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Naming a New Business: 4 Important Steps to Choosing the Right Business Name

Posted: 24 May 2020 11:07 AM PDT

By Darpan Munjal

Recently, a survey was released that became a trending topic across major news outlets and social media channels. The unscientific poll claimed that 38% of Americans wouldn't buy Corona beer because of the coronavirus. While the accuracy of this survey is questionable, outlets and audiences took the story and ran, claiming that the shared name of our now global pandemic hurt beverage sales. While it was nearly impossible for the brand to have predicted such a coincidence, Corona is now receiving additional criticism for the release of poorly timed ads during this highly sensitive time.

What Corona is dealing with is an example of a negative name connotation based on world events. A name can have a significant impact on a company’s bottom line. In fact, researchers found that stocks with easier-to-pronounce names performed better than those with more difficult-to-pronounce names. These are real-world consequences of untested or misinformed name choices. A brand name is the mission statement and the first impression rolled into one. It's crucial to have a name that immediately captivates customers and leaves them wanting more.

Developing a lasting name for your brand is one of the most challenging parts of the creative process. While you cannot predict the next news cycle or global health crisis, here are four ways to select a name with meaning during the precarious times we live.

1. Understand naming constructs

What’s in a name? Everything. The first step to selecting a long-standing brand name is to understand naming constructs. The vast majority of brand names fit into one of five styles: classic, clever, pragmatic, emotional, or modern. The style of your brand's name determines the tone of your brand, which in turn affects your audience's perception of your company.

Each style has different advantages depending on your business and the preferences of your target audience. Carefully consider each category, as styles that work well for some brands perform disastrously for others.

Adopting a naming style that represents your business and values (classic, clever, pragmatic, emotional, modern) will allow you to move forward in a clearer direction. It will also allow you to immediately take ideas off the table that are not a good fit for your business model, goals, and strategies.

2. Brainstorm

Lasting names often derive from productive brainstorming. It may feel that the “good” names have already been taken. After all, over 627,000 new businesses open each year. Selecting a quality name can appear too competitive and nearly impossible. However, don't let this discourage you—let it motivate you to be innovative.

Brainstorming is the first part of the naming process. Instead of selecting a word or two words that sum up your entire brand, product, and values, focus on capturing a single essential element. This may mean looking past your product or business model, and at your brand attributes, values, and customer experience.

Try starting with an idea or an image, and then create different versions of this idea or image, using various names. Get your team involved with this process. Not only will it cultivate collaboration and team building, but the diversity in thought will spark new name ideas you would not have imagined on your own. From visual descriptions to compound phrases, to plays on words to foreign idioms, the results from the brainstorm session will get creative juices flowing.

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3. Ask your audience

If we learned anything from Netflix, it's that love is blind. So is falling in love with a name early on in the naming process. Unfortunately, we often have a preference based on our assumptions or even unconscious bias. This can turn into a PR nightmare if we fail to ask for feedback regarding our ideas.  For example, Kim Kardashian West was under immense pressure to rename her Kimono shapewear brand to SKIMS after being accused of cultural appropriation. This isn't the first time a brand was accused of being insensitive to our growing global market.

After brainstorming, it’s extremely important to audience test. Audience testing will offer valuable insight into the names that will appeal to your target market. There are several ways to test audiences that include Facebook groups, survey platforms, or Google forms. As the results come in, you may discover that the name you initially loved does not resonate with your audience. Even worse, you may find that the names are actually offensive.

Be prepared to give up on favorites if they don't connect with audiences. It's also not uncommon for audiences to resonate with unexpected names from your shortlist. Audience tests are so helpful because they allow you to look past your own perspective and dive into the mindset of your eventual target demographic.

4. Function over fashion

After you've narrowed down your list of potential names, it's important to put these names through some hoops to ensure that they resonate with your customers. A major aspect of brand naming that many people don't consider is functionality. In naming, functionality refers to how easy it is to communicate your name through speech and print.

There are three main parts of functionality to consider:

  • Read to speak: Can people easily say the name aloud after reading it? Do they pronounce the name correctly?
  • Hear to spell: Can someone easily spell your name after hearing it? Would they be able to Google search it after hearing it once or look your business up on social media?
  • Speak to hear: Discover if your name passes the "crowded bar test." Would someone be able to clearly understand your brand name even if it was spoken in a crowded bar? Would whoever heard it be able to repeat the name back in the same situation?

If you want people talking about your brand and spreading organic referrals, then you need to make sure that your brand name is highly functional. In order to create a name with a long-term impact, it must be clear and functional as well as communicate the core values of your business.

