EQUINOX Business Law Group - Seattle Bellevue

Building Value Into Your Business: Wrap Up

July 31, 2009

We made it through our first Equinox Focus month, sharing how you can build value into your business. As part of this new Equinox Focus programming, we implemented a number of new tools to help us communicate with you: a newsletter, guest blog postings, regular Facebook and Twitter updates, and our Equinox Focus event. These tools allowed us to share, in addition to our legal perspective, valuable insights from colleagues in accounting, intellectual property and financial planning on different ways to think about business value, and what you can actively do to increase it. Forming an advisory board, protecting intellectual property and monitoring how dependent you are on certain customers or vendors are a few nuggets offered. If you missed any of these postings, take a look back at our July blog posts. You don't want to miss this information!

We hope that we were able to help you gain a deeper understanding of how you can affect the value of your business and look forward to kicking off our August Equinox Focus programming on "Social Media: Strategy and Brand Identity."

If you have topics you'd like to propose for an Equinox Focus or feedback on our communications with you, please email us.

Increasing Business Value with Advisory Boards

July 30, 2009

Our guest blog post today comes from Corey Hansen of Morgan Stanley Smith Barney.

--------------------------

Why should a business use an advisory board?

Advisory boards can be a great tool for some businesses to accomplish two things.
The first is that it can be helpful to have people with more diverse experience give the owner and their management team feedback and advice, primarily on how to deal with important issues of growing the company. They can also help with more short-term issues but this should be limited or dealt with one-on-one at another time. The primary goal is to get your advisors together in one place so they can hear the advice you are getting from the others and either agree or disagree and say why. This discussion often leads to unexpected benefits and without it there can be conflicting advice, without much basis to understand the recommendation. This can lead to confusion, which is the killer of good decisions.

Second, it is a good idea to have individuals associated with the business who have different contacts and backgrounds than the owner. Unless the owner is a successful serial entrepreneur, a growing business will sooner or later outstrip the owners experience and resources. A good advisory board can help with both. Also, the increased credibility with prospective lenders, investors, vendors, and customers is invaluable. A great board member is someone who can make a call on behalf of the business or owner and get an introduction to whoever can help get what is needed.

How to set up the board and find the right people?

This is the classic question and many people start off by talking about family and friends they know with business experience. I tend to avoid family and friends as advisors as it can be hard for them to give critical advice when it is needed. Besides, it is easier to find a good advisor than to repair a damaged family relationship. One way to find prospective board members is for the owner to ask their network to pass on an email invitation to other people.

Particularly during the early stages a source of prospective advisory board members are the experts at the Small Business Development Centers and SCORE. These organizations are local and give free and confidential assistance either as prospective advisory board members, or as a resource to recruit board members. Other resources are local business associations, economic development organizations, and online business networks such as Linkedin.com.
One of the key factors to look for in board members is not their industry experience necessarily, but rather their experience with growing a for-profit business at the level you are trying to achieve over the next five years. Two or three people are usually a good start for your board, and preferably about five to eight for an established growing business. It is usually better to get the advice of a few people than the opinions of many.

----------------------------
Corey Hansen is a licensed advisor whose practice is focused on private-owned businesses and professionals. Corey was a certified business advisor with the Washington Small Business Development Centers and worked with over a thousand businesses on accelerating managed revenue growth and profitability. While at the SBDC, his top clients were named to the prestigious Inc 500 and numerous other awards. A former business owner in the US and New Zealand, he is also a co-author of the book, “Best Practices of High Performance Entrepreneurs: Transform Your Business from High Potential to High Performance” (2007) and co-founder of Hot100business.com.

At Central Washington University, he graduated at the top of his class in business and later completed a graduate degree in Organizational Development, focusing on entrepreneurship and high-performance growth organizations.

Personal Liablity of Managers or Owners for Unpaid Wages

Recent cases have found that senior executives of an employer company can be liable for unpaid wages even when the employer company files for bankruptcy. Courts (including Ninth Circuit in Boucher v. Shaw and the Washington State Supreme Court in Morgan v. Kingen) have classified the senior executives as the "employer" and thus liable. This concept flies in the face of traditional thought that officers, managers, and owners of a company are insulated from the liabilities of the company. Where wages and taxes are concerned, be very cautious. If your business is struggling, ensure you talk with a bankruptcy attorney early on to understand your rights and obligations with respect to all debts and to prioritize which obligations will be paid first.

An Intellectual Property Perspective on Value

July 26, 2009

Today's blog post is by guest blogger Jim Ruttler, a Seattle-based intellectual property attorney and founder of Ruttler and Long PLLC.

