When thinking about potential board members, consider the following:

• Are there experts in your industry that would enable you to leverage their expertise or relationships as board members?
• As most companies are dependent on financing, is there a local banker that could sit on your board to provide a lender’s perspective?
• How about local business people that could bring experience and a rolodex of connections to the company?
• Include at least one founder on the board to keep the dream alive, but don’t stack the board with all the founders.  You want a diverse set of directors — not too much concentration with one group.
• Include a venture capitalist on the board.  They are great for strategy, financing, relationships, fiscal responsibility and process.  However too many VC’s can be a problem for the same reasons!
• Include a marketing expert — this will counterbalance all the linear thinkers on the board.
• Independence, Independence, Independence!  I can’t say this enough.  Having board members that are independent of the business and the executives will help facilitate a 360 degree view as well as hold executives accountable.

In addition, there are some obvious choices that may not be your best bet:

• Company Counsel.  While it may seem quite convenient to have company counsel sit on your board, this may be detrimental in the long run when that attorney has a conflict of interest and must withdraw from both roles.  In addition, the line between business advice and legal advice gets blurred when company counsel sits on the board.  This presents issues when trying to protect conversations under the attorney-client privilege.
• Your Spouse.  Mixing marriage and business can be a very difficult balance to strike.  If you have achieved it, congratulations!  Unfortunately, many of these relationships turn sour in one way or another.  You should think long and hard about mixing these important relationships.  If you decide to proceed, be sure to work with an attorney to correctly structure the business relationship.
• High Profile Board Members.  Typically, these people are over-committed and cannot give the time and energy needed as an active board member.  Try finding other roles for these people, like a strategic advisor, spokesperson or coach.

The more strategic you can be when composing your board, the more beneficial your board will be to the growth and success of the company.  Be sure to check back for more posts on corporate governance matters.

I think it is important that all business people (including lawyers) be able to understand, digest and interpret basic financial statements.  If you are not familiar, I have set forth below a few key financial ratios that you can use to assess the financial health of a business:

• Quick Ratio (Acid Test):  Cash+Marketable Securities+Receivables / Current Liabilities.  This tests the short term stability of the company by determining the extent to which the company can pay its current liabilities without relying on the sale of inventory.  This test is a bit more precise that the Current Ratio because it excludes inventory and focuses on liquid assets.
• Debt to Equity Ratio:  Total Liabilities / Net Worth.  This test quantifies the relationship between the capital invested by owners and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. However, an extremely low ratio may indicate that the company is too conservative and not realizing its potential.
• Gross Margin Ratio:  Gross Profit / Net Sales. This test indicates how well the company can generate a return at the gross profit level, by addressing three areas — inventory control, pricing and production efficiency.

• Return on Investment Ratio (ROI):  Net Profit before Tax / Net Worth.  This is the percentage of return on funds invested in the business by its owners and tells the owner whether or not all the effort put into the business has been worthwhile.  It is used to compare investment in the company against other investment opportunities.
• Accounts Receivable Turnover:  Total Net Sales / Accounts Receivable.  This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash it has on hand.

• Break Even Analysis:  While not a true financial ratio, a break even analysis is a very important tool for business people.  A company breaks even when its total revenue equals its total expenses. At the break even point, no profit has been made, nor have any losses been incurred, but the lower limit of profitability has been identified.

There are many other ratios and financial tests that can drill into other specific areas.  However, the tests shown above will provide a good start when evaluating the financial health of a business.

1. Plan Early.  The time to begin business succession planning is well before your anticipated transition.  Getting started sooner will ensure your goals and objectives can be met.
2. Commit the Time and Resources.  This process will take time and resources.  If you are not willing to commit to the process, your result will suffer.  Therefore, invest the appropriate time and resources at the beginning to ensure a successful result.
3. Engage an Outside Adviser.  There are many difficult issues you will confront while planning your business succession.  Finding a good adviser (i.e., an attorney or accountant that has experience in this area) that can guide you through the process is invaluable.  The right adviser will ease your mind and create the optimum plan to achieve your goals.
4. Invest in the People.  People are your strongest assets.  Make sure you have the right talent in place.  If you don’t, find the right talent — do not settle for second best.
5. Management v. Ownership.  Perhaps you think these go hand-in-hand, but they can easily and understandably be separated.  Often, when transitioning a business, splitting these roles is vital to the ongoing success of the enterprise.  Think about the skills of the people involved and then decided how to deal with management and ownership.
6. Understand Relationships.  Businesses are made up of people.  Understand that decisions you make on transition matters will have ripple effects on many of the key people in the business.  Make sure you understand how the  unintended consequences of the decisions you make may effect the key people in the organization.
7. Look at all Options.  In devising your succession plan, you will be faced with numerous choices and decisions.  Make sure you look at all possible options before making a decision.  While this may seem overwhelming, you only get to transition your business once, so make sure you do it right.
8. Tax Strategy.  This is one of the most important and tricky areas to address.  Make sure you have a well qualified tax adviser available to assist.  The consequences can be extreme, so proper planning in this area is vital.
9. Integrate with Estate Plan.  For many business owners, the business represents a significant part of their net worth.  Therefore, it is very important to integrate your estate planning with your business succession planning to achieve a comprehensive result.
10. Plan for the Unexpected.  The only thing that is certain in planning for the future is that things will happen that you did not plan for.  Unforeseen circumstances may alter your plan, so make sure you consider alternative strategies and make sure you have flexibility in your plan to account for the unexpected.

