The document discusses different types of startups and how founders can structure their businesses to be scalable, saleable, or operate as a small business. It covers strategies for de-risking a business to attract investors or buyers, such as clarifying operations and reducing liability. Transaction documents like confidentiality agreements, term sheets, and sale agreements are examined. Considerations for the parties, forms of consideration, warranties, and remedies for breach of warranty in a sale are also summarized.

1. The scalable andsaleable program Legals

3. How does an entrepreneur create value and sell that as an asset on exiting the business?

8. Scale up business to enable rapid growth

9. To enable rapid growth need access to external funds – investments by venture capitalists

10. Correct structure in place to ensure adequate accountability, management control and limit liabilities

11. Companies employ professional management, legal and financial advisors

12. Implement formal board structures and ensure contractual relationships with 3rd parties are watertight and limit company’s liability

14. Attractive to buyer and able to operate without founder

15. Strategic buyers looking to grow by acquisition

16. Implement strategies to build value in the business and reduce risk

18. Owner’s vision is simply to improve current financial and lifestyle position and hopefully fund a reasonable retirement

19. Business strategy focused on developing steady growth and provides owner with wage + small profit

20. Little thought to how they will exit the business

21. Not spent time sufficiently preparing business for exit

23. Reliant on skills and knowledge of owner

24. Owner finds customers, services & takes care of management

25. Working in the business and not on it

26. Profits small enough to support owner

27. No solid wealth creation strategy

28. Can’t operate without owner

29. No succession plan

31. Attracting outside investors / buyers – ‘getting investor ready’

32. Value from point of view of buyer/ investor

33. Reducing areas of exposure to uncertainty and risk

34. Increases chances of success and provides clarity in critical areas of the business

35. Exposure to liabilities – prevent ‘skeletons in closet’

37. Structural changes may build value for business – increase transparency + confidence

38. Premium to acquire de-risked business

39. Process of 2 de-risking falls into 2 main areas:

40. Clarification

42. Reduce potential risk and liability

43. 3. ShareSale or Asset Sale

45. Asset sale – subject matter is the specified assets acquired and liabilities assumed by purchaser

46. Share sale –

47. Verify members, number and type of securities making up entire share capital

48. Identify options or convertible securities

49. Identify restriction i.e. pre-emptive rights or change in control right in constitution or shareholders deed

50. Purchaser indirectly acquire all assets and liabilities

51. Asset sale –

52. Description of assets necessary to conduct business

53. Detailed schedules of fixed assets, IP and other assets

54. Broad general wording for assets owned and used by vendor in business

56. Liabilities remain with vendor

59. Indirectly acquires all assets and liabilities

60. All contracts remain with company – change in control clauses

61. Licences for operation of business

68. Sufficient information to evaluate business

69. Vendor – concerned about level of information to be disclosed to purchaser, sensitive commercial data, trade secrets other confidential information

70. Purchaser + advisers to enter into CA

72. Obligations mutual or one way

73. Purchaser (recipient) agreed to be bound by obligations of confidentiality in favour of Vendor (discloser)

74. Scrip consideration – reciprocal confidentiality undertakings

75. (Scope):

76. Vendor will want the scope of information to be specified broadly

77. Purchaser will seek defined specific scope

78. (Exceptions): Discloser to ensure that exceptions to confidentiality are sensible and appropriately defined i.e.

79. Information in public domain

81. (Recipients): Determine to whom recipient may disclose the confidential information i.e. Advisers - limit and define.

82. (Auction Sale):

83. Number of bidders – potential purchaser

84. Each bidder enter into CA

85. Ultimate purchaser require assignment of each of bidder’s CA at completion to enable it to enforce obligations of confidentiality

86. (Exclusivity Undertakings): No Shop/ No Talk

87. No shop – Vendor agrees not to solicit offers from 3rd party during agreed period

88. No talk – Vendor agrees not to negotiate with any other bidders – whether approach solicited or not - subject to fiduciary carve-out

89. Fiduciary carve out - directors may respond positively to a better offer if form view that in ‘best interests’ of company/ shareholders ‘

91. Listed Company mindful of offence of ‘tipping’ – communication of price sensitive information to persons likely to trade in the securities

93. Record agreed legal + commercial terms

94. Preparation and negotiation of acquisition documents

95. Structure for negotiation of formal acquisition documents

96. Assist in drafting contracts

97. Continue negotiations in good faith

98. Key Provisions:

99. Purpose

100. Confidentiality (regard to existing CAs)

101. Negotiation of contracts

102. Exclusivity

103. Responsibility for costs

104. Break fees (1% of enterprise value)

105. Time table - road map for transaction

106. Access/ due diligence rights

108. When drafting an agreement consider whether or not agreement (in whole or in part) is legally enforceable

109. General Principle - Courts will not enforce an agreement to agree - Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982)149 CLR 600

