The Legal Beat

Kick the Tires Before You Buy

There are essentially two types of used car purchasers in the world. First there is the “price buyer.” A price buyer typically visits various dealers, checks for prices on the car makes and models of choice, and buys the desired car at the lowest price, satisfied that the best deal was obtained … until the car breaks down several times over the next six months. The second type is the “tire kicker.” Tire kickers do what price buyers do, with the added steps of having their own mechanic inspect the cars, retrieving car histories, and peppering salespeople and prior owners with questions. Tire kickers, request price breaks and extended warranty coverage based on the items their research uncovers, and they rarely leave the lot without scoring a good deal and good protection against unanticipated breakdowns of the vehicle. Tire kickers let the items under the hood dictate the deal they will accept.

Tire kickers set a great example for those seeking to purchase a business. The deal you accept when buying a business should be dictated by a sound due diligence review. Checking transaction prices and deal terms of acquisitions involving similar businesses is a good way to begin, but it is imperative you investigate the target from top to bottom before setting a purchase price and entering into a binding acquisition agreement. An attractive offering price may very well be your good fortune. It could also be the bait for a bad deal. The only way to know is to dig into the components of the business and its operations, and see what’s what.

Reviewing the target’s financial statements is no brainer. If you’re looking to buy a business you probably understand the importance of profit and loss statements, cash flow analysis and balance sheets. But where many business acquirors get in the weeds is the legal due diligence review. A poor legal diligence review can leave an acquiror at risk of a total loss of investment dollars when the smoke settles.

A thorough legal diligence review is required to ensure, among other things, that the transaction is properly authorized and approved. This helps to limit costly court disputes regarding the validity of the transaction after the deal has closed and money has exchanged hands. A legal review is also necessary to accurately determine the current ownership of the target and its assets, and to determine who should be involved in the items transferred in the transaction. The last thing an acquiror wants is to find out it did not receive the shares or assets it paid for because there were some unaccounted shareholders or property owners out there of whom it never heard.

Additionally, a detailed legal review process can also help determine whether major contracts will be terminated, or whether penalty payments to third-parties are required in connection with the company sale. This is important because lost profits from major contracts and penalty obligations inherited by the buyer impact the value of the business. If armed with this information, an acquiror acting like a tire kicker can ask for a reduction of the purchase price or get an indemnification obligation from the business seller.

Remember, companies that look very sharp from the outside can have some real serious problems on the inside. So don’t be a price buyer. Do your homework and check underneath the hood before taking the proposed purchase price and terms. Otherwise you might be stuck with a business that’s a lemon.

 Travis Townsend Jr. is managing partner at Townsend Lockett & Milfort, LLC

What is I.P.?

By Tennell Lockett

What is Intellectual Property?  I find myself being asked this question all the time. I am amazed that, in 2010, there are still so many people from all walks of life — lay people, professionals, CEOs, etc. — that still have no grasp of IP. My father has known that I am an IP lawyer for nearly 10 years and I still catch him on the telling people that I can help with their real estate issues. It’s classic.

Although many do not know exactly what IP is, virtually everyone talks about IP, uses IP, wants to leverage IP, but have no context or concept of how to make it work for them. I once overheard a lady in a Kroger grocery store saying she had a great T-shirt logo that she intended to patent. I chuckled. Sitting down to write this blog I thought, maybe it is time to stop chuckling and try to inform. Maybe it will help the lady in Kroger, maybe not. At the least, it will be a good reference point for my father, concerning what I do.  

What Is IP and What Does It Protect?

In plain English, Intellectual Property is any protectable, non-tangible property that you create. One way to think of it is to consider the product you would have if you could pour the valuable contents of your mind into a box, package it and sell it. IP includes expressions of creativity, ideas and inventions, processes and identifiers of source, among other things. 

IP law breaks these non-tangible property rights into a number of different areas:

Copyrights cover original works of authorship that are “fixed in any tangible medium of expression.” In other words, you would take your original mental concept and reduce it to tangible means. Paintings, literary works, photographs, even recipes can all receive copyright protection.

