Intellectual Property and Business Succession Planning

I try to make the point that what has made Bill Gates all his money is his intellectual property: trademarks, patents and even copyrights. Pennsylvania Trusts and Estates Blog takes this a step further with Intellectual Property in Your Estate:

Forbes published a list of the 13 Top-Earning Dead Celebrities. The estates of these persons are making fortunes with the decedents' intellectual property. How much do they earn? The top-earning 13 decedents earned a combined $194 million over the last 12 months. It makes dying look like a good career move. Who are they? Elvis Presley, Charles M. Schulz, Heath Ledger, Albert Einstein, Aaron Spelling, Dr. Seuss (Theodor Geisel), John Lennon, Andy Warhol, Marilyn Monroe, Steve McQueen, Paul Newman, James Dean, Marvin Gaye.

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Any author or artist should consider choosing a an executor who is knowledgeable in his or her field to serve as a special executor after his or her death. For example, an author might appoint a family member as executor to take care of the estate in general, but name a literary executor to be responsible for and carry out certain duties with regard to the decedent's written works.

Intellectual property can be a valuable assets and it must be managed in your estate to maximize
income streams income, address infringements, protections, registrations and maintenance.

What have you done to protect your heirs and your business when you die? What have you done to protect your business between now and your death? I do not suggest waiting - get yourself to a lawyer as soon as possible.

What Happens to the Business if There is a Divorce?

Consider this scenario from The Golden Scribe's Prenuptial Agreements to Protect the Family :

In a similar fashion, business partners can be protected with a prenuptial agreement. If Tom and Scott have worked over the past five years to create a successful business, and Tom is about to get married, the business and its assets can be protected by the prenuptial agreement. This not only protects Tom, but it protects Scott, as well. Without a prenuptial agreement, Tom and Scott’s business could potentially be torn apart by a divorce.

What happens to your business if this was you or a partner or other co-owner? Don't know for sure? Get yourself to a lawyer ASAP. If you are in Indiana and do not already have legal counsel, give me a call.

Oh, what if everyone is married before starting the business? Think about a post-nuptial agreement.

Business Survival: Buy-Sell Agreements

I have written before about the problems solved by having a buy-sell agreement, but Importance of having buy-sell agreements from Bermuda's The Royal Gazette presents the issue again in a very well written article.

What follows applies to any business organization having more than one person as owner: corporation, limited liability company, partnership.

"As a business owner, one of the earliest decisions you will make is how to build your team. Should you run the business on your own, or take on partners? There are strong arguments both for and against partnering with others and sharing equity; however, we would like to focus on a different aspect of partnerships that many do not think about - until it is too late. While partnerships are almost always formed with the best of intentions, it is important to have a mutually agreed framework for ending the business relationship BEFORE it is needed."

Not a single thing I disagree with in this paragraph - including the "BEFORE". The article then gives three scenarios where not having a buy-sell agreement means trouble, if not ruin, of the business. Followed by this:

Benefits of a buy-sell agreement include:

• Establishing a "fair', structured plan for a shareholder exit - this is particularly important during contentious circumstances.

• Enabling a smoother transition while normal business operation continues.

• Creating liquidity and a ready market to sell a business interest - exiting shareholders are more certain of being able to "cash-out" of their equity positions. In Bermuda, where there is a limited pool of buyers, this can be critical!

• Mapping out the events which will trigger the buy-sell - this aids in eliminating ambiguity and reducing possible disputes.

• Providing procedures for dispute resolution, removing emotion from the decision-making process.

• Pre-determining the process by which the business interest will be valued - this will save both time and money when it comes time for a shareholder to sell their stake.

• Assigning a value to the business interest without necessitating a purchase/sale transaction - this is particularly important in divorce scenarios!

• Protecting against unwanted new partners - this provides incumbent shareholders with an opportunity to either increase or decrease their existing shareholdings.

• Determining payment and financing terms.

Bermuda may be smaller than Indiana but selling a closely held business is not easy. Indiana has no great pool of buyers looking to buy out a closely held business. The article goes onto describe the process for reaching an appropriate buy-sell agreement:

1 Choose the appropriate agreement structure. The three basic types of buy-sell agreements are repurchase agreements (in which the entity buys the interest from the exiting party), cross-purchase agreements (in which one or more existing shareholders buy the interest from the exiting party) and hybrid agreements (which may allow the founder first priority to buy the interest and other owners or partners the second option to buy).

