Protecting Your Business: Long-Term Success Begins With Defense

In today's super-competitive business world it's becoming emphatically dire for business owners to protect their business and secure their developed ideas, services and products. This is not only protection from a business to business perspective, but in the digital realm of today, safeguarding the business's brand and voice from damaging consumers and reviews. It's a constant worry and hassle that all businesses, regardless of the age or maturation, have to deal with and be confronted with at some point or time in their operations. Regardless of what it is that's affecting your business, having the appropriate legal and business structures will ensure your business value isn't damaged by an outside factor. Whether having the necessary protection from another competing business in your area (or online) to assuring that damage control is in place for any negative consumer reviews and comments; these are all mandatory cases where business owners have to constantly be ahead of the curve and protecting their businesses.

Here are a few pointers to consider whether you're safeguarding your business operations, company's liabilities or even assuring that bad reviews and comments don't damage your brand beyond repair.

1. Protecting business processes and limiting excessive liabilities with the proper legal documents:

* Start with having the proper legal documents and contracts or agreements in place. This begins with the proper "Employee Contracts and Agreements" on file for every employee, intern, freelancer or aligned consultant of the business entity. This outlines the expectations between the two parties and addresses how the agreement will pan out over time. "Non-Competing Agreements" are another area of protection from workers or employees taking your ideas and incorporating them into their own areas of business. Of course, these Employee agreements can be directly specialized per employee or just a basic underlying agreement. Some additional areas may include: "Ownership of Inventions" (maintains company ownership for those employees who invent or create within their respective roles while employed via the company), "No Authority to Contract" (called an agency provision, defines the employee to employee relationship and not an agency relationship) and Termination, Arbitration and Compensation clauses.

* When or if your business deals with outside consultants and business partnerships (with other companies), having the best aligned partnership agreements and including "Non-disclosure Agreements" (NDA) can/will ensure that not only your business process is being covered, but ensures that no ideas or internal insights on your business seep out through outside hands, mouths, via conference call, memo's or emails. Consider including "Gag Order" terms within your Non-Disclosure Agreements, if you're seriously protecting the 'next big idea' or that hot "business" consumer good... or maybe it's just a really powerful product idea. NDA's can and should be a part of any or all business to business meetings where you're disclosing any inside knowledge, processes or insights of your company. NDA's ensure that business partner isn't just 'picking your brain' for innovative ideas to incorporate.

2. Protecting business ideas, creations and inventions:

* Copyrights: are forms of protection for authors "of original work or ownership" within a tangible form of expression. Copyrights can cover the areas of literary, drama, art, music, intellectual property, photos, pictures, graphic designs, drawing and more. Copyright lends it way for licensing and royalty agreements and deals. Note, copyrights don't cover names, short sayings/text, words or short phrases. This is when you register it as a trademark.

* Trademarks: protect words, names, symbols or other notable devices used in trade to distinguish or denote a specific brand or good from others. Trademarks only protect one from another using your "mark" not from another competing business creating a very similar or same good under a different mark. Trademarks, used in interstate and foreign commerce, are filed through the Patent & Trademark Office.

* Patents: are necessary for inventions, and grant property ownership to the inventor. Handled through the Patent & Trademark Office, patents terms are 20 years from the application date the patent was filed. Patents grants the "right to exclude others from making, using, offering for sale or selling" the invention in the US or importing the invention into the US.

3. Protecting the business' reputation & brand:

* Local Content Management Services/Strategy: Ensures that any information about or related to the business is accurately maintained and distributed across all local and national distribution points or outlets. This can be extended to protect and manage the business online content or verbiage, and may pertain to business listing & data, meta tags, page titles, images, and the actual content on your sites. A local content management system offers accuracy and a universal language to all your online consumers.

* Reputation Management: Consumers post millions of comments, reviews and feedbacks about brands constantly and via the internet, web, and mobile and social platforms daily. Some good and other just negative and bad or offensive to brands and company's success. Having an online reputation management service allows a company or business to be alerted when comments, reviews, feedback and other posts or tweets pertain to your business. They alert the business about what's being said and where, allowing the business to proactively deal or address the negative or bad (damaging) comments. Having this effective tracking device ensures that consumers are receiving the very best brand information that you want your business to be recognized for; without jeopardizing your brand's online image.

