Owning and selling a business in many ways can be like owning and selling a house. If you have a solid foundation and invest in regular maintenance, you can maximize your asset’s value despite market fluctuations.
A real estate agent – and common sense – will tell you that even a sturdy home needs regular cleaning, lawn care, and paint touchups. It also needs periodic upgrades, like an updated kitchen, more modern bathroom fixtures, and a new roof. Putting off these tasks means two things: The house is less pleasant to inhabit, and when it’s time to move on, you’ll have a lot of work to do and a lot of money to spend to sell at a reasonable price.
As lawyers, we have seen the same lessons in our clients’ businesses. Those who invest in a solid foundation for their business and attend to regular maintenance are more likely to enjoy a smooth operation. And when our clients want to hand the business to partners, staff, a new family generation or an outside buyer, those transitions are easier and often more lucrative when the business is in proper working order.
Here are the business law equivalents to maximizing the value of your home. Investing in these items can pay healthy dividends in the long run. While we most commonly see limited liability companies, the general principles below apply to other corporate structures as well.
Keeping our house analogy, an operating agreement makes up a limited liability company’s foundation and establishes how key issues will be handled. It governs the rights, duties, limitations, qualifications, and relations among the owners and managers of the company.
Operating agreements are also critical because they set out rules by which major decisions – such as purchases of property or a sale of the business itself – are made. Some require a consensus for a small group of owners, while large groups of owners, such as a physicians’ practice, may set out a majority or super-majority rule. Lawyers will tailor these agreements to the needs of the company and advise on what systems tend to work best for different types of organizations.
Key contracts, employees, and IP
Consider these to be your electrical, plumbing and HVAC systems, which you may not think about every day but without which your life or business grinds to a halt.
Supplier and customer contracts are sometimes set up quickly, without a lot of foresight, because one or both parties are just trying to meet an immediate need. Over time, smart businesses update their contracts to make their execution more predictable and, for key suppliers or revenue streams, more long-lasting. This benefits the business tremendously each day of operation, and even more so when the time comes for a sale.
Consider how a potential buyer will value a house after an inspector shows the electrical or plumbing system will need to be replaced in six months. The same will occur during a transaction’s due diligence period, when the buyer’s lawyer or accountant discovers that your most important vendor is working on a month-to-month agreement, meaning their price could rise within 30 days. Asking your lawyer every year or two to review your key agreements can keep them best suited to your long-term future.
There are also employees of your company that are critical to your operation. Ideally, you have built some redundancies so that the business can run well under several different leaders, but your company’s value is tied to a well-trained staff. Again, a lawyer can help you invest smartly in contracts and policies – perhaps a stock incentive plan – that keep your key staff motivated and committed to staying with the company.
Finally, your business likely has some value in intellectual property, or “IP.” This doesn’t have to be a secret formula for your main product, although an IP lawyer should know of anything likely to need solid protection. Your valuable IP could be your company’s name or logo, or a key product or service.
It’s helpful if your lawyer reviews your intellectual property and their protections – federal or state trademarks, for example – to make sure they are up to date. Your attorney may also want to consider any threats to the value of your IP – such as companies that sell products with the same name as your products, or competitors with names similar to your company’s.
Time to sell
Sooner or later, business owners need to move on. At that point, it’s important to estimate the monetary value of your business – whether you are simply giving the keys to your children or selling it to the highest bidder.
Ideally, your operating agreement has set out a method of determining the company’s value. Based on certain industry standards, this could be a multiple of annual revenue or income, an appraisal by an expert, or some other formula. Regardless, establishing a realistic value is important to setting a price for potential buyers and figuring out estate and tax consequences for all parties involved.
Of course, when you sell a house, you probably aren’t including the vase that has been passed down for three generations in the deal. Similarly, if less sentimentally, you need to consider what you are transferring – all of the equity, every asset, or are you keeping anything for yourself? This is where a lawyer can help determine your options. They can also help you make realistic assessments of potential buyers and successors.
Jeffrey S. Hurd is a commercial and regulatory attorney with Ireland Stapleton he can be reached at firstname.lastname@example.org or (970) 822-1310. Sarah H. Abbott is a business, regulatory, and real estate attorney and she can be reached at email@example.com or (970) 822-1306.
What is written here is for general information only and should not be taken as legal advice. If legal advice is needed, please consult an attorney.