No Funny Lawyers

The Four Types of Business Buyers. Part 2: Financial Buyers

noreply@blogger.com (Jim Thomas) — Tue, 11 Sep 2012 14:52:00 +0000

Financial buyers have been big news lately—one in particular—but not because of deals they are doing to buy moderate-sized, privately held companies (read: human owned). In fact, financial buyers have been relatively quiet in that respect. Politics, not business, has put the spotlight on them.

Private equity funds, such as those run by Republican presidential nominee Mitt Romney’s Bain Capital, are financial buyers. My focus is how they operate, not the taxes they pay, because barring some major legal changes, private equity buyers are here to stay and one could well be the buyer of your business. Upwards of one trillion dollars is purportedly sitting in private equity funds, awaiting deployment as investments in other companies.

A typical fund controls millions of dollars. Its managers are looking for industries with significant growth potential and companies that provide the opportunity to create value for the fund’s owners. The fund may invest as a minority owner in a business, but most often, and my subject today, the fund will buy a majority of a company typically using some of its own and a significant chunk of borrowed money secured by the assets of the company it just acquired.

The financial buyer’s objective is to improve the target company’s performance so that it can sell the business (to a strategic buyer or another financial buyer) or take it public, in either case at a significant profit in three to five years. This focus means that financial buyer must be able to see a clear path to that result, it will not be swayed by the long-term potential of your business, and it will be very careful not to overpay for your company. This usually means the financial buyers will drive a harder bargain than the strategic buyers discussed in my first post in the series. This does not, however, mean that a deal from a financial buyer will ultimately be less desirable than that from a strategic. It only means that you and your financial and legal team have to work that much harder to evaluate the different offers.

A financial buyer rarely buys 100% of a private company. In many cases, some or all of the original owners will stay on as minority owners and as part of their management team. So, as closely as a financial buyer is evaluating you, you need to evaluate them. The value of your retained interest and your sanity is at stake. I’ll illustrate my point with two stories of companies I helped sell to financial buyers.

In both cases, my client, the original owner retained about 30% of the company, in one case the retained interest was equity; in the other, the retained interest was a combination of equity and subordinated debt (meaning that my client was paid only after the commercial lenders to the buyer were paid). In both cases, my client stayed on as part of management, but in a role that answered to managers brought in by the private equity firm.

I hardly heard from the first client after the sale until a few years later when the private equity firm sold the business it had bought from him. He told me he was making more money selling the retained 30% than he had from the original 70%. That’s the kind of picture-perfect ending that the private equity guys pitch when they talk to sellers. My second client, however, wasn’t so lucky.

From almost immediately after closing, my second client struggled answering to a bunch of “wet behind the ears” MBAs whom he thought knew nothing about the relationships with customers and suppliers that made the business successful. He complained bitterly that his formerly debt-free company was struggling with the debt the buyer had loaded on it.

Some business owners don’t do well when they aren’t the boss, so they aren’t the best candidates for private equity deals, but maybe my client was also on to something, because the business performed poorly as part of this private equity portfolio. After a number of challenging years, which included disputes with his “partners” and a couple difficult refinancings of the commercial debt, my client parted ways with the company he founded, getting almost nothing for his retained interest.

The lesson I hope you learn here is two-fold. First, be sure your after-tax proceeds from the initial sale are sufficient to meet your minimum goals for a sale and don’t leave you overly reliant on the financial buyer’s management of your former company. Second, pick your financial buyer carefully. Follow the link to a good New York Times piece on the due diligence you need to do.

Labor Day, the Bittersweet, Confused Legal Holiday

noreply@blogger.com (Jim Thomas) — Mon, 03 Sep 2012 14:03:00 +0000

Summer's over. That's the bittersweet meaning most people put to this legal holiday. The confused part comes from the word "Labor." Beyond the oxymoron of a day off to celebrate work, many still associate the day with unions, when the focus is much broader: the work and workers that are the engine that powers our economy.

The U.S. Department of Labor tells us that Labor Day “is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.” The DOL doesn’t tell us that Labor Day was rushed through Congress by President Grover Cleveland to appease America’s labor movement a mere six days after his controversial use of federal troops forcibly ended the bloody Pullman strike that paralyzed rail traffic, and thus the country, during the summer of 1894.

Cleveland’s gesture didn’t work for him—his Democratic party was slaughtered in the 1894 midterm election—or help the labor movement that much either. Many needed reforms, such as reasonable working hours and safe working conditions, now taken for granted, would not be enacted for decades--decades that would include the infamous Triangle Factory fire and Colorado’s own Ludlow Massacre.

The Labor Day holiday illustrates that while the pace can be slow our country does eventually do what needs to be done. Election-year finger pointing aside, what if, instead, we focused on the changes We the People can create without the politicians?

There are over 30 million human-owned businesses in our America. If only five percent of us (that 5% includes you and me, right?) committed to hiring at least one new employee before New Year’s Eve, together we’ve created at least 1,500,000 new jobs. All those new jobs means more business for all of us. Then maybe the politicos and the rest of the country will get the message and follow along.

So enjoy a day off, and then get back to the labors that made America great.

I close with my traditional photographic farewell to summer.

a blogger and his mom

The Four Types of Business Buyers. Part 1: Strategic Buyers

noreply@blogger.com (Jim Thomas) — Thu, 16 Aug 2012 15:46:00 +0000

News of a strategic buyer acquiring a string of Colorado businesses spurred me to end this blog’s summer break and to help human-owned businesses understand the distinctions among possible buyers of such companies. Business buyers are often described as “strategic,” “financial,” or “entrepreneurial,” and the differences between the three result in important implications for prospective sellers. This four-part series will explore these three profiles and one more, the related-party buyer. This series draws heavily on some great thinking and advice my partner Ned Minor gives in his book “Deciding to Sell Your Business.”

You will jump through many hoops when you sell your business. It helps to know which ones are important.

A “strategic buyer” comes from the pool of companies that conducts business, directly or indirectly, in your industry. Any business that sells goods or services to your industry, distributes your industry’s products, or provides financing to your industry is a possible strategic buyer. Of course, your direct competitors may be the most important group of strategic buyers.

The strategy that drives a strategic buyer to acquire a particular business changes from buyer to buyer, deal to deal. Here’s a list of some of the most common strategies:

Increase revenues;
Diversify revenues;
Reduce competition by acquiring a competitor;
Reduce competition by acquiring a business before a competitor can;
Increase market share;
Economies of scale;
Expand into a particular market segment;
Expand into a new geographic market;
Secure a specific location;
Open up strategic alliances;
Protect or enhance a supply chain; and
Enhance growth opportunities for employees.

Strategic buyers have dominated mergers and acquisitions, lately, since they often use their own cash to make acquisitions. Financial and entrepreneurial buyers typically rely on the leverage of credit to make their deals happen. With the credit markets yet to recover fully from the Great Recession, in some markets, those buyers have been sidelined or put at a significant disadvantage relative to strategic buyers.

More often than not, a strategic buyer will pay a higher purchase price than a financial or entrepreneurial buyer. There are several reasons for this. Strategic buyers compare the cost of purchasing your business to the cost of starting a business in your area and competing head to head against you. The strategic buyer knows your industry and may be willing to pay a premium because it understands the opportunities, dangers, pitfalls, market conditions, and trends in the industry. Because strategic buyers understand the risks, they can also be more flexible when it comes to negotiating indemnifications in the sale transaction.

The potential for financial and operational synergies is another strong motivator for strategic buyers to pay more for your business than financial buyers, entrepreneurial buyers, or related parties. Strategic buyers can cut costs, eliminating areas of duplication. For example, once the post-closing transition phase is complete, your controller may be looking for a new job. Most strategic buyers already have strong accounting/financial departments in their home offices. The strategic buyer may consolidate multiple locations, thus saving significant rental expense. Some strategic buyers may stop doing business with smaller, lower margin customers in order to improve their profits.

