Running a business is not easy. Not only must you keep customers happy while staying one step in front of the competition; you also must comply with a tapestry of not-so-obvious rules and regulations. Otherwise, one or more of the many local and federal government agencies might whack you with fines or worse for breaking their rules.
This predicament is especially tough for new businesses. At that stage, they have enough to worry about just finding customers. As a result, it’s fairly common for new businesses to take shortcuts either accidentally or on purpose. These shortcuts, in turn, bake risks into your business that could spoil at any time.
As your company matures, one way to find and fix areas ripe for penalties or litigation is to conduct a legal audit. Under this process, a business lawyer or other subject-matter expert will analyze your company by examining your records, policies, and procedures. But the scope of that analysis is up to you. The reviewer can target a single ailment, check for the usual suspects, or run a full battery of tests.
What kind of documents will the audit look at? It depends on the scale of the audit. But in a broad audit, the auditor would check your organizational documents like the articles of organization, operating agreements, corporate resolutions, meeting minutes, and more. They also would review your government filings such as your tax ID and business licenses. Plus, they would look at your insurance policies and business contracts (both your templates and signed contracts). If you have employees, the auditor would also want to see your employment agreements, employment handbook, policy documents, I-9 Forms, and so on. And if you have intellectual property, real estate, or potential litigation, then the auditor would also want to view things like your patents, trademarks, copyrights, leases, and litigation-related documents.
Once the auditor had assembled and reviewed these documents, they would draft a report. The report would summarize the information gathered, identify potential risks, suggest ways to manage or eliminate the risk, and provide a list of recommendations for how to move forward.
What kind of risks do audits typically spot? Many things. But some of the common ones include identifying ways in which the company’s behavior might cause owners to be personally liable for the company’s debts and problems; discovering that the company does not have all of the proper permits and licenses, thus putting the business at risk of penalties or even closure; and uncovering failures to obey tax, wage, immigration, safety, or equal-employment-opportunity rules that could lead to fines and lawsuits.
Is a legal audit just for young businesses trying to figure out their legal weak spots? Hardly. Owners thinking about selling their business should conduct a legal audit too.
Why? For the same reason that people tune up their cars or tidy up their houses before selling them. To get top dollar, the business needs to be in good shape when the potential buyer performs its own version of a legal audit. Otherwise, the buyer will walk away or ask for a discount.
Plus, a fresh audit saves time. After all, if you’ve just performed an audit and fixed the issues, then it’s easy to transfer the newly improved records, policies, and procedures to the buyer for review. But if you haven’t, then you’ll need to do all that work in the midst of a potential sale and hope for no unwanted surprises.
How often should you conduct a legal audit? It depends. But, at a minimum, it makes sense to conduct a legal audit before putting the business up for sale as well as any time the company’s management changes significantly. You may also want to conduct an audit every few years just to make sure that everything is in good shape.
In sum, whether you are a new business just learning about the many rules that apply to you, a seasoned business about to be put for sale, or somewhere in between, periodically having a fresh pair of knowledgeable eyes check out the company’s documents, policies, and procedures can save you time, money, and headaches later.
This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.