Your Business Planning Roadmap: From Start-Up to Succession

Women Entrepreneurs of Minnesota

March 19, 2013

Adizes: The Corporate LifecycleSource: ttp://www.adizes.com (2012)

What We Can Learn fromThe Corporate Lifecycle Model

Businesses have predictable and repetitive patterns of behavior as they grow and develop.

The same methods that produce success in one stage can create failure in the next.

Problems are normal and desirable. Problems are the natural result of change.

As a leader, focus on accelerating your organization's ability to recognize and resolve problems.

An organization in Prime has achieved a balance between control and flexibility. A Prime organization knows what it is doing, where it is going, and how it will get there, enjoys both high growth and high profitability.

The founder’s “big idea”

Start-up company

Going Concern

Presented by:Margaret Cronin (margaret.cronin@leonard.com)Jenna Bettes (jenna.bettes@leonard.com)Leonard, Street and DeinardProfessional Association150 South Fifth Street, Suite 2300Minneapolis, MN 55402612-335-1500

Legal Lifecycle of a BusinessBi

g Id

ea

•Patents•Trademarks•Copyrights•Nondisclosure Agreement•Work-for-Hire Agreement•Joint Development Agreement

Star

t-Up

Com

pany

•Organizational Documents•Choice of Entity•Articles•Bylaws/Operating Agreement•Assumed Name

•Start-Up Financing•Self-Financed•Bank•Friends and Family•Private Placement: Outside Investors

•Angel Investors

•Adding Partners•Alignment•Division of Roles/Responsibilities

•Buy-Sell Agreement

•Hiring Employees•Employee vs. Independent Contractor

•Noncompete Agreement•Employment Agreement

Goi

ng C

once

rn •Third Party Litigation•Protection of Intellectual Property

•Disputes with Vendors and Suppliers

•Employees "Stealing" Ideas•Employees Joining a Competitor

•Firing or Laying Off Employees

•Partner Issues•Partner Disputes•Minority Shareholder Litigation•Buyouts•Exit Strategies

•Sales and Marketing•Social Media Compliance•Adapting a Competitor's Idea

•Financing Growth•Venture Capital•Private Equity•IPO

Legal Lifecycle of a BusinessBi

g Id

ea • Patents• Trademarks• Copyrights• Nondisclosure Agreement• Work-for-Hire Agreement• Joint Development Agreement

Trademarks What is a trademark?

– In short, it is a Brand Name.– May be a word, name, symbol, device, or

any combination thereof, used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from another, and to indicate the source of the goods.

– May also be a Service Mark.– May be international.

What a trademark is NOT.

Trademarks (continued) How to obtain a trademark?

USE! Trademarks are protected from their date of first public use.

If mere use creates a trademark, why would I register my mark with the USPTO? Additional legal advantages and

protection How do I register my mark

with the USPTO?

Copyrights

-What is a Copyright?- Form of protection provided to authors of “original

works of authorship”.- Original works includes the following:

- Literary;- Dramatic;- Musical,- Artistic;- Certain other intellectual works, both published

and unpublished.-What a copyright is NOT.

- Does not protect titles, slogan, or short word phrase.

Copyrights (continued)

- What does a copyright do?- Provides owner the exclusive right to reproduce the

copyrighted work, prepare derivative works, distribute copies, perform or display the work publicly.

- How do I obtain a copyright?- Again, use! By putting the work in any tangible form,

it is copyrighted.- Why would I register my work with the

Copyright Office?- Additional legal protection and remedies.- Puts the world on notice of your ownership to

prevent infringement.- How do I register my work?

KEY DISTINCTIONS:

• A copyright protects a form of expression, not the subject matter of the expression.– (EG: a written description of a machine can be

copyrighted, but protection only prevents unwanted copying of the description itself, not the making or using of a machine made using the written description.)

• The purpose of a trademark is to protect words, phrases and logos used in commerce.

Legal Lifecycle of a BusinessStart-Up

Company• Organizational

Documents• Choice of Entity• Articles• Bylaws/

Operating Agreement

• Assumed Name• Start-Up Financing

• Self-Financed• Bank• Friends and

Family• Private

Placement: Outside Investors

• Angel Investors

Legal Lifecycle of a BusinessStart-Up

Company• Adding Partners

• Alignment• Division of

Roles/Responsibilities

• Buy-Sell Agreement

• Hiring Employees• Employee vs.