You need to think carefully before talking about a deal with a competitor. Antitrust laws may make add challenges and costs to closing the deal. Confidentiality will be key, especially since industry rumor mills wreak havoc on employees, customers and suppliers by spreading premature, or downright false, information about negotiations. But most critical of all, if the transaction fails to close, the competitor will know everything there is to know about you, giving it an unfair advantage. A good transaction attorney can help minimize this risk with a well-crafted nondisclosure agreement, as well as carefully timed, and structured, responses to the buyer’s due diligence requests.

One fundamental principle applies to all buyers, but especially to the strategic buyer. No matter how successful you are, your strategic buyer believes he is smarter than you, knows your industry better than you do, and can make more money running your business than you can. The challenge for you, and for your transaction attorney negotiating the sale, is to make that strategic buyer pay a premium for the opportunity to prove just how smart he really is.

The Blessing of Opportunity, the Independence Day Legal Holiday (Rodeo Style)

noreply@blogger.com (Jim Thomas) — Wed, 04 Jul 2012 13:55:00 +0000

Happy Independence Day 2012. Simply calling this "the Fourth" misses the point. Today’s legal holiday exists not only to mark a legal event, the formal adoption of Thomas Jefferson’s eloquent Declaration, but as a time to reflect on the many blessings we share as Americans.

Before I was a lawyer, I had the best job in the world; I was a member of the Philmont Staff.

Philmont, I should add for my non-Scouting readers, is the premier High Adventure camp of the Boy Scout of America, each summer attracting thousands of young men and women for backpacking and unforgettable experiences. My own experiences at Philmont, located in the Sangre de Cristo range of the Rocky Mountains in northern New Mexico, are directly responsible for my decision to make Denver my home.

Before meals, I, my fellow staffers and the campers and Scout leaders across "the Ranch" would stop and say the Philmont Grace:

For food, for raiment,

For life, for opportunity,

For friendship and fellowship,

We thank Thee, O Lord.

My many summers at Philmont bound me to those words forever. The fact that my daughters picked it up at a Staff reunion and now say it at many evening meals gives me further opportunity to reflect on the grace.

The campers will say these words before their meals, mostly without any more thought than other public blessings. But there, in the middle, two phrases after "for raiment" (which admittedly made a few stop and ask its meaning--clothing), is a reminder of the definitive blessing of this day, of our independence: opportunity.

Images of friends from the Philmont Staff in 1980 and 1981 enjoying their day off (most of the Staff was not so lucky, Philmont is a 24/7 operation) at the annual 4^th of July Maverick Rodeo in the nearby village of Cimarron, New Mexico illustrate this year’s Independence Day post.

My former series on our legal holidays (they’re all here, if you are curious; try Columbus Day if you are really curious) was my request that we not forget why we celebrate. Independence Day is one of the few that I still come back to year after year. While this holiday is easy on the surface, even young children understand a birthday party, the gifts received at that party are also easy to overlook. So it’s time to write some thank you notes. Happy Birthday to us, Americans. We’ve received that greatest gift of all—opportunity.

It is worth reading or hearing (the annual reading on National Public Radio is one of my favorite traditions) the Declaration from time-to-time if only to remind ourselves of the mutual pledge of our Lives, our Fortunes and our sacred Honor, with a reliance on the protection of divine Providence, that was made to give birth to our country.

Should we expect to sustain it with less?

Quick Bites - June 1

noreply@blogger.com (Jim Thomas) — Fri, 01 Jun 2012 21:47:00 +0000

2012 may be the year to sell your business. Don't push the compensation envelope too far (down for S corps or up for C corps). Ways to successfully use storytelling in B2B social media.

Can you afford to wait to sell your business?
By: Scott Greiner, Denver Business Journal

Business owners must think about possible tax law changes when thinking about selling their business. The tax increases that are currently slated for 2013 will more than offset likely growth in many companies.

“Now it’s 2012: Credit is freeing up, those recessionary fears have subsided and recent statistics reveal valuation multiples in Q4 2011 were as high as those in the peak of 2007, and are expected to remain that way throughout 2012. What do you do: Sell or wait some more?”

Small “S” corporation owners: Watch your wages

By Maureen Eldredge, ColoradoBIZ Magazine

A reminder of the pig rule - pigs get fat, hogs get slaughtered. Pay yourself a reasonable wage.

“The IRS is concerned that some “S” corporation owners will set artificially low wages to take advantage of the savings and reduce their payroll tax obligations. IRS regulations therefore require that “S” corporation shareholders who provide employment-type services to the company they own pay themselves “reasonable compensation” based on market rates for similar jobs in the area.”

4 Ways to Use Storytelling for B2B Social Media

By Jeffrey L. Cohen, Social Media B2B

People like stories. Use storytelling, not promotions, in social media to better connect with your customers and prospects.

“B2B companies who embrace social media to connect with prospects and customers need to understand storytelling as a means for communication. No one wants to hear about your products. They want to hear about solutions to their problems.”

It's my birthday - a quick bite for me!
Photo by: Megan Duggan

Memorial Day, 2012

noreply@blogger.com (Jim Thomas) — Mon, 28 May 2012 13:39:00 +0000

With few words and a handful of photographs from a recent family vacation, on Memorial Day in 2009 I published the first of what would become a series of posts on our nation’s legal holidays. My thought was that some reflection on the why of our holidays was a good thing.

I've since ended the series, but I return to Memorial Day, Independence Day and Veterans Day because their why is too important. Legal holidays become required holidays. Required becomes entitled. Entitled doesn’t ask why.

Memorial Day honors the men and women who gave “the last full measure of devotion” in service to our country. So before firing up the grill or saving money on a mattress, remember why the day used to be called Decoration Day.

You don’t need to go a ceremony or a cemetery to be grateful for what they did for you. You can stop for a moment and think about the families gathered at our 131 National Cemeteries and countless private graves across the land to remember their loved ones, men and women who made this day, and each day after it possible for you and your family.

With gratitude and in tribute to all who serve our country and risk everything for us: the National Anthem performed by the Colorado Children’s Chorale at opening ceremony for the 2008 Democratic Party National Convention here in Denver. (Note the Color Guard--these gentlemen are Navajo Code Talkers. It was cool to meet them.)

My Attorney Told Me Not To Do It!

noreply@blogger.com (Jim Thomas) — Fri, 25 May 2012 14:30:00 +0000

I couldn’t resist the title. This guest post from Tad Lyle, a Denver-area business and financial planning advisor and President of Planning Resources, Inc., reminds us all that we can’t recommend (or reject) a business transition idea until the owner’s goals are clearly defined. Begin with the end in mind.

It may not be uncommon for business owners to call one of their advisors to complain, that their lawyer (or CPA or financial advisor) told them that they should not even think of transferring their business to their child and key employees, but they want to do it anyway.

If you’ve made this type of call, I hope your advisor answered with the same definitive "maybe" that fictional owner, Fred Venturer, received.

Case Study

When Fred Venturer called his accountant to complain about his attorney’s warning not to consider a transfer to his child and key employees, the accountant immediately initiated the business exit planning process.

As an advisor skilled in exit planning, Fred’s accountant did not limit the scope of that process to probing Fred’s choice of successors. Rather, she started asking Fred the first questions every owner must answer when thinking about departure:

•"When do you want to leave?"

•“How much income or money will you want or need when you leave?"

•"What do you want to do for your key employees and for your other children?"

The accountant quickly involved Fred’s other advisors (attorney, and financial planner) to brainstorm the many questions and strategies that required Fred’s input. This Exit Planning Advisor Team asked Fred a number of questions beginning with an examination of the financial resources available to Fred.

As the Advisor Team immediately pointed out, it is one thing to design a business exit via a transfer to a management team; it is quite another to ensure the owner’s financial objectives are met in the process. The Advisor Team had to know how Fred defined his financial objectives to determine the size of the gap between his existing financial resources (both personal and business) and the amount of cash he could expect from a transfer of his business to his desired successors. Only then could Fred’s Advisor Team answer Fred’s original question (Can you help me to transfer my company to the successors I choose?) with a firm "yes" or "no."