In addition, your name must stylistically match with the tone of your company, allowing the name to form a true connection with your target audience. By following our guidelines, your buzz-worthy brand name will promote interest as it encompasses your brand's unique journey.

RELATED: 5 Rules of Thumb for Choosing the Best Domain Name for Your Business

About the Author

Post by: Darpan Munjal

Darpan Munjal is the founder and CEO of Squadhelp.com, the world's #1 brand naming platform and two-time Inc. 500 company. He frequently contributes thought leadership content on branding, naming, entrepreneurship, and technology to major publications including Forbes and Entrepreneur.

Company: Squadhelp
Website: www.squadhelp.com
Connect with me on Facebook, Twitter, and LinkedIn.

The post Naming a New Business: 4 Important Steps to Choosing the Right Business Name appeared first on AllBusiness.com. Click for more information about Guest Post. Copyright 2020 by AllBusiness.com. All rights reserved. The content and images contained in this RSS feed may only be used through an RSS reader and may not be reproduced on another website without the express written permission of the owner of AllBusiness.com.

The Office of the Future Is Here—And It Needs a Lot of Work

Posted: 24 May 2020 10:43 AM PDT

By Ryan Denehy

The shift to remote work has been accelerated by the current pandemic we're in, and it has brought to light many shortcomings in our technology stacks. We've taken a giant step forward in workplace philosophy and two big steps back in workplace capability, security, and standardization.

For organizations with a remote-focused culture prior to this pandemic, this situation is merely an extension of the capabilities and infrastructure they already had in place. Unfortunately, most businesses were not prepared for what's unfolded over the last few months and are playing catch-up—only just now considering how to roll out work from home protocols at scale.

If we forget about VCs and longtime teleworkers/freelancers, the average home office and remote IT setup is about as technically capable as a cubicle farm from 2005. Employees are doing their best, but most left the office expecting to return in a few weeks at maximum.

We're all taking this day by day, but it would be doing your teams a disservice to not prepare for this to be our reality into the next fiscal year. Even if stay-at-home orders are lifted, executives need to be cognizant of the fact that many people wouldn't feel comfortable returning to the traditional commute or packed offices for a long time.

How efficient are your employees' home offices?

If you were to ask those in positions of leadership basic questions in this current state, such as:

1. Do you want your team members to succeed and do their best work?
2. Do you care about the security of your organization, employees, and customers?

No self-respecting leader would answer "no," but it's important that they first reflect on these questions through the lens of an employee and their home office setup at the moment:

1. Access and usability of tools

Do all employees have what they need, and, if they don't, how easily can they get these assets in the most efficient and secure way possible? Who needs to use what apps? Are these third-party vendors running a tight ship? For most organizations, this just means adding licenses ad hoc and then touching base with the CFO at the end of the quarter. This process not only impacts long-term productivity and cost, but can also pose security risks as well.

2. Predictable system performance

Some employees have a great internet service provider in their building or neighborhood, some don't. Almost nobody has a commercial-grade router, and very few are using VPNs. Now consider each of your employees' computers, which are often used for personal computing in addition to work. Is there regular system maintenance being run on all devices touching work data? Both network and laptop management have to be completely reevaluated in a remote work environment.

3. Collaboration

With in-person interaction out of the question during this time, tools such as external monitors, digital white boards, cameras, smart keyboards, etc., are the cultural glue that holds your company together. You might know what you need to be productive, but does everyone in your organization know how and what to properly optimize? Has it been rolled out in a cohesive way?

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Setting up a technologically efficient home office

As remote work continues to become a larger fixture of the modern business, and employees' home offices become an extension of your company, leaders need to accept responsibility to create a setup that mirrors the standards of quality held in traditional offices.

Home offices should be based on a handful of principles that encourage seamless production of work with minimal technical disruption:

1. Laptop performance and security

Employees' computers should not just power on and function to some degree—they need to work as fast and efficiently as possible. If this isn't the case, a remote help desk needs to fix the device immediately. The devices (all of them: Mac, Windows, Linux, Android) should be visible and controlled from a central location. My team chose to automate Jamf and Kaseya deployment, and built a centralized management console so even a non-technical person can manage hundreds or thousands of devices. That's not the only route available, but it's worked for us.

2. Keep patching frequent

Applications on employees' work devices should be installed and updated automatically or semi-autonomously. We've all been the person to hit "remind me tomorrow" on a device update—it would be irresponsible to assume everyone has a firm grasp on the importance of device patching and why it's so important. To navigate this, automate the process so they don't have a choice to hit snooze.

