Recently in Business Transactions Category

5 Common Legal Mistakes Business Owners Make

October 10, 2014,

As much as you may want to avoid litigation when it comes to your business, conflicts arise and are sometimes unavoidable as a cost of running a successful business. While you and your business partners may have other philosophies on handling workplace issues, sometimes litigation is the best course of action to deal with messy company separations, distribution of assets, protecting your property, and sometimes even handling suppliers and consumers.
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As a business owner involved in litigation, you don't need to resort to spending years in litigation or paying unreasonable settlement sums; you need to build strategies with a business lawyer so you can resolve conflicts efficiently and effectively, and maximize your ability to avoid future disputes. When litigation is initiated, it is important that it is done right to avoid unnecessary mistakes that waste all parties' time and money.

Here are 5 common legal mistakes business owners can make when stepping into legal territory, and how to avoid them.

1. Not Taking the Lawsuit Seriously. If you know you haven't done anything wrong, it can be tempting to avoid hiring a lawyer at all. Developing a strategy, finding and interviewing witnesses, and getting paperwork in order can all be costly to your business if not done properly. To ensure you can keep your full attention on business operations during the lawsuit, hire a litigation attorney who specializes in helping business owners.

2. Not Considering Other Options. Sometimes in sticky litigation battles, one or either party may be too eager to settle before taking full stock of all assets at stake. Mediation and arbitration may also be other options to consider before going to court to save money on fees and avoid long delays.

3. Making Decisions Based on Emotions.
Being involved in litigation can be a highly emotional experience, and it can get very difficult to make important decisions that will affect your business. Instead of making impaired decisions based on your emotions, work with a business litigation attorney to come up with a strategic plan based on a cost-benefit analysis. Remember that the dispute is business related, and not personal.

4. Keeping Information from your Lawyer. Your lawyer is there to help you navigate the process, so it's imperative that you keep your lawyer apprised of all relevant information. Sometimes it may be overwhelming and frightening to present the "bad facts" to your lawyer, but hiding facts can seriously impact your chances of success in settlement discussions or in court.

5. Using the Wrong Lawyer. Be sure to do your research when it comes to finding a lawyer that specializes in the type of dispute you are a part of. The right lawyer will be able to provide you with objective advice that is best suited toward your business. Business can be extremely personal so it can be easy to overlook pertinent facts. To avoid clouded judgment and conquer inflexibility, always consult legal counsel to ensure your best chances of success. If you need advice or assistance on how to proceed, contact your team at Structure Law Group.

About Structure Law Group
Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Pros and Cons of a C Corporation vs. an S Corporation

September 19, 2014,

Pros and Cons of a C Corporation vs. an S Corporation

Selecting a business entity is one of the most important decisions an entrepreneur faces. There are numerous options including sole proprietorships, partnerships, limited liability companies and corporations. To make things even more complicated, there are two primary types of corporations, each with its own benefits. In order to ensure you choose the best business entity for your purposes, you should always conduct careful research and consult with an experienced California business attorney to discuss your options.

Once you have decided you want to incorporate, your options are to form a regular C Corporation or an S Corporation. Though these two types of corporations are quite similar, there are a few key differences that can determine which one is right for your business.
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3 Similarities between S & C Corporations
The following are a few ways that an S Corporation and C Corporation are alike:

1. Both types of corporations are owned by the shareholders, who have protections from liability for business debts and most business-related legal matters.
2. Both are structured the same way: the shareholder/owners elect a board of directors that oversees major issues. The board of directors then elects officers, who handle the day-to-day operations of the business.
3. Both must comply with state law regarding document filings, fees, bylaw and more.

Differences Between S Corporations and C Corporations

The most important difference between an S Corporation and C Corporation is the way that they are taxed. In both cases, shareholders pay taxes on dividends of any distributions of profits. A C Corporation, however, may also be taxed on the corporate level, which means it may be subject to double taxation. On the other hand, the taxes for an S Corporation all pass-through to the shareholders, so there is only single taxation. This pass-through taxation is authorized by IRS Code, Subchapter S of Chapter 1.

