Since 2018, the number of small businesses in New Jersey has increased by over 19%, making New Jersey a Top 5 state for small business growth in the Northeast. While growing a business is important, New Jersey entrepreneurs should not lose sight of the importance of a meticulously planned exit strategy. This article delves into the key considerations that demand attention during this critical phase in the lifecycle of a business.
Eliminating liability risks
In planning an exit strategy, business owners must first confront the potential liabilities facing their business. Engaging in thorough due diligence can resolve regulatory noncompliance or legal issues early and ultimately prevent future roadblocks.
Business owners can start this process by running a judgment and lien search, which will identify any legal claims of record, liens or judgments that may be attached to a particular individual or business entity. A clear search helps ensure that there are no outstanding judgments or liens that could impact the business’s value or derail an ownership transfer.
Entrepreneurs should confirm that all permits and licenses necessary to run their business in New Jersey are current and will remain active through any ownership transfer. Business owners should likewise strive to settle any outstanding disputes with customers or clients, as this will help avoid potential litigation during a transition.
Securing key contracts
When planning for an ownership transfer, it is critical to evaluate all business contracts, such as agreements with customers, vendors or suppliers, and technology license agreements. Business owners should renew or renegotiate these contracts to fortify stability and maximize value, ensuring that all contracts either permit a change of control or assignment. Business owners should also confirm if there is a requirement to get consent for an ownership transfer or any penalty for early termination.
Employment law compliance
In preparation for a transition, business owners must comply with all applicable labor laws and employment regulations, both on the federal and state level, especially if any employees will be terminated. Employment law violations will often scare off potential buyers, whether due to economic concerns or a fear that correcting the violation will create an adverse business culture based on past practices. Open communication with employees and independent contractors is likewise crucial to address concerns and quell uncertainties surrounding any ownership transfer.
Securing noncompetes with key employees
Protecting intellectual property and trade secrets is vital during any business transition. Business owners should identify which employees play a pivotal role in the business’s operations and consider implementing nondisclosure agreements to avoid leaking valuable information to competitors. Entrepreneurs may want to include restrictive covenants in their employment contracts to prevent employees from leaving and joining a direct competitor or soliciting other employees, clients or customers of the business. It is also equally important for business owners to ensure that these contracts can be assigned to a buyer without prior consent of the employee.
Real estate considerations
For businesses with physical workspaces, real estate considerations will form a significant part of exit strategy planning. Business owners should consider getting a property valuation, whether for the purpose of selling or leasing.
Entrepreneurs that rent their business locations must assess lease agreements to ensure that they are not in default of any tenant obligations. Business owners should confirm whether the lease can be assigned to a new tenant or if it will need to be terminated because of a change of ownership. Business owners will want to maintain a positive relationship with their landlord throughout the duration of their lease, as many lease assignments, even if permitted, will require the landlord’s consent.
Business owners that own the real estate connected to their business must decide whether to sell the property or serve as its landlord going forward. If there is a mortgage on the property, business owners should determine whether leasing the location will constitute a default or create new obligations under that mortgage. Finally, evaluating potential environmental risks and liabilities on the property is crucial, as certain businesses in New Jersey will require an environmental clearance process to transfer ownership regardless of whether the location is owned or rented, and this process can take substantial time and advanced planning.
Getting professionals involved early
Navigating the complexities of an exit strategy requires a team of professionals with specialized knowledge. Engaging legal, financial and business professionals early sets the stage for a comprehensive and well-executed strategy. These professionals can aid in matters such as business valuation, negotiations, contract drafting and compliance, thus streamlining the transition process and maximizing value.
William S. Barrett, CEO of Mandelbaum Barrett P.C., is a corporate attorney who has handled exit strategies for business owners throughout the state, and Eileen Funnell is an associate in the firm’s Corporate Practice Group. Contact William Barrett at wbarrett@mblawfirm.com.
