How to create an exit strategy for your business – a legal perspective

A well-thought-out exit strategy is just as important as a sound business plan. It ensures you, your employees and your business assets are protected during any transition – whether that’s the sale of the business, or your ultimate retirement. Without a clear exit plan you could face tax headaches, legal disputes or unanticipated delays that can stop you from moving on successfully. Here’s how to create a legally sound exit strategy for your business.
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How to create a legally sound exit strategy for your business

A carefully crafted exit strategy will ensure you have a smooth transition when you’re ready to move on from your business. And it starts with understanding your goals.

Determine your exit goals

Your first step is to ask why you’re exiting the business? The answer to this question will shape your exit strategy – whether you’re retiring, selling for profit, merging or transferring ownership to your kids, your goals determine your next legal steps.

• Selling: If your goal is to sell your business to a third party, this requires valuation, due diligence and a legal sales contract.
• Family succession: For family succession you’ll need to focus on careful estate planning, inheritance and other tax considerations and binding legal documents to avoid family disputes.
• Merger or acquisition: If your goal is to exit while merging with or buying another company, this will require legal agreements to protect your interests and transition the other company’s shares, employees and assets, as well as fulsome due diligence.
• Restructure: If your plan is to exit the company through a restructure, you’ll need to be able to ensure the legal and financial frameworks of your business align with the new ownership structure, check over partnership agreements or corporate governance structures and understand your tax obligations.
  

A business or commercial lawyer can help you clarify your goals so you know your legal responsibilities when it comes to your chosen exit strategy.

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Conduct a business valuation

A business valuation is a key step to understanding your company’s worth. And understanding the worth of your company puts you in a strong position to negotiate a sale price, transfer equity or shares and even know your tax obligations.

Your valuation needs to take into account tangible assets like property and stock as well as intangible assets, like goodwill and intellectual property.

Your lawyer can help you with the steps and documentation and make sure you’re in compliance with NSW requirements.

Review legal structures and agreements

Your business’s legal structure will also determine some of the processes involved in exiting.

• Sole traders – requires the transferring of the business and notification to the ATO, as well as deregistering your ABN and any licences if you’re shutting down completely.
• Partnerships – requires you to review partnership agreements to ensure compliance with the terms for dissolution or the partner’s exit.
• Companies – requires you to review shareholder agreements about voting rights, profit distribution and share valuation methods.
  

Again, your business lawyer can help you review and update these structure-based documents to ensure you reflect your intended exit strategy.

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Draft and review contracts for sale

If you’re planning to sell, then your contracts for sale must be legally airtight and represent the terms of the sale as you and the other party have agreed. As part of this, your contact must include:

• Purchase price and payment terms
• Transfer of assets, IP and goodwill
• Employee transfers and other considerations
• Warranties and guarantees
  

Your lawyer will help you ensure your contract complies with all NSW and Australian commercial law requirements and protects you against disputes or claims in the future.

Meet regulatory & tax obligations

Exiting a business can trigger regulatory and tax obligations. It’s a great idea to speak to both your business lawyers (we can help!) and your financial and tax adviser to make sure you’re meeting these. Some that you might need to be aware of are:

• Capital Gains Tax. CGT is something you’ll definitely want to consider when you’re determining the right exit strategy for your business. You might incur CGT on the sale of your business assets or if you pass it along to your kids in your succession planning. Depending on your situation, small business concessions could reduce your liability. This is definitely something to speak to your tax adviser about for proper planning.
• GST. You’ll have to make sure your contracts and valuations (of your business or another one in the case of a merger or acquisition) account for any GST obligations.
• Licenses and registrations. Depending on the structure of your business, and how you are exiting, you’ll need to transfer or cancel business licenses and registrations with the proper authorities. Again, your lawyer can help with this process!

Plan for employees

Your exit strategy must also include plans for your employees, suppliers and stakeholders. These are the people that make your business work. And planning for them when you plan your strategy is vital for your successful exit!

What should you think about?

• Employee entitlements: This might include redundancies, unpaid leave, owed benefits and superannuation.
• Contract transfers: What supplier or client contracts might need to be reassigned to new owners or to the new business if the structure changes?
• Fair Work compliance: Of course, all your business changes must comply with Fair Work employment laws. It pays to have a lawyer go over this with you, as often contractors and freelancers might be considered employees under the regulations, even if you don’t consider them to be employees.
  

Succession planning for family transfers

Transferring ownership to family members might seem straightforward. However, it also requires careful legal and estate planning. For example, you may need to:

• Update or create a family trust.
• Establish clear roles and responsibilities for the next generation.
• Align the transfer with your personal estate plans and wills.
  

A wills and estates lawyer (like us) can help facilitate a family succession plan that protects the business, makes sure everything is fair and lowers the risk of family disputes.
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Wind up and deregistration (if closing the business)

Closing the business completely is always an option for your exit. While this is the most straightforward, it still requires you to take some legal steps. We also suggest that you really carefully consider this before you wind up. Often, there’s plenty of life left in a business that worth passing down or selling.

However, if you speak to your advisers and you determine that winding up is the right approach, some things you’ll need to do are:

• sell or dispose of your business assets and stock
• settle all your debts and liabilities
• finalise any employee entitlements
• notify your contractors, suppliers and clients
• end any lease agreements
• finalise your tax obligations
• deregister business with ASIC or cancel your ABN
  

Once your business is closed down, you’ll want to keep some business records. Each industry will have its own requirements but generally, you’ll need to keep financial, customer and employee records for a minimum of five years.

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Protect your IP

Your intellectual property can be one of the most valuable assets in your business. Work with your lawyer to make sure your trademarks, patents, copyrights and business names are transferred legally. You’ll also want to have your business lawyer review any licensing agreements to ensure continuity.

Risk mitigation

Addressing your legal and financial risks before you finalise any exit strategy will help you minimise your risks. Due diligence is one of the best ways to mitigate your risk because through it you can identify gaps, address any non-compete agreements or restrictive covenants and sniff out any unresolved legal disputes or liabilities.

Financing your exit

Sometimes there might need to be financing when it comes to your exit. If you're selling, your buyer might have to get financing. Or you may have to if you’re acquiring another company.

A commercial lawyer helps you understand finance agreements and structure instalment payments with property security, guarantees and more. This ensures a safer, smoother and more successful exit from a financial perspective.

Post exit legal responsibilities

Once the deal is done, you might be tempted to celebrate. And that’s a great idea! But it’s also important to remember that requirements don’t stop when the deal is done. Some of your obligations might continue.

For example you might have ongoing personal guarantees, potential legal claims and even non-disclosure agreements, and you will certainly have to retain some documentation. It’s important to understand these before you pop the champagne!

How Patrick Dawson Law can help you protect your legacy

For personalised legal advice on commercial law in NSW get in touch. Exiting your business can be an excellent opportunity to take the next step in your life and work. And we’re here to help you navigate your business exit strategy and protect your legacy!