112. ‘subject to contract ’ or ‘subject to formal preparation of contract’ –intention is that neither party is contractually bound until formal contract executed – Masters v Cameron (1954) 91 CLR 353

113. Must explicitly state that informal agreement or parts of it are legally binding

114. Coal Cliff Collieries v Sijehama (1991) 24 NSWLR, Kirby P lists features indicative of a binding agreement in context of HoA providing for negotiation in good faith:

115. Formal nature of the document – words such as ‘agreement’

116. Certain of the provisions being immediately enforceable

118. Formulation of more comprehensive agreement yet to be negotiated

119. Contemplated that ‘fresh or additional’ terms to be agreed upon i.e. terms in HoA open to negotiation not intended to be binding

120. ‘Proposal’ – commitment for future not presently legally binding

121. Absence of dispute resolution clause

123. When Informal Agreement not directly enforceable - estoppel and restitution may allow Court to grant relief

125. Acting on reasonable reliance that valid contract is or is about to be formed/ fact

126. Justice requires enforcement of the promiseInvoke estoppel to prevent other party reneging – held to representation

128. May claim in restitution for the return of its benefit or its value

129. Summary:

130. Clear of intention - document or particular provisions legally binding

131. If intention that no binding agreement until formal documents settled, then provisions relating to:

132. confidentiality

133. exclusivity

134. break fees

135. due diligence rights and

136. costsMake intentions clear – Obligations to be legally enforceable

138. PoA – appointing buyer pending registration of shares

139. Share Transfer Form

140. Share Certificate

141. Consents to act as director, secretary, member, registered office & public officer

142. Resignations - directors

144. Deeds of release (charge over asset)

145. Novation Deed

146. Assignment Deed

148. Have regard to structure of vendor/s i.e. individuals, trusts, funds or PE vendors

149. Different types profiles/ corporate structures

150. Indemnities, warranties and post completion liability structure

151. Existence during warranty period

152. Vendors to be jointly & severally liable under sale agreement – determine early on

154. Purchaser look to Warrantor/s – entity/person standing behind the warranties

155. Alternative means where parties lack creditworthiness – pay portion of purchase price into escrow

157. Purchaser form newco to purchase assets/ shares

158. No comfort that can satisfy claims – substance

159. (Lack of credit support):

160. PE vehicles/ funds typically do not provide deposits or any credit support at signing

162. Market practice for sales to PE buyers for vendors to accept credit risk

163. Comfort – reputation in market

168. Recover whole loss leaving vendor to seek contribution from other vendors

169. Vendors can sign a deed of contribution amongst themselves regarding cross liability – vendors may agree to cap liability to respective proportion of purchase price

170. Vendors counter-argument – not take risk on the solvency of other vendors not related to it

172. Permitted method of payment:

173. Electronic transfer in Real Time Gross Settlement – RTGS

174. Payment by Bank cheque

175. Escrow arrangement

176. ‘Cleared funds’ before completion

178. Completion obligations incl. issuing or procuring the issue of shares to vendor

180. Purpose – allow purchaser to set off against deferred component of PP any warranty claims or other amounts falling due in period from completion until date deferred component of PP becomes due

181. Purchaser becomes contingent creditor of the vendor – risk of insolvency or non-payment (credit risk)

182. Address issue by payment of deferred component of PP to escrow agent to hold until parties entitlements established

183. Purchaser entitled to set off against deferred PP the amount of any warranty claim

185. Agreed liability for breach of warranty or other liability under sale agreement

187. Sale agreement set out how to measure performance of business:

188. Revenue

189. Earnings i.e. net profit before tax, EBIT or EBITDA

191. Sale agreement - express terms represent entire agreement

192. Implied warranties or representations are excluded

193. Purchaser receives little protection under law – caveat emptor ‘buyer beware’

194. Purchaser takes on risk

196. Both types of agreements incl. warranties in relation to identity of vendors and ability to enter into transaction

197. Most negotiated sections of sale agreement

198. Vendors wish to limit warranties to which feel comfortable giving from own knowledge

199. Purchaser broad warranties

200. Scope of warranties may be limited based on how comprehensive DD investigations have been

201. However, DD investigations usually based on material provided by vendors

203. In asset sale, warranties sought usually those that effect value to which parties attribute to the assets

204. Examples:

205. The assets

206. Ownership of assets

207. Licences – to be transferred

208. IP – ownership/ transfer

209. Contracts

210. In share sale – scope more extensive & detailed

211. Purchaser seek warranties in relation to assets of business, shares, capacity of vendors & liabilities of company

212. Examples:

213. Financial and other commitments of company

214. Share capital of company

216. Litigation

217. Insurances

218. Taxation – purchaser insist on indemnity in relation to tax liabilities

219. Person/ entity who gives warranties – Warrantor

220. Seek warranties from persons who have economic interest in sale or sufficient substance to minimise credit risk over warranty period

