Bottom Line Business Insights

What Thomas' English Muffins Can Teach You About Non-Compete Agreements

Eliot Wagonheim — Tue, 09 Mar 2010 08:24:03 -0400

A week or so ago, I came across a story in the legal press that reminded me of something I wish more of my clients would focus on: Non-Compete Agreements. The story was about a lawsuit filed against Chris Botticella, a former Senior VP of the company that owns Thomas’ English Muffins. It seems that Mr. Botticella had accepted a new position as a senior executive at Hostess, one of Thomas’ competitors in the baked goods space. Thomas’ sued to prevent him from taking the job, and won.

Why? Well, it seems that Botticella is one of only 7 people on the planet – yes, the planet – who knows the secret to how Thomas’ English Muffins are made. And Thomas’ certainly didn’t want him taking that knowledge to one of its biggest competitors. As a result of the court’s decision, my guess is that Botticella is going to have a tough time finding work as counter help at the corner bakery, much less as a senior executive at a large, national baked goods company.

How does a lawsuit over English Muffins relate to YOUR business? Simple: your people are your greatest asset, and, when they leave, potentially your greatest liability. They literally have the power to make or break your business. Every business guru will tell you this, but then you’re left to your own devices to figure out what it all means, and how to protect your business’ reliance on this sometimes unpredictable asset.

Perhaps the most important way you can protect your business’ customer accounts, secrets, processes, plans, and the like from traveling to a competitor after the defection of a key employee is to require key employees to sign a well-crafted Non-Compete or Non-Solicitation Agreement.

A Non-Compete or Non-Solicitation Agreement will prevent your best sales executive (you know, the one whose accounts resulted in 68% of your gross income last year) from leaving your company for a competitor, and taking her business with her to boot. Additionally, if you’ve got any proprietary systems or technologies, it’s imperative that you protect them. Your competitors will likely pay top dollar to lure away your key sales executive, information systems guy, CEO, or key manufacturing process employee. The loss of such an employee (and your competitor’s gain of that employee) will be felt where it hurts the most: your bottom line. Equally as important, they are enforceable. As recently as 5 weeks ago, Judge Richard D. Bennett of the United States District Court for the District of Maryland reaffirmed in TEKSystems, Inc. v. Bolton not only that a Non-Compete is enforceable if reasonable in scope, but also that it will be automatically extended for the period the employee is found to have been in breach.

Do you have employees whose loss would or could have a devastating effect on your revenues or your business? If you do, or even if you’re not sure, feel free to give me a call or shoot me an email and we’ll discuss it. I’ll be happy to answer your questions and point you in the right direction. Free of charge. And with no obligation. You can also read more about Non-Competition Agreements in our recently released Business Owner's Pocket Guide.

In the next entry, I’ll be writing about some of the important provisions a Non-Compete or Non-Solicitation Agreement should contain, and the real effects of these agreements. Stay tuned.

Excerpts from an Interview about The Business Owner's Pocket Guide

Eliot Wagonheim — Tue, 16 Feb 2010 14:27:06 -0400

Recently I was asked some pointed questions about my inspiration and motivation for writing The Business Owner’s Pocket Guide and I thought I’d share those thoughts here:

What was the motivation behind writing The Business Owner’s Pocket Guide?

The purpose of The Business Owner’s Pocket Guide was to help owners of small to medium sized businesses build stronger companies. As a small business owner myself, I know that these companies are the lifeblood of our economy…and I wanted to help make them better. Through The Business Owner’s Pocket Guide, I wanted to provide business owners with answers before it was too late by focusing on areas of critical importance throughout the life of their companies. I wrote the Guide to address bottom line concerns – even legal issues – in an easily relatable way in the hope that it may not only help business owners avoid unnecessary risks, but also travel well down their chosen path.

How was the content selected for The Business Owner’s Pocket Guide and what makes this guide different?

Having counseled businesses of nearly every size and description for over 20 years, I've gained an understanding of what’s important to business owners. Many of the major concerns cut across industry lines:

What do I need in my contracts to ensure that I’m going to get paid?

Should I ask my salespeople to sign a non-compete agreement?

What should I do if I want to bring on a new investor?

What happens if the owners of the company can’t agree on critical issues, and how can we prevent the problem before it arises?

How do I position my company for sale when I’m ready to retire?

I drafted the Guide based on the questions and concerns I saw over and over again. Then I sent the rough copy out to a group of business owners to get their feedback. I think that’s what makes it different – it’s not a textbook and it’s not written to sound “like a lawyer.” It addresses real world issues in an easily accessible way…and it’s free!

Who can and will use The Business Owner’s Pocket Guide?

In the few days since it has been out, it’s been downloaded by business owners in industries ranging from landscaping to catering, professional service firms, and even some folks in local government. Basically, I see the Guide as a valuable tool for business owners and managers, regardless of industry, and whether the business has 5 people or 500.

I wrote it to address issues across the board…and it seems from the enthusiastic early reception as though it is doing just that.

Visit www.wagonheim.com to download The Business Owner’s Pocket Guide and come back here to leave your thoughts and comments.

The Business Owner’s Pocket Guide is the third in a series including The Contractor’s Pocket Guide and The Banker’s Pocket Guide, which were released over the past several years by Wagonheim & Associates.

