Factors to Consider  

Do you hold shares in a small business? Are you considering cashing out?

Once you decide that you are ready to exit the business, the process may seem very cut and dried to you. You think that all you have to do is find a willing buyer and sell your stake. However, it may be wise to consider various factors before signing away your rights in the business.

Let’s take a brief look at some of these considerations.

Assets of the business

Often, when a stakeholder sells their stake in a business, they fail to consider various important aspects of the business’s patrimony. This can result in a serious undervaluation of the business and consequently, the stakeholder may end up selling for significantly less than they should have.

Before selling your rights, it is important to examine closely the assets of the business. The assets include, not only the tangible property that the business owns (for example, buildings, vehicles, equipment) but also intangible assets such as intellectual property (for example, copyrights that could eventually generate royalties) or certain contract rights (for example, lease renewal rights on premises located near a new hospital, university or other potentially high-traffic site).

Personal guarantees

If you have signed a personal guarantee with respect to any of the business’s obligations, you may be responsible for theses debts even if you sell your stake in the business. In these cases, you will have to obtain the consent of the creditor of the debt (or the beneficiary of the guarantee) in order to be released from your responsibility with regards to the debt.

For example, if you have “co-signed” on the business’s lease, you are not automatically released from your obligation towards the landlord just because you sell your shares in the business. You may need to obtain a discharge from the landlord in order to be free of this obligation. Similarly, if you have personally guaranteed a loan made in favor of the business, you will likely need the lender’s consent if you would like to be relieved of your guarantee upon the sale of your stake in the business.

Shareholders agreement

Before promising to sell your business interest, it may be wise to check the agreement between the business’s shareholders to verify whether there are any restrictions on the sale of shares. Sometimes, shareholders agreement will prohibit the sale of company shares to outsiders or will forbid shareholders from selling their shares before a given date. That is why it is wise to verify what restrictions exist in your shareholders agreement before attempting to sell your shares.

These are just a few of the relevant factors to consider when deciding whether to sell your interest in a business. For more information, you may contact Kelly Francis at (514) 802-7736 or at info@kellyfrancisavocate.com.

Disclaimer: This article merely gives readers an overview of the issues discussed therein and is not legal advice. Please do not take action based on this article alone without first seeking the legal counsel appropriate for your specific situation!