Small Business Law | Law Outside the Box

Questions to ask yourself when preparing a Buy-Sell Agreement

On April 22, 2010, In Small Business Law, By Luke Enno

When considering what you need to include in a buy-sell agreement, ask yourself the following questions:

(1) Who can and cannot buy a departing owners share of the business?

(2) Will a buyout of a departing owner allow for outsiders to buy in or will the buyout be limited strictly to the remaining owners or even just the company itself?

(3) What events can trigger a buy-out? Typical events include death, disability, and retirement but also may include personal bankruptcy and divorce.

(4) How much money will be paid for a departing partner’s share or interest in the business?

(5) How will a buy-out price be determined?

(6) How will financing to pay the departing partner’s share be arranged? Private financing and bank financing are just a couple of options.

Other considerations are important as well. Clauses dealing with covenants not to compete and relating geographic and time limitations may be required. How will existing loans be dealt with if a co-owner leaves the business? And finally, should the buy-sell agreement apply to just the current owners or will it be binding for the life of the business and any new owners that join?

Variations of buy-sell agreements are also available such as an “insured buy-sell agreement.” When a business has an insured buy-sell agreement, triggered buy-out (such as a death), is funded with life insurance on the participating owner’s lives. This ensures that the buy-sell agreement is well funded and guarantees that there will be money if such a buy out occurs.

Finally, if you are thinking about having a buy-sell agreement, this is one area where legal guidance is a strong recommendation to ensure all considerations are included.

Image Credit: © FreeClipartNow.com

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Hiring an attorney – what you need to know!

On March 26, 2010, In Divorce Law, Landlord Tenant Law, Probate in Minnesota, Small Business Law, Wills and Trusts, By Luke Enno

Are you in the process of hiring an attorney? Selecting the right lawyer to represent you is critical to the success of your case. As in any profession, there are good attorneys and not-so-good attorneys. Often an attorney might be good in one particular field but not in another. I happen to have a lot of experience working in estate planning and small business formations. I have no expertise in personal injury or criminal defense however. This is important to know because if you tried to hire me to represent you in a personal injury case, you’re chances of success would be diminished greatly unfortunately.

In 1984, my dad had a significant need for a knowledgeable business attorney to represent him in a major business deal involving tens of thousands of dollars. Rather than selecting an experienced lawyer in that field, he pursued hiring a general practice attorney that really didn’t have the knowledge or expertise to adequately represent him. My dad didn’t know this going in however.

Why?

Because he didn’t ask the important questions about what this attorney knew or didn’t know until after the business deal was done. Unfortunately, it was too late then because the business deal went sour quickly. My dad discovered too late that this lawyer had steered him in the wrong direction on a number of aspects of the business deal which two attorneys informed him subsequently as he was digging out of a deep financial hole.

Here are 10 questions I recommend you asking the potential attorneys you interview:

1 – Can the lawyer provide a free consultation initially? (This gives you the time to ask important questions!)

2 – How long has the lawyer been in practice?

3 – What percentage of the lawyer’s cases are similar to your type of case? (i.e. if you are looking for an attorney to prepare your will, does the lawyer specialize in estate planning or does she primarily focus on family law?)

4 – Can the lawyer provide you with any professional references?

5 – What type of fee arrangement does the lawyer require? (Use this opportunity to negotiate the price!)

6 – Does the lawyer share my values/beliefs? (…if this is a significant issue to you)

7 – Can I feel comfortable working with this lawyer on my case? (If the attorney’s personality is not conducive to your liking, look for a different lawyer.)

8 – Who will be working on my case? (Will it be the lawyer I hire or a paralegal or other attorney?)

9 – How long will it take to complete my case? (Most experienced lawyers can give you an idea)

10 – What are the strengths and weaknesses of my case and what is the likely outcome?

These are all important questions to ask. Are there any other questions you have found helpful to ask when interviewing for an attorney?

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Tagged with: hiring an attorney

Preparing a Business Plan – Avoiding Legal Landmines!

On March 23, 2010, In Small Business Law, By Luke Enno

Most people are familiar with the name Eli Whitney from their history class. Whitney is most recognized for inventing the cotton gin which in essence revolutionized the efficient use of cotton in every day products including clothing. He was also responsible for a number of other inventions and innovations which are still in use today.

