EQUINOX Business Law Group - Seattle Bellevue

Exit Planning

September 26, 2007

This posting is really a warning to those of you currently in or entering into business partnerships. I write this because I am currently working with numerous companies with multiple owners either forming or breaking up. At formation, it's easy to believe that certain events will never happen because the business partners have discussed the possibilities. For example, the owners know they will never want to add a third owner nor will either of them ever want to sell to a third party. The logic for this is understandable but creating an agreement that provides structure around how and when various scenarios would kick-in is very important. The reason I say this is because I'm dealing with one breakup where the agreement did not provide for any buyout among the members nor did it provide for a transfer to a third party. Basically, the parties are stuck together unless they can come up with a third party buyer for the entire business or can negotiate a buyout which is not as easy as it sounds in some cases. Another scenario does not allow a party to withdraw from the business without penalties but only allows for the transfer to a third party. If the business isn't saleable, this transferability provision is worthless. Therefore, my recommendation would be to talk through what your plans are for the business and how you expect to exit and then consider what other options might be necessary. For instance, ensuring that one partner isn't stuck with a third party they don't know or like. Regardless of how much thought you put into it, there's always a chance that the agreement won't address the realities of your circumstances. That being said, talking through it and thinking of the possible scenarios makes it more likely to create a smooth exit scenario, whether that scenario is planned or unplanned.

What's an Angel?

September 19, 2007

I'm working with a client to exit a business and the other owner has the option of seeking a third party buyer such as an "angel" to purchase my client's shares. The other owner has been advised by her advisors that she nor the company is a candidate for angel investment because she has no history as an entrepreneur nor the educational credentials to attract such investment. I wanted to comment on this misconception. An "angel" is anyone who is interested in investing in your business. The person may or may not be an acquaintance. It is someone who is making the investment with a view toward obtaining a profit from the investment. That being said, in very early stage companies whose business owners do not have a track record and the management team has limited educational or experiential credentials, angel investors who do not have an emotional or personal connection to the business are virtually impossible to come by. Typically friends and family serve in this capacity and are "angels" with a view for a profit. Otherwise, their investment may be a loan rather than an equity investment. Sometimes a loan is the more prudent way to go for a startup in order to build a track record for the business before going after outside financing. This will enable the owners to retain a larger percentage of ownership because there's less risk to the investors. Don't rule out angel money but understand the best options for your business. Remember that even if your angel is someone personal and very close to you, if that person is taking a stake in the business solely in exchange for the cash they are providing, you must consider whether the State or Federal Securities Laws apply. Be sure to consult an attorney when seeking outside investment for your business.

Planning for Employment

September 12, 2007

I attended a session today on employment law taught by attorney Jill Pugh. One of my primary takeaways was the planning required for making smart employment decisions. This is particularly pertinent to me given that I am currently contemplating various hiring and outsource decisions with respect to expanding my own practice. I have found, as you also may have, that by the time you realize you need someone, you're too busy to plan for it. I talk with all my clients and seminar attendees about employment issues even when they say they don't expect to ever have employees. Business grows and changes, sometimes faster than you expect, and you never know where it will lead you... make sure you're ready before you need to be so you're in a position to make smart hiring decisions. A bad hiring decision will cost you a lot more time than what it takes to do it right the first time.

Business Advisors

September 05, 2007

Most business owners know how important it is to have a strong team of advisors for their businesses -- a banker, an accountant, a lawyer, and possibly a business coach. These relationships are sometimes setup at the outset of the business and sometimes are formed later. Some last for years while others change as the business changes. I have recently run into numerous business owners that have accountants but don't use them for any purpose except for taxes. I spoke with a business owner recently that had been given lots of conflicting information as to whether the businesses heowned should be LLCs or S Corporations. As we talked, the owner felt that his biggest impediment to being able to pay himself a salary was the obscene amount of self employment taxes hewas incurring through the LLC structure. As we talked further, the business owner really didn't have a strong relationship with the accountant he was using and didn't even really know the person's qualifications. The owner felt, after our conversation, that the potential tax savings through an S Corporation made it the right decision -- I begged to differ since we hadn't performed any financial analysis to back that up -- we knew that tax savings were a possibility, not a guarantee. Without an understanding of the financial situation of the business, it's impossible to determine what is driving costs and to effectively plan for the future. Remember, your business advisors are there to advise you not simply to do transactions for you. Use them as a resource to plan and make wise decisions for your business.