2 Negotiate the major provisions. The provisions are the meat of the agreement and outline how exactly a business interest will be sold and to whom.

3 Determine value and price. Map out how the business interest will be valued and priced in support of the provisions. Will a business valuation professional be used? Will a previously agreed upon formula be used?

4 Determine triggering events. What events will trigger the buy-sell agreement? These can include death, long-term disability, voluntary or involuntary termination, or third party actions, such as personal bankruptcy or divorce.

5 Choose how the buy-sell will be funded. How will the exiting party be paid for their business interest? Will it be an all-cash transaction or can the transaction be financed? What insurance needs should be considered in order to provide immediate cash without causing financial harm to the company.

Which is pretty much the process I have used for years. For those having set up their businesses themselves, I have two questions:

1. Have you got a buy-sell agreement in your corporate bylaws (if you set up a corporation), your operating agreement (if you set up a limited liability company) or partnership agreement?
2. If you do have a buy-sell agreement, does it cover all the points outlined in this article?
   

You can access my other articles on buy-sell agreements here and here and here.

Selling A Business: Top Ten Tips For Entrepreneurs | 4 entrepreneur

4 entrepreneur writes about Selling A Business: Top Ten Tips For Entrepreneurs. I recommend anyone selling - or buying - a business read all of the post. Of the ten, I had to emphasize the following:

4. Run the Negotiations Through the Lawyers. The entrepreneur should do what he does best — i.e., build companies — and leave the negotiating to a strong corporate lawyer. Entrepreneurs are generally no match for sophisticated venture capitalists or private equity or corporate development guys who do deals for a living. Accordingly, a smart entrepreneur will stay above the fray and let his corporate lawyer run the deal. The Big Boys may try to do an end-run around the entrepreneur’s lawyer (and may even criticize the lawyer and try to turn the entrepreneur against him), but the entrepreneur should remain disciplined and avoid “side-bar” negotiations with the principal(s) on the other side. This approach is particularly important where the entrepreneur will have an ongoing relationship with the other side post-closing; the goal is thus not to poison that relationship with testy, acrimonious negotiations (i.e., let the lawyers fight it out).


10. Hire an Aggressive Corporate Lawyer to Watch Your Back. As a corporate lawyer at two major New York law firms, I have learned first-hand the importance of watching my clients’ back. Indeed, I have worked on billion-dollar deals where, prior to signing, emotions run high (as discussed above), and a few of the significant risks are minimized or pushed-aside by investment bankers and/or business guys in order to get the deals done. My job, probably more important than anything, is to sober the entrepreneur and lay-out all of the significant legal risks — and then push hard to negotiate appropriate protections. If the deal sours and lawsuits are filed, well-drafted documents become like an insurance policy to the entrepreneur — and what entrepreneur doesn’t have insurance?

Getting a lawyer after the deal sours saves no one any money. Getting a lawyer before the process starts may prevent a bad deal, improve a mediocre deal or save a good deal.

Small Business Estate Planning

Some good ideas from TLD's General Counsel Blog:

A buy-sell agreement is one option (which won't be discussed here in this post) and setting up an estate plan is another option often considered. If you set up an estate plan to include a revocable living trust, you can assign or transfer your business interest into your trust and specify what happens to that share of the business interest.

One common approach for married couples is to transfer the business interest to the trust and allow the surviving spouse to manage the interest and upon the death of both spouses, the interest is then transferred to the surviving children either in equal shares or to the child who is most interested in the business interest (for whatever reason). Additional language can be included depending on the type of business interest involved and what your wishes are in case something happens.

Remember that trusts are a tool. I do want anyone to think they are the only tool. Another tool may be the answer in another situation. In other words, one size does not fit all. The important things for business owners to do is to plan for the succession in their business and then take steps for carrying out the plan.

If you have an Indiana business and need legal counsel for estate planning, I am taking on new clients at this time.

