Ep 498: Important Things to Consider Legally When Starting a Business and Building a Brand with Matthew Miller

AJV (00:02):
Hey, everybody. Welcome to the influential personal brand, AJ Vaden here. So, so, so excited to get to introduce you guys to one of my closest friends, Matt Miller. And although I could literally spend the next 60 minutes just shooting the breeze with Matt, that is not the purpose of today’s conversation. So y’all, before I introduce you guys to Matt, I want to tell you what the premise of this podcast is all about and why you need to stick around. And then I’ll do a quick formal introduction. There are a lot of things changing in the legal landscape, and here’s what I know to be true. Most of us have no idea what they are, . And so I am one of those people. I am an entrepreneur, small business owner. I have a personal brand, right, author, speaker, podcaster, and I am constantly struggling straggling to keep up with all of the things that are changing that somehow the US government thinks that I should stay on top of with no real reasons or know how, how to do that.
AJV (01:01):
And so I have invited on a very, very knowledgeable wise individual to help us understand what it is that we need to know when it comes to protecting our business, protecting our personal brand, but then also just some things we need to know in the ever constant changing landscapes of what it means to do business today in the United States. So that is what today is about, which means if you’re in business, it pertains to you. So stick around. So now let me formally introduce you to Matt, formally Matthew, but I call him Matt Miller, who is a nationally recognized attorney and a legal advisor to businesses with a niche in healthcare companies as he lives in Nashville, Tennessee. Everyone has to do business in healthcare. But my love is that he has a focus on merger, mergers, acquisitions, private equity transactions, and general corporate law.
AJV (02:00):
I’ve been harassing him for months on how do you, how do you become my, my general counsel? I think eventually he will fold and say, fine, fine here. Here’s how we do it. But he is literally, when we say nationally recognized, he was named as one of the Bloomberg laws, 40 under 40, and being recognized as one of the nation’s most accomplished legal minds. He has been recognized in the best lawyers in America. He has overseen transactions ranging from a hundred million to over a billion dollars. That’s with a be. And that is why I have him come o come on the show today because I need someone who actually knows what they’re talking about to help us understand what is going on in the legal landscape today. So, Matt, welcome to the show.
MM (02:44):
Thank you, aj. This is amazing to be here. Are you guys a billion dollars yet? I think you’re getting close.
AJV (02:48):
. Yes. No, however, one day one day, Lord willing. All right, Matt. Well, I know as we were prepping before I hit record, you’re like, wow. Yeah, those are pretty general broad questions, and I’m like, yeah. And one of the reasons I wanted to have you on is because there are so many people chatting in my entrepreneur community as well as in the Brand Builders group community, and they’re just constantly asking, have you heard this? Is this true? When did that pass? When does that go into effect? And I find myself constantly going to Google for legal updates, and I’m like, I don’t think this is a good general source of accurate information. So here’s my first very broad question. I feel like there’s been a lot of conversation in the last 12 months, and even even more so as we are approaching mid 2024 of just even this year of things that are changing not just in like general business, but with real estate and different other, you know, sectors like mortgage. And then you’ve got the interest rates. It’s in election year, know there’s just a lot going on that’s affecting business. And so what I wanted to hear from you is what are some of the things that have gone down so far in the last 12 months that you find most small business owners don’t know that they need to know when it comes to your business?
MM (04:11):
Well, that’s, you know, like we said, broad questions are the name of the name, name of the game today, I guess. I mean, I, I think it’s amazing that, you know, a lot of people are getting their legal information off of Google today. . If, if you go to Google and you’ve clicked those links at the top, you might see Google Scholar, there’s even a Google patent link. There’s all kinds of links that Google does, but they don’t have a Google Law link. Not, not to my knowledge at least. And of course, there’s chat, GPT, there’s all kinds of these developments that are coming out that I think are really good and helpful in a lot of ways. But I don’t really understand how a small business owner is gonna sort through or even know how to apply that information, right?
MM (04:52):
So what we do as lawyers is not just, you know, have the information in our heads and, and, and, you know, provide that to clients, but we try to organize and apply that information in a way that benefits the client. So I think with all that’s going on out there with, with the changes, and like you just pointed out, is it is an election year. There is is going to be potentially a change in the executive branch. There could be changes at the judiciary. There were certainly a lot in the last few years. There are changes happening at the regulatory level on the FTC side. There are changes happening at the antitrust level. There are changes happening in the small business domain. There are so many things happening. How do you get your mind straight around what’s important?
MM (05:41):
You know, what, what, what do I need to pay attention to? What is just you know, not applicable to me? And, and there’s a lot. So I totally see how it can be overwhelming at times for the small business owner. And, and that’s what I really would like to do, is help make that a little bit more accessible, make it a little more organized, make it a little more or understandable so that small business owners can go out and feel protected and, and have confidence in what they’re doing is compliant. So, I mean, I guess one of the, one of the areas I think, or I guess what I could say at the outset is, one thing that’d be good to like take off the table is that if you are a small business owner that is operating, you don’t need to really have your finger on the pulses of every legal, legal change.