What people may not realize about Whitney is how much difficulty he had from a legal standpoint forwarding and protecting his business ideas including the cotton gin. Even in the 1700s, the legal battle for control of his ideas nearly bankrupted him and caused him to lose his business. It is impossible to say to what extent a well-crafted business plan would have done to help Whitney but suffice it to say, advanced preparation can head off potential known legal troubles down the road.

If you are a new business owner with a business idea or invention that you are looking to take to the next level, it is important that you give careful consideration to the legal aspects of your business. Your business idea can be copied or stolen (often without your knowledge) and substantially impair your ability to maximize the profit and use of your idea.

When it comes to working with a great business idea, I always recommend that the inventor of that idea sit down with a knowledgeable business attorney as well as a lawyer well-experienced in the area of intellectual property (patents, copyrights and trademarks) and proactively organize a plan to address potential risks.

I have represented a number of clients that invented or innovated a product only to see a competitor steal the idea and take advantage of that client’s idea. In many cases, had the client taken the time in advance to evaluate the legal considerations, he/she could have stopped the competitor dead in his tracks.

As an entrepreneur, what are some important priorities you have as it relates to your business plan?

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Tagged with: business law • business plan • trademarks

How to hire an attorney

On March 22, 2010, In Divorce Law, Landlord Tenant Law, Probate in Minnesota, Small Business Law, Wills and Trusts, By Luke Enno

Hiring the right attorney can be one of the most important decisions you’ll ever make. Hiring the wrong attorney can result in damaging consequences including excessive fees and failed expectations. With so many different lawyers out there, how do you select the one that meets your needs?

1 – Select a lawyer who specializes in the area of law you need

If you are planning on meeting with an attorney, you should do your homework in advance on that attorney before meeting with him/her. Find out how long he/she has been practicing and in which areas he or she specializes. Note: an attorney who claims to be a generalist may not have as much experience in a particular area of the law. Attorneys who narrow in on 3 or 4 fields of law (out of many) are more likely to have specific knowledge and expertise in those areas which should help you gain better results.

2 – Locate an attorney who can offer a complimentary initial consultation

Most good lawyers will offer to meet with you for a half hour or hour free-of-charge to discuss your case. Take advantage of this opportunity and bring your questions in writing as well as important documents relevant to your case. The more focused you are at the initial meeting, the quicker the attorney can provide you with guidance as to your options.

3 - Negotiate the price

Many times, the price an attorney quotes you is negotiable. If it isn’t, they’ll let you know! In particular areas of the law, you can flat fee services (estate planning, business formation). In other areas of the law, you may be able to hire the attorney on contingency (lawsuits, personal injury cases). If you don’t ask though, you’ll not know and you’ll end up taking the price the attorney quotes or else receive a surprise bill after the work has begun! This is also an opportunity to have the attorney ballpark the final price tag for you and have all of this executed in writing. Getting it in writing helps you manage your financial expectations as well!

What have you found helpful in hiring the right lawyer?

Image Credit: © FreeClipartNow.com

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Tagged with: hiring an attorney • initial consultation

How to draft a contract

On March 16, 2010, In Small Business Law, By Luke Enno

Drafting a contract can be a difficult process because there are so many different types of contracts out there. Many times, contracts call for specific requirements laying out the rights and responsibilities of the parties that are involved. If you are considering how you should draft a contract, bear in mind the following considerations:

1 – Properly identify the parties to the contract

This goes without saying you tell me. However, I cannot tell you how many times I’ve witnessed improper parties listed on a contract. If you own an LLC for example and your LLC is involved in a business deal, don’t list yourself as the party to the contract. That is the purpose of your LLC. Make sure to identify the business entity exactly as stated in your Articles of Incorporation.

2 – Carefully detail the price of the contract

More often than not, the prices the parties think they are agreeing to is the number one cause for lawsuits. One party says that the price was $10,000. The other party says it was $5,000. Listing the price sounds like a simple clause to include in the contract. But so often it is one important detail that gets missed. Be clear on any monetary exchanges.

3 – Carefully detail the timeline to perform the contract

Again, this is a common area for misunderstanding down the road. One party believes the contract is going to be performed in 6 months. The other party thought they had a year to complete performance. Laying out a timeline under a contract is essential to reducing confusion.

4 – Plan for uncertainties

What if one of the parties fails to pay under the contract? What remedies does the other party have? What if one of the parties dies before the contract is complete? Bankruptcy? Divorce? Excess time? Excess cost? A move? Contingencies are important to include in any well-written contract.

