B U S I N E S S O P E N E S S O P E R A T I O N S B I O N S B A S I C S : C S : M I T M I T I G A G A T I N G R I S K N G R I S K S A N D L I A B I S A N D L I A B I L I T Y R O R O B E R T R T E E . H H A U B E R G E R G , J J R . B A K B A K E R D O N E L R D O N E L S O N O N J U L J U L Y 2 0 , 2 0 2 0 , 2 0 1 7 M A D I S O M A D I S O N , N , M S M S
ASSESSING RISK What is your busi What is y ur business endgame? ness endgame? Build up the com Build up the compan any and sell and sell it it • Cont Continue t to o own and manag n and manage com company f for the long t r the long term rm • Think strat ink strategically – gically – not just f ot just for this y r this year ar If o If overly aggres erly aggressive, will there be , will there be collat collatera ral conseq l consequences, pressure t uences, pressure to t tolerat lerate risk risk • If selling the com If selling the compan any, ho how will acq w will acquirer’s irer’s due diligen due diligence and its o e and its own t n toleran lerance f e for r • risk risk af affect the lik ct the likelihood or t lihood or terms rms of a of a deal deal Lack of com Lack of compliance creat liance creates added risk added risk • 2
CAPITAL AND OPERATING INCENTIVES AND RISKS As o As owner, ho how will w will R&D and daily operation R&D and daily operations be be funded? funded? Are there st Are there stockholder ockholders or o or other par her partner ners? ? Ho How transparent will w transparent will finances and operations be? nances and operations be? What rights will What rights will minority shareholder minority shareholders ha have? To inspect the books and inspect the books and recor records • To be treat be treated f d fairly in valuing irly in valuing the co the comp mpany, e especially w when c comp mpany i is s sold • Recour course t se to direct litigation f direct litigation for f r faulty ulty valuation valuation / lack of / lack of business judgment business judgment / / • oppression or oppression or “unf “unfair prejudice” air prejudice” Use Use of derivativ of derivative litigation t litigation to reco recover f r for the com r the compan any f y for negligence, breach r negligence, breach of duty of duty, , • breach breach of trust b of trust by direct director ors Avoid “ “robbing Pe Pete ter to to p pay P Paul” Be Beware re falsifying re lsifying revenue nue or or expenses t penses to sho show a a bett better er bo bott ttom line om line • Hire good Hire good accountant accountant • 3
TAX ISSUES IN OPERATIONS Be Beware obligati re obligations t ons to pa pay em y emplo ployee benefits and tax ee benefits and taxes – es – healthcare, ealthcare, • social social security deducti security deductions ns Incentiv Incentive ma e may be t y be to postpone pa postpone paying ying, in , invest no st now in R&D or w in R&D or expansion, pansion, • and hope t and hope to mak make it up it up by end of th end of the tax y e tax year so ar so pa payment yment can f can final nally be y be made made Risk becomes one of tax e Risk becomes one of tax evasion and IRS penalties asion and IRS penalties • 4
SETTING INTERNAL POLICIES AND COMPLIANCE Int Internal Structure rnal Structure 1. HR Policy and reporting mechanism 2. Compliance Plan a. Tone at the top b. Training 1) In person 2) Electronically c. Conformance to regulatory standards/audits if in a regulated industry d. One size does not fit all e. Benefits outweigh costs 1) Reputational damage 2) Sentencing Guidelines reduction in corporate fines 5
SETTING INTERNAL POLICIES AND COMPLIANCE (CONT.) 3. Reporting to Compliance Officer/Inside Counsel/Board Committee/Supervisor a. Hot-line/anonymity b. Non-retaliation c. Information flow to avoid whistleblower going public d. Investigatory / disclosure process 6
CONTRACTING WITH THE GOVERNMENT Risk Risk in Obtai in Obtaining Cont Contract ct 1. 1. Stat State Pr e Procur ocurement ement Pr Process ocess a. Avoid pay for play b. Bids versus sole source contracts c. 2017 change in procurement process in Mississippi 2. 2. Federal Pr deral Procurement Pr ocurement Process ocess a. Federal Acquisition Regulations (FAR) b. Military (DFARS), Civil (GSA), Healthcare (CMS) c. Truth in Negotiations Act 1) Skill required 2) Labor costs and other expenses 3) Defective pricing 7
