exit strategies: planning for a trade sale

Exit Strategies: Planning for a sale

Anthony Turner, Partner, Lucy Greenwood, Partner, The International Family Law Group LLP

www.istructuring.com

Introduction

Founder InvestorMinority Shareholders

Trading Company

Family

Expensive lifestyle


Introduction• A medium sized UK trading company

• Not at an early stage and looking to raise significant funding

• The founder holds a significant stake alongside a number of small investors

• Substantial investment by a family office almost concluded, to provide growth capital for international expansion

• The investor is looking for an exit within five years

• A trade sale, to an international competitor, is the most likely exit.


Personal Aspects• The founder is heavily involved with the business, and a

workaholic

• He is married, with five children. He and his wife were both born in Cyprus

• He has a tempestuous relationship with his wife (who does not work), which is well known to the staff

• There is no significant family wealth and cash extraction from the company has funded the family's (extravagant) lifestyle.


Legal Agreements• Shareholders' Agreement and Articles:

– Share transfers are restricted– Permitted transfers– Leaver provisions– Board representation– Restrictive covenants– Confidentiality

• Investor controls timing and manner of exit• Founder will give warranties to the investor and on an

exit.


Legal Agreements (contd.)• Incentivisation package for founder:

– Salary

– Bonus scheme

– Share options

• No dividends• The main incentive for the founder is a sale (especially with

the tax advantages).


Strategic Documents• Business plans

• Forecasts

• Growth plans are all very much focussed on increasing size and international footprint

• Confidentiality is vital, especially in relation to valuation.


Management• Key management is weak and the business is heavily reliant

on the founder

• The investor plans to develop the management team and incentivise them with share options/exit bonuses.


Everything is rosy• Everything is on track:

– There is a clear strategy to build and sell

– Market conditions are good, and improving

– Founder is engaged

– Expansion funds are in place

– Legal documents are about to be signed

• The only risk is business performance…


Personal Aspects

Catastrophic personal circumstances arise…………….

• The founder’s wife leaves him

• Their separation looks likely to lead to divorce

• It is never good to be faced with such unplanned and profound changes

• In the case of family businesses the impact can be even more far reaching.


What might this mean for the SME? Even if there is no immediate divorce, a separation might still result in:

• Delay/loss of the proposed investment

• Founder spending more time away from business

• Concern from the minority shareholders and proposed investors

• A need for the founder to consider releasing money from the company sooner than planned

• The shareholders’ and investors’ agreements affecting any settlement.


What might this mean for the SME? (Cont’d)

• Reviewing tax planning?

• Can the founder still give warranties to investors and on a sale?


Immediate Steps• Founder should seek immediate legal advice from a specialist

international family lawyer. (On these facts he or his wife could issue divorce proceedings in Cyprus or in England)

• Consider which jurisdiction is best in which to divorce?

• How will each jurisdiction treat the company and what degree of disclosure would they seek?


Immediate Steps (Cont’d)

• Can the founder speak to his wife about any of this and the potential impact divorce proceedings will have? If not, why not?

• Consider how well informed the wife is about their financial position, the terms of any shareholders' agreement and the plans for the company’s development and sale.


Wife issues divorce and financial claims in England

• The founder cannot challenge jurisdiction (spouse first in time to issue in EU secures jurisdiction)

• A court timetable commences with substantial disclosure requirements

• Joint expert reports to value the company and advise upon tax issues upon sale

• Liquidity and forecasts of the company might be impacted (interim maintenance and regular payments for legal fees).


Wife issues divorce and financial claims in England (Cont’d)

• Whilst founder can impress the necessity to slow down the procedure to facilitate the longer term profitability of the company, will wife believe him?

• Founder might lose control over how his company is managed.


What orders could she seek?

• Disclosure orders (including a broad range of company documents, including forecasts prepared for investors)

• Income/maintenance orders for the wife and the children based on the joint report’s findings as to what can be afforded to be taken as income from the company.


What orders could she seek? (Cont’d)• Sale of the founder's shares in the company – possibly even

more than half of the founder’s share (timings to be agreed or ordered, but unlikely to be as long as the intended five year plan if this timing is negotiable). What impact does this have on tax planning?

• Transfer of the founder's shares to his wife (less likely unless wife has had an active involvement).


Advance Safeguards • Pre or post-nuptial agreements dealing with a separation of all

or part of the company assets and their exclusion from division upon divorce

• Consideration of Choice of Law clause

• If the wife is a shareholder – provision in a shareholder’s agreement as to what to do in the event of divorce (align this with any pre or post–nuptial agreement)

• Include confidentiality agreements.


Advance Safeguards (Cont’d)• Diversify your capital portfolio (i.e. to provide options for raising

capital, and even income e.g. rental properties as separate investments)

• Good tax advice

• Take legal, accountancy and company law advice when you first sense your marriage might be even slightly rocky.


Contact Details

• Anthony TurnerPartnerFarrer & Co LLP

+44 (0)20 3375 [email protected] www.farrer.co.uk

• Lucy GreenwoodPartnerThe International Family Law Group LLP

+ 44 (0)20 3178 [email protected]


mailto:[email protected]

http://www.farrer.co.uk/

mailto:[email protected]

http://www.iflg.uk.com/