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Ownership Planning: The legal audit

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in Business Management

Knowing where you stand…

Before delving into the development of an ownership plan, every business owner must first know where he/she currently stands in the business lifecycle—and the processes and protections presently in place. First things first: Conduct a directed legal audit to nail down the state of the business’ foundation. From there, you can establish the base points from which to launch forward planning.

The legal audit focuses on the legal components of the business. It looks at how business relationships are documented, both internally and externally. The audit takes account of practices and protections already in place in order to spot — and fix — areas of potential risk, often overlooked or unknown.  Generally, the legal audit should focus on eight areas of business relationships: corporate, property rights, intellectual property, tax, finance, operations, human resources and insurance.

The legal audit checklist generally includes certain documents to be inventoried and information to be compiled including:
  • Corporate documents, e.g. articles of incorporation, bylaws, minutes, stock certificates
  • Partnership agreements, shareholder agreement and/or operating agreements
  • Detailing of all business assets, including intellectual property, review of trademarks, copyrights and patents and procedures for enforcement
  • Commercial and retail leases
  • Human resource and benefits matters, including retirement programs, employee handbook, employment applications
  • Restrictive covenant and non-compete agreements
  • Insurance coverage
  • Contracts with third parties
  • Loan agreements
  • List of significant customers  (representing in excess of 5% of annual sales)
  • List of significant  suppliers (representing in excess of 5%) , licensing and joint venture agreements, annual and interim financial statements
  • Tax returns and well as documentation of audits.
With the focus on increasing profits — and in today’s challenging economy, struggling to simply survive — protecting assets gets pushed to the back burner.  All too often, owners find themselves in the position of having to react to problems when they arise (usually brought to their attention by an irate employee or customer or a lawsuit) rather than having taken action to prevent them. “Putting out fires” is almost always more expensive, and resolutions less optimal than if one had proactively eliminated the risk.

When risks, current and potential, are identified well before they materialize into problems, it is relatively easy to strengthen procedures and apply other remedies that are quick, relatively inexpensive and 100% effective to significantly reducing or eliminating certain risk factors.  If an owner is to exit one day when he wants…the way he wants…with the cash flow he wants, which is the goal of Ownership Planning, an initial legal audit is an important first step.

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