MM (06:21):
I think you do need to be aware of a couple things. And those with, with, by and large, don’t change, right? So the typical rules around formation of your corporation, the tax rules around recognizing revenue and income those things, you know disclosures to your shareholders, if you have shareholders, how you treat employees, you know, discrimination, hiring and firing rules, all that doesn’t change by and large. But the things that do change, you hear about, right? And I, I think we were talking either before we started, or you just mentioned it, that we’ve all heard about the recent changes to the non-compete laws that have been proposed. And you, you’re right. I mean, the FTC, which is one of the agencies that oversees antitrust and anti-competition laws held a special session where they voted three to two to actually make illegal non-competition agreements for most workers.
MM (07:18):
Okay? Hmm. So this applies to both W2 employees and to consultants. And that’s a pretty revolutionary thing. And formerly you could apply a non-compete to an employee in most states. It just had to be narrowly tailored in terms of the scope and in terms of, you know, the geographic scope and then the duration of the non-compete. But what the FTC has said is that starting, and I, I, I apologize, I don’t remember the effective date of this, but it, you know, it’s not effective yet, but starting here in a few months, the proposal is that every non-compete would be defacto illegal in the United States. Now, there are a couple of exceptions to that. There’s, there’s the standing exception for if you sell your business, you’re not allowed to turn around and compete against the buyer. So non-competes in connection with the sell of the business will remain in effect, and non-competes for certain high level executives will be allowed, it seems again, with narrow prescriptions around duration and scope.
MM (08:19):
So that is one key area that has changed a lot, and it’s interesting to see that that happens right on the cusp of an election year. So you’re right to be mindful of those things. But I wouldn’t say that you need to be juggling all of this as a small business owner. You can talk to your tax accountant, talk to a CPA or talk to a lawyer who, you know or even if you have to Google it, and they’ll probably give you enough information at least, oh, ask an intelligent question . But yeah, you’re right, there is a lot happening these days.
AJV (08:47):
Yeah. So on this topic of non-competes, like, just in case someone is listening, going like, okay, I hear this term tossed around a lot, but what does that actually mean? Can you like, help explain, like, what is a non-compete?
MM (08:59):
Right. Well, a non-compete is actually a it is a contractual agreement. It’s a restrictive covenant. Okay? So it’s a promise that you make as an employee or, you know, going forward a consultant that says that you will not participate in a business that is potentially competitive, or is comp actually competitive with the person or the company on the other end of that agreement? Right? So if you are an executive at a company and, and you’re privy to a lot of internal information, a lot of confidential information, then you go and leave that company and you want to start another business that your company will want to put certain restrictions around you to make sure that you’re not going to start a business that could compete and, and take away customers and take away take, take away business, take away employees to, to this new venture.
MM (09:56):
Mm-Hmm, . So that’s what a, a non-compete is, is basically a restriction on the employee’s free decision on where they want to work. So this right to work concept is something that has really become a, a focal point of the Biden administration. Again, that’s not a political statement, it’s just, I think it’s, it’s, it’s been in the works for a long time, and the Department of Labor has made that a big priority the last few years, and you’ve seen now the FTC come out against them. So as, as a, as a brand owner, and I know that a lot of your audience are, are individuals that own their own brands, that own their own businesses, they may not be employed, they may have employees. So this cuts different ways depending on where they’re situated. But I’ll say just as a general topic in terms of a brand, the key aspect to a brand, it goes beyond trademarks.
MM (10:48):
It goes beyond logos. You know, I think, you know, you talk a lot about reputation. It, it really is your, a reputation in the marketplace, or in other words, your goodwill. That’s the legal term for it. One way to really lock up goodwill is a non-compete. A non-compete means you can’t take that goodwill from one business and take it over to another one. It is restrictive. It is, it is in some cases could be deemed punitive. And so the law has always tried to reduce those and tried to make those reasonable and supported by consideration. But now it’s, it’s, it’s, you know, could be the law of the land. And now states have been doing this for many years. California has always made non-competes defacto illegal, and you can actually get in trouble if you try to enforce one in, in certain states. But the landscape is changed, is, is changing. And I think it’s important for brand owners to understand that it, this is actually a potentially good thing for them because it means that their, their goodwill is going to be protected and respected and not subject to unreasonable restraints.
AJV (11:58):
Yeah. You know, it’s interesting because this whole concept of a non-compete or a consultant Mm-Hmm. is quite fascinating because, you know, before Brand Builders group, my former life was consultant to a lot of Fortune 500, fortune 1000 companies, and there were lots of restrictive covenants of, Hey, if we’re gonna hire you, like, this is super confidential, can’t use da dah, dah, dah, dah, dah da, can’t do this. So how does that change for someone in, you know, because I, we have a lot of coaches and consultants who listen to the show, like, is this in their benefit in that regard? But yet as a business owner, right? So I’d love to talk about this both ways. One, as a consultant, ’cause it kind of seems very much in their favor. Definitely. I see that would’ve been in my favor. It’s like, I, well, great, I’ll just go from healthcare company to healthcare company, right?
