RCBA – Real Estate Section: Now What? Transitioning Old LLCs to the New Act Act

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Practical guidance on how to help companies formed under Chapter 322B (Minnesota’s prior LLC statute) adapt to Chapter 322C (the new statute effective for all companies January 1, 2018). How to turn old Member Control Agreements in to new Operating Agreements, including questions related to Chapter 322C.  The event will take place from 12:00 PM to 1:00 PM on January 16, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

RCBA – Real Estate Section: Cyber Security for Dirt Lawyers: What Real Estate and Construction Lawyers Need to Know About Cyber Threats

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Cyber security is not just for big companies and industries; breaches can affect small businesses, as well.  Big and increasing risks are out there.  Learn how to limit the risk, and what to do in case of a breach.  The event will take place from 12:00 PM to 1:00 PM on December 19, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Strategic Thinking for Leases & How Lawyers Can Help

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In the wake of Amazon’s latest acquisition of Whole Foods, the fate of traditional, brick-and-mortar retailers may not be as bleak as it once seemed.  The world’s largest online retailer is facing certain difficulties in the realm of lease agreements, the same kind of difficulties that any tenant may face when entering into such a lease.  Oftentimes clients have a perfect location picked out, with an excellent business and marketing plan worked out, and clients and customers ready to go, however, they get a major surprise when they receive the lease from the Landlord.  Many tenants as well as landlords forget about the implications that a lease agreement holds down the road for future competition of subsequent tenants.

Stores such as Bed Bath & Beyond, Best Buy, and Target all have legal rights to halt certain operations proposed by Amazon by way of Whole Foods markets when it comes to where they may open or what they can do at various locations across the country because of their leasing rights and restrictive covenants in related agreements.

The carving out of certain provisions in leases such is a routine practice in the industry.  Tenants with enough leverage will negotiate with Landlords to have some protections put in place in order to avoid certain competition.  It is common to see proposals of various restrictions, such as no other grocery stores, electronic stores, toy stores, or discount retailers allowed in a mall so long as the tenant is leasing there.  Landlords frequently give up their business rights to substantially alter malls and therefore sacrifice tenant mix – but they do so as part of a careful negotiation.

The main issue that Amazon is facing, however, is that of neighboring retailers having clauses that, although do not bar the retailer completely, substantially limit its capabilities newly offered by Amazon.  Such limitations have the capability of vastly altering, or in some cases, prohibiting, the things that make a company unique.  Though the future for Amazon and Whole Foods is unclear, I think there will be a lesson learned of heightened focus on negotiations in general.

The question remains then, how can retailers adequately protect themselves from the e-commerce giant that is Amazon, or any competitor for that matter?  In general, a lawyer can aid tremendously in the process by providing the know-how, skills, and ultimately the language necessary for such protection.  As evidenced by the above, carefully drafted lease agreements are key and are able to withstand even the biggest and most powerful companies.  In a world where Amazon is seen as a dominant and intimidating player in a multitude of markets, this instance has taught us that companies much smaller can not only survive, but thrive in an environment where physical Amazon stores exist, albeit with adequate lease agreements.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Panel: Craft Beer, Restaurant, and Other Start-Up Challenges at Twin Cities Startup Week 2017

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Royee will be presenting at the Twin Cities Startup Week 2017 Panel: Craft Beer, Restaurant, and Other Start-Up Challenges at Headflyer Brewing in Minneapolis.  The panel will discuss their experiences with their own start as well as tips on funding your own start-up.  Come join Flagship Bank for a beer and networking.

Please contact us with any questions or for additional information.

RCBA — Real Estate Section: Tax Forfeited Property

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Everything practitioners need to know about tax forfeited property: delinquent taxes, forfeiture, redemption, public auction and terms, rehabbed structures, title defects, and the attorney’s role.  The event will take place from 12:00 PM to 1:00 PM on October 17, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Key Areas of Concern When Dealing with a New Vendor

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Whether you are a well-established company or just starting out, outsourcing certain services may be in your best interest; big box retailers, for example, need not concern themselves over the creation of a customer-facing app to sell their products and all of the intricacies that accompany the technological world.  In order to create said app, or do virtually any other service for that matter, businesses often hire other companies better suited to do so, whose job it is to specialize in such matters.  When engaging in these outside vendor hiring processes, it is important to take into consideration a multitude of different factors, such as reliability, insurance, assurances, and termination rights.

A vendor’s reliability is perhaps the most important factor to take into consideration when first addressing whether to do business with them.  Make sure you conduct due diligence on the company and assess their past record of entering into contracts such as yours.  Have former clients of customers favorably or unfavorably reviewed them?  Are they rated by the Better Business Bureau?  Take a look at such testimonials and ratings in order to gauge the company’s reputation and overall reliability going forward.

Another way to protect your business from the potential harm of outside vendors is to require them to obtain multiple kinds of insurance coverage.  In particular, cyber insurance can be especially helpful if the vendor in question is to have access to private electronic data, such as the personal information of customers or employees.  Cyber insurance typically covers such things as computer and data loss recovery, credit monitoring, notification expense, and other related forms of liability.  Additionally, businesses oftentimes require certain amounts and other types of insurance coverage, even conditioning their vendor contracts on being named as an additional insured party in those policies.  Paying attention to how such requirements are drafted within the contract are just as important as requiring them in the first place.

Third party service providers, perhaps now more than ever, are being required to provide a multitude of assurances to their clients, promising such things as confidentiality, risk management, compliance with expectations, and integrity.  Companies are more frequently appointing people within their organization to attend to the management of the quality of service rendered.  It is important to lay out your expectations and required assurances at the outset of any vendor-vendee relationship, as it provides a permissible roadmap of situations to come, specifying what is and is not acceptable practice.  Contractual requirements and carefully laid out details help manage expectations. Details are always helpful because the parties can help ensure that everyone understands the “rules” and alleviate concern with new relationships on how the other party may act.

Likewise, and relatedly, the termination rights of parties are also important to consider.  As a business, it is important that you have the legal right to move on from a contract that is, for a valid reason, unfavorable to you or later on becomes unfavorable to you.  Try to anticipate potential issues that may arise, such as a material breach by either party, and provide for that in contract form.  Businesses may even wish to discuss the termination of a contract based purely on inconvenience, with a potential expense being incurred on the terminating party.  In essence, you want to make sure that you are not stuck in a bad situation by predicting future problems, and figuring out a way to settle them in a way both parties can agree to, in contract form, before they ever arise.  Likewise the vendor may require fallbacks to protect their interests. Such provisions can be negotiated by both parties to achieve an agreement which works for everyone involved.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Real Estate Legislative Update

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Royee will be introducing attorney Kevin Dunlevy, from Beisel & Dunlevy, P.A., at the next Ramsey County Bar Association Real Estate Section event to discuss legislative updates related to real estate. Kevin Dunlevy will focus on both what happened in 2017, and what is likely to happen in the 2018 legislature. The event will take place from 12:00 pm to 1:00 pm on September 19, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us for more information!

Beware the Oxford Comma

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Upon first glance, the fact that the US Court of Appeals for the First District recently upheld an appeal by five Maine delivery truck drivers of dairy products may not seem like a huge deal—it was essentially held that the drivers in question were entitled to overtime pay, something that their employer had thought they were exempt from because of Maine’s applicable law.  However, the reasoning behind the actual irrelevance of the law in the circumstance lay within its use, or rather lack thereof, of a comma separating the last two items of a list, otherwise known as an Oxford comma.  Though this case did not take place in Minnesota, the lesson it provides is manifestly true in all areas of contract law and drafting, that being: grammar truly does matter.

