Protect Intellectual Property Before You Start-up

Entrepreneurs must understand the different types of intellectual property and how to protect each type. Entrepreneurs should then take action to protect their intellectual property as soon as possible – before launch is best.

Protectable intellectual property includes patents, trademarks, copyrights, and trade secrets.  Each of these categories protects a different aspect of your ideas. In this article, I will only discuss how to protect your intellectual property in the United States.  The laws and schemes of other jurisdictions will vary.

Patents protect useful inventions that solve a specific technological problem. In return for disclosing your solution to that problem (the solution may be a product or a process), you are granted exclusive rights to exploit the invention for a period.  After the patent expires, anyone can use the invention.

Trademarks protect the brand names, logos, and slogans you use to sell your product. A trademark grants you the exclusive use of the name, logo or slogan you use, and permits you to stop anyone else from using a name, logo or slogan that is confusingly similar.

Copyrights protect your original artistic or literary works. Like patents, the copyright gives the author certain exclusive rights to use or exploit the copyrighted work for a period.

Trade Secrets are business information, processes, practices, formulas and the like that a business owner has chosen not to patent and that the business owner seeks to protect by limiting access to them.  Trade Secrets are secret as long as you can protect them.  Business owners use laws like the Uniform Trade Secrets Act (in most US States) to help them protect their trade secrets.

Entrepreneurs should take the time – up front – to determine what intellectual property they have and to protect that intellectual property.

For inventors, patent registration is imperative. Not only must your invention be novel and useful, but also you cannot patent an invention once it has been publicly disclosed.  Therefore, patenting your product or process is not something that can be put off until later. You apply to register your patent at the United States Patent and Trademark Office. Before you register, you or your patent attorney must conduct a thorough patent search. You may also need professional drawings and detailed specifications.  Patents are by far the most complex of the intellectual property schemes, and there are many options, including provisional patents, utility patents, design patents and plant patents.  Unless you have considerable patent experience, you should get a patent attorney to help you with this process.

Trademark registration should be thought of as a mandatory, basic expense for almost any small business.  You are going to be putting a great deal of time and money into growing your business’s name recognition in the marketplace. It always hurts when you have finally gotten some traction, and you get that nasty letter from some trademark attorney telling you to “cease and desist” infringing on their client’s trademark. At a minimum, you will be changing your name, possibly your logo, and losing all the traction you have gained in the marketplace. The fact that a state had allowed you to use a name when you formed your business does not give you a trademark.  The fact that you were able to buy the ‘.com’ of the name does not give you a trademark.  In either case, the trademark owner can come along later and make you change the name or give up the web address.  Trademarks are obtained by filing a trademark application online at the United States Patent and Trademark Office.  As with a patent, you or your attorney should conduct a thorough search first, and you may need a professional drawing if you’re trademarking a logo. You may be able to make it through trademark registration without an attorney, but an attorney who knows trademark procedure and has registered trademarks will be money well spent.

Copyrights are the easiest protection to do yourself. The forms are relatively simple, and if you are a person who can follow detailed instructions carefully, you can do it.  One registers a copyright at the United States Copyright Office – a department of the Library of Congress.  There are at least five different type of copyrights (literary, visual art, performing art, sound and serial). Sometimes, this can get a little confusing (a computer program is a ‘literary work’, for example), and a good copyright attorney can be useful.  This is especially the case because there are often sticky issues of ownership, rights, licensure, etc. that surround a copyright.  These issues create a fertile source of small business litigation – better get this right the first time.

A small business protects trade secrets by keeping the information confidential, by identifying what information you consider as secret (marking any document it appears in is a good way) and by including trade secret protection language in your employment agreements, your employee handbook, or your job offer letters, as the case may be.  Trade secret law is local – each US State is different – unlike patent, trademark and copyright law, which is federal and the same in each state.  Your business attorney should be familiar with your state’s particular trade secret law and how to best protect you.

Intellectual property gives your business value, and a well curated portfolio of intellectual property will impress potential buyers and make exit easier and more profitable.  Protecting your intellectual property will also enable you to get full value from your thoughts and ideas, realize the benefits of your marketing efforts, and protect your investment from dead ends like infringement.  The wise entrepreneur protects intellectual property up front, budgeted as a start-up cost, and does not put intellectual property protection off until later.

What is a Corporate Secretary, and Do I Need One?

A secretary is a “person entrusted with secrets”. The term came into use in the early 1400’s, and was used to describe a person who kept records and write letters for a king. In the late 1500’s, as parliaments took control of government from the kings, it began to be used as a title for ministers presiding over the executive departments of the state – such as our Secretary of State or of Defense.  The word itself comes from the from Medieval Latin secretarius, derived from the Latin secretum “a secret, a hidden thing”.  We derive our English word “secret” from the same latin root.

