Business spring cleaning
A few days ago, a glorious 60 degree February day in Colorado allowed me to run outside in shorts and a short sleeved shirt. This brief respite from winter reminded me that spring is around the corner and with it the traditional spring cleaning at our house. Springtime is also a good time for business owners to take stock of their venture from a legal perspective to make sure that they are doing the things that will increase and protect the value of their company.
A lot of us spend our time in the trenches, concerned with the day-to-day. However, it is beneficial to take a break once and a while and look at the bigger picture, what your goals for the company are and whether you are taking the actions that will help you achieve your desired result. A yearly spring cleaning for your business can help you be in a better position to act and capitalize on unexpected opportunities in the future.
From my experience, one of the biggest items that most small business owners do not spend enough time considering is their exit strategy. Do you want to run the company for a few years and then sell it? Are you positioning the company for an IPO? Are you planning on running the company until you reach retirement age and then turn it over to your children? I have seen many clients that walk in our door because out of the blue someone is interested in buying their business.
A lot of times they receive substantially lower values than they potentially could have due to the fact that the business was not in a condition ripe for sale. Unfortunately, these owners were all-consumed in the day-to-day operation of the company and didn’t take the time to do what was necessary to preserve the value of their company. Contracts with key third parties were expired or didn’t exist, sweetheart exclusive deals they granted to third party suppliers or venders lurk in the background or the owners could not provide a clear written title to inventions, products, technology or trademarks.
In some cases, these issues scuttled potential deals as the buyers were scared off. In these situations, business owners are leaving tens of thousands, if not hundreds of thousands of dollars on the table, because they never took a look at the big picture and never placed an emphasis on growing and protecting the value of the company.
Ultimately, whatever exit strategy you choose, your legal check list will pretty much look the same. The overall goal is to build a company whose intrinsic value or worth is not tied or dependent on the owners or founders of the company. In these companies relationships with third parties are clearly documented. They have identified “crown jewel” assets and have taken steps to protect them as much as possible. The company books and records are in order and are easily understandable. This will allow the business owner to maximize the value of any sale of the business later on or will ensure that a proper foundation is in place for a transfer of power. Some of the things to look at include:
• What are the critical third-party relationships in the business (suppliers, distributors, retailers, consultants, etc.)? Do contracts clearly set forth the relationship?
• Do existing contracts allow for flexibility if business circumstances change?
• Are relationships with key third parties dependent on the owner or the owner’s participation in the company?
• Are agreements with employees in place and designed to protect the value that is created in the company (proprietary information and invention agreements, non-competes, confidentiality agreements)?
• Are processes in place to identify and protect the intellectual assets (Patent, Copyright, Trademark, Trade Secrets) the company creates?
• Is the company in the right form (sole proprietor, partnership, corporation, LLC etc.) for desired goals?
• Have business records been kept in a proper manner and consistent with the form of entity in which the business exists?
Truthfully answering the above questions will help identify areas of a business that may need special attention. Making sure that these areas are addressed and properly dealt with will put business owners in the best position to maximize the value of a company upon exit.
If a business owner fails to do this, all of their hard work may be for naught as they are not able to realize the maximum value of their business.