Though the single taxation of an S Corporation likely sounds preferable, the S Corporation entity is not an option for every business. Another difference between the two is that, while a C Corporation can be quite large and have numerous shareholders, an S Corporation may only have a maximum of 100 shareholders. In fact, the IRS created Subchapter S in part to encourage small businesses and entrepreneurship. Therefore, the size of your business may play a significant role in the type of corporate entity you choose.

If you have any questions about C Corporations, S Corporations, or other business entities, do not hesitate to contact an experienced attorney at the Structure Law Group for assistance today.

About Structure Law Group
Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Closing a Business Transaction is A Lot Like Riding a Mountain Bike

June 10, 2013,

As a business and M&A lawyer in San Jose, it is not uncommon for me to burn the midnight oil hammering out a deal for a Silicon Valley client. There is often a need to break from the perpetually connected life to recharge the lithium cells, so to speak. On a recent bike ride in Santa Clara on the local single track, it occurred to me that the life of a deal can be contained in a single mountain bike ride.

A ride starts with the first drop of a pedal. Any deal starts with the first realization that two people or groups can get together and construct a process that will create value for both of them. Whether it is a simple software license, or a complex strategic alliance and funding deal, it is that first pedal that moves everything forward.

Whether you are involved in a transaction deal or a single track mountain bike ride, you need the right tools to make it all work. For a lawyer, it is the years of learning that just begin after you leave law school. The late nights wrestling with creating a structure that will reduce risks and the time spent attending or teaching professional seminars all contribute to the base of knowledge that comes to bear in every transaction. Making sure your tires fit the trail and your derailleur is adjusted and chain oiled can make the difference between a ride and an ordeal.

Both deals and rides can vary in how they start. Sometimes, you are thrown right into the negotiations, having just met the client minutes before, like the ride that starts with a pounding incline over gravel and sharp rock. Other times, there are in depth discussions over goals and approaches, like the trail that starts level and smooth through redwood shade.

Then, there is the slog. I ride in the mountains, and it is very typical for rides to start uphill, and end downhill. Cranking slowly up a ponderous grade is not glamorous, but is critical to getting to your goal. Even a business deal built on insightful strategy needs implementation, and it is the late nights and weekends, slogging through reams of documentation and often mind-numbing minutiae that lead to success. It is sweaty ponderous work, but somebody has got to do it.

The home stretch is where things can get, shall we say, interesting. In mountain biking, the downhill is where skill is required to keep bike and body together. Any mountain biker will tell you about their last "endo," so named because your body has just gone "end over" the handle bars. Road rash and cracked ribs are the usual result. In deals, it is the same. At some point, some new fact or number is looked at just a little bit differently, or a recalcitrant stockholder will not cooperate, or a delayed negotiation on a major issue leads to stalemate, or a lawsuit from left field hits, and you have received the legal equivalent of a body slam. Although the first few minutes may feel like it is the end of the world, most times you pick yourself up, assess the damage, figure out the fix (time to replace the rear derailleur drop out or buy out that difficult stockholder) and continue on your way. In rare circumstances (like you just snapped your collar bone or the Federal Trade Commission will not approve your deal), you lick your wounds and try again another way on another day. But this is rare.

There is an old lyric that goes "... you better watch your speed, trouble ahead trouble behind, don't you know that notion just crossed my mind". All parties to a deal want it done yesterday, and the business case for doing so can be convincing. Going too fast on a mountain bike, however, can lead to the dreaded endo, and a whole other parade of orthopedic and epidermal horribles. In a business deal, it can be worse. The Time Warner AOL acquisition was rumored to have been negotiated and signed under a very compressed time schedule, and is taught in business schools as one of the worst mergers in American history. Go fast, but be deliberate and do it right.