Fred is not the only owner who has asked (and wanted an answer to) an exit question that can be answered only after the three basic exit planning questions are resolved. (Again, those questions are: When do you want to leave? How much money do you need when you exit your company? and To whom do you want to transfer your company?)

There is a natural tendency for owners (and may be for some advisors who lack experience in exit planning) to focus on the desired outcome and on the route they believe will facilitate that outcome before they know exactly where the owner wants to go. The philosopher Seneca wisely warns, "When a man does not know which harbor he is heading for, no wind is the right wind."

In Fred’s case, he wanted to transfer his business to his management team that included one of his children. Rather than immediately pursue that particular exit path, it was critical for Fred to step back to see if that type of transfer would satisfy his other exit goals and objectives. Would a transfer to his management team allow him to leave on his timetable? Would such a transfer yield the amount of cash he needed to attain his financial objectives?

If not, were there other paths that would allow him to leave at or before his chosen departure date, with more money, or perhaps, greater benefit of his family or other families? These fundamental questions (and other more specific questions) require Fred’s careful consideration (and yours) before charging down any particular path.

Beginning an orderly consideration of your exit objectives today can help to save you time, money and grief. Better still, it can help change the "maybe" answer to the question "Can you help me leave my company to the successor I choose?" to a "Yes."

Who Owns Your Business-Related Social Media?

noreply@blogger.com (Jim Thomas) — Mon, 14 May 2012 15:43:00 +0000

There is a time bomb in your company that you had better defuse. This is true whether you are employee or employer, because when it blows, both sides will be out lots of time and money, including plenty in attorney’s fees. Not that we attorneys don’t want your money; it’s just that some of us would rather get a little to prevent a problem, instead of a lot to clean it up.

The bomb is your failure to be clear about, or even consider, ownership of the business connections represented by social media platforms such as Facebook, Twitter and LinkedIn. A couple of ongoing lawsuits, which I discuss in my presentations on the legal issues in social media, are examples of the trouble that you can avoid with a little attention.

In both cases, former employees (one was even the former owner) thought the social media networks (one on Twitter, the other on LinkedIn) built while at their old jobs belonged to them personally. The former employers thought differently. It wasn’t the tweets, posts, pictures, etc. that mattered; rather the issue was ownership of the network, the extensive base of active business connections—fans, followers, friends, whatever—represented by the accounts.

Noah's former company demanded he pay $2.50 for each of his 17,000 Twitter followers.

Since the employees had a hard time understanding how their “personal” accounts could be company property, litigation ensued. Now legal fees are piling up, and valuable time that could be spent on the real work of running a business is instead being spent applying old legal principles to the new and constantly evolving world of social media. Neither case has yet reached any definite conclusions, and even if they do, they will be limited by their facts and the laws in their states.

What is clear is that, under some circumstances, a Twitter or LinkedIn account that might appear to be personal may actually belong to the employer. That means a “personal” Facebook profile or Pinterest board, you name it, could likewise be company property. I’m not saying that result is right or wrong. I am saying that having the employee and employer agree upon ownership beforehand is infinitely better than going to court to determine it later.

Truly personal social media isn’t the concern, though companies should have policies on when such personal activities can take place while at work or using company property. Many business people (me included), however, promote their companies through their “personal” social media. Some companies, likewise, instruct their employees in coordinating “personal” social media for business purposes. In the same vein, subordinate employees often maintain the “personal” accounts of some high-profile employees.

If any of those situations sounds even vaguely familiar, or if you just want to be certain, it’s time to invest some thought and energy (and a little bit of legal fees) in the development of a policy that distinguishes the rights of the employee from those of the employer.

That process should solve at least part of the issue. Even when ownership of the account is clear, the actual use of the account could still create problems. In a future post I will tackle another potentially explosive issue: non-compete and non-solicitation agreements in a highly connected digital world.

The Persistence of Vision. Colorado Experience 2012.

noreply@blogger.com (Jim Thomas) — Fri, 04 May 2012 19:42:00 +0000

Leaving your day-to-day work and normal surroundings, even if only for two days 70 miles to the North, can be eye opening. Lessons learned, even important ones like the vitality of vision in successful communities, however, fade without persistent attention. Vision, and leaders who live the vision, were my takeaways from the Colorado Experience 2012. That, and how cool it would be to have a slide in my office.

My Leadership Denver classmate Paula Henry takes the Otter plunge.

This second installment of the Colorado Experience program of the Denver Metro Chamber Leadership Foundation brought about 125 business and civic leaders from Denver to Fort Collins. Cooperation was the word that best expressed my thinking about last year’s inaugural Colorado Experience to Colorado Springs. This year’s word is vision, and I want to share with you three successful visions shared with this year’s group. Then, I’ll consider what happens to vision when persistence wanes.

Invest in systems to run the company and then invest in people to run the systems. Otterbox is a successful Colorado company with strong visions of how a company succeeds. Success, however, was not a straight-line result from their vision. Persistence and multiple trips “back to the garage” were required. Equally compelling: a successful company must not only be engaged in its community, it must inspire others to do so. Thank you, Otter owners Curt and Nancy Richardson.

Let your life speak. It’s not just a Quaker adage; it’s as much a part of the brew as the hops at New Belgium Brewing. Leaders honor the company’s triple bottom line of people, planet and profits that makes New Belgium sustainable; employees understand the vision is more than lip service. Recognize that challenges are inevitable, so celebrate accomplishments. After all, if it is not fun, it is not sustainable. Thank you, New Belgium CEO Kim Jordan.

Make the skills to succeed available to the not-yet-successful. This is my take on the 150-year-old vision behind our Land-Grant colleges, including Colorado State University, a focus of much of this year’s Experience, as well as my undergraduate alma mater Texas A&M, and many other schools. Imagine the audacity of investing (during the Civil War!) in a system of higher education to be available based on merit, not social class. Our collective investment in those schools fueled the growth of innovation and entrepreneurship that created our nation’s economic success and strengthened our democracy in the process. Eighty years later, the GI Bill renewed that investment, this time directly in the young people who had served in our country’s military. Thank you, CSU President Tony Frank.

The world’s greatest system of public education enabled America to become a nation blessed by opportunity, productivity, and prosperity, but the vision of making the skills we need available at affordable prices is being forgotten. I read in the Wall Street Journal that 30 years ago we led the world in educating young adults; today we are 15th. President Frank described the shift in educational costs, and the allocation of those costs, over the same period. We once had a system in which two-thirds of the reasonable cost of a public college degree was an investment by the state in its future. We now have a system in which the individual student bears 70% of a more expensive education, often using loans that may not be repayable.

If we want to revert to a system in which the skills to succeed (and not be a burden to society) are generally available only to those who already have means, then it seems we should at least have a conversation about it. Perhaps the vision that replaces the Land-Grant idea requires a complete rethinking of what we mean by “education” and how it is delivered. I know I don’t have the answers, but I know we won’t solve the problem without leadership.

Denver Metro Chamber of Commerce CEO Kelly Brough shows her leadership style.

Which brings me to one of my favorite moments of the Experience (along with the Otter slide and the New Belgium beer), when Kelly Brough, CEO of the Denver Metro Chamber of Commerce, asked our group to remind ourselves of the qualities leaders need when tackling tough issues. Collaboration means we resist positional battles and focus on shared goals. Passion brings the energy and courage required when facing certain risk. Of course, leaders need vision and the commitment to live the vision, even through inevitable setbacks. That is our Colorado experience.

Here is a slideshow of more slide shots and other photos from the Colorado Experience.

We Can Afford Not to be Great

noreply@blogger.com (Jim Thomas) — Sun, 01 Apr 2012 16:24:00 +0000

Once this country did great things, inspiring things. Apparently, we can’t afford to continue that tradition. That’s lucky because we also seem incapable of training our children to become the engineers and scientists who make great, inspiring things possible. It’s easier, and much more profitable, to become consultants and investment bankers.

