Thinking Of Selling A Business? What You Need To Do Now.

by Barbara I. Berschler

A serious business owner needs to be nimble so as to be ready to take advantage of unexpected opportunities.  One important opportunity to anticipate is the sale of your business.  It may not always be a “planned for” development, because an offer could be made at any time.  In such a circumstance, you will be faced with a variety of decisions and actions requiring a quick turn-around.   Will you be ready to exploit such an opportunity advantageously?

This article poses a series of questions and identifies concrete steps that every business owner should incorporate into her business operations.   If followed, then, like the proverbial Boy Scout, you will “be prepared.”

1.    Are You Ready for the Due Diligence Inquiries That the Buyer Will Make?

It goes without saying that a seller will be confronted by a close examination of its organizational and operational documents by the potential buyer.  Therefore, at least yearly, you should:

·         Review and update your entity’s documents (enabling and owner related agreements) and keep them current.
·         Maintain your business entity’s legal good standing in all jurisdictions in which you function.
·         Verify licensure and other regulatory requirements.
·         Review management and operational procedures.

Unfortunately, business owners frequently fail to conduct this type of annual self-examination.   Perhaps surprisingly, a common oversight is the failure of a business to maintain its good standing in all the jurisdictions where it is organized and doing business.   This lapse, along with the failure to have documents signed or to keep licenses current, can quickly derail what otherwise seems to be a marriage made in heaven.

2.    If Some or All of Your Business’ Assets Are Tied to the Good Will Associated With an Individual, What Steps Are You Taking Now to Allow for a Smooth Changing of the Guard?

From a seller’s point of view, it may not be what the founder wants to hear, but if others are not being groomed for a change in control, then the business’ value is likely to be diminished in the eyes of a potential suitor.    Especially in a business where the key asset is “its people,” if this asset is not going to be preserved in a change of control, the buyer is going to move on.  The necessary preparatory actions for a potential seller are to have the hard discussions, be willing to anticipate changes, have contractual obligations in place and be comfortable with those changes well before a potential buyer comes to call.

3.    If Your Business Relies Heavily on Intellectual Property Assets, Do You Control What You Need?

Conduct an inventory of all of the intellectual property (IP) assets that your company uses.  Types of IP to make a careful study of are:  copyright protected works, trademarks, patents, trade secrets.  Not surprisingly, business owners understand the need to inventory and value their hard assets if, solely to have such listed and depreciated on tax returns.  Conducting a full inventory of a business’ IP assets can be harder because it is not always clear who actually owns the assets.  But it is of equal importance because those assets can add great value to your business’ bottom line.

The inventory should cover an assessment of what you have and close review of your documents to be sure they comport with your expectations of ownership and control.   Once you have the inventory, periodically re-evaluate it to be sure all permissions are current and available for your continued use and exploitation.    Can you answer the following questions in the affirmative?  If not, then you could be leaving money on the table.

·         Are procedures in place to identify the ownership of the IP that your business uses? 
·         Are you living within the limits of any licenses to which you are a party?
·         In the case of copyrighted works, trademarks, and patented or potentially patentable works, have you registered them? 
·         Are all IP registrations current? 
·         What steps are you taking to police your IP to prevent others from infringing upon it? 
·         Do your contracts with third parties include the IP protections you need?
·         Are you complying with the IP related laws of other countries where you conduct business?
 
4.    Do You Have a Good Team of Consultants in Place Who Can Watch Your Back?

By engaging a good team of advisors, you will have the necessary documents in place and you may be able to delegate some of the preparatory work outlined in this article. The obvious players are your corporate lawyer and CPA.   But your insurance agent and marketing specialist can be equally important advisors who can help you ask the hard questions and position your business in the most favorable light either to acquire or be acquired.

5.    Do You Know What Your Business Is Really Worth?

Offers to be purchased can come from a variety of unexpected places.  An insider may want to make a play for control or a larger company may have identified your company as a strategic acquisition.   Similarly, you may conclude that it is important to expand.  Knowing what your business is worth will be helpful in evaluating an offer to buy you or in obtaining financing for an internal expansion.  

Therefore, regularly analyze the value of your assets.  Your CPA’s reports and even feedback from your banker should give you a good idea of the “fair market value” of your business as a whole and its various assets.

6.    Are the Business’ Assets Transferable?

For valuable assets such as commercial leases, intellectual property and licenses, it is important to know whether they are transferable or assignable.  A periodic review should answer questions such as:  whether restrictions exist on the transferability of licenses; whether a new owner can use the software or data on which you rely; whether your commercial lease can be assigned in connection with a third-party acquisition.  Going forward, a word of advice:  when negotiating new deals, try to avoid restrictions on your ability to transfer assets.

