6 Questions You Need Answered by Your Potential Attorney:

1. Are you experienced? Don’t be afraid to ask direct questions about a lawyer’s experience. If you know you want to incorporate your business, for example, ask if he or she has ever handled an incorporation.
2. Are you well-connected? Your business attorney should be something of a legal “internist”–one who can diagnose your problem, perform any “minor surgery” that may be needed, and refer you to local specialists for “major surgery” if needed. No lawyer can possibly know everything about every area of law.

   If your business has specialized legal needs (a graphic designer, for example, may need someone who is familiar with copyright laws), your attorney should either be familiar with that special area or have a working relationship with someone who is. You shouldn’t have to go scrounging for a new lawyer each time a different type of legal problem comes up.

3. Do you have other clients in my industry? Your attorney should be somewhat familiar with your industry and its legal environment. If not, he or she should be willing to learn the ins and outs of it. Scan your candidate’s bookshelf or magazine rack for copies of the same journals and professional literature that you read.

   Be wary, however, of attorneys who represent one or more of your competitors. While the legal code of ethics (yes, there is one, believe it or not) requires that your lawyer keep everything you tell him or her strictly confidential, you do not want to risk an accidental leak of sensitive information to a competitor.

4. Are you a good teacher? Your attorney should be willing to take the time to educate you and your staff about the legal environment of your business. He or she should tell you what the law says and explain how it affects the way you do business so that you can spot problems well in advance.

   The right lawyer will distribute such freebies as newsletters or memoranda that describe recent developments in the law affecting your business.

5. Are you a finder, a minder or a grinder? Nearly every law firm has three types of lawyer. The “finder” scouts for business and brings in new clients; the “minder” takes on new clients and makes sure existing ones are happy; the “grinder” does the clients’ work.

   Your attorney should be a combination of a “minder” and a “grinder.” If you sense that the lawyer you are talking to is not the one who will actually be doing your work, ask to meet the “grinder,” and be sure you are comfortable with him or her.

6. Will you be flexible in your billing? Because there is currently a “glut” of lawyers, with far too many practicing in most geographic locales, lawyers are in a position to have to negotiate their fees as never before, and it is definitely a “buyer’s market.”

   Still, there are limits–unlike the personal injury lawyers who advertise on TV, business lawyers almost always will not work for a “contingency fee,” payable only if your legal work is completed to your satisfaction.

Most lawyers will charge a flat one-time fee for routine matters, such as forming a corporation or LLC, but will not volunteer a flat fee unless you ask for it. Be sure to ask if the flat fee includes disbursements (the lawyer’s out-of-pocket expenses, such as filing fees and overnight courier charges), and when the flat fee is expected to be paid. Many attorneys require payment of a flat fee upfront, so that they can cover their out-of-pocket expenses.

You should always ask to “hold back” 10 to 20 percent of a flat fee, though, in the event the lawyer doesn’t do the job well.

Lawyers will be reluctant to quote flat fees if the matter involves litigation or negotiations with third parties.

The reason for this is bluntly stated by a lawyer friend of mine: “Even though it’s a transaction I’ve done dozens of times, if the other side’s lawyer turns out to be a blithering idiot who wants to fight over every comma and semicolon in the contracts, then I can’t control the amount of time I will be putting into the matter, and will end up losing money if I quote a flat fee.”

In such situations, you will have to pay the lawyer’s hourly rate. You should always ask for a written estimate of the amount of time involved, and advance notice if circumstances occur that will cause the lawyer to exceed his or her estimate.

If a lawyer asks you for a retainer or deposit against future fees, make sure the money will be used and not held indefinitely in escrow, and that the lawyer commits to return any unused portion of the retainer if the deal fails to close for any reason. You should be suspicious of any lawyer who offers to take an ownership interest in your business in lieu of a fee.

It’s commonly said that business valuation is more art than science. If this is true, then the practice of valuing a start-up business is squarely in the domain of the artist.

Nevertheless, entrepreneurs need to put a value on their start-ups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of start-up valuation.

1. You are what the market says you are. If investors are telling you that your start-up is worth $1 million, then that’s what it’s worth. You might think it’s worth more. You might even know it’s worth more because your company may have more than $1 million is liquid assets, or more than $1 million in receivables, or more than $1 million in sweat equity. But if you’re unable to raise money for your start-up with a valuation above $1 million, then you’ll have to accept the market valuation.
2. But you can also tell the market what you’re worth. Although this might seem to contradict the point made above, it’s possible to tell the market how to value your company. After all, if investors think your start-up is worth $1 million, it’s usually because of something you’ve told them. By definition, start-ups don’t have a history of financial performance on which to base a valuation. Therefore, it’s up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.
   • Comparables: Find out how much similar companies in your industry and geography are worth. You can use sites such as BizBuySell and BizQuestto determine how much businesses are selling for in your industry. If you have a high-tech or high-growth start-up, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage. In my experience, attorneys tend to overvalue star-tups, and accountants tend to undervalue start-ups, so you may want to talk to both before making a decision.
   • Financial forecasts: Although it’s notoriously difficult to forecast revenue at a start-up, you’ll need to do this to determine value-and eventually to defend your valuation. For example, if you’re starting a pet food store, your valuation and financial projections will likely be lower than if you’re starting a speculative biotechnology firm.
3. You’re not really worth anything until you’re profitable. If you’re not profitable, your business probably isn’t worth very much. That is, it doesn’t have as much liquidity as it would have if it were profitable. Many businesses cannot be sold, since there aren’t enough business buyers for every seller. Almost all unprofitable businesses cannot be sold for the same reason.

This makes valuation particularly challenging for a start-up. Since young businesses take time to become profitable, the trick of valuing start-ups is to focus on the future. First, determine how many years it will take to be profitable. A business with a long road to profitability will usually be worth less than one with a quick path to profitability. Next, determine how much comparable companies have been valued at when they reached profitability.

A company that could be worth $5 million at profitability will be worth some fraction of that number at the start-up stage, based on factors such as the likelihood of success, the time frame to exit and the quality of the management team.

It’s easy to get caught up in the excitement of valuing your company at the highest amount possible and forget that you’ll one day have to deliver on the expectations of investors. It’s also tempting to adapt your business model to maximize start-up valuation.

Be careful about overvaluing your start-up with faulty assumptions; it will only make your life more difficult-particularly if your investors have governance rights, such as positions on the company’s board.

Much like artists, entrepreneurs need to use creativity in valuing their start-up businesses. Traditional approaches to valuation based on book values and P/E ratios are akin to painting by numbers. If you want your start-up to be a masterpiece, you’ll need to use the right side of your brain as much as your left to determine value.