5 – All parties must sign and date the contract

It makes the contract much more difficult to enforce when one or more parties doesn’t sign the contract. I have handled numerous lawsuits involving an unsigned contract and an unsigned contract is no more enforceable than an oral contract. He said. She said.

In your experience preparing contracts, what terms would you recommend including in any contract?

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Tagged with: contracts • drafting a contract agreement • preparing a contract agreement

How to form an LLC

On March 15, 2010, In Small Business Law, By Luke Enno

How to form an LLC in 4-easy steps. In Minnesota, the process of forming an LLC is similar to most other states. When deciding how to form an LLC, you will want to start by preparing the following documents:

1 – Articles of Organization

The Articles of Organization are the foundation of your LLC. The Articles are basic in nature but their effect is to communicate to the world that your LLC is a legally-recognized business entity. Once filed, the Secretary of State issues a Certificate of Organization.

2 – Bylaws / Operating Agreement

Like a rulebook for the NBA or NFL, the Bylaws of an LLC serve as the rulebook for your LLC. They give meaning by defining broadly who an owner is (and is not), who an officer/manager is (and is not) and how your business will be run.

3 – Organizational Minutes

The Organizational Minutes are the formal adoption of the Articles and the Bylaws and also attach specific names to various roles in the LLC. As things change in your LLC, updated versions of Minutes can then be prepared to reflect such changes.

4 – Membership Units

Membership Units are akin to stock certificates. They reflect in writing ownership by an individual.

If you are forming an LLC with one or more business partners, you are strongly advised to also prepare a Member-Control Agreement (i.e. Buy-Sell) and/or Partnership Agreement that lays out the relative rights and responsibilities of each of the owners to each other and the LLC itself.

If you are going to operate under an Assumed Name, you will want to file appropriate documentation and connect that Assumed Name (D/B/A) to the LLC.

If you’ve experienced forming an LLC, are there any other considerations that you would recommend a new business owner take into account?

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Tagged with: articles of organization • bylaws • forming an llc • organizational minutes

Why lawyers should be scared of companies like LegalZoom

On March 10, 2010, In Small Business Law, Wills and Trusts, By Luke Enno

Today, I read an excellent article on MyShingle.com. In the article, the author described many of the challenges to the legal profession that come with online do-it-yourself companies like LegalZoom. I’m regularly asked by clients and prospective clients why they shouldn’t just use a company like LegalZoom to prepare their Will or other legal documents. The answer to that question isn’t always easy. But here are some of my thoughts on the matter:

One of the key challenges that I see in the legal profession is finding a way to offer value-added service to the client while still providing a fair and reasonable price. Many people are afraid of lawyers because of the perception that they are going to overcharge them or else bill them an excessive rate for the relative amount of work that is done. In a fair number of cases, those fears are justified. From this perspective, a compassionate lawyer needs to recognize this perception and do his/her best to alleviate such concerns.

Although this is a bit of a generalization: a trained monkey can crank out a form such as a Will. The real value of a lawyer in an estate planning context for example, is to work with the client and help the client see the whole picture. In this process, a good lawyer will educate the client on a practical level that they can relate to and understand. When a client is educated, they are empowered and quite often they will come to appreciate the value of hiring a good attorney.

Hopefully, as companies like LegalZoom compete for clients, the perception of stuffy, emotionless and aloof lawyers will begin to melt away and start changing to a paradigm of approachable (and knowledgeable) attorneys who have their client’s interests first at heart. This is what the client wants and expects!

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Tagged with: hiring an attorney • perceptions of law

Why you should think twice before collecting bad debt in small claims court

On March 8, 2010, In Small Business Law, By Luke Enno

If you’re a small business owner, you’ve probably faced a situation where a customer or client has failed to pay some or all of the money owed to you. In a situation like this, perhaps you’ve hit a dead-end in terms of finding options to collecting that bad debt and now you have decided to take the matter to small claims (a.k.a. conciliation court).

Before filing a case in small claims court, there are three things you should know about small claims court that might affect whether it makes sense for you to file:

(1) You can only sue up to $7500 in conciliation court.

Thus for example, if your delinquent customer owes you $9000 and you choose to file the case in small claims court, you are barred forever from collecting the $1500 difference in any court regardless of the outcome in small claims court.

