It’s a pretty safe bet that if you own a viable, privately-held business you have excellentoperational skills. Day-to-day you “make the trains run on time.” But how well do you recognize and evaluate options or make good decisions when it comes to strategy? Can you identify bold moves that will propel the business beyond incremental growth – and how well do you implement those bold moves?.

My good friend Scott Barth, founder of ascendBIZ2, recently shared with me his insights about how most successful business owners he works with assemble an advisory team with expertise in seven key areas.

Team structure and operation

In some cases, the “team” is the owner’s collective set of relationships with one or more trusted experts, like a CPA or a banker. This business owner typically deals one-on-one with each subject matter expert (SME) as problems arise or when the owner takes the time to contemplate big-picture issues.

At the other end of the spectrum, the business owner convenes his or her team of advisors on a regular basis, typically quarterly or annually, in some type of strategic planning environment. In this setting, the SME’s focus their expertise on critical, long-term matters related to the health and future of the business.

There are other advisory team models, of course, but the important thing is that privately-held business owners need to find a way to harness the collective, professional wisdom of their advisory team members.

Team members

Scott also shared with me this list of skills that should be represented on the team:

1. Advisory CPA – Engage a CPA for more than just tax preparation. In a future article, I’ll explore some of the areas where a CPA offers much more than tax advice, such as financial health and break-even analyses and key performance indicators.
2. Banker – Don’t just choose a bank. Build a banking relationship-yes, with an actual person. Down the road, we’ll discuss the many tools and areas of guidance and support a banking partner can offer.
3. Business attorney – Choose an attorney for the long haul-someone who will offer proactive advice at every stage of the company’s evolution.
4. Wealth management adviser/wealth planner – Find a trusted adviser who charts a course for your financial security and factors in how your company fits into the picture.
5. Business coach/consultant – As your business grows, shift from mentor relationships to coaching arrangements with advisers who create the accountability most business owners need but few actually experience.
6. Valuation specialist – Work with a valuation expert who can define and fine-tune the formula for building wealth and value within the company.
7. Human resources expert – This is a complex and constantly evolving field and a good candidate for outsourcing. Business owners need someone on their team who can readily benchmark best practices in this area.

In future articles I’ll write about my interviews with some of these SMEs and give you more specific examples of how they can help you, such as:

1. How to determine the true value of the business and identify the value drivers that will make the biggest difference over time.
2. How to and why an attorney needs to serve as a legal advisor and personal business advocate rather than just a hired gun.
3. Why an entrepreneur should never be the person to scale the business.

How will you know the right fit?

Scott emphasized that a potential team member must be willing and able to serve as a consultant and not just as a service provider. He put it best: “You can identify all these skill sets and people-CPAs, attorneys, and so on-and if you can legitimately put the word ‘consultative’ in front of the profession when describing that person and their skills, then they may be a good fit for your advisory team.”

How to find the best people for your advisory team?

1. Vet the candidates and get to know them well, until you’re confident they’ll be able to provide the guidance and expertise you need.
2. Seek out recommendations and referrals from other successful privately-held business owners and advisors you respect.
3. Make sure they are critical thinkers and offer skills that you don’t possess.

If you’d like to meet Scott, or if you’d like some ideas about candidates with these skills to serve on your advisory team, please feel free to call me at 303-831-1411.

Steve Bush, attorney at law, founded Steven M. Bush, a Professional Corporation in 2003 in Littleton, Colorado. The firm specializes in representing privately-held businesses and their owners on a range of legal matters.

In a stock sale, the corporation’s stockholders sell their shares of the corporation’s stock to a buyer in exchange for cash, property, other stock, the assumption of their debts, or something else of value. Any sale of stock should be done subject to a stock purchase agreement. There is no such thing as a “one-size-fits-all” stock purchase agreement, so the agreement should be tailored to reflect the unique issues in a given transaction.

The buyers’ lawyers must be careful to ensure that the buyer will truly own the corporation’s stock free and clear of unexpected encumbrances after the sale is concluded. At a minimum, a stock purchase agreement should contain representations, warranties, and indemnifications made by the selling stockholders to cover against significant potential problems. These representations, warranties, and indemnifications should address such things as:

1. the capital structure and organization of the Seller;
2. ownership of all outstanding equity interests in the Seller,
3. the fact that no equity interests are encumbered by liens, claims, or other liabilities;
4. the fact that issuance and transfer of equity and the terms of the transaction are duly authorized by the corporation’s stockholders;
5. the fact that the transaction creates no conflicts with any of the corporation’s organic documents or contracts; and
6. the fact that the corporation has unencumbered ownership interests in all of the assets it claims to own.

Depending on the transaction, sellers and buyers might address any number of other areas relating to the nature of the corporation’s business or its stock, including financial matters; real and personal property; environmental issues; contracts; employees; employee benefits; insurance; bank and credit agreements; indebtedness; compliance with laws; current or possible litigation; intellectual property; insider transactions; and competing businesses.

Because stock is a “security” under various state and federal laws, the selling stockholders should keep in mind that these laws may create obligations and potential liability with respect to their offers to sell their stock and the sales transactions. In some situations, these laws can create liabilities for the sellers even though the sellers have made no affirmative representations or warranties in their stock sales agreement. In addition, the selling stockholders and the buyer, if it is issuing its own stock as consideration for the purchase, must be exempt from the registration requirements under applicable federal and state securities laws. In most cases, these transactions fall within the private resale or private placement transaction exemptions from registration. However, the parties should always consult with their lawyers to perform a detailed analysis of whether registration is an issue.

