You’re an Owner – Act Like One

Owners of businesses – particularly closely held businesses – often divide responsibilities for company matters based on their individual strengths, interests, likes/dislikes, etc.  Those that are good at sales handle sales; those that are good at production manage production; etc.  This makes perfect sense, and I get it.  In fact, these types of preferences, skill sets and synergies are often the reason that certain people make good business partners.  However, this does NOT mean that they should not monitor each other’s performance and the performance of all material aspects of the company’s critical business operations, processes and finances.  Failure to do so often leads to misunderstandings, and in extreme cases can lead to business breakups or even outright failure.

Frequently I encounter businesses whose owners are not particularly strong in financial matters or simply don’t enjoy monitoring the company’s finances.  Without sounding too harsh or patronizing – complete delegation of your company’s finances to another party (even your trusted business partner) without regular reports, monitoring, etc. is NOT acceptable or prudent.  After all, as an owner, that’s your money they’re dealing with.

We all know the old saying – “The buck stops here.”  Well, part of being a responsible owner is understanding that the buck stops with you.  Too often I’ve seen owners who discover too late that someone was doing something wrong, something was not getting done at all, or the business simply wasn’t healthy or performing properly – and the explanation frequently is that it was someone else’s fault.  I hate to be so blunt, but it’s always the owner’s fault – and it’s always the owner’s money that’s lost.

The bottom line is ownership comes with benefits, burdens, responsibilities and obligations.  Monitoring all aspects of your company’s performance and finances is one of the burdens – or at least one of the responsibilities.  Take it seriously for your own benefit and protection.

Raising Outside Capital? Know the Basics – Part 1

So your company is doing well and has great growth potential, but the banks won’t loan you money to grow, you’ve exhausted your personal resources, and you’ve run out of friends and family willing and able to write checks to your company – what does that mean?  It probably means it’s time to raise outside capital – perhaps angel or venture capital.  Here are some considerations before raising outside capital and some of the key points you’ll likely be negotiating:

Dilution/Loss of Control:
First, consider whether you’re prepared to own less than 100% of your company, and if so, whether you’re also prepared to have less than 100% control over business decisions.  If the answer to either of these questions is no, you should not raise outside capital.

Capital Need – Sources and Uses:
Second, carefully consider how much money you need and what exactly you’re going to do with it.  The reason is twofold – first, no experienced investor will take you seriously unless you have a detailed and well thought out strategy; and second, the more you raise, the more ownership and upside you give up.  Raise just what you need to execute your business plan (with the caveat that everything generally takes longer and costs more than planned).

Strategic Investors:
Third, consider what qualities, skills, connections, experiences, etc. you would like your ideal investor to bring to the table.  After all, a dollar is a dollar, but these other strategic offerings are what differentiate one investors’ dollars from another’s – and make them more valuable to you.

Valuation:
Valuation will be key.  At the risk of stating the obvious, the higher the valuation you can justify, the lower the interest the outside investors receive for each dollar invested.  And be prepared to justify your valuation – this company is your baby, not theirs.  What you see as a cute dimple, they may see as an ugly scar.  In the end, the value of the company becomes what you and your investor(s) agree it is.  Make sure you’re prepared to make the strongest case for your valuation – and understand that to the investor, it’s just business.

Stay tuned for “Know the Basics – Part 2.”

Angels and Opportunities – What a Concept!

One of the biggest challenges facing angel investors is access to good deals. One of the biggest challenges facing early stage companies is access to capital; another is access to experienced, strategic investors who bring more to the table than money. There’s no real mystery here – we need to go beyond ad hoc networking to connect angels to investment opportunities for their mutual benefit and for the benefit of the start-up and entrepreneurial ecosystems inIowaand beyond. We’ve known this for a long time, but now we’re finally doing something about it – enter “The Plains Angels.”

 The Plains Angels is the brainchild of Mike Colwell at the Greater Des Moines Partnership and will be led by Mike, Christian Renaudand Tej Dhawan with support from BrownWinick. It is not an investment fund, but rather a group of angel investors looking for a reliable and consistent source of high quality deals that have been vetted by experienced consultants. That’s the mission of The Plains Angels – to connect angels with opportunities.

This is not a new model – it’s proven successful in Omaha, Austin, Denver and elsewhere, and it will succeed in Iowa. And the beauty of it is, it need not and should not be limited to Iowa companies or Iowa angels. In fact, in order to develop the synergies and diversity of opportunity that we’re looking for, it’s essential that The Plains Angels cross pollinate and be cross pollinated by other like-minded groups.