As a business owner in today's challenging business world, having a tight control on protecting your business is a constant and daily grind. However, with the right tools and documents in place, you can guarantee that other competing businesses aren't siphoning your business models or goods. It can be the deciding difference in outcomes of permitting your 'next big idea' from being broadcast across the national press release outlets under someone else's brand name to losing tons of revenues from negative comments about your brand. Protecting you business for the long-terms starts with safeguarding your business from the start of the day to end... and that begins with your employees, business agreements & deals, and includes your consumers or customers. Remember defense wins in the long run.

Family Business: Some Things To Think About

There are two rules about family businesses:

1) It's absolutely essential to separate business and family; and

2) It's totally impossible to do so.

Family businesses come in many shapes and sizes. Research shows that they have clearly defined business problems which frequently are repetitive and avoidable. Family businesses often do not achieve their full potential or fail due to their inability to handle the mixing of family and business issues. You actually can't separate them and that's where problems occur. It also depends on the family dynamics.

Why is a "family business" different from "non-family business"? Family businesses generally have a number of key idiosyncratic issues facing them in addition to those faced by non-family businesses. These key issues are like potholes in a road. It is important to be able to recognise them, be able to avoid them, and if one cannot avoid them one must assist in damage minimisation.

The key business issues can be categorised into five main headings and they relate specifically to the nature of the family business itself. Naturally there will always be an overlap, but in general the headings are:

1. Conflict between business and family values

Families can be described as warm, socialistic and nurturing, whilst businesses as cold, ruthless and hard-nosed*. Thus when the two get together, which is what happens in a family business, there is a huge potential for conflict. An example is the owner who states it is good for their child to work in the business. However, a question the family should ask is whether the child is good for the business? In wealthier family businesses the business can afford to carry a poorly performing family member, but there is no such luxury in an unprofitable business.

*This is not always true of course.

2. Funding lifestyle versus growth versus retirement

Where is the money going to come from for lifestyle, growth and retirement? Usually there is a conflict - take the money now or leave it for retirement? If it is left for later on, will there be enough to live an adequate lifestyle? An example of problems that may occur is whether the children will be able to afford to pay out the retiree(s), without leaving the business short of funds?

3. Governance issues

Most family businesses, when compared to non-family businesses, are weak in the area of governance, and this includes professional management. Surveys show that family businesses are lacking in many areas, including: functioning boards of directors (including lack of independent outside directors), formal meetings, long-term plans, management structure, performance appraisals on family members. The effect is that a business is not run as efficiently as it could have been. Whilst this may not be of great concern to the owners, that is the family, it may be of great importance to banks, possible buyers, and employee managers.

4. Leadership, management and ownership succession

Statistics show that a substantial number of business owners will be retiring in the next 10 years. They also show that few businesses have done any planning for a smooth transition apart from making a basic will. If the succession aspect is not considered (including leadership, management and ownership) it is clear that the transition will not be as smooth as it could have been. Problems that may occur include tax, sibling rivalry, interruption to the business, and litigation between relatives etc, being problems that may have been reduced or eliminated had they been attended to.

With regard to succession planning, choose one person to take over the business, even if you make enemies in the process. That's the nettle that must be grasped. Use everybody's talents to the best degree.

5. Relationship between family members

Rivalry between family members has existed from the dawn of humanity and will continue to do so. It is not different in family business, which is an extension of the family. Examples include the machinations as to who will be the next CEO, or the holder of a particular office?

FAQ When Selling a Business

Q. How is a Business Broker different from a Real Estate Agent?

A. Real estate agents do a fantastic job at selling properties but don't generally have the training, knowledge, expertise or skills required to negotiate and fully understand the financial and legal aspects of selling businesses. The whole procedure from start to finish is much more complex, even in the simplest of businesses. A Business Broker will understand the legalities of a contract and the ramifications to both parties if not followed through correctly with precision and accuracy. Also, the market is constantly changing and by choosing to use a qualified business broker, you can be rest assured that your business will be appraised accordingly for today's market, an essential component to consider as an overpriced business will simply not sell and to under-price your business will cost you valuable dollars!

