“I don’t care about the value of my business.”
You won’t hear those words coming from a successful business owner or executive! The strategic management of legal risks to protect the value and assets of a company has become one of the most important roles of any business owner, executive, or director. Whether selling a business, transitioning to the next generation, attracting investors, or expanding into new markets, managing legal risks enhances the value of a company.
Businesses face risks on a daily basis. Certain risks, like entering a new marketplace, have positive consequences which lead to growth and increased profitability. However, other business risks are frequently unintended or unforeseen and result in litigation, fines, or the loss of key employees. Business owners and executives without legal assistance play the dual role of making business decisions and legal decisions. A failure to understand legal risks and their impact on the bottom line, negatively impacts the value of a business before the business owner even realizes it is too late.
The following five categories present examples of legal risks, which if not handled appropriately, can impact the value of a business.
Corporate – Governance, business structure, and business practices should routinely be evaluated to determine effectiveness and exposure to legal risks. Are the directors fulfilling their legal obligations? Does the business have an appropriate legal structure? Is the company structured to maximize value? If operating internationally, is the company exposed to Foreign Corrupt Practices Act violations? A nimble business will constantly ask questions like these and act decisively to minimize legal risk by implementing new policies and procedures.
Assets – A business must protect its tangible and intangible property, as well as its own human capital. A failure to do so imparts risk and devalues the business. Are the tangible assets properly insured or sheltered from legal liability? Are the intangible assets titled in the name of the company and properly registered? Are key employees properly incented and locked in for the future of the business? Loss of tangible and intangible assets and human capital diminish the value of any company.
Litigation Disputes – No business can completely insulate itself from litigation. Contract disputes, employee misconduct, product liability claims and disputes over the use of intellectual property can all result in a drain on time and resources, even if the claim does not result in litigation. Litigation can frequently be avoided by taking proactive steps and working closely with counsel to assess risk and taking the time to insulate the company from liability.
Contracts – Contracts govern the company’s relationships with third parties, as well as its ability to generate revenue and manage expense. The systematic under-management of contracts creates expense leakage and missed revenue opportunities. Each of these types of contracts should be reviewed regularly to assess the company’s risk exposure.
Regulatory – Many businesses must comply with regulatory laws in order to remain viable. For, example, a food and beverage company must comply with relevant portions of the Food Safety Modernization Act. Likewise, businesses that collect and process personal data must assess and comply with data privacy (and security) regulations – increasingly in multiple jurisdictions. Proactive regulatory risk management requires the implementation of policies, procedures and protocols to ensure proper compliance.
Competition is fierce these days. Business owners and executives should not be responsible for the dual role of making business decisions and legal decisions. Working with experienced counsel to identify areas of legal risk and to propose reasonable solutions should help businesses avoid significant pitfalls, which would undoubtedly impact the company’s overall value.