Answering these questions should go a long way in helping you be ready should “the call” come from a potential buyer.  As with anything worthwhile, you need to take the time and make the investment in advance to have your business ready to respond with agility to whatever opportunities come along, including being bought.

Who Owns Copyright in Source Code in Technology Start Up Company?

Start-up ventures, especially in the area of technology, often begin based on nothing more than good faith assumptions of the founders. Frequently they operate informally without understanding the need to document the relationships among the venture, its principals and its employees. More often than not avoidable disputes ensue, creating needless expense, arguments and sometimes the split-up of the founders or the loss of key employees leading to the dissolution of the venture.

JustMed, Inc. v. Michael Byce, a case decided by the U.S. 9th Circuit Court of Appeals earlier this month, involved a dispute between the founders of the venture about the ownership of the copyright in computer source code. This case is a classic illustration of what not to do; these facts are often present in startup companies (not only the IT field), namely the absence of written agreements and formal employment procedures.

Former brothers-in-law, Joel Just and Michael Byce, patented a device to help those whose larynxes have been removed. Together they formed JustMed for the manufacture and development of the necessary hardware and software. Byce was a shareholder and served on the Board of Directors. He took over the development of the software from a company employee, and basically rewrote the source code. JustMed had no employment agreement with Byce; he created the source code at home; worked his own hours; and his pay was in company stock.

Byce was anxious that he would not receive his fair share should there be a buy-out or merger of the company. So, to protect what he considered his intellectual property, he deleted the source code from the company’s computers.

The expected lawsuit followed. From JustMed’s point of view, it owned the copyright in the software on the theory that Byce was its employee and, therefore, the source code was a “work made for hire.” Byce countered, arguing that he was an independent contractor and, therefore, owned the copyright in the work.

In deciding whether an employer/employee relationship existed, the Court examined several factors to determine to what extent JustMed controlled the manner and means of the creation of the source code. Typically in employee vs. independent contractor disputes, factors such as whether an employment agreement exists; whether taxes are withheld and social security paid; to what extent the employer controls the creation of the work product; and what level of skill is required in the work, are examined to see which side proves stronger.

Here, despite that JustMed operated informally as to Byce’s compensation, namely, by the issuance of stock; did not exert control over the manner and means of the creation of the source code; and was lax in its tax and withholding procedures, the Court nevertheless concluded that Byce was an employee, making the source code a work made for hire, which meant that JustMed owned the copyright in it.

In other circumstances, such informal employment practices could be seen to favor an independent contractor interpretation. Here, because of the start-up nature of the technology enterprise, the Court relied on other factors (such as that a software developer is expected to be inventive and work independently, that the project was central to JustMed’s business and that Byce performed other tasks for JustMed) to buttress its conclusion that he functioned as an employee.

Regardless of whether one considers the outcome fair in this case, had some of the variables changed slightly, it is unclear whether another court would give similar leeway to a technology company faced with a challenge to its copyright ownership in its software. But why take the risk? Had JustMed documented its relationship with Byce and specified who owned the copyright, it could have avoided the expense, disruption and animus that both sides experienced.

Commercial Photographer Dilemmas in Protecting Copyright in Photographs

A case recently decided by the US Eleventh Circuit Court of Appeals offers commercial photographers a primer on what to do and what not to do in order to protect their copyright interests in their photographs. While the case involved some well known players—Kawasaki Motors and Roaring Toyz—and the unveiling of the ZX-14 sports motorcycle at the Daytona Bike Week in 2006, it took four years for the 11th Circuit to rule on the copyright claims of a photographer, and not all of the issues have yet been resolved.

The basic facts were that Kawaskai wanted to focus on the customization potential of its new motorcycle. It hired Toyz to customize some ZX-14 motorcycles to display at Daytona. As part of its customization efforts, Toyz hired an independent contractor, Ryan Hathaway, to apply custom paint and graphics to the vehicles. Toyz also hired Todd Latimer, a motorcycle photographer known for his unique and artistic style, to photograph the two customized ZX-14s.

The dispute arose over whether Kawasaki and Toyz used Latimer’s photographs in ways beyond those he claimed to have authorized. In response to Latimer’s claim of copyright infringement, the defendants raised significant arguments that he had to rebut. By examining some of these defensive arguments, you can learn from Latimer’s miscues.

Latimer’s first mistake was not having a written agreement that clearly stated what uses of his works he was permitting. Not taking the time to consider and memorialize, even if by an e-mail, what uses are permitted, subjected Latimer to the task of proving a negative, namely, that he did not authorize the use about which he then complained.