This is an exciting time to be involved in the start-up/entrepreneurial and angel groups in Iowa and more broadly.  The Plains Angels is what we’ve needed for several years to put us over the top locally and make an impact regionally and nationally. This is going to be a lot of fun – join us for the ride!

Shared Values Matter in Attorney-Client Relationships

Everyone knows that shared values matter greatly in interpersonal relationships – in fact, they may be one of the few absolute requirements for a successful and rewarding long term personal relationship.  Most would also agree they matter within an organization, where individual values ultimately dictate company culture.  I’d like to make the case for the importance of shared values in attorney-client relationships.

Both attorneys and clients come in many “shapes and sizes” when it comes to personalities, preferences, communication styles, etc.  I’m not suggesting that these qualities need to be the same or even similar.  In fact, one can argue that it’s healthy to the overall team to have varying skills, experiences and styles.  However, I don’t believe that’s true when it comes to values.  I believe shared values and value systems are essential to a long term successful relationship.

When speaking of values in the attorney-client context, I’m talking about those principles – business, ethical, etc. – that dictate both what we’re willing to do and not willing to do and how we’re willing to do it.  For example, I’m not willing to lie or mislead, abuse or mistreat, or place unfair demands or blame on the other side to a negotiation.  My value system inherently tells me that these are the wrong actions and behaviors to bring about a positive outcome for my clients.  I am, however, willing to push myself and my team to the limits to zealously and aggressively represent my client’s interests.  When clients share these values with me, we make a great team and can accomplish great things.  If we don’t, it will ultimately lead to frustration and disappointment.

If you haven’t taken the time to explore whether you and your attorney (or you and your client) share the same essential values, you should.  It can go a long way toward establishing the right relationship and building it so that you – as an attorney-client team – reach your maximum potential for the benefit of your business.

Changing Relationships Call for New Agreements

Have you ever had wills drafted or met with your financial advisor or insurance agent, and at the end of the meeting, he or she said, “Now we need to revisit this every couple of year to make sure things haven’t changed.”?  That same approach should be followed in your other legal and business relationships.

Relationships and circumstances can change for a variety of reasons.  The law changes.  One party is faced with financial or other business hardships.  One party transforms from a start-up business that is just happy to have a contract to an industry powerhouse.  An employee right out of school becomes a partner in the business.  Territorial capabilities or needs change.  Etc.  When these changes happen, it is critically important that the parties’ contract(s) be reviewed, and where appropriate, revised.  Otherwise, that ever-important “meeting of the minds” that we attorneys talk about may no longer exist – and that’s a recipe for trouble.

As I’ve said before, in negotiating and drafting agreements, we should attempt to anticipate the various ways that the parties’ relationship may change over time, and where possible, include provisions that allow the contract to evolve as well.  However, it’s rarely possible to anticipate all of the changes that may occur.  For that reason, I recommend a periodic revisit of your contracts.  The old saying, “If it’s not broken, don’t fix it,” is absolutely true; but your contracts may be broken now simply because they don’t fit your evolving business relationship.  Don’t let that be the case – remember the other saying, “An ounce of prevention is worth a pound of cure.”  Review your contracts and relationships periodically as part of your preventive maintenance.

How to Begin a Project With Your Lawyer

I was working on an international dealership project with a long time client this week, and something caused me to ask – why is there mention in this email string of a third party that isn’t part of our deal?  Oh, my client responded, you remember that we work with them and they get a piece of each deal “like this” – meaning not like their standard deal.  In fact, it’s been 4 years since we worked on the contract with the third party, and we haven’t worked on a deal “like this” since then (although we’ve worked on many that were not like this) – so, no, I didn’t remember.  Thank goodness I asked about the third party’s involvement, because it was not evident from any other information my client had provided so far, and without knowing this, I could have missed some key issues.

What does this scenario tell me?  It tells me that even in longstanding attorney-client relationships (and maybe especially in those relationships – since sometimes clients forget that the lawyer has many other clients and is not immersed in the client’s business 24/7), we need to always focus on the basics of the deal.  This starts with a detailed description from the client of all relevant facts, circumstances, concerns, interests, etc., and a specific identification of the ultimate business objective.  Next, the attorney should restate his or her understanding of the deal, and ask any specific questions and gather any specific information necessary to fully understand the project and properly advise the client.  This exchange between client and lawyer may be verbal or in writing, but the point is, when it’s complete, the attorney should be clear on what’s happening and what’s most important to the client.

