General Business Files

Based on recent litigation storm clouds, business owners planning exit strategies better batten down their legal hatches.

As a small business owner, your company most likely represents a significant portion of your net worth.  That’s why it’s crucial not to let litigation wash it away when the time comes to convert your years of hard work into cash.

Selling a business involves substantial amounts of money and a wide range of issues including warranties and representations, disclosures and contractual obligations.  Consequently, there are many opportunities for litigation to arise.  Not only is litigation highly unpleasant and disruptive to your lifestyle, it is also very, very expensive – even if you win.

But other than wishing, hoping and praying, what’s a small business owner to do? Rather than complaining try something more constructive. Here are eight strategies to follow when selling your business that can help minimize litigation issues.

1.  Honesty is the best insurance policy. Tell the truth about your business.  Do not attempt to hide any problems or issues that, if left undisclosed, might be the basis for future litigation. Rest assured that the cost of disclosure in a transaction is very small when compared to the cost of litigation for non-disclosure.

2.  Develop a confidential business review.  This is a high-quality and comprehensive document that describes your business and its background.  Within this document, clearly disclose any negative issues that are involved in the business.  Not only will disclosure reduce litigation risks, it will also add to your credibility with potential buyers and save you time by eliminating those who are unwilling to accept the realities of your business.

3.  Accurately communicate historical financial results. Do so in a manner that demonstrates the earning power of your business.  Ideally, this information will be presented in a summarized format that recasts your discretionary and certain other expenses to show EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

4.  Require your buyer to go through extensive due diligence.  Due diligence is the process by which a buyer conducts an independent investigation of the information you have provided about your business. The written due diligence materials should be incorporated into the final legal documents to minimize your litigation risks.

5.  Assemble a strong team of experienced professionals.  Your accountant and your attorney will play key roles, and their expertise will reduce litigation risks.  You may also benefit from the assistance of an experienced intermediary, broker, or merger and acquisition firm that specializes in selling privately owned businesses. However, before hiring an intermediary, make certain that they do not charge up-front fees and that they have a litigation-free track record.

6.  Ensure that closing documents are thorough and complete.  Not only must these documents contain appropriate legal language, they also must anticipate and address potential disagreements that may occur after closing – disagreements on issues like equipment or inventory values and condition, collection of accounts receivable and more.  These issues are easily addressed during the courtship phase with a buyer, but they can cause major problems after the transaction is closed and the honeymoon phase is over.

7.  Be careful with employment, transition and consulting agreements. If you enter into longer term agreements with your buyer, make sure the terms are entirely consistent with your retirement plans.  Otherwise you run the risk of being unwilling or unable to perform your obligations, and that can lead to litigation.

8.  Maintain confidentiality throughout the entire selling process. Although confidentiality will not directly protect you from litigation, it will help minimize the risk of losing valuable employees, customers and vendors during the process. One of the best ways to avoid litigation is to help ensure your buyer’s success, because that success significantly reduces the basis for damage claims.

The goal is a successful, worry-free transition.  Take the time to recognize and act on the many opportunities you have to minimize your litigation risks and reap the benefits later.

Today many organizations have decided to move their IT development offshore to reduce costs and increase competitiveness. Work is sent to places such as India, China and Russia. The cost savings in these countries is considerable but the headline saving is only a small part of the equation. Running projects offshore is very different to running them at home. Having spoken to many project managers over the past year, it has become clear that the same issues are arising time and time again. Understanding these before you start an offshore project will help you to be better prepared. These are six of the key areas to consider and where most of the issues lie when offshore outsourcing.

Understanding the Culture

This is possibly the most complex area and takes time to understand. Western norms of doing business cannot be applied in places such as India and China. Without a good understanding of the culture it’s easy for things to go wrong. This is where it can be useful to go on a cultural training course. A good course will tell you what to expect, how to react and plan strategies to deal with different ways of working.

Selecting the Right Projects to Go Offshore

Some companies are taking a blanket approach to their offshore adventure, expecting to dispense with their internal IT development entirely. The problem is that not all projects lend themselves to offshore development. Good candidates for going offshore are typically those projects that are either very well defined with very little change expected or repetitive work. Projects that require a large amount of customer interaction or are likely to have a lot of changes during development are not suitable.

Defining the Scope

Offshore projects need to be defined in more detail than those run at home are. You will get exactly what you ask for including all mistakes and errors, whether obvious or not. Make sure everything is written down and never make assumptions about what is obvious or implied. A spin off benefit many companies have experienced in this area is an improvement in the quality of their functional and technical specifications.

Getting What You Pay For

It is important to check whether the people and services you pay for are what you get. There is a tendency to provide cheaper solutions. Agree what you are buying and check on a regular basis that is what you are getting. Ask for peoples CV’s to ensure that they have the relevant experience and qualifications. Make regular visits to check that the working environment and equipment is as expected.

Effective Communication

This is probably the single most important aspect of offshore working. A lot of effort should be put into setting up a good communications structure. It cannot be assumed that the correct information is passed to the right people and it is important to make sure that it is to avoid problems later. One solution is to have a company manager offshore, at least initially, to ensure that everything runs smoothly.

Monitoring Progress

The terms “offshore development” and “black box” should not be heard in the same sentence. This is a concept that will not work. Offshore projects need managing or at least monitoring. It is important to have short milestones and frequent deliverables in any offshore project so it’s easier to monitor progress and quality and take timely corrective action. The onus is on the customer to monitor progress because the offshore company will seldom mention problems or delays in order to save face.

Common Pitfalls

i Not a quick fix budget cut. It takes from three months to a year to completely hand the work over to an offshore partner and during this period costs will rise, therefore don’t assume savings during this period.

ii Employing arms and legs rather than brains. It is common place to find that you will be assigned a qualified and experienced developer and several inexperienced trainees or students. The developer is expected to coach and guide the inexperienced staff to deliver packages of work. These people are usually unable to make sound technical decisions and in some of the worst examples have only a rudimentary knowledge of the technology they are working with. This can lead to poor quality and extended lead times.

iii Lack of accountability. It is important to have a single point of contact that can make decisions and get you want you need. All to often the person in this role has no power and is only there as a token to keep the customer happy.

iv Onshore experience. Do not rely on telephone and e-mail communication only. It is necessary for key staff from the offshore partner to work onshore in order for them to understand the company culture and what is expected of them. This can typically last between three and six months.

Anecdotal evidence from companies with two or more years experience in offshore outsourcing is that given time it can work and savings can be made but be prepared for the years of effort and a large up-front investment.

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