3. Network/ISP performance

Company-wide home office speed tests should be the norm. Deploying a small commercial-grade router to each home office is a small price to pay for centralized management, troubleshooting, and security for hundreds or thousands of home networks. If you have the capability, create a customized work-from-home IT infrastructure that includes a relatively inexpensive commercial router that can be shipped to each employee and easily deployed.

4. Peripherals

Standardize all home-office peripherals, including shipping and installation. This might seem trivial—"Just get a second monitor”—but depending on a person’s role, there’s more to it. A graphic designer and a sales rep don’t need the same monitor. Your head of legal or CFO might be accessing more sensitive information than your marketing team, so they may require additional security devices like a VPN. What about a digital white board? What’s your hard phone/soft phone strategy? What does that even mean? A lot to consider!

The office of the future is now

The office of the future arrived early. Depending on whom you ask, it’s either really cool or not cool at all (and you’re probably in it right now). Maybe there is a dog sleeping under your desk or a child asking you for an iPad.

Beyond the technical specs, consider the new normal that your teams are grappling with. If you're a CEO, reach out to as many people as you can. Check in on the people keeping the lights on. If you're new in your career, voice your challenges and struggles to management. Take time to step away from screens. Encourage face-to-face video chats, but give ample notice so all parties can brush their hair.

We need to start with the basics to make sure we're setting up teams for success. On a personal level, that starts with a check-in; on a technical level, that starts with elevating your work-from-couch IT capabilities.

Excellence in the “new” office starts with leveraging IT as an enabling-function for your team. It starts with rethinking IT and the definition of “office” from the ground up.

RELATED: 10 Tips for Conducting Productive Virtual Meetings

About the Author

Post by: Ryan Denehy

Ryan Denehy is a 3x entrepreneur and the founder and CEO of Electric. Having experienced the pain and frustrations that many business owners encounter in managing their IT infrastructure and support needs, Ryan’s light bulb idea to create a cloud-based, real-time, 24-7 IT support ecosystem laid the foundation for Electric’s vision to redefine IT support for a new generation.

Company: Electric
Website: www.electric.ai
Connect with me on Twitter and LinkedIn.

The post The Office of the Future Is Here—And It Needs a Lot of Work appeared first on AllBusiness.com. Click for more information about Guest Post. Copyright 2020 by AllBusiness.com. All rights reserved. The content and images contained in this RSS feed may only be used through an RSS reader and may not be reproduced on another website without the express written permission of the owner of AllBusiness.com.

To Make Your Business Stand Out, Try ‘Borrowing’ Business Tactics From Other Industries

Posted: 24 May 2020 10:24 AM PDT

All businesses have tricks of the trade—tips and tactics that help them attract customers, increase revenue, and grow their companies. However, these solutions tend to be known and practiced within specific industries. Retail businesses, for instance, have their secrets to success, and service businesses have theirs.

But what if we mix it up? Are there retail tactics and techniques service businesses can "borrow" to improve their businesses and vice versa?

Retail tactics

First, let's examine some of the proven techniques retailers use. This blog post on Vend offers 17 tips to increase retail sales. Some are equally relevant to service businesses. Let's take a closer look at a few.

1. Hire and develop employees who can offer exceptional customer service

Almost every retail expert advises retailers to hire wisely, making sure all employees are "passionate and knowledgeable" about the product mix and trained to provide great customer service.

While service businesses are likely hiring skilled staff knowledgeable about their industry, they often overlook the customer service angle. Whether you're an accountant or financial advisor, run a graphics design firm or janitorial service, even if your employees are good at what they do, if they're not equally strong working with people, your business could be in trouble.

Like retail employees, your staff needs to be trained to recognize what your clients need and want and how best to deliver it to them.

2. Promote corporate social responsibility (CSR)

Being a good corporate citizen should be part of every business's core strategy. But it's often easier for retail businesses to promote their CSR than service companies. Try these CSR activities to let people know your service business is dedicated to helping the community.

Service businesses with storefronts that attract customers throughout the day, such as hair and nail salons, spas, and gyms, can donate a portion of a day's sales or profits to a charity or other worthy cause. Local schools often hold fundraisers at retail or food establishments. Perhaps your service business could host one in your facility.

If you own a car repair company or you're a consultant, accountant, financial advisor, real estate agent, lawyer, graphic or web designer, tutor, dentist, etc. check out local community events. Many have booths where you can, while not dispensing advice, give out free, relevant checklists, such as general tax tips or how to stage your home for sale, how to go green, or five books every middle school child should read. You get the idea. Make sure your logo and contact info is on the documents and try to collect names and addresses (asking for permission to email them).