Everyone will tell you that deals are not a sprint. In any ride, you need to make sure your energy stays fueled, or you will "bonk", hit the wall, run out of gas, or hit countless other metaphors that mean you've just come to a full and complete stop. In a transaction, we call it deal fatigue. Bringing up countless new issues as a deal gets closer to close, experiencing unexpected delays, or a thousand other things, can kill a deal as fast as any bonk. The cure: deal with it upfront. Before a ride I slam a peanut butter sandwich (whole grain bread, thank you very much). Before a deal, the more I know about the parties, their business, motivation, experience and interests, and the more I know about getting done the type of deal in which I am involved, the less chance my transaction will bonk.

I could go on, but the last conference call just ended, the next turn of the agreement went out the door, and it is time to go spin the local single track.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Your Company Has Just Signed an Acquisition Agreement - Now What?

August 6, 2012,

As a Silicon Valley corporate attorney who often represents the selling company in mergers and acquisitions, I know that a huge amount of effort goes into signing an acquisition agreement. As I have discussed in past blogs, issues from earnouts to preparing exceptions schedules will have turned into countless hours of negotiations, documentation, and late night telephone calls for both the seller and the acquiring company and their corporate lawyers. In the end, the agreement is signed and everyone gets some well-needed sleep, only to wake up to the final sprint to closing.

In this blog, I will discuss what happens when a deal does not close simultaneously with the signing of the acquisition agreement. Similar to a contract for buying a house, many merger and acquisition deals require the buyer and seller to sign an agreement, and then perform additional items before the final closing.

At the same time as the deal team pours over the necessary closing tasks, there is still a business to run. Even though the seller remains in control of the business, the buyer wants to make sure it eventually acquires a company that is in good working order. For this reason, commitments are designed to guide business operations pending the closing.

Many aspects of the "operational covenants," as they are sometimes called, are fairly standard. Material actions, such as entering into major contracts or making substantial capital expenditures, are called out as matters requiring the buyer's consent before proceeding. The parties will negotiate the thresholds that are required for materiality and will typically allow exceptions for activities in the ordinary course of business.

In addition to the operational issues, there are a number of deal-oriented provisions. The first is our old friend the no-shop provision, explained in a prior blog ("Merger and Acquisition Letters of Intent - Binding the Nonbinding," May 30, 2011). These provisions may become more involved than those in a letter of intent, and arguments revolve around, among other things, exceptions for unsolicited offers which a board believes must be accepted to satisfy its fiduciary duties, and the length of time the no-shop restriction will exist.

A buyer will typically want to continue to have access to the seller's books and records. Once the deal is signed, the desire of the buyer to speak directly with the seller's employees and customers increases. Sellers are reticent to allow a buyer to speak directly with the seller's material customers, even if the deal has been publicly announced. To the extent the buyer needs to speak with the seller's customers, the specific customers to whom the buyer can speak are usually specifically negotiated. The buyer will also want to speak directly with the seller's key employees. Negotiations often focus on the buyer's ability to terminate the transaction if certain key employees do not continue with the business.

A key aspect of deal-oriented provisions is the parties' commitments to secure the necessary stockholder and regulatory approvals. As part of the stockholder approval process, the buyer will usually require that the seller's Board of Directors unanimously recommend stockholder approval. Often, voting agreements are signed as part of the acquisition agreement signing to lock-up the votes of the major stockholders.

Regulatory approvals can run the gamut from simple bulk sales notices and escrows (for small, asset-based transactions), to Premerger Notifications to the Federal Trade Commission and Department of Justice (for multi-million dollar acquisitions). Timing issues on these matters need to be considered carefully, due to the need to prepare necessary filings and provide appropriate notice.

A critical post-signing activity is the Seller's need to secure consents to the transaction from important suppliers and customers. Often, a seller's material contracts will contain provisions that require the other party to approve a transaction to prevent the contract from being breached. Securing this consent can be a quick formality, or a delay ridden nightmare. It is very important for the seller to determine which contracts require the approval of the other party to the contract, and the process, and time required, to secure the necessary approval. The best approach is for the seller to review all of its materials agreements even before the deal starts, so that the approval process can begin very quickly after the acquisition agreement is signed.