While on spring break with my kids, I was trying to come up with a joke to continue this blog’s tradition of an April Fools post. The joke came to me while touring the Kennedy Space Center at Cape Canaveral, Florida. Our tour guides spoke in past tense: this is where this used to happen, this is where we used to do this.

Launch Pad 39A where we used to launch the Shuttle and, before that, Apollo

I’m of an age that astronauts were my first heros; I knew their names and backgrounds like other kids knew baseball players. Growing up in an Air Force family, I was fortunate that one of my Dad’s stations was at Langley Air Force Base, Virginia, where NASA was born. We lived almost in the shadow of the huge gantry where moon landings were practiced. It got even better when I married the daughter of a NASA engineer and heard first-hand stories of the sacrifices, but ultimately the inspirations, of the Space Race.

The business end of a Saturn V, the moon rocket.

But we won’t be hearing those stories anymore because America’s not up to the challenge. I know we are engaged in unmanned space exploration, and Colorado’s United Launch Alliance is working on Orion, the next generation of space craft for humans, but actual human space exploration won’t happen in this decade (or ever, given our history of dropping programs); that’s too hard, too expensive. We have other priorities, we can afford not to be great.

We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too. --President John Kennedy, September 12, 1962

A LEM, Lunar Excursion Module. Apollo 11's landed on the moon on July 20, 1969

How Can My Loan be in Default if I Never Missed a Payment?

noreply@blogger.com (Jim Thomas) — Fri, 16 Mar 2012 22:01:00 +0000

Delinquent loans, mostly residential, are constantly in the news, so it is easy to understand why some business owners may lose track of the fact that missed payments are not the only way to get in trouble under commercial loans, or leases or joint venture agreements, for that matter.

Contracts, and a loan is just a type of contract, typically contain a number of promises, “covenants” in legalese, that the parties make to each other. In a business loan, the lender promises to lend money, and, in return, the business promises to repay that money plus interest. The borrower’s promises don’t stop there, however, and a failure to keep any one of those promises, a breach of covenant, can result in foreclosure or bankruptcy as easily a failure to make payments.

A front-page story in a recent Denver Business Journal highlights the importance of these covenants. A local redeveloped retail center is in foreclosure despite the developer never having missed a single loan payment. Unspecified loan covenants are cited as the issue.

Loan covenants can be expressed as things the borrower must do (affirmative covenants) and things the borrower cannot do (negative covenants). Affirmative or negative, it doesn’t matter; breach of either can land you in the same trouble as missing payments.

Crocus are one of spring's pleasant surprises. Don't let loan covenants be an unpleasant one.

Covenants about the company’s finances typically get the most notice. These promises, in theory, are designed to help the borrower avoid getting to the point of missing payments. Requiring the borrower to maintain a minimum net worth relative to the loan is a common covenant, as are limitations on the ability of the business to pay compensation or dividends to its owners.

Restrictive covenants not explicitly about finances are also part of the loan package. These covenants may be buried in pages and pages of loan documents, and are sometimes ignored in the rush to make sure the financial aspects of the loan make sense. Not anticipating the limitations these covenants impose on your business may hamstring your company, usually at the worst times.

For example, you may not surprised by a covenant that limits the borrower’s ability to sell its business without paying off the loan (though prepayment penalties may still apply), however, more than one business has been surprised to learn that they need their bank’s consent to acquire another business, even if borrowed money isn’t used in the deal.

Medical marijuana poses a special problem for Colorado property owners. A typical covenant in a commercial real estate loan requires that the property be used in compliance with laws. Legal under Colorado, not legal under federal law; what’s a landlord with a loan to do? The safest choice is to not accept the tenant without lender consent.

Your best opportunity to negotiate flexibility into your loan covenants is, of course, BEFORE you sign the loan. Have your lawyer explain the proposed covenants to you and decide then what you can and can’t live with. Use the threat of losing your loan to another lender to your advantage. Attempting to negotiate a forbearance agreement after your lender has threatened to call, or even called, the loan for breach of covenant is a poor second option.

South Dakota's Badlands should be seen; the badlands of covenant breach should be avoided.

There is one more covenant to consider: the term of the loan. Even if you have paid the loan on time and haven’t violated any covenants, the bank may still choose not to renew your at the end of its term. Business loans have short terms, 5 years typically, (distinguished from lines of credit that are renewed annually). These loans don’t fully amortize, meaning large balances, or balloons, have to be repaid or refinanced at the end.

In this lending environment, take no chances and start renewal discussions early enough for you to negotiate with new lenders in case your current lender says no or imposes unacceptable terms on you. Lastly, be sure to include your business lawyer in the process. Avoid potential loan issues on the front end is always easier than negotiating out of them later on.

Quick Bites – February 16

noreply@blogger.com (Jim Thomas) — Thu, 16 Feb 2012 23:32:00 +0000

Using another’s photo without permission can get you sued. Business success may be tied to your socks. Why numbers of fans/followers is not as important as the quality of engagement.

Photographer Sues Quincy Jones Claiming Picture Used Without Permission
By: Eriq Gardner, The Hollywood Reporter

The same fate could await businesses that use others' photos to promote themselves without permission.

“Quincy Jones is now being sued by a photographer who claims the legendary music producer is using without permission a photograph of Jones at work to advertise a signature line of headphones and in a book about the producer's approach to music.”

A Foot in the Door in Silicon Valley
By: Claire Cain Miller and Nick Bilton, The New York Times

A different take on how to get a leg up in the business world.

“For barristers in 18th-century London, it was shoulder-grazing wigs. For the Mad men of 1950s New York, it was briefcases and fedoras. For the glass-ceiling-shattering women of the 1980s, it was shoulder pads. And for today’s tech entrepreneurs in high-flying Silicon Valley [and lawyers in high altitude Denver], it is flamboyantly colored, audaciously patterned socks.”

And yes, these are my socks today.

The Hollow Emptiness in Social Media Numbers - Most Accounts Are Fake or Empty

By: Tom Foremski, ZD Net

This article points out that the real value in social media is in the actual conversations that occur, not simply the numbers of fans or followers.

“If large numbers of accounts are fake, and equally large numbers have no profile information, it means that there is a far less commercial value in social media networks than total numbers would suggest.”

Law for Business, Hope for Artma

noreply@blogger.com (Jim Thomas) — Wed, 08 Feb 2012 17:51:00 +0000

Business is hard, but cancer in kids is harder. My Minor & Brown colleagues and I use legal skills to help remove roadblocks to business success. This week, however, we are also taking aim at cancer in kids. I’ve said it before: good businesses make money, but great businesses build the communities that make good business possible. Since we aspire to be not just great lawyers, but great members of the business community, I am proud, humbled, fired-up (pick an adjective) to continue the Minor & Brown partnership with the Morgan Adams Foundation.

Real partnering with non-profits requires a business to do more than write the occasional check. Engaging employees in business philanthropy is a best practice that resonates with me. When employees have both a voice and a hands-on role in the community building efforts of the business, the non-profit, the business and the employees all benefit. I think our partnership with MAF has paid-off since Minor & Brown employees, even former employees, couldn’t wait for artma 2012 to come around.

artma began when Morgan Adams, a beautiful six-year-old girl, lost her 11-month battle with a glioblastoma multiforme brain tumor. It is in her honor, and in tribute to all those children who have been through, or are going through a similar battle, that artma has become a gift of love and hope. Through the generous donations of art from local, regional and nationally recognized artists, and the incredible support of community businesses, our event has blossomed.

Minor & Brown employees are part of artma’s set-up and take-down teams. We will have folks working the event, and folks attending the event along side guests that we helped recruit. We even hope to add to our collection of artma-purchased art, but we hope to be smarter about it than last time when I realized that my partner Lisa D’Ambrosia and I were bidding against each other for a piece that now hangs in our reception area. What the heck, it’s for a great cause, it’s for hope.