AJV (12:54):
It’s like, right. There’s a lot of different things there that probably was not okay when I was in that world just even six years ago. And today it’s going, no, like I could go do whatever I want with all of your competitors, but then also I wanna talk about it as the, as the owner, as the CEO, as the founder. If I hire a consultant, the last thing in the world that I wanna do is give them keys to the kingdom of everything we have built, and then have them also go call up John Smith, you know, my top competitor and go do it for them too. So I see how it’s advantageous in one, you know, one way and super not in the other. So, am I reading that wrong? Am I hearing that wrong? Or how does that play
MM (13:37):
Out? No, no. You, you are exactly right. And it’s a very astute question, and I’m trying to get too in the weeds on this, but, you know, consultants, you can restrict their performance, right? Because one of the tests to see if someone’s an employee versus a consultant or not, is whether or not the company or the employer is exercising too much control over the service provider, right? If you exercise too much control, then they actually convert from a consultant or an independent contractor into an employee. And one of the ways that you exert too much control is, is having something that’s an expressed non-compete against a consultant. So they have or, you know, so you, you, you will see, you will see things like conflicts of interest policies where they will say that if you are working for us on this project, you cannot go out and work again, you know, work for a competitor.
MM (14:30):
While you know, you know, you know, while you have this information with, with us, that is, that is a non-compete that would be potentially struck down under, under the analysis the FTC is now putting out. So conflict of interest type policies you know, you have to really word those correctly to have them only apply, like while the service provider is providing services. And you really can’t have a post-term period of a non-compete. And so that is potentially challenging for the business owner and potentially liberating or freeing for the consultant. Mm-Hmm, , right? There, there’s, there are some other provisions that you can include in your contracts with consultants specifically around confide confidential information and trade secrets. And that is really, you really wanna focus your efforts if you are a business owner, is to make sure that those confidentiality protections are broad enough that you can claw back any information that you need to get back from the consultant when they’re done providing services, if they’re, if they’re terminated, that that there would be certain provisions that would require them to destroy information that you don’t want them to have in their possession.
MM (15:43):
There’s lots of different ways that you can address this new liberality that consultants have under these non-compete under the loosening of the non-compete laws. But but yeah, I mean, previously consultants were the most subject to these kind of ancillary non-competes that were, were enforceable. Now they’re seeing a, a great lifting of those restrictions in their ability to go provide services after the consulting agreement is ended. So during, during the period of, of service, you know, a non-compete or some sort of conflict of interest policy that’s reasonably tailored, that’s probably okay. Mm-Hmm, . But for sure post term conflicts unless they’re really rooted in the confidential information and the proprietary information of the employer or the, or the, the company those probably will not stand the test.
AJV (16:41):
So that’s interesting. So it’s kind of like with anything, it was, there’s this natural ebb and flow, right? You’re gonna have some release of some of these restrictions, but it’s very likely, very possible and probably in the, you know, business owner’s best interest to then tighten up some areas of contract or service agreements and other areas like, you know, confidential information and trade secrets, right?
MM (17:07):
And, and that’s, those are usually the information that, those are usually the terms that the business owners know least about. Yeah. And there’s not great forms that really cover they’re sort of broad based, you know, templates that are out there, but they don’t really address your unique business and your individual business and your situation, and they may not be tailored to your laws. Particularly trade secrets are operate under a wholly different set of laws than just typical confidential information operates. So those are kind of separate concepts. You know, I think something else to keep in mind is that non-solicit will still be enforced. So there are certain things that the law will allow you to continue to do that have been historically the way we’ve done business for a long time. And things like non-disparagement clauses, other restrictive covenants that prevent someone from leaving a company and then saying bad things about that company later down the road.
MM (17:58):
Those will all be those will all still continue as will just general releases when you, whenever an employee, employee leaves a company. And, and if, if, you know, if there’s a, if you get a release from them, those will be upheld and enforced so long as they’re supported by consideration. Mm-Hmm. . So, I mean, there, there are a lot of things to to keep in mind there, but like, you know, nothing is really changing except that that narrow kind of focus on post-term non-competes for for most workers, right? Which includes not only W2, but 10 99 contractors.
AJV (18:35):
Yeah. So it’s so interesting because, you know, on the one hand, you know, our former business was heavy on, you know, 10 99 and, and we literally had to like, you know, check every t dot every i for, you know, all the compliance things. And I wonder just like, how much of this is just to deter, right? Hiring 10 90 nines and kind of forcing everyone towards the more W2 environment Mm-Hmm. , thus having to pay payroll
MM (19:04):
Tax. Sure. Well, and, and there’s another thing to keep in mind too, is that a lot of companies will have arbitration clauses with their consultants, and you have to word that arbitration clause correctly. I’ve seen this a lot lately where an arbitration clause that does not have a carve out or protecting your confidential information means that you’ll have to go to arbitration in order to protect your ip. Right? Now that is difficult because you’re going into court where there’s not a judge that can give you an order that can allow you to do an injunction. You’re really in front of a binding judge. But that, but they’re not a court of, it’s not a court of law. It’s not under the laws of our United States and our federalist system. It’s more of like a contractual agreement between the parties to go to a commercial resolution Mm-Hmm. . And now it’s confidential. It’s confidential, and it’s private, and it’s quick and generally affordable. But you want to have some carve out language in your, in your arbitration clauses if you have one that allows you to go into court to protect your confidential information, particularly in light of this new expansion of the rights of consultants post-term. So that’s another another point to keep in mind. Yeah.
