential purchasers advance, we recommend that heads of terms are agreed with a prospective buyer. Heads of terms set out a brief agreement on each of the key terms of the share purchase agreement and facilitate negotiation of the same between the parties. The agreed heads of terms will inform the drafting of the transaction documents and make this process more efficient and less costly.

Financial Considerations 

We now consider the key questions that a seller’s exit plan should address from a financial viewpoint. For starters, what are the owners’/stakeholders’ goals, desires, and intentions?

The answer to this question is heavily influenced by the business’s ownership structure.

If you are the sole owner, your circumstances – such as age, retirement plans, and financial needs for a comfortable lifestyle – will shape the response.

Alternatively, if you have raised external institutional capital, the answer may differ significantly, as venture capital or private equity investors operate on specific timelines, and they require returns on investment.

Raising outside capital should be approached with caution, as it involves careful planning in many areas that affect the business, such as valuation, processes, and corporate governance – though this is a topic to be explored in detail separately.

The next question to ask is: what is the company’s current valuation? At what valuation would you, as the seller, feel excited about exiting, and what steps are needed to reach that point?

Acquirers typically assess a company’s value based on both financial and strategic metrics. Financial metrics are easier to quantify, and they serve as the foundation for many valuation methods. Popular approaches include M&A comparables, public comparables, the leveraged buyout model, and discounted cash flow analysis.

Strategic metrics, on the other hand, are harder to quantify, and they often require a more subjective approach. These can vary by buyer, but they typically focus on intangible assets such as the team, technology, market traction, and customer base. It is essential to understand your business’s current value (the baseline), the desired valuation at the time of exit (goals and objectives), and the potential paths to achieve that (strategic planning). Integrating your exit plan into the business’ ongoing strategic planning is crucial.

Another key question to ask is: what steps can be taken to increase the company’s value and ensure a smooth exit transaction?

It is key to understand an acquirer’s requirements at the time of exit. As mentioned above, due diligence can be an overwhelming task, often involving request lists with 300–500+ diligence items. Anticipating what buyers will request in advance allows sellers to be well-prepared, supports good business practices, and minimizes future surprises – i.e. getting your “ducks in a row.” Select key areas to focus on include:

• FINANCIALS Track financials (profit and loss, balance sheet, cash flow, etc.) on a monthly basis, ensuring they are accurate and accessible (e.g. in Excel). Ensure non-operating expenses are properly documented, so that adjustments can be made to determine a true adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

• PROJECTIONS Track actual performance versus budget/projections, and ensure near-term forecasts are realistic, as the exit process can take months. Missing projections can reflect poorly, and buyers often tie compensation to achieving these targets.

• CONTRACTS Have easily accessible, fully signed, and up-to-date digital copies of all material contracts. EMPLOYEES Retain accurate historical and current employment data, making sure it is easily accessible.

• EMPLOYEES Retain accurate historical and current employment data, making sure it is easily accessible.

• KEY PERFORMANCE AND INDICATORS/KEY-VALUE DRIVERS Ensure you are tracking the specific key performance indicators (KPIs) for your industry to see the performance and health of the business over time. Identify the key value drivers for your industry and sector, i.e. customer concentration, margin profile, topline growth, etc.

• KEY LISTS Maintain an accurate customer list, as well as an up-to-date and accurate vendor list, including third-party software providers.

• INTELLECTUAL PROPERTY/TECHNOLOGY  Maintain key information and documentation on all intellectual property such as patents, copyrights, trademarks, etc.

• TAXES Always seek out advice from professionals on any important topics that could impact the business – tax issues are often key items that can impact an exit process. It is imperative that you have proper processes in place to address any tax issues as they arise. Keep proper documentation, that is easily accessible, for this purpose.

• ACCESSIBILITY Ensure easy access to key documents buyers may request, such as formation documents, share capital table, funding agreements, litigation history, and supporting evidence, etc.

Time is the biggest deal killer – having all of these elements in order is critical to a smooth process and a successful close.

Making it Happen

There are many key things that a seller should do and as importantly not do to maximize the chances of a successful exit. Select examples include:

DO…

• SEEK EXPERT ADVICE  Consult with professionals on critical topics such as taxes, legal matters, and M&A early on, rather than waiting to address issues as they arise.

• BE PROACTIVE Approach exit planning with a proactive mindset, rather than reacting to situations as they come up.

• UTILIZE KEY THIRD-PARTY TOOLS Employ essential tools, like technology and software, to help you stay organized and prepared – i.e. “keep your ducks in a row.”

• DEVELOP STRATEGIC RELATIONSHIPS Build valuable commercial and strategic connections with potential buyers.

• INVEST IN PEOPLE  Cultivate a motivated and skilled team, as they will be a crucial asset during the exit process.

DON’T…

• DELAY ADDRESSING ISSUES Procrastinating on resolving problems can make them harder to fix later on.

• GO IT ALONE Avoid the mindset that you can handle everything on your own or that you know it all.

• OVERSHARE OR COMMIT TO RESTRICTIVE AGREEMENTS Be cautious about sharing too much information, or entering into exclusivity or restrictive agreements.

• RISK OVER-CONCENTRATION Avoid relying heavily on a single client(s) or partner(s), as this can pose significant risks, may impact valuation, and could be a potential deal killer.

• DISCUSS VALUATIONS PREMATURELY Leave valuation discussions to M&A experts rather than engage in these talks with potential acquirers.

About The Authors

Chris Williams is Managing Partner at Bracewell LLP (Dubai). 

Amelia Bowring is Senior Associate at Bracewell LLP (Dubai). 

Jon Cottrell is Director at JPC Advisors and eGateway Advisors.