We often hear from clients: why do I need to worry about my corporate records? I’m a family-owned business- no one else cares!
From a short-term and selfish perspective, you may well be right. However, this point of view lacks an important longer-term perspective on both corporate/business growth and resulting exit possibilities.
Depending on the nature of your family-owned business and its related industry(ies), most start-up/family-owned businesses usually grow along a fairly predictable trajectory. Initial capital typically comes from the founders and is often shortly followed with exempt investments from the founders’ “Friends and Family”. This is often followed by either a second “Friends and Family” round or investment from arm’s-length angel investors. This, too, can occur in a single or in multiple rounds of financings.
Through this stage of growth, businesses also need to pay attention to talent acquisition and retention. This is often managed through some form of stock incentive program (e.g. a stock option plan) because businesses at this stage are often not yet revenue-positive, let alone profitable. Accordingly, non-cash (i.e. salary/bonus) modes of talent-compensation are required. The business is also probably engaging consultants and other contractors (i.e. not employees) to do important work, sometimes including intellectual property development.
Debt Financing & Due Diligence
Once an operating business has passed through all this growth and becomes revenue-positive (or better yet, profitable) and has therefore established its own business credit, then debt financing may also be an option.
Regardless of the stage or nature of the funding transaction(s), each of these investors/funders “cares” about whether or not a potential investee company (or borrower) has “done things properly” with respect to their corporate record-keeping. It is an important due diligence review step for investors/lenders when evaluating the risks associated with their possible investment. As much as they are reviewing the actual numbers, they are also importantly evaluating management and are accordingly deciding how reliable management is when providing information/answers as part of the due diligence/negotiation process.
After years of representing issuers and investors, borrowers and lenders, buyers and sellers, one thing that consistently comes up is how an issuer, borrower, or seller whose books and records are clean and complete receive better terms and conditions from their investing/lending/buying counterpart than the same business does if its books and records are incomplete, inaccurate or otherwise a disaster. The investors, lenders and buyers consistently report doubting the accuracy of the information they receive, the competence of the founders and, ultimately, the future success of the business in question. Accordingly, they require harsher terms, like a greater ownership percentage, higher interest rate or a lower purchase price, among many others, in order to agree a deal.
So, while it’s imperative to be focused on the now of your business, it is also critical to have an eye to the future and your possible exit transaction. You will receive far better terms/pricing if you can show that you’ve done things properly right from the beginning. Show the investor/lender/buyer that you’ve been competent, proactive and thorough throughout the life of the business rather than incompetent, reactionary and nonchalant. The latter will cost you far more than the price you’ll pay up front to establish proper documentary processes and procedures.
At Mills & Mills LLP, we pride ourselves on providing expert business law advice to businesses of all sizes, from small start-ups to large multi-national corporations. Our clients know that by retaining us as their business lawyers, they will receive individual attention and establish meaningful relationships with our business law professionals, while benefiting from knowledge, expert skill and capabilities equal to the city’s largest corporate-commercial law firms. To benefit from the individual, customized service and the superior business law knowledge that Mills & Mills LLP offers, please contact us at 416-863-0125 or send us an email.