Legal/Regulatory Factors
8 Legal/Regulatory Factors
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1. Corporate Structure
Is the company an S Corporation or was it switched to an S before 1990? S Corporations have more flexibility in deal structure than C Corporations. The buyers preferred deal structure may create tax problems for C Corporations. This can put downward pressure on values as buyers get less favorable tax treatment if they cannot use the preferred deal structure.
2. Board of Directors/Advisors
Credible outside directors on a company’s board is a sign of strength and very attractive. It gives management real accountability to shareholders. Outside directors with industry connections could boost the company’s growth objectives and bring new skills. Financial buyers like private equity are going to want a significant board influence to make an investment in the company.
3. Lawsuits
A history of lawsuits would be examined closely by buyers during due diligence. Any current or pending lawsuits need to be disclosed. We live in a litigious world so lawsuits aren’t necessarily a deal-breaker. Clearly, it’s preferable if there aren’t any. Major legal liability will weigh on price.
4. Taxes
Attractive companies have a history of staying current on all tax filings and tax payments. It demonstrates seriousness and professionalism. Any recent IRS audits should show a clean report.
5. Environmental
If the company has ever used hazardous materials as in a manufacturing company, a Phase I or II audit is desirable. The same is true of underground storage tanks. If there have ever been past problems, have the local, state, and federal authorities provided signoff documentation? For companies that deal with hazardous materials, it’s best to have a specific individual in the company who is formally responsible for compliance.
6. OHSA
Buyers want to see relatively clean histories of OHSA inspections. Does the company have a history of fines? That would be reviewed. When was the last inspection completed? What were the findings? Were the identified areas for improvements addressed? This is not sexy stuff to focus on but still among the factors of business attractiveness.
7. Product/Service Liability Insurance
Regular review of all liability insurance is a must. Prospective buyers are going to pay a lot of attention to insurance coverage. Is the coverage sufficient for the potential liabilities the company has? Is the coverage on an “occurrence” basis or on a “claims made” basis?
8. Patents, Trademarks etc. Registered
If a buyer is going to get comfortable paying on the high end of the valuation range, they are going to want to see that the intangible assets are protected. Assets such as patents, trademarks and copyrights. Are they properly registered and fully registered? In the case of patents, does it have over half of its original life remaining? It’s more attractive if they do.
