Archive for the 'Legal' Category

The small business ownership transfer challenge

One of the primary reasons most small businesses aren’t prospects for venture capital is because of incompatible thinking regarding the exit strategy. VCs expect to get their money back within a few years (less than 10 but closer to five) while a business founder typically thinks of running the business until he or she gets tired of it and/or retires.

Regardless of exit strategy goals, all business owners must think about how they’re going to exit the business they founded: selling to a new owner, going public, handing the reins to family members, or as in way too many cases, simply going out of business. But sadly, as much of a certainty as it is that a founder will exit the business, most fail to plan for this inevitability.  And the result of this failure to plan an exit often results in an expensive and painful scenario for the owner, and in the case of health problems or death, the family.

But all of this inefficiency, pain and brain damage can be prevented with a strong resistance to floating down that river called denial, plus some forethought and planning.  If you’re having trouble making this happen, your problem can be fixed by talking to professionals who know how to hold your hand and get you on the right ownership transition track, regardless of which exit scenario is most likely to be in your future.

Once you’ve come to grips with your ultimate departure from the business, you can start to accept that the way your business is operated and structured when you show up each day - let’s say, in the middle of your ownership tenure - will be different from the way it will look on the day you convey the business to the next holder of the keys, whether an arms-length sale or a family transaction.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the process of planning for the orderly and successful transfer of ownership of a small business with a member of my Brain Trust, Dr. David Gage. David is a leader in the field of business mediation, a founder of BMC Associates and author of Partnership Charter: How to Start Out Right with Your New Business Partnership (or Fix the One You’re In).

Take a few minutes to listen to this conversation and be sure to leave your own thoughts, including any business transfer stories you might have. Listen Live! Download, Too!

How judicial empathy harmed one small business.

Upon the announcement of the retirement of Associate Supreme Court Justice, David Souter, President Obama announced that he wanted to replace Souter with someone who has “that quality of empathy, of understanding and identifying with people’s hopes and struggles.”

Days later, the president made good on that promise by nominating Sonia Sotomayor to replace Souter. Based on Sotomayor’s past rulings, as well as comments in speeches and participating on panels, Mr. Obama accomplished his “empathy” goal. In a speech at Berkeley, Judge Sotomayor said, “I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion as a judge than a white male who hasn’t lived that life.”

How does empathy, gender, race or experience reconcile with what is no less than the cornerstone of American jurisprudence, blind justice? What would empathetic justice look like? In my career as a business owner, I’ve had some experience with an empathetic judge who chose to peek under the blindfold she swore to wear when ruling on petitions brought before her. Here is that true story.

A salesperson was hired by me to call on prospects and customers of a company I owned. Since I knew I would be giving him proprietary pricing and sales strategies that were the intellectual property of my company, I asked him to sign a non-compete agreement when he was offered the job. By accepting, if he should leave my company for any reason, he would have to forgo operating in my industry within a reasonable geography and time frame. He signed and went to work.

Less than two years later, I discovered that he was making plans to quit, and in fact had already started his own new company which would compete directly with my business. Worse, he was actually telling my customers about his new venture in an attempt to subvert sales to him. Not only was his future behavior going to violate the non-compete agreement, but his disloyalty is against the law in our state. Immediately after he was fired for this infidelity, he opened his competing business with a storefront location.

In the subsequent non-jury lawsuit I brought to enforce the non-compete agreement, the District Court judge, who just happened to be a woman, listened to the facts, reviewed the evidence and ruled in my favor. The defendant should cease and desist operating his business for the period and geography he originally agreed to. Alas, he continued operating his business, in defiance of the court order.

Within six months, we were able to bring the man before the judge again with the evidence of his continued violation of the agreement and the court order. But instead of throwing the book at the defendant, incredibly, the judge instead dismissed her earlier ruling against him. Her reason? She had since discovered that her daughter knew a member of the defendant’s extended family who, as a teenager, had been killed in an automobile accident a few years earlier. The judge went on to say that she now felt the family had been through enough and, essentially, she didn’t want to place any more hardship on them.

Thus, I came face-to-face with judicial empathy and found it violated a valid contract, disregarded testimony, facts and evidence and preempted the constitutional right of this American citizen to petition the court with an expectation of receiving blind justice. My brush with touchy-feely justice cost me a few thousand dollars in damages and legal fees. But if empathy as a basis for deciding cases at the Supreme Court level becomes reality, I fear it will undermine two of the cornerstones of our nation: the sanctity of a contract and the judicial system that for more than 200 years has been the model for the rest of the world.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about my experience with judicial empathy. Take a few minutes to listen, and be sure to leave your own thoughts and experiences.

The evolution of small business dreams

The British playwright, William Archer (1856-1924), once remarked to a friend about how a “perfect plot” had played out to him and “evolved” in a dream one night. He saw “the whole thing, from beginning to end,” and when he awoke, put pen to paper.

Small business owners know about this kind of dream. It begins with what I call the founding dream, which is the first time an unconscious entrepreneurial inclination pops upon our consciousness radar screen.

At first a founding dream may be barely perceptible. And when one is remembered for the first time upon waking, the awareness is often more troubling than remarkable: What does this mean? What do I do with this?