Although signing an acquisition agreement is a giant step forward in any transaction, there can be a number of tasks ahead that must be handled very carefully to ensure the long sought closing actually will occur. An experienced team is essential in this regard

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.

Risky Representations - Part 2

February 13, 2012,

As a merger and acquisition lawyer in Silicon Valley, I have been involved in numerous business transactions, from small startups transferring their technologies after getting acquired by other companies, to medium-sized and larger technology and pharmaceutical companies going public. With Facebook's impending IPO, many companies in San Jose, Sunnyvale, Santa Clara and Mountain View are expecting another technology boom. A company hoping to take advantage of the imminent dot-com boom and sell its business should make sure its books are in order and hire a good M&A attorney to prepare an acquisition agreement.

As discussed in my last blog, a seller will often make a number of commitments to a buyer concerning the seller's business. These commitments, known as representations and warranties, allocate between the buyer and seller many of the risks existing in the seller's business.

One of the most important documents accompanying the representations and warranties is a schedule that describes certain items requested to be disclosed, and any exceptions to the content of the representations and warranties. This document, which goes by "Schedule of Exceptions" or "Disclosure Schedule," is really a description of the main documents and key agreements of the seller, and disclosures of material facts concerning the buyer and its operations. It can often take as much time to prepare and negotiate as the acquisition agreement itself. There are a number of things the seller can do to help expedite the preparation of this document.

First, keep good corporate records. As I discussed in my blog on due diligence, organizing the seller's major documents, and making sure they are readily available, will considerably reduce the time to close the transaction.

Second, appoint someone who has intimate knowledge of the seller and its operations to assist in gathering requested documentation and answer the inevitable questions. Typically, the company's chief financial officer or controller will fill this role.

Third, get all of the documents to the company's attorney as soon as possible. The lawyers will need to review the documents and decide what types of schedules and disclosures will be required. This is a very time consuming process.

Fourth, discuss early on any areas where the company thinks a buyer might be concerned. This is not a time to sweep difficult issues under the rug, but a time to get them out in the open. There is nothing worse than being blind-sided at the last minute with the proverbial skeleton in the closet. Worse, failing to disclose difficult issues known to management can lead to a fraud claim, a claim for which the seller's liability is never limited. Areas that raise concerns include any transactions between the seller and any of its insiders, litigation and threats of litigation, and accounting irregularities.

Fifth, start preparing the Disclosure Schedule as soon as possible. Attorneys that are experienced in acquisition transactions are aware of the likely representations that will be requested, and can start organizing and preparing the substance of the Disclosure Schedule even before the acquisition agreement is distributed. Delivering a completed Disclosure Schedule to buyer's counsel sooner rather than later will surface any issues so they can be resolved in a timely manner.

Sixth, review the Disclosure Schedule with your attorney to determine if any issues exist that will delay closing. There are two major areas that need to be reviewed. The first is the approval that is required for the transaction to proceed. Almost always, this will involve approval by the board of directors and the shareholders of the Company. It may require preparation and delivery of a separate disclosure document to the shareholders to assist them in determining whether to approve the transaction. The second is the existence of any material agreements, desired by the buyer to operate the business, that require approval of the other party in order to close the transaction.

Continue reading "Risky Representations - Part 2" »

Risky Representations - Part 1

February 6, 2012,

Those endless representations and warranties in your acquisition agreement aren't just for your merger and acquisition lawyer. Ignore them at your own risk.

Mergers and acquisitions in San Jose and elsewhere are a lot more complex than those of the past when deals were closed with a handshake. As acquisition documentation becomes more extensive, companies frequently turn to mergers and acquisitions attorneys to assist them with their transactions. One issue on which an attorney will focus deals with the representations and warranties of a seller.

A seller's representations and warranties, which are the commitments that a seller will make to a buyer concerning the state of the seller's business, make up one of the more extensive sections of an acquisition agreement and serve a number of functions. This is because they allocate between the buyer and seller many of the risks existing in the buyer's business.

