Bryan Schwartz, founder of Schwartz Law, LLC, was our guest speaker at a recent Exit Planning Peer Advisory Board meeting. He spoke to the group about the benefits of a legal audit and how to prepare for one.
A legal audit, which equates to a legal check-up for your business, is recommended at various stages of your business as it grows and evolves. It’s especially important for small businesses which may not have legal counsel in-house to oversee legal compliance.
You’ll need a qualified business attorney to perform a legal audit which will involve a review of legal documents, policies, and procedures for non-compliance and legal vulnerabilities. Discoveries during the process may include outdated contracts, misclassification of workers, missing documentation, improper handling of data, non-compliance with government regulations, and more that can slip through the cracks and potentially create legal battles.
One occasion that would warrant a legal audit is when you are considering selling your business or otherwise exiting your company. According to Schwartz, these are some of the benefits:
- “Clean” companies are attractive to buyers.
- A legal audit will help streamline efficient due diligence.
- Mitigate risk and address potential deal-breakers before they affect valuation.
- Determine what or who might be able to torpedo your deal.
- Find and eliminate surprises related to poor governance, non-compliance, bad contracts, litigation, or employee problems.
- Ensure that you are in compliance and good standing with lenders, landlords, controlling stockholders, licensors, contract parties, and government agencies.
Who is interested in the results of your legal audit?
- Stockholders
- Management and board
- Legal Counsel
- Potential buyers, investors, lenders, insurers
- Regulators
Schwartz suggests that you be prepared to answer the following questions during the process of a legal audit.
- Who are your top five customers and suppliers?
- Does your company own IP that is crucial for the business?
- What contracts are at risk, if any?
- Can you find your company’s bylaws?
- When is the last time you reviewed your company’s cap table?
- How does your company protect the security and privacy of your clients’ and employees’ data?
To prepare for a legal audit associated with a potential sale, start by defining the scope and objectives aligned with the transaction structure including timelines, budget, and resource allocation. For any legal audit you’ll need to locate important incorporation and shareholder documents. Using spreadsheets will help track your research and analysis. Be sure to maintain attorney-client privilege throughout the audit process and implement confidentiality measures for third parties, data, and technology.
A legal audit is crucial at certain stages of your company’s growth, such as when you are considering a sale or major changes. Yet conducting this audit regularly will help keep your legal foundation solid so your business can grow confidently.
Our thanks to Bryan Schwartz for sharing his expertise with our group. He founded his law practice in 2017, built on eight years of practice in law firms and ten years as general, in-house counsel, after graduating from the University of Denver Strum College of Law. If you’d like to consult with Bryan regarding a legal audit or other business law concerns, he can be contacted as follows:
Bryan Schwartz, Esq.
Schwartz Law, LLC
(303) 642-6484
bryan@bschwartzlaw.net
https://www.linkedin.com/in/bryanschwartz5555
www.bschwartzlaw.net
Bob Zarlengo is a certified exit strategist and CPA. More than four decades of experience in public accounting, expertise in financial reporting, income and estate planning, and tax compliance makes him a valued and trusted advisor to his clients.