Independent Contractor

• Noncompete Agreement

• Employment Agreement

Top Tips About Starting Partnerships

Think very carefully before taking on a partner

Could you hire someone to perform the role that you need from the partner?

Don’t jointly and severally guarantee any debt you couldn’t cover individually

How will you handle a need for additional capital?

Start with the dissolution – while things are amicable and collaborative – and consider every contingency

Write it down in your Partnership Agreement, Buy-Sell Agreement or Member Control Agreement

Legal Lifecycle of a BusinessGoing

Concern• Third Party

Litigation• Protection of

Intellectual Property

• Disputes with Vendors and Suppliers

• Employees "Stealing" Ideas

• Employees Joining a Competitor

• Firing or Laying Off Employees

• Partner Issues• Partner Disputes• Minority

Shareholder Litigation

• Buyouts• Exit Strategies

Legal Lifecycle of a BusinessGoing

Concern• Sales and Marketing• Social Media

Compliance• Adapting a

Competitor's Idea

• Financing Growth• Venture

Capital• Private

Equity• IPO

Components of Business Succession and Exit Strategy Planning

Contingency Plan

•How do we plan for unexpected events in the business?•E.g., Death, disability, divorce, bankruptcy of owners•Contained in Buy-Sell Agreement and Estate Plan

Succession Plan

•How do we create and implement a plan for transferring ownership of the business to a new ownership group so that the business can continue?•E.g., Gift/sale to family members, sale to partners, sale to employees

Exit Strategy

•How do we plan to maximize the business for sale to a third party?•E.g., Sale to competitor, sale to individual or small investor, sale to strategic acquirer, sale to private equity firm, IPO

Initial Considerations

• Who are the key players in your business?• How sustainable is your business model?• What is your time frame for transferring

ownership?• What advisors should you have at the

table?

Goals and Objectives

Financial Security of Owners, Spouse and Children

•Providing stream of income or note payments•Reviewing possible strategies

Retirement Planning •Reviewing corporate-owned retirement plans•Coordinating financial plan with plans for business

Estate Planning •Minimizing estate taxes •Providing for equality among heirs

Liquidity Planning •Creating liquidity for compensation•Creating liquidity for estate taxes

Protection of Minority Shareholders

•Reviewing share transfer restrictions in Buy-Sell Agreement•Reviewing governance provisions in Bylaws

Succession of Business •Deciding who will own and control the family business•Working through family conflict

Legal and Tax Considerations

Structure of Entity• Is the entity a corporation (s-corporation or c-corporation), limited liability company, partnership or other

entity?• How are the interests currently owned?

Tax• If business interests are transferred by sale, what are the capital gains tax consequences?• Will depreciation and recapture cause gain on sale of assets to be taxed as ordinary income?• If business interests are transferred by gift, have the estate and gift tax consequences been examined? Compare step-up in basis to capital

gains tax upon future sale. Be mindful of retained control or enjoyment.

Regulatory Compliance• Do the successor(s) have the appropriate licensure to continue the

business?

Valuation• If discounts are applied to the value of the ownership interest, were these

discounts obtained through a qualified valuation?

Legal Documents• Are legal documents in place, such as Employment Agreements, Noncompete and Confidentiality Agreements, Stock Purchase Agreements and

a Buy-Sell Agreement?• Are the corporate Bylaws/Operating Agreement and Minutes up-to-date?• Have prior loan documents and Lease Agreements been reviewed?

Matrix of Options

Sale

Sale of Assets to Third Party

Sale of Stock to Third Party

Installment Sale of Stock to Family Members

Installment Sale of Stock to Defective Trust

Sale of Stock to Partner(s)

Sale to Employees using ESOP

Gift

Outright Gift of Stock

Gift to Irrevocable Trust

Grantor Retained Annuity Trust

Family Holding Company

Other

Stock Redemption

Corporate Division

Your Business Planning Roadmap

Begin with the end in mind: what is your

best possible result in your current phase?

Work backwards: what needs to

happen in order to achieve this result?

Create a plan: seek input from

advisors to create a strategic plan

Implement the plan: this may take several stages

depending on the readiness of the

company

Reevaluate the plan:Is it working, and is

the desired outcome still achievable?

Transition smoothly: Be prepared to

consult, and ready for your next phase

Thank you!Margaret Cronin (margaret.cronin@leonard.com)

Jenna Bettes (jenna.bettes@leonard.com)Leonard, Street and Deinard

Professional Association150 South Fifth Street, Suite 2300

Minneapolis, MN 55402612-335-1500