Capital Exit Plan (Do you Have one?)

Regardless of the stage you are at in your business, it is prudent to always consider what you are going to do with this significant asset that you have built when you want to move on.

You have undoubtedly thought about this, but do you have a clear plan that you can refer to and refine if things change?

A Capital Exit plan is designed to lay forth the steps you and your fellow shareholders are to take when one or all of you decide to exit the business.

There is often a lot going on at such a time; heightened emotions, stress, and uncertainty. Hence, the value of a well thought through plan shows through.

How does one build such a plan?

There are a few things to consider;

1. Shareholders agreement

2. Company Constitution

3. Timeline

4. Goals

5. Pre-emptive rights for existing shareholders

6. Valuation

The plan takes into consideration all of the above and more.

When formulating the exit plan, questions need to be asked of all parties;

1. What are your expectations of one another? Performance targets, roles and responsibilities?

2. If one shareholder wants to exit, are there shares offered to the existing shareholders first?

3. Who will conduct the valuation of the selling shareholders shares? An independent firm, or your existing accountant?

4. What sort of timeline do each of the shareholders have? Does one want to get out of the business in 5 years, while the others are in it for at least 10?

The shareholders agreement is where the plan will be agreed upon. However, it’s important that a separate plan, or document is prepared that lays the plan out clearly as the shareholders agreement is a legal document that won’t have a simple layout to follow.

If one shareholder is going to exit the business, and the other shareholders are to purchase the exciter’s shares, how are they going to fund this purchase?

Could it be through a vendor loan where the exiting shareholder is paid out over a number of years from company profits? And if so, what rights does the exiting shareholder have; do they maintain a seat on the board for oversight? Do they maintain shareholder voting rights until the loan is paid off? Or will the existing shareholders re-mortgage their home and if so, is their sufficient equity in the home to do so?

If all shareholders want to exit at the same time, then what are the trading restraints on each? If any?

Much to consider, but nothing that can’t be worked through with level heads.