According to Maine’s wage and hour law, as set forth in Chapter 7 of Title 26 of the Maine Revised Statutes, an employer is not compelled to disperse overtime pay if its employees are engaged in the following activities:
The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of:
(1) Agricultural produce;
(2) Meat and fish products; and
(3) Perishable foods.

The issue arose with regard to the lack of a comma after the word “shipment” above, meaning the drivers argued that it should be interpreted as meaning “packing for shipment” or “packing for distribution” and that since the work performed dealt only with distributing milk and not packing it in any way, their employer was not exempt from paying them overtime.  Conversely, the employer believed that the law should be read as if there was a comma after the word “shipment,” therefore splitting the tasks not eligible for overtime pay into “packing for shipment” and “distribution” generally.  An alternative version of the law, with the Oxford comma included, would in pertinent part read: “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment, or distribution of . . . .”  This interpretation would better delineate the fact that both those involved in packing for distribution as well as simply distribution are subject to the law, rather than two kinds of packing.  Without it, however, the law as it stood remained unclear.

Ultimately, the court came down on the side of the dairy drivers, declaring that “ambiguities in the state’s wage and hour laws must be construed liberally in order to accomplish their remedial purpose[.]”  To longstanding proponents on either side of the classic Oxford comma debate, this comes as a weighty precedent in its favor.  A non-legal example of the comma’s relative importance can be seen in sentences such as: “This book is dedicated to my parents, Elvis Presley and God.”  With that said, opponents say the use of it is oftentimes unnecessary and generally displeasing in a visual sense.  In general, however, it is important to note that what should be aimed for is clarity, not blind adherence one way or the other.  This is perhaps especially true in the legal field where so much can be misinterpreted or misunderstood from an outsiders’ perspective already.

In brief, though the events that took place and the legal consequences that followed did not occur in Minnesota, they certainly could have.  The ramifications of the dairy employers’ reliance on a single missing comma ended up costing them approximately ten million dollars, and as such it goes to show us all about the importance of transparency in writing overall good grammar.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Ten Things to Consider When Taking a Product or Service to Market

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1. Basic business structure. First and foremost, it is important to make sure that your enterprise is incorporated correctly, whether that be as a sole proprietorship, partnership, LLC, or otherwise.  Making sure that you have completed the applicable governing documents in order to legitimize the overarching business is essential to making sure that a product launch runs smoothly and without legal issue.

2. Separating yourself and employees from competition. Many products or services grow out of pre-existing ones, however, it is critical that those in charge of the operation, as well as any employees, separate themselves from possible conflicts of interest or potential competitors of the product or service in question.  Doing basic background checks of employment history is a common way in which new employers come to know of any hindrances of an employees’ ability to work, such as non-compete agreements or confidentiality agreements.

3. Clear contracts. Contracts with processors, retailers, suppliers, and otherwise all need to be in good standing and properly executed by the time a product goes to market.  Ideally, they should be kept up to date and crucially specific, going well beyond the basics of what is being bought or sold, for how much, and when.  They should also abide by all applicable laws and customs and therefore consulting a reputable attorney is critically important when accomplishing this task.  All too often companies will utilize a generic contract that provides miniscule amounts of protection (if any) and that leaves clients with too much exposure to risk.

4. Licensing.  If you are a relatively small company and would perhaps like to broadly expand yet you don’t have the resources to do so, you may want to consider licensing as an alternative approach to taking your product to market yourself.  Licensing is a tool that allows you to essentially enter into a legal agreement with another and have them pay you for your ownership of a product or idea.  It’s important to note here, however, that licensing agreements bring with them a myriad of other legal considerations to think about in and of themselves so it is important to not think it is the perfect legal solution.

5. Laws around sales and marketing. Sales and marketing are integral parts of making a new product launch a successful one.  However, even though the ever-expansive internet may make reaching target markets exceptionally easier than ever before, the laws surrounding just what you can and can’t do are equally broad.  For example, you must be careful not to include copyrighted infographics or photos in marketing as well as make sure any user data you may be collecting or using for such purposes is, in fact, legal.

6. Confidentiality. It is generally a good idea to keep new products or services, especially those of a “new” or “unique” nature, relatively private in order to preserve them until they are ready for the broader market.  From a legal perspective, it is important to prevent public disclosure, otherwise you may lose your ability to file for intellectual property rights protection.  Non-disclosure agreements are also commonplace in such scenarios, even when dealing with information that is merely sensitive and not specifically product-related.

7. FDA approval. If you are considering taking a market that is generally susceptible to applicable United States Food and Drug Administration Laws, it is very important to make sure you are abiding by all applicable rules in relation to that enterprise as well.  The FDA approval process is notorious for being not only costly but time-consuming, so make sure to allot for such provisions in both your overall budget and timeline.

8. Trademarks and patents. Trademarking and patenting certain concepts or ideas is often a good idea in terms of protecting your own interests, though it also reassures you that your business is unique in nature and is not already trademarked or patented as well.  It is a good idea to comb through the website of the United States Patent and Trademark Office, either by yourself or with the help of a lawyer, at https://www.uspto.gov/ and do a bit of background research.  You might also consider looking internationally in this regard if you plan to expand as well.

9. Understanding liabilities. Be sure to know the risks associated with your product, and reasonably protect yourself against them.  For instance, it may be in your best interest to specifically limit your liability in contracts by placing carve out clauses relating to such in the various agreements you use.  Likewise, indemnification clauses are another common way businesses protect themselves, namely by stating that if a specific action occurs, a different party, like a supplier for instance, is held responsible.

10. Hiring and experienced lawyer. Lastly, and as you’ve seen, partially woven throughout this list, it is important that you consider consulting with an experienced business attorney when embarking on taking a product or service to market.  Entrepreneurs face specific challenges when beginning a business venture, and receiving adequate, competent legal advice is vitally important to starting off on the right foot.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Contaminated Real Estate – Purchase Agreements/Leases

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Royee will be introducing attorney Eric D. Larson, the General Counsel of the St. Paul Port Authority, at the next Ramsey County Bar Association Real Estate Section event to discuss real estate issues related to purchase agreements and leases.  Larson will focus on provisions addressing contaminated real estate and environmental project management.  The event will take place from 12:00 PM to 1:00 PM on April 18, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us for more information!