Here are links to read more about the Morgan Adams Foundation and artma (if you are reading this before February 11, you might be able to grab some tickets on the artma site--it always sells out), as well as some early posts from this blog about the Minor & Brown connection to artma, including hot glue that connected me, literally, to some of the art that kids from the cancer unit at Children’s Hospital Colorado made for sale along side the professional work.

Thanks to artma photographers Steven Adams and Gifford Ewing for their photos of the M&B team and me from artma 2010.

Four Ways to Get Out of Your Lease, Part 2

noreply@blogger.com (Jim Thomas) — Fri, 13 Jan 2012 16:40:00 +0000

Before my schedule bogged down in tinsel and year-end deadlines, I posted on a question that’s been almost common: “I signed this lease before the economy tanked. How can I get out of it?” Typically, the business has contracted to a degree that it no longer needs, or simply can’t afford, all (or any) of the leased space.

While there are no magic bullets, there are four ways to eliminate or reduce the burden of a lease on a business. The first option, explained in Part 1 of this post, is buying out the lease. Let’s now consider options two through four.

Assignments and Subleases.

Oversimplified and misunderstood, subleases and assignments have someone else take responsibility for some or all of your space. They can be useful, but be clear about the differences between the two approaches. Also understand the requirements your lease imposes on your ability to use them. Typical leases give the landlord rights to approve your deal (with you paying for the landlord’s costs in doing so).

Also know that in today’s market, with rents down and vacancies up in many places, the chances of finding a subtenant or assignee (who will expect to pay less rent to you than they would to the landlord) to get you completely off the financial hook, are low. You may have to settle for a deal that leaves you responsible for some part of the rent obligation.

In an assignment, the new tenant takes over your lease with the landlord, but that might not take you out of the equation. An assignment does not automatically release the original tenant or personal guarantor from liability. If the new tenant doesn’t pay the rent or otherwise defaults, the landlord will come looking for you. Therefore, you may not have improved your situation at all, and may have made it worse. If an assignment doesn’t include a full release from liability, you may be better off subleasing.

In a sublease, you become the landlord, or in legalese, a sub-landlord (if your lease IS a sublease, a sub-sub-landlord, and so on). Your liability to your landlord is not changed by a sublease, but you have a better chance to protect yourself than in badly handled assignment. Since your sub-tenant is paying the rent to you, you’ll know when rent is being paid (or not), and you’ll have the legal right to pursue the sub-tenant for the unpaid sums. On the other hand, a sublease can be trickier than an assignment in that you need to make sure the critical provision of your lease and the sublease match up.

Take Backs

Maybe the landlord will agree to take some or all your space back. Maybe the Mayans are right and the world will end on December 21, 2012 this year, so why worry about your lease? But seriously, a take-back may not be likely, but it is worth thinking through. If your business has a below-market rent, yet it is still struggling in this economy, your landlord may see the benefit in taking space back. If market rents are down, it may be necessary to sweeten the deal with an agreement to cover some or all of the spread between your rent and the new tenant’s deal.

Extend the Lease

It sounds counterintuitive, but extending the term (lengthening the lease) might solve your current problems with the lease. There is no free lunch (or magic bullet); you will pay more over the long run with this approach. The landlord agrees to reduce your rent in the short term if you agree to a longer term with higher rents in the future. Thus, you and the landlord are betting that business will get better and your company will be able to handle that increased burden. If you have personally guaranteed your lease, kicking the can down the road could be a terrible decision. Either be sure the Mayans are correct about 12/21/12, or carefully work through the idea with your attorney, before agreeing to a deal like this.

Remember, a premature exit from a lease is best negotiated before you sign it, and the best way out of a bad lease, or any bad contract, is not signing it. Your business lawyer can help you think through the issues.

A Degree of Practical Wisdom: Law School by the Numbers

noreply@blogger.com (Jim Thomas) — Fri, 16 Dec 2011 23:45:00 +0000

Early this year, as part of my ongoing lament on law schools and the challenges of training good, affordable lawyers for human-owned business, I offered my own story as an example of a financially sensible approach to buying a legal education. My starting salary as a lawyer was about twice my student loan balance, which I thought made sense. The typical debt load of many of today’s law grads seems completely out of line with the salaries those young people will receive, assuming they can even get a law job.

Turns out, I was right on the money, so to speak. Jim Chen, the Dean at the Louis Brandeis School of Law at the University of Louisville is publishing an article entitled A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability. In a much, much more scholarly analysis than I brought to the question, he comes to the same conclusion. The article will appear in the William Mitchell Law Review.

Even as the cost of attending law school has increased, law school graduates’ job prospects have not kept pace. In recruiting new students, law schools rarely if ever address this economic reality. Whether that failing arises from blissful ignorance, complacency, or willful disregard is ultimately a matter of moral judgment.

If we can’t explain why the Law Degree Factory ignores reality, at least I can do my part to help those thinking about law school to be somewhat objective about the decision to pursue law as a career. The typical reasons for going to law school: To advance justice; To serve the underprivileged; To right wrongs and ensure peace, which Dean Chen cites, are great. We need lawyers who feel that way. We just need for them to be able to make a living and pay off their loans, too.

Quick Bites - November 23

noreply@blogger.com (Jim Thomas) — Wed, 23 Nov 2011 20:18:00 +0000

New tools provide a wider use for social media. Employee theft is a huge concern for small businesses. What you can learn from Joe Paterno’s estate plan. Relating a business sale and Thanksgiving might seem like a stretch, but check out the similarities in this round of Quick Bites.

Raymond James Makes Its Social Media Move
By: Davis D. Janowski, Investment News

It’s inevitable. The legal barriers to business use of social media are evolving and companies are finding new tools to help them jump compliance hurdles.

“The firm is using the Socialite platform from Actiance Inc. so that its financial advisers can use social media to prospect for new clients and connect with existing clients while still being compliant with Finra rules.”

Is Your Small Business at Risk of Employee Theft?
By: Rieva Lesonsky, Network Solutions

We all want to work where we are trusted, but there is nothing wrong with your business having systems in place to be sure trust isn't abused. As President Reagan said: Trust, but verify.

“Worldwide, businesses lose an average of 5 percent of their annual revenue to internal fraud, according to a study by the Association of Certified Fraud Examiners (ACFE) reported in MarketWatch. Nearly one-third (30 percent) of companies affected by embezzlement have under 100 employees. And companies that size lose an average of $150,000 to the crime. Could you afford a loss that big?”

Inside Joe Paterno’s Estate Planning Play
By: Liz Skinner, Investment News

Whatever the true motivation, there are valid estate planning reasons for high net worth individuals, whether business owners or football coaches, to transfer assets. Consult an estate planning attorney to make sure your plan is up-to-date.

“Joe Paterno's transfer of homeownership to his wife in July most likely wasn't an attempt to shield assets before a sexual-abuse scandal hit Pennsylvania State University's football program. Instead, the move was by the legendary coach more likely made to take advantage of expiring estate tax rules, lawyers said.”

5 Reasons Selling Your Business is Like Thanksgiving Dinner
By: Barbara Taylor, The New York Times

The analogy is a bit of a turkey, but there's enough here to make it worth a quick read. Missing is the concept of tradition. Parties, buyers especially, want the deal done a certain way because they've always done them that way. They, like your great aunt's insistence on canned cranberries, can get over that and try something fresh.

“Thanksgiving dinner without the pumpkin pie would be a major letdown. Building a successful business that has no transferable value seems equally disappointing. Selling your business and cashing out after years of hard work is the ultimate reward. Prepare yourself and your business well for the day you will leave, and when you do, you will savor a slice of success that many business owners never enjoy.”

Four Ways to Get Out of Your Lease, in Two Parts. Part 1

noreply@blogger.com (Jim Thomas) — Mon, 21 Nov 2011 19:14:00 +0000

The best time to think about getting out of a business lease is before you sign it. For the many companies with leases signed, perhaps too casually, before the economy tanked, that’s little help. While their numbers are down from recent highs, businesses still come to my law firm looking for the magic bullet out of their leases. (Spoiler alert: there is no magic bullet.)