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If it's appropriate, pick a cause that makes sense to your business mission and promote it. Contractors, home remodelers, interior designers, for example, could work with an organization like Habitat for Humanity.

Any service business can sponsor a local sports team (kids or adult) or a local marathon or other race.

The idea here is to be active and visible in your community.

3. Communicate, communicate, communicate

Retailers are always replenishing inventory, bringing in new products. This creates natural opportunities for them to regularly communicate with their customers. Savvy retailers employ a variety of communications methods, including postcards, text messaging, websites, e-newsletters, social platforms, etc.

Service entrepreneurs can use all those methods as well. Some service businesses have organic, seasonal opportunities to send communications. Accountants should be sharing tax tips both during the tax season and at the end of the year. Cleaning businesses should promote their services for "spring cleaning" and getting ready for holiday celebrations. Car mechanics and repair companies can promote "how to winterize your vehicles," while hair salons can promote new styles for prom, graduation or other seasonal occasions.

All service businesses should have information to share. The easiest ways to do that are via their websites and e-newsletters.

4. Sell products

Obviously, retail companies are in the business of selling products. Service businesses can easily add a retail component. Whatever products you sell should be relevant to your business. Accountants can sell accounting software. Most salons already sell products (nail polish, shampoo, etc.) but you can add other merchandise your customers would like, such as hair accessories, jewelry, scarves, etc. Maid services can offer specialized cleaning products. Some service businesses, particularly ones specializing in offering information, such as marketing companies, can sell subscription newsletters or e-books. Almost any service entrepreneur can find books of interest to sell to their clientele.

If you have an office, you can sell these products there, but setting up an e-commerce component on your business website is easier than ever these days.

Service business tactics

5. Be the expert

Since service entrepreneurs are usually specialists in their fields it's easy for them to position themselves as industry experts. They can augment that by teaching workshops or classes or becoming a go-to source for local media.

Retailers can easily do that as well. Depending you what you sell, you can become the local expert on the best toys for kids, beauty, fashion, and food trends, design ideas (furniture and décor), houseplants consumers can't kill, recommended reading, etc.

Underscore your expertise by highlighting what you know on your website and in e-newsletters. You too can promote your expertise to local media, using press releases or just sending a note via email. Be active on social media—use it not only to promote sales, but to "show off" your what you know.

6. Social proof

Unlike retailers, service entrepreneurs generally sell something that can't be seen. So they need to find other ways to get their prospects to see the value in what they're selling.

Social proof is one way to do that. Consumers feel better about making a purchase (B2B or B2C) if they know other people have done it as well. Service business owners do this by using testimonials in their marketing materials.

Retailers can do this by showing how others have bought and used your products. Ask your customers to send pictures for you to post on your website. If you sell clothes and accessories, consumers can send pictures of themselves in their outfits. If it's home décor or furniture, etc., they can send you shots of how your products look in their home or yard.

Ask your customers to post these pictures on their social platforms as well, tagging your business. Of course, you'll need to amplify their posts. Also monitor the ratings and review sites, so you can promote the good reviews and try to fix the bad ones.

7. Focus on feelings

No matter what you're selling, focusing on your  prospects' feelings can be key to making the sale. Think about how financial advisors appeal to people's emotions about major life moments, like having a baby, buying a house, retirement, etc.

Retailers can appeal to consumers' emotions in your marketing materials. Use language like "this rug will make your home feel cozy," or "show the world you've made it by wearing this elegant watch," or "make your pet feel loved by feeding them organic food."

Most consumers buy products that make them comfortable and safe. Especially with big purchases, you don't want to push them out of their comfort zone. However, if you sell inexpensive, impulse items, you have a little more leeway to sell them merchandise that makes them feel glamorous or sexy or adventurous.

Borrowing business tactics from industries other than your own can help make your business stand out from your competitors. Consumers prefer to do business with companies that aren't doing the "same old thing."

RELATED: Got a Boring Business? Try These Marketing Ideas

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Did Your Business Receive a PPP Loan from the SBA? Here’s How to Handle Potential Press Inquiries

Posted: 24 May 2020 09:42 AM PDT

By Joe Rubin

The Paycheck Protection Program (PPP) has provided billions of dollars in loans to millions of small businesses. Most of the recipients received relatively small loans (average size of $80,000 for the second tranche of loans), but there are a significant number of recipients who received $1 million or more, and 40,000 businesses received $2 million or more.