AJV (20:15):
And then you also mentioned the non-solicitation. So that will stand, so can’t solicit employees, can’t solicit clients. All of those things will stand, even though the non-compete will eventually fade away.
MM (20:30):
That’s right. Because, you know, that’s a restriction on on, on the, you know, not a restriction on someone’s ability to, to be employed and to go work where they want to work is different than the ability for someone to come and, and take employees from someone else. And now you, you can always generally advertise and, and invite people to come work for your company, and you just can’t do a targeted solicitation if there’s a non-solicit in your contract. And, and that will continue to be the case. But yeah, this is, you know, it, it, there’s a, there are also some changes happening that are relevant to the business owner in, in something, some things around corporate formation and reporting beneficial ownership. And I think, I think, you know, aside from the non-compete, there, there are some changes in the law regarding corporate information.
MM (21:24):
And, and that’s called the Corporate Transparency Act. You may have heard of it. This is a law that requires it, it was really put out for to prevent money laundering. And so people would companies were starting shell companies and no one really knew who owned these entities. And in order to deter fraud and, and in order to like cut back on Monday laundering and things like that, they have started requiring businesses to report their ownership. Now, it’s interesting because one of the carve outs or exceptions from the reporting obligation are large businesses or businesses with lots of employees. Those typically do not have to report their beneficial ownership, but small businesses do. And so this is one of those laws which is meant to target one group of, of individuals or, or, or companies or founders, but it ends up you know, having an effect on a d on a different class that they really intended.
MM (22:24):
A lot of people are still grappling with the requirements of the CTA. There are portals to register and, and to make reporting your information more efficient. Most people are not even aware of it, and there’s already a couple suits making their way up to the Supreme Court, hopefully about the legality of requiring people to disclose their ownership in, in these corporations. So that’s another development that if you’re not aware of it speak to your lawyer or talk to your even accountant would probably have some information on that. And then the the so,
AJV (23:01):
So on that note, really quick before you move on, so the Corporate Transparency Act is basically, so when you say small business, is this like under 5 million, under 10 million? Like, are, is it a revenue requirement? Is it employee requirement? What is it?
MM (23:16):
Yeah, I, so I think there is an employee requirement. If you have more than 20 employees then, then, you know, I think you, you fit into the large business. And I think that there’s, I, I can’t remember right now off the top of my head what the revenue requirement is. But we actually have a policy at our firm that any advice related to the CTA has to be run through a special team because it’s so new and it’s just so unclear what, what the process is. I mean, this happened January of this year, and now we’re just, just past April tax reporting season, and now people are starting to report for the first time. And
AJV (23:54):
How are people supposed to know about this?
MM (23:57):
? It’s a great question. I mean, like, ask your lawyer, ask your accountant. It’s, I, I admittedly, it’s very difficult to keep in mind. And, and this kind of goes to the question of, you know, the role of a lawyer in, in the system, right? In, in the, in our legal system, you know, why do you need a lawyer for these things? Well, it’s to help, it’s to keep you updated on these types of changes so that you can remain compliant. And, and it’s, it’s too much for any business owner to handle on by themselves. And, and so that’s, that’s that’s why you need the right people on your team. It’s very critical.
AJV (24:30):
Yeah. So there’s a couple of things. So I just think this is so fascinating. I only knew about the Corporate Transparency Act because you told me and I consider myself pretty savvy when it comes to tax law and corporate law. And I mean, there’s been two or three things that have come up here lately that I’m like, well, what, where did I miss the memo on that? And I am generally someone, I subscribe to a lot of newsletters, I attend lots of webinars. I’m in different organizations to keep me up on that, and I’m still just like missing stuff left and right. And I’m just curious, for the average business owner who is head down in their business, who’s not checking in with an attorney on a regular basis and really only talks to their accountant during tax season, like, what are the repercussions for not doing this or not knowing about it? Like, are there gonna be penalties? Are there fines like,
MM (25:27):
Well, we don’t even know. That’s the point. . I mean, when, when these laws come out, they’re so new and fresh, they haven’t been tested before. And, you know, law is an evolving process. I mean, we have a whole system of federal courts and state courts, right? We have executive judiciary, you know, we have legislative branches of government, and then within the, the judiciary we have statutes, we have case law, and we have codes of, of regulations. And, and how do you possibly keep tabs on all of this? Well, the answer is you can’t, I don’t think even lawyers can. That’s why there’s so many specialties within the practice of law. And we like to think that the, the main goal of the law is justice, and hopefully it is, right? But really the chief aim of the practical aim of the law is to promote efficiency and to align incentives.