What is a Corporate Secretary?

A “Corporate Secretary” is an officer of a business corporation. All corporations are required to have at least three officers: a President, a Treasurer and a Secretary.

The primary responsibility of the Corporate Secretary is to ensure that Board members have the proper advice and resources for discharging their fiduciary duties to the shareholders. The Corporate Secretary is also responsible for ensuring that the minutes of each Board meeting reflect the proper exercise of those fiduciary duties.

The Corporate Secretary is also a confidante and resource to the Board and senior management, providing advice on board responsibilities and logistics. The Corporate Secretary is a senior, strategic-level corporate officer who plays a leading role in the company’s corporate governance.

What are the Corporate Secretary’s Specific Roles and Responsibilities?

• Corporate Record Keeping: The Secretary maintains a current record of key corporate documents, including bylaws, meeting minutes and records of actions, shareholder records, records of required state corporation and regulatory filings, and key contracts;
• Corporate Filings: The Secretary is responsible for ensuring the Corporation is current on state corporation law and regulatory filings;
• Board and Shareholder Meetings: The Secretary manages all board and shareholder meeting logistics, ensures proper notices have been sent, attends and records the minutes of all board and shareholder meetings, advises the Board on its roles and responsibilities and facilitates the orientation of new Directors and assists in Director training and development;
• Stock Records: The Secretary oversees the logistics of stock issuance and transfer, including the issuance and cancellation of share certificates and keeping the shareholder records up to date.

Do small businesses need a Corporate Secretary?

All corporations must have a corporate secretary.  Often, in small businesses, the attorney appoints one of the founders as Secretary and that person never knows what they are supposed to do or does any of it. Signs that a small business should have had an active corporate secretary is when the corporation is sued and cannot produce the required business records to show it was not merely the alter ego of its founders, or when a regulatory filing is not made, or when there is a lawsuit between the partners and the records are out of date and do not reflect the reality of how the company was governed.  In other words, the owners discover that they need a Corporate Secretary when it is too late and the oversight is expensive.

If the small business has shareholders that are not active employees or managers of the corporation, an active corporate secretary is imperative. If the small business is a business partnership that has more than one owner/manager, then having an active Corporate Secretary is imperative. If the small business is in an industry where there are numerous regulatory filings to track, such as the requirement to file annual reports in several states or to file annual or biannual licensing renewal, then having an active Corporate Secretary is imperative. The only corporation that can reasonably afford to do without an active Corporate Secretary is a solo entrepreneur operating in just one or two states in a business with few regulatory hassles.

What about LLC’s?

There is no required office of “Secretary” in a limited liability company, and LLCs generally have more relaxed record keeping and reporting requirements than corporations.  However, if your small business LLC has members who are not active in the business, or has multiple members, or  is in an industry where there are numerous regulatory filings to track, then it is a good idea to create a Company Secretary position.

Does the Secretary need to be full time?

The Secretary needs to be able to devote as much time to record keeping and governance as your company needs. Active Corporate Secretaries can also play key roles in staying abreast of and recommending new governance ‘best-practices’ to the management team and board, and can help the board keep their focus on long-term strategy rather than getting too focused on near term imperatives.  That being said, for many small businesses, Corporate Secretary is not a full time position. The solution is either to make one of your full time partners or employees also the Secretary, or to hire an outsourced Corporate Secretary. Should you decide to stay in-house, the key is to make sure the person selected has the knowledge and skills to do the job, and has the time to devote to it, so that the required record keeping is not overlooked while the person focuses on their primary responsibility.

Should our lawyer be our Corporate Secretary?

A legal background is not required to carry out the duties of the Corporate Secretary. The corporation’s attorneys are responsible for giving the company legal advice.  The Corporate Secretary is responsible for giving the company governance advice.  In fact, having a Corporate Secretary who also provides legal advice creates difficult questions about whether a particular communication made to management is legal advice – which may be subject to the attorney-client privilege – or general corporate/business advice, which is not.

The “dual hat” corporate secretary/lawyer must always be careful to distinguish (and, as secretary, record) which “hat” is being worn, and whether it is legal or governance advice that is being given. If there is litigation between the partners or between management and non-managing shareholders in the future, you can be sure that the dual role will become litigated, the lawyer is likely to be disqualified, and the entire mess will be expensive.

