The state of being exit ready – what does it mean?
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Building a successful business is a tremendous achievement, but every business journey eventually reaches a crossroads where a decision must be made – whether to continue on the current path or embark on a new adventure. This pivotal moment often comes in the form of an exit strategy. Common exit strategies include selling the company or the business, merging with another entity or a public listing (initial public offering; IPO).
The concept of exit readiness
Exit readiness is the state of readiness a business reaches when it is equipped to handle a significant change in ownership. Whether you are planning to sell your company/business, merge with another company or seek funding, exit readiness is critical. From a legal perspective, the exit process involves a wide range of complex issues and considerations. For the purpose of avoiding any negative surprises and pitfalls post-transaction, potential buyers or investors often conduct thorough due diligence in order to assess the value and risks associated with the target business.
Legal considerations
Legal due diligence covers several key legal areas including, but not limited to the following:
review of contracts
corporate governance and regulatory compliance;
evaluation of intellectual property rights;
review of pending and potential litigation;
employment contracts, employee benefits, incentive schemes; and
tax compliance and any outstanding tax liabilities.
For instance, it is important to ensure that contracts have been entered into in written form (and include sufficient provisions on e.g., termination rights and limitations of liability on the part of the target) and that they do not contain any materially unfavorable clauses that could jeopardize your exit process. The results of performed legal due diligence are critical in determining the overall risk associated with a transaction and can influence the terms of the deal or the decision to proceed. It enables the acquiring or investing party to make informed decisions, negotiate terms and develop a strategy for dealing with any legal issues that may arise post-acquisition or post-investment.
Exit readiness and venture capital funding
Exit readiness is even critical in early-stage companies for the purpose of attracting venture capital (VC) funding. For start-ups and early-stage companies, securing VC investment can be a game changer. The VC investment itself provides the financial backing needed for the company to scale and grow. In addition, the VC investors often bring along key strategical thinking, access to relevant networks and professional governance models to the board of directors. However, VC investors don't just look for promising business ideas. They are also keenly interested in making sure that, for example, the target company’s day-to-day operations are sufficiently organized and compliant with applicable laws and regulations before making the final funding decision. VC investors are looking for substantial, in most cases short-term, return on their investment. For them, exit readiness means strategic planning and potential for a lucrative exit by way of a sale of the company/business or IPO. VC investors want to see that your business is poised for significant growth and that their investment will ultimately yield a high return. At the same time, a VC investment is inherently risky, and investors want to mitigate that risk as much as possible.
How exit readiness can be assured and when the preparation should start?
The process of achieving exit readiness is complex and requires solid legal expertise, meticulous planning (incl. project management) and attention to detail, which may take a long time to fully develop and implement. With the help of professional legal advisors offering legal assistance in a broad range of legal areas you can navigate through these challenges and ensure a smooth exit. Remember that early preparation is the key to exit readiness, and taking the time to get the legal aspects in order will pay off in the long run. This means that if the first possible exit is to take place within the next few years, then now is the ideal time to start making the necessary preparations. If you get assistance from professional legal advisors, you are able to focus on the most important things in the negotiation phase of an exit process and, eventually, get the deal done on the best possible price and deal terms.