Helping companies do the best possible due diligence

Secrets of Due Diligence for Small Business

Secret #7: Don’t Ignore All That Corporate Stuff

Every small business starts the same way. All the focus is on surviving long enough to reach critical mass. Building revenues is always the first priority of any business, of any size. Building the team should always be the second priority. And the list goes on.

Worrying about all that corporate stuff, articles of incorporation, bylaws, minutes of board meetings, minutes of shareholder meetings and on and on and on… The usual attitude is “What a pain!” These are the last things small business people want to think about. So, onward and onward they go, some day, many times years from starting, they come up against the big request to see all that corporate stuff, from commercial banks, investor prospects, joint venture prospects, all sorts of regulatory agencies, potential cooperative arrangements of all kinds with other firms, the IRS, State government agencies, Federal government agencies, potential Board members, potential senior executives, local government organizations, leasing companies, etc., etc.

Here are just some of the categories of all that corporate stuff:

• Agreements of All Kinds
• Bank Relationships
• Benefits
• Board of Directors
• Capitalization
• Client Information
• Contracts
• Corporation Information
• Customer Service
• Directors
• Employee Information
• Executives
• Financial Statements
• Insurance
• Inventory
• Labor Disputes
• Legal Matters
• Licenses
• Litigation
• Material Commitments
• Officers
• Operations Procedures
• Patents, Copyrights and Trademarks
• Properties
• Quality Procedures
• Real Estate
• Records Retention
• Regulatory Affairs
• Shareholder Information
• Tax Matters
• Vendor Information

Here’s a sampling of some of the details:
 

• Articles of Incorporation (or similar documents for different types of corporations), Incorporators’ Names, Addresses, DOB’s, SS#’s, Telephones, Citizenships
• Board, Shareholders & Other Meetings, Since the Incorporation Date, Resolutions, Minutes, Notices or Waivers of Notices of Meetings, Dates of All Meetings, Records of All People Present or Absent for All Meetings, Dissenting Information, Signatures, Consents of All Types
• Board Directors & Corporate Officers, Names, Addresses, DOB’s, SS#’s, Telephones, Citizenships, Dates Started, Dates Stopped, Curriculum Vitae for All
• Detailed Corporate Identification Information
• Authorized Representatives and Limits of their Authority
• History of the Firm, including Pre-Incorporation
• Certification of Incorporation, Jurisdiction, Incorporation Number, ID Number, etc.
• Articles of Amendment
• Capital Structure, Share Classes, Voting Rights, Dividends, etc., etc.
• Regulatory Notices Requirements
• Certificates of Compliance

This is a tiny sample. Over the years I built a system that now runs into hundreds of pages!

Here’s the bottom line. Don’t put off the corporate stuff. Start when you start the firm. If you don’t know what to do, or how to do it, find out. All the Directors, Officers, Executives, Shareholders… everybody who has any authority or something to lose, must discipline themselves from the very beginning. If you start early, you stay ahead of the curve.

Here’s the scary part. You can lose everything! If you don’t do any of this stuff, everybody in the organization is exposed to all sorts of liabilities. Your firm can get sued for anything. I had a client once who got sued over a very small misunderstanding, and the matter eventually went to court. The client was about to receive a summary judgment because the other side’s attorney claimed they were not a valid corporation. It turned out that my client did not include the “Inc.” on their letterhead, business cards, or any other paperwork. Attorneys call it piercing the corporate veil. If there is no public use of the “Inc.” than the law says that the corporation is not operating correctly as a corporation, and no longer has the corporate veil in place, and everyone in the corporation is wide open to every liability imaginable. I told the client to get everyone in the entire firm in first thing on the next day and go through every filing cabinet, every desk, every box… dig in all the corners and try to find anything with the “Inc.” on it. We found paperwork for a very old seminar they did when they first started which they had publicly advertised, and the firm suing them had received the paperwork, which had the “Inc.” on the last line. That was enough to stop the piercing of the corporate veil. They got lucky!

So, even if you think you have done everything right, and you have all the reams of paperwork and all the filings and all the copies, all you need to do is miss one tiny but critical aspect. If you don’t have it, you can quickly be out of business, go broke, lose your reputation, lose your family, go deep in debt, go to jail, or all the above. It’s that simple.

Do it right. Do it from the beginning. Don’t ignore all that corporate stuff.
 

This is an excerpt from my upcoming book, ‘The New Diligence: Building Better Business for Small Businesses.’

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon@superdiligence.com
Due Diligence, Inc.
www.superdiligence.com