A lease is the most common, yet least understood, contract a human-owned business will sign, so a post on exit planning for leases is going to be helpful whether you are trying to get out of or in to a lease. Exit planning, by the way, isn’t limited to just the owner’s exit from the business. How key relationships, including the one with your landlord, end is a subject deserving forethought in any business.

I blame professional sports for the unrealistic expectations some businesses have toward contacts, including leases. If you regularly hear about the rising star athlete who gets out of the contract signed when he or she was a bit more humble, you might get the impression that your business can get out of a contract whenever a better offer comes your way.

That your business is suffering, or rent is lower across the street (or even in your building), is generally of no concern to your landlord--other than at renewal time. Supposing the landlord is willing to do something for you, chances are the landlord has its own contract it can’t get out of—a mortgage. Your lease is part of their collateral, so the landlord’s lender has much less interest in helping you out of the lease, than in helping you in.

If your business is viable, any change in your lease has to present some upside to both landlord and lender. Personal guarantees, commonly required in leases to human-owned businesses, give the landlord and lender still less reason to make a deal, even if your business is struggling. There are, however, still some options, though they are MUCH better discussed before the lease is signed.

Buyouts.

The typical lease gives the landlord the right to collect, upon a default of the lease, from your business (or you, if you are a guarantor) an amount equal to the sum of any past due rents plus all future rents for the remaining term, discounted to present value. If the landlord can re-let the space, the former tenant gets a credit for the rent paid, less the landlord’s costs—such as brokerage commissions and improvements to the space required for a new tenant. Thus, what you owe on default of your lease can be a huge number. But it doesn’t have to be.

When negotiating the lease, cap on your default liability in the form of a buyout—a fixed sum you pay to get out of the deal. If you can’t limit the business’s exposure, try to limit the terms of any personal guarantee. If you didn’t get a buyout in the lease, asking the landlord for a buyout now is asking them to weigh the bird in the hand against those in the bush. Depending on your financial circumstances and the market, trading your lease for cash in-hand, or even a little cash and a secured promissory note, might be a viable option for landlord and lender.

In Part 2, I’ll cover three more options for getting out of a lease: Assignments & Subleases, Landlord Take Backs, and Extending the Term.

Lip Service for Their Service? Veterans Day 2011

noreply@blogger.com (Jim Thomas) — Fri, 11 Nov 2011 15:25:00 +0000

Effective at the 11th hour of the 11th day of the 11th month, the 1918 Treaty of Versailles marked the end of the Great War, the "war to end all wars." At the first anniversary of that event, Armistice Day became our national commemoration of those who served in what would too soon be renamed World War I, but it would not be a legal holiday until 1938.

Fort Logan National Cemetery

After World War II and the Korean "Conflict" (legal semantics for political purposes), Congress, in 1954, recognized the need to honor all who serve and gave this legal holiday its present name, Veterans Day. In 1971, Congress separated the holiday from its roots by moving the observance to the 4th Monday in October. The American people tolerated that for only a few years and the original date was restored in 1978.

Popular fascination with today’s palindrome date, 11/11/11, distracts some attention from this year’s holiday, but numerology isn’t what is on my mind. At the beginning of this week, the Westboro Baptist Church brought its odious "God hates America" campaign to Denver’s East High School, where my daughters are students.

Westboro’s hate crusade against homosexuals, Jews, and others is infamous for many reasons, but most of all for making the funerals of America’s war dead platforms for Westboro’s abhorrent messages. The East High community (including my family and I) came out in force to challenge the Westboro picketers, just as communities, faith groups, and many veterans do at locations all over the country.

Westboro’s messages, while hateful, were rote, delivered with no passion in their eyes or voices and ultimately ineffective. While I have never had to endure their detestable presence at a military burial, I have to wonder what’s the greater disservice to our servicemen and women, Westboro or public praises and recognitions of their service that fail to move beyond words.

As we express our gratitude, we must never forget that the highest appreciation is not to utter words but to live by them.

President John Kennedy included that idea in the Thanksgiving proclamation issued only days before his assassination, but it speaks to our observation of this legal holiday as well, especially at a time when the burden of defending our nation is borne by a very small portion of our population, when the costs of war, or even the very idea that we are at war, isn’t felt in the lives of the vast majority of Americans.

Less than 1 percent of Americans serve in uniform today, but they bear 100 percent of the burden of defending our Nation. Currently, more than 2.2 million service members make up America’s all-volunteer force in the active, National Guard, and Reserve components. Since September 11, 2001, more than two million troops have been deployed to Iraq and Afghanistan. Fifty five percent of the force is married and 40 percent have two children. Only 37 percent of our families live on military installations; the remaining 63 percent live in over 4,000 communities nationwide. Multiple deployments, combat injuries, and the challenges of reintegration can have far-reaching effects on not only the troops and their families, but also upon America’s communities as well. These challenges should be at the forefront of our national discourse.

The 11th hour of the 11th day of the 11th month ended World War I, but the 11th day of the 11th month of the 11th year ends my legal holiday series. I’ve been round the calendar more than twice on this journey. I began with Memorial Day; it seems fit to end with Veteran’s Day, which has always been my favorite in the series. More than the debt the nation owes our veterans, I owe two vets, my parents, for my existence and for inspiring me in everything.

This post and this series end with a photo of a standard government tombstone. This one is not in a national cemetery, but in a small graveyard near the northwestern shore of Lake Buchanan in the Texas Hill Country. Uniformity connects in death as in life; even the casual observer will know that an American hero is buried here. I am honored to call this hero Dad and I miss him very much.

Quick Bites - November 8

noreply@blogger.com (Jim Thomas) — Tue, 08 Nov 2011 20:50:00 +0000

Preparation (and a great team of advisors) is key to a successful business sale. Advice for business owners on how to deal with online slander. Social media’s reach has expanded to include national intelligence.

Preparing for Business Battle

By: Chris Younger, ColoradoBiz Magazine

My firm has worked closely with Chris on a number of business sales. His thoughts on approaching this complex undertaking are spot on.

“Selling a business is a process - like any other business process, if it is executed according to well-defined and tested steps and procedures by someone with a lot of relevant experience, you tend to get predictable results. Conversely, if it is executed on an ad hoc basis by someone with limited or no experience, you also tend to get predictable results.”

How Business Owners Counter Online Slander

By: Karen E. Klein, Bloomberg Businessweek

A tough and growing problem for business. Your business should have a plan for dealing with it, and sue the $%^*! is rarely the best option – defamation suits can even backfire.

“While a crop of online reputation management services has surfaced in recent years, fighting back is costly and time consuming. It is difficult to find the source of many complaints, short of a federal court order, and when they surface they most often come from competitors or fired employees. Complaint boards and watchdog websites tend to repost content, so one grumble may appear like a systemic problem.”

CIA following Twitter, Facebook

By: Kimberly Dozier, Associated Press

National intelligence is making the most of social media – your business should too. The CIA can judge the mood of a region; you can judge the mood of your potential customers or the background of potential employees, only check with your lawyer for the limits on what you can do.

“From Arabic to Mandarin Chinese, from an angry tweet to a thoughtful blog, the analysts gather the information, often in native tongue. They cross-reference it with the local newspaper or a clandestinely intercepted phone conversation. From there, they build a picture sought by the highest levels at the White House, giving a real-time peek, for example, at the mood of a region after the Navy SEAL raid that killed Osama bin Laden or perhaps a prediction of which Mideast nation seems ripe for revolt.”

Giving Business a Fresh Start on Worker Misclassifications

noreply@blogger.com (Jim Thomas) — Wed, 02 Nov 2011 16:17:00 +0000

The proper classification of a worker as an “employee” or “independent contractor” is one of the more important, but sometimes confusing, tasks faced by a business. In earlier posts, I’ve provided guidance on making the right classification and warned of enhanced efforts by governments looking to force reclassifications to increase tax revenues.

