Business Transactions

A Conversation with Eddie Brown about Beating the Odds

I recently had the pleasure of interviewing Eddie Brown, founder of Brown Capital Management. My interview with Eddie was part of this year’s The Twelve-In-Twelve Book Club Meet the Author Forum in Columbia, Maryland. Eddie, who last year published his memoirs entitled Beating the Odds: Eddie Brown’s Investing and Life Strategies (John Wiley & Sons), was the invited author.

Beating the Odds has a potential dual meaning. First, Brown Capital Management, founded by Eddie Brown in 1983, has a history of slightly outperforming and sometimes significantly outperforming the market. A deeper meaning arises from the fact that Eddie was born in 1940 Jim-Crow-era Apopka, Florida to a teen-age mother and into poverty. He beat the odds of those less-than advantageous circumstances to become a Howard University-educated electrical engineer; a valued worker at IBM; the first African-American portfolio manager at T. Rowe Price; a regular financial commentator on national television show, Wall St. Week; the founder and president of a financial services firm with $6 billion under management; and a philanthropist.

During our interview, Eddie and I discussed his childhood in Apopka, Florida; what it means to have an entrepreneurial gene and how he has exercised that gene throughout his life; the role and importance of family in his life; his attitude towards and approach to handling racism; his approach to investing; and the impact of his philanthropy.

All those topics are of course covered in Beating the Odds, written by Eddie Brown with co-author Blair S. Walker. I highly recommend you pick up a copy.

A Lesson for App Developers: Why Amazon’s Smack-Down of Ebook Lending Sites Is No Surprise

Update: March 23, 2011. After some email communications, Amazon did restore Lendle’s access to the Amazon API. Amazon agreed to the action if Lendle would disable the functionality of the Lendle Book Sync tool which syncs a user’s Kindle books with their Lendle account. In this Lendle blog posting, Lendle discusses the reinstatement as well as its new-found realization that it needs to be less reliant on third-party APIs.

Lendle co-founder Jeff Croft may have been surprised by today’s revocation of Lendle’s access to Amazon’s API– but I wasn’t surprised. I was only surprised that Amazon allowed Lendle and other book lending sites to operate for the few months they were in existence.

Some Background on the Book Swapping Sites

Ebook lending sites like Lendle.me and Booklending.com take advantage of the lending functionality offered by Kindle and Nook. Instead of being restricted to lending your ebook for two weeks to your friends and family, these book-swapping sites bring together strangers with ebooks to lend and give you thousands of potential ebook lenders and borrowers. Lendle and other book-sharing sites rely heavily on Amazon’s API (application programming interface)

What’s the Lesson

When your business model piggy-backs on another company’s business, your business is significantly exposed to the whims of that other company. Companies can very easily block your access to their APIs and modify their terms of use. If your app is not clearly allowed by the platform’s terms of use and not firmly inside the spirit of those terms, it’s prudent to have a dialogue with the platform before expending resources and time on building an app and business model that the platform can shut down with a few keystrokes. To my knowledge, none of the ebook lending sites ever had a discussion with Amazon.

A Hard Lesson for Lendle to Grasp

On the Lendle blog, co-founder Croft talked about how the Lendle site could be re-formatted and go back into business by eliminating reliance on the Amazon APIs. Croft later expanded in comments to msnbc.com that Lendle could rely instead on information submitted by users (i.e., a user would have to type in the book title rather than Lendle importing that information from Amazon).

What Lendle doesn’t seem to be processing is that third party app developers need some cooperation from the platforms for which they build and Amazon dislikes Lendle’s business model. I doubt Lendle will successfully circumvent Amazon. I can certainly visualize a few changes to the Kindle user agreement or technical changes to the Kindle user interface that could effectively kill a Lendle re-formatted for reliance on customer data input.

And need I mention the breadth of Amazon’s resources in the event this turns into a legal fight?

The Accountant’s Role in the Sale or Purchase of a Business. Audio Interview with Jina Etienne,CPA.

Previous posts have covered the role of attorneys as well as the role of business brokers (here and here) in the sale or purchase of a business. Recently, I talked with Certified Public Accountant,  Jina Etienne, about the role of accountants in the business sales process.

Jina shared advice concerning

• the tax implications of purchasing/selling a business via a stock sale versus an asset sale;
• what a buyer/seller should consider when allocating the company purchase price among real property, tangible and intangible assets, and goodwill; and
• how a company’s long-term strategic objectives should impact tax decisions during the sale.

(Click the link below to listen to my 12-minute conversation with Jina Etienne, CPA.)

Interview with Jina Etienne

How Much Attorneys Charge to Handle a Company Sale or Purchase?

In a recent posting, I outlined what attorneys do to help business people buy and sell companies. An attorney’s role in a company sale includes helping the parties with getting ready for sale, contract negotiation, financing, due diligence review, and closing.

Of course, one of the initial questions I get from clients seeking a lawyer to help with a company sale is “How much are the legal fees for a company sale?” I’ll talk in terms of number of hours. If your lawyer charges an hourly rate, you can then do the math. Here are some general guidelines on attorney hours required for the phases involved in a relatively straight-forward small or medium-sized company sale:

• Drafting and Negotiating Term Sheet, 5 - 10 hours
• Drafting and Negotiating Purchase Agreement, 10 - 20 hours
• Conducting Due Diligence Review, 10 – 15 hours
• Drafting and Negotiating Ancillary Documents, 20 – 40 hours
• Handling Closing and Post-Closing Matters, 10 hours

Hours required will vary greatly depending upon which party has responsibility for drafting the various agreements and how much negotiation is required to reach agreement. Attorney hours required can increase significantly if a problem is uncovered or develops and must be remedied prior to closing. Sample problems include chain of title in property to be conveyed; difficulty obtaining required third party or governmental consents; and a party’s unwillingness to assume potential liabilities uncovered during due diligence.