MM (26:22):
And if you keep that in mind, a lot of things that you think are the law, they could change because either they don’t align the incentives correct correctly, or they’re, they don’t promote efficiency. Hmm. You know, so that, that’s one of the things that’s, that’s cha challenging about the law, is that even when something is the law, like in the case of the non-compete that we discussed, that can change in a year or, or, you know, in, who knows, it may, it may come back and it may, it may be different in different states, but, but it, it looks like at least for now, that those are the two big developments this year are, is the change of the non-compete, which, which would be a federal law, meaning it applies to all states, and that a state could not go below that floor.
MM (27:07):
And, and the, the Corporate Transparency Act, which requires small businesses to report their beneficial ownership. I think it, if, if you could put that on the awareness radar of most of your audience and most of your listeners, I think then they can start asking the questions, well, what do I need to do? But in terms of the penalties for non-compliance, in terms of like, what happens if you don’t do it? You know, my advice would be do it follow the law, right? While it’s the law. But the truth is we don’t know because it’s so new. So even lawyers are grappling with these things.
AJV (27:41):
So fascinating. And part of why I wanted you to come on, because I think there’s just so much that, you know, unless you do have, like, you know, legal counsel on staff or accountant on staff, and most, I would say personal brands don’t, right? That this is a really hard thing to keep up with. So is there a place that if you don’t have an attorney that it’s like, oh, well, this is how I get federal updates or legal, like, does that exist? Like, how do you
MM (28:10):
Find this stuff out? You, you know, you know, unfortunately, it, I don’t, to my knowledge, there is no place other than having a lawyer to explain these things to you. There’s no place you can go that will give you legal advice. I mean, it’s, it there, the way that our legal system is structured and the way that our attorney-client engagements work, it’s very outdated. It’s very antiquated, and it, it, it, it, it’s not that it discourages the free full of information because you can get information and you can get people to help you. Like you can go to a conference, for example, Mm-Hmm. . And there might be an attorney there speaking about changes of the law. But I, I think what’s, what’s really needs to happen is the way that we think through client engagements and the way we think through the provision of legal services to provide a little bit more awareness.
MM (28:59):
You know, you know, about these changing trends, about these legal issues to the general public. Mm-Hmm. . I think if, if you wanted to go on, on Google, for example, and try to look up some information, you, you, you could do it. But we, we have like a way of sorting and, and prioritizing sources. So if you see someone who’s not a lawyer opining on a certain topic, you should weight that with less credibility than someone who is a lawyer at a law firm writing on the same topic. And that’s one way that you can try to get a little bit of a leg up on the information is like really sourcing out the credibility of the, of the information that you’re getting. But in. But really, like I said earlier, it’s applying that and navigating the intricacies, understanding the exceptions, understanding really, you know, the strategy like the, there’s, there’s a lot of thinking that goes into it and, and you know, you want to have someone with you walking through that process.
MM (29:55):
I, I think the law firm model is, is really evolving from a, a fee for service institution to a, to a flat fee kind of project based or relationship based model where clients are able to get the information that they need based on their, their unique situation and, and not so much based on the billable hour as it has been in the past. And, and that, that is one big problem out there is that the affordability of good legal counsel, it’s hard, is not really available. Yeah. We don’t, and now, now there are legal clinics that are out there, right? There are, you know, there, there are services that will provide advice on a relatively budget basis but a lot of, a lot of founders, a lot of entrepreneurs that are actually making revenue and growing and growing businesses won’t qualify for a lot of that support Mm-Hmm.
MM (30:56):
. And so they are in this really tough spot of being, you know, too big for you know, free services and, and, and you know, like, like they’re not a, they’re not indigent, you know, they’re, they’re growing businesses, so they’re too big for that, but they’re too small to have an in-house counsel or Totally. To have a lawyer on the payroll. So they have, for those individuals, they have to go out to the private market to retain a law firm to assist them. And, and the law firm model, like I said, is it, it is, it is more geared towards billable hours and, and you really want a larger block of of it’s hard to do small projects for those clients. And so there, you know, one thing that I would, would like to see more of are these types of, you know information conveyances where you’re able to provide information to the people who need it in, in a way that is benefits them, but but they’re not having to come out of pocket and pay exorbitant fees for that.
AJV (31:57):
Yeah. Because at the end of the day, well, first of all, it seems like there’s a gap in the marketplace that you should go and fill. So I’m just gonna give some encouragement. There seems like a, well, I, I have,
MM (32:07):
I have some updates I can share on that if you, if you want.
