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By Jenkins Fenstermaker, PLLC on 07/30/2020
The Significance of Compliance Matters in a Business Exit Strategy

The purpose of starting or operating a business is to create revenue by serving some public need. While many businesses follow a business plan, surprisingly few business owners have an exit strategy. Whether your business is the expression of a passion, a service to the community, or an investment, at some point you may want—or need—to sell or close it. A business exit strategy provides helpful guidance for operating and winding up your involvement in the business cleanly and smoothly.

Meeting federal and state business compliance requirements is a necessary part of operating a formally structured business, but is also a key element in a smooth exit from a business investment. Regardless of the formal business structure—corporation, limited liability corporation, partnership, limited liability partnership—keeping up with recordkeeping and annual filing requirements can facilitate operations and prevent unnecessary delays in business transfers and deal closings.

What Is a Business Exit Strategy?

A business exit strategy is a specific plan for disposing of an interest in a business. It is best created--(or at least considered--while developing the initial business plan because both will guide operating decisions. An exit strategy should contemplate exactly how you will sell or transfer your interest or wind up operations if the business will close permanently. An exit strategy that involves the continuing operation of the business looks quite different from one that plans to permanently cease operations. 

A successful business exit requires advance preparation. That includes being up-to-date on all compliance matters. And a change in ownership or the termination of a business triggers additional compliance requirements. Whether your exit strategy focuses on realizing a profit, cutting losses, or just getting out, be sure your operation of the business includes following federal and state compliance requirements.

Establish a Business Exit Strategy Early

Many don’t think of an exit strategy as part of a business plan, but the two go hand-in-hand. A business plan is the blueprint from which you operate your business and includes information like this: 

  • A summary of what your business does (products or services);

  • A company overview and organizational structure;

  • A description of management and personnel required;

  • A marketing plan;

  • A list of company goals or milestones; and

  • A financial plan.

While the business plan guides the start-up and operation of a business, the exit strategy defines the end of the owner’s involvement with the business or the end of the business itself. 

Dovetailing with the business plan, the business exit strategy picks up where business plan goals or milestones leave off, defining how to proceed if an event triggers the end of the owner’s involvement with the business. In this way, the exit strategy informs business decisions throughout the life of the company.

What is in a Business Exit Strategy

Identifying the triggering factors for your exit from the business will help you identify the best goal and exit strategy alternative. Different exit options exist for selling a business interest that will continue operating, for profit or to avoid further losses, versus closing up the business without a buyer. 

Options for selling or exiting from business operations may include offering the business for sale in an initial public offering, a private sale to management (a managed buyout) or a third party, a merger with or acquisition by another business, family succession, or closing a business altogether. If your exit involves ceasing operations, options include liquidation of assets or even liquidation through bankruptcy depending on the business’s financial situation (though bankruptcy is obviously not a common exit strategy).

Factors to Consider for Your Business Exit Strategy

Determining how to divest a business interest requires consideration of the nature of the business and your goals after the transaction. Following are some of the factors to consider and incorporate into your plan:

  • The event or circumstances that would trigger your exit;

  • The size and organizational structure of the business;

  • The marketability of the business if planning to sell;

  • Whether you want to retain any control or interest in the business;

  • Whether you want the business to continue operating after your exit; 

  • Whether you want the business to remain operating as-is or would you tolerate operational changes; and

  • The tax consequences of the change in ownership or winding up the business.

Just as changing circumstances over time may require updating your business plan, you also need to revisit your business exit strategy from time to time. By reevaluating these and other relevant factors, you may determine whether your exit strategy also requires modification.

Activating a business exit strategy is not a solo effort; it requires assistance from other professionals. An experienced accountant, financial advisor, and business sales attorney can be invaluable in helping you determine the appropriate valuation method and exit strategy for your circumstances.

Compliance Matters in a Business Exit Strategy

Every business with a formal business structure must meet certain regulatory requirements. A buyer, in the case of the sale or transfer of interest in the business, or you as the owner, in the case of winding up a business, will need to make sure regulatory filings are up-to-date and all business records are in order. A due diligence checklist for buying a business is a helpful guide to compliance matters and commonly includes items like these:

  • Documentation on the organizational structure, such as articles of incorporation and bylaws for a corporation or a partnership agreement for partnership organizations;

  • Documentation showing the organization is in good standing, such as a copy of the most recent annual report or documentation from the state secretary of state business division;

  • Lists of physical assets, real estate, and intangible assets;

  • Financial documentation, including audit records, inventories, and a balance sheet;

  • Tax records and filings for the most recent years;

  • Documentation on employees and all labor matters;

  • Documentation of insurance and other forms of risk management;

  • Documentation on all licenses and permits, including any renewal dates; and

  • A list of pending and potential claims against the business.

Maintaining these records in a timely and organized fashion during the life of the business helps make running the business and disposing of your interest in it proceed smoothly. 

In day to day operations, it’s tempting to let the normal demands of a business or dealing with crises put business compliance matters on the back burner, but don’t. A business that is not current on busines compliance matters or does not have well-maintained records of corporation filings and records may suffer a hit to the business valuation or lose the sale altogether. Following are corporation records that should be maintained and up-to-date at all times:

  • Articles of incorporation;

  • Bylaws and any amendments to the same;

  • A list of all officers and directors;

  • The name and contact information of the registered agent;

  • Resolutions passed by the board of directors, if any;

  • Copies of communications to shareholders; and

  • Minutes of shareholder and annual meetings or written agreements in lieu of the same.

Further, the sale of a business interest will likely trigger the need for additional document and regulatory filings. Take, for example, an exit strategy that contemplates a West Virginia (WV) business’s merger with or acquisition by another company. The transaction necessarily involves assessing corporation compliance in WV.

To operate in West Virginia, corporations must file articles of incorporation with the West Virginia Secretary of State Business Division or register a foreign corporation in the state. The state also requires corporations to file annual reports. Depending on the terms of the transfer, disposition of a corporate business in WV could result in the need to update several corporate documents and filings with the Secretary of State Business Division, including the list of officers and directors and the name and contact information of the registered agent, and would definitely require documentation to show approval of the transfer by the directors or shareholders as appropriate.

How a Business Sales Attorney in WV Can Help with Your Business Exit Strategy

A business owner armed with a thorough business plan and comprehensive exit strategy is well-poised for success, but developing and updating an exit strategy involves more than a buy-low-sell-high approach. Business owners and entrepreneurs should bear in mind the importance of compliance matters in a business exit strategy throughout the life of the business. 

Owners and entrepreneurs interested in developing an effective and comprehensive business exit strategy benefit from consulting a business sales attorney at Jenkins Fenstermaker, PLLC. For a consultation, call (304) 523-2100 or complete this online contact form