The corporate lawyer has a key role to play in the life of the corporation, even a small business corporation.  The lawyer must help to train the Corporate Secretary and help the Corporate Secretary identify the line between governance advice and legal advice, so that the Corporate Secretary does not unwittingly engage in the unauthorized practice of law.

Final Words

Corporate Secretary, or Company Secretary in an LLC, is a key role that requires someone with the training, and the time, to perform it well. Read any account of the causes of expensive business litigation and you will find poor record keeping, especially of ownership and governance records, to be cited as one of the most common factors leading to protracted lawsuits.  Good records allow cases to settle more quickly. Poor record keeping can also be the cause of a corporation’s shareholders losing their limited liability, or of a company losing its regulatory authority or state licensure to do business.  Finally, poor record keeping distracts the board from long term planning and causes the boards to lose their focus and their institutional memories. A good Corporate Secretary is an asset to your business.

Financial Statements – An Overview for Entrepreneurs

Financial Statements are records that present your business’s financial activity in a clear and concise way. It is important for entrepreneurs to understand the different records that make up the financial statements and how they work. Properly used and understood, financial statements let you, the small business owner, understand and manage your own business more effectively, and help you present an accurate representation of the financial health of your business to important allies.

There are four documents that generally make up the financial statements of any business. They are:

The Income Statement (also called the Profit and Loss Statement or the “P&L”);

The Balance Sheet (more formally the Statement of Financial Position);

The Statement of Cash Flows; and

The Statement of Changes in Equity

Each of these tell the story of your business in a different way. Taken together, they should offer the whole picture.

The Income Statement is used to look at the business’s profitability. It measures and totals the business’s income from all sources, and then shows the business’s expenses. The final line of the Income Statement shows the business’s net profit (or loss) over the period measured. The Income Statement covers a specific time period: monthly, quarterly, year-to-date and annual statements are the most common. You can determine the period covered in the income statement’s title. An income statement entitled “for the month ended 3/31/2015” covers all income and expense incurred in the month of March. An income statement entitled “for the quarter ended 3/31/2015” covers all income and expense incurred from January 1 – March 31.

The Income Statement does not include money that may move in and out of the business that are not income or expenses. For example, if your business borrows money from someone during the period covered, that will not be shown on the income statement, because the money you get from borrowing is not “income” – it is not taxable. Similarly, if your business paid some of the principal of a loan back during the period covered, it will not be shown, because the repayment of a loan is not an “expense” – it is not deductible (the interest you pay on that loan, however, is an expense and is shown).

A final note about income statements is that they may be prepared on a “cash” basis or an “accrual” basis. Cash basis statements record items of income or expense as they are actually received or paid by the company. On a cash basis, you record income when you actually receive the money, and you record an expense when you actually write and send the check. Accrual statements record the items of income and expense when they are earned or incurred. On an accrual basis, you record income when it becomes owed to you (you complete the work and send the bill), and you record expense when you owe the money (you receive the goods or the service), regardless of when you pay.

The Balance Sheet is used to show a business’s assets, liabilities and equity at any given point in time. Balance sheets have a single date on them, and speak as of that day. Typically, one would present an Income Statement for a given period, along with a balance sheet for the last day of that period. An Income Statement “for the year ended 12/31/2014”, then, might be accompanied by a Balance Sheet dated 12/31/2014.

The Balance Sheet measures all of the business’s assets (cash, accounts receivable, inventory, equipment, property, etc.). Note that the balance sheet shows the depreciated value of those assets, and detailed balance sheets might even show the original basis (amount you paid, generally) of the item, and then show how much depreciation has been taken and show the net asset value (basis – depreciation). All of the values of all of the assets are the totaled as “Total Assets”.

The Balance Sheet then measures liabilities (trade payables, the principal amount of debts or loans owed, taxes owed but not yet paid) and equity (the value of all shares in the company plus any retained earnings). The total of all liabilities and equity together must equal the total of assets. In other words, assets balance with liabilities plus equity. That is why it is called a “balance sheet”, it must balance. Any increase in a business’s assets, without a corresponding increase in a company’s liabilities, therefore increases the company’s equity.

The Income Statement and the Balance Sheet are the two most commonly asked for and provided Financial Statements in a small business setting. The other two Financial Statements, though, are important to understand and can be used by the business owner to help better understand the business, even where they are not being asked for by outsiders.

The Statement of Cash Flows covers much of the same information as the Profit and Loss Statement – it covers items of income and expense for a certain period of time. The Statement of Cash Flows has two important differences, however. First, the Statement of Cash Flows is always a cash-basis statement. It measure the actual movement of cash in and out of the company. If the Income Statement was prepared on an accrual basis, the Statement of Cash Flows becomes critical to understand the company’s actual cash position at any given time. For example, if your company is owed a lot of money it has not collected, the Profit and Loss Statement (accrual basis) may show a healthy cash flow, when in fact the bank account is empty.