 

Five Things to Think About When Dealing with Purchasing Contracts

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  1. Determine what factors are most important to you and your business. Whether it’s price, quality, terms of payment, or otherwise, it’s important to remain introspective into your own company and discover what is truly the most important factor in your own circumstance.  Undoubtedly, price will oftentimes be the most common determinative factor, but it’s often helpful to list out all factors in order to determine the best supplier fit.  If, for instance, prices are relatively the same across suppliers, but the delivery schedule of one is much more favorable to your business over another, it’s important to note and prioritize that.  Likewise, if a price is suspiciously low, you may want to look at other important factors to you to make sure that such a supplier is not taking shortcuts elsewhere.  Creating a list of business go-to items will help the legal analysis for the contract.
  1. Take a look at indemnification provisions. If something goes wrong with the purchased product, you may want to make sure you are protected by the supplier company.  Indemnity clauses obliging one party to pay for any damage or loss incurred, are oftentimes commonplace in purchasing contracts, but it is important to make sure that they are correctly incorporated into such a contract and that you, the buyer, are adequately protected.
  1. Consider what warranties and representation provisions are in play. When a seller contracts with a buyer for something, representations and warranties are implicit within the sale.  For example, the seller is representing him or herself as the owner of such product, with the legal right to do so, while the warranty may be that it is free of defects and if a defect does occur, the seller may fix it up to a certain future time.  Delve into the specifics of these things to make sure they are preferable and realistic in your own situation.
  1. Don’t limit yourself to one supplier. It is easy to fall for the apparent ease of dealing with a singular supplier, but don’t let that discourage you from playing the field.  Competitive pricing for differing products exists, so make sure to talk to multiple suppliers before settling down on just one, and perhaps even let them know you are quoting different sources.  If suppliers know you are doing your homework and not simply settling for convenience, they are more likely to grant you a better deal.  Conversely, however, it’s also possible that a single vendor may give better deals to those who do lots of business with them or who sign on to long-term contracts, so make sure to take those discounts into consideration as well.
  1. Choose a type of supplier agreement. When considering different suppliers and looking into future timelines, one may want to reflect on whether perpetual or finite period of time contracts are best.  While contracts that run in perpetuity may further streamline negotiations, they can sometimes create problems when a party’s circumstances, whether financial or otherwise, change over time or if one party feels their terms are unfavorable.  By contrast, finite contracts may require a great deal more work when it comes time to renew a business relationship. They may result in having to find a new supplier however, this also means that each party ends up with more freedom and flexibility as well as the ability to legally get out of unfavorable contracts under more reasonable timelines.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

USLS – Start Me Up!

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Royee is collaborating with the University Student Legal Service, other experienced attorneys, and the Holmes Center for Entrepreneurship to present a legal panel and advisory session on the basics of business formation and operations to business students at the University of Minnesota. This is one of many Start Me Up! programs that Royee has organized to help students understand how to be smart and strategic when forming new ventures. This event takes place on Thursday, March 23 at 4:30pm, in the Carlson School of Management, Room 2-219.

New JOBS Act Regulations, Equity Crowdfunding, and Alternatives

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Looking to invest in a startup online?  Have your own entrepreneurial idea that may require additional funding?  There have been recent changes in the law that may affect just that.

Certain provisions of the Jumpstart Our Business Startups (JOBS) Act recently came into effect as of May 2016.  Most importantly, Title III of the Act reduced restrictions around equity crowdfunding.  Small businesses are now able to raise more capital through online investments by being accessible to all potential investors.  Now, any individual can invest their money in these early-stage businesses, with the only caveat being that the amount they can invest ultimately depends on their net worth.  This is different than prior rules because it used to be prohibited for any individuals with a net worth of under a certain standard to invest at all, whereas now there are, in essence, tiered amounts permissible for all.  Conversely, if you’re going to be on the other side of the transaction and are looking for investors in your company, it’s important to note that the company itself is subject to minimum disclosure requirements as they pertain to the totality of cash raised.

Equity crowdfunding, however, also involves a great deal of risk.  In addition to the possibility that an investment may be significantly, if not entirely, lost due to the venture failing, it likewise is seen as a more expensive option in general.  It also may be difficult to read and understand all available information and data provided without the assistance of a financial or legal professional.  Such an endeavor may also take up a lot of company bandwidth, and there may be unforeseen pressures associated with the venture.  Due to these factors, it’s possible that such an extensive legal undertaking may not necessarily be for you.  If that’s the case, many alternatives are available:

  1. Borrowing from a bank is likely the most common scenario one imagines when building out his or her company.  Banks may grant loans to individuals or companies at a pre-determined rate of interest, oftentimes offset by a security interest or collateral.  There are many loan options but not all business can qualify for a loan.  Working with an experienced business attorney and business banker will be key if you go this route.  Sometimes, however, the company is too new or has some unique aspect which prevents it from getting a loan, and so another option may be private investors.
  2. Borrowing from private investors, such as friends and family, is another viable option.  One should decide at the outset whether this kind of payment is structured like debt or equity, and treat it as such.  Putting the parameters of the agreement in writing is also highly encouraged.
  3. Active partners may help contribute financially to a business while also taking on some of the work associated with it.  This option may benefit a business by growing the expertise within it while freeing up time, however, the control and overall dynamic of the business may change and future profits may need to be aptly divided.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Small Business Mergers & Acquisitions

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Mergers and acquisitions (M&A’s) aren’t just for big corporations. Small businesses can, and frequently do, merge with or buy out competitors. If you’re contemplating an M&A transaction as a buyer or seller, here are a few tips to get the process started.

If you’re the Buyer, you should know:

  1. What contracts the Seller has and whether they will be terminated. A merger or acquisition agreement can provide that the Buyer will be the legal successor of the Seller, and will assume all the Seller’s legal obligations. However, it’s best to figure out what those obligations are early on. If the Seller has contractual obligations that the Buyer doesn’t want to continue, the Seller will need to pursue termination of those contracts.
  1. Who’s paying taxes. Most contracts transferring large assets allocate tax responsibility, including assessments against land, to the Seller. There’s not a hard rule, however, so it’s best to have a written agreement that tax payments remain the Seller’s responsibility until the purchase or merger is complete. This minimizes risk in the event the transaction becomes protracted or is never accomplished.
  1. That you can cancel company shares. For example, a merger agreement can provide that at the time the merger becomes effective, corporate shares simply cease to exist. They could be replaced by a proportionate share of stock in the new company, but there’s nothing requiring a buyer to do so.
  1. That buying out or merging with a competitor isn’t the only way to purchase its assets. An asset purchase agreement is a routine way for businesses to sell a portion of their assets—for instance, a product and associated trademarks—without needing to acquire the whole business.

 

If you’re the Seller, you should know:

  1. That selling your business without merging doesn’t mean you have to terminate its current form. A corporation acquired by another corporation, for example, could simply become a subsidiary of the buyer corporation.
  1. That if you do terminate your business in its current form, there’s probably a defined legal process for it. For example, specific rules govern the terminating or “winding up” of an LLC, including paying out shareholders. For a corporation, you might need to file a notice of dissolution with the Secretary of State that the corporation no longer exists. Many states’ Secretary of State websites have resources for dissolving various businesses.
  1. Whether the buyer expects you to sign a non-compete agreement. If a competitor is buying you out, it’s safe to assume they don’t want you establishing a new competing business in the near future. Non-compete provisions can even survive the termination of a contract like a merger agreement, so it pays to be attentive to where, how soon, and how much you can exercise your expertise after selling your business.
  1. Whether you’re indemnified against future lawsuits. An ideal acquisition or merger agreement would clearly state that you’re not obligated to help the Buyer defend any claim arising against the Buyer related to the Seller’s business after the acquisition or merger takes place, pay costs and attorneys’ fees, or pay any damages awards.

 

Lastly, both Buyers and Sellers can benefit from the advice of an experience attorney to help tailor a merger or acquisition agreement to a business’ individual needs. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Considerations When Expanding Your Business

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Expanding businesses face choices about whether to add new partners, owners, or shareholders. Unlike simply hiring new staff, adding members to your company’s core may affect the business’ organizational structure. It also entails power- and profit-sharing dynamics that can be detrimental to some businesses.

Given the riskiness of surrendering partial control of your business, as well as the legal and financial headaches of getting rid of a co-owner or partner you don’t like, it is wise to consider alternatives. Here are some common reasons we hear for adding new core members, as well as some other options to meet your business’ needs.

