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Family Business - Exit Strategies

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Family Business Exit Strategies

MEET THE TEAM

Lance Parker

Lance Parker, partner with lawyers, Charles Lucas & Marshall and a member of the firm’s family business team, considers the exit strategies open to family businesses.

In previous articles, my colleagues, Hemant Amin and Michael Overend, have considered the difficulties family businesses face in long term planning and handing on the business. I now turn to consider exit strategies.

A typical family company may be owned by different family members, some of whom are involved on a day to day basis in the business and derive their main income from it (Executive Owners) while others are not employed in the business but are simply passive investors (Non Executive Owners).

Problems may arise if Non Executive Owners wish to sell their shares, when the Executive Owners wish to carry on in business.

Various strategies need to be considered, ideally well in advance, to cover this possibility and to balance the interests of those concerned -

Right of first refusal - provisions may be included in the Company's constitution (Articles of Association) and perhaps also in a Shareholders’ Agreement, obliging any shareholder who wishes to sell their shares, to firstly give all other shareholders the right to purchase those shares before the selling shareholder is able to sell to a third party.

To avoid the risk that the remaining shareholders will be unable to fund several purchases of shares in quick succession, the ability of any shareholder to sell shares may be restricted for periods of time and/or a limit placed on the number of shares that can be sold annually.

Buy-back of shares by the Company - if the Company is generating sufficient profits and has sufficient available cash, the Company may (subject to various legal requirements) be able to buy back some or all of a selling shareholder's shares.

If a majority of family members wish to exit at the same time, it may then be necessary to consider a sale of all the shareholders' shares when various issues will need to be considered -

A buyer will almost certainly only be prepared to buy 100% of the issued shares in the Company. It is therefore essential that all shareholders agree to sell. In some cases, when a sale is envisaged in advance, it may be possible to include provision in a Shareholders’ Agreement requiring minority shareholders to sell to a buyer on similar terms to an offer received by the majority.

A buyer of the shares of a company thereby acquires all the company's liabilities such as they are. Accordingly, as part of the Sale and Purchase Agreement, a buyer will require the sellers to give significant indemnities and warranties against various liabilities, breach of which is likely to lead to a claim by the buyer against the sellers.

It is likely that this will be of particular concern to the Non Executive Owners who are unlikely to have any detailed knowledge of the business. In such circumstances it may be possible to persuade the buyer to take indemnities and warranties only from the Executive Owners.

However, if the Non Executive Owners own a significant number of shares and will take a significant portion of the sale price, the buyer is likely to require indemnities and warranties from them.

In such circumstances, the Non Executive Owners will need to be satisfied by the Executive Owners that the required indemnities and warranties may safely be given without risk of claim.

For more information contact Lance Parker on 01635 521212 or lance.parker@clmlaw.co.uk