The Prepared Business Owner: He Sleeps in a Storm

Eliot Wagonheim — Mon, 01 Feb 2010 15:54:53 -0400

In Have a Little Faith, Mitch Albom quotes a sermon so important to business owners that I have reprinted the entire excerpt below:

A man seeks employment on a farm. He hands his letter of recommendation to his new employer. It reads simply, 'He sleeps in a storm.'

Several weeks pass and suddenly, in the middle of the night, a powerful storm rips through the valley.

Awakened by the swirlining rain and howling wind, the owner leaps out of bed. He calls for his new hired hand, but the man is sleeping soundly.

So he dashes off to the barn. He sees, to his amazement, that the animals are secure with plenty of feed.

He runs out to the field. He sees the bales of wheat have been bound and are wrapped in tarpaulins.

He races to the silo. The doors are latched, and the grain is dry.

And then he understands. 'He sleeps in a storm.'

Running your own business is an exercise in piloting to safe harbors through strong and unexpected storms. And as business owners, the storms rage all around us. The bankruptcy of a major customer is a storm. So too, the loss of a major salesperson, along with the customers who elected to follow her. A job gone south, the loss of key support personnel, and one's own unexpected absence from work -- all are gales of sudden and untold destructive force.

To many, the state of our economy this past 18 months has been a storm of epic proportions.

The question then becomes: "Can you sleep in a storm?"

Have you:

Secured lines of credit with terms and limit appropriate to your business?
Protected your streams of revenue by locking down key salespeople with restrictive covenants?
Limited your risk by negotiating manageable damages and indemnification provisions -- particularly in those contracts governing your largest projects?
Trained your replacement?
Documented key procedures so that a new person could step into a job knowing key passwords, resources, and procedures?

Too often, these types of preparations are like flowers at a funeral -- they arrive all at once, and too late. Prudent business owners prepare. They schedule regular meetings with their management team and key advisors, whether quarterly, every 6 months, or even annually, to consider and prepare for what storms may come.

And when those storms arrive, as they most certainly will, the prudent business owner sleeps soundly.

Uncle Joe doesn't have all the answers

Eliot Wagonheim — Wed, 20 Jan 2010 13:02:01 -0400

It’s not hard to find a relative or friend willing to offer a personal opinion on a professional problem. There is really no cheaper advice than that coming from your neighbor. But with the discounted price, one risks listening to uninformed advice from a possibly sophomoric source.

Every month, I consult with business owners who have received wrong, incomplete and sometimes catastrophic advice from friends or relatives who happen to be professionals, albeit with the wrong kind of experience. Often, such advice is simply unfit for the specific business or situation at hand. Advice that is irrelevant to you and your business, although well intended, is more harmful to you than harmless.

For example, let’s say that you had a good fiscal year and need some additional accounting assistance. Your Uncle Joe has volunteered his services since he used to own his own small business and had to file tax forms for years. What your retired Uncle doesn’t know is that tax laws have changed drastically since he was last in business 20 years ago and filing these principle forms wrongly would result in damaging consequences.

One of the great truths I have learned in my 20 years of experience counseling businesses is that paying for quality advice is never a mistake. Professional consultants are experts in their fields and have built their businesses and reputations on giving solid, experienced guidance in their areas of expertise. The time and expense it can potentially cost to correct any problems caused by misguided advice is an unnecessary one. Consulting with the right person from the beginning will save you time and money.

When you are sick, don’t you go to a doctor? When you have a toothache, don’t you go to a dentist? Reputable specialists are so for a reason. If you have a legal matter, consult a respectable attorney as you would consult a brain surgeon, if needed be. Your business is important and the counsel you seek to nurture it should reflect that worth. Consult with the right people: professionals with experience directly relating to your business.

The Handshake vs. the Written Contract

Kimberly J. Hankins — Tue, 05 Jan 2010 12:29:03 -0400

I may be a bit younger in years, but I can still recall when a “handshake and a promise” deal actually meant something. Perhaps some of my confidence in another’s word stems from my small-town Mississippi roots. Nonetheless, in today’s economy, your business will need a lot more than a handshake if you want to get paid. Luckily, only a few hours spent with a reputable attorney can present you with a sound contract based on solid terms and conditions, which will save you time, stress and money, should a client try and stiff you on down the line.

Without a mutually agreed upon legal contract in place, any terms agreed upon with a handshake are moot. Entering into a handshake agreement could put a business at risk for losing money not only in the original agreement but also in court fees for legal action against a deceitful client (unjust enrichment, quantum meruit, and the like).

Since we’re not in 1950’s southern Mississippi, and few millennials even know the meaning of such hospitality in business transactions, a good rule of thumb for any business is to ditch the handshake and ask for a signature acknowledging an ironclad contract, complete with terms and conditions. Those terms and conditions should include the most basic items such as:

Compensation and payment terms
Changes/ additional services
Emergency services
Reimbursable expenses
Provisions of default
Dispute resolution
Governing law

Legal considerations, as stated above, are extremely important to help ensure appropriate compensation for hard work. Some businesses believe that something in writing, though not in legal contract form, is just as dependable. The reality of the situation is a lack of clearly stated legal terms and conditions could leave a business with a higher level of risk for a transaction.