1. I need to offer more services to generate more clients.

Problem: While broadening your service options may require adding new talent, it’s best to know for sure that the person you’re adding—and the services—are a good long-term fit. It can be painful to have a new partner leave within a year. It can be worse to realize that the new service area isn’t actually generating much business.

Alternative: Hire an independent contractor. Basically, this means contracting with someone to provide specific services—such as sales or consulting in a specific area—and ordinarily comes with a time limit. You can be very creative on the payment structure and you get a chance to observe whether you want them around long-term. The perks of this approach are that it’s easy to terminate a business relationship with someone you don’t like or don’t need long term.

Do keep in mind that there is a difference between an independent contractor and an employee, and compensation requirements are very different. Hiring “independent contractors” whose job duties make them look more like employees can cause trouble later if you haven’t been compensating them as employees.

2. I need the financial boost of having a partner buy in.

Problem: Adding partners or shareholders for purely financial reasons doesn’t allow you to prioritize their skill level or experience. Too often the new partner becomes a “silent owner” who exercises considerable control over your business but isn’t easing your workload.

Alternatives: Seek funding through a small business loan, not through a risky partnership deal, and test out potential partners through the independent-contractor framework described above. Or, if you have an investor you trust, set up a profit-sharing agreement. They get a percentage of profits; you get up-front cash while retaining control over your business. You can also set up different classes of shares/stock with and without voting rights. There are some issues on how this is done, but it is feasible.

3. I need someone to share my workload.

Problem: This doesn’t necessarily mean you need to add core members; it might just mean you need more employees. Especially if you’re still figuring out how to manage a high volume of business, you may not want to give up substantial control of the business just yet.

Alternatives: If your problem is sheer workload, try the independent-contractor arrangement described above—it allows you to temporarily offload tasks but gives you an option to terminate relationships at a definite time in the future. When the contract period expires, you can assess whether the work volume has subsided or is likely to persist.

If your problem is too many potential clients, try setting up referral fee agreements with businesses that aren’t your direct competitors. You’ll be compensated when people or businesses you’ve referred become clients of the outside company, and the collaborative relationship may also help direct business to you when business slows down.

Business owners can benefit from the advice of an experienced attorney to help with organizational decisions about dividing ownership or sharing profits. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Top Considerations to Make When Securing Financing for a New or Growing Business

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Whether you are a current small business owner or an aspiring one, business financing is an important topic. Without financing, businesses often cannot expand rapidly or even get off the ground in the first place. As the saying goes, it takes money to make money. In this post, we survey the five most common sources of business financing and discuss the most important practical and legal considerations business leaders should make when pursuing each.

Family and Friends

One of the most common sources of financing for small businesses is family and friends. Very small or even new businesses may find that seeking help from neighbors and loved ones is both easy and preferable to other financing options. Although it can be awkward to ask others for help, you might be surprised at who in your network may be willing to help you succeed. Often, friends and family financing involves written promissory notes, gifts, or even small investment in exchange for a stake of the company. Usually, friends and family will be willing to provide you financing in a way that won’t overburden your fledgling company.

Depending on the friendly financier, interest rates and other loan terms (if a promissory note is involved) can be extremely favorable. Such may be the case when wealthy friends or family members are willing to help you start or grow your business. However, one of the greatest risks of friends and family financing is that it can dramatically change the nature of your relationship and even lead to conflict. Thus, despite the financial and legal advantages this source may offer, it should be pursued with caution.

Bank Loans

When friends or family are not available, most entrepreneurs turn to their local bank for a loan. Bank loans are the most common sources of funding for small businesses. Typically, bank loans involve moderate interest rates and short repayment times. Because many small businesses fail, these terms seek to offset the bank’s lending risk. In addition, banks usually require that small business owners chip in a significant portion of start-up or project costs; banks often will not lend 100% of financing needs.

In addition to these characteristics, bank loans usually involve additional legal considerations. For example, most banks will require that the loan be guaranteed by the business’s owners. This means that if the small business fails to pay back the loan, the owners are still on the hook—even if the small business goes bankrupt. Also, banks often require the small business to put up collateral for the loan, as a form of security in case the small business defaults on payments. In the case of default, the bank can then repossess the collateral-property. Depending on the business and amount involved, a bank may seek a security interest in only a few pieces of property to all the assets of the business. Thus a bank may not be as easy of a process as a friend or family, but obviously it is the most traditional and structured process. Although a bank loan may be a little intimidating, a borrower knows that the bank will be a solid institution to approach and receive structured guidance from and perhaps more formality will help make the business you are seeking funding for act more “business” like.

Government Grants and Loans

Some small businesses may find that they qualify for government loans. These sources of financing are essentially bank loans, but without high interest rates, short repayment times, and security interests—sometimes even without personal guarantees. Government loan programs secure favorable loan terms by guaranteeing the loan themselves. Thus, instead of the owners making a personal guarantee, the government makes one instead. Many small businesses will likely find that they qualify for some amount of government loans through the Small Business Association.

The state and federal government also offer grants to small businesses. These grants are usually targeted at increasing opportunity to minorities or encouraging the creation of new businesses in needed industries and in rural areas. In many cases, the grant money is provided at no cost, and without any obligation to repay. However, these grants usually are for smaller sums unlikely to fully cover all financing needs. Therefore, government grants are a good supplement for other sources of funding. You can review available grants at www.grants.gov and mn.gov/deed.

Crowdfunding

The newest form of business financing is crowdfunding, which entails seeking a large amount of funds from many people who individually contribute small amounts. As crowdfunding has increased in popularity, it has expanded at the state and federal level and can now finance projects involving only a few thousand to millions of dollars. However, different crowdfunding paths involve very different legal considerations.

The most popular fundraising usually takes place online at websites such as Kickstarter.com. There, anyone (including small businesses) can create a fundraiser. These sites often require that the fundraising be for singular projects, such as the creation of a new product or the building of a new facility. Those who pledge money to the fundraiser are often entitled to some kind of benefit depending on the project. But most importantly, no one who contributes money receives any kind of ownership interest in the company. If you have a compelling project that many people would be excited about, online crowdfunding might be a good first shot at financing.

For those seeking to raise hundreds of thousands to millions of dollars, other crowdfunding programs exist. New in Minnesota this year is MNvest, a program that allows small businesses to crowdfund up to $2 million. Unlike online crowdfunding, though, contributors are investors and own a stake in the company. On the federal level, the JOBS Act allows for crowdfunding through the Securities and Exchange Commission. This crowdfunding is similar to MNvest, but allows small businesses to seek investment from residents of all states and up to $5 million. Small businesses interested in crowdfunding should carefully consider the reporting and regulatory requirements of raising capital in this way, as these may be difficult to comply with and costly.

Equity Financing – Angels and Venture Capital

Lastly, small businesses looking to grow rapidly and needing millions of dollars of funding may turn to “angel” and venture capital investors. These kinds of investors pool large sums of money and invest in multiple start-ups and small businesses at a time and can offer significant financing. Note, however, that this kind of financing is equity financing, which means that the investors gain a stake in the company. And when it comes to angels and venture capital, the stake required is often substantial.

