Lawyers are conditioned from shortly after the time they begin law school to start thinking in terms of contingencies: i.e., what might happen in the future, and what to do about it if it does. We were all put on the spot and asked to answer hypothetical questions about the legal implications of multiple scenarios. As uncomfortable as that may have been, it is incumbent upon us to ask our clients to think about the future in this way so they can lay out the best plans for success.
In business, this concept comes up when we talk about business growth and exit strategies. Some people just want to make their products and earn a living doing so without much desire to expand to new locations, develop a franchise, be acquired or go public – and that’s fine. Maybe they’ll set up a generational trust to own the business so it stays in the family. Those with aspirations to eventually cash out, however, can benefit from thinking about how to exit in advance.
For example, having a single corporate parent company for a business with multiple units, locations or holdings may be attractive for investors looking to acquire such a business, as all subsidiary entities will follow the purchase of the parent and multiple purchase transactions can be avoided (the caveat being the acquiring entity may request or even require divestiture of certain assets prior to purchase). Also, the profits and losses of the corporate parent are a cumulative reflection of the overall value of the enterprise, so valuation may be more streamlined for investors.
There may be good reasons, however, to have different companies set up to hold different assets. For example, you may want to have real property assets held separately from the goodwill associated with the intellectual property of the company, or from its operations. This enables you to market your brand separately from your real estate, for example, when you sell your business. This works to your benefit if you have investors who love your brand but not your location. It also may protect you against losing your real estate assets if you go out of business.
Most growth strategies require additional investment. If you are independently wealthy or have a number of close investors you can rely on to contribute additional capital, a simple LLC structure may be a good vehicle for you that limits your liability. If you are not in such a privileged situation then you may want to think about incorporating so that you can issue stock. One thing to keep in mind is that S-corps may only issue one class of stock, while C-corps allow for multiple classes of stock to be issued. Some investors may want to invest only if they can own preferred stock that yields fixed dividends and comes with senior payback rights if the corporation is liquidated.
These are just a few ideas to consider, but as always, consult with trusted professionals to help you do what’s best!
For more information on this topic, please contact Scott Lloyd at firstname.lastname@example.org.
ABOUT SCOTT LLOYD
Scott Lloyd is a registered patent attorney who specializes in intellectual property counseling and commercialization work. He has served as a technology commercialization specialist and advisor to companies in a diverse array of markets, including biotechnology, pharmaceuticals, medical devices, food and beverage, specialty chemicals, technology, and engineering. In addition, Mr. Lloyd spent ten years as in-house general counsel to small and mid-sized companies, where he managed corporate matters and resolved commercial disputes in addition to intellectual property strategy, and now serves in the same capacity for entrepreneurial clients. He serves as counsel to small and mid-sized business owners seeking to implement growth strategies and succession plans.
While in-house, Mr. Lloyd has also contributed to the successful formation of international affiliates of domestic businesses as well as a $400,000,000 business acquisition.
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