While most tele-communications professionals stay actively aware of developments in technology, far too often they forget about the “business side of business,” and only find out too late, when a costly problem arises, that a simple step, taken up front, could have avoided disaster.

Problem No. 1

I sold my business last year — and now I got hit with a whopping tax bill, plus I found out that my friend recently sold a similar business for a lot more.

Experienced business lawyers understand how businesses are valued and how sales are structured for tax purposes.

What is your business worth? The short answer: Whatever a buyer is willing to pay for it. But you first need to know how much to ask for, and a business lawyer can help.

There are several valuation methods that can provide guidance when valuing a business. However, the process of valuing a business is an art, not a science, and there is no single method, formula or technique to use.

Valuation methods are commonly categorized broadly into the income-based approach, the asset-based approach and the market-based approach. Industry norms, economic conditions, the kind of business (service, manufacturing, retail, etc.), levels of risk and a host of other factors help determine which approach (or combination of approaches) should be used, and how it should be used.

The income-based approach is a general way of assessing value by converting anticipated future economic benefits (usually either cash flow or net income, but gross revenue is sometimes used) to a present value. This is the most common approach used to value a privately owned business. One typical example of the income-based approach is a multiple of the average net earnings before interest, taxes, depreciation and amortization (EBITDA) over the past three years. The multiple (analogous to the P/E ratio of a public company) will vary depending on the type of business and other factors, but is often in the three-to-10-times range.

The asset-based approach evaluates the value of a business based on the book value or replacement value of the business' assets, less its liabilities. Quite often, the most valuable assets of a business are intangible, such as goodwill, name recognition and intellectual property rights, which are difficult to value. As a result, the asset-based approach is used less than the income-based approach in the context of privately owned businesses.

Because the market-based approach involves a comparison of similar businesses that have been sold, and because there is little public data regarding the sale of privately held businesses, the market-based approach is not often used to value a privately owned business.

When preparing to sell your business, you should consult your business lawyer early to determine the best structure for the transaction. What a buyer is willing to pay, and what a seller is willing to accept, can also be significantly influenced by federal and state tax consequences.

Problem No. 2

My top salesperson quit — and he's taking all of my customers and key employees.

This problem can be prevented at the time your employee starts working for you. Every new employee who has the potential, based on his position in the company or his experience, to harm the company after he leaves should sign an agreement preventing this situation.

The agreement can contain several types of restrictions depending on the situation. If the concern is to prevent your top salesperson from taking your customers or key employees, you should have him sign a non-solicitation agreement.

Alternatively, if the concern is to prevent your senior executive from going to work for your biggest competitor and taking your customers and other employees, you should have him sign a broader non-competition and non-solicitation agreement. A confidentiality provision should be included in all of these agreements to protect your confidential and proprietary information.

Another issue to consider is the scope of the restrictions in terms of the duration and the geographic scope. The answers to these questions will depend on applicable law and your specific business.

For example, a national business might want the restrictions to apply throughout the United States, and a local business might only be concerned about protecting a 10-mile area.

Although these kinds of restrictions are common, their enforceability can vary greatly from state to state. Courts generally oppose restrictions that are too broad in scope and could prevent an employee from earning a livelihood after he leaves your company. Generally speaking, the less restrictive the agreement is, the more likely it will be enforced.

CAUTION: Some states, such as California and Texas, have specific laws that prohibit or limit certain types of restrictions imposed on employees.

It is not too late to protect yourself now with respect to current employees. However, it is possible that you may have to give your employee something in return for signing the agreement. In some states, simply continuing to employ him is enough — in other states, you must provide some added benefit, such as a one-time bonus payment.

Problem No. 3

Trademark infringement must be considered when you start your business or introduce a new product.

When selecting the name of your company or product, your business lawyer can perform a preliminary search for the name you hope to use. This kind of search will “knock out” any obvious bad choices by showing quickly and inexpensively whether a name is already a registered trademark, or is otherwise unavailable.

For greater assurance, your business lawyer can obtain a comprehensive search report at a cost of about $500. The search results will be compiled and provided to your business lawyer for his review. The cost of this preliminary work can be minimal compared to the cost of rebuilding brand recognition and buying new signage, letterhead, advertisements, etc. — or worse, the cost of defending your company against an infringement claim.

Problem No. 4

My business partner and I each own 50 percent of the company. We can't get along anymore and the business is suffering.

Deadlocks in control can quickly destroy a good business. Unfortunately, this is a very common problem — and also one that should be addressed at the beginning of the business relationship. When you are ready to bring in a partner, or start a new business with a partner, ask your business lawyer about a Buy/Sell Agreement. Without one, you will be forced to either negotiate a business divorce or sue your business partner if a dispute arises. In either case, a business divorce is frustrating, emotionally draining — and very expensive. A well-drafted Buy/Sell Agreement tries to anticipate future situations and disputes and create mechanisms by which they can be resolved without resorting to litigation.

Buy/Sell Agreements should always address dispute resolution procedures. There are a variety of ways to deal with potential deadlocks between partners.

One method is a mandatory buy-sell provision, where either partner can require the other partner to sell his interest. In these cases it is critical to consider how the price will be determined. Some agreements require a third party appraisal.

Alternatively, a formula based on the company's financial position may be used. Another way of resolving disputes is to require the partners to submit to binding arbitration, or give an independent third person the ability to break any deadlock.

If the partners will also be employees of the company, the Buy/Sell Agreement should address what happens upon a termination of the partner's employment.

For example, if one partner is taking action that may harm the company, who has the authority to terminate that partner's employment?

Similarly, what happens if a partner dies or becomes disabled? Does the partner's spouse become an owner and/or employee of the company? These questions can be addressed in a Buy/Sell Agreement.

The best time to sign a Buy/Sell Agreement is at the beginning of the relationship. At that time, the interests of both partners should be aligned, both partners are confident the business will succeed and, presumably, the partners get along. It will be extremely difficult to get the partners to agree at a later date when their interests have diverged.

Problem No. 5

I retained an independent software developer to create a program for my company — so why don't I own the program?

This is another problem that arises frequently when business owners retain an independent contractor without talking first to the company's business lawyer. The result can be disastrous for a company that relies on the product created by the contractor.

The law generally provides that any work performed by an employee in the scope of his employment is owned by the company. This is referred to as the “work made for hire” rule.

However, if you retain an independent contractor to perform work for your company, the contractor will own the work that he creates unless you have an agreement that clearly transfers ownership from the contractor to the company. Without such a transfer, you will be entitled to use the product for your internal business purposes, but the contractor will own the product and can create problems for you if you want to modify it later, even though you paid the contractor to create it in the first place.

Often, the contractor does not realize he owns the product until some event occurs that creates an issue as to the ownership of the product.

At that point the contractor will have significant leverage over the company, and the price the company must pay to reacquire the product may be very steep.

As evidenced by these very common situations, consulting your business lawyer early in the process of your business decisions can provide substantial benefits to the company.

This article was written by the staff of the law firm of Shulman Rogers Gandal Pordy & Ecker.