--------------------------------------------

There are four primary steps to protecting intellectual property in a business.

The first is to identify whether you have any intellectual property to protect. There are trademarks for product/service identifiers, design patents for ornamental product designs, utility patents for functional inventions, and copyrights for creative works. Typically, every business has a name, logo, or slogan that is important in identifying their products or services and distinguishing those products or services from others. These are the typical trademarks, but trademarks can also include colors, product shapes, sounds, smells, and anything else that indicates the source of products or services in the eyes of consumers. Utility patents are the traditional patent that most individuals are aware of as they are often associated with consumer goods, software applications, and mixtures. Similarly, most people are familiar with copyrights and their applicability to writings, paintings, music, movies, and other creative works. However, design patents are often overlooked. Design patents overlap trademarks, utility patents, and copyrights and are applicable to ornamental designs of existing products, such as new artistic bottle shapes, sunglasses, or even golf club heads.

Once your intellectual property rights are identified, you’ll need to make sure you actually own those intellectual property rights. The default rules are that trademarks are owned by the entity using the mark, patents are owned by the individual who conceived of the invention, and copyrights are owned by the individual who created the work of art. These default rules apply unless there is some exception, such as an assignment agreement or some other legal doctrine like Work-For-Hire. If the default rules apply and there isn’t an exception, it will be necessary to acquire those intellectual property rights.

Third, once IP is identified and rights are confirmed, it is necessary to formally register those rights. Patents require registration for protection of an invention, with a limited exception for trade secrets, and there are strict time windows for filing for patent protection. The process generally takes at least a year and is relatively expensive, but the rewards can be exceptional for deterrence and attracting investors. Trademarks don’t actually require registration for protection, but failing to register a mark that is important is extremely risky. The advantages to registration include presumptions of ownership and validity, nationwide priority in a mark, and the availability of a mark on a central database to notify others of your rights. Copyrights also do not technically require registration, but you can’t enforce your copyright unless there is registration and your damages are severely curtailed while the copyright is unregistered.

Lastly, once registration is accomplished, it is necessary to monitor the market for potential infringers and immediately address that infringement. Catching infringement early as the greatest potential for avoiding costly disputes given that it is relatively easy for new businesses to change course. Also, new businesses don’t usually have money laying around for engaging in lawsuits.

This is a high level summary of best practices, but it should assist you with providing a framework for having a meaningful conversation with your attorney and maximizing the value of your intellectual property.

More Ways to Build Business Value

July 23, 2009

The Equinox Focus event yesterday on "Building Value Into Your Business" with Thoughtshot Consulting was an overwhelming success. We discussed what audiences value your business, the assets in your business that have value (physical, intellectual, relationship, and process), and how to protect each.

This morning, I attended the monthly breakfast roundtable for the Center for Advanced Manufacturing Puget Sound (CAMPS) where the topic was "The Value of Certifications." The program centered on whether formal certifications such as ISO 9000/14000 for manufacturers are valuable for a business. Generally, businesses embark on certification processes for marketing or sales purposes -- a particular vendor or customer requires certification in order to continue working with a company or it helps bring business in the door. What the businesses find, though, as they take on the certification process, is that the rigor of analyzing and documenting company processes saves them substantially more in time and money. The return on investment is leaps and bounds beyond just the one customer or vendor they were focused on. It actually saves them money. One CAMPS member pointed out that the ISO 14000, which deals with environmental impact, brought forward opportunities for cost savings they wouldn't have thought of previously such as how much waste is generated by the business.

As we discussed yesterday, process is a critical component of value in a business and certifications often place some rigor around process creation and documentation that didn't exist before. If the business doesn't have processes that can be transferred, it's value to a buyer is limited because the business activities cannot be replicated. This is why people pay for franchises - it's what we call "turn key" - and what you should be striving for, too!

Our final two blog posts of the Building Value Into Your Business month will be from guest bloggers.

A Financial and Valuation Perspective on Building Value

July 16, 2009

Today's post is from guest blogger CJ Mitchell of Berntson Porter & Company PLLC's Business Valuation and Transition Services Group.
------------------------------------------------------
The value of any business is a function of three variables: available cash flow to investors (derived from an earnings stream), expected future growth of the available cash flow to investors (what will happen to the earnings stream in the future), and the perceived risk of the investment (a discount rate translated into a percentage). Each variable impacts the value of the business and is highly subjective, resulting in different values for the same company depending on how an investor perceives that company. For example, an acquiring company may be able to reduce staff levels and eliminate other redundant expenses, which would result in additional cash flow to investors. All things being equal, this would result in a higher perceived value.