But if the mind and the spirit are receptive, a founding dream “evolves” into more than a blip on the radar. Subsequent dreams become less impressionistic and more real. Animated dreams come next. Your nocturnal entrepreneurial visions play out with an actual cast of characters - sometimes in Technicolor.

Now you’re well aware of, and more comfortable with, your small business dreams and you start to do a little day dreaming. Day dreaming is the first step in the due diligence process - the research. You start asking lots of questions: What if….? How do I…? Where does this…? Who can…? When should…?

Ultimately, as the answers to these questions are revealed and accumulate, you begin to make your entrepreneurial dream become reality; you actually start living the dream of owning your own business. At this point the start-up dreams will stop. Since you’re now living your dream, why dream about it, right?!

Your founding dream now has a name, address, phone number and a tax ID number. It has “evolved” into the “perfect plot” for your small business.

The power of small business trade secrets

Forgive me, because I know you’ve heard me say this many times before, but we’re not in Kansas anymore, Toto. We’re in the 21st century, and things here are different. And nowhere is this truth more evident than in the world of intellectual property (IP). You know: patents, trademarks, service marks, licensing, copyrights and trade secrets.

One of the cool things about 21st century IP is how easy it is for small businesses to create and leverage it. Unfortunately, too many small business owners get the idea that they don’t own intellectual property because they don’t have a big brand trademark like Nike’s swoosh, or they don’t have patented inventions, like Research In Motion’s Blackberry. But that’s like thinking you can’t cook a delicious steak on the grill at home because you don’t own a restaurant.

The truth is small businesses - including yours - create intellectual property all the time, just not always the flashy kind. One of the best examples of small business IP is a trade secret. This is anything that you’ve developed or discovered that gives your business a competitive advantage. It could be a delivery system or an inventory management scheme. It could be as simple as a finely-tuned payroll-to-revenue ratio, or as elaborate as a customer relationship management program that you’ve created for the way you want to track sales development and customer service.

Either way, it was created by you, your business is leveraging it and, therefore, it’s an asset that belongs to you - which means you should recognize that it has value and should take the necessary steps to protect it.

Recently, I talked about how to value and protect your trade secrets on my small business radio program, The Small Business Advocate Show, with Brain Trust member and intellectual property attorney, David Dawsey. David’s firm is Gallagher and Dawsey, based in Columbus, Ohio. I think you will benefit by taking a few minutes to listen to what this expert has to say. And be sure to leave your thoughts on this topic.

How dear are your small business mistakes?

Mistakes are worth contemplating, and yet we often don’t. The reason, I think, is because it hurts a little to focus on them. It’s not fun to see ourselves that way. Mistakes are definitely not ego food.

But there is something very important to remember about mistakes: Not focusing on them can ultimately be more painful.

Sixteenth century French Renaissance writer, Michel de Montaigne, wrote, “Those things are dearest to us that have cost us the most.” Think he’s talking about mistakes? I do. Do you think of your mistakes as “dear”?

If you don’t contemplate your mistakes and learn from them, you are subjecting yourself to double jeopardy. Because today you will not only make the new mistakes we are all destined to make as we go through life, but you’re also doomed to repeat the old ones you should have learned from yesterday.

Whether your mistakes are valuable or expensive depends on whether you contemplate and learn from them, or deny them and keep on paying for them. I think paying for a mistake once is “dear” enough, don’t you?

Small business asset ratio: tangible vs intangible (IP)

Around the turn of the century, I ran across a study that was conducted to look at changes in the way businesses leveraged assets to execute their business model between the 1970s and the 1990s. Reading the results of that survey was an “Aha!” moment for me, and it contributed significantly to my thinking about how we would do business in the 21st century.

Study author and intellectual property attorney, Kenneth Krosin, found that in the late 1970s, corporate assets amounted to about 70% fixed assets, like buildings, equipment, tools, fixtures, inventory, etc., and about 30% intangible assets, a/k/a intellectual property (IP), such as patents, trademarks, licensing and trade secrets. But the big news in this study was that by the end of the 20th century, those asset category percentages had essentially inverted. By 1999, businesses were leveraging around 70% IP, and only 30% were assets that had serial numbers, stock numbers or an address.

Welcome to the Digital/Information Age.

In the speeches I deliver to small business owners around the country every year, I describe the findings of the Krosin study so I can poll the audience about how they’re leveraging IP. My unscientific findings show that, while most small businesses are not quite leveraging IP to fixed assets at a 70:30 ratio like the big businesses in the Krosin study, most are leveraging IP more every year and fixed assets less.

Besides the types of intellectual property - patents, etc., - there are two categories of IP: 1) the kind that someone else creates, for example, the patented software you license to use on your computer; and 2) the kind that a business creates for itself, like a delivery scheme developed internally that reduces fuel costs, which is often employed as a trade secret.

In the 21st century, it doesn’t really matter who creates the IP your small business is leveraging, as long as you’re continually finding new ways to do so. I believe that any small business that isn’t leveraging IP more and tangible assets less is headed for extinction.

I’m happy to report that Kenneth Krosin (foley.com) has become a member of my Brain Trust and has joined me several times on my small business radio program, The Small Business Advocate Show, to talk about IP and small business. I think you’ll enjoy my most recent interview on this topic with Ken. And don’t forget to leave a comment.




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