While developing long-standing relationships with clients is important, don’t forget to protect yourself and your business in the process. Shake your client’s hand and exchange the promise to fulfill the contract, but also take a couple of hours with your attorney to put a “gentleman’s agreement” into writing. For the most part, your company’s terms and conditions can and should be standard with every contract, so this will not be an ongoing legal expense. Rather, it will ensure you peace of mind in knowing that should an agreement not go as planned, you have a contract to protect your business.

Marketing Momentum in the New Year

Eliot Wagonheim — Mon, 21 Dec 2009 12:00:00 -0400

We all know the resolution drill. The new year marks the welcome of new beginnings and a commitment to resolutions focused toward adopting healthier lifestyles. Come the new year, gyms and fitness clubs across the country will be filled with people sweating off the holiday pounds. Yet, by spring many of those same people are on the way to the office without a workout in sight. With one bite of a calorie-filled blueberry muffin, the resolution once made with dedication is no longer a priority.

Marketing your business can easily be compared to this all-too-common scenario. As soon as a new product is rolled out or new service offered, a business quickly plans a strategy to get the word out to consumers to increase sales and visibility to target audiences. Spending merely a few weeks working to get your business or product noticed, building your brand, and expanding your network will most likely not offer you the same results as making a constant, consistent effort.

Think about the results you get from exercising. A few weeks of dedication at the gym may result in a pair of pants one size smaller, but months later they aren’t going to fit if you haven’t maintained a consistent workout regimen. The same can be said for your business. You may feel good when business is busy and profits are up, but you must put yourself and your business at the forefront and keep marketing to consumers to stay visible. It takes commitment. It takes a plan.

An easy way to commit to marketing your business year-round is by creating a marketing plan. If this is your businesses’ first attempt, consider consulting a professional or start small by creating a short-term marketing plan with smaller, attainable goals that can be reached in shorter time. Near the end of the short-term marketing plan, evaluate your goals and consider expanding to a long-term marketing plan with annual goals.

As daunting and time-consuming as a marketing plan may seem, the following are a few simple activities that can be done every week to help increase your brand awareness in the community:

Attend industry networking events
Volunteer to lecture or speak at appropriate professional associations or community organization meetings
Write editorial pieces based on recent news affecting your industry for your local newspaper
Sponsor local events or charities

While a plethora of practices can be considered for use, the invariable ingredient to a successful marketing formula is consistency and rhythm. Allotting the time for habitual marketing will help to steadily build a company’s brand visibility. Additionally, the regularity in practices will help to avoid making resolutions to get a business back in shape. Let’s face it…resolutions are tricky to keep, especially if they involve going to a gym, but if it’s better marketing you want, take the time and make the commitment to a solid marketing plan and adopt a proactive mentality. It could be as simple as turning on your computer once a week and researching opportunities online, blueberry muffin in hand.

The Business Lessons of Chanukah

Eliot Wagonheim — Thu, 17 Dec 2009 08:35:51 -0400

Last week, I found myself reading up on Chanukah -- the Jewish Festival of Lights -- as my family and I prepared for the holiday. As I looked for a new way to talk about the meaning of the holiday with my children, I began to realize the business lessons to be drawn from the symbolism used in the celebration.

Each night, a new candle is lit on the menorah. On the first night, only the shamas (literally "servant") or highest candle is lit, along with one other, symbolizing the first night. On the second night, the shamas is used to light two candles, and so on.

It is written that the celebration is really about overcoming darkness, whether it be physical or spiritual. A parallel can be drawn to business condition. Particularly in these economic times, every business -- successful or not -- must fight to overcome inertia, old/bad practices, routine, or complacency. Every business leader has to work each day to embrace and master new challenges, sometimes radically altering the way his or her company had done business for years before.

Overcoming the weight...and yes darkness...that constitutes resistance to change is a very real and daunting challenge. The first light on the menorah, therefore, symbolizes how one candle, representing even the smallest positive change, is enough to overcome a world of night and darkness.

The lighting of the second candle shows how the light represented by that one small prior act now spreads. This is a reminder that a single act -- a single positive change -- while not sufficient to accomplish a significant goal, can lay the foundation for more change. The second light shows that we must redouble our efforts, even after the success of the last initiative.

The lesson of the third light is consistency. As the saying goes: "We did it once because we were inspired and a second time because we were encouraged by the first. This third time, we push back at the darkness because we are committed." It is this third effort that expresses persistence and commitment to dispel darkness with light.

Upon reaching the fourth light on the menorah, we would find that we are halfway to fulfillment of our purpose. This is point at which many worthwhile efforts find themselves sidetracked by distractions. It is here that a leader must help the organization maintain focus by constantly asking the question: "Does this help me achieve my goal?"

On the fifth night, we have achieved a majority. The balance has been shifted from the old (darkness) to the new (light). This is the most dangerous point in any process -- when the goal is in sight and people can become complascent, knowing that the path is now downhill. Should the team spend too much time reveling in its accomplishments, it will ultimately fall short of its goal. So it is here that the leader must demonstrate the importance of bringing light (change) to even the most remote corners of the company. It is not enough to achieve a majority -- the goal must be completely fulfilled.

It is the sixth and seventh nights that are the richest in symbolism. The Judeo-Christian heritage teaches that the world was created in six days. By reaching the symbolic sixth night of any initiative, the leader has maintained a path long enough to bring about monumental change. This is the time to check benchmarks.

