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When to Seek Legal Advice During Each Business Phase

Posted by Amanda Butler Schley | Sep 01, 2020 | 0 Comments

There are four phases most businesses go through: start up, growth, maturity, and decline or renewal.  During each phase of your business, you will require different types of legal counsel. My experience has taught me that what separates success from failure are those clients who know when to seek legal counsel and when they can do it themselves.

This checklist will help you determine if you are in a phase that calls for or is ripe for speaking with a business lawyer.   

The Startup Phase

From the moment you have your business idea, your business becomes a startup. The first phase of the company growth cycle is one which some businesses find themselves occupying for years because they are perfecting their processes to find and obtain customers, developing their product or service, and building a brand identity that connects with their ideal client.

If you're wondering if your company is in the startup stage of business growth, consider the following questions:

  • Do you have enough customers to be viable?
  • Do you have enough resources to deliver your products on time? 
  • Can your services compete with your competitors'?
  • Are you profitable? 

If you answered “no” to some or all of these questions, you're more than likely still in the startup phase. 

As you might expect, this stage often is chaotic, marked by turbulence and self-doubt. Because it is a phase in which many businesses are undercapitalized, entrepreneurs in this phase tend to be less inclined to seek legal counsel unless they feel it's absolutely necessary. When they do undertake a search for legal counsel, they look for the “cheapest” attorney they can find to perform a specific legal task that they delegate to that cheap attorney, i.e. help in drafting an operating agreement or reviewing their lease. 

As a serial entrepreneur myself and the queen of the internet DIY solution – I fully understand this approach.  After 13 years of practicing law and advising business clients in the later stages of their business who have made it past the startup stage, one of the common denominators of that success is budgeting annually for legal expenses and regularly seeking legal advice. This legal advice is not just on specific legal tasks, but these entrepreneurs regularly check in with their business lawyer to discuss a myriad of issues they are experiencing and get their lawyer's wholistic advice on their business matters and approach to day-to-day operations.

What legal services should you be seeking during the startup phase?
  • Entity formation and structuring

    • A lawyer should draft your Operating Agreement, even if you are a single member LLC but especially if you have business partners. Operating Agreements govern the relationship of the partners in the business and establish each partner's role in the company and are the legal foundation of your business.
    • Should you be an LLC or an LLC taxed as an S Corp?
    • What state is the best place to form your entity? There are tax and legal considerations involved.
    • Maintaining your limited liability protection through your entity: Do you know what practices are needed to ensure you are administering your LLC correctly? Are you following best practices with your bank accounts? 
  • Trademarking

    • Before naming your business and LLC, have you performed a USPTO trademark search to ensure your business name is trademarkable, if it were successful?
    • Trademark your name immediately if you are a: retail store, restaurant, bar, product manufacturer, or intend to franchise in the future. Trademark your name after you've established a reputation in any other line of work.
  • Commercial Lease Review/ Permits and Occupational Licenses

    • Any business that is leasing commercial retail space – i.e. restaurants, bars, hotels, and retail stores should always seek legal review of their commercial lease agreement from an experienced real estate lawyer –but not a title company. Title companies are typically not well versed in commercial leasing and it's a mistake to engage a title company to handle your business lease.
    • Obtain all permits and occupational licenses for your type of business
    • Speak with an attorney about the types of insurance you should have and the consequences of not carrying the proper insurance
  • Tax Accounts

    • You must make sure you are paying all appropriate federal, state and local taxes. There are many local sales taxes that you might not have ever heard of before, i.e. New Orleans Exhibition Hall Tax (NOEHAT).

Breaking Out

The key to success in this stage is to take risks, explore new ideas, tweak your business model and formalize processes that have proven to work. This is a critical juncture in many entrepreneurs' careers since the startup phase is where most businesses fail.  Getting the perspective of a lawyer who speaks with hundreds of business clients in your area can give you a competitive advantage and will improve your odds of long term success.

The Growth Phase

The growth phase begins once you know exactly what your business model is—and so do your customers. 

By the time you reach this phase, you should have a refined marketing budget comparable to other similarly sized companies in your industry or niche. 

Here are telltale indicators of the growth phase of a business's life cycle:

  • Long-term business financing is secured
  • You no longer worry about turnover or making payroll
  • You've maintained multi-year client relationships
  • You're regularly reinvesting profits into the company
  • You've hired several key high-level team members

During this stage, profits are usually strong and competition is tight. The pre-eminent challenge associated with the growth stage is maintaining effective management in the face of constant growth and expansion. 

To break through this stage, you need to develop your managerial skills as you grow your team by learning how to delegate authority and empower your employees.

Constant investment and reinvestment is the name of the game when in the growth stage. To continue building your business, you need to be willing to dip into cash reserves to spur future growth and tap into new revenue streams or secure external investment.

This is a good time to decide whether you should rely on debt or equity financing to fund your operations in the years ahead, as both encompass a range of benefits and drawbacks.

Scaling Successfully

To successfully make it through the growth phase, you need to hunker down and formalize all of your workflows and operating systems. As your team expands and you make critical hires, one of the keys to business growth is to have standard processes that all team members can easily follow.