AJV (32:09):
Yeah. Yeah. But then also I think it is kind of one of those things of, you know, really it’s like, it’s, it’s the beauty of content creation, right? It’s like the whole premise of, you know, give away the what for free charge for the how. Right? It’s like, just because I know about the Corporate Transparency act doesn’t mean I’m gonna go and DIY the whole thing. It’s like, tell somebody for free, tell me about it, and then tell me how you could help me do it. Right? It’s, you know, welcome, you know, to year 2024 attorneys. So,
MM (32:41):
Well, I mean, there are actually, there are actually in, in, in the, in the, for the average business, there are really five journeys that they go on and, and the lifecycle, right? And it’s, it’s starts with, with the, with the founding or the formation of the, of the business. And then it goes all the way through to the exit of the business. And as the business grows and evolves and goes through these different journeys, I like to call them their needs change. And so it’s not just about having advice at, at the stage that you’re at, it’s what are, what advice are you gonna need as you continue to grow and evolve? Because it, it does change every time.
AJV (33:19):
Yeah. So it’s a great transition that I think would be really good to talk about is since you have such specialty in mergers and acquisitions I would love to just hear from you, like, what are the things that people need to know or consider? Like if somebody is listening today going, Hey, maybe I’m in the beginning phases. Maybe I’m in growth phase, maybe I am, you know, ready to exit, whatever they are. But what are some things that you see that make a business worth buying? Right. Because I think there’s a difference in I’m trying to sell my business versus someone who’s trying to buy my business. Right? Right. And I think we just had this conversation a couple of weeks ago with a friend of mine of going, trying to sell your business means that you are trying to find someone versus someone who’s trying to buy it. So make it a business worth being bought. Right? Right. So, how do you make your business worth being bought? So since you’ve been through this, what are some of those things? Like what makes a business purchase worthy?
MM (34:22):
Yeah, so I mean, I mean, I, I guess the first thing is what you do in the early stages really matters at the end. Mm. And it’s not just, okay, now we’re ready to sell our business, let’s go to market. It’s, it really when someone comes to look at your business, they’re gonna do diligence on your business, and they’re gonna go all the way back to the moment that you formed your company till the present date. So things that you do in the beginning matter later. And that’s, that’s the first point. The second point is that, you know, the, the way you organize your business model matters a lot too. If, if you are going to be a services business, that is kind of one direction, if you’re going to be an ip business, that, that relies more on proprietary information and systems, that is another direction, right?
MM (35:06):
If you’re, if you’re gonna have a brand that does a little bit all the above, you know, that’s, that’s another business. And, and those businesses are valued differently and, and, and at the later stages of their, of their life than they are than the others. So not every process is the same, but, but what we look at when we’re trying to acquire a business is we wanna make sure that the risk is minimized as much as possible for the buyer. And that if anything was done that was not correct or not accurate you know, or not in compliance with law, that that risk remains on the seller. So you, you, it’s not like you can just sell your business and then you don’t have to worry about it anymore. I mean, the buyer will make sure that, that you are responsible and ultimately held accountable for that, and it could come out of the sales proceeds.
MM (35:56):
So it’s really in your interest you know, when the business is small and, and these things cost a few hundreds of dollars to deal with them now versus when they cost few hundreds of thousands of dollars later. And we see business owners have to put up large escrows large amounts of indemnification to offset certain risks and purchase price, price adjustments all the time because of things that were not caught early enough in the, in the process. So it, it’s really like, do yourself a favor. Save a ton of money later if, if you’re planning to ever exit by getting those things right today. You know, and I think as, I think really if you look at the early stage founder, one of the most important things that they can do is choose the right business partner. And I think that is something that often gets overlooked or, or not really fully appreciated, is that, you know, are you in business with the right person?
MM (36:53):
And does that person have the same vision as you? The same? Are the, are the skill sets complimentary? Are, are they gonna be able to take the business the long term? Do they have the same sort of goals as you, and, and, you know, it may be that they do initially and that changes over time, and that’s okay. I think it’s okay as long as you have the right documents in place. And that’s the third thing, is you wanna have, you know, the, the right business model, the right team, and the right documentation. And that documentation is really where the rubber meets the road, because say there is a change in the partnership, say there is a, a different direction that the founders want to go, and one founder wants to leave and the other founder wants to stay. And, you know, how do you negotiate that split? Because that is a very common that’s a very common scenario. Happens all the time. It’s nothing, it’s not like it’s a bad thing. It’s just you need to plan for that in some ways. Or at least you need to have mechanisms that allow that to naturally evolve without it destroying the business or harming the business. So that’s what we focus on a lot in the initial stages of the business.
AJV (37:59):
So when you talk about documentation, you mean like an operating agreement?
MM (38:03):
Correct. Yeah, the operating agreement. If you’re an LLC, if you are a corporation it would be something like a certificate of incorporation or a charter. Typically, we would organize businesses that want to raise capital. So if you’re a software business or a technology business, or you’re any kind of business that has a really high level of research and design r and d attached to it, you’ll probably, so if it’s capital intensive, you, you may need to raise money. Mm-Hmm. in order to fund that development, and you can raise money in three ways. You can raise money by borrowing debt, right? From a bank, you can, you can fund it yourself or you can issue equity in exchange for the capital. And probably the most company friendly way of doing that is if you can’t fund it yourself, then you sell equity. And that’s called an equity financing. And we typically want most companies that are raising equity to be C corporations because investors like those more, they’re also much simpler. Why,
AJV (39:07):
Why do they like ’em more?