CONTRACTING WITH THE GOVERNMENT (CONT.) a. Procurement Integrity Act 1) No sharing by government of bid information 2) No collusion among bidders b. SBA minority §8 contractor and SBIR awards c. Fed Biz Opps notice 3. 3. Operat Operational risk ional risk a. Pricing b. Allocating costs to correct project, line items c. Failure to provide service, compliant goods 4. 4. Risk Risk of Cancella of Cancellation on of Cont of Contract (t (termi erminati tion f on for con r conveni enience/cau e/cause), e), recoup recoupmen ment b by go governm rnment nt, litigati , litigation under f on under federal F deral False Claims Act lse Claims Act 8
EXAMPLES OF RISK IN OPERATIONS EMPL EMPLOYEE EE SELF- SELF-DEALING EALING 1. Combating embezzlement/theft of equipment a. Double person check approval b. Alternate vacation times for authorizers c. Warehouse surveillance 2. Avoiding employee kickbacks – frequency of bids 3. Keeping receipts for all expenses – avoid cash only transactions for tax audits 9
EXAMPLES OF RISK IN OPERATIONS VENDO VENDOR/ R/SUPPLIE PPLIER RELA R RELATI TION ONS 1. Collus Collusion on among among v vendors ndors a. Identity of bids b. Alternating/rotating bids c. Territorial restrictions on service/delivery 2. 2. Self-dealing b Self-dealing by em emplo ployees ees a. Pay to play required of vendors b. Uncharged service/supplies for employees personally c. Refunds to employees off-book 10
VENDOR/SUPPLIER RELATIONS (CONT.) 3. C Cheating eating by supp supplier liers a. Mislabeling b. Shorting c. Substitution of untested or defective equipment/parts 4. 4. Mischargi Mischarging a. Booking sales before delivery to enhance quarterly/annual revenues b. Allocating to wrong department/budget item 11
EXAMPLES OF RISK IN OPERATIONS THE THEFT OF TRADE OF TRADE SECRE SECRETS TS/INTELLECTU NTELLECTUAL PR L PROPERT OPERTY 1. 1. Pr Prot otect ect inno innovations with p tions with patents an nts and trademarks d trademarks 2. 2. Keep confiden eep confidential so al so la label bel restr restricti ction as such n as such 3. 3. Set limit on what Set limi on what depa departing em emplo ployees ees can tak can take with them with them 4. 4. Pr Prom omptly asser ptly assert rights rights if com if compromi mised 5. 5. No Notice una ce unapproved/ ed/unlicensed use d user t to cease and desi cease and desist 6. 6. Threat Threaten litigation en litigation 12
EXAMPLES OF RISK IN OPERATIONS WORKPL PLACE SAF E SAFET ETY/ENVIR Y/ENVIRONMENT ONMENT 1. 1. Key En y Envir vironment nmental R l Regulation gulations A s Affecting B cting Business O siness Owners a. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA): 1) Hazardous substances released into the environment 2) Liability of purchaser, existing owner 3) Phase I conducted to earn defenses and limit liability b. Clean Water Act: 1) Storm water runoff from construction projects 2) Disturbance of wetlands in property development c. Resource Conservation and Recovery Act (RCRA): 1) Solid waste and underground storage tanks 13
EXAMPLES OF RISK IN OPERATIONS WORKPLACE SAFETY/ENVIRONMENT (CONT.) 2. 2. Agencies encies which ins which inspec ect/i t/invest stigat ate a. OSHA – construction/workplace accidents, equipment safety b. EPA/MDEQ – underground storage tanks, leaking chemicals, discharges into waterways, medical and other hazardous waste c. NTSB/MDOT – delivery vehicle accidents, 18 wheelers to railroad cars 14
DEALING WITH ENFORCERS AND WHISTLEBLOWERS 1. 1. Inspecti Inspections/ ons/audi udits a. Licensing agencies b. Loan/grant programs c. Safety/environmental checks 2. 2. Sear Search W ch Warran rrants/subpoen oenas a. Have protocol/training in place in advance b. Cooperate, do not obstruct or destroy documents c. Issue freeze memo, explanation of rights/obligations to employees 3. 3. Whist Whistleblo eblowers a. Resist firing, reassign laterally instead, avoid obvious retaliation b. Learn what details are from whistleblower c. Prepare internal investigation report if enforcers have been informed d. Sometimes voluntary disclosure to enforcer will mitigate e. Incentives to whistleblowers – False Claims Act, IRS, SEC 15
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