It is important to remember that the value of your business is not determined by the years you’ve worked or how much you’ve sacrificed. Unfortunately, business is not about fairness. It is about leverage, profitability, enforceable rights, and controlling access to things of value.
Business owners often don’t have the time to consciously think about what it is that governs the value of their business – aside from profitability, and perhaps trade secrets. Typically, this is because they have their nose firmly to the grindstone keeping it all running. So when it comes to selling their business, this tends to result in:
(1) A painful and messy due diligence process;
(2) A lower than expected valuation;
(3) The buyer requiring the seller to stay on in the business for a protracted period.
The source of the problem
Remember that the business is the network of systems (made up of processes, information, assets, legal rights, employees etc etc) that convert money and information into profit. You must be able to separate these systems from yourself, package them, and sell the right to use them to another party.
With this in mind, the above issues tend to derive from two main problems:
(1) The business owner has not fully externalised the business systems by establishing processes, training and delegating to employees, and documenting their knowledge. Instead, they are the critical element that makes the whole system work.
The purchaser will have to discount from the purchase price the cost of hiring and training employees to perform the roles of the business owner, plus the cost of keeping the former owner on for a protracted period to ensure that all the know-how is transferred.
(2) The business owner has not ensured along the way that the company actually owns, or has the enforceable right to use, all the IP upon which the business relies to operate. For example, contractors will have been used from time to time to help build the business systems (e.g. website, modified or custom IT systems, sales materials, and other documents) but ownership of the IP hasn’t been assigned in writing.
The purchaser will have to walk away, or discount the cost of either clarifying the ownership of these systems or building its own replacement systems.
Addressing these issues will increase the value of your business and finally allow you to take a holiday; not to mention that if the business systems can operate without the owner’s ever-present attention it can scale and grow, and even expand into new and interesting areas.
It is best to deal with these issues before you start negotiating with buyers as it will remove leverage that they can later use to keep changing the deal on you – something that you will be particularly vulnerable to if you agree to negotiate exclusively with one particular purchaser.
Optimising and growing the value of your business
Separating the business systems from yourself is a matter of wearing the upfront cost in time to delegate, train, and document, in order to reap the long term benefits to your business’ growth and value. As this means sharing confidential information and know-how with employees and contractors, it will place increased emphasis on your intellectual property arrangements in order to protect the value of your business as you grow.
For starters, you will need to address:
- Ensuring all employment and contractor agreements are in writing, and include clauses addressing:
- Confidential information;
- Assignment of IP;
- IP moral rights;
- Restraint of trade (for key employees).
- Reviewing existing IP in your business and shoring up your rights to use it:
- Getting previous contractors to assign the IP to you in writing;
- For any licensed third-party IT systems,
- Clarifying who owns the IP in any modifications you’ve made;
- Confirming what arrangements are in place should the third-party provider cease to operate (e.g. escrow arrangements and who would have the ability to keep the service running);
- Clarifying your alternatives should your ability to continue using the third-party systems be affected;
- Registering business names and trademarks;
- Ensuring the domain names are registered to the company;
- Protecting your IP:
- Consistently enforcing your IP rights against infringers (e.g. other businesses or individuals who are using your copyrighted works without payment or permission, or other parties using deceptively similar branding to market their products and services);
- Clearly marking any confidential materials used in the course of your business as ‘confidential’ so that everyone involved is conscious of their obligations;
- Having standardised ready-to-use agreements that are easily adaptable, such as:
- Employment agreements;
- Non-disclosure agreements;
- Assignment of IP agreements;
- Consider whether any new products under development should be patented.
- Negotiating an affordable standing arrangement for legal advice and services, to:
- Resolve disputes with IP infringers and debters early (ongoing disputes are expensive and seriously undermine your valuation);
- Keep your business’ legal arrangements current, and allow you to take advantage of changes in the law;
- Ensure that your agreements actually secure the benefits that make them worth signing;
- Maximise the strength of your position before entering negotiations, and provide tactical advice throughout.
It is common for business owners to view lawyers as a cost, and some lawyers have not done much to rebut this opinion. However, partnering with the right lawyer will maximise the value of your business, reduce the stress and uncertainty involved in running it, and provide you with a trusted adviser who will fight your battles and protect your interests.