Ironically, Latimer had to overcome the argument that because his photographs were shot without Hathaway’s permission, he infringed on Hathaway’s copyright in the graphic art appearing on the motorcycles. Therefore, Latimer’s second mistake was not recognizing that what he was photographing contained separate copyright --protected material, thereby exposing himself to the claim that his photographs were not protected by copyright because they infringed Hathaway’s work. Only because the Court concluded that Hathaway had granted an implied license to have his work on the customized ZX-14s photographed was Latimer able to remain in the game. However, in accordance with the well-settled legal principle that “What is good for the goose is good for the gander,” Kawasaki and Toyz argued that their uses of the photographs came within an implied license from Latimer.

At this point it is useful to discuss how a court will determine the existence of an implied license. Basically, an implied license can be inferred from the conduct of the parties. The objective facts of a photographer creating a work at the request of another, delivering that work and intending that the person will copy and distribute the work, (i.e., knowing how the client intends to use the work), show the existence of an implied license. Once an implied license is established, it will be interpreted broadly unless there is proof that at the time of the work’s delivery, the photographer placed limitations on its use.

Latimer’s third mistake was not recognizing that his actions could be viewed as his grant of an implied license to use his photographs. In this case, the Court concluded that Latimer’s conduct resulted in an implied license. The unanswered question was whether any of Kawasaki’s uses exceeded the scope of the license.

Latimer’s fourth mistake was not having any clear proof when he delivered his work product (the photographs), that he intended to limit the scope of their use. This absence of proof of his intent resulted in the case being returned to the trial court to examine the facts on that issue.

The lesson from all of this is that commercial photographers can avoid Mr. Latimer’s problems by taking relatively simple steps to protect the use of their work.

Open Source Software & Its Legal Ramifications: What is Open Source Software?

I will be writing a series of posts that examine various issues related to open source software and legal ramifications for the average business owner -– not just those working in the IT field. Initially, I will address the main differences between proprietary software and open source software.

More and more software is being written to respond to the explosion of computer driver services in business operations. So it is important to understand how that software is created, and what –- if any –- limitations to its use may accompany its acquisition by an individual/or business.

Software is written by a programmer to operate a particular computer program. A business owner can either buy “off the shelf” software, like Microsoft Word or WordPerfect, or have some created for her special needs. What the business owner ends up with most likely is proprietary software. She pays for the use of the finished product -- and most likely is not given a version of the software to allow her to see “under the hood” of the program.

To know the inner workings of the software requires having access to the source code, i.e., the programmer’s instructions which have been compiled into a format that the computer can understand.

As part of the evolutionary process of writing software, a major path has emerged called open source software. So what does that term mean? It is software written by programmers to accomplish the same kinds of tasks as proprietary software. But using open source software means how the programmer obtained it, and how it can be further distributed may be subject to a set of requirements that are different from the proprietary version.

Proprietary software is often obtained for a fee, is used or distributed under an extensive license, and, most likely, does not give the user access to the source code. In contrast, open source software is obtained for free and the programmer/or user can see exactly how the software was constructed because the source code is revealed. In addition, the user may freely modify and distribute the modified software.

However, depending upon the originator of the software, there may be limitations placed on its further distribution. But unlike proprietary software, the object of such requirements is to advance the philosophical point of view of the author, rather than to seek an economic gain.

Next time I will discuss why open source software was developed. If you have comments on this topic or suggestions as to issues you would like me to cover, please let me know.

Copyright Office's Increased Fees

As of August 1, 2009, the Copyright Office is instituting new fees for registering works that are protectable under the Copyright Law of the United States. And, as with many of the federal government agencies, the Copyright Office encourages people to register on-line.

In the case of a fully electronic registration of a basic claim, the fee remains $35.00. However, because the Copyright Office is required to recover the full cost for many of the services it provides, it has now instituted a new schedule of fees.

Because copyright protection applies to more than literary writings, there are other application forms to consider. If you are registering a visual art work, performing art work, sound recording or serial, such as magazine issues, newspapers, newsletters, then you must select the proper form whether you submit your registration application electronically or via a paper format. The fees for those kinds of submissions have been increased from $45.00 to between $50.00 and $65.00.

While the Copyright Office’s registration forms are short, their apparent simplicity can be deceptive. From the applicant’s point of view, it is critical to understand what kind of work you are seeking to protect and what ownership interest you have in the work. Moreover, the electronic registration process can require submissions to be made partially on-line and partially via delivery of an actual hard copy to the Copyright Office.

Keywords: intellectual property, copyrights, copyright, copyright registration, trademark, trademarks, trademark registration, copyright office, copyright office basics, copyright office fees