Investment Ready Part 3: The Indispensable Role of Corporate Legal Document Review
In the world of business, due diligence is not just an exercise but a critical step to ensure the long-term sustainability and viability of your business. Your preparations go beyond product development, market research, or financial planning. At the core of these preparations lies a series of legal documents, the bedrock on which businesses are built and protected.
Why Review Corporate Legal Documents?
According to the American Bar Association (ABA), corporate legal documents “serve as the foundational charter for the operation of the corporate entity.” Errors, omissions, or outdated clauses in these documents can lead to significant liabilities and can impact a business’s ability to attract investors.
Here’s a closer look at the importance of each type of document:
- Corporate Organizational Documents: These documents, including articles of incorporation and by-laws, define the business structure and purpose, the roles and responsibilities of directors and officers, and other essential corporate governance matters. Regularly reviewing these documents ensures that they align with current business practices and legal standards.
- Corporate Operating Agreements: For limited liability companies, the operating agreement outlines the management structure, distribution of profits and losses, and procedures for adding or removing members. The ABA emphasizes that this document “should be carefully tailored to the specific needs and intentions of the members.”
- Contracts: Contracts with suppliers, clients, and partners dictate the terms of business relationships. Without periodic reviews, companies may inadvertently breach evolving industry standards or legal regulations.
- Intellectual Property (IP): Protecting IP is paramount in today’s competitive market. A company’s value could significantly diminish if their intellectual property rights aren’t correctly secured and maintained. Regular legal audits can identify potential IP infringements or opportunities to further secure IP assets.
- Employee Agreements: From non-compete clauses to confidentiality agreements, ensuring that employee agreements are up to date can protect a business from potential legal pitfalls. The ABA suggests that such agreements should be “clear, enforceable, and in line with current employment laws.”
Investors Are Watching
Investors are more than just financial contributors; they’re partners who are investing in the future of your business. They come with their own set of due diligence processes. As Wharton’s articles reveal, one of the most significant deterrents for investors is legal risk. Unresolved legal issues or poorly drafted documents can result in investment delays or even deal breakups. Being “investment ready” means that your legal house is in order, providing confidence to those considering a financial commitment to your business.
The Role of a Qualified Attorney
A qualified attorney doesn’t just bring legal expertise; they offer business insights. Their external perspective can identify areas of vulnerability or suggest changes to keep pace with industry standards and legal shifts. According to the ABA, utilizing experienced legal counsel “can save businesses from costly mistakes and ensure that they are operating within the bounds of the law.”
In Conclusion
While the journey to becoming “investment ready” encompasses a myriad of steps, prioritizing the review and updating of corporate legal documents remains crucial. As illuminated by both the ABA and Wharton’s publications, a legally sound foundation not only shields your business from potential setbacks but also enhances its attractiveness to discerning investors.
As a business leader, partner with a qualified attorney, and take proactive steps today to fortify your corporate legal standing. In the world of investments, preparation and foresight will set you apart.
What has been your own experiences with corporate legal documents (good or bad) and their impact on your business?
About the author:
John A Morris, MBA
John Morris has 40+ years of business experience beginning with IBM, from there expanding his business experience and skill set with leading companies at HP Books (Knight Ridder Inc.), and Sunset Magazine and Books (Time Warner Inc). In 2001 Mr. Morris formed CMX Development, Inc. as President/CEO and Founder, growing the company revenues to $10+ million and over 50 employees within three years consulting with business leaders developed and implement strategic plans. In 2017, John became a Vistage Chair, guiding and coaching CEOs in a private advisory board.