When angels and venture capital firms invest in companies, they usually require certain concessions from the original business owners. In addition to receiving a large stake of ownership, they may require preferred shares that give them dividend and liquidity preference above other owners. In addition, they may seek the ability to select directors for the board of directors and to take an active role in oversight and even management of the business. Some may obligate the main entrepreneurs to stay with the company for a specified period of time so as to reduce risk that the entrepreneurs will leave for other opportunities. While these concessions may seem like a lot to give up, angels and venture capitalists can bring important people and connections to a business (in addition to much-needed financing). Such benefits may be absolutely vital for a company to take off in a short amount of time. Thus, choosing an angel or venture capital investor is extremely important and usually involves significant searching and negotiation.

If you plan to be involved in business financing, you should work with an attorney to help guide you and advise you on associated legal risks. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

What the New Federal Defense of Trade Secrets Act Means for Minnesota Businesses

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If you’re a businessperson, chances are you come into contact with trade secrets every day. Trade secrets are, generally speaking, any piece of information that derives value from not being known to or readily ascertainable by other persons who can use them and which are protected from disclosure by reasonable efforts. Trade secrets are anything from specific customer lists to algorithms for computer systems. And even unpatented inventions are often trade secrets.

Trade secret protections are protected primarily by state law, but recently Congress passed the Defend Trade Secrets Act (DTSA), which adds some federal protections. For most small-to-medium businesses, the DTSA will not have much of an impact; the DTSA only provides additional protections for trade secrets that are exchanged over state lines and supplements state trade secret protections. But for Minnesota companies that share trade secrets and other confidential information with other businesses and persons outside of the state, the DTSA provides additional protections, but imposes some additional requirements.

Immunity Provisions in NDAs

One such additional requirement is the need for parties to provide notice of certain disclosures that are immune from liability under the DTSA. When companies share trade secrets with each other (usually in collaborative arrangements), they often sign confidentiality or non-disclosure agreements (usually referred to as NDAs). Many NDAs contain clauses that require that the parties not disclose any confidential or trade secret information under any circumstances. Under most state laws, this provision is completely valid and has no effect on the remedies available to disclosing parties in the event their confidential information or trade secrets are disclosed to the public by unscrupulous recipients. However, the DTSA limits the effectiveness of these clauses in federal trade secret cases.

Under the DTSA, in order for a trade secret owner to obtain exemplary (punitive) damages or attorney’s fees (essentially reimbursement for the legal costs of suing to protect the trade secrets), all NDAs must contain certain notices of immunity. The DTSA provides immunity for disclosing trade secrets to any person who discloses trade secrets “in confidence” to a federal, state, or local government official, “either directly or indirectly to an attorney . . . for the purpose of reporting or investigating a suspected violation of law” or in a “lawsuit or other proceeding,” so long as the filing is “under seal.” In effect, this immunity provision overrides the “no disclosure whatsoever” approach to NDAs. It further requires that parties must provide notice of this immunity in their NDAs. If the notice is not given, exemplary damages and attorney’s fees are not available to anyone seeking to protect their trade secrets or receive compensation for misappropriation. Since these remedies can be fairly substantial, it is in a business’s best interest not to foreclose the possibility of receiving these remedies.

Effective Date

As stated above, the DTSA does not override or change state trade secret law, so most small businesses are unaffected by the immunity and notice provisions. For larger businesses, however, it makes good proactive sense to begin including an appropriate notice of immunity clause in NDAs. Since the effective date of the law is May 11, 2016, any NDAs entered into after that date should include this language. NDAs entered into before this date need not include a notice of immunity provision.

If you plan to be involved in any sharing of confidential information or trade secrets, you should work with an attorney to draft NDAs in accordance your specific needs and goals and the applicable law. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

The Importance of Working with Counsel Early in Your Business Planning

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Many people start their company with the help of an attorney—doing things like drafting the articles of organization, member or partner agreements, and various transactional documents. Unfortunately, a number of people don’t continue this relationship after the initial documents have been created because their focus becomes on sustaining the business, and dealing with day to day issues. After a while of steady progression, business owners do eventually begin planning on the future sale or change in their business and again re-connect with their attorney to strengthen their business planning to help ensure a path to success. A few of the key services attorneys can provide to make your business more appealing for an acquisition down the road are discussed below.

Key Issues to Consider

The sale of a business, or business acquisitions are inherently complex regardless of the parties involved. As a small business owner, you can take concrete steps to simplify this process on the front-end when you are planning and growing your business. When either another person or a different company is looking at purchasing a company, they will want to see stability within the organization in the form of standing contracts with large vendors and clients. They will also be checking for specific clauses within various business contracts, such as indemnification—making sure they are not held liable for problems outside of their control, assignment rights—allowing you to transfer the rights under various contracts to the new owners, and termination rights within real estate contracts—providing a mechanism for terminating lease agreements if the new owners want to relocate the business. Working with an attorney during the business planning phase of your company will help to make sure these items are consistently considered and included in the various agreements your business will enter into. Attorneys also bring a wide variety of experience to business planning for their experience on both sides of the negotiating table during acquisitions. If business owners fail to involve counsel in their business planning, it can lead to significant setbacks in future negotiations. For example, even if someone is very interested in purchasing your business, if they are unable to take over the rights under a major supplier agreement, they may either significantly reduce the price they are willing to pay, or even worse, back out of the deal entirely.

Moving Forward with Your Business

Starting a business is no small undertaking. You should work with an attorney to structure your business and take care of the initial agreements, but don’t let the relationship stop there. You should continue to work with an attorney to plan the future of your business. Not only will an attorney be able to help you articulate a plan, they will also be able to assist in creating relationships that will lead to the successful execution of that plan in the long run. If you are looking at starting a new business or are interested in learning more about how an attorney can help with business planning, please reach out to the sponsor of this article, Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

A Crash Course in Letters of Intent

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What is a letter of intent?

A letter of intent is essentially a document that lays out basic information about a particular future transaction. Typically, the goal of a letter of intent is to show that the parties have agreed to negotiate the final transaction and have come to some level of mutual understanding on certain terms of that transaction, given the current information. Depending on the situation, the letter of intent may also create an obligation of exclusivity, lay out the process for due diligence or inspection, and provide structure for future negotiations. In many circumstances, letters of intent are similar to memorandums of understanding or term sheets, but there are obviously differences in how/when they are used. Since letters of intent will often have specific deal terms or purchase prices, people can get nervous about signing the letter before having the chance to complete due diligence. In the following paragraphs we discuss whether these letters are binding, and what that means for you and your business.

Are they binding?

In Minnesota, letters of intent default to being non-binding, but there are still important considerations to keep in mind. If a party claims that a letter of intent was meant to be an official contract and binding on the parties, the actual language used in the letter is the primary source of information a court would use to determine whether it is binding on either party. It is common for at least a few terms to be binding and enforceable, such as an exclusivity clause or the obligation to negotiate in good faith. Other terms, like the closing date, are expected to potentially change based on information revealed in due diligence and the incorporation of additional agreement terms. Regardless of the default rules, it is crucial that the language of the letter of intent specifically state whether it is intended to be binding to avoid any ambiguity within the document and between the parties. If any clauses or terms are an exception, those must be specifically called out. Although the actual letter is the primary source for information on enforceability, courts may also look at additional factors, including, but not limited to, other communication between the parties indicating an intent to be bound, whether this type of transaction typically requires a more detailed agreement, whether there are terms left to be negotiated, and the general context of negotiations.

Should I have a letter of intent?

