Though connotations of the word “legal” may bring images of gavels, robes and juries, your business’s legal considerations are certainly not confined to a courtroom. This subject touches several areas of your company’s functions, regardless of what industry you may operate in or what the function of your business may be. While a great deal of your company’s legal considerations and plans may not originate in a courtroom, there are certain things that you can do to safeguard your company to make sure that they don’t end there.
The top five ways to increase the value of your business through legal considerations are:
1. Make sure your capitalization table is current.
Do you know who the owners of your business are? While this may seem like a dumb question, in some cases, the answer is not an emphatic “yes”! Typically, when a company is getting started, the founders reach out to family and friends (or other angel investors) for capital, and sometimes, they come up with creative ways to repay those investors. Have you ever offered equity in your company to others? Is there someone who may have (or think that he or she has) a verbal agreement or an informal promise for ownership? I have seen multiple cases brought by these kinds of people, and they have won settlements. The worst part is that these people usually surface during or after the process of selling your business, and they can completely derail your plans. It’s best to vet these arrangements and to formalize them to eliminate any future surprises.
2. Protect your intellectual property.
If you have anything proprietary in your business, protect it! Hire the right attorney to follow all the necessary steps to legally secure your rights to intellectual property in the form of trademarks, copyrights, patents, industrial design rights and even trade secrets. Do your research to find an attorney who is well versed and is an expert in intellectual property rights law.
3. Understand and document all contracts, including customer and vendor arrangements and leases.
It is imperative that you have a good grasp of all of the key terms of your major contracts, whether with vendors or customers. These contracts will be under extreme scrutiny in a transaction with potential acquirers and will certainly result in lower valuations if any issues are identified.
If you have any verbal arrangements, it’s in your best interest to formalize the terms and execute a contract. Furthermore, make sure that all of your contracts are assignable and transferable. This may seem like a small provision, but it has a major impact on the valuation of your business. Lastly, all of your contracts should be current. I cannot tell you the number of times our team gets into a transaction, only to find that the key vendor and customer agreements are expired or not transferable, rendering the enterprise value worthless until corrected. In some cases, the issues couldn’t be rectified fast enough to bring the deal back to life.
4. Engage an attorney who understands your particular industry.
Often, business owners engage a general practitioner who is an old family friend. This person could be sufficient in certain cases, but I generally recommend finding an attorney who works almost exclusively in your particular industry because he or she will understand the various nuances that are specific to your business and will also be able to share insights from other clients similar to you. This level of knowledge can be invaluable to you as you operate your business and make critical decisions.
5. Settle any outstanding lawsuits.
This point is self-explanatory! Any cases, claims or assessments against the company will cast a shadow of doubt to the acquirer. It’s best to resolve these matters as quickly as possible to avoid a devaluation of the business and to hedge the risk of uncertainty.
Access the other pieces in this series:
Giving attention to your business’s legal matters can save you significant time, money and grief in the future, while adding value to your current position.
Hanny Akl is a Member of Warren Averett and leads the Firm’s Transaction Advisory Services practice, which focuses both on buy-side and sell-side transactions along with advising owners on creating value within their businesses. Click here to contact him directly.