The Statement of Cash Flows may  reveal a drought of cash and alert you to take action to get those bills collected, raise cash, or delay expense. The other important difference is that the Statement of Cash Flows includes movements of money that are not included on the Income Statement because they are not items of income or expense (receiving or paying loans, for example), and it does not include items that are on the Income Statement that do not involve actual movements of money (like depreciation expenses). In that way, the Statement of Cash Flows is a more accurate measure of the movement of cash and your business’s cash position even when the Income Statement was prepared on a cash basis.

Finally, the Statement of Changes in Equity looks specifically at the ways in which the “Equity” portion of the balance sheet changed over any given period. The Statement of Changes in Equity looks, like the Income Statement, at a given period of time, and measure the change in that portion of the balance sheet over that period of time. Assume, for example, we had a balance sheet dated 1/1/2014, and another balance sheet dated 12/31/2014. Imagine also that the Equity portions of those two balance sheets (the Share Capital and the Retained Earnings) was different. Some change had occurred to the equity over the period. The Statement of Changes in Equity for the Year Ended 12/31/2014 would explain, in detail, the reasons for those changes. The Statement breaks the reasons for the changes down into categories (changes in accounting policy or corrections from a prior period, issuing or redemption of capital shares, income, etc.).

The Statement of Changes in Equity is most often used in a small business setting where there are non-managing investors who want an easy to review document that details what has happened with their investment, without having to wade through all the other Statements to figure that out.

Financial Statements can be used by business owners to better understand their business and make decisions. Financial Statements are used by the business’s professional advisers to make legal, business and tax/accounting recommendations. Financial Statements are used by investors to decide whether to invest in your business or to monitor their investment. Financial Statements are used by banks and other lenders to decide whether to make credit available to the business. The ability to understand and provide accurate financial statements can be critical for small business owners. In future posts, we will look at these important documents in more detail.

Perfect is the Enemy of Good

Le mieux est l’ennemi du bien.

–  Voltaire “La Bégueule”

 Deep (or not so deep) within the hearts of many entrepreneurs lies the perfectionist.  The one who is constantly striving to get it right.  To make it better.  To seek . . . perfection.

 Often, it is why we become entrepreneurs in the first place: we can’t stand to work for the other guy when we can see better ways of doing it, but don’t have the power to make changes.

  But this quest for perfection can lead to and endless tinkering with processes that are already good enough, to the exclusion of actually doing the work.  We can spend an inordinate amount of time getting from 96% right to 99% right, without any real increase in revenues.

 Worse yet, we don’t actually do the task at 96% while we tinker.  We don’t hit “send” on the email campaign.  We delay meetings.  We don’t schedule speaking engagements .  We delay sales calls.  A product launch sits on the desk.  All while we work to perfect something that would have worked if we had done it.

 When perfect keeps us from executing a plan that was good enough to work, perfect has become the enemy.

 My friend and fellow MasterMind participant Matt Stocking brought this to my attention this week.  Matt, who owns ColorHammer, said he had a great month of sales, because he stopped tinkering with a process that was 96% right and just focused on executing the plan.  The plan was good.  The plan worked.  The 4% that was driving him crazy was stuff his customers would never notice or miss.  By stopping thinking and wrestling and worrying over perfection, and just concentrating on executing a good enough process, he not only had his best sales month ever – he also had one of his least stressful months.

 My son, Henry, is an artist and a musician.  We talked this weekend about putting some of his music up on the internet.  He has been waiting until he felt it was perfect.  But perfect is not the point.  He has decided to make one new piece of music per week, and put it up there.  If he sticks with it, he will have 52 pieces of music on his website by the end of the year.  The music may not be perfect, but it will be good enough: he already is a talented guy.  And making 52 pieces of music will make him better all by itself.  He could wait 52 weeks, make all that music in private, and then put up his best piece next year, but how would anyone find him or hire him in the meantime?  They won’t.  Perfect would be the enemy of good enough.  Don’t wait for perfect – get good enough out there and join the conversation.

This is not to say we can rest on our laurels and stop innovating.  The key attribute of small business – the one that allows us to compete with the megacorporation – is agility.  We must be able to adapt to changing circumstances.  There is, however, no end to things to improve.  No end to new ways to engage with our customers.  No end to new developments and innovations to explore.