No single answer will fit every situation. Letters of intent are generally a good tool to start negotiations, get an idea of what the final agreement may look like, and usually provide some form of exclusivity during the negotiating and due diligence period. A letter of intent can also help start the conversation with banks or other sources of financing so that you have a general idea of the financing terms before going into negotiations on the final agreement. On the other hand, a letter of intent may be found to be binding in court even if you didn’t intend it to be, leading to potentially major liabilities. If you are comfortable and able to go straight into negotiations on the final agreement, a letter of intent may not be worth the risk. If you do choose to use a letter of intent, it is a best practice to avoid getting too detailed. Too much detail may make a court think the parties intended to be bound, and may reduce flexibility to adapt to new information prior to finalizing the transaction. In general, letters of intent help to build trust and form a relationship between parties who may not have worked together before. A letter of intent is a practical tool that parties can use as a roadmap for exploring potential obstacles and understanding what the relationship between the parties may ultimately look like.

Takeaways

Letters of intent can provide useful predictability to the different parties and stakeholders in an agreement. The major risk is being bound by terms intended to be non-binding, and the best way to combat that risk is through clear, unambiguous language. Due to the potential for major liabilities and importance of legal language, it is always best to consult with an attorney prior to signing a letter of intent. If you are considering writing or signing a letter of intent, or have questions regarding letters of intent, you should work with an attorney discuss your specific situation. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA — Real Estate Section: Real Estate Lending Issues

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Royee Vlodaver is introducing the presenter, Jodie Leigh Grabarski, for the Ramsey County Bar Association’s CLE: Real Estate Lending Issues. This CLE is a discussion of real estate lending issues from the client, lender and attorney perspectives. Details of the event are available here.

Please contact us with any questions or for additional information.

When is a Confidentiality Agreement a Good Idea?

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Many business discussions begin with an interesting new idea. Whether it’s about a possible merger, a new way to run a process, or a new product, new ideas are what keep businesses moving forward. People and companies often start discussing new opportunities and ideas before they have been formally recorded or granted intellectual property protection, which leads to a great amount of exposure when sharing and discussing these ideas. Everyday, people and businesses are talking about their ideas with others in order to grow and develop their businesses. Confidentiality agreements are a necessary part of these discussions to ensure the long-term protection of high-value business information and insights.

Confidentiality and Nondisclosure Agreements, or CNDAs, are relatively commonplace for large corporations and businesses. Smaller businesses and individuals may be less familiar with these types of agreements. Regardless of the size and experience of your business, you should always have a signed CNDA in hand before beginning any important business discussions. Some people think it is strange to insist on signing a contract before even starting discussions with another party, but it is actually very beneficial for both sides. A well drafted CNDA will not only protect a list of items at the core of discussions defined as confidential, but will also protect items like business policies or product specifications that you may not otherwise think to include on the list. Even if these additional items don’t seem like they will come up in discussions, having this protection in place makes it possible for both parties to have open and well-rounded discussions without needing to pause and think about each piece of information they are sharing.

Small and independent businesses often work with CNDAs in three main situations: when they are having general business discussions with another company (business to business); when they are attempting to attract major investors, sell their business, or market a new invention to another company (inventor to business); and when they are bringing on a new employee (business to employee). Each of these situations will demand slightly different treatment in a CNDA, but there are many common themes or clauses you should be looking for in any CNDA. First, read the definition of confidential information very carefully—make sure you understand what information is and is not covered by the agreement for both parties. Even if your information is protected, you need to understand your own obligations after learning potentially confidential information from the other party. Second, find the time frame of the agreement. These agreements can last for years or even indefinitely, so don’t let that scare you away as long as you are comfortable and confident in the rest of the agreement. Third, read through what happens in the event of a breach. The nature of confidential information is such that it can be very hard to undo damage once the information has been released. Make sure that damages clauses are written broadly and allow you to recover damages for any harm that could come to your business due to a release of that information. Keep in mind that this clause will most likely be mutual, so take great care to avoid any breach of the agreement terms, or you may be stuck with the bill for all of the losses and expenses of the other party.

The ideas discussed above are very important in understanding the agreement at a high level, but there are many other underlying complexities that can influence a CNDA. If you are considering entering into a Confidentiality and Nondisclosure Agreement or are unsure whether a CNDA is necessary, you should work with an attorney to assess the situation for your business and to structure a contract to your unique situation. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Three Steps to Improve Your Indirect Procurement Process

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When running a business, it’s easy to focus on your cost of goods sold or salaries when looking to cut costs, but indirect procurement expenses can be just as large of a driving force behind the company cost structure. In this article, three simple steps are provided to reduce unnecessary expenses associated with indirect procurement and to help you keep these processes running efficiently. As in many process improvement efforts, the first step is to take inventory of the current status of your indirect procurement operations. The second step is focused on simplifying your processes, and the third step looks at ways to cut purchase prices.

Step 1. Evaluate Current Processes

In order to understand the best ways to improve a process, it is crucial to understand the starting point. Evaluating how your company currently handles indirect procurement, using quantitative data whenever possible, will illustrate any positive or negative patterns, and will provide a useful benchmark for evaluating future performance.

Step 2. Simplify Operations Through Compliance and Consolidation

Businesses can often fall into the trap of doing things the way they have always been done, and then miss out on valuable opportunities. Once you have a solid understanding of the metrics surrounding your indirect procurement, it is important to take the time and read through the agreements governing those sourcing relationships. Periodic reviews of these agreements can bring compliance issues to light, allowing you to take quick action, and ensuring that you are receiving the full benefit of the bargain. Something as simple as having those responsible for sourcing meet and discuss updates or trends in their respective areas can help share information that is beneficial to the company as whole. Also, be sure to take advantage of any applicable discounts provided for in the agreements, and pay special attention to any renewal clauses. Renewal clauses may contain incentives for early renewals or allow for more flexible arrangements in the future as well as indicate supplier strength. Understanding any power dynamics will make it easier to effectively renegotiate agreements in Step 3.

Consolidation is another great option for simplifying indirect procurement processes. Businesses are constantly growing and expanding their product lines. There is a good chance that a supplier will have added additional capacity or products during the term of a supply agreement. When looking at renewing a supply agreement, a few simple questions can help you understand any new offerings. The more products you can source from one supplier, whether in terms of variety or quantity, the less logistical issues you will run into. This can help to streamline processes, but it does require more interdependence with suppliers and should only be pursued if there is a trusting relationship. Such a relationship should heavily consider suppliers bandwidth and alternatives in case of emergencies.

Step 3. Reduce Costs by Renegotiating and Recycling

Renegotiating contracts is one of the best ways to cut costs in indirect procurement. Leveraging company growth for larger bulk discounts, using changes in respective power in the market, or using an experienced attorney in negotiations are all ways to use the renegotiation process to reduce costs. Identifying opportunities to recycle products consumed within your business operations is another great way to reduce overall spending. Sometimes even small changes in use can extend the useful life of products, or different business groups may be able to use products at different stages of its lifecycle. For instance, departments with only light computer needs could use computers after the technology heavy departments need to update their systems.

Each company has very different needs when it comes to indirect procurement. When looking at your indirect procurement operations, the most important thing to do is continually monitor and look for ways to improve your processes. If issues come up or if costs need to be brought down, the three steps above — evaluation, simplification, and cost reduction — can help to streamline processes and reduce the overall burden of indirect procurement on your business.