However, while the program clearly allows businesses with up to 500 employees to take out loans of up to $10 million, Congress and the Administration are rethinking that, and are promising to examine and audit those companies that have received more than $2 million in PPP loans. In addition to that scrutiny, however, the press is actively pursuing companies that have received loans of $1 million or more, often "naming and shaming" them and pressuring them to return their PPP funds.

Unfortunately for many businesses that do not have experience in dealing with reporters, the challenges of responding to press inquiries often go "sideways," with business leaders straining to defend the reasons why they need this money. This has led many businesses to agree to return their PPP money, even if it is good for the business and their employees.

Specifically, while business leaders generally have time and resources to prepare for scrutiny from the government, dealing with the press presents a whole host of new and important challenges, such as dealing with hostile questions and an unknown audience, and having to respond real time.

These questions are also generally not based on legal requirements, but are often based on a reporter's perception of "fairness" to other recipients, legitimate "need," and simply the size of the loan. In addition, these new and novel questions and pressure are occurring in real time, and do not give business leaders time to prepare beforehand the best ways to react and respond.

As a result, companies are often forced to respond to public questioning and reporters with no support or training to help them get through these questions. It’s not surprising, therefore, that many of these companies simply give up and agree to return the PPP money, even if it could be a vital support for their business.

In other words, business leaders who accept larger PPP loans need to think carefully about how to respond to public inquiries about the loans, and why they're important to their businesses, employees, and customers.

There are several "rules of the road" that business leaders should keep in mind as they respond to reporters:

1. It is all about employees and customers

The goal of the PPP is to ensure employers can afford to retain and rehire workers that may have been laid off as a result of declining sales, closed stores, or other adversity caused by the coronavirus. Therefore, when being questioned by a reporter about the need for PPP funds, a business leader should continually return to the benefit that the PPP money provides to their employees:

"We took PPP money because we care deeply about our employees and wanted to make sure that we have the ability and resources to continue to provide a regular paycheck during these challenging times."

It is particularly helpful if an employer can point specifically to the number of employees who had been laid off but the company was able to rehire because of PPP funding.

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2. The size of the loan is not in and of itself relevant, though that may be the focus of the press

Some negative press that is being generated centers around the size of the loans that some PPP recipients are taking out, comparing the size of the loan to a "typical" PPP loan. For example, a $2 million PPP loan is going to be 25 times larger than the typical loan received in the second tranche of PPP loans ($80,000).

The way to respond is to not take the bait, but focus on the need to protect your employees:

"We are very fortunate and thankful to our employees and customers that we have been able to build a successful company with a significant number of employees, and the employees are the most important asset that we have. We based our PPP request on the legal parameters that we believe are necessary to try to maximize the number of employees that we are able to bring back. We did not use this in any way to disadvantage other companies, and only requested and received enough to cover our payroll for up to 10 weeks. We are proud that we were able to receive money that we can use take care of our employees."

3. DO NOT commit to "giving the money back"

Some of the reporters' questions are likely to try to push the company into returning the money that was received from the PPP.

DO NOT make that commitment. If you feel trapped, you can say you will consider returning money that you may not need under the PPP, and that you will examine the potential need for the money, but that you made a determination early on you would need this money to rehire and retain your employees, and that analysis has not changed:

"Giving the money back would be unfair to our employees and customers because it would mean that we would be forced to again lay off our valuable employees."

Be prepared with your response

If your company has a PPP loan over $1 million, be prepared to respond to public and media pressure regarding the appropriateness of your loan. Think about your responses and plan ahead so that the press is not able to prevent you from protecting your employees and customers.

RELATED: New Treasury Guidance Provides Safe Harbor for PPP Loans

About the Author

Post by: Joe Rubin

Joe Rubin is an experienced attorney, government, and public affairs professional with over 25 years of experience who works with companies of all sizes and industries to help them deal with engagement with the federal government, including lobbying, crisis management, and press and public affairs.

Company: Rubin Strategies
Website: www.joesrubin.wixsite.com/rubinstrategies
Connect with me on Twitter and LinkedIn.

The post Did Your Business Receive a PPP Loan from the SBA? Here's How to Handle Potential Press Inquiries appeared first on AllBusiness.com. Click for more information about Guest Post. Copyright 2020 by AllBusiness.com. All rights reserved. The content and images contained in this RSS feed may only be used through an RSS reader and may not be reproduced on another website without the express written permission of the owner of AllBusiness.com.