Q. How do I know if my business is saleable?

A. Your Business Broker should offer all the help and advice that is needed to get your business ready for sale. By providing them with the information requested and answering a few questions, you should be given a written appraisal in a relatively short timeframe outlining the basis on which the appraisal has been completed. Most businesses are in fact saleable it's just a case of determining the correct sale price in the current market. An overpriced business will not sell and of course by selling your business below the market value you will be doing yourself an injustice.

Q. What is consider when appraising my business?

A. There are many factors considered when appraising your business

Net profit (before & after adjustments)

Gross Profit %

Turnover Fluctuations in all the above

Age of the business

Location of the Business

Lease agreement

Staffing structure

Role of the owner

Intellectual property

Written contracts/agreements

Barriers to entry

Competition

Potential for growth

These are a few but not all the factors considered. All businesses are different and each one is assessed individually.

Q. Can you give me a 'ball park figure' if I don't supply written information to you?

A. No, this would be a disservice, the appraisal could be severely over or under valued without all information considered. One tiny difference in the information supplied could mean thousands of dollars in the value of your business.

Q. What is the ROI?

A. The ROI stands for RETURN ON INVESTMENT. This is the way that most, although not all businesses are valued here in WA. Essentially it means the percentage of the purchase price (if run at the same sort of profit) that the buyer would expect to get as a return each year exclusive of his personal drawings. For example if he were to buy a business at a 50% ROI that would mean he would be likely to get 50% of his initial purchase price back in the first year effectively taking two years to get it all back. The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk - the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge.

Remember...the stronger the business, the lower the ROI and the riskier the business, the higher the ROI!

For example if we take a retail business, 7 days per week, short lease, lots of staff, reliant on location:

Net profit $100,000

ROI 70%

Sale Price $142,857

Wholesale business, 5 days per week, long lease, easy product lines, barriers to entry and low staff

Net Profit $100,000

ROI 30%

Sale Price $333.333

The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk - the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge. There are many points considered when arriving at the ROI to be used in our calculations, they are pretty much the same as how a business is valued (see above)

Q. How does the breakdown work?

A. Once you have been presented with your written appraisal, you will see that the suggested selling price is inclusive of all the Plant, equipment and also stock. The value of the plant & equipment is decided on and the stock value is taken as an average over the year

For example Let's say the sale price is $1,000,000 Stock $180,000 P&E $300,000 Total $480,000 Then the goodwill would be $520,000

Q. What are add backs or add ons?

A. When you look at your profit & loss statement in your accounts, at the bottom you will see your net profit. This is the end result and what you are left with after all the expenses of the business have been paid. As part of the expenses, many (but not all) business owners may choose to run several private expenses through their accounts and the final figure may not be a true representation of the business, therefore adjustments must be made to show exactly what profit the business is in fact making.

For example: The net profit as per accounts shows $150,000 Within the expenses there may be an expense of $20,000 for accountancy but the business owner may have several investments that his accountant takes care of on his behalf and the entire bill is paid through the business whereas realistically, the normal cost for the accounting in this particular business should cost approx. $4,000 therefore we would do an add back of $16,000. This would then effectively increase the net profit to $166,000.

On the other side of the coin, the current owner may own the property he is operating the business from and not pay himself a rent for the property. This has the opposite effect and effectively artificially increases the net profit therefore we must do an add on (or a negative add back).

For example: The net profit as per accounts shows $150,000. Within the expenses there is no expense for any rent allowance. Therefore you must ascertain what the fair market rent would be to an incoming purchaser and make an adjustment accordingly. So, if the rent for the property were to be set at $60,000 per annum inclusive of outgoings then this must be deducted from the net profit effectively reducing the actual net profit to a new owner down to $90,000

There are many different add backs and add ons all with different reasoning behind them. It is essential that all adjustments are provable during the course of the due diligence as the net profit of the business is one of the major factors in the valuation method right from the start.