Representations allocate risk in a fairly straightforward manner. The seller will make a statement of fact regarding its business. If the seller's statement is wrong, and the buyer is damaged as a result, the seller will compensate the buyer for any damages the buyer incurs.

An example helps illustrate the point. Let's say that the seller states that it has paid all of its taxes, a very common representation. After the closing, the business that was sold gets hit with a sales tax audit, and is found to have underpaid its sales taxes. Because the seller's representation was wrong (i.e., it hadn't paid all of its taxes), the buyer, all other things being equal, can look to the seller for reimbursement for the amount of the additional sales tax liability.

The situation above describes the simplest form of risk allocation in an acquisition agreement. In this form, the seller bears the risk whether the seller knew there was a problem or not.

Some types of risk allocation shift risk only if the seller knew there was a problem. These representations, sometimes referred to as knowledge-qualified representations, allow a seller to escape liability in a representation if the seller did not know a problem existed.

In our sales tax example above, let's say that the representation stated that the seller did not know of any nonpayment of taxes. Let's also say that the seller's officers were completely unaware that they had failed to pay any sales taxes. In that situation, the seller would not be liable for the sales tax liability.

Because acquisition agreements are prepared by lawyers, the concept of knowledge can mean different things. For example, does knowledge mean the subjective knowledge of the seller's CEO, or the subjective knowledge of all of the seller's employees? Does knowledge mean just what is in employees' memories, or should employees be required to look through their files? If employees are required to look through files, should they also be required to look through other documentation, such as public records and other resources? For these reasons, it is critical that the concept of knowledge be defined so that the seller knows what they have to do to satisfy the representation, and both parties know how the risk is to be allocated.

What if the seller wants to allocate the risk of an item back to the buyer? When a seller makes a representation that he or she knows may not be entirely correct, the seller will disclose an "exception." The seller provides this disclosure in a schedule commonly attached to acquisition agreements, known as a "disclosure schedule," or a "schedule of exceptions." Unless the agreement specifies otherwise, a buyer cannot recover for damages for an item that has been disclosed.

Going back to our sales tax example, if the seller knew there was a problem, the seller would describe the problem in a disclosure schedule. The seller would say something like "Seller underpaid its sales tax liability for the periods 2008 through 2010, which liability seller believes to be between $50,000 and $75,000." The buyer could not thereafter bring a claim for reimbursement for the later assessed tax liability as a result of the seller's disclosed exception.

As I mentioned above, representations and warranties, and their accompanying disclosures, are heavily negotiated. One point of contention is whether the risk of an item, even when disclosed, should be allocated to the buyer. Buyers with sufficient leverage will force the seller to remove the disclosed item, or affirmatively accept the risk associated with the item. Another point of contention is what the concept of knowledge means, and whether knowledge can qualify a particular representation. For these reasons, it is critical to spend a lot of time understanding the representations and warranties of any acquisition agreement so that you can understand the risks that may exist for you in a deal.

Continue reading "Risky Representations - Part 1" »

Selling Your Business - It Takes a Team

January 6, 2011,

Any large business transaction, particularly a merger or acquisition, requires a well-coordinated team for success. Assembling your team early on makes a large difference between success and failure, whether you are in San Jose, California or Sydney, Australia.

The most critical advisors are your attorney and your accountant. If you are a business owner and you don't have an attorney or an accountant advising your company, you need to get one now. Although either professional can "parachute in" to assist your company in the event of a sale, their advice to you will be much more efficient and effective if they have direct and long term experience with your company. Failing to have ongoing advice in legal, tax, and financial matters will likely result in the need for remedial work and higher expense in closing a business sale.

Finding a suitable attorney will likely be your first task in assembling your business team. As with any advisor, you should use your referral network to find a professional that is appropriate to your business. You should only choose someone who you believe can act as a trusted, strategic advisor in planning, growing, and selling your business, rather than someone who can merely produce documents. An attorney who you allow to attend your board and/or shareholder meetings and generally become familiar with your business will be able to advise you on building the proper foundation for an ultimate sale of your business. He or she will also be able to tailor their advice to the realities of your business and your own risk preferences.

