Many small businesses considering a sale are at least two years out from obtaining fair market value on their operations. This is mainly due to the fact that the business owner(s) has been focused inward on running the business, not outward on selling the business. But the more a buyer is able to see for himself, the more comfortable he will be to make an offer on a business. Preventive legal audits are a comprehensive appraisal of a company’s legal affairs whereby the attorney can make constructive recommendations for changes in a company’s policies/procedures to create more transparency for a potential buyer. In addition, preventive legal audits can help business owners to avoid pitfalls in a variety of different areas:
- avoid court,
- avoid jail and fines,
- reduce legal costs,
- improve the business reputation and public relations,
- take advantage of future trends,
- educate employees, and
- improve the overall work environment.
We encourage preventative healthcare is to examine and define health problems before they occur or become irreversible. The purpose of the Preventive Legal Audit is the same: Protect your company’s legal health before a disaster such as a lawsuit, criminal prosecution or disrupted work environment occurs.
Most businesses need help spotting potential legal problems before they occur. Entrepreneurs, caught up in the day-to-day struggle to keep a business growing, often neglect legal matters such as partnership agreements or fail to comply with employment regulations such as documenting reasons for firing an employee. Consequently, they do not realize there is an issue until they list the business for sale – or worse – until they end up in court!
A Preventive Legal Audit will preempt trouble before it occurs. Normally, for a reasonable fee, attorneys with legal experience and a background in business will visit a company, analyze legal vulnerability, and draft a remedial plan for the client, explaining potential legal exposure, recommend compliance guidelines, legal forms and employee training; and provide written reminders regarding leases, loans, and other agreements.
A Preventive Legal Audit will address issues like the limited liability company operating agreement or corporate by-laws, licensing agreements and contracts from purchase orders to joint ventures, credit and collections practices, loss prevention strategies and accounts receivable, human resources and employee manuals (documenting important guidelines for benefits, disciplinary procedures, time off and employee obligations, employee liability and disability, prevention of harassment and violence in the workplace etc.), buy-sell shareholder agreements, real estate & leases, storage and retention of records for taxes and other purposes; ADA and OSHA compliance, loans, payroll, accounts payable (to avoid fraudulent invoices, outright stealing or pilfering), compliance with environmental regulations on lead or other hazardous materials, consumer & product liability protection laws, and generally keeping up to date with new relevant legislation that may affect the company.
When Should I See an Attorney?
Most business owners avoid consulting a specialized Massachusetts business attorney in the belief that it will save them money. It is of course highly advisable to see your lawyer whenever a situation becomes even the slightest bit complex. Many of our small business clients once believed that they could save a couple of thousand dollars by using internet articles [ahem] to guide them into closing a potential deal … only to lose out on thousands of dollars, or even lose their business, when a deal sours or a disgruntled employee sues the business (penny wise and pound foolish!). The following list of situations are those where we have seen complications frequently arise:
- Business start-up – An attorney can assist you when you start up a business by clarifying your business objectives and analyzing your business proposal. Your attorney can evaluate the soundness of your business plan, research, and risk analysis. Some businesses demand the limited liability of a Corporate or Limited Liability Company structure, while the use of these forms of business would be a waste of money for others. Every business owner must also consider the impact that the business form will have on his/her estate planning/asset protection plan. Failure to consider possible exposure to business liabilities could result in the loss of personal assets and financial security. See number 13 below.
- Incorporation –
An experienced business lawyer can speed up the incorporation process and have your business incorporated in one day… in the case of an emergency. The services he or she can provide include the following: reserving the corporate name you have selected; preparing the Certificate of Incorporation, minutes, and bylaws; filing the Certificate of Incorporation and other necessary forms; filing for an Employer Identification Number (EIN); completing and filing the IRS Form 2553, Election for treatment as a Subchapter S Corporation; arranging for shareholders’, directors’, and officers’ meetings; and updating the corporate minute book.If the corporation has more than one shareholder, the start-up stage is the appropriate time to establish a shareholder buy-sell agreement, employment contracts, covenants not to compete and buy-out arrangements. You should consult with your lawyer before you sign any of these agreements.
Many of our clients have called those magazine ads that advertise incorporation in Delaware or Arizona for a flat fixed fee. What was not explained in that phone call, however, was that the businesses still needed to register in Massachusetts as a ‘foreign” corporation before legally operating in the Commonwealth. So after that convenient flat fee the clients came to us and learned that still more fees were due – to the State of Massachusetts – each year! Was any money really saved? Likely not! Further, is it really advisable to annually pay the cost of two state Tax returns? Unless we are dealing with a multi-national conglomerate, or a holding company, incorporating in Delaware does not save any money, or provide any additional benefits from simply incorporating in Massachusetts.
- Partnerships –
A well-drafted partnership agreement will provide for such things as capital contributions; profit and loss distributions; limitations on partners’ powers; retirement; and transfer of interest. Your lawyer’s assistance can be invaluable in preparing an agreement that can avoid protracted legal proceedings if the business or partnership does not work out.It is always wiser to settle certain matters at the very beginning of the relationship. Employment agreements, covenants not to compete, and buy-out arrangements are more likely to be agreed on when the enterprise is in a fledgling status, and the parties are more willing to accommodate one another, than later when personal differences may arise. The attorney for the business can provide the objective sounding board the parties need to reach an agreement on these issues.
If you are like most of our clients, you are probably saying… ok! Great! But, I’ve been in a partnership or S corporation for 8 years and we haven’t had any problem at all. Well…. all I can say is…. you are the lucky exception! In part two of this article series, we begin with an example of why even those with the best intentions can run into pitfalls.