A Guide to Acquiring a Distressed Tech Company

Posted: 24 May 2020 09:11 AM PDT

By Daniel Lopez, Richard Vernon Smith, Douglas S. Mintz, and Richard Harroch

After years of sky-high valuations, private equity funds and strategic buyers will have ample opportunity to purchase technology companies at a discount in the wake of the COVID-19 crisis. This article highlights the unique opportunities and risks associated with acquiring a distressed private technology company.

1. Finding Distressed Tech Deals and Identifying Decision Makers

In addition to traditional sourcing outlets, buyers can access potential targets by purchasing debt and other claims from existing creditors. If done thoughtfully, a buyer can transform itself from a hopeful outside bidder into a creditor armed with special rights. Specifically, being a creditor may enable buyers to utilize information and inspection rights contained in credit agreements to enhance due diligence and implement special legal structures to complete an acquisition, as discussed further below.

Once a target has been selected, buyers should take care in identifying the "real" decision makers. This analysis is typically straightforward in the non-distressed context because the board, management team, and key stockholders can usually negotiate and approve a deal, while creditors are simply repaid.

However, in the distressed context, creditors are an additional and important stakeholder group that can dictate terms. What's more, buyers targeting companies with tiered debt structures and syndicated loans must navigate a web of liens, covenants, remedies, and intercreditor agreements to determine which creditor (or group of creditors) are needed to approve a deal.

2. Selecting a Structure for a Distressed Tech Company Acquisition

Distressed tech company acquisitions are often structured as a purchase of assets, and not as a merger or equity purchase. The two principal reasons are: (1) this structure minimizes the buyer's assumption of unwanted liabilities of the seller and (2) the buyer obtains a stepped-up tax basis in the acquired assets. If the distressed company has significant net operating losses that the buyer may be able to use (which are subject to the IRS change of ownership rules), a reverse triangular merger may make sense.

But deals can use traditional acquisition structures or creditor-driven structures outside of or through bankruptcy court ("out-of-court" versus "in-court"). Each structure carries different levels of deal expense, execution speed, and post-closing liability risk. Here are the key points for nine alternative acquisition structures:

Equity Purchase Structure

  • Target equity acquired directly or by a merger.
  • Buyer indirectly bears the risk of all target liabilities.
  • Buyer should require the seller to pay before closing all known liabilities and receive payoff letters and/or releases to the extent possible.
  • Indemnity can mitigate liability but recourse may be impaired if equity holders receive little/no consideration.
  • Buyer should consider obtaining representations and warranty insurance (RWI).

Asset Purchase Structure

  • Seller assets acquired (all or in part).
  • Seller retains all pre-closing liabilities, except for specific liabilities assumed by Buyer or operation of law.
  • Same indemnity and RWI considerations as Equity Purchase Structure above.

"Acqui-Hire" – License and Waiver

  • Buyer hires certain seller employees/service providers, receives a robust release of claims, and receives a non-exclusive license to use the seller's intellectual property (optional).
  • No equity, assets, or liabilities are transferred.
  • Same indemnity consideration as Equity Purchase Structure above.
  • RWI likely not available.
  • Increasingly popular structure for VC-backed companies (which often have talented teams, but minimal revenue or monetizable intellectual property).

"ABC" – Assignment for Benefits of Creditors

  • Seller assigns to an assignee.
  • Assignee liquidates the assets and distributes proceeds to creditors.
  • Assets generally transferred free and clear of liens and liabilities, except for (1) claims by creditors senior to foreclosing party and (2) risk that bankruptcy court may later unwind sale.

Foreclosure (Private Sale)

  • Creditor forecloses on, and then sells, defaulting seller's secured assets.
  • Buyer must be a third party—foreclosing creditor cannot buy assets (subject to limited exceptions).
  • Assets generally transferred free and clear of liens and liabilities, except for (1) claims by creditors senior to foreclosing and (2) risk that bankruptcy court may later unwind sale.

Foreclosure (Public Sale)

Same as private foreclosure sale except:

  • Sale must be advertised and accessible to general public (which adds time to sale process).
  • Foreclosing creditor may bid for/acquire the assets (and therefore competes with any buyer).
  • Lower risk of bankruptcy court scrutinizing/unwinding sale due to fairer process.

Section 363 Sale under the Bankruptcy Code

  • Process:
    1. Seller finds a "stalking horse" bidder to acquire its assets. (The "stalking horse" bidder sets the initial bid on the assets of a bankrupt company.)
    2. Seller and stalking horse sign asset purchase agreement (APA), which includes auction procedures, topping rights, and break-up fee/expense reimbursement.
    3. Seller files a motion in bankruptcy court. Can be before or after stalking horse identified.
    4. Creditors notified and formal auction conducted (~20-30 days). Bidders propose purchase price and edits to stalking horse APA.
    5. Seller seeks court approval after final bidder selected.
  • Creditor approval required with respect to its secure collateral.
  • Assets transferred free and clear of liens and liabilities.