This month, take that thing you have been worrying to death and just do it.  The doing of it will make you better at it all by itself, while you spend your creative powers elsewhere.  Allow yourself to call good enough – good enough.  Allow yourself to execute the plan that is great but not perfect, and move your mental focus to something else – something new and exciting you can take from 0 to 96.

 Maybe you’ll have your best month ever.

The Insurance Funded Exit

There are many ways to fund your exit from your small business.  You can sell it to someone and “take back” a note for the purchase price, and get paid over time.  You can try to sell to a buyer that can get bank financing or has cash.  You can gradually give the ownership to your kids over time.  But today I wanted to talk about insurance as a funding tool for some buyouts.

I recently had a great meeting with Northwestern Mutual Life agent Ben Worley.  We were discussing small business issues, including exit planning and insurance funding.  Ben is a wealth of information on this stuff, and he has some pretty great ideas.

Most everyone is familiar with the life insurance funded death buy-out.  I want to fill in some details that came out of my meeting with Ben:

There are two good reasons for a business to have life insurance on an owner: key man and buy out.  These are separate things, although I suppose you could have one policy to fund both.

With the key man, the insurance proceeds go to the company, and the company keeps them.  The funds are used to soften the blow of losing the key man.  The company may need to hire temporary help, or it may take a while for the company to cut overhead to account for the lost productivity, or it may take some time to find a new producer to pick up the slack.

To fund a buy-out, the company is the beneficiary, but the company has an agreement with the insured owner (which is binding on the insured’s estate or spouse or heirs or whatever) to buy the deceased partner’s shares.  The company gets the money and pays it to the estate or heirs and gets the shares back in return.   Obviously, this works best when there are two or more owners, but it can also work if you choose a key employee or employees to take over and give them the ability to buy in at the deceased owner’s death or some such.  There are really dozens of ways to set this up, depending on your situation.

Insurance can also be used, however, to fund buy-outs in other ways.  A key employee or partner can buy life insurance and then fund it for some number of years, building up a cash value that the insured can borrow against.  When it comes time for the exit, the potential buyer borrows that cash value from their policy, and uses it either to fund the buyout or as the down payment for the buy-out, followed by a bank loan or seller take back loan for the rest.

Sometimes, these policies can have changeable beneficiaries, allowing the owner of the business to change the beneficiary if the intended buyer/employee leaves the business for some reason.  In the meantime, the death benefit of the policy is a nice employment benefit for the key person – one way to keep a good employee.

This type of setup works best if you have some lead time for the policy to build value.  In the meantime, you can build the value of the business by demonstrating profits, growing gross revenues, and building great customer relationships.

If you begin with a targeted sale price, you can ask a business valuation expert what the numbers need to be to get to that valuation, and set goals accordingly.  That will tell you how much to fund the policy each year, and you can measure your progress toward both the goal of funding the policy adequately and meeting the price goal.

Each of these life insurance strategies has complicated details and tax ramifications, which makes a knowledgeable professional insurance agent like Ben a must.  They also each need clear, well written contracts, so don’t try this yourself or with some junk you found on the internet: hire a good business lawyer (like Ralph Gleaton or John Perkins, if you’re in Greenville).

And if you want a business consultant to help you craft your plan, or to ride along beside you on you journey, call me.

A Word About Buy-Sell Agreements

Negotiating a buy-sell arrangement is complicated.   As my wife, Kristine, pointed out to me yesterday, most people see how complicated it is and just chose not to do it.  After all, it is the heady, early days of the partnership, so who wants to talk about a break up?

A great deal of the stress, I think, comes from the unknown.  What are the options?  Which options should be chosen?  It is difficult for business partners to choose a buy-sell method when they don’t even know what their choices are.

Here, then, are a few of the most popular choices, demystified a little (I hope):

The Appraisal:  A favorite of big firm lawyers, they use the appraisal for almost any buy-sell situation.  Events that trigger a buyout are defined.  They usually include death or disability of a partner, and may also include mechanisms for voting a partner out, retiring, and other events like the ones listed here.  When a triggering event happens, the company hires a business appraiser.  Often these are CPA’s that specialize in business valuation, but they might be some other form of financial analyst, business lawyer, economist, etc.  The appraiser will get the financial documents needed to value the business, and will usually interview the partners to find out if there are any known events on the horizon.  The appraiser then generates a fair market value (or a fair value) for the shares being sold.

The good thing about this kind of buy-sell arrangement is that it works no matter how many partners or what their shareholdings are.  It is important to give the appraiser some guidance about the terms of purchase, and perhaps to specify mandatory discounts when the reason for the buyout is a “bad reason” (like a partner just quits, when the business agreement did not allow quitting or punishes quitting with a discount).

