Time to Plan an Exit Strategy

exit planningMany former business owners will tell you that they started to contemplate selling their business only one year before, if at all. Experienced exit planners and strategists explain, however, that since this is a process, it should require 3-5 years of planning in order to do justice to the process and optimize the owner’s chances of receiving the full value of his company.

As anyone who has been involved in this process will testify, there is so much to do in planning for a sale before an owner should approach the marketplace.

Barring any unforeseen circumstances (such as an owner’s death), when is the appropriate time to begin planning to sell your business? Most owners argue that they are too involved in operating the business (even at the CEO level) to begin to think about exit planning, and in any event, they will know when the time is right. They maintain that some event will occur, either within their lives, the industry or the economy, that will send a signal to them. Unfortunately, this is not the most prudent way to approach realizing the full value of something that has taken almost a lifetime to build. All too often, the focus is on keeping it going profitably.

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Earn Out and Escrow Account Provisions: Sellers and Buyers Beware

biz_acquisitionIn the practice area of acquisitions, Sellers and Buyers alike should be careful about earn outs and escrow accounts provisions in their transaction documents. Although each serves a very different purpose, the aftermath of applying these provisions to a particular situation can be time consuming, expensive and unsettling to both sides of the transaction.

What appears clear at the time these clauses are drafted into the final agreement, becomes less certain as facts emerge which form the basis for interpreting these provisions.

Both clauses play a role in each side getting what they feel is the benefit of the bargain. The Seller sees each clause as part of the Purchase Price that he left on the table to be distributed/disbursed to the Seller at a later date. A mere deferral of the purchase price. The Buyer sees each as protection against ultimately paying too much for the acquisition at hand.

Understandably, both sides have good intentions, but as time passes and events occur, even with well-drafted clauses, there is a natural inclination to interpret these provisions very differently, depending upon your side of the transaction.

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The Courageous

In order for an entrepreneur to be in business, it requires certain courage, strength of character, conviction and perseverance. As a business emerges, every day presents an obstacle or challenge, depending upon your perspective. Entrepreneurs almost never view these situations as obstacles, but rather as challenges that drive them to find new and innovative solutions.

Does this mean that they go it alone? Not by a long shot. The best entrepreneurs, who I have had the pleasure of working with in my experience in representing companies over my 38 year career, know how to take advantage of good advice from their various advisors. They realize that no one person has all the answers and that many people have expertise in a particular area that they don’t have.

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Business First

noncompete agreementsSometimes as lawyers we are faced with a dilemma, which goes something like this:

Client: Please review this agreement and make sure that I am protected and will receive the benefit of my bargain. Oh, by the way, although we have had this document for some time, I have been very busy, but we need to sign it today.

Attorney: Absolutely and I will get back to you immediately.
There are a number of provisions that run counter to the deal you had originally explained to me. Some of these provisions carry a significant chance of liability exposure and should be stricken or comprehensively re-written.

Client: Thank you. Here is the contact information of their attorney. Please call him to straighten this out.

After the attorney-to-attorney phone call, the client’s attorney reports back that the other company’s attorney is intractable and will not make the desired changes or even entertain a compromise. The attorney suggests that we have a four-way teleconference to talk through each of these points, and highlight the critical ones and our concerns.

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Preserving Your Company’s Competitive Edge

noncompete contacts Much has been written about non-competition restrictions, including both their pros and cons, and the laws surrounding their enforcement have evolved rapidly. There are, however, a few things basic principles that employers and their advisors should keep in mind when considering this restriction.

It helps to remind ourselves that the restriction isn’t a restriction against competition in general. It is designed however to protect the competitive edge that a company has legitimately created by virtue of a combination of ideas in different spheres of its business, which are unique and known only by those associated with that business. The competitive advantage isn’t necessarily always a high tech invention or a new product, but it could be a new and more effective approach to their market. Companies have spent time, money and human resources in order to research and uncover these unique ideas and/or processes, but suffice to say it is something that is known only by the employees within that company.

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Tech Tax DOA

gov deval patrickAs the events of last week progressed, the Governor of Massachusetts finally decided to go with the flow, and the flow was definitely against implementing the tax on technology services provided by companies doing business within the Commonwealth.