If you are considering entering into or renegotiating an indirect procurement agreement or have a question involving such an agreement, you should work with an attorney discuss your next steps. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Today’s Two Biggest Legal Threats to Your Small Business

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Small business owners are often being pulled in many different directions and don’t have the resources to bring an attorney on board. What this means is that small businesses can be very susceptible to inadvertent legal problems. With a business moving and growing so quickly, details can often be overlooked that create the potential for future legal liability. In today’s business environment, the two biggest issues can be boiled down to hacking attacks and data privacy, and the growing regulatory environment. Technology sophistication has lead to a huge increase in the number of companies conducting business online, as well as the number of malicious internet users trying to exploit data security weaknesses. As the business environment adapts to the online marketplace, new regulations are consistently being created both to govern these new types of transactions and to update older regulations to function efficiently in the modern era.

Hacking Attacks & Data Privacy

Not only will a hacking attack damage your company’s reputation and customer perception, it will also expose you to numerous potential legal liabilities. Depending on the type of business you operate, one of the biggest issues will almost certainly be the release of confidential customer information. In recent years, the mindset of business owners surrounding hacking attacks has shifted from a question of whether an attack will occur to when and how bad an attack will be when it inevitably occurs. If a breach does occur within your company, the up-front costs will certainly include repairing any damaged hardware or software, providing notice to affected parties, and possibly paying the bill for credit monitoring services like many of the major corporate victims have been doing recently.

Data privacy goes hand-in-hand with the risk of hacking attacks. If the data controlled by your company is adequately protected, it will minimize the likelihood of a successful hacking attack. Depending on the type of customer information stored by a company, the legal duty of care can vary. Laws and regulations vary drastically based on subject and location, but businesses owners and managers are commonly held to a standard of using reasonable business judgment, acting in good faith, and acting in the best interests of the company. The legal standards vary and are somewhat subjective, so it is best to work with a trusted advisor or attorney to reduce data privacy risk. To get a general feeling on whether your company may run into data privacy issues, you can ask yourself a simple question: if a different company was storing your confidential personal information in the exact same way, would you be comfortable with it? To mitigate some of the risk companies like yours are now facing, cyber liability insurance continues to grow in popularity as an option to help protect your business in the event of a breach.

Growing Regulatory Environment

New and more complex regulations surrounding various business practices are being issued all the time. It is never safe to assume that just because your business was compliant with all laws and regulations in the past, that it is still complaint today. Regulations are very dynamic, and it is important to continually monitor the news and political bodies to understand what regulations are in the pipeline. Something as simple as setting up e-mail news alerts can help you stay on top of any regulatory developments. Membership and participation in industry organizations is another great way to hear about possible changes industry regulation. The more in tune you are to the legal environment of your industry, the more advanced notice you will have to consult with advisors on how to best respond to any proposed changes. If your business operates in a heavily regulated environment, it is even more important to have a solid understanding of how the regulatory schemes surrounding your business operate.

Large companies often employ in-house counsel to manage, monitor, and take action on these big-picture issues, but many small businesses do not have the resources to make that feasible. As your business continues to grow and these issues come to the forefront, obtaining appropriate legal advice is a must. Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities, and the sponsor of this article, provides an outside in-house counsel service to meet these very needs. If you would like a free legal consultation, contact us.

Twin Cities Cardozo Society Annual Dinner

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Royee Vlodaver is a co-chair for the 16th Twin Cities Cardozo Society Annual Dinner. The Cardozo Society Annual Dinner is an “evening to celebrate the legal community and honor those who exemplify excellence as legal professionals and as caretakers of the Jewish community.” Details of the event are available at: http://jewishminnesota.org/cardozo.

Please contact us with any questions or for additional information.

Purchasing a Small Corporation

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Roughly 20% of all small businesses in the U.S. are organized as corporations. Whether you are looking to buy or sell a corporation or even just shares of a corporation, there are a number of ways to determine the fair value. Even if you aren’t planning a transaction, it’s a good idea to keep track of the value of your business as a performance benchmark, and as an indicator of business strength when working with banks or outside investors. Two of the major methods for valuations of corporations are provided below. Within each of these methods, different techniques can be used to find more precise estimates. While no technique is perfect, these basic samples will give you two ways to value the company and estimate an appropriate price.

The first step of evaluating a corporation should always be to review its financial statements. If these are not publicly available, it may be necessary to enter into a confidentiality and nondisclosure agreement with the corporation you are interested in. These documents will provide detailed information regarding the revenues and expenses of a corporation. Financial statements and additional information from the seller will be necessary to compute fair values under the methods listed below.

If buying or selling shares in a small corporation is your ultimate goal, you will likely need to enter into a confidentiality agreement before reviewing financial statements and starting initial discussions with the other party. A relatively standard confidentiality agreement can reduce the risk of disclosing confidential information for both parties. Once an agreement is signed, the seller will be more comfortable disclosing details about the performance of the business that may not be fully recognizable from financial statements alone. Without a confidentiality agreement, the buyer may not have access to the full details of business performance, leading to increased risk of error in determining a price. The two methods below can be thought of as a good baseline for getting a rough estimate of the value of a company, however, financial analysts can help you determine a more accurate estimate and can explain many of the nuances in corporate valuations to help you make a well-informed decision.

Asset Method

The asset method is a very straightforward way to determine the value of a business. To determine the value of the business, you simply add up the value of the assets of the company. The balance sheet financial statement should provide all the information you need, but be sure to use the asset values after depreciation is taken into account. The asset method is easy to use and gives you a concrete number, but it doesn’t account for situations where the business may be worth more than the sum of its assets.

Earnings Method

Historical and projected earnings can be a useful estimator of the value of a business. Many large corporations are valued by analysts based on projected future cash flows. Under an earnings method valuation, you will make predictions about future revenues and expenses across a timeline and then discount those cash flows back to the present value using an appropriate interest rate based on economic conditions and the risk of the business. This method makes use of more variables and requires more subjective judgment than the asset method. A benefit of this method is that it takes into account the value of goodwill — the value of the business separate from the assets. Due to the complex nature of this method, a professional should be consulted to make sure that all assumptions and predictions are appropriate.

Valuation Adjustments

If you are looking at valuation methods to determine the price for shares rather than an entire business, majority and minority interests should likely be priced differently. If the shares in a transaction will grant majority control to the purchaser, the price of the shares should be increased to account for the additional voting power granted by those shares. In contrast, a minority interest should often be sold at a discount. This is because even if you own the shares, you may not be able to exert control over the business operations. Each share can initially be valued at the pro rata share of the total value of the company and then discounts and premiums should be applied for minority and majority interests respectively. Additionally, the classification of the corporation as either a C-corp or S-corp may affect the valuation. If the company is an S-corp, it will not be subject to the same double taxation that occurs with traditional C-corps, however an S-corp shareholder may have less protection from litigation. As with any nuance in the transaction, you should go over the details with an advisor to determine its effect on the business valuation and purchase price.

Purchasing a business is a very large commitment and should not be rushed. Transactions on this scale should always be heavily researched and conducted with the assistance of experience professionals. If you are considering purchasing or selling a small corporation or a large number of shares in a corporation, you should work with an attorney to ensure that you are adequately represented and that all the details have been taken care of. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

If you would like more information on confidentiality and nondisclosure agreements, and mergers and acquisitions, please see our previous articles: Confidentiality in Mergers & Acquisitions: When, Who, and What; A Buyer’s Guide to Intermediate Steps in Mergers or Acquisitions.

USLS – Start Me Up!