Trademarks and Service Marks are logos, symbols, words or other identifiers that designate to the public that a product or service comes from a particular source. Nike’s Swoosh is a popular example. 

Patents are used to protect ideas. For an idea to be patentable, it must be novel (e.g., something that has not already been invented) and non-obvious (e.g., it cannot be an obvious modification of previously known technology). Examples of patented inventions are everywhere, from simple devices to complex technologies. 

Trade Secrets, as the name suggests, cover information or things that have value in an industry by virtue of its secrecy. Coke’s soft drink formula is a good example. There are other niche areas, but those are the major areas.

How Do I Use It?

IP owners typically use IP to achieve one of two basic objectives: to create an exclusive field in which they can commercially operate; or to charge others to operate in their protected field. If you want to create an exclusive field, you do so through IP enforcement (ranging from delivering demand letters to full-blown litigation). If you want others to “pay to play,” you typically attempt to license or, if the price is right, to sell your IP. A qualified IP attorney can assist you with your process from start to finish.        

 It is the tip of the iceberg, but in a nutshell, that is IP. 

 Lockett is a partner at Townsend, Lockett & Milfort, LLC

What’s Love Got to Do With It?

By Travis Townsend

The other day my office phone rang, and on the other end was a prospective client virtually screaming me into hearing loss about a business relationship gone sour. He gave me the full rundown about how stubborn his partner is, how his partner really doesn’t understand the vision of their business, and how his partner is blocking him from implementing strategies that will assuredly lead to significant profit margins for their company. His query to me: “What legal steps can I take to get control of my company so I can run it the way I want?

This story is far more routine in the world of business relationships than it has to be. I wish I had a dollar for every time I’ve heard the story about the unbearable, short-sighted, villainous business partner blocking the company’s growth. I feel like a divorce lawyer sometimes. What makes these situations even harder to swallow is that I know that when the partners initially got together they were hopeful, in awe of their respective business acumen, and overwhelmed by each others’ work ethic. But most of the time, neither I, nor another business savvy lawyer, was around for that part. Far too often business partners keep the blissful times to themselves, and share with the lawyers only in rocky times; and that’s where the error lies.

A key step in building a prosperous business relationship is bringing the lawyers along on the honeymoon. If you want to have a long-lasting business bond, it helps to have a clear understanding of expectations, rights and obligations, and clear procedures for decision making as well as exit strategies. There’s no better way to do that than to have expert legal counsel assist with the organization of your business entity, the preparation of your governing documents, and most importantly, the drafting of your relationship agreement. 

When enterprising parties first get together, all they can see is the promise of embarking upon the venture together. Likes and commonalities are naturally more salient than dissimilarities and diverging philosophies; otherwise the parties would never take the leap of starting the joint endeavor in the first place. Therefore, little thought is given to devising mechanisms that ensure the actions of all parties are consistent with the company vision. Almost no concern is shown for possible decision-making impasses. New partners rarely consider what will happen if they come to a point where they absolutely cannot bare teaming up any longer and must go their separate ways.

At minimum, any parties who are contemplating entering a joint business enterprise should consult with a corporate attorney at the onset. The financial expense of a simple consultation pales in comparison to the costs associated with poor corporate structure, inflexible governing documents, and uncertainty of partner rights and obligations. Moreover, expenditures that result from a bad foundation are not limited to monetary outlays. The emotional strain of dealing with a dysfunctional business relationship can take a hefty toll on a person. Friends and family who become business partners may become estranged enemies when business goes bad.  So please, all you aspiring business moguls, do yourselves a favor before hopping into the sack with a partner and hire competent legal counsel. Remember, Ike and Tina started out with love aflame and money rolling in, yet and still that union ended up rollin’ down the river when it was all said and done.

 Townsend is managing partner at Townsend Lockett & Milfort, LLC