Maximizing Your Business Exit: Why Early Collaboration with Legal Counsel Matters

When it comes to selling a business, timing it right involves multiple elements, not just readiness to sell and market conditions. The most important element is early preparation. Many business owners wait until they’re ready to sell before engaging legal counsel and advisors, but this approach can lead to costly oversights and missed opportunities. Through our recent conversation with Gerrard L. Grant, Esq., of Aventus Law Group, we explored why early collaboration with legal counsel helps business owners ensure a successful exit.

Three Common Pitfalls in Business Exit Planning

Grant identified three critical areas where business owners often stumble without early legal counsel:

1. Lack of Understanding About Roles: Many owners don’t fully grasp the distinct purposes of their broker, legal counsel, and other advisors. Early engagement helps establish clear roles and ensures all parties work in concert toward the owner’s goals.
2. Insufficient Preparation: A successful exit requires careful timeline management and coordination between all parties. Early planning allows for proper documentation and addressing potential issues before they become deal-breakers.
3. Unclear Motivation: Sometimes owners rush to sell without fully understanding their own objectives. As Grant notes, “Understanding the motivation behind the sale gives both the advisor and the attorney… an understanding of how we can really best serve our client.”

Key Steps to Preserve and Increase Business Value

To maximize value before a sale, Grant recommends reviewing several critical areas with legal counsel. These include:

Ownership Structure Review

• Examine current ownership arrangements
• Review operating agreements and bylaws
• Identify any potential consent requirements
• Address any shareholder disputes or concerns

Contract Analysis

• Review major vendor and client contracts
• Check assignment clauses and change-of-ownership provisions
• Address any vague or problematic contract language
• Pay special attention to contracts representing more than 20% of revenue

Strategic Planning

• Consider estate planning implications
• Evaluate tax optimization strategies
• Assess regulatory requirements
• Plan for post-sale transitions

Early review in all of these areas helps to drive smooth due diligence and deal negotiations later.

Understanding Deal Structures: Asset vs. Stock Sales

One of the fundamental decisions in any business sale is the structure of the transaction. As Grant explains, both asset and stock sales have distinct advantages depending on which side of the table you’re sitting on. The right advisor can help you understand how these impact your specific deal.

Asset Sales

• Preferred by buyers, especially in manufacturing, logistics, and other asset-heavy industries
• Provides buyers with a higher basis for depreciation
• Offers tax advantages through “phantom expenses”
• Allows buyers to select which liabilities they want to assume
• May result in higher taxes for sellers due to depreciation recapture

Stock Sales

• Often more advantageous for sellers
• Benefits from long-term capital gains tax rates
• Transfers the entire business entity, including all assets and liabilities
• Can be more straightforward from a regulatory perspective

The value of having experienced counsel becomes particularly evident when dealing with complex deal structures. Grant shared an example where a private equity buyer attempted to reshape a deal’s structure late in the process, citing tax concerns. Through collaboration with the advisory team, they were able to propose an alternative solution using warrants that preserved the original economic terms while addressing the buyer’s structural concerns.

The Cost of Waiting: A Cautionary Anecdote

Grant shared a telling example of what can go wrong without proper legal guidance from the start. A friend who owned a therapy business sold his company but ended up short $200,000 because he didn’t understand all of the tax implications of the deal structure. His attorney, who specialized in corporate law but not necessarily in M&A transactions, hadn’t fully explained the differences between asset and stock sales. By the time Grant reviewed the deal post-sale, it was too late to recover the lost value.

Conclusion

The path to a successful business exit is smoother when it’s paved well in advance. Instead of thinking of early collaboration with legal counsel as a matter of avoiding problems, think of it as a way of maximizing opportunities. As Grant emphasizes, when all parties are aligned and working together from the start, the chances of achieving the best partnership and highest offer increase significantly.

Whether you’re planning to sell in six months or six years, the time to start working with advisors is now. By understanding deal structures, addressing potential issues early, and building a strong advisory team, you can position your business for a successful exit that achieves your goals while maximizing value. If you’re considering your next move, please reach out to Align for a complimentary consultation and business valuation, and Gerrard L. Grant, Esq., of Aventus Law Group, for legal preparation for this important transaction.

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This article is for informational purposes only and does not constitute legal, tax, or financial advice. Readers should consult qualified professionals regarding their specific circumstances.