Law Technology Today From the ABA Legal Technology Resource Center
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Making a change to your business isn’t a simple matter. However, it’s often necessary. Whether it’s time to sell the company, add an owner, choose a name, or set up a new structure, you want to make sure you follow the legal rules.
How can you ensure you cross your t’s and dot your i’s? First, be sure you know the reasons behind the change. Then, choose the right legal professional to guide you through the process.
How to Prepare For Change
The first step is to carefully analyze your business before you move forward with a change. Even seemingly simple, small movements can be a disaster if they aren’t tested and thought out in advance. For instance, ConvertKit’s attempt to rebrand to “Seva” was announced as a complete surprise, and ultimately, completely flopped. They wanted to choose a name that meant service and encompassed their mission, but they didn’t test it among the public.
Seva is a Sanskrit word that means “selfless service,” but it’s also a word connected to the Sikh religion. The pushback was quick and severe, with customers and the public pointing out that Seva is not connected to profits and the use of the word was cultural appropriation. The company ended up undoing months of planning and eating a half-million dollars in costs.
One important step before deciding on a change is to perform a stakeholder analysis to ensure you have the buy-in you need from important leaders and customers. When those outside the leadership team give approval, you’re on your way to success. If you do embark on a change, be sure to choose an attorney that is aware of how to keep their clients in the loop as changes are made.
Making a Name Change
Changing the name of your company may seem minor, but it’s very significant to your customers. Be sure—as ConvertKit learned—that you get customer feedback before you move forward.
Why would you change your company name? A company may want to change the name due to negative publicity or trademark issues. Sometimes the owners want to change the direction of the business or need a name that more fully embodies their brand. For example, Google changed its company name to Alphabet in 2015 in order to signal that it was moving beyond search alone.
Once you’ve decided to make a change, you need to follow the full legal process of claiming and registering a company name. This includes making sure the name isn’t taken, notifying the appropriate state office, and changing any license and permits in your business’ name. You’ll also need to follow the IRS’ process for business name changes, and you may need a new EIN as well.
Finally, be sure to update your new website domain and social media handles, update your business documents and contracts, and make sure your suppliers, customers, and other stakeholders are aware of what’s different going forward.
For instance, KFC’s brand name change was dogged by persistent rumors that they weren’t using real chicken and thus couldn’t legally call themselves Kentucky Fried Chicken. There was no truth to that, and they chose to address the rumor publically on their website.
Business Sale
Selling your business generally means dissolving the original entity and forming a new one under new ownership. As you might guess, this is a complex process best handled by a professional in-house legal team working with an experienced attorney. For example, when Dow Chemical and DuPont merged in 2015, they were trying to maintain their market power after being targeted by activist investors and facing a down market. The merger necessitated a lot of layoffs, but the company has been successful since.
Your board will need to approve a variety of resolutions that include a new owner, the new structure, and other details. The new owner will need a new EIN and proper state and federal filings to notify authorities of the new company. Your assets and liabilities will be assigned to the new owner, and you’ll also need to perform a legal business dissolution of the original company, and let the state business division know.
The transition may take time, so don’t expect to walk away without any responsibility as soon as the deal closes. Everything from employee issues to payroll to taxes needs time to be resolved. Often, there will be changes in the organization, structure, and who does what work — which may mean layoffs.
Filing For Bankruptcy
Hopefully, this is a change you never have to make, but even businesses who have been successful for years have to take this step. For instance, Pier 1 Imports recently announced they are closing hundreds of stores and Chapter 11 bankruptcy seems imminent.
The good news is that some forms of bankruptcy allow you to restructure your business and emerge slimmer, trimmer, and ready to continue in business. For example, many airlines, including Delta and American Airlines, have filed for and emerged from Chapter 11 bankruptcy to return to profitability. Unfortunately, companies such as TWA and Woolworth’s were not as fortunate.
That doesn’t mean bankruptcy is easy or that success is assured, however. If you choose Chapter 7 bankruptcy, you’re choosing to liquidate your business and a trustee will be appointed to distribute assets. A Chapter 11 bankruptcy is a reorganization — you can expect to file a detailed plan of reorganization showing how you will handle creditors. Still, you have to be prepared for legal discovery, a variety of claims, and more.
Hopefully, bankruptcy will be temporary and you’ll return to success quickly.
Changing Your Structure
Some changes to the structure are made for tax or liability reasons, and others are made due to investors or new owners. These changes may include forming an LLC instead of a sole proprietorship or becoming a corporation. Each of these changes requires specific legal filings and some require additional oversight (such as a board of directors). Another form of restructuring happens when you decide to reorganize your current departments, change vital business processes, or add additional verticals.
Reorganizations are common in the business world, but you have to pay attention to employment contracts and laws and communicate clearly as changes are made. Many businesses help excess employees find new positions within the company, while others provide outplacement services.
Changing important business processes is an important way to keep up with your industry, but you need to ensure you introduce the changes effectively. Unfortunately, a lot of process changes don’t stick, but with the right setup, you can improve your chances.
Set Your Company Up For Success
Change is a fact of life in business, but the changes mentioned above have specific legal requirements. Make sure you work with a legal professional that will walk you through the research and filings—and then plan carefully for implementation.
When you keep your business operating by the book, you’ll be much more likely to succeed as you change and grow.
