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How to strengthen the value of your company and prepare for a successful exit

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As an entrepreneur, exiting your ownership position is inevitable. Taking the proper steps to prepare your company for this is essential to its value and to a successful exit. By focusing on three key areas, you can enhance the value of your business, feel assured that you are more prepared should your exit timing be unexpected — as in the case of an unsolicited acquisition offer — and increase the likelihood of a smooth exit. While running your business, pay special attention to the following three areas:

1. Intellectual property

Intellectual property is often a key driver in building business value. In developing your intellectual property portfolio, assure that intellectual property that is created by employees or contractors is assigned to the company. Additionally, protect trade secrets, register trademarks and service marks, obtain key domain names, and if applicable, file for patent protection.

What may seem obvious is sometimes overlooked. It is critical that you enter into confidentiality and invention assignment agreements with your employees and contractors, and insist on NDAs with third parties to whom you disclose confidential information.

2. Legal and financial records

When building a valuable company, remember that in order to convey its value to others, you must keep sufficient records. Companies that keep good records are more prepared when the due diligence process begins.

Everything including financial statements, stock records, board minutes, intellectual property assignments and contracts, will be looked at closely during due diligence. To be best prepared, records and copies of signed contracts should be organized and digitized, routinely.

It is important for buyers to feel assured that they are making a good investment. Well kept, organized records facilitate quick transactions and entice buyers to move forward confidently and importantly, without increased negotiation leverage. Poorly kept records can jeopardize acquisitions, altogether. Alternatively, they may result in buyers demanding lower purchase prices, or more aggressive deal terms. These terms could include increased indemnification obligations, larger escrows, or buyer favorable deal structures, such as asset purchases.

3. Contracts

In building business value, remember the importance of your contracts, such as those with strategic partners, customers, vendors and employees. Good contractual terms might help to increase value, while poor or ambiguous contract terms could have a devastatingly, negative impact. Common focus areas during due diligence include indemnification obligations, intellectual property ownership, royalties, assignment and “change in control” provisions, and termination rights.

In closing, remember that the steps that you take now in order to build and protect intellectual property, keep good records, and ensure that you have good contract terms, could positively impact the value of your business, as well as the likelihood of a successful exit.

Submitted by Mike Brown. Brown is a partner with Stradling Yocca Carlson & Rauth, and specializes in corporate and securities matters, including M&A, VC financing, private equity, public offerings, SEC compliance, and strategic alliances. Brown was recently named one of the Daily Transcript’s 2012 Young Influentials.

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