MM (39:09):
Well mostly because they’re corporate in Delaware a lot of the time, and the Delaware corporate code is very investor friendly. Mm. Also for tax purposes, c corporations don’t have an automatic pass through. Mm-Hmm. . And so the investors are able to trap gains at the corporate level and not distribute up until they’re ready. Yeah. Interesting. Yeah. Then there’s also just a, a well-defined suite of documentation around doing venture raises that only apply to corporations that aren’t necessarily an easy fit over to a LLC model where you have an operating agreement. There are di different things like anti-dilution adjustments that investors like, and now we’re getting into the weeds a little bit, but, but those exist more at the C corporation level. And and we have an actual stock certificate or a tangible share of stock that can be adjusted based on the changes in, in the business and whether or not you’re raising money when the business is more valuable or raising money in a situation where the business has become devalued, which is called a down round.
MM (40:15):
And you wanna protect the investors. So investors get a little, a little bit more protection in a, in a C corporation, but you can certainly invest in an LLC as well, like LLC operating agreements. Certainly can have investor provisions and they can issue units, common units and preferred units just like a corporation. They can even have you know, many of the same investor rights, hard is harder. And to, to make the same level of anti-dilution protections in an LLC as you get in C corp. And I’ve actually seen that a lot lately, or a couple times lately, where investors have been asking for anti-dilution protection, but it’s an LLC that they’re trying to invest into. And the way the partnership system works, because it is a pass through, it causes all sorts of issues from a tax perspective when you try to adjust for the varying levels of, of the company’s valuation amongst members in an LLC.
MM (41:11):
Interesting. So that’s one issue. And now it, now a lot of people have been asking about s corporations, and I’m not a tax attorney. But you’ll see people form S corporations or you’ll see ’em form LLCs and it’s Fast Corp, excellent LC and then right. And then file, then check the box, file a, it was called an 88 32 form election, which checks the box, and then they’ll file a 25 53, which is an s selection to essentially qualify for better tax treatment on their self-employment. And, and that’s fine if you are doing a consulting business or if you are, you know, just, you know what, what you don’t wanna do is start an operating company file an S selection and then go need to raise capital. Mm-Hmm. Because what you can’t be, if you’re an S corporation, is you can’t be a, you can’t be a business that has multiple classes of stock.
MM (42:07):
That’s one of the impermissible things in an S corp. And the moment you take investor money from investors, they’re going to want usually a preference or some sort of interest rate, and that creates a different class or different economic treatment on that stock. And that can invalidate your s selection. So if, if you’re forming an S corporation solely for the purposes of being a consultant and, and getting some tax efficiency on your, on your on your self-employment that, that’s one thing if you’re forming an S corporation because you want to be a corporation, but want to pass the treatment of an LLC but wanna raise preferred stock, that’s not okay. You’re gonna blow your s selection. So, oh, man, that’s one thing you can do correctly. And I’ve actually seen a business get all the way down to the end 10 years later thinking they’re an S corp and turns out that they had actually blown their s selection a long time ago, and now that’s a big tax bill that the company, the sellers have to come up with at closing in order to make the buyer comfortable enough to buy the business back.
AJV (43:11):
And not only that, it’s a very, make sure you form it correctly in the beginning. So it’s like really, like, you know, that old saying, start with the beg you know, start with the end in mind is
MM (43:20):
Like Yeah, yeah. Begin with the end in mind. Sure.
AJV (43:22):
This is such a great real life tangible business example of, I think a lot of people just rush to get their entity started, right? Mm-Hmm. , and they’re like LLCs what everyone else does. Sounds good, right? Or it’s the easiest thing to do sometimes. And, but if you’re not thinking through like, do I wanna investor money one day and, you know, all these different things, like to your point, like you could get 10, 20 years down the road and try to exit and you’re like, oh, shoot. Right? Yeah. Now I’m coming up with hundreds of thousands or millions of dollars of tax bills because the way I wanna sell isn’t the way I’ve been doing business for 20 years.
MM (44:03):
My, my favorite one is that people will say, I just want to do the simplest thing. I’ll do a 50 50 J, I’ll do a 50 50 LLC. So an LLC with each member has a even share. And, and most people think that’s the most simple way of going forward. It’s actually the hardest way to structure any entity formation because it raises all sorts of issues around voting. And the impasse you, when you, if you don’t have an agreement among the 50 50 members, then you can have a real problem. Not a, not a, not, it’s a, it’s avoidable. It’s fixable. Yeah. But you, it’s, it’s one example where most people think they’re doing the easy thing, but in reality, it’s actually the hardest thing you could possibly do. So it’d be much better to do, just do 50 51 49, please , have someone give someone the tie break, right?
