Keeping Ahead of the legal side of that eventual transition.
I had such a great time on our podcast this week with good friend and attorney Cleve Clinton. He has a story for very nearly every possible legal situation you could encounter in business transitions. If you haven’t taken the time to listen to it, now is as good a time as any.
So, with that podcast fresh in my mind, I wanted to recap some of the important things business owners should consider, whether you’re planning to transition now or sometime down the road.
Review your Corporate Documents
One of the BIG things that business owners overlook is keeping their corporate records up to date. When the time comes for your business to transition, one of the first things a buyer will look at are your corporate records. If your records are in order, it's very likely that due diligence will go smoothly. If however, your corporate records have not been updated in a number of years, it will cause the buyer to dig deeper and look for other things that have not been done properly.
I am frequently asked if a business really needs a corporate records book. Frankly, in today's world everything can be kept electronically, however it's a good practice to keep and maintain a corporate records book. And, it's important to know the rules governing record keeping for your corporate structure. For example, although typically there are no minutes requirements for LLCs, it's a good practice to keep corporate records anyway.
An easy way to find out the record keeping requirements for your business would be to have a quick conversation with the corporate attorney that set up your business. They will know what is required and how to stay compliant.
Execute Buy-Sell Agreements
If you have more than one shareholder or partner, it is always a good practice to execute buy-sell agreements at the beginning of the business. If you didn’t do that, be sure to take care of it now while things are good. A buy-sell agreement provides an opportunity to address a potential future breakup long in advance. My friend Ladd Hirsch, corporate “divorce attorney,” calls these agreements corporate prenuptial agreements. In case you missed it, here is our podcast on business divorce.
While it may be uncomfortable to address breakup issues at the beginning of the business, it is far easier to set up a “break up agreement” while you're in agreement with your partners or shareholders. That way, if anything happens in the future, perhaps something that was never predicted, you have a method for breaking up the organization. It's just solid business practice.
Have Agreements with Key Employees
It's very likely that any future buyer of your business will need your people to continue to operate without you. If, during due diligence, they uncover a risk that your key employees might walk out post transaction, buyers will likely get cold feet and you will potentially lose your opportunity to sell the business.
That's why it's important to get agreements in place with the key people in your organization. Good key person agreements will address things like confidentiality, non-competition and non-solicitation. They may also include a change of control clause that specifies what happens when the company transitions.
Settle any Outstanding Lawsuits or Disputes
It is so important to have a “clean” business when it's time to transition and that includes having no outstanding lawsuits or disputes. This delays a transition. Of course, the best advice is to avoid having lawsuits at all. However, it is always in your best interest to settle lawsuits or disputes before they get out of control. One of my great friends and corporate attorney David Hammer once told me that lawsuits have nothing to do with right and wrong, so it never pays to argue a moral issue. Do what it takes, get them settled as quickly as possible and get on with your life.
Hire or Rent General Counsel
One of my favorite “value hacks” is to hire a general counsel on retainer. Most good corporate attorneys would be happy to set up a retainer program in order to be available to you at all times and regarding all legal matters.
I paid our GC (general counsel) 10 hours a month, on a “use it or lose it” basis. This allowed me to direct my people to him any time a customer or a vendor presented us with a legal document or agreement. I can't tell you how much this has saved me. I was never shy about sending documents to him or reaching out with other issues. If you don’t have an attorney on retainer, you are taking a risk signing an agreement without getting proper legal advice.
Although it should go without saying, you should never sign a legal document without getting legal advice, because there are terms and language that only attorneys understand. It’s saved me thousands in future disputes by taking this ounce of prevention.
Formalize documentation
If a business owner has an understanding with an employee, a customer or vendor that is only verbal, that “agreement” is open to interpretation on both sides. Many business owners delay putting agreements in writing, but I always say that if it is worth saying, it's worth documenting. While verbal agreement may cause future disputes because one party remembers one thing and the other party remembers something completely different, having it in writing eliminates all confusion on the matter. This applies to employees, customers, and vendors.
So, stop right now, and go do a self assessment of your legal situation. Check each of the items:
Review your Corporate Documentation
Execute Buy-Sell Agreements
Have Agreements with Key Employees
Settle any Outstanding Lawsuits or Disputes
Hire or Rent General Counsel
Formalize Documentation
and if something needs your attention - then get on it!
Addressing your legal issues long before a transition will have more impact on your business value than you think! What are you going to do today - to Maximize Business Value?
And remember, we’re here to help. If we can help you in any way don’t hesitate to reach out!
ABOUT THE AUTHOR: Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.
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