Top 10 Mistakes Now That Could Blow Up Your Exit

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Top 10 Mistakes Now That Could Blow Up Your Exit

As you build the equity in your business, taking steps now on how you may be perceived when it comes time to exit could be the difference between success or failure.

  1. Failing to “Sew Up” Your IP: If you do not definitively own the intellectual property you are trying to monetize, you have no negotiation. Period. Acquirers do not work off of presumed ownership, they buy based on actual, proof-in-hand ownership. Like selling the Brooklyn bridge you don’t own it, so it’s hard to get paid for it
  2. Hiring the wrong (or no) Advisors: Whom you choose as an attorney, CPA or investment banker is important. Money spent on experienced professionals to help you in business will pay off in gold; having inexperienced advisors (or no advisors at all) could not only cost you much in both time and money, it could cost you the very deal you’ve been working to close. If your financials are inaccurate and/or not GAAP compliant (cash basis is not GAAP), cleanup of financials can delay / kill deals
  3. Bad Exclusive or Strategic Business Relationships: Relationships are everything, and that’s true even in business. When you have established a major relationship with the wrong partner, there are always major risks involved. It could, indeed, threaten your deal. Some exclusive commercial relationships with one party can turn off another acquirer.
  4. Board Constitution Challenges: Lack of documentation when significant members (such as, a board director) are replaced. Again, validating certain actions retroactively are very difficult, especially when key players are no longer easily accessible. Detailed, timely documentation is your friend, my friend.
  5. No Drag Along: What if your investors don’t want to sell at a price you like?  If you have investors who don’t like the deal you’ve been offered or a significant number who are holding out, your deal may quickly evaporate.
  6. Too Many Investors: A buyer may find your company less attractive if you’ve sold stock to too many investors. Too many shareholders or unaccredited investors, even if not in violation of securities laws, can bind an acquirer looking to pay you with stock
  7. Securities Law Drama: Offering shares of stock or options to unaccredited investors can be costly (in California, one violation can cost you $2500, in addition to other penalties).  Just because you heard someone else did it doesn’t make it legal in your situation. Double check the validity of what you are offering BEFORE you offer it.
  8. Cap Table Drama. Document, document, document. Did we mention documenting? You have to be able to quickly and clearly outline who owns what, and that means you have to track your options and shares. You should also give some thought as to how options may be treated in the event of a change in management.
  9. Employee Compensation Issues. Compensation is a huge subject, and when this part of the equation has major holes, you also are waving major red flags. Here are a few examples: classifying consultants as employees, failing to report the appropriate values when stock is offered as part of the compensation package, failing to file 83(b) elections and failing to withhold employment taxes. Straightening out these types of issues can be very costly and time consuming and can definitely reduce your chances of a smooth exit.
  10. Failing To “Keep House.” Presumably, you are holding formal meetings to keep everyone abreast of what is happening. If you are not, start. Nothing is more important than assuring that every facet of the organization knows what is happening and is involved. The exact same is true for board meetings and stockholder actions. Nothing tells a potential investor your house is in disarray quite like the lack of documentation and/or the lack of involvement from your corporate attorney on major decisions. The fix is simple: take detailed minutes and make sure that your corporate attorney is present at every board meeting.

This post is based on a talk by Paul Johnson, Partner; Co-chair, M&A / Strategic Transactions Group at Procopio LLC. In San Diego, California.

What do you think of this list? Anything you might add?

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