MM (44:54):
Ah, but people often will say, no, 50 50, we’re just trying to be fair and reasonable, not realizing that they’re causing themselves a whole lot of information of, of, of, of a headache. Because now they have to go out and get a buy, sell clause into their LC agreement. And if they don’t have that, then they find themselves at an impasse where they have to really negotiate amongst themselves how they’re gonna wind down the business or, or, or come over or make a certain decision that might be a, a different change of direction for the company. And, you know, the company needs to have a decision maker. It needs to have someone at the helm and 50 50 LLCs are not always the best for that. So
AJV (45:32):
That’s good. All right. Last question. I know ’cause we’re running out of time, but since you do have a lot of this, there’s been a lot of talk and my circles at least around the, the valuation of companies has like, it’s like an all at, at an all time market low. Whether that’s true or not, I don’t know. ’cause I’m not in the business of buying companies and I’m definitely not trying to sell mine, but can you give us any updates on how are companies being evaluated today? I heard the other day it’s like, you know, what was getting 10, you know, 10 x multiple five years ago is like getting three today. What’s true, what’s not true? And what do we need to know when it comes to getting, you know, a valuation on your company today?
MM (46:15):
Yeah, so I mean, the thing about valuations, good businesses are selling at great multiples. Good
AJV (46:22):
To know.
MM (46:23):
Okay. So that, that has not changed. But, you know, a lot of valuation metrics are based on the appetite of the buyer and what they are looking to do with the business that they’re acquiring. In the healthcare space a lot of companies, private equity companies will go and acquire a, a healthcare practice, a a medical practice, and they’ll pay the initial the, the initial practice will, will get a high multiple, and then as they go and add other practices to that platform they, they will pay lower and lower multiples in, in order to arbitrage or or average out the average multiple paid. And then with hopes of growing the platform over time and then selling that platform to, you know, a higher bidder. By the way, healthcare private equity is also an area where there’s been a lot of change lately and a lot of attraction from the federal regulators.
MM (47:22):
So that’s also another area, but not so relevant maybe to your, to your audience. But you know, that it, it, you know, multiples are a function of the economy. They’re a function of, you know, interest rates. They’re a function of a lot of different socioeconomic and political forces. But ultimately good businesses will sell at the max multiple. You know, and, and, and that’s something that just won’t ever change. If a buyer wants the business bad enough, and if it’s accretive enough to their organization, their revenue you know, their, their own reasons for wanting to acquire the business, you know, they will pay it. Mm-Hmm. , you know, other than that, if, if you’re, if you’re relying on, on the revenue being higher or lower based on some external macro factor, then I think that you, you, you have to ask yourself, are you running the kind of business that’s really standing out or are you kind of going with the flow and hoping that economic forces will buffer and, and will allow you to, you know, exit.
MM (48:28):
You know, and that really is market timing, right? , you’re just trying to find the right time to sell, which by the way happens, I mean, 20 20, 20 21 were some of the record. We had 5 trillion in, in global m and a activity in 2021. It was the largest year on record. And, and that was part and parcel to people saying, well, hey, look, interest rates are zero. It’s a ERP environment we’re gonna sell Now the, the the, the money is cheap. You know, people are hungry for these assets, and it just, it caused a, a bit of a bubble. It would’ve been a great, it’s always great if you can participate in a bubble, but you can’t really depend on, on that happening, right? So I think the, the age old advice is to is to just run a great business, be as, as lean and as, as you know, profitable as you can and get as large of a, of a market share as you can.
MM (49:25):
And that’s really where brands come into play, right? Because ultimately a brand, the way that the law looks at a brand is, it’s a trademark, right? Mm-Hmm. and Trademark is a, is a license from the United States in order to have a limited monopoly on a, on a word or a phrase or, and, and, and it’s, it’s a way to build your reputation, to build your business. And if you can build a valuable business, you’ll get a great multiple beyond that, I would say that talk to an investment banker. This is always my, usually my first point of advice is to talk to a reputable investment banker. People hear investment banker and they think someone on Wall Street that’s trading stocks , that’s not an investment banker. I mean, I guess it could be. But when I say investment banker, I mean a business broker, somebody who specializes in marketing and selling businesses just like you would market and sell your home.
MM (50:15):
Mm-Hmm, . And these individuals are really, really adept to taking your business, looking at your financials, you know, making adjustments in order to cast your business in the best light possible so that you can get the highest sales price. Whether that market is in your favor or against you, that’s not really in your control. But whether you can maximize your position in any market is, is within your control. If you have the right sell side team that includes investment bankers or brokers, it includes CPAs, tax advisors, and it includes your legal team. Yeah. So I think that’s the best approach for any business trying to exit.
AJV (50:56):
Yeah, and I love that. ’cause It, it’s, it’s keep it simple. It’s like if you have a great business, then likely you would be naturally attracting a great buyer. And I love that. Matt, thank you so much for coming on the show today. So much wisdom, so much information and I love most of all that there’s nothing that you said that should cause anyone to get in a flurry or a panic, but nonetheless, we all need good resources. And this was a great resource for our community today. So thank you so much. Thanks for being on the show. And for all of you guys listening, stay tuned for the recap episode, which will be coming up next. And we will see you next time on the influential personal brand.