Now the question becomes, will the Massachusetts Legislature take up the charge or will it take a referendum by the people? Already signatures are being collected to assure that the requisite numbers are obtained just in case the Legislature decides to take a wait and see attitude–something it is notorious for.

As a business lawyer, I watch entrepreneurs struggle each day to make their budgets work so that they can bring their service or product to market. This is certainly no small accomplishment in today’s economic times. And yet, the legislative process allows our elected officials to spend without regard to the same principles that govern responsible business practices. With the mere swipe of the pen, they create revenue and engage in spending programs that no prudent businessperson would ever undertake.

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Sales Tax on Technology Services?

mass_tech_taxRecently the Massachusetts legislature enacted a sales tax on the sale of technology services, effective on July 31, 2013. More specifically, the act provides a 6.25% sales tax to “certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or prewritten software.” This tax was enacted to support the override by the legislature to pump $800 million dollars into the transportation system. The rationale behind the override was that the aging and ailing transportation system (i.e. transit service, roads and bridges) was adversely impacting economic growth within the Commonwealth. Apart from the wisdom of enacting such a tax, there are a number of issues surrounding its implementation.

The act is vague and ambiguous as to what services are within its scope; therefore its implementation will be a challenge for the Massachusetts Department of Revenue. The flip side of this is that the targeted technology businesses might not completely understand if their particular service is covered, or how to allocate the tax should their service and product offering be sold as an integrated package.  No one should have to guess at something this critical to the pricing structure of their company. 

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Selling Your Business? Establish a Board of Directors

buyers_see_redI recently attended an event in which the discussion turned to the topic of owners selling their businesses. At one point during the conversation, I introduced the concept of recommending to clients the creation of an independent board of directors as a way to enhance the value of the business in the eyes of prospective purchasers.  Although a myriad of comments ensued, one comment in particular caught my attention (and I am paraphrasing): “That in 20+ years of helping owners sell and buyers acquire companies, they have never encountered a seller that had any board, interested or otherwise, that functioned as a true board of directors.” 

Although I realize that everyone’s experience is unique, I found it incredible that this commentator had never come across a board of directors, other than in name only.  Please don’t misunderstand what I am suggesting.  I certainly believe what he said, but what I found incredible is the pervasiveness of that situation.  As a corporate attorney involved with all phases of a business from its inception to its ultimate transfer, I am constantly advising clients to observe the formalities of the entities that have been set up to insulate their personal assets from third party liability. Within that bucket of “To Do’s” is the establishment of a board of directors that has meetings, telephonically or otherwise, and records and logs its minutes.  The advice goes a long way in providing the umbrella of protection that they have come to expect from the establishment of such an entity.  However, it also serves another purpose, perhaps just as valuable, which is to enhance the value of that company in the eyes of a prospective purchaser.  (Please note, that there are many other reasons for the creation of a board of directors, but describing those is beyond the scope of this blog).  

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Pitching VCs: Getting It Right

Venture-Summit

Recently I attended the New England Venture Summit where approximately 79 emerging and early stage companies made presentations to more than 50 venture capitalists.  The various companies broke down into three primary groupings: Technology, Life Sciences, and CleanTech.

It is always exciting to see what innovations are on the horizon, and this Forum presented a first hand opportunity to get a glimpse of what the future may hold.

This post seeks to highlight for entrepreneurs/innovators an outline of the format of what a presentation for funding to VCs should encompass.

First and foremost, keep your presentation short, simple and concise, but compelling.  Each company at the Summit was given exactly 7 minutes to make their pitch for funding.

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Thinking Ahead: The Future of Small Business

In a previous post, “The M&A World- Now and the Future”, I wrote about the changing economy and its impact on the recent merger and acquisition activity.  If my supposition is correct, then what will be the future of small businesses in America and how will that directly affect the many baby boomer entrepreneurs?

Although it is next to impossible to predict the future course of events (who would ever have foreseen the shift in the auto industry that we have witnessed?), I have suggested that many of these businesses will be shuttered because they will no longer present competitive opportunities in the market and there aren’t a sufficient number of buyers to absorb the overflow of these less profitable companies.

Is this inevitable? No one knows for sure, but unless strategies are put in place to change this dynamic, we could be heading for a shift much like the world of banking and auto dealerships have undergone.

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