Cost is the biggest problem with this approach.  These types of business valuations are expensive.  A thorough one can cost $10,000 or more.  If you use the three-appraiser variation (where the buyer chooses an appraiser, the seller chooses an appraiser, and the two appraisers choose a third appraiser) you can be in for some serious expense.  Because of the cost, this option is really not appropriate for smaller businesses.

The Standoff:  This is a favorite of my friend Robert Demes.  In this type of buy-sell agreement, the partner who wants the separation, for whatever reason, names the terms of the deal: price, cash down, payments over time (term, interest rate and collateral) and any other deal points.  The other partner then chooses to buy or sell at that price and under those terms.

This is a great way to get to a fair price without a lot of cost.  It is useful only in limited situations, however.

It is difficult to use this process if there are more than 2 partners, or if the partners do not have an equal number of shares.  It is difficult to use this process if the partners have significantly different wealth: the wealthier partner can simply choose terms the poorer partner cannot meet.

It is also useful only for events where both partners may want to or are able to continue the business.  It doesn’t make a lot of sense when one partner has left the business due to death, disability, retirement, quit, etc.

The Escalating Bid:  This is similar to the standoff, except that the partner who wants to buy the other one out proposes a price, and then the partner receiving the offer must either accept the price or counteroffer to buy the first partner out at a higher price.  The rounds of raised offers go on until someone agrees to sell.

To make this buy-sell agreement work, the terms are usually set, as far as percentage down, interest rate, number of years to pay, and security.  The only variable you are negotiating is the price.

This buy-sell agreement is essentially a variant of the standoff, and works well and doesn’t work well in the same situations and for the same reasons.  The escalating bid is less of an all-or-nothing and more of a structured negotiation.

The Set Price:  The set price is meant to be a fair and inexpensive way to have a very flexible buy-sell agreement that can work in all situations and no matter how many partners there are or what the percentage ownership is.  With the set price, the partners set the price of each share of stock (or membership interest or partnership share) each year, usually at the company annual meeting.   The share price prevails for the next year: if any event occurs that triggers a buy-out during the year, the company buys the shares at the set price.  Like the escalating bid, the terms are also usually spelled out, and can include set discounts for minority shares or for certain triggering events (you might get the full price for disability, but not for quitting).

When this works, it can work well.   The set price works best when the partners take advice from their accountant and attorney at the annual meeting and really take care to set a fair price.

This method has a lot of potential pitfalls, though.  First, most partners eventually just forget to keep setting the price every year.  This makes the buyout useless.  Attorneys sometimes try to paper over this by making the last set price good until a new one is set, but that can be a disaster when it has been years and the last set price is grossly out of date.   Second, this method often has partners setting a price when the sale event is on the horizon.  Partners may have a good idea who will be the buyer and who will be the seller, and it may become difficult or impossible to set a fair price.  Worse yet, one set of partners may be tempted to withhold critical information from the partner they think they will be buying out, in order to get agreement to an inadequate price.  If discovered, this can lead to some nasty litigation.

The set price is a nice buy-sell method, buy I recommend you specify a back-up to resolve problems or take over if the price cannot be agreed on or you forget.

The Formula:  This is a cross between the set price and the appraisal, and can work well.  With the formula, the partners, hopefully with the help of an accountant or a business valuation professional, agree up front on the formula that will be used to calculate share value when a triggering event occurs.  The formula can be complex or simple, and can change over time as the company matures.  The formula can include all manner of situational discounts and other bells and whistles.  When a triggering event occurs, the partners plug the company’s data into the formula and determine a share price.  The company then buys the shares.

 This works well if you have a good formula, so it is one of the more expensive up-front options because you pay to have the formula crafted on the front end, and get a relatively inexpensive buyout on the back end.  The method only works as well as the formula, though, and as your company changes over the years, the formula may become dated and inaccurate – you are well served to have the creator revisit the formula from time to time.

 These are a few of the most popular buy-sell options.  There are many others, and unending variations on these.  I may describe some others in a future post.  In any case, getting this done before you have a buy-out event will save you a lot of time, money, heartache, and legal fees.  The method you choose is only as good as the document it is described in, so pay the money to hire a competent business lawyer and get it drafted up properly.

Sometimes you’re the Bug, Sometimes you’re the Windshield

“Sometimes you’re the bug, sometimes you’re the windshield”, said my friend Bret Mingo, was we walked down the streets of Annapolis on a beautiful Tuesday night.  I was in town to help Bret and his partner, Chris Van deVerg, sort out back office issues for their company Core Communications.  We were discussing another friend’s company that had broken up, and it had not gone well.