Traditionally, the seventh day is a time of reflection. Consequently, even though we may be in view of the goal, we have not quite reached it. Near (but not at) the endpoint is a time to take stock. Enough has been accomplished for us to review progress and make course adjustments to continue on.

Finally, we reach the eighth night -- the time at which we have accomplished our goal of bringing about significant change. Over the years, I have learned that nearly every culture has a holiday or festival that revolves around lights, whether electric (Christmas), candles (Chanukah, Kwanzaa and the season of Advent) or even lanterns in certain Asian traditions. These festivals almost always seem to take place at the darkest time of year and serve to remind us of hope and of our own ability to spread light where there is none.

In the tradition of Chanukah, the use of the menorah through the eight nights of the festival, the teaching is that miracles can happen even though the road is long and arduous.

In the management of any business, it strikes me that the teaching is the same.

Vision: Figuring Out Who You Are and What You Want to Be

Eliot Wagonheim — Tue, 08 Dec 2009 15:01:35 -0400

Not long ago, Duke University Men's Basketball Head Coach Mike Krzyzewski and the Duke athletic department developed a list of nine principles that defined Duke athletics. Coach K described these principles as "the things that are essential to who we are."

The nine principles were revealed to a gathered crowd of 850 student-atheletes, coaches and administrators in Cameron Indoor Stadium by former Duke student-athletes who represent great success stories in their respective fields. The words selected by Duke to define Duke were: (1) education; (2) respect; (3) integrity; (4) diversity; (5) sportsmanship; (6) commitment; (7) loyalty; (8) accountability; and (9) excellence.

As I read Coach K's description of Duke's guiding principles, I could not help but focus upon the applicability of the same methodology and mindset to my own small business and those I am fortunate enough to counsel. I wondered whether one could gather a roomful of often cynical employees around a conference table, discuss values, and have it actually mean something tangible.

In other words, I wondered "what were the keys to a successful company vision?"

Tony Gattari, an Australian corporate consultant wrote in Good Ezines that successful corporate visions share three attributes:

It's infectious. Just like a disease, a vision is at its most contagious when it is alive and active in the host.
It comes from within. Rather than having management swoop in and tack a poster in the lunchroom or spend $1,000 at Successories, the vision is tied to the employees and created from the real passions and desires of the company's leadership.
It goes beyond the company's 4 walls. A company with a successful corporate vision extends that vision to vendors, colleagues, customers, and the business community at large -- not in an evangelical way, but rather simply by the way the company interacts with the outside world.

In the privacy of their own homes and hearts, people often find themselves doing some soul-searching in December in contemplation of resolutions for the coming year. Perhaps, and maybe even especially, in these economic times, December may be a good time for some corporate soul searching as well.

Where Company Policy is Concerned: The Devil is in the Details

Kimberly J. Hankins — Mon, 23 Nov 2009 17:08:35 -0400

Yesterday, we received the catalog from Despair.com. One of their demotivators featured the legend: “Hard work often pays off after time, but laziness always pays off now.” I thought about this as I was working with a client on revamping her company’s employee handbook. We discussed everything from dress code to paid-time-off, to the point where she was so tired that she asked, “Do you think that all of these details really matter? Can’t we be a little more vague and worry about addressing some of these issues when they come up?”

But the point is, you can't -- not if you want to avoid unwanted results from your employees or claims from DLLR. As time-consuming as the redrafting effort was, we needed to get it right. The devil is in the details.

It’s easy for this idea of the devil being in the details to be lost on some. In this economy, we are tempted to rush, rush, rush to get the end product completed. We’re stretched thin, and our only goal tends to be the almighty dollar. However, we have got to stop and be reminded that, in any endeavor, the devil – the difficult part – is getting those small details just right, so that the end result is excellence.

When we neglect the details, people notice. For instance, in that employee handbook, if we failed to note that jeans were impermissible for office staff, you can bet that employees would notice and would expect that jeans were acceptable attire. What’s worse, the client who walks through the door to your business and sees the office staff wearing the jeans may be turned off by the lack of professionalism. And if you later tried to enforce a “no jeans” policy, or ultimately let an employee go as a result of the lack of professionalism, not having this detail documented in the handbook may allow that employee a legitimate claim for wrongful discharge and/or continued benefits.

Of course, the flip side is also true. Sometimes the more details you tend to, the less that people really notice. But this is a good thing. Allow me to explain:

You come home from work today, check your mail, and find an invitation to a party in a few weeks. The date comes along, and you go to said party, where you eat, drink, mix and mingle for a few hours, and then head home. Do you really think about all of the details that went into the party?

If I were your hostess, here’s what would have gone into that party (at a bare minimum!):

2 hour to select the perfect theme (season, occasion, etc.), date (no Ravens home game, or other obvious conflict), time and location (backyard, fancy restaurant, art gallery, you name it!)
30 minutes forming a guest list (taking care to stay within proper friend and family circles and to be as inclusive as possible),
2-3 hours to select the perfect invitation (considering everything from the theme to the font, because the invitation sets the tone of the event),
30 minutes choosing stamps and timely mailing the invitations (there is such a great selection of stamps out there, you may as well find one that works well with your event!),
2 hours selecting decorations (even more if some decorations are homemade or require any kind of legwork)
3 hours selecting a menu
2 hours shopping for decorations and food (if you aren’t using a caterer)
4 hours preparing food (again, if you aren’t using a caterer)
5 hours cleaning and/or setting up the space (placecards or nametags… labels to identify food selections… fresh flowers on tables and in the powder room…)
2 hours assembling my own wardrobe for the event

And then, the guests arrive.