Misclassification is often described in stories of unethical businesses or over-zealous law enforcement. Today’s post falls in between those extremes, where businesses struggle, but sometimes fail, to make the right decisions, and government agencies want not to punish but to create a reasonably level playing field.

Recently, the IRS, the U.S. Department of Labor, and eleven states (the initial group did not include Colorado, but Colorado joined the effort as announced in the December 6, 2011 Denver Post) announced agreements for the sharing of information and cooperation in the enforcement of classification laws.

Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with federal labor laws — for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law. In addition, misclassification can create economic pressure for law-abiding business owners.

While that announcement seems less about helping, and more about hammering, out-of-compliance companies, in a separate announcement the IRS makes it clear that at least part of the federal government is interested in aiding the businesses that want to correct misclassification missteps.

The Voluntary Classification Settlement Program (VCSP) was announced as the latest part of the IRS Fresh Start initiative. Businesses that have misclassified employees as independent contractors may be eligible to reclassify the workers with limited tax liability.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Not all businesses are eligible for VCSP; however, participation is limited to those employers who:

• Consistently have treated the workers in the past as nonemployees,

• Have filed all required Forms 1099 for the workers for the previous three years

• Are not currently under audit by the IRS

• Are not currently under audit by the Department of Labor or a state agency concerning the classification of these workers

Other factors should be considered before joining the program. VCSP isn’t a complete clean slate. A business that misclassified workers may still have exposure for state or local taxes as well liability to the workers for wages or benefits. Talk to your business attorney about any worker classification concerns and the opportunity of VCSP. Just don’t wait too long. If IRS/DOL/States initiative is successful, more businesses will be audited for misclassification and then it will be too late to apply for a voluntary settlement.

Quick Bites

noreply@blogger.com (Jim Thomas) — Mon, 24 Oct 2011 20:01:00 +0000

Interconnectedness means businesses need to be smart about network security and lawsuit prevention. All businesses use quick pitches, but if you are looking for investors be even more prepared. Some good news, even if it is just a little, is the sweet finish in this batch of Quick Bites.

5 Ways to Protect Your Company From Employee Devices By: Cynthia Bunting, Business News Daily

Employers and employees need to be thoughtful about managing the company’s risks from employee use of personal devices that access the business network.

"Employees are also responsible for keeping company information secure. One option is to require employees requesting to access the network via a personal device to sign an Acceptable Use Agreement. The agreement may include conditions, such as installing a device certificate or the remote-wipe software mentioned above. It may also state that devices can be seized if necessary for a legal matter. At the end of the day, it ensures that maintaining security when using personal devices is a shared responsibility between both the user and IT."

Social Media Policy: How to Get Started By Ivan Walsh, Small Business Trends

Does your business have a social media policy? It should, and if it doesn’t, this article is a decent place to start thinking about how to create an effective policy. Call your lawyer (or me) to discuss what needs to go into that policy—you might be surprised.

“Why do so many people feel that social media policies are a bad thing? The main reason policies don’t work (or get a bad reputation) is that they make it more difficult for employees to do their work. Maybe that’s not completely true, but for many employees, these policies feel like an intrusion and one more rule to follow. How can you get around this?”

Great Startups Can Hook an Investor in 60 Seconds By Martin Zwilling, Gust.com

A business looking for investors needs a compelling elevator pitch (and a great lawyer.)

"Highlight people strengths. “Bet on the jockey, not the horse” is a familiar saying among investors. Tell them the high points about you and your team’s background and achievements."

Colorado Region Economy Improves Slightly in Third Quarter 2011 From the Beige Book of the Federal Reserve

Because building optimism among human-owned businesses helps us all.

"The Tenth District economy improved slightly in late August and September. Retailers and auto dealers reported stronger sales and anticipated further gains in the months ahead. Sales were weaker at restaurants and hotels, leading to pessimism in these industries as the holiday season approaches. Manufacturing activity rose at durable goods factories, and the high-tech services industry experienced strong growth, while transportation activity was flat. Residential and commercial real estate and construction contacts continued to report weak conditions. Bank deposits continued to increase, while loan demand and loan quality deteriorated slightly. Crop conditions varied across the District, but farm income expectations remained strong. The energy sector expanded further with production increasing for oil, natural gas and coal. As input prices continued to increase, more contacts expected to raise prices in the coming months. But wage pressures eased from already low levels."

Quick Bites

noreply@blogger.com (Jim Thomas) — Thu, 13 Oct 2011 22:52:00 +0000

Quick Bites is a new feature for No Funny Lawyers. Short and sweet, maybe not all to your taste, but relevant to my concerns for human-owned business and the communities that support them. This first sampling concerns business succession (so often overlooked), free education and Facebook marketing support for small business, and a question of whether society needs a new form of business that blends for-profit and charitable models.

Apple Was Prepared: What About You? By Jamillah Warner, Small Business Trends

The loss of Steve Jobs impacted the world, but the business of Apple was ready. How would your business survive losing you? Will your family depend more or less on the value of your business when you are gone?

If you intend for your business to survive long after you are gone, then you need to address a few core things today. In the small business community we don’t run large corporations; we run small companies, and when the owner dies he or she often leaves behind a grieving a family that must also figure out what to do with the business, its debts and everything else that goes with death.

Facebook 'Likes' Small Business By Sarah Needleman, Wall Street Journal Small Business

Human-owned businesses are using social media (like I use this blog, Facebook and Twitter). My typical message is be aware of the significant legal traps in it, but be more aware that you can waste a lot of time--if you don’t have a plan. This could be part of the plan.

The initiative is being launched in partnership with the U.S. Chamber of Commerce and National Federation of Independent Business, a small-business group. It is intended to educate small businesses on how to promote themselves on the social-networking site, like buying display ads targeted to specific markets, but also through cost-free measures to engage more with customers.

A Quest for Hybrid Companies That Profit, but Can Tap Charity By Stephanie Strom, New York Times

California just approved a new form of business similar to one rejected in Colorado. As this article points out, there is little to stop current for-profit companies from taking steps toward social good, but there are limits on non-profits looking to add earned income to their budgets.

A new type of company intended to put social goals ahead of making profits is taking root around the country, as more states adopt laws to bridge the divide between nonprofits and businesses.

Searching for Excitement. Columbus Day, 2011.

noreply@blogger.com (Jim Thomas) — Mon, 10 Oct 2011 19:48:00 +0000

Excitement and Columbus Day? Protests and arrests have been the only excitement associated with this legal holiday of late, and those come on the Saturday beforehand because nobody outside of the federal government gets this day off. Virtually no private employers, and increasingly fewer state and local governments, recognize it. Political correctness and economic reality combined to sink Columbus’s day, with economics being the rockier reef.

In an economy that’s a ship dead in the water, traditional ethnic pride isn’t worth the cost of a paid holiday for our workers, government or private. I get ethnic pride; my grandfather, Antonio Evangelista born in Italy, is only one of my three foreign-born grandparents. I get tradition. I am a Texas Aggie, a graduate of a university where tradition has been known to trump common sense. Tradition is also the foundation of our federal legal holidays and this blog’s posts on them.

The Presidential Proclamation for this year’s legal holiday uses the voyage of 1492 as metaphor for our national character:

The excitement Christopher Columbus and his crewmembers experienced that October morning is felt every day by today's pioneers: entrepreneurs and inventors, researchers and engineers. On the anniversary of Christopher Columbus's voyage, we celebrate the pursuit of discovery as an essential element of the American character. Embracing this heritage and inspiring young people to set their own sails, our Nation will reach the shores of an ever brighter tomorrow.

The most important discovery that will make our tomorrow brighter isn’t going to occur in some laboratory or R&D unit. It has to occur in Congress and statehouses across the county when our elected representatives, like Columbus’ crew, discover that the ship doesn’t move forward without cooperation. We don’t get far when the right side and the left side of the boat are more concerned about beating each other than in what lies ahead. But enough about that, how about this legal holiday?