Q. What if the stock value is different than we have included at stock take?

A. The stock can obviously vary throughout the year therefore quite often there will be an adjustment at settlement. The purchaser has no legal obligation to take any additional stock however it may be that an order has just arrived and pushed the levels higher and in most cases the purchaser will need it anyway and an agreement shall be arrived at between both parties as to how this additional stock shall be paid for. If the stock is lower than as agreed on in the contract of sale, then the amount shall be deducted from the price. You would be advised that the stock level be kept as close as possible to the agreed amount in the contract of sale as much as possible.

Q. Can I use management accounts (i.e. MYOB) for the appraisal?

A. You can use the management figures initially but you'd be better advised to use audited figures prepared by your accountant. The reason for this is to ensure that you are using the same figures that a buyer will be using when conducting a due diligence. Management figures can often be incorrect and adjustments are still yet to be made. The last thing you want to happen is to set any doubt in a buyer's mind as to the legitimacy of the accounts.

Q. Can you sell the freehold along with my business?

A. Yes you can list it at the same time. It often works very well. In some cases, the buyers are adamant that they will only buy the business if they can get the freehold at the same time.

Q. What is a due diligence?

A. A due diligence is carried out by the buyer as a condition of the contract of sale to satisfy them that the information we have provided to them is a true representation of the business they are buying. It can vary in timeframes according to the size and complexities of each business. It is generally conducted by their accountant although it can be carried out by the buyer themselves, bookkeepers or financial advisors etc...

Q. How can I be assured of confidentiality?

A. All potential purchasers should be made to sign a Confidentiality Disclosure Agreement (CDA) prior to receiving any information on your business.

Q. What about Work In Progress?

A. Not all businesses will have work in progress but for those who do, a formula must be agreed on as part of the due diligence process to decide the best way to calculate the work in progress which is acceptable and fair to both parties and this shall be paid in addition to the agreed selling price.

Q. If my business isn't ready for sale, what will happen?

A. Depending on the reason, you will be advised the best steps to take to help you to achieve the maximum selling price for your business later down the line. It may be a few months or it may be in a couple of years.

Q. How important is it to have accurate information?

A. Accurate information is vital. It is extremely important In all business sales, it is imperative that the procedure is followed through correctly to not only avoid the sale falling from through but to reduce the chance of the purchaser coming back to you down the line and starting any sort of litigation proceedings. This is why you should produce a full written document outlining all that the business entailed, the roles of the owner and the staff members, the products and services, past history, suppliers, stock, plant and equipment, target market, positioning and strategy, barriers to entry, differentiation and competitive advantage, lease details, what was to be included in the sale, the owners obligations both pre and post sale and also how the sale would be documented. Of course there is also the financial side of the business and the necessary financial statements should also be provided with an emphasis on confidentiality between all parties maintained at all times.

Q. What are your top tips for preparing my business for sale?

A. It is wise to consider all the above information when you first start thinking about selling but basically, right from inception, you should consider at least the following:-

Meet with your business broker to ascertain the current value of your business and get tips on whether the business needs to make any changes prior to going onto the market.

Ensure you have clean, precise and accurate financials.

Try to keep add backs to a minimum as a healthy "operating profit" is good to see.

Have your systems and procedures well documented.

Try to keep the business as un reliant on the owner as possible.

Ensure the premises are clean and presentable. If possible, try to have a reasonable length lease in place (if leased premises).

Ideally just one working owner is advisable if possible.

A well documented report outlining exactly what is being offered for sale will eventually be prepared by your broker with information provided by you so ensure this is all correct.

Obtain a justified business appraisal that has been priced accordingly in the current market

Ensure you understand and agree with explanations of any add backs, or add ons, it is generally a good idea to let your accountant have a look over these too.

Any business that shows a gradual increase in turnover and profits each year is going to be desirable to potential purchasers, if we have a decline in either turnover, profits or both we need to have an explanation as to why this is, sometime it may be that this industry is in a general decline and probably one that will be hard to sell purely due to that point.

Prior to becoming a Business Broker several years ago, Helen has been involved in and owned several businesses both here in Australia and over in the UK. She has been involved in many business transactions ranging from $150,000 up to several millions.