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Where is the Exit?


Several years ago, Edward Entrepreneur started his business, Eddie's Exotics. Edward's motivation for starting the business was to do something he enjoyed and make a little money for him doing it. As the years went by, the business prospered and expanded—adding employees and multiple locations. Recently, Edward was asked whether he would be interested in selling his business. Until that inquiry, Edward had been focused on operating his business and had not considered exiting the business, nor how to go about doing so.

Certainly the prospect of selling his business for a nice profit was intriguing and deserved further thought. But the business might also provide a continuing source of income for himself and for future generations of the Entrepreneur family. Edward decided he needed to work through some of the issues that would arise if he proposed to sell the business or to hand it off to the younger Entrepreneurs.

Edward soon found there was much to do to prepare a business for sale. At the outset, Eddie's Exotics needed to have more complete financial statements. Business valuations (and therefore purchase prices) are frequently derived from formulas based upon the revenues or profits of the business, and solid financial statements were needed to assure that he would get a good price for the business. Edward started a checklist with the note: "Talk to CPA about improving financial statements and obtaining a business valuation."

Edward leased his business locations from a number of different landlords on varying lease terms. Some of the locations were key to the business. If he sold Eddie's Exotics, Edward knew the right to continue under those leases would have to be part of the deal. In addition, he wanted to be sure that, when he did sell the business, that he would no longer have any further liability under the leases. When he reviewed his leases, he found the landlords had all kinds of rights on transfers of the leases and on "transfers of control" of the business. Another note for the checklist: "Call attorney for advice on lease assignments and what constitutes a transfer of control."

What would happen to all of the employees of Eddie's Exotics in a sale? What about the personal guaranties Edward had signed to obtain bank financing and equipment leases? Should the logos and slogans used by the business be registered with the U.S. Patent and Trademark Office? What about the few shares of stock the business had issued to one of its employees -- how could Edward be sure the employee would sell his shares when they had never entered into a shareholders' agreement? The questions began to swirl in Edward's head. A new note was added to the checklist: "Sit down with the attorney and start developing a plan to prepare for possible sale."

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