In Colorado, Columbus Day has a place of honor in the list of legal holidays because while the New World was “discovered” 1900 miles to our southeast, the legal holiday commemorating it happened here. Colorado was the first state to make Columbus Day a legal holiday in 1907; the feds didn’t follow suit until 1971.

As business is this blog’s focus, we should recall that Columbus’s voyage was actually a business venture that took advantage of increasing competition and imperialistic attitudes among European nations. If this Italian had not opened the door to Europe’s colonization of the Americas, it is inevitable that another European would have. Exploitation, slavery and disease would have followed just the same. We can’t change how cultures collided 500 years ago, but we don’t have to accept continuing collisions.

Jasmine Pickner, world champion hoop dancer from the Crow Creek Sioux, celebrating another legal holiday: Independence Day

Americans of Italian descent (my family and me included) should be able to celebrate their rich heritage. We can and should be able to celebrate Native American cultures as well. St. Patrick’s Day, Cinco de Mayo, and Juneteenth are all popular celebrations outside of the focal ethnic groups. These days are occasions to celebrate our varied backgrounds. They happen, quite naturally, without need for a legal holiday and without reason for protest.

If we can afford a mid-October legal holiday, then perhaps it should be re-conceived as a celebration that honors the peoples, not the conquest, of the Americas. An Americas day, plural not possessive, can honor the original peoples of the hemisphere as it reminds us, its current peoples, that we share more than a land mass, we share a future. That future will be exciting, too, once we get back to the business of exploring, of looking forward and fixing problems, not fighting over responsibility for past troubles.

7 Keys to Indemnification in Business Sales. Part 4 of 3.

noreply@blogger.com (Jim Thomas) — Mon, 26 Sep 2011 21:22:00 +0000

If you are buying or selling a business, the first thing you’ll do when your lawyer sends the draft contract, if you’re like my clients, is check the purchase price. Then you’ll make sure they spelled your name right. Then, if you are my client or a regular reader of No Funny Lawyers, you’ll flip to some legalese buried near the back.

How deal documents divvy-up the downside has been my focus of late. After first introducing the idea of indemnification, I explained the role warranties and representations play in risk allocation. Then an unplanned spin into fact checking explains both due diligence and why this is the 4th post of a three part series.

Whether you are buyer or seller, here are seven elements to think about when reading an indemnification provision: scope, damages, survival, exclusivity, caps, baskets, and third parties.

Baskets of money are good for more than one reason.

Scope. Simple enough, what does the indemnification go to? Breaches of reps and warranties are always covered. Beyond that it depends on negotiations. Identified issues, like liabilities the buyer isn’t assuming in an asset deal, or a specific problem, say taxes or the threat of a third party law suit, are often included. Expand that last notion backwards and forwards from closing and you get what is often called “my watch, your watch” indemnities. If something bad happens when I own the company, I promise to make sure it stays my problem, not yours. Sounds fair, but think twice, especially if you are the seller.

Damages. Direct damages, what’s typically associated with a breach of contract, are usually indemnified against. Beyond that is a host of bigger ideas accompanied by bigger numbers. Consequential damages. Lost profits. Punitive damages. Purchase prices may be calculated or even expressed as a multiple of some number representing results of the business, like EBITDA. If the seller’s numbers supporting that result are wrong, does that same multiplier (5x, 9x, 12x?) apply to the buyer’s damages?

Survival. You know about statutes of limitations-- how much time the law allows someone to be on the hook for something they did. In deals, survival is how the buyer and seller describe the time limits for when a party (usually the seller) can be held liable for indemnification. These are typically much shorter than statutes of limitation: 18 months to 3 years versus 4 to 6 years.

Exclusivity. Is indemnification the only remedy or is it just one? Sellers usually want to wrap all their post-deal exposure into one section of one contract--indemnification--instead of having to worry about any number of other legal claims where buyers can attempt to pin problems back on them. Fraud is one claim, however, that can’t be contracted away.

Caps. What’s the most a party can be held responsible for? Without a cap, there is NO limit. This is a major seller concern. Caps are usually expressed in dollars, but negotiated as a percentage of purchase price. 100% of purchase price is certainly better than no cap, but 25% or even 10% is even better, if you are the seller. How low it can go depends on the risk in the business, the buyer’s attitude about risk (strategic buyers and private buyers are often less concerned than financial buyers and public companies), and relative bargaining power.

No one-size-fits-all. Cap sizes are determined by the deal.

Baskets. Sellers like small caps but big baskets. A basket is like a deductible in risk allocation. The buyer can ask for indemnification only once the damages suffered by the buyer exceed a certain threshold. There are variations, of course. In a tipping basket, once the damages exceed the basket threshold, the seller is responsible for all damages from the first dollar. Caps, baskets and survival periods, by the way, are often varied by the type of liability. Straightforward business risks may have low caps, big baskets and short survivals. Fundamental concepts, like actually owning what you purport to sell, go the other direction.

Third Parties. No one uses the party of the first part or the party of the second part anymore, but third parties are still in contracts, and M&A indemnification provisions typically spell-out how buyer and seller will respond when some other person makes a claim against one of them or the company. If the seller is going to be responsible for paying any damages if the third party claim is successful, then typically the seller would like to be able to control the process of defending (and potentially settling) that claim.

The Rocky Horror Labor Day 2011

noreply@blogger.com (Jim Thomas) — Mon, 05 Sep 2011 13:00:00 +0000

If you’re here for the last installment of my series on risk allocation in the buying and selling of businesses, you’ve got to wait. (“I see you shiver with antici….pation.”) It’s time instead for my tradition of posting on our legal holidays.

Summer is ending, but our economy’s Rocky Horror Show is not. The news is dominated by our continuing failure to create more jobs, while the President and the GOP bicker over who should have center stage to talk about solutions…three years into this mess. (“It’s astounding, time is fleeting, madness takes its toll.”)

So as you say good-bye to summer, I want to take a moment to review the oxymoron: a national day-off to celebrate labor. (“I would like, if I may, to take you on a strange journey.”) But first I'll confirm your suspicions. Yes, the parentetical quotes are from the Rocky Horror stage and film cult phenomenons. Yes, I was once a member of that cult and knew the lines by heart, but I left it for another cult: the Bar.

The U.S. Department of Labor tells us that Labor Day “is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.” The DOL doesn’t tell us that Labor Day was rushed through Congress by President Grover Cleveland to appease America’s labor movement a mere six days after his controversial use of federal troops forcibly ended the bloody Pullman strike that paralyzed rail traffic, and thus the country, during the summer of 1894.

Cleveland’s gesture didn’t work for him—his Democratic party was slaughtered in the 1894 midterm election—or help the labor movement that much either. Many needed reforms, such as reasonable working hours and safe working conditions, now taken for granted, would not be enacted for decades--decades that would include the infamous Triangle Factory fire and Colorado’s own Ludlow Massacre.

I’ve suggested on Labor Days past that we shouldn’t allow our nation’s slow pace of change, as reflected by the holiday’s story, discourage us. On this Rocky Horror Labor Day, I want to point specifically to our sad history of political gamesmanship (“If only we were among friends, or sane persons!”) and call for the rest of us to ignore the politicians. What if, instead, we worked on changes we can create without them?

There are over 30 million human-owned businesses in our America. If only five percent of us (that 5% includes you and me, right?) committed to hiring at least one new employee before New Year’s Eve, together we’ve created at least 1,500,000 new jobs. (“Don’t dream it, be it.”) Then maybe the politicos and the rest of the country will follow along.

So enjoy a day off, maybe see a “Science fiction double feature,” and then get back to the labors that made America great. (“You’re lucky, he’s lucky, I’m lucky, we’re all lucky.”)

I will close with my traditional photographic farewell to summer, but first "Let's do the Time Warp again."

My alter ego Finch.

The Okapi's Best Friend.

The Original Pooh Characters.

Thanks to my daughters, Genevieve and Olivia, for helping out with the photos.