Businesses will often have an attorney that they use for operational matters who is unfamiliar with the specifics of a merger or acquisition transaction. In these cases special acquisition counsel is retained, often at the recommendation of company counsel, to assist in the transaction. Special counsel should be brought in as soon as possible. If you have been presented with any type of proposal to sell your business, such as a letter of intent or term sheet, you should not sign any documents until you have had an attorney who is knowledgeable in mergers and acquisitions review them.

Your accountant should be familiar with generally accepted accounting principles, or GAAP, for your industry. As mentioned in an earlier blog posting, your company should not rely on tax-oriented financials in an acquisition, but should maintain financials based on GAAP to allow for accurate business valuation and comparison. Any accountant should be experienced with the tax issues facing your business's operations and eventual sale. As your company grows, your accountant can recommend a controller and other potential employees who can perform daily accounting functions in-house. Like your attorney, it is critical that you view your accountant as a key advisor to your business, rather than as someone who merely prepares your company's financial statements and tax returns.

Mergers and Acquisitions - The Importance of Good Company Records, Part 2

December 30, 2010,

What should you do to get your company documentation ready for a potential merger or acquisition? Consult your lawyer. First, he or she will assist the company in getting its basic corporate minute book updated. Important transactions, such as those involving company stock or stock options, appointment or election of directors and officers, and substantial transactions should all be properly documented. The company's stock book and capitalization table should be reviewed for accuracy, particularly if there are multiple owners. If the company has gone through equity financings or debt financings, closing binders containing the material documents in each of these transactions will need to be made available.

Second, your lawyer should review existing documentation for legal traps. The minefield that poorly prepared documentation presents is extensive, but a few examples can help illustrate the problem. Companies early on may not be able to afford employees, so they will use independent contractors to help create their basic technology. If the company does not have a signed agreement from the non-employee inventor assigning all rights to the company, the inventor, not the company, owns the technology. If the same company has licensed its technology under a purchase order that provides for a transfer of title, then the company now may not own its own technology because it just transferred to the customer title to its technology. Of course, because it didn't get an assignment from the inventor in the first place, it may not have been legally able to transfer the technology to the customer, so the company may now be in breach. Situations like this do not typically advance closing dates.

Another legal trap exists in confidentiality terms, common to many contracts. These provisions prevent you from disclosing important information you receive from the other party. Often, this information includes the contract itself. As a result, you'll need to get permission from the other party to disclose the contract. When you ask the other party to disclose, they will want to know who the recipient will be. At that point, you'll need to disclose the name of the acquirer, and likely the fact that your company is being sold. The fact that you are being sold may not make the other party to your contract very happy. All of this requires you to make sure you know where you are under confidentiality, and to have a strategy where the disclosure requires delicate handling.

It is important to start early in making sure the documentation you provide to a buyer creates the best picture for the company. Otherwise, the once in a lifetime opportunity to sell your company may prove as fleeting as the paper in an oral contract.

Mergers and Acquisitions - The Importance of Good Company Records, Part 1

December 27, 2010,

Even in the San Francisco Bay Area, buying a business is like buying a house. You wouldn't do it without performing due diligence and a good inspection. Unlike a house, however, strengths and challenges in a business lie in its relationships, and not necessarily in its building. For this reason, buyers will spend a significant amount of time in reviewing a company's documentation before any merger or acquisition.

A buyer reviews documentation for a number of reasons. Many are business-oriented, such as whether the company has good title to its technology, has solid supply and strategic relationships, and has not overextended itself in promises made to customers or employees.

The fastest way for the sale of your company to implode is for you to be unable to deliver a complete record of your company to a buyer. It is typical for a company hoping to sell itself to make available online their corporate documentation promptly after a letter of intent is signed. The longer it takes to make this documentation available, the longer it will take to close the sale. A long sale process is almost never to the seller's advantage. Worse, not having information readily available creates a perception that the company is disorganized. This will increase the perceived risk to the buyer and will further lengthen the time to close.