The purpose of the above example is to illustrate that a business owner can increase the value of its business by increasing either the available cash flow to investors, its future growth prospects, or by reducing the perceived risk of the business. Today, I am focusing on how business owners can minimize the perceived risk of their business to build value.

1. Management Team – Is there an experienced management team or key employees in place? Investors want seasoned, management level employees to maintain the day to day operations after an acquisition. This is a crucial factor during the sale process as it can be lengthy and emotional and any distractions from daily operations could impact the offer price and/or terms.

2. Financial Statements – Working capital and debt levels should be within industry norms or better. Financial statements (audited and reviewed) and tax returns prepared by independent CPAs provide more credence than internally generated statements.
Internal Controls – What policies and procedures are in place to safeguard company assets?
Customer and Vendor Contracts – Long-term contracts minimize future uncertainty and allows for better management planning.

3. Diversity in Customers, Suppliers, and Geography – Similar to diversifying an investment portfolio, businesses that diversify in terms of stakeholders or geography minimize the risk that a single customer, vendor, or locale can depress the earnings capability of the business.

Although the above list is not all-inclusive, it touches on important aspects that investors would consider in determining the value of a business.

CJ Mitchell, CPA/ABV, CVA, MBA works for Berntson Porter & Company, PLLC, a full-service CPA firm in Bellevue, Washington. He is a manager in the Business Valuation and Transition Services department, and he serves as the Chairperson for the WSCPA Business Valuation and Litigation Services Committee. He can be reached at 425-454-7990 or cjmitchell@bpcpa.com.

Creating Business Value

July 06, 2009

In owning a business, you have taken responsibility for an entity, a "person," separate from yourself. On a daily basis, you make decisions, both operational and strategic, on behalf of the entity with goals of increasing revenues and serving your customers well. The goals you pursue are a means of creating value in the business. The value, though, does not only arise from the cash generated by the business; but also from the care and protection of the business' assets. Just as your own person requires physical, intellectual and spiritual growth and protection, so does your business. The growth and protection you provide to your business creates a body of assets that, viewed together, have value that can be transferred when you are no longer a part of that business.

Decisions in your business will center around growing and protecting the physical assets, the intangible assets, and the business' relationships. Here's an idea of how each can be leveraged to build value into your business:

Physical Assets. Physical assets such as equipment and inventory are the easiest assets to understand. They are tangible and can easily be transferred. Managing these assets for long-term durability and safekeeping through insurance protects them and helps them retain value. Physical assets also have cash flow and tax implications which can contribute value to the business if managed correctly.

Intangible Assets. Intangible assets such as the business' trade names, reputation, and intellectual property are uniquely valuable. Because intangible assets are inextricably linked to the company itself and to no other company, they are immensely valuable. Intangible assets, such as trademarks, copyrights, patents, trade secrets and customer lists, though, are only valuable when are protected properly. Formal registration processes and protective covenants in contracts are critical to maintaining and growing the value of intangibles.

Relationships. Relationships in business create value, especially where the relationships are unique and protected by contracts. If your business has secured a key vendor, customer, or employee in an exclusive contract, that relationship has value that can be transferred as an asset of the business. The more secure the relationship, the greater the value.

Decisions you make as the steward of your business entity, separate from yourself, are important to developing these assets into a package of value that will pay off when you are no longer in the business. Remember, as Michael Gerber, author of "The E-Myth" states: "The entrepreneur builds an enterprise; the technician builds a job." You're out to build an enterprise -- an enterprise that ultimately rewards you for your careful care, protection and investment in its future.

July Equinox Focus - Growing Value Into Your Business

July 02, 2009

July kicks off our first Equinox Focus month discussing how to grow value into your business. This comes across to many as a strange concept - growing value into the business? Every decision you make as an entrepreneur or business owner impacts the value of your business. Each asset of your business should be considered with a view toward building something of worth to transfer to future generations upon the sale or transfer of the business, making more cash available for the business owners as they exit, which is ultimately the point!

This month, we'll discuss, through our blog postings by expert guests, our newsletter, and July 22nd presentation, how to grow value into your business by paying special attention to how each asset of your business, including physical assets (equipment, inventory) and intangible assets (intellectual property, customers, employees), is held and managed by the business.

We look forward to providing you with counsel on this topic from Equinox and other experts in the field throughout the month!