“The time to negotiate what will happen when you break up is before you get together, or soon thereafter”, Bret opined.  “You have to make the deal before you  know whether you’re the bug, or the windshield”.

Bret was right.  Deals are much tougher to negotiate after everyone knows whether they are the buyer or the seller.  Deals are much more difficult to negotiate after you know whether you are the partner left running the business, or the partner whose widowed spouse is left trying to raise the kids.

Life has a way of going in unexpected directions.  I think any small business potentially benefits from considering, up front or early on, what will happen in many of the following situations:

1. One partner wants to leave.
2. The other partners want one of the partners to go.
3. One of the partners dies.
4. One of the partners is disabled, or can’t work for an extended period of time.
5. One of the partners isn’t pulling their weight.
6. One of the partners is arrested.  Does it matter who the victim is?  What the crime is?  Does it matter if the person isn’t convicted?   What do you do in between arrest and conviction?
7. One of the partners wants to retire and be bought out.
8. One partner wants to buy the other partner out.
9. You want or need to bring a new partner in?

All of these are possible.  The answers will depend a lot on the number of partners, the type of business, the corporate form of the business, and relative wealth of the partners, the relative working value of the partners, and a host of other factors.

In order to do this right, the partners will need advice from:

• A good accountant – to tell them the tax problems and opportunities
• A good business lawyer – to help them write a binding agreement that makes sense and is enforceable
• Possibly a good banker – to discuss financing realities of some of their choices
• Possibly a good insurance agent – to offer advice on other financing options for some of the issues: like life insurance, disability insurance, and retirement plans

I have seen a lot of bugs get hit by a lot of windshields in the last 20 years of working with entrepreneurs.  Bret has too, and I’ll bet any entrepreneur or professional who works with entrepreneurs has seen it more times than they care to recall.  It is always painful to see a company destroyed when it didn’t have to be, all because the partners didn’t negotiate a deal before the windshield was flying at one of them.  By then, it is often too late.

The Dream Exit

I was having coffee with a friend and client today, and out of our conversation came a really powerful insight: getting clarity about your dream exit is a powerful tool for an entrepreneur.

I have touched on long-term exit strategy with clients before, and often this leads to thinking about buy-sell agreements or rights of refusal or life insurance funded trusts for my client’s lawyers to create (you’re welcome), but today it was really about envisioning the exit my client wanted, taking a look at what the company had to look like in several years to achieve that, and defining short and medium term concrete goals to get there.

It was exciting.

On of the awesome things about being an entrepreneur is that you are creating your own work life.  You really do have the power, at least within the limit of your skills and finances, to do the work you like and not to do work you do not like.   You can envision the life you want, and make a plan to get there.  Once you have done that, with specificity and clarity, the day-to-day decisions take on a new meaning.  You can measure the decisions by whether they are working the plan.

In our case today, we were discussing an opportunity that had come up, which was exciting.  We thought we had it about down.  Then we had the conversation about long-term goals.  At the end of that conversation, even though our discussion about long-term goals is only beginning, we could both see that we had missed an important part of the opportunity we thought we had thoroughly covered.  The goal drove the opportunity, and by tweaking it a little we made the opportunity a better part of the long-term success.

Most entrepreneurs are very, very busy with what is happening right now.  If it is not both important and urgent, it gets done tomorrow, not today.  But taking time to think about what that dream exit looks like, or even what the dream company looks like, is time well spent.  The time spent for that planning will pay you back in making those day-to-day decisions a little easier to make.

So clear some time and some head space for thinking about what the dream future looks like, and how you can reduce that to specific and measurable short and medium term goals.  You will not regret the time.

If coffee and a conversation with me would help, call me.

Platform – Getting Noticed in a Noisy World

“Privacy is dead” writes Michael Hyatt.  He wrote these prophetic words a year before Mr. Snowdon told the world about the NSA snooping program.  Mr. Hyatt’s point is that it is no longer realistically possible to be engaged in commerce and have privacy on the internet.

The thing to do, instead, is to create your own platform.  You can then use that platform to broadcast the image a content you want to create.  Your good content will chase out any bad content, or at least give it a context or a counter-story.

Content is king these days.  Consumers, whether shopping for goods or for services, have begun to expect it.  Consumers want relationships.  Consumers want to know with whom they are doing business.  Consumers want to know that you know your stuff.  Consumers want to do business with people who are putting it out there.  Today, more than ever, it is about engagement.