Pre-Packaged & Pre-Negotiated Bankruptcy Plans

  • Creditors and company negotiate a plan of reorganization before filing in bankruptcy court, which allows company to be sold as a going concern.
  • Pre-packaged plan: formal creditor vote obtained before filing.
  • Pre-negotiated plan: creditor vote not obtained before filing, but agreements with key creditors and lock-up/support agreements evidence approval.
  • Securities issued pursuant to court approved plan exempt from registration under the Securities Act of 1933 and "Blue Sky" laws.
  • Usually faster than a "free-fall" bankruptcy, where debtor files with no plan.

"Free Fall" Bankruptcy Filing

  • Debtor files for bankruptcy with no pre-agreed exit from bankruptcy and relies upon Chapter 11 protections to negotiate with creditors and possible buyers.
  • Longer time frame to resolution compared to other in-court proceedings.
  • Rare event for larger companies.
  • Creditors and debtor attempt to agree on a reorganization plan.
  • Securities issued pursuant to court approved exit exempt from registration under the Securities Act of 1933 and "Blue Sky" laws.

3. Due Diligence Issues in Distressed Acquisitions

In distressed tech company acquisitions, buyers still need to undertake due diligence, but the diligence may need to be accelerated and limited. And because of the coronavirus "stay at home orders," in-person diligence may be limited or difficult.

Key due diligence issues will include:

  • What liabilities are to be assumed and which liabilities are to be specifically excluded?
  • What accounts payable have been deferred?
  • How likely are accounts receivables to be collected?
  • Are the assets to be acquired subject to a third-party lien or encumbrance?
  • What is the condition of the assets?
  • How has turnover in employees affected the ability of the business to continue?
  • What litigation is pending or threatened?
  • What key contracts need to be assumed and do those contracts need to be renegotiated?
  • What COVID-19 related legal risks (such as litigation risk) does the target business face?
  • Is the seller in compliance with federal, state, and local orders related to the pandemic?
  • Are there supply chain risks?
  • Is the seller in compliance with health and safety laws with respect to its workplaces and employees in light of the danger posed by the pandemic?
  • How is key intellectual property to be transferred and subject to what third=party licenses or other rights?
  • What are the termination rights under key contracts? Do the seller's contracts include "force majeure" clauses that may enable it or the counterparty to terminate the agreement or suspend performance or payment?
  • Will key customers of the seller continue with the buyer? What is the financial condition of those customers?
  • What IT, cybersecurity, and data breach issues has the seller encountered? Has the seller had problems with hackers interfering with video conferences or taken steps to prevent that risk?

For a comprehensive discussion of due diligence issues in mergers and acquisitions, see A Comprehensive Guide to Due Diligence Issues in Mergers and Acquisitions.

4. Additional Key Issues in Distressed Tech Company Acquisitions

Once a structure has been selected and the parties are in execution mode, buyers should take ownership of the following issues in the sprint to closing. Buyers cannot assume that a seller's management team will be invested in the transaction or properly focused on these issues because they will likely receive sub-optimal deal consideration or just abandon a "sinking ship" altogether by resigning. Also, unlike a non-distressed deal, buyers will likely have limited or no recourse against selling stockholders for post-closing claims or liabilities. Put simply, many seller problems become buyer problems.