221. Ability to compensate for any damages in event of breach of warranty

222. Nature of vendors i.e. individual, company, trust or partnership to determine who provides warranties

225. CP to be satisfied before completion

226. During interval period, vendor continues to operate the business

227. Sale agreement – restrictions on way business to be operated

228. Purchaser require warranties to apply at date of execution of contract and at completion

230. Place claimant in position it would have been in had warranties been true

231. Calculated by deducting from market value that business would have had if the warranty had been true, the actual market value of the business

232. Market value of the business, if warranties had been true, will generally be the price paid for the business or shares

234. Purchaser prohibited from claiming damages for breach of warranty for loss preventable by reasonable mitigating action

235. Key difference between warranty & indemnity is that under an indemnity there is no duty to mitigate loss and concepts of causation and remoteness do not apply

236. Indemnity – a promise to reimburse indemnified person should a particular liability arise – warranty on indemnity basis

237. Purchaser push for wide all encompassing definition

238. Vendor seek to confine concept

239. Purchaser require indemnity to cover total amount of loss + costs + interest + penalties i.e. purchaser insist on tax indemnity

241. Warranties customarily qualified by anything disclosed in disclosure letter, sale agreement, DD material and information available for inspection in public records

242. Sale agreement define meaning of a reference to,’ except as disclosed’

243. Acting for vendor – anything disclosed in relevant disclosure material

244. Acting for Purchaser – reference confined to anything fully & fairly disclosed in such a way that quantum & risk is reasonably apparent from the disclosure material

245. Both parties should keep detailed records of information provided throughout sale process including DDQ, responses, RFI

246. Vendor ensure information described in sufficient detail

248. Warrantors not liable unless receives notice of claim within specified time

249. Purchaser seek extended periods for claims regarding tax – usually 4yrs after relevant tax yr

251. Fulfilment of all conditions precedent and to occur within agreed no. of days of that happening

252. Common mistake to under resource the completion process

254. What are options if don’t have it & banks won’t lend it?

255. Venture capital, seed capital, investment capital, private equity – money to grow your business in exchange for equity

256. Companies raise funds by issuing shares and borrowing and issuing debentures

257. Trusts raise funds by issuing units (capital/income units) and also borrowing

259. Value depends on assessing value of the enterprise

260. Because of intrinsic connection between information and value of securities, the law requires issuer to disclose information which a reasonable investor would require to make an investment decision

261. Fundraising and disclosure requirements regulating offer of securities in Australia - Chapter 6D of the Corporations Act (Cth) 2001

262. Fundraising provisions ensure that investors have access to the information which a reasonable investor would require for the purpose of making an investment decision

264. Existing shareholders of company; or

265. Employees of the company.b. General proposition : Disclosure Person must not make an offer of securities that needs disclosure to investors until a disclosure document for the offer has been lodged with Australian Securities and Investments Commission (ASIC) – unless offer is exempt from disclosure (sections 708/708A & 708AA) As long as investors are given access to all material information, it is up to them to decide how to use that information and to accept the risks in investing

267. Most of the exclusions relate to circumstances where those who receive offers are in a position to take care of themselves and do not need the degree of mandatory disclosure which Chp 6D provides

268. This reasoning does not apply to small scale offerings - where the justification for the exclusion seems to be the concept that a disclosure document is not required for a private/personal offer

271. Net assets of more than A$2.5 million

272. Has income of more than A$250K over last 2 FY

273. Is investing A$500K or more into the business

274. Retail investor is simply everyone else who doesn’t meet above test

275. No limit on how much and how often you can raise funds from wholesale investors – exempt from 20/12/2 Rule

277. new shares first offered to existing shareholders

278. existing shareholders consent

279. anti-dilution provisions

280. Shareholders Deed – regulates issue of further securities

281. Terms of issue of existing securities i.e. preference shares may restrict further issue of shares having equal or better rights

282. Power always exercised in good faith in best interest of company

285. right to receive annual financial statements

287. Loan may be secured by a mortgage over the company’s assets or unsecured and usually bears a low interest rate that recognises the benefit the noteholder has in being entitled to later convert the loan into equity

289. The law still gives remedies to an investor who was subject to misleading or deceptive conduct in the fundraising

290. This could arise from inadequacies in any informal information memorandum put out or even in a response to a verbal queries from the investor about the position or prospects of the company