Busting Up a Business

New York Business Divorce has been publishing a series on a New York business dissolution case under the title Anatomy of a Dissolution Slugfest. I think all are worth reading for anyone setting up a business or wanting to get out of an existing business. I wish I could say that all problems would be solved with proper planning but not all problems can be contemplated and planned for - just that things go better when an attempt is made.

Thje following is from Anatomy of a Dissolution Slugfest: Part I:

"Question: What do you get when you take a luxury automobile dealership consisting of multiple corporations and limited liability companies, stir in three business partners, add contradictory documents concerning one partner’s ownership interest, season with a federal indictment of that same partner for stock fraud following which the other two partners freeze him out of the business, top off with a pair of litigators and bring to a boil?"


Anatomy of a Dissolution Slugfest: Part V contains descriptions (and links to the subequent parts) of the remainder of the series:

...Part II (read it here) covered some additional issues raised in the court’s initial decision including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s June 2007 decision in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint. Part IV (read it here) addressed the court's September 2007 decision in which it denied defendants' motion for summary judgment contesting Marciano's share ownership and arguing that Marciano's March 2007 guilty plea to unrelated stock fraud charges justified their excluding him from the business operations.

This Part V examines the court's final decision dated December 7, 2007, concerning a new twist in the proceedings triggered by the defendants' assignment of a valuable dealership lease held by a company co-owned by Marciano to another company owned solely by the defendants. A postscript follows for readers interested in the outcome of the case and some reflections on its greater meaning.

Business Succssion Planning: An Example from Baseball

With baseball season now starting, I think The New York Times' Oedipus Bronx might have even a bit more relevance.

"For the Yankees, the ongoing succession is a lot more complicated than it was for either the Mets or the Knicks. The team is now in the hands of not one but two designated heirs, and one of the Steinbrenner sisters, Jennifer, will have a voice in the team’s operations, too, as will Felix Lopez, the second husband of the other sister, Jessica. “Like almost any family business with a patriarch and children, the long-term future of the Yankees will depend on the need to avoid sibling rivalries and other types of problems,” one of the team’s limited partners told me. “The question is going to be how they function as a family.”"

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If resentment does surface between Hank and Hal, their father will be at least partly responsible. He had years to prepare a succession plan, but like so many successful family-business leaders, who tend to feel an especially powerful sense of ownership, he had a hard time letting go. From time to time he talked about “letting the young elephants into the tent,” as he put it, yet at the end of the day — at least until Steve Swindal emerged — he always kept the flaps tightly closed. What’s more, Steinbrenner Sr. pitted Hank and Hal against each other with comments like the ones he made to Sports Illustrated in 2004 and presumably created the current Darwinian arrangement in which they are both “equal partners” in the business.

Off-Topic - sort of about franchising

Here I am looking over FranchiseLawBlog when I see Wendy's Franchisees Missing Dave. Frankly, so I have. Reading I see that others also have a similar complaint that I have:

Complaints include the introduction of a summery fruit salad in the depth of winter, the current ad campaign featuring men wearing pigtailed Wendy fright wigs and an autocratic decision-making style.

In (a probably vain) attempt to keep this post on topic, we might be seeing a problem common to businesses when the originator passes from the scene. Just what was the succession planning at Wendy's? What planning have you done with your business?

Meanwhile, I really think the Wendy's advertisements are about the worse out.

Business succession planning

Do you have your business' future planned? Sell out? Leave it to family members?

Here is an article from the Canadian Financial Post with some ideas. Passing the keys to key staff.

The point is to have a plan.

Please contact me if you have an Indiana business and want to set up a succession plan for your business.

What happens to an Indiana business in a divorce?

Keep in mind that a business is property. Indiana divorce law presumes a 50-50 split of the property.

Here is a current statement of the law from Frederick v. Frederick (NFP opinion 10-24-2007, PDF format):

C

oncerning personal goodwill and enterprise goodwill, our supreme court has held:

[B]efore including the goodwill of a self-employed business or professional practice in a marital estate, a court must determine that the goodwill is attributable to the business as opposed to the owner as an individual. If attributable to the individual, it is not a divisible asset and is properly considered only as future earning capacity that may affect the relative property division. . . . [T]o the extent a business or profession has goodwill (or has a value in excess of its net assets) it is a factual issue to what extent, if any, that goodwill is personal to the owner or employee and to what extent it is enterprise goodwill and therefore divisible property.