Content is easier than ever to create and publish.  Because content is easier than ever to create and publish, content is also harder than ever to get heard.  Content is often lost in the great waves of content being created.

Platform is an excellent, easy to read book about how to build a platform for your content, so that you can be heard.

Platform has short, easy to understand chapters that cover building a platform from the ground up.  It teaches many practical things.  Almost every time I read a chapter, I took the book to my computer and made changes to my content pages.

If you are interested in doing business through the internet, and would like to understand more about the practical side of twitter, blogging, speaking and the like, then I highly recommend this book.

I thoroughly enjoyed it and found it very useful.

Let me know what you think, when you read it!

Goal!

Goal setting is a powerful tool for business success.  Here is why:

First, you and your employees engage in a great deal of activity.  Without specific, short-term, measurable goals, this activity is unfocused.  Add such goals, and you influence both your and your employee’s activity.  You direct it.  You channel it.

Second, people love competitions and games.  By setting goals and measuring progress, you make work a competition.  You make work a game.  This will motivate your staff.

Third, you change what you measure.  You want to change your and your employee’s habits, and motivate each of you to spend your activity on the things that matter.  By choosing a goal and measuring progress toward that goal, you will change behavior.

Fourth, you provide a yardstick to measure choices against.  Once you have specific, measurable goals, you give yourself a powerful mental tool for decision-making.  When someone wants you to spend time or money on something, you can ask whether this will help you meet one of your current goals.  If not, it is easier to say “no”.

How, then, does one go about setting goals?

Set Goals That Matter.  If goals are going to change your and your behavior and channel your activity, the goals had better be ones that really matter.  Many companies get into trouble because they set goals that do not matter, and then their activity is directed into channels that do not really help accomplish long term strategic objectives.

Therefore, goals must be things that, if accomplished, will move the company toward accomplishing its long-term strategic objectives.

When I was hired as Traffic Manager by McDevitt Street Company in Charlotte in 1989, part of my job was to manage the mail room.  McDevitt Street’s headquarters in Charlotte took up two, four-story buildings off the Billy Graham Parkway.  McDevitt Street also had permanent satellite offices all over the country – Orlando, Nashville, Dallas, several in California.  About twenty satellites altogether.  There was a  lot of mail, both between the workers in the home office and among workers in the home office and workers in the satellite offices. 

When I took over, one of the biggest problems with the mailroom was misrouted mail – every day, multiple items of mail when to the wrong satellite office and had to be re-routed, costing days that were, in some cases, valuable.  I could have yelled and screamed and threatened and created an emergency, and that would have gotten the workers attention for a short time, and misrouted mail might have temporarily declined.  I did not.  Instead, I put a poster up in the mailroom.  On one half, it said “Days With No Misrouted Mail”.  On the other half, it said “Most Days with No Misrouted Mail”.  I changed the numbers every day.  I told the group that our goal was ten consecutive days of no misrouted mail.  Once we hit that goal, I told them we should shoot for thirty.  When we hit that, I asked them what the new goal should be.

A year and half later, when the “Consecutive Days Without Misrouted Mail” hit 250, the President of the Company came to the mailroom and personally thanked the mailroom workers for a job well done. 

Set Goals That Are Achievable.  To really be a goal, one needs to be able to achieve it within a determinable time period.  Otherwise, it looses its immediacy and becomes a sort of long-term objective.  Tom Mendoza of NetApp says 90 days is the right time frame.  That’s a decent rule of thumb, but one can set thirty-day goals or even annual goals – the key is to cause the goal to be immediate enough that it affects daily decision-making,

Set Goals That Are Measurable.  If it’s not a game, why are we keeping score?   Goals are only goals if progress toward them can be measured, and you can objectively determine success.  “Dress Better” is not a goal – it cannot be measured and success cannot be determined subjectively.  “Sell more” is also not a goal – even though an increase may be measurable, one doubts if selling $0.01 “more” is really success.  To create that competition/game excitement and really change behavior, your goals must be measurable.

Set Goals That Reward.  Many people will tell you that every goal should not only be achievable and measurable, but also that each goal must have a specific, financial reward tied to success.  This overstates the case.  Napoleon said “A soldier will fight long and hard for a piece of colored ribbon”, and he was right.  Often, recognition and appreciation are enough to create change.  Rewards come in many flavors – financial is just one tool among many.

There is an old army saying “Inspect what you Expect”, meaning that only those things that are measured will change.  Business owners will be amazed by the results if they can master the challenges of setting goals that matter and measuring progress toward those goals.

Have a goal-setting success story: share with the group by commenting.  Need help setting goals and measuring progress?  Give us a call!