Making an Exit? Don't Go Without a Clean Legal House

This week, we did something unprecedented on In Process: we talked about law. Generally, we like to feature conversations with thought leaders outside the legal field on topics ranging from mindfulness in the workplace to the rise of artificial intelligence. Most currently, we’ve produced a series (which will lead up to our coinciding event Prepping the Princess) totouch on the issues that business leaders should keep top-of-mind before an exit—even if that exit is years away from fruition. As we approached the fourth episode in our five-part series on In Process, there were some aspects of legal housekeeping that couldn’t go unmentioned.

“The whole point of a transaction is to sell a business, which means that it has to have some fundamental building blocks. A business has to have contracts that protect them from a legal liability standpoint, but also support recurring revenues,” says John Monahon. “That's something that can be transferred and assigned over to the buyer and will support ongoing revenues of the business post-sale.”

One of the biggest bombshells in a potential sale can go back to intellectual property rights, a huge source of value in many technology companies that can be lost to independent contractors if the company hasn’t structured their contracts correctly from the beginning.

“That is not something that's intuitive. People, especially in the technology space, use independent contractors more and more often. When we go to sell, the acquirer wants to know that every single one of those people has a written assignment,” says Monahon. “Sometimes, they're very difficult to obtain at that point. It's years later.”

Once would-be sellers are actually approaching an exit, the law can affect the structure of the transaction, too.

“Buyers typically prefer an asset sale, in that they buy the assets in the business from the company and do not assume the liabilities that they don't want to assume,” says Allen Bradley, who is Partner-in-Charge of the Tax Practice at Trusted Counsel. “From the buyers' perspective, one of the large issues is, ‘What are the tax consequences of the consideration that I received—whether it's cash or stock in the company?’”

Stream the conversation in full in the player below for an in-depth conversation about diligence, transaction structures, and the legal documents your company needs to have in place before sale.

If you liked this podcast or are interested in exiting your business, consider requesting an invitation to our upcoming event, Prepping the Princess for the Party: Is your business ready to sell?, on October 12 at 6 p.m. The event will host business owners and C-level executives for a panel discussion on what it takes to get top dollar for your business. For more information or to request an invitation, visit PreppingthePrincess.com