Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
You just need money to make it happen. Unfortunately, you are not independently wealthy, so you need some help. You ask your family to invest. They do.
Unless you were very careful, or more likely lucky, you might have joined the ranks of Kenneth Lay and Martha Stewart and gotten accused of violating securities laws. Most business owners understand that raising money from venture capitalists or in an initial public offering (an IPO) requires some level of legal involvement.
What most do not understand is that raising money from friends and family, or so-called founders stock, is governed by many of the same laws. Considering that 10 times as much money is raised from friends and family than from venture capitalists, this is a sobering thought.
Unfortunately, there is no distinction between your neighbor or brother-in-law and larger institutional investors when it comes to complying with the securities laws.
There is also no such thing as founders stock that makes it immune from the securities law or different from any other sale of securities, whether the sale is to the people that start the business or the friends that give some money to help get it going. Any offer and sale of stock, LLC units, LLP interests and so on must either be registered with the Securities and Exchange Commission and the applicable state regulators or exempt from such registration. Even borrowing money from your friends and family might count as a sale of a security.
The first and most important rule for a business owner to remember when raising money is securities laws are designed to protect investors, not help business owners. Remember this whenever you are thinking of asking people for money to help your business. The securities laws are complicated and it is easy to misunderstand what is required. The two-tier system of federal and state regulation and the fact that every state has its own rules, many of which are unique to that state, makes this even worse.
Selling securities in violation of these laws can result in penalties that range from being required to refund investors’ money, with interest, to payment of fines, and even potential criminal penalties for serious offenses.
You will need to make sure that you provide enough information to your potential investors so they can make an informed investment decision about your company. People need to understand the nature of your business, what their money will be used for, the risks involved in the business and most importantly, that they will lose their money if the business fails.
Failing to tell your potential investors, even your brother-in-law, about all the important aspects and risks related to your business is fraud. The best way to avoid this risk is to prepare some kind of disclosure document, or private placement memorandum.
You also must be careful when deciding who you will let invest in your business. Rich Uncle Sebastian is a better investor than your 82-year-old mother-in-law on Social Security. People with wealth or high incomes can more often afford to lose money in a risky venture than those with little wealth or meager incomes.
Remember, the law protects the investors, especially those who cannot protect themselves. Also, you should favor investors who have good business judgment and avoid those with little or no business experience.
For more information, visit dev.divistack.com, April 2005, Todd Taylor
There are many valid reasons to take your company public. These include raising a large amount of capital, having publicly traded stock for use in acquisitions, and providing liquidity to shareholders. The benefits of becoming a public company must significantly outweigh the burdens.
Those burdens include public disclosure, compliance with Securities and Exchange Commission, stock exchange and other regulations, public scrutiny, and restrictions on how your company conducts its business.
Successful public companies have large and stable revenue. They also have systems in place to accurately predict revenue and profits on quarterly and annual bases. This is crucial for setting expectations within the securities markets and avoiding surprises.
Investors and analysts in the securities markets focus on short-term performance. They interpret a company’s failure to achieve predicted revenue or profits, even by only a few pennies per share, as a negative sign. The result is often a significant decrease in the company’s stock price.
The management team must have the skills to grow the company in terms of revenue, profitability and other measures, and must also have experience with the requirements of being a public company. CEOs must effectively communicate to a variety of interested groups including shareholders, analysts and business partners.
CFOs must understand public company reporting requirements, including financial disclosures and disclosures about the company’s future operations. The management team must also understand the corporate governance requirements that apply to public companies.
A skilled management team requires experienced and involved directors. Your company’s board of directors should include individuals who currently serve, or who have served in the recent past, as directors of public companies. Experienced directors are important in establishing and implementing corporate governance programs and organizational expectations.
For more information, see dev.divistack.com, March 2005, Douglas Ramler
Forget taxes for a minute. There are a number of non-tax reasons for estate planning. If you have not done any planning, state law determines where your assets will pass when you die.
Let’s assume assets would be distributed just as you would like. There are still several reasons to plan. First, in your will you can determine who will handle your estate when you die — called the personal representative. A will also allows parents to nominate who will take care of their minor children. Although the court makes the final appointment, naming a guardian ensures your wishes are known, and in most cases, followed.
Some situations are more complex and may require more than a will. Non-traditional family dynamics, tax planning issues and privacy concerns might be better handled through a trust. Marital property agreements clarify ownership of marital and individual property.
Even if your will plans for the distribution of property, don’t forget to address incapacity. You should consider naming someone as the financial power of attorney to handle your monetary affairs.
For business owners, estate planning requires a delicate balancing act between preserving the interest and longevity of the business, planning for their own financial independence later in life, and creating an equitable distribution of interests to heirs. Only some of these issues are addressed in a business’s partnership agreements.
Many businesses’ legal papers address the passing of company ownership in the event of death. In the case of closely held businesses, many times ownership passes to the next generation. Tax laws actually make this transaction very efficient. The unaddressed issue, however, is distributing equal assets to all heirs, particularly if they choose not to participate in the business. An estate plan can create an equitable solution.
Many closely held businesses do not have a current succession plan in writing. Those that are written often are not funded, meaning the stipulated successor hasn’t planned to inherit the business and therefore does not have the funding to assume ownership. This presents significant challenges when a business owner’s estate is liquidated to heirs.
For more information, visit dev.divistack.com, June 2005, Loren Viere
