Your Legal Situation is the Eighth Step to a Higher Valuation
Updated: Oct 7, 2020
The legal ramifications of a transition or transaction is important and often complicated. This Article highlights those legal issues that you should consider such as Intellectual Property, implementing a Board of Directors and an Employee Handbook. Having these in place will protect growth, accelerate value and sustainability of your business.
This is the ninth in a series of nine articles that follow a business owner, John. He is taking action to increase the value of his company before transitioning or selling it and moving into retirement. In the first article, he learned that Tom—who owns a similar business—had sold it for a much higher price than John was told his company was worth. In the subsequent articles, John discovered the importance of having a business plan, what it should include, and how strong leadership, people, operations and finance drive the value of a business.
Business Value Enhancement 101
Value drivers affect either the earnings or the worth of an operation. Being in business is about making a profit and creating sustainable transferable value.
Value isn’t always about the numbers. Environmental and qualitative value drivers have a dramatic effect on a company and its ability to grow. Knowing what creates—and destroys—value helps owners and managers make better day-to-day decisions. That also allows them to build increasing a company’s value into its culture.
The place to begin is a detailed discussion about the quality of the organization. This should include the owner, management team and advisor. At Birkdale, we use the results in our Deep Discovery and an Enterprise Value Assessment and the Value Enhancement Process. An initial conversation broadly examines the eight main value drivers:
Planning
Marketing
Leadership
Operations
People
Finance
Sales
Legal
In working with his business advisor to take an in-depth look at each area, John moved to the eighth category: legal.
Are There Hidden Assets with Value?
Over the years, John and his people developed many products, marketing ideas, unique product names, and other intangible assets. All of these were used consistently in the normal course of business. However, none of this intangible property (IP) was reflected on the balance sheet and little had been done to protect it. John and his advisor determined there might be some value to these assets, so this was worth a closer look.
Patents, trademarks and copyrights are the usual focus of most companies. However, other intangibles can have a very real impact on a company’s success and value. These include slogans, specially designed characters, packaging designs, trade secrets and formulas, proprietary sales methods, a well-trained staff, customer lists, and training programs.
In addition, John had never considered if any of his business activities could be capitalized on to generate additional recurring revenue: through licensing or commercialization. This would increase profit margins and the company’s ultimate value.
John now understood that he needed to become more aware of the value of his IP. Only then could he ensure it was 1) protected, and 2) leveraged to add the most value to his business and enhance its competitive advantage. That’s when his advisor suggested doing IP and technology audits.
Intellectual property audits are typically conducted by an attorney, or a firm with knowledge of IP and valuation matters. They offer these benefits:
Determine what IP is owned. Often business owners don’t know what they have, so the first step is to uncover this.
Preserve and enhance the value of existing IP. Federal and state laws govern protection for trademarks, trade secrets and copyrightable materials. Companies can unknowingly make mistakes and jeopardize this. An audit spells out actions to avoid these problems.
Identify new opportunities to profit from IP. A clear picture of their IP allows business owners, innovators and marketing departments to develop, license and capitalize on it.
Identify roadblocks and prevent costly disputes. An audit can highlight possible problems—with others infringing on a business’ IP or vice versa—and create plans to resolve or avoid these issues.
Facilitate and optimize business transactions. Once owners understand the estimated value of their IP assets, they are better prepared to make smarter decisions on opportunities such as a sale, financing, expansion, and new revenue sources through licensing.
John was now aware of how IP could increase the value of his company. He asked his advisor to help him prepare for an audit. This would allow his company to develop a system to manage and maintain its IP, which could lead to significant returns on the investment of time and money.
How Employee Handbooks Add Value
Like many business owners, John viewed employee handbooks as a necessary evil: something with little value that possibly even encourages bad behaviors.
A discussion with his advisor revealed handbooks can be used as a tool to make the organization more successful:
Fewer employee complaints because people are treated consistently across the company
Higher morale because supportive language promotes respect
Clear boundaries that reduce micromanagement and increase productivity
Employee behaviors are aligned with company goals
To achieve this, the handbook must be clearly written, making the company’s policies and procedures easy to understand. It should focus on the desired outcomes and give examples of how to achieve these. In addition, it needs to provide standards and expectations, and explain who will judge the outcomes.
The mere existence of a handbook isn’t enough: the way it’s used will determine its success. This means management has to support the policies and decisions across the organization. They must hold employees accountable for their conduct. If the handbook is consistently applied and enforced, it also can help to defend an employer from potential liability.
John and his advisor decided to hire a human resources specialist or organizational psychologist to write the handbook, as well as an implementation plan. Then they would have a legal specialist should review it, to make sure the handbook complied with federal and state laws.
Board of Directors versus Board of Advisors
For many years, John relied on the advice of his accountants, attorney, insurance agent and others to help run his company. He and his advisor discussed whether or not it made sense to establish a board of directors or board of advisors.
John saw the value of an independent viewpoint, in addition to his advisor. He wanted counsel from others who were at a higher level, to help him with the process of enhancing the value of his business. John’s expected a board to provide insight into business and marketplace trends, make strategic introductions, suggest alliances, and hold him and his management accountable.
With this in mind, his advisor explained the differences between the two types of boards.
Board of Directors:
Manage the CEO and formally approve all key company decisions
Support the vision and protect the interests of the organization and shareholders
Often an odd number (five to seven people) with no business ties to the company
Directors bring real value, such as experience in the industry, a special skill set or expertise and provide usable deliverables
If members have a financial interest in the company, their voting rights match their ownership, as set by the by-laws
Typically paid to attend meetings and reimbursed for travel expenses
Have a legal duty to the company and can be found liable if mistakes are made, so require directors and officer’s insurance
Board of Advisors:
Less formal and usually comprised of mentors with specific industry knowledge
The priority is to advise and assist the CEO and top managers
Size doesn’t matter, so there can be as many as necessary to help grow the business and achieve results
Possess specific skills that are missing in the organization and there to adjust the thinking of the CEO and executive management
Typically receive lower compensation for attending meetings and sometimes forego meeting attendance fees and expenses for a small equity stake
With limited exceptions, can’t be found liable for mistakes and insurance is unnecessary
John decided that the less formal board of advisors met his current needs. He and his advisor would start the process by taking a look at the gaps in his management team’s knowledge and experience and begin identifying the types of mentors that could benefit his company.
This legal discussion was very instructive for John. He now had a plan to start making the most of his IP, clarifying the expectations for employees, and benefiting from mentors to help build his business. All of these actions would help to meet the overall objective to achieve long- and short-term goals and reduce company specific risk.
By Barry Goodman CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners
Copyright: Cannot be Reused without Author’s Permission
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning and/or not recognizing what needs to be added, corrected or modified before then.
Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and at the conclusion of an engagement.
For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or contact us.
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