  • Fiduciary Duties. As with any potentially contentious deal, the parties should ensure that the seller's directors and officers fulfill their fiduciary duties in order to avoid creditor and stockholder claims that may scuttle a deal or haunt buyers for years after closing. This is especially important in conflicted transactions in which an existing stockholder or creditor is the buyer or receiving special treatment. See Financing a Distressed Private Company: De-Risking Inside Rounds for a brief discussion of fiduciary duties and risk-mitigation tools for conflicted transactions, such as the use of independent committees, informed stockholder votes, and independent valuations and opinions.
  • D&O Insurance, Exculpation, and Indemnification. In addition to taking the foregoing front-end precautions to reduce fiduciary claim risk, the parties should also ensure that the seller's organizational documents properly insulate directors and officers with exculpation, indemnification, and advancement provisions, and that those obligations are adequately backstopped with robust D&O insurance. See Time to Review D&O Liability Protections in Distressed Private Companies for a more detailed review of director and officer mitigation tools.
  • Transition Services. Buyers must carefully consider which transition services will be needed after closing. These costs may be substantial and impact overall deal pricing because the seller may be unable to provide any transition services, and the entire workforce may be terminated at closing.
  • Fraudulent Transfer Issues. A buyer of a distressed tech company runs the risk that the sale is later deemed to be a "fraudulent transfer" and set aside. Under federal law, state law, and/or the U.S. Bankruptcy Code, the sale can be voided upon a showing by dissatisfied creditors or by a bankruptcy trustee subsequent to a bankruptcy filing that there was "actual" fraud (i.e., the sale was actually intended to hinder, delay, or defraud creditors) or "constructive" fraud (i.e., the sale was made for less-than-fair consideration or reasonably equivalent value, and the target was insolvent at the time of, or rendered insolvent by, the sale). Counsel working with the buyer can limit this risk by building an appropriate record and structuring how the proceeds can be used to ensure creditors are protected.
  • Escrow or Hold-Back of a Portion of the Purchase Price. A buyer may want to hold-back or escrow a portion of the purchase price to take into account any indemnification protection of the buyer under the acquisition agreement. In the distressed M&A context, a hold-back or escrow often serves as a buyer's sole source of post-closing recovery because the seller and its equity holders may be unable or unwilling to satisfy indemnification obligations. If the seller agrees to the escrow or hold-back, it will try and negotiate for a short period of time that the escrow or hold-back lasts.
  • Third-Party Consents. A distressed tech company sale will often require a number of consents from third parties, including: (1) the seller's stockholders and board of directors; (2) counterparties to the seller's key commercial contracts; (3) landlord consents if any leases are to be assigned; and (4) lenders to the seller (including any related releases of liens).
  • Regulatory Hurdles. The buyer needs to review whether any regulatory hurdles must be addressed. For example, the federal Hart-Scott-Rodino Act should be examined for any anti-trust issues, assuming the dollar thresholds are met in the transaction. For foreign buyers, a filing with the Committee on Foreign Investment in the United States (CFIUS) may be prudent or mandatory. CFIUS has jurisdiction to review national security implications of takeovers of U.S. businesses by a foreign party, especially from China. Other regulatory hurdles should be reviewed in connection with banks, financial services companies, healthcare organizations, and other regulated businesses.
  • Employee Compensation. Buyers should cause sellers to pay in full all wages and other amounts due to employees. In addition to severe reputational damage and harm to employees, a buyer may be responsible for paying these amounts, and the sellers' directors and officers may face personal liability under federal and state wage and hour laws for earned but unpaid wages.
  • WARN Act. The Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide at least 60 days' advance written notice before a mass layoff affecting 50 or more employees. Some states, such as California, have their notification rules. Although these rules may seem simple, a technical analysis is required to determine if previous pre-closing layoffs are counted towards any layoffs that are planned at closing.

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About the Authors:

Daniel Lopez is an M&A and corporate partner in the San Francisco office of Orrick, Herrington & Sutcliffe LLP. He advises private equity funds and private and public companies in the tech, life sciences and energy sectors on strategic transactions, including debt and equity investments, acquisitions and dispositions. Daniel also counsels boards, special committees, investors and other key stakeholders on fiduciary duty, securities law and corporate governance matters. He can be reached through Orrick's website.

Richard V. Smith is a partner in the Silicon Valley and San Francisco offices of Orrick, Herrington & Sutcliffe LLP, and a member of its Global Mergers & Acquisitions and Private Equity Group. He specializes in the areas of mergers and acquisitions, corporate governance and activist and takeover defense. Richard has advised on more than 500 M&A transactions and has represented clients in all aspects of mergers and acquisitions transactions involving public and private companies, corporate governance, and activist and takeover defense. He is the co-author of the 1,500-page book "Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements," published by Bloomberg Law. He can be reached through LinkedIn.

Douglas Mintz is a restructuring partner in the Washington, D.C., office of Orrick, Herrington & Sutcliffe LLP. He has deep experience representing lenders, debtors and official and ad hoc committees. He works primarily with bank and hedge fund investors and co-leads Orrick's hedge fund client initiative. Doug also represents debtors in the energy and technology sectors. He can be reached through Orrick's website.

Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. His focus is on internet, digital media, and software companies, and he was the founder of several internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He is the co-author of the 1,500-page book "Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements," published by Bloomberg. He was also a corporate and M&A partner at the law firm of Orrick, Herrington & Sutcliffe LLP, with experience in startups, mergers and acquisitions, and venture capital. He has been involved in over 200 M&A transactions and 500 startups. He can be reached through LinkedIn.

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