The above process may seem obvious or even tedious, but I can assure you that it will better protect the client’s interests than the “ready, fire, aim” approach that is often the case.  An added benefit is that it will reduce legal fees and the time it takes to consummate your deal – it’s a real win-win.

Sign Your Deal NOW!

I’ve seen it happen a thousand times – in fact, I’ve seen it happen twice this week.  Parties to a negotiation reach a “deal” but don’t have documents ready for signature.  So one party takes responsibility for drafting them, but by the time drafts are circulated, one or both parties change their position, back up, get cold feet, reconsider, or whatever else you want to call it – and the deal falls apart.  While that’s not always a bad thing, it often is, and it is also frequently avoidable.

Now, I’m not suggesting that parties hastily enter into deals or sign incomplete or inaccurate agreements.  But, I am saying that well thought out and carefully considered deals are often at their best – that is, closest to the actual “meeting of the minds” that we lawyers talk about – right after negotiations are complete.  This is why it’s important to move quickly from negotiations to definitive documents, to execution. 

Remember, the name of this blog is BizB4Law – when negotiations are complete (and assuming they were well thought out and comprehensive), the “biz” portion is in most cases complete – all that is left is the “law” portion.  While the documents should spell out the business terms agreed to and fill in gaps, it is generally not productive to reconsider or reopen the negotiations – and doing so often means the parties lose the “benefit of the bargain” they had just made.

So all of this means we should follow a few simple guidelines, as follows:

• Make sure your negotiations are as comprehensive as possible.  Discuss and agree on all material terms.
• Include your lawyers as early as possible in the discussions.  If that’s not possible or productive, include them just prior to preparing definitive documents – so that any specific open issues or questions they may have get answered before the parties conclude negotiations.
• Draft definitive documents as soon as possible after negotiations are complete, and stick as closely as possible to the terms agreed to in negotiations.  The document stage is not the time to surprise your prospective business partner.
• If you feel you have to change something from what was agreed to or address something important that wasn’t previously discussed, let the other party know before you send them proposed documents.
• And finally, move from first draft to final draft to execution as soon as possible after negotiations are complete.

These are pretty simple guidelines, but they will help you to avoid disputes and get your deals done.

Be Careful When Contracting With Related Parties

Ever heard the expression, “Good fences make good neighbors.”?  I have a similar opinion as to contracts between related parties.  I’m talking about business contracts between parties who know and trust each other and may even be in related or competitive businesses.  Even in those circumstances, a clear and specific contract is important to avoid misunderstandings and effectuate the parties’ agreement.

Let me give you a recent real life scenario.  My “Client” is in a competitive and sophisticated commodity based business where a few pennies on the input or output side can mean millions of dollars and the difference between profitability and failure.  The Client is owned by a group of individuals that are also owners and operators of competitive businesses (the “Competitors”) in the same industry – this means the owners are both partners and competitors.  To further complicate things, a subset of the owners has a related company (the “Management Company”) that manages the commodity-based businesses (both the Client and the Competitors) for a fee.

So, the Client wants to enter into a contract under which the Management Company would manage the Client’s facilities – in addition to managing its own facilities and the Competitor’s facilities.  This arrangement is filled with conflicts of interest and competitive risks/concerns – in other words, this is a situation where the contract is critical.

I can’t discuss all of the key issues here, so I’ll focus on just a few.  The parties’ proposed contract said the Management Company:  (i) had complete discretion and authority to make decisions and enter into contracts binding on the Client; (ii) could use and share the Client’s confidential information with and for the Competitors’ and the Management Company’s own purposes; (iii) had no limits on competition, solicitation or the allocation of business opportunities; and (iv) had no stated standard of care.  In other words, the proposed contact was A RECIPE FOR DISASTER FOR THE CLIENT.

Now, as it turns out, none of the above provisions accurately reflected the parties’ intentions.  However, because they know each other well and trust each other, they thought they could cobble together any document labeled “Management Agreement,” and they’d just work things out as they went along.  When presented with a series of “what-if” questions, the parties quickly realized that this contract needed a lot of work, and we included provisions addressing the above issues and