How to lock in the true value of your business

Commercial law specialist and author Joanna Oakey shares three ways to lock value into your business.

Every business faces unexpected landmines that threaten to erode the value in a business. A strongly fortified business is the best way to protect the assets you have built. Laying the right foundations will lock in and maximise the value you will be able to extract. To lock this value in, you must identify that value and protect it. Here are some areas to consider:

1. Customer base and business relationships

The customer base drives revenue – it is the most common area of key value. The value of the customer base is intertwined with branding, key staff, technology and location, and it can vary depending on the lifetime value of each customer, the length of time they stay and how often they repurchase. To protect the value in the customer base, lock that value into fixed-term or recurring revenue contracts that provide continuity of the relation­ship. Protecting your brand should be high on your agenda as it is the glue between the business and the customer base.

Employment contracts should have strong non-solicitation restraints to protect against staff leaving and taking clients, partners or other staff. It might also be appropriate to have some staff committed to non-competition restraints – these must be set up carefully if they are to be effective.

Identify any third-party relationships that are important to the business (suppliers, franchi­sors, licensors, referral partners, distribution partners, sales agents), and consider how those relationships can be secured in terms of contractual obligations and commitments.

2. Protect your team and your personal assets

Although your business should have strong employment and contracting agreements to ensure staff cannot take other key staff if they depart, this should also feature in customer, supplier and partner contracts so staff cannot be poached. You can protect the value of your team with staff retention strategies like bonus schemes or employee shares. Providing a way for key staff to hold equity in the business is a killer protection strategy.

Other legal strategies for protecting the value of the team include reviewing and creating company policies (risk protection mechanisms) that protect staff and help you deal with issues, for example, a code of conduct and policies on recruitment, anti-bullying, health and safety, anti-discrimination and harassment.

Personal asset protection is critical and is related to the structure of the business. Consider how your current structure protects the elements of value in the business and how your interests are held in the business. It’s essential to protect the value of your equity by providing clarity around restraints on other equity holders taking staff, clients or suppliers, or competing with the business.

3. Secure intellectual property (IP) and location

IP can hold a significant component of value. It can be difficult to detect infringement of IP rights and to prove your ownership to enforce the rights you have over the property. Having the right protections can play a large role in helping a business achieve the highest value in a sale. Sophisticated buyers understand the value of IP, which is common across most businesses: the brand sitting in the name of the business and the products; the website and promotional material; written material including manuals, articles, books and designs; and software code where the business is a developer of software.

The value in IP is protected through IP rights but to begin protecting your IP you can evaluate the IP in your business, register brands as trademarks, review contracts and agreements, develop an IP register for recording the development of copyrighted works, buy the right insurance, and seek advice to understand what IP exists and is being created in your business and how to protect it.

In many instances, there will be a component of value sitting in the actual business premises. If location is important or relocation costs would be high, you should lock in the future term of that lease. Alternatively, you can buy the premises, which will provide certainty and stability to the business.

Identifying and protecting the value in your business will ensure growth and consolidation, and safeguard against landmines that may threaten its very existence.

Joanna Oakey, author of Buy Grow Exit, is the founder and Managing Partner of commercial law firm Aspect Legal and host of the successful business podcasts ‘Talking Law’ and ‘The Deal Room’. She brings decades of experience-based insights from working with business owners (and their advisors) on acquisitions, exits and general commercial legal matters. You can purchase her book at www.buygrowexit.com.au.