Setting a Price for a Company Sale. Audio Interview with Business Broker, Clayton Wendt.

In this posting, I continue the discussion about how attorneys help buy and sell companies as well as how other professionals aid in facilitating a company sale.

If you seek to buy or sell a company, one of your first questions is what’s the value of the business? That’s a question a business broker can help you answer. Clayton Wendt, a business broker with Sunbelt Business Brokers in St Paul, Minnesota, shared with me his thoughts on how to set a price for the sale or purchase of a business.

When valuing a business, Clayton divides companies into separate tiers. A main street business might sell for of up to about $1M and is valued according to a multiple of the seller’s discretionary earnings. A mid-market company might sell for a price of up to $7 - $8 Million and is valued at a multiple of EBITBA (Earnings Before Interest, Taxes, Depreciation and Amortization). Clayton also explained how copyright, trademarks, and patents owned by the company get worked into the valuation.

(Click the link below to listen to my 10-minute conversation with business broker, Clayton Wendt.)

Interview with Clayton Wendt

The Business Broker’s Role in the Sale or Purchase of a Business. Audio Interview with Paul Corrigan.

In my last posting, I outlined what attorneys do to help business people buy and sell companies. Of course, attorneys aren’t the only professionals who work on company sales. Business brokers collect listings of companies available for sale, make those listings available to the public, pre-screen buyers, and facilitate the closing of the deal. (In some ways, they are analogous to a real estate broker helping you buy or sell a home.)

I recently spoke with Paul Corrigan, a business broker at ROI Business Broker. During our conversation, Paul shared how his firm prepares a confidential business memorandum to promote transparency and minimize the chances of the transaction going off-course. Paul also discussed the importance of confidentiality in the company sales process, the positive impact of recent SBA legislation, and how buying and selling businesses stimulates the economy.

(Click below to listen to a 5-minute excerpt of my conversation with Paul.)

 

Interview with Paul Corrigan

 

Your Attorney’s Role in the Sale or Purchase of a Business

I allude to the attorney’s role in the company sales process as part of the blog series, "Steps In a Business Transaction". I thought it would be helpful to outline more specifically what attorneys do to help business people buy and sell companies:

Getting Ready. Small businesses owners sometimes neglect corporate formalities such as annual meetings and resolutions. If the small business is organized as a corporation or LLC, it must make sure that its organizational documents are up-to-date. It will have to represent that they are as part of the sale. Attorneys review your organizational documents and help fill-in anything that’s missing. Reviewing the other party’s (i.e., the buyer or the seller) organizational documents is also part of the due diligence review. When representing the buyer, the attorney’s "getting ready" activities might include organizing the business entity (e.g., a new LLC or corporation) that will make the company purchase.

Negotiating Technology Licensing Agreements

I received a query asking opinions on which portions of an otherwise boilerplate technology licensing contract merit special attention. Setting aside for a moment my belief that there is no “boilerplate” and every contract provision requires review, here’s my brief take on a few important technology licensing provisions.

License Fee. Obviously, the parties will be concerned with the amount of money that exchanges hands. Setting the license fee is often the highest hurdle for the parties – especially when there are no objective benchmarks to determine the value of the technology. In those circumstances, the final license fee is determined by bargaining power, negotiation skill, and an accurate sense of what the market will bear.

Representations and Warranties. In our litigious world, warranties are often hotly negotiated provisions. The customer buying the rights wants the technology company to guarantee that the customer will not have any problems or suffer any losses as a direct or indirect result of using the technology. In contrast, the technology company wants to limit its exposure to liability and provide as few guarantees as possible.

Indemnification. This is the technology company’s promise to reimburse the customer for any money the customer loses due to the technology company’s breach of any of the guarantees made in the representations and warranties. The technology company need not leave its responsibility to indemnify the customer completely open-ended. For example, a technology company might use language that (i) limits indemnification to losses suffered only in the United States, (ii) gives the technology company the right to negotiate and settle any covered claims made against the customer, and (iii) explicitly negates the technology company’s indemnification obligation if the customer uses the technology in an unauthorized manner.

A Few Do’s and Don’ts for Small Business Contracts

Important Do’s:

• Make an honest assessment of what you want from the working relationship.
  
• Discuss expectations candidly with your prospective partners.
  
• Put your agreement in writing – ideally with the assistance of a qualified attorney.
  

An Important Don’t:

Don’t leave yourself without an exit strategy in the event the relationship fails. When possible, formulate an exit strategy that doesn’t destroy the business. I talked about this topic, “When Business Partnerships Go Bad”, in a twelve-minute podcast interview with Steve Mullen of Start-Up BizCast. You can find the interview here. (It’s episode #30. My interview starts about 2 ½ minutes into the podcast.)

Seller Financing for Company Purchases

If you’re a prospective buyer who is short on cash or a seller who wants to sell his company quickly, you might consider seller financing.

With seller financing, the seller defers a portion of the purchase price. The buyer pays a portion of the purchase price at closing and pay the remainder over a period of years at a market interest rate. Structures for seller financing are as varied as structures for residential mortgages. The seller typically wants payment completed within one to five years and a security interest in the assets of the company. The seller’s willingness to be flexible in financing terms is directly proportional to the seller’s eagerness to sell the company.

From the buyer’s perspective, the seller financing arrangement should be independent from other aspects of the deal. For example, sellers often hang around as consultants to the company. Sometimes, those arrangements do not work out. If the consulting arrangement with the seller goes sour, there should be no ripple effect that negatively impacts the financing deal between the seller and buyer.