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Royee is collaborating with the University Student Legal Service, other experienced attorneys, and the Holmes Center for Entrepreneurship to present a legal panel and advisory session on the basics of business formation and operations to business students at the University of Minnesota. This is one of many Start Me Up! programs that Royee has organized to help students understand how to be smart and strategic when forming new ventures. This event takes place at the Carlson School of Management on November 5th, 2015.

RCBA – CFPB and the New TILA-RESPA Integrated Disclosure Rule

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On September 29, Royee will be moderating a talk presented by Barbara Gilmore, North Central Division Counsel, Old Republic National Title Insurance Company.

Dramatic changes are coming to the real estate industry October 3, 2015 as the CFPB’s TILA/RESPA Integrated Mortgage Disclosure Rule goes into effect. Join us for a discussion of what this means for the industry and how it will affect the loan closing process. Specifically, we will address the essential information all parties involved in consumer mortgage transactions will need to know, including critical document submission timelines, disclosure requirements and a tour of the new Loan Estimate and Closing Disclosure forms, and how they will affect you.

The event will take place in the First National Bank Building Training Room in St. Paul from noon until 1:00 pm.

Please let us know if you have any inquiries!

User Agreement Terms & Conditions

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Businesses that interact with many clients and customers often implement master agreements that apply to the majority of their relationships. This is especially common with businesses conducting transactions online. Master agreements are a great tool for reducing the burden of creating unique contracts for each customer and they greatly reduce the likelihood of inadvertent errors in drafting. It provides for certainty and efficiency.

Drafting for Flexibility in the Original Agreement

Some form of a master agreement, typically called a user agreement, often governs online customer accounts. If your business wants to make use of permanent customer accounts for future transactions, you should note that a user agreement that meets your needs today may not be sufficient in the future, whether due to changes in law, new technologies, or other circumstances. You should regularly review any master agreements in use by your business to ensure that you and your company are adequately protected and that all material terms have been defined. In order to put these reviews to use by implementing changes, the original agreements must have flexibility built in to allow the company to update the master agreement. As an example, the iTunes Terms & Conditions contains the following clause:

CHANGES

Apple reserves the right at any time to modify this Agreement and to impose new or additional terms or conditions on your use of the iTunes Service. Such modifications and additional terms and conditions will be effective immediately and incorporated into this Agreement. Your continued use of the iTunes Service will be deemed acceptance thereof.

It is important to note that while this clause does not require Apple to notify customers of changes, they typically do so. PayPal recently sent out a notification that their terms were changing, providing a summary of those changes, and a link to view the updated agreement in its entirety. Sending this type of notification to customers is always a best practice.

Implementing Changes

Clients and customers should always be notified of any changes in a master user agreement that governs their relationship with your business. Not only is this important for enforceability, but also for maintaining a trusting relationship between your business and the other parties. Additionally, the client or customer must be given an opportunity to terminate the relationship if they do not agree to the new terms. At no point should a master agreement be changed without notifying the customer and giving them the opportunity to terminate the contract.

Enforceability

For a preliminary assessment of enforceability, ask yourself three questions: did the original contract allow updated terms? Were those terms updated in compliance with the procedures set forth in the original contract? And lastly, was the other party given sufficient notice and opportunity to discontinue the agreement under the new terms? If the answer to these three questions is “yes” then you may be able to enforce the contract with the updated terms. Conversely, if the answer is “no” to any of these questions, the updated terms may not be enforceable.

If you are drafting a master agreement or have a question involving such an agreement, you should work with an attorney discuss your next steps. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Valuation Methods for LLC Buy-Sell Agreements

Posted by & filed under Blog.

With Minnesota’s Revised Uniform Limited Liability Company Act going into effect later this year, it is a perfect time to review your current LLC’s operating and member control agreements, or to start planning if you are going to form an LLC under the new law. Many different topics are addressed in an operating agreement (which will now encompass what used to be member control agreements). One of the most important sections is the buy-sell agreement. The buy-sell agreement sets a plan for how members will be able to buy and sell their rights in the company, triggering events for when a company or other members will have the option or be forced to buy back rights, and how to set a price when a potential sale may take place.

Each company will have different views on how to deal with voluntary or forced sales, and whether the company, other members, or third parties should be the purchasers. Regardless of how each LLC decides to handle different triggering events, every transaction will need to have a price. Triggering events will almost always include very difficult situations like death, disability, and divorce, so it is important to make the process run smoothly and avoid additional stress for the parties. The three main valuation strategies for buy-sell agreements are discussed in more detail in the sections below.

Fixed Price Agreements

Fixed price agreements are the easiest and cheapest option for valuing a purchase, but this does cause sacrifices in other areas. This valuation technique works exactly as it sounds — members set the price of a share, which needs to be updated periodically. If you choose this method, be sure that your members and board (if applicable) are actively involved in the oversight of the company and will be able to update the price periodically; this method could drastically over- or under-estimate a reasonable price if it is not updated. The biggest problem with this method is that the price does not take current conditions into consideration, and it may be very outdated. However, an added benefit of this method is that the periodic price update can be used to evaluate the performance of managers. Having the members set a price on shares is effectively periodically valuing the company. Changes in the total value of the company are a great benchmark for judging managers’ past performance. By using this price as an evaluation tool, you can cut down on the time required to prepare evaluation metrics, and more accurately see the impact of managers across the entire company rather than one aspect of the company at a time. As a whole, fixed price agreements are cheap and easy but they often lead to the least accurate price for a transaction.

Formula Agreements

Formula agreements, like fixed price agreements, may not reflect the market reality when the transaction is taking place. Formula agreements will often be written with each share having the value of a fixed percentage of revenue, EBITDA, or a similar metric. Formula agreements more accurately represent the current state of the LLC, but may end up relying on metrics from the previous year that are substantially different from the current year. To combat this issue if you choose to use a formula agreement, it is often more prudent to use averages of your benchmark value — whether revenue, EBITDA, or another factor indicative of your LLC’s performance — spread over multiple years. This will help to paint an accurate picture of the company’s value and will mitigate the impact of unforeseeable spikes or drops in the market. Although company metrics may seem to speak for themselves, any metric used in a formula should be defined in explicit detail. It is best to remove any ambiguity when first writing the buy-sell agreement to avoid problems in what may be a very difficult and complex transaction. Formula agreements provide more accuracy than fixed price agreements, but still risk setting an inaccurate price by possibly ignoring the current condition of the company.

Process Agreements

Process agreements are the most accurate in terms of setting a realistic value, but they can also be the most time consuming and expensive. Under a process agreement, the company will typically hire appraisers to value the shares at the time of sale. It is important to note that this is the only method that sets a price based on the current market rather than a past determination. There are many ways to use appraisers in valuing a sale — just make sure to clearly define the process in your agreement, and give a definitive role to each appraiser that may be involved.

Each of the above pricing strategies has good and bad aspects. The right choice will depend on your business, and where your priorities fall in a transaction.

If you are considering updating or creating a buy-sell agreement, you should work with an attorney to structure your contract to meet your needs and expectations. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RBCA – Real Estate Law Legislative Update

Posted by & filed under Past Events.

On May 19, Royee will be presenting Kevin Dunlevy of Beisel & Dunlevy, P.A., on the topic of what real estate law changes occurred during the 2015 Minnesota legislature. The event is at noon at the First National Bank Building Training Room in Downtown St. Paul.

Please let us know if you have any inquiries!