Yoon v. Yoon, 711 N.E.2d 1265, 1269-70 (Ind. 1999). “If a party wishes to exclude personal goodwill from a business’s valuation in a dissolution proceeding, they must submit evidence of its existence and value to the trial court by ensuring that their chosen expert provides proof of such existence and value.” Balicki, 837 N.E.2d at 538.

Which means that the court gets to decide how to divide the property unless there is a prenuptial agreement.

If want to read more about prenuptial agreements, this link will take you to all the articles I have posted on prenuptial agreements at my Indiana Divorce and Family Law Blog.

Please give me a call if you live in Indiana and are thinking about a prenuptial agreement.

More prenuptials for businesses

I usually discuss prenuptial agreements on my Indiana Divorce and Family Law Blog. I use Google news alerts to keep track of news on prenuptial agreements and that is why I am writing about them on this blog. The latest alert came laden with references to stories from the business page. This might be a trend as an earlier post here mentioned. Certainly, it is good for the business writers to acknowledge the importance (and impact) of family law on businesses.

The New Hampshire Business Resource has a fairly good article Protecting your business assets with a ‘prenup’. I do take issue with part of the following paragraph, though:

Stock in a family business owned by one spouse is marital property, and absent a valid prenuptial agreement would technically be subject to division under New Hampshire’s statutes. As a practical matter, however, it is unlikely that a court would order one spouse to transfer shares in a closely held business to the other spouse upon divorce, since judges and marital masters are mindful that post-divorce joint ownership of a business venture is unlikely to succeed. Accordingly, the court is likely to award all shares of stock in a closely owned family business to the spouse related to that family.

After nineteen years, I think that anyone can say what any judge will do about any matter in any particular case. Judges in divorce cases think that if both parties are equally angry then they have done a good job. What makes a prenuptial so useful is removing the surprise inherent in any judge's decision of what makes an equitable division of property.

Spouse as Partner

I got to admit that I have an aversion against partnerships. I think most attorneys do not like them. Why? Liability. Law school beats us over the head to avoid liability for our clients as much as possible.

Partnerships ooze with liability issues. From your partner's creditors seizing business assets for his debts to your assets being on the line for business creditors, partnerships just scare lawyers. Maybe a partnership between corporations or limited liability companies or between a corporation and a limited liability company.

With all these problems with partnerships why have one with a spouse? Because partnerships can be implied by actions as well as by a formal agreement. Two spouses start a business and even without a formal agreement, a partnership can be created by their acts. Of course, the husband and wife have probably not even thought of talking to a lawyer about the kind of problems they might be getting themselves into. Why spend good money that could go into the business?

If anything goes wrong with the business, then business creditors can go after all the joint assets. Since most businesses fail, what do you think now of not talking to a lawyer?

What would chatting with an attorney accomplish? I repeat that most attorneys would get the business set up as a corporation or a limited liability company. If the clients were adamantly committed to a partnership, then there would need to be a partnership agreement.

If the clients want to keep the business running as long as possible, they need to consider all of the problems including divorce. I think the equivalent of a prenuptial agreement (or a post-nuptial agreement, if already married) needs to be considered regardless of the business type used by the husband and wife. With a partnership and limited liability company having a written document (and a LLC requiring a written operating agreement) setting out how the business shall be run, incorporating some of the prenuptial/post-nuptial's terms does not seem out of place. Based upon that reasoning, they need a separate prenuptial/post-nuptial agreement if the business is to be set up as a corporation.

Then they need to consider their retirement and estate planning objectives. If the business entity is a partnership or a limited liability company, these objectives need expression in the partnership agreement or the LLC operating agreement and for corporations in a separate document.

Business succession planning article from Toronto Star

I find no one likes estate planning. I have nightmares about some of my business clients but we do muddle through. I think this will be the big issue coming up locally in the next few years as many of the local business owners get old.

Then I find this article in Toronto Star which seems so very familiar. The same problems between generations just a different country. Okay, there is some reassurance in that the resistance to estate planning meets the same obstacles as here.

I do suggest that anyone reading this blog and has a business take a look at the article With the exception of one small detail, there is good information there for us Hoosiers.