Paying attention to all of these details is exactly why the party will go off flawlessly. And exactly why not one guest will think twice about everything that went into making the party fabulous. But guess what? It’s exactly why every guest will remember the evening.

Both personally and professionally – whatever your business, give great care to those details!

Tuck in your shirt. Look the part.
Proofread. Yes, even emails.
Avoid saying “um.”
Remember people’s names.
Make eye contact. Smile!
Create an outline before your next presentation. Practice.
Ditch the AOL, Yahoo, or Gmail account and get your business its own domain name! For $75, two guys in a pickup are transformed into a solid company you can trust.

If you take the time to battle those devilish details, they are sure to produce returns tenfold.

I wore maroon, patent leather, pointed-toe, crocodile-printed pumps to work today. They pick up the hint of burgundy in my brown checked suit and truly complete the outfit. They even make me feel more confident as I attend my morning, lunch, and dinner meetings today.

As I said…the devil is in the details.

Fall (Corporate) Housekeeping

Michael J. Lentz — Mon, 05 Oct 2009 16:44:39 -0400

In an unfortunate rite of fall, Maryland law requires the State Comptroller “immediately after September 30 of each year,” to prepare, and send to the State Department of Assessments and Taxation (“SDAT”), a list of every Maryland corporation that has not paid any tax due (other than a purely local tax) by October 1 of the year following the year in which the tax was due. The requirement also applies to Maryland Limited Liability Companies (LLCs), and includes a failure to make any required unemployment insurance contributions or reimbursement.

When SDAT receives the list from the Comptroller, it sends each entity on the list a notice that the entity’s charter will be forfeited if the taxes due are not paid by the date stated in the notice. Unfortunately, mailing of the notice is sufficient – failure to receive the notice does not affect or delay the forfeiture or annulment of corporate existence.

Most companies, though, find another aspect of the forfeiture law even more troubling, as it is a trap for the unwary business owner. Maryland entities, as well as those formed outside of Maryland but subject to jurisdiction in Maryland (which likely means doing business in Maryland) must file an annual report, and pay the annual report fee. Because the form, found here, is called a personal property tax return, many business owners understandably believe that they need not file the form unless the business owns property in Maryland.

Unfortunately, this is not so. The filing requirement (and $300 annual fee) apply to domestic and foreign corporations, limited liability companies (LLCs), limited liability partnerships (LLPs) limited partnerships (LPs, Business Trusts, and Real Estate Investment Trusts (REITs), whether or not they own personal property in Maryland. Immediately after September 30 of each year, the Comptroller certifies to the SDAT a list of entities that have not filed their personal property returns. The SDAT then issues a “proclamation” forfeiting the charters of all non-compliant entities. When a forfeiture occurs, the SDAT will mail notice of forfeiture to the affected entity, at the entity’s address on record with the SDAT.

There are two significant consequences to forfeiture: first, any person who knowingly transacts business in the name of a corporation whose charter has been forfeited and not revived is guilty of a misdemeanor “and on conviction is subject to a fine of not more than $500.” Second, once a corporation’s charter is forfeit, the corporation in its own name can no longer maintain or defend any suit in any Maryland court. Rather, the directors of the corporation become trustees for the assets of the corporation.

Revival of a forfeited charter is a fairly simple matter. First, the forfeited corporation must correct the problem that led to the forfeiture. Once this is done, the corporation should file Articles of Revival (form and instructions here). For an LLC, LLP, or LP, file Articles of Reinstatement (form and instructions here).

As a matter of careful housekeeping, the forfeited entity should, after revival, adopt resolutions expressly ratifying all actions taken during the period for which it was without a charter.

Bottom Line: Make sure that your business has paid all necessary taxes and has filed a Personal Property Return for 2009, even if the business does not own any property. If you are unsure, you can check the SDAT website listing entities subject to forfeiture. You can also check whether your company entity is in good standing via the SDAT’s Charter Search Page. If your entity has been forfeited, revive it promptly; this will avoid many headaches later.

Inventory Control Means Value at the Time of the Sale

Eliot Wagonheim — Thu, 10 Sep 2009 22:36:54 -0400

The Letter of Intent ("LOI") set the price at $22,000,000. The Asset Purchase Agreement, known as the "APA", executed just six weeks later set the price at $21,750,000. At closing, the purchaser wound up paying $20,200,000. The sole reason for this 10%, two million dollar haircut was the seller's lack of inventory control.

Particularly in a tight economy, due diligence is the order of the day. Savvy purchasers will look for audited financials and recently documented full, physical inventories before coming to the settlement table. In that same vein, savvy sellers will address this issue well before even putting their company on the block. The price of overlooking inventory controls is steep.

If the Buyer ever gets to the point of knowing more about the company than the Seller, the Seller will take a hit.

Too many companies, particularly family owned companies, try to sell the business while relying on the strategies and procedures which served them well over the years while building the company. They don't work. A successful sale depends upon the seller's ability to view the company through the eyes of the buyer. Most notably, this includes absolute verification of inventory.

So, before seeing their lawyer, business broker or investment banker, sellers hoping to realize full value at closing, would be best advised to take a stroll back to the warehouse...and stay there for a while.