Companies that wait until the last minute will often find their documentation is, at best cobbled together, inconsistent, and nonexistent. Poorly prepared contracts or agreements often contain traps that will result in the buyer shifting any risk arising out of the deficient documentation to the seller, thereby reducing the purchase price or making the seller liable for any damages incurred by the company after the sale.

Part 2 will provide some suggestions for getting your documentation in shape for a sale of your business.

Sale of a Business: Jump the GAAP

December 23, 2010,

Even in the reality-distorted vortex of Silicon Valley, a company's financial statements are a critical tool in any merger or acquisition. If you are a venture-backed company, or have substantial bank loans requiring annual audits, your company's financial statements may already be in relatively good shape. If you are an owner-operator, or have otherwise been relying on a tax-oriented approach to your financials, you'll need to convert your financial statements to the standards commonly used by accountants.

Generally accepted accounting principles, or GAAP, is the method used by the accounting profession to create financial statements. If you are trying to sell your company, you will need to have GAAP financial statements to be able to attract the best buyers, and to be sure you are getting the best value. Because GAAP is so widely used and, in many cases, mandatory, failing to provide a buyer with GAAP financials will increase the perceived risk with respect to buying your company, thereby lowering the price.

An acquirer will likely require that you submit GAAP financials. As part of your agreement with the acquirer, you will represent that your company's financials are compliant with GAAP. If you are wrong and the buyer is damaged as a result, the agreement will provide that you will have to compensate the buyer, usually through a reduction of the purchase price.

Because converting to GAAP financials is not an easy process, you need to get started as early as possible. In some businesses, such as those technology start-up companies, the conversion to GAAP could take years rather than months. Complications may arise, particularly in the revenue recognition area, and prior year financials may need to be restated. This could be disastrous if, in the middle of negotiations, adherence to GAAP eliminates the year-over-year profit increases you hoped to show.

Continue reading "Sale of a Business: Jump the GAAP " »

Mergers and Acquisitions: Start Now or Forever Hold Your Company

December 20, 2010,

Your company, like many companies in Silicon Valley, may suddenly find itself faced with a market window to sell and provide a liquid return for its owners. If you are an entrepreneur or other business owner, you are always on the lookout to reap the value of your business. Before you start planning the next phase of your life, however, you need to plan carefully how you will sell your company.

A company sale is typically a multi-year process, and the sooner you begin the better off you will be when a deal finally arrives. Although exceptions exist, particularly in the roulette world of high technology start-ups, a good rule of thumb is that it will take you between two to four years to sell an operating company. You should plan to begin the process no later than three years before you plan to close. Preferably you should start when you form the company.

Why so early? If you are an owner-operator, you will need to change your focus from maximizing the amount of cash and other compensation you generate from your company, to improving business valuation. A simple mathematical example drives home the point. Many companies are sold on a multiple based on earnings before interest, taxes, depreciation, and amortization (often referred to as "EBITDA"). If your business can be sold for five times EBITDA, that extra dollar in compensation will cost you five dollars in sale price.

Even if you are not an owner-operator, you need to start early to show a smooth history of revenue growth. Managing EBITDA to show constant year-over-year growth can go far in creating a perception of value, and of lower financial risk for the buyer.

Another reason to start early, regardless of whether you are a single owner or work with a number of investors, is that you will likely need to clean up a number of items. Of these, your financial statements are key. It is critical that your financial statements be expressed in generally accepted accounting principles, or GAAP, so that a buyer can compare your business with others and is comfortable that the financials have been prepared using standards acceptable to the accounting profession. Your legal documentation should also be tight. Your basic entity documentation, employment contracts, and materials agreements with key customers and vendors should be complete and fully executed. If you have a technology company, you will need a signed agreement from any person creating technology for your company assigning to the company any technology he or she has created.

Your ability to secure for yourself and your investors value for the company you have built may only occur once. Make sure you are prepared.