Although these tips will get you started down the road to effective business succession planning, the list is not exhaustive.  There are many other issues that need to be addressed as you build your succession plan.  At a high level, the most important thing to keep in mind is to build a solid strategy and stick to that strategy as you move through the transition.  You don’t have to tackle this project alone — engage the right resources to help you through this milestone.

First, a definition.  Piercing the corporate veil is generally a situation where a shareholder or director of a corporation is held liable for the debts or liabilities of the corporation despite the general principle that shareholders are immune from suits that otherwise would hold only the corporation liable.  Once the corporate veil is pierced and the separate corporate entity is disregarded, the shareholders and directors can face personal liability for obligations of the corporation.

Although the laws are different in each state, generally for the corporate veil to be pierced, there must be evidence that shows the corporation was merely a formality and that the corporation neglected corporate formalities and protocols. Here are some factors that are reviewed when deciding whether corporate formalities have been neglected:

• Absence or inaccuracy of corporate records.
• Non-arm’s length relationships with related parties.
• Failure to observe corporate formalities (such as documentation requirements, board and shareholder meetings, or accounting practices).
• Failure to observe legal formalities (such as annual registrations, payment of annual fees or filing tax returns).
• Intermingling assets of the corporation and the shareholder.
• Illusory corporate officers and/or directors.
• Significant under-capitalization of the business.
• Withdrawing corporate funds by the dominant shareholder.
• Treatment by a shareholder of the assets of corporation as his/her own.
• The use of the corporation as an “alter ego” of a shareholder.

While this is not an exhaustive list of factors a court will look at when deciding whether to pierce the veil of a corporation, and not all of these factors need to be present to pierce the veil, they do give a flavor of the types of activities that should be avoided.

Whether the corporation is large or small, following corporate formalities is extremely important to preserve the liability shield offered by a corporation.  Investing early in the life of a corporation to ensure you have processes and procedures in place for handling routine corporate formalities can payoff significantly over the long term.  So, spend a few minutes in the next week looking at your corporation and determine whether you believe you have risk factors for piercing the corporate veil.  Then, contact an attorney that specialized in corporate law to instruct you on how to properly run your corporation to mitigate any possible risk of piercing the corporate veil.

The basic purpose of a board of directors is to have a group of individuals that are selected by the owners of the company to jointly oversee the activities and business of the company.  This can include governance issues, overseeing senior management, determining strategy, providing advice and direction, setting goals and priorities and other roles based on the needs of the company.

In small and medium sized companies, a strong board of directors can provide mentorship to management, networking opportunities, growth connections and can help build and establish important relationships.  For larger companies, in addition to the previous advantages, a strong board can provide corporate oversight, help manage risk, hold management accountable and provide independence.

Selecting the right members for the board is very important.  Often times, a natural instinct is to add your friends and family or your corporate attorney.  Here is an interesting post on why not to add the company’s attorney.  I tend to agree that it is not the best idea for the corporate attorney to also sit as a director.  I feel the same way with family and friends.  While it is an honor to sit on a board, reserve that honor for someone that can offer advantages to the company.  Challenge yourself to look outside your four walls for directors.  I tend to favor industry experts, local business people, banking or finance experts, marketing experts and/or other people with skills or relationships the company can leverage.  A good board can act as an extension of the company, so when looking at directors, you may want to focus on areas that will benefit the business.  Here is an interesting article on board considerations from the Harvard Law School blog.  Although it is more focused on public company boards, the principals can be applied to any board of directors.