What Message are Your Employees Really Sending?

Eliot Wagonheim — Mon, 07 Sep 2009 22:55:19 -0400

Yesterday, I found myself at a traffic light behind a company truck. The truck belonged to and advertised a dog waste removal company. I pondered this. For a while, I wondered what the job interview was like. But as the light turned green and traffic started to move, I noticed something else. The truck was sporting a bumper sticker that read:

Your Life is not My Problem.

I turned my pondering up a notch. "How is it," I wondered "that in this one moment, frozen in time, the dog poop guy seems to be looking down on my life?" Now, don't get me wrong. This guy, perhaps even the owner, had a company, did honest work, and maybe even made a killing performing a service hordes of people would pay to avoid having to do. But why was his employee insulting me. And did the company's owner know it?

And this led me to my question:

How many owners realize the hidden (and not-so-hidden) messages their employees are sending?

Several years ago, Walgreens faced a lawsuit over just this issue -- only in more extreme form. It seems that Walgreens pharmacy employees entered their thoughts on various customers in the comments field of the company's perscription software. There, stapled right to a perscription for a customer's anti-anxiety medication, was a print out featuring some anonymous employee's assessment "She's CRAZY."

Now maybe she is, and maybe she isn't. But one thing we know for sure. Walgreens has spent millions of dollars on a campaign to convince the public that it is a friendly neighborhood pharmacy. How much money, then, did this one errant employee flush down the drain with one careless, or in this case, incredibly stupid example of personal expression?

Appearances matter. If your employees have customer contact, check every aspect of the interaction.

What do the outgoing voice mail messages say?
Look for bumper stickers on vehicles used for delivery -- political, religious, or even humorous. What's funny to one is insulting to another.
Listen to how your employees express themselves. Do they have a penchant for telling ethnic jokes or making sexist comments in an attempt to be funny? Some people do these things so often they don't even notice them anymore.

Can you see your company through your prospective customer's eyes? If the dog waste company could, they might have taken the time to ponder that bumper sticker.

Employee or Independent Contractor: What Business Owners Need to Know

Eliot Wagonheim — Fri, 04 Sep 2009 09:08:43 -0400

Employees are expensive. Misclassifying them as independent contractors is more so.

Most state laws require employers to pay for their employees' workers' compensation coverage and unemployment insurance...at a minimum. The Federal government imposes additional (and very expensive) requirements. Specifically, employers must:

Pay Social Security contributions of 6.2% of salary up to $106,800 (in 2009),
Withhold 1.45% of all earnings for Medicare,
Pay overtime to eligible employees
Provide unpaid leave under the Family and Medical Leave Act for those companies to which the Act applies.

Independent contractors, on the other hand, receive 1099 forms at the end of the year and are responsible for their own taxes. Employers contribute nothing.

It is tempting, therefore -- particularly in difficult economic times -- for employers to classify people as independent contractors and save both the money and the headache of withholding taxes insurance payments, and contributions. But it's not that easy. The IRS looks very carefully at each situation to determine the exact nature of the relationship between the company and the individual. For the most part, it comes down to a question of control.

The IRS and most states examine the following factors to determine the nature of the relationship:

The company's right to direct or control how the work is being performed
Who establishes training programs and whether they are mandatory
The source of the tools (including computers and software) used to perform the work
The location where the work is performed
Whether the company has the right to assign additional projects
Whether the hired party hires and pays his or her assistants or support staff
THe company's right to determine when the work is performed and/or set certain hours

Bottom line, if your company has the right to control or direct what is being done, how it is being done, and when it is being done, your company is most likely and employer.

Most importantly, a wrong answer can be extremely expensive. Companies which misclassify employees and independent contractors can be subject to huge tax bills for unpaid taxes as well as penalties for failure to file required tax forms and, in certain circumstances, failure to adhere to Federal and State statutes such as the Family and Medical Leave Act and Title VII of the Civil Rights Act of 1964, as amended (applicable to employers who have 15 or more employees). In addition, misclassified employees can pursue their own claims against the company for any losses they may have sustained.

Both companies and individuals can ask the IRS to make a determination of employment status by filing with the IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Business Rule #1

Eliot Wagonheim — Tue, 01 Sep 2009 19:50:46 -0400

It is a simple lesson learned by those good at what they do. The world's best software designers use it as their primary focus, as do diplomats, the nation's top deal-makers, and (believe it or not) legislators evaluating U.S. tax policy. Whatever the path, there are many roads to a successful outcome, but they all start with Rule #1: Make it easy for people to do what you want them to do.

Allow me to illustrate.

Two weeks ago, my 10 year old came down with strep throat. Once he spiked a fever, my wife took him to our neighborhood urgent care center. To date, I've received three statements from my insurance carrier. Three separate envelopes. Three detailed statements. I still don't know what I owe. I presume these people want me to pay them. (Why else would they send me the statements?) I want to pay them. But they're not making it easy. Instead, they are making it almost inevitable that I will do one of three things:

Delay paying them until I can sort out their bill
Call their customer service number and tie up a representative for a while, thereby raising their employment costs by making such people necessary in the first place
Pay the wrong amount, forcing their accounting people to deal with the discrepancy

Not one of these things is what the insurance company wants. They want their payment promptly; and they're not going to get it. This company has failed to follow Rule #1.