(2) It is very difficult to collect on a conciliation court judgment

A high percentage of debtors know that a conciliation court judgment does not guarantee payment. Usually, you are much better off reaching a written settlement with the debtor before taking the matter to court.

(3) Even if you win in conciliation court, the other party may have a right to appeal, resulting in a “do over”

Many times, I have seen clients that won in conciliation court only to witness the other party appeal the case to district court. In district court, it is like the case is brand new and you have to start all over again. It makes no difference that you won in conciliation court!

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Tagged with: conciliation court • small business owner • small claims court

Protecting your business with a subcontractor agreement

On March 3, 2010, In Small Business Law, By Luke Enno

As a business attorney, I have represented a number of contractors in legal disputes involving other contractors. Generally, this is seen in the construction industry. A general contractor hires a subcontractor on a handshake. Something goes wrong. Someone isn’t paid. A misunderstanding happens. Suddenly, the parties aren’t on such good terms.

I can tell you based on experience that legal disputes (usually in the form of a lawsuit) can be 20-30 times as costly as having a simple written subcontractor agreement in place. A written subcontractor agreement is not a cure-all by any stretch. But it can significantly reduce the likelihood of a lawsuit, thereby saving the contractor time and money.

Legal Tip 1: A well-written subcontractor agreement can save your business

In 2008, I represented a subcontractor who had been in the construction business for a number of years. His company was involved in a nasty lawsuit involving a disgruntled general contractor that had an ax to grind. Because there were no written agreements anywhere, it was one man’s word versus another. My client spent thousands and thousands of dollars in three different court cases defending his business against this general contractor’s allegations. In the end, it was not enough and it just didn’t make sense for my client to continue his business. And so he folded shop.

Legal Tip 2: A well-written subcontractor agreement does not need to be expensive

I can say without question that if a subcontractor agreement had been in place, this result would not have happened. In most cases, a knowledgeable attorney can prepare a good subcontractor agreement to meet your state’s requirements in as little as an hour or two. If you’re in a situation where you have been operating on a handshake, it may be time to rethink that strategy before it’s too late.

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Tagged with: independent contractor agreement • protecting your business • subcontractor agreement

Is a Handshake Agreement Enough to Protect You?

On February 22, 2010, In Small Business Law, By Luke Enno

In my time as a business attorney, perhaps the worst legal situation I have seen involved a business partnership that failed to have a written Buy-Sell Agreement.

About three years ago, Alvin and Harvey (not their real names!) came into my office to discuss a new business idea they had. Alvin was going to supply all of the capital (around $120,000) and Harvey was going to provide most of the sweat equity. They wanted to know what they needed to do in order to protect their individual interests.

Right away, I mentioned that a Partnership Agreement and a Buy-Sell Agreement seemed appropriate because these agreements would address their rights as those rights related to each other. Alvin and Harvey seemed interested but they did not commit to hiring me to help them with this.

Six months later, in a dire emergency, Alvin gave me a call. He said that they had gone ahead with their plans to start the business soon after leaving my office. They still figured a handshake agreement was sufficient since they trusted each other as friends. Harvey hadn’t been on the level however. Within a few weeks after starting to work together, Harvey had been using large chunks of the money on aspects of the business that Alvin believed amounted to gambling.

Alvin didn’t agree with the direction the business was going and he wanted out immediately. But Alvin didn’t know what to do. Unfortunately, in this case, Alvin’s options were limited.

A Buy-Sell Agreement allows a partner the opportunity to sell his interest in the business if he wants out. In Alvin’s situation, he was forced to pursue his business partner in a costly, time-consuming lawsuit in order to exit. The lesson I use from what happened to Alvin is simple: having written agreements in place makes good sense because handshake agreements are very difficult to enforce.

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Tagged with: business partner • business partnership • buy sell agreement • handshake agreements • partnership agreement

Law Outside the Box

Small business and estate planning legal information for the rest of us

Questions to ask yourself when preparing a Buy-Sell Agreement

Hiring an attorney – what you need to know!

Preparing a Business Plan – Avoiding Legal Landmines!

How to hire an attorney

How to draft a contract

How to form an LLC

Why lawyers should be scared of companies like LegalZoom

Why you should think twice before collecting bad debt in small claims court

Protecting your business with a subcontractor agreement

Is a Handshake Agreement Enough to Protect You?

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Small business and estate planning legal information for the rest of us

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