What legal services should you be seeking during the growth phase?
    • Your company needs a customized handbook, not a template, and a process and procedure to collect and store all handbook acknowledgements.
    • You should meet regularly to discuss employment issues, including: (a) pay, (b) diversity, (c) potential areas for discrimination, (d) ADA accommodations, (e) overtime procedures, (f) hiring and firing practices, (g) EPLI insurance. 
  • Contracts

    • All of the forms of your key contracts should be reviewed and approved by a lawyer
  • Merger and Acquisition Preparation

    • Annual legal audits performed on key areas of your business, including: (a) human resources, (b) intellectual property, (c) corporate structure, (d) securities, (e) government compliance
  • Franchising

  • Private Equity

  • Employee Profit Sharing Plan

    • Retain and attract talent by instituting an Employee Stock Option Plan, or other profit sharing incentive
  • Intellectual Property

    • All business names, logos and slogans should be trademarked
    • Custom agreements approved by a lawyer for each creative providing artistic work used in any branding and a process for collecting and keeping track of all signed agreements
    • All proprietary and novel processes or products patented
  • Commercial Lease Negotiation/ Real Estate Acquisition

  • Project Financing

    • Tax Credits
    • Personal Guarantees/ Corporate Guarantees
    • HUD, USDA, SBA Loans
    • Municipal Bonds (for economic development financing provided to for-profit and nonprofit entities)
    • Corporate Bonds
    • Opportunity Zone Investment
  • Operating Capital/ Receivables Financing

    • Line of Credit
  • Founder Tax Structuring/Planning

    • Founder Estate Planning  

The Maturity Phase

The maturity phase is marked by rapid year-over-year growth and a solid core of employees who are now coming up on a decade or more of service. 

The maturity phase is marked by predictable revenue, the acquisition of other business entities and multiple product line spinouts.

Mature businesses also are prime for investors to buy because they are consistent performers that can reliably generate revenue in the future.

For this reason, if you're successful enough to grow a business to the maturity phase, you'll need to consider whether it's in your best interest to turn to an external investor or continue expanding the company.

Maintaining Stability 

While small business growth is about constantly expanding upward, the maturity phase is all about vigilance and looking out for signs of decline. Some of the warning signs that a business may be declining include:

  • Frequent receipt of late payments
  • High employee turnover
  • Branch-outs from the business's core
  • Increase in criticism, disrespect and blame 
  • Diminished aspirations 
  • Decline in initiative 

If any of the above indicators of decline are present in your business, you need to consider if your company is headed toward the last of the business life cycle stages: decline or renewal.

What legal services should you be seeking during the mature phase?
  • Consider Hiring In House Counsel for daily proactive legal advice

    • Your attorney should be an integral part of your business at this point and you will most likely be seeking legal counsel from this partner on any business decision that is not part of the ordinary course and scope of your day to day operations
  • Tax Credits

    • State and Federal Historic Tax Credits
    • Economic Development Tax Credits
    • Industrial Development Tax Credits
    • Restoration tax Abatement
  • Initial Public Offerings (IPO)/ Corporate Securities

  • Tax Planning/ Entity Structuring

  • Business Succession Planning

    • Key Man Life Insurance
  1. The Decline or Renewal Phase

The standard 4 stages of the business life cycle include a decline or renewal phase, in which the company can branch out into gradual decline or renew itself to adapt with the changing times. 

Often, this stage is not the direct result of business strategy. In many cases, new technology, changing consumer preferences or market conditions can steer a company toward irrelevancy.

At this point in the corporate life cycle, it's critical that company leadership adopt new policies, standard operating procedures and formal systems to suit the changing environment.

As with evolution, in which successful species develop better behavioral adaptations in the face of adversity, businesses have to stave off competition by constantly improving their product lines, service models and functions over time.

Remember the Titans

Think of some of the most famed U.S. companies that folded: Blockbuster, Woolworth's and Kodak. Each of these companies failed to make critical changes necessary for survival. Let each of these once-great businesses serve as a reminder that no business is too big to fail—constant growth and renewal are needed to fend off decline.

Adapting to Survive

The renewal or decline phase is, of course, paramount for assuring a company's success. 

In this phase, the leadership of the business must constantly search for new growth opportunities and new markets to break into. If necessary, costs need to be cut and budgets must be tightened to sustain cash flow. 

How a business chooses to adapt will determine whether it remains a thriving enterprise or a failed venture.

Positioning Your Business for Success

No matter where your company finds itself in its life cycle, set your sights on strategies to ensure long-term business growth. 

The key to prolonged success is to maintain the growth mindset entrepreneurs often have in the early stages of their businesses' life cycle. This way, innovation, positivity and experimentation can help you adapt to and capitalize on changing conditions so you can move toward a state of business maturity.

What legal services should you be seeking during the decline or renewal phase?
  • See legal services to consider during the startup phase, as the decline and renewal phase is similarly situated to a startup and is highly speculative

About the Author

Amanda Butler Schley

Ranked as a Top Rated Business and Commercial Attorney, I have more than a decade of experience representing boutique hotels, family-owned businesses, privately owned restaurants, breweries, artists, executives and entrepreneurs.

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