Holdouts

A sale of stock is usually the simplest way to transfer a business because the stockholders selling their stock are the only people required to give their consent for the transaction. No director or other stockholder meeting or approval is usually required.

In some cases, a buyer must deal with multiple stockholders and some of them may refuse to sell their stock. If the prospective stockholders plan ahead, those that wish to sell their stock can prevent the holdout stockholders from delaying or preventing the sale by negotiating something called “drag-along” rights into an agreement between the stockholders. Drag-along rights generally provide that if a sale is approved by a certain group of stockholders, all of stockholders agree to be “dragged along” in the sale. The group might be comprised of a minimum percentage of stockholders or even the board of directors. In most cases, the existence of a stockholders’ agreement with drag-along rights increases the attractiveness of the stock to buyers.

When the owners of a corporation, the stockholders, want to sell the business they usually want to sell the stock. While the sale of the stock will accomplish the sale of the business, the business can be also be sold by having the corporation sell its assets or by having it merge with another company. Choosing the method that will be best for a specific business sale depends on, among other things:

• whether the buyer and the sellers want a simple transaction.
• taxes.
• whether the entire business will be sold, or whether only part will be sold.
• how many stockholders there are and how many are required to approve the sale.

A sale of a corporation’s stock is straightforward. The corporation’s stockholders trade their stock certificates for money or for property. The corporation keeps all of its assets and liabilities. The only things that change are the names and identity of the stockholders. For a corporation whose stock is not publicly traded, the transaction is generally simple and usually involves only paperwork, including a stock purchase agreement, a bill of sale, the surrender of the existing stock certificates, the transfer of the stock on the corporation’s records, and the issuance of new stock certificates.

Under Colorado law, a merger is generally treated like a sale of stock. In the merger the buyer, called an “acquirer,” assumes all of the corporation’s assets and liabilities by operation of law and without the need for any other agreement or transaction.

When someone buys a corporation’s assets, the corporation sells its property, like its contracts, furniture, fixtures, and equipment, for money or in exchange for other property. The corporation gets the money and the buyer gets the assets. The buyer generally does not take or assume any of the corporation’s liabilities. Sales of assets are usually trickier than sales of stock. The sale of assets that involve third parties, like customer and vendor contracts or leases of property, involve the “assignment” of the asset to the buyer. Contracts with third parties usually require the corporation to obtain the third party’s consent before the corporation can assign the contract to the buyer.

If the corporation’s employees are going to work for the buyer after an asset sale, the corporation technically must fire the employees so that the buyer can hire them. The firing and hiring process can raise employee benefit issues, such as whether the employee is entitled to receive accrued vacation pay and whether their health and retirement benefits are changed.

Some sales of a corporation’s assets give rise to government agency filing or permit requirements. A sale of real estate requires that a formal deed be filed to transfer the property. Finally, if the corporation has used its assets to secure the payment of a line of credit or another debt, the corporation will be required to fully pay the line of credit or debt before the bank will release the liens on the assets that the corporation wants to sell. Buyers often prefer asset purchases to stock purchases for tax reasons. In most cases, the depreciated book value of the corporation’s assets is lower than their fair market value. In this situation, a buyer will want an asset deal so that the buyer’s tax basis in the assets will equal the purchase price and will allow for the greatest depreciation expense. The seller, on the other hand, usually wants to sell the corporation’s stock in order to avoid tax on the difference between the sales price of the assets and their depreciated book value. If the corporation is a C corporation, the seller also wants to avoid paying tax on the distribution of the sales proceeds from the corporation to the shareholder.

Under the tax laws, a merger may be treated as either an asset sale or stock sale, depending on the entity’s structure. Always consult a tax specialist for assistance when dealing with a merger.

Portion of Business Being Acquired

An asset sale is appropriate when the buyer is purchasing less than the corporation’s entire business. After the buyer takes the specified assets, the remaining assets may be used to continue as a going concern or may be disposed of by sale, liquidation, or distribution in kind.

Corporate Approval Requirements

Under Colorado law, mergers generally require the approval of only a majority of the shareholders of the parties to the merger. An asset sale ordinarily requires the approval of a majority of the selling corporation’s shareholders. A sale of stock, however, requires the approval of all of the corporation’s shareholders if the buyer wants to own 100 percent of the business. Unless there is a contractual agreement to the contrary between the stockholders, any individual shareholder can refuse to sell his or her stock.

In some cases, a buyer can use a merger to buy a corporation with a reluctant stockholder. The typical transaction is called a “reverse triangular merger.” To start, the buyer forms a new, wholly-owned subsidiary. The new subsidiary then merges into the corporation with the reluctant stockholder, since this requires only a majority vote. After the merger, the buyer owns 100 percent of the corporation’s stock, and the reluctant stockholder owns stock in the parent of the new and merged corporation. The reluctant shareholder can choose to exercise “dissenter’s rights,” but if the transaction is generally fair to the selling shareholders the cost and relative benefit of exercising these rights often dissuades shareholders from troubling themselves.