Every facet of your business, from employee policies to marketing and customer service, should be created from the ground up in service to Rule #1. In other words, for each part of your business, figure out what you want and then develop policies which make it easy for people to give it to you.

If you want people to pay you timely, make your bills easy to understand, stick religiously to a schedule when sending them out, make sure they do not contain unpleasant surprises, give people a variety of ways to pay, and submit your invoices or requests for payment in a form readily acceptable by your customers.
If you want your customers to use you as a resource, make it easy for them to find and contact you on at their convenience. (If your business serves construction contractors, for example, you better be reachable at 7:00 a.m. because that's when they're on the job site.)
If you want to know what your employees are thinking, create policies which incent them to provide their input and make it easy for them to do so.
If you want someone to keep sending work your way, figure out how you could make sending you work a no-brainer for them. For example, see if you can send referral sources a quick reference which would serve the dual purpose of making their job easier while keeping your company's contact information front and center. Another example would be to offer free services such as assessment or contract review to enable your referral sources to get the ball rolling on a project without cost. After all, once you're in; you're in.

Rule #1 applies equally to customers, employees, partners, and investors. Too many company policies exist simply because they always have. As noted by despair.com

"just because you've always done it that way doesn't mean it's not incredibly stupid."

If that's where you are, change. The tough part, of course, is actually examining each facet of your business -- from HR policies to website design -- to figure out what response you want, and what kind of responses are counterproductive. Once you have that figured out, discard the policies that do not serve Rule #1 and build on those that do.

Good luck.

Avoid Commodity, Distinction Is Key

Eliot Wagonheim — Mon, 31 Aug 2009 14:54:47 -0400

Two months ago, our copier vendor called to tell us that our lease was almost up. The purpose of the call was obvious -- they wanted to sell us a new copier. The result of the call was a business lesson that we will use to guide us over the life of our firm.

The end of our copier lease left us with three options:

Pay off the lease
Upgrade to a new copier
Explore our options.

Paying off the lease would require one final payment equivalent to about 8 of our normal, monthly payments. By month nine, absent an unexpected mechanical meltdown, we would be home free.

Our vendor (we'll call them Oldco) clearly wanted us to choose the second option. They were offering a lease on a newer, faster copier for a slightly lower monthly cost. The problem was, we had no problem with the old copier. It was fast enough, scanned well, and a slight upgrade in speed, with perhaps a better stapler, did nothing for my bottom line.

Our choice came down to either keeping the current copier or exploring our options. Upgrading machines with no discernable benefit made no sense.

Our search for other options took us to Advance Business Systems. We invited both Advance and Oldco to make a presentation. (Not that we're offering a million dollar copier contract, but whatever the money is, it's important to us.) Our Oldco salesman walked into the presentation with the company's president and showed us some very nice brochures on the copier upgrade. We could slightly reduce our monthly payments while increasing the speed of our copying and scanning. (And maybe add a hole punch...I mean who's to say?)

Advance, on the other hand, scheduled a meeting at their showroom after asking us detailed questions about how we run our practice. At their office, we were ushered into a conference room where we were given a demonstration of how their copier could integrate with our practice management software while helping us achieve the kind of document control system we had envisioned.

The companies provided a stark contrast. Oldco sold copiers. Advance sold a document management solution that happened to work through copiers. What became apparent was that somewhere in its development, Advance had decided that anyone could sell copiers and that anyone can claim to have reliable service. To avoid becoming a commodity, Advance had to identify how it fit into its customers' development. It had to figure out how it was more important than the other guy and then make that distinction apparent to its customers.

Therein lies the lesson.

When I now look at companies, I find myself asking: "Are they Oldco or are they Advance?" I've asked that of my own. In so asking, I think I've found my answer and charted the road we, as a law firm, have to travel to ensure that we never become a commodity.

My law firm's answer to that challenge as well as my request for feedback concerning other companies and the roads they've chosen, form the basis for future posts.

The Power of the Humble and Much Maligned Meeting...Done Right

Eliot Wagonheim — Fri, 21 Aug 2009 09:25:04 -0400

I hate meetings. To me, they usually seem like 5 minutes of substance packed into 2 hours. In fact, the best part of any given meeting is time just before everyone gets there -- when you get a chance to chat with those who arrived early. But then the "Agenda" starts, and anything resembling a productive use of time comes to a screeching halt.

And yet...some companies thrive on them -- in fact, thrive because of them. The theory being that, done right, meetings can become short bursts of adrenaline, becoming a company's rhythm and tone.

Verne Harnish, author of Mastering the Rockefeller Habits, writes:

One of the most successful practices any would-be gazelle [Harnish's term for a nimble, fast-growing company] can implement is that of a daily huddle -- nor more than 15 minutes per group, in a room or on a daily conference call, just to celebrate progress toward goals or identify barriers blocking that progress.

What too often goes without saying, is that it takes months of soul searching and sometimes years of experiments and failures for a company to discover its goals, barriers, and measurable "metrics" upon which to base its 15 minute boost.

The latest statistics out of the Small Business Administration bear out that the vast majority of businesses fail within the first 7 years. To excel, however, a business must focus beyond a question of mere survival.

So if we accept, for the sake of discussion, that a daily 15 minute huddle, done right, would keep your company moving forward, the question then becomes: "what should be distilled into that 15 minutes?" What is so important to your business that it should take up the only 15 available all-company minutes per day?

