Ok, your business is growing or you have a great idea to move it to the next level. As a Grand Rapids small business lawyer and former business executive, I can probably help you in the transition. Here are some things that might be helpful.
It’s not unusual to need additional capital for your business expansion. This might include capital for: (a) working capital (for increased inventory, work in process, and accounts receivable); (b) capital expenditures (land, building, equipment, etc.); (c) acquisition of another business; (d) research and development; and (e) the list goes on.
Here are the two most common ways to do that:
Sale of Equity (ownership interests): such as corporate stock, LLC membership interests, partnership interests. This might include angel investors (family, friends, employees), strategic investors (vendors, customers), venture capital, and crowdfunding. There can be several significant legal issues involved with selling equity, such as: (a) federal and state securities laws; (b) your expanding duty to “play fair” with minority owners; (c) changes to the company’s governing documents (LLC operating agreement, Corporate Bylaws); (d) Buy-Sell agreement to prevent owners from selling to “outsiders”; and (e) the list goes on. If you are willing to be a C corporation, you might want to consider issuing preferred stock (where these shareholders are more like creditors as they get a set rate of return and get paid before common shareholders). This would allow you to capture more of the increased value of the company without sharing it with the preferred shareholders. Regardless of which route you go, you should definitely have an attorney involved in any sale of ownership interests.
Issuing Debt: The most common way to raise capital for small businesses is debt. Debt usually comes via credit cards, bank debt, or angel creditors. Other than credit cards, debt is usually secured by the company’s assets – and most of the time will require that you personally guarantee the debt (so if the business defaults, then you are on the hook). There are several legal issues involved. The one most important is probably the loan covenants – which are required performance standards that your business must meet (such as maintaining minimum accounts receivable value, inventory value, financial ratios, etc.) – which if they are not maintained will allow the bank to “call” the loan. And, don’t think they won’t. I have been involved with two banks that did this in situations that I felt were not justified. It is always a good idea to have an attorney review the documents and walk you through them so you understand what you are committing to and what the consequences are if you breach the agreement or a covenant. As an experienced Grand Rapids attorney and former CFO for several companies, I can help.
Joint Venture: A joint venture is a joint enterprise of two or more companies entered into for a strategic purpose. Typically, it is used by entities that are already doing business together (for example, a customer or vendor) to: (a) expand into new territories, products, etc.; (b) achieve a competitive advantage; (c) ensure a continued relationship with a supplier and it source of critical resources (materials, manpower, etc.); and (d) insure a continued relationship with a customer as it expands its business. Typically, a joint venture is a new entity created by the parties. You may have a customer or vendor who would like to join you in your expansion and who is willing to put up some or all of the capital in return for ownership in the joint venture company. The most important aspect of a joint venture is the joint venture agreement. It is important that the agreement be as specific as possible as to each party’s role, responsibilities, and financial return. This is an agreement that you definitely need to have an attorney participate in its drafting and/or review.
Why Acquire other Companies? Your expansion might include acquisitions of businesses to: (a) increase market share in your current territory or to take advantage of economies of scale or to obtain better management and systems; or (b) expand into new territories by purchasing businesses that already operate in that territory; or (c) acquire a key vendor to ensure the supply of critical materials or manpower; or (d) obtain new products to augment your current product line; or (e) acquire a company with a new distribution channel for your products or services; or (f) acquire technology, know-how or a skilled workforce to augment your current capabilities; and (g) the list goes on.
Types of Financial Vehicles. Acquisitions can be accomplished through either: (a) cash buyouts where you buy the company with cash; or (b) leveraged purchases where you pay some of the purchase price up front and the seller takes a note for the remainder of the purchase price – or a bank or other lending entity lends you the money; or (c) the purchase involves issuing stock in your company to the seller’s shareholders in return for their shares in the seller company.
Types of Purchases. There are three typical types of acquisitions: (a) you can purchase the stock of the selling company (and then hold the stock); (b) you can purchase the stock and then merge the company into your company, or (c) you can purchase a majority of the assets of the company.
Obviously, there are significant legal considerations and issues in this area, such as: (a) undertaking significant due diligence to make sure you know what you are buying; (b) federal and state securities laws; (c) tax implications; (d) representations, warranties and related indemnification by the selling company; and (e) the list goes on. You will need legal and tax counsel to walk with you through an acquisition. As a Grand Rapids small business attorney, my legal, business executive and CPA background give me an unusually broad understanding of these transactions. This allows me to help you in this process more than most attorneys.
If you are expanding your business into new products, territories, vendors, etc., you may find yourself once again in a startup phase. For items to consider in this startup phase, visit the Startup webpage.