Business Assets Protected
Incredible Result: “No one can take what our Company has built.”
Avoidable Train Wreck: Business disputes and litigation losses deplete your business resources.
Main Play: The Business Asset Protection Protocol
What This Is: You have designed your business entity structure, and you have taken the specific actions needed, to help protect your Company’s proprietary rights, intellectual property, key personnel and key assets from existing and future competitors, litigation and potential claimants.
Every time we buckle up or check our smoke alarms, we are protecting the assets and the persons we care about. This same motivation drives those Family Business Pioneers in their businesses.
One of the first keys to protecting your business is to operate under the best corporate structure. The second key is to initiate the protection of your key intangible assets.
Structuring Business Entities For Asset Protection
Businesses operate under a variety of corporate and affiliate legal structures. Often the entire business operation, along with all of its assets, is simply held in one entity, which is typically a corporation or a limited liability company.
There are a number of reasons for operating the business within a legal entity, rather than simply in the name of the business owner as a sole proprietor. These include the ability to limit an owner’s personal liability from the debts or liabilities of the business and to provide an entity which is the legal owner of the basket of assets and revenues of the business operation as well as continuity of the venture upon the death or disability of the owner.
Depending on the size, scope and nature of the business operations, more than one legal entity is often used. For example, it is common to have a parent-subsidiary corporate structure or to have a parent corporation which owns more than one subsidiary in a parent-brother-sister operation.
Reasons for this structure may include a desire to shield potential liabilities of one business operation from the assets and revenues of another business operation. This structure may also provide a means to more easily have separate accounting and separate lines of responsibility for each business division or location.
When Business Pioneers begin with their “Fourth Quarter” First, they are considering whether their corporate structure (entity, asset and debt structure) is in line with the protection of their business for the whole game.
Fourth Quarter thinking includes a review of the Business Pioneer’s objectives in light of the present business operating structure to determine whether any revisions to that structure are needed.
Identify Valuable, Transferable Intangible Assets
Tangible assets are easy enough to identify. These are typically reflected on the asset side of a Company’s financial statements. Under generally accepted accounting principles, the value of such assets is typically identified (with certain exceptions) at historical cost. These assets include cash, inventories, equipment and buildings, to name a few. Generally speaking, a company’s financial statement does not reflect the true market value of these tangible assets, nor does it reflect the degree to which you are efficiently using all of the tangible parts of your business to produce profit or to produce a predictable, sustainable, growing cash flow.
Less apparent from reading any company’s financial statements is the presence or type of intangible assets which the company has assembled and put into operation to produce that profit and cash flow. While certain intangible assets may have a cost allocated to them when they have been purchased, a balance sheet very likely does not include a recorded list of intangible assets.
Instead, the presence of intangible assets within a company is typically identified by a potential purchaser in the due diligence process when a potential acquisition candidate is being evaluated for purchase. Even when identified, the value of these intangible assets is often determinable only indirectly, for example, by considering the extent to which a company’s profit exceeds a reasonable rate of return on the value of its tangible assets.
To realize better value during the life of their business, as well as upon the sale of their business, Family Business Pioneers are identifying the valuable, transferable intangible assets they’ve built as part of their business.
Various types of intangible assets exist in a successful company. Examples include brands, reputation, tradenames, trademarks, patents, business systems, leadership team, workforce in place, intellectual property, know how, Business Model design, key personnel, leadership development programs and Business Model innovation systems.
By identifying those intangible assets which are truly creating your company’s earning capacity, and by carefully protecting them so they remain intact during all Four Quarters, including when you are negotiating your transition or exit, you can improve your Fourth Quarter results.
The Business Asset Protection Protocol
Once identified, the Fourth Quarter Planning process can address whether you’ve taken the steps to protect the intangible assets you’ve developed.
You cannot successfully transition from your business under the financial terms you might wish if you have not sufficiently protected your business along the way. Too many businesses – both large and small – fail to survive due to reasons that are often self-inflicted and avoidable.
Ideally, you and your advisors will focus on those areas which often cause companies financial distress or destruction and which may need some “shaping up” for your Company. This will help protect your business while you own it and will also provide a much more saleable business to a buyer.
The Fourth Quarter Planning review can help uncover those areas of your business in which you have not adequately protected your intangible assets. Some of the tools in this area include trademark/service mark and trade name registrations, patents for unique products and processes, trade secret confidentiality agreements, defensible covenants not-to-compete agreements, non-solicitation agreements and employment agreements.
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