My hunch is that if you find that, you would find the kind of adreneline boost that would turn your business into one of Verne Harnish's gazelles.

Question: What is the central idea or them around which you would plan your 15 minute daily huddle for your company?

Contracting Basics: Why Boring Things Like Venue and Jurisdiction Matter

Eliot Wagonheim — Tue, 18 Aug 2009 12:07:47 -0400

In the last 12 months, my firm helped our clients close transactions and manage litigation in Maryland, New York, New Jersey, Connecticut, Florida, Delaware, Pennsylvania, Virginia, Texas, and Washington State -- all from our sole office location in Hunt Valley, Maryland. We're hardly alone.

Today, geographic boundaries are becoming less and less relevant to businesses of every size and description. With that globalization (or at least "Americanization") comes the uncertainty of collection. It is interesting that in an era where electronic communication is so commonplace as to jeopardize the two century old institution that is the U.S. Postal Service, the written contract -- often complete with real, live signatures -- has if anything gained in importance.

This fact was brought home to me yet again when consulting with a client concerning her company's $20,000 claim for arising out of work performed for a North Carolina firm. The Purchase Order described the work, named the price, and outlined the payment and delivery terms. And while my client thought it was sufficient at the time, she now realizes that she has no chance to recoup her attorney's fees, will not realize any interest on the overdue payment, and worse yet, has to travel to North Carolina in order to chase her money.

Every contract. Allow me to repeat...every contract...should state where suit (or arbitration) must be filed in the event of a dispute. These provisions may be called "Dispute Resolution" or even the technical, legal terms of "Venue" or "Jurisdiction." However called, the language must not only provide which state law governs the contract, but also which courts will have "jurisdiction" or power of review over any claims. Had this provision -- two sentences at most -- been present in my client's purchase order, her customer would have to come to her in order to defend the claim, rather than force my client to throw good money after bad traveling to her delinquent customer's home state.

Lesson learned.

(If you have a contract question...or horror story...send it in. It may prove useful to others or just serve as a source of amusement in a Schedenfreud sort of way.)

Friend...Connection...Follower...Fired.

Eliot Wagonheim — Fri, 31 Jul 2009 20:21:10 -0400

Businesses are running scared.

Twitter is driving the NFL to distraction. According to the New York Times, the Green Bay Packers have announced that players using Twitter during games, practices, or to report on team activities will be assessed heavy fines. The Miami Dolphins have all but outlawed Twitter. Who knew a tweet could do what a 290 pound lineman couldn't?

And the NFL is not alone. Consider...

On January 21, 2009, the Associated Press reported that officials in Paramus, NJ suspended without pay an employee for posting allegedly racist comments on his Facebook page. He used his own computer and made the entry on his own time.
In March, a Philadelphia Eagles employee lost his job over Facebook postings critical of the teams trade decisions.
July saw the requested and accepted resignation of a NY government employee for some strongly worded postings critical of both President Obama and Professor Henry Louis Gates

Lest you think that social networking sites inspire fear in only the weak of heart, consider this: CNN reports that the United States Marine Corps have launched a full, frontal assault on social networking sites. According to a Marine Corps spokesman:

"These internet sites in general are a proven haven for malicious actors and content and are particularly high risk due to information exposure, user generated content and targeting by adversaries."

Businesses throughout the country and around the world are struggling to harness the marketing power...and contain the potential HR fallout...of social networking sites. As this plays out, and in view of the incredible and virtually untapped marketing potetion of these sites, I have a few recommendations:

Develop written social networking site guidelines for your employees;
Talk to your employees about your company's presentation to the outside world in the hope that you can make them part of the solution, rather than the problem;
Review all employment contracts to ensure that your company can take proper disciplinary action against those who's postings cast you or your company in a negative light; and
Make sure any Personnel Manuals or handbooks include both the Company's social networking site rules and a discussion of the possible ramifications of violating company guidelines.

Facebook and Fish Gills: The "Working" Part of Social Networking

Eliot Wagonheim — Thu, 30 Jul 2009 19:43:13 -0400

Not long ago, I was on a plane, giving some serious thought to the business applications of Facebook, MySpace, LinkedIn, and Twitter. I was thinking about business, but the subject I kept returning to was fish gills.

It was my 12th grade biology teacher, Mr. Williams, who posed the question: "Why are gills deeply ridged, almost like the pages of a book, rather than smooth?" The answer was "surface area." A gill's sole function is to absorb as much oxygen from the water as possible -- just like lungs in a human. The more ridges, the greater amount of surface area. The greater amount of surface area, the greater the exposure to oxygen -- all packed into a confined space. Which brings us back to the social networking sites.

Facebook, MySpace, LinkedIn, and Twitter are all about exposure to the outside environment. The greater a person's participation, the more friends, fans, followers and connections. From a business standpoint, exposure to potential customers out there in the environment equates to one's surface area.

But it's not just surface area that matters. For the organism to thrive, gills must be exposed to the proper environment. A fresh water fish will die in salt water. Similarly, large scale exposure of a business to a community of non-buyers will result in noteriety, not success.

And that's the question facing businesses, my own included --- how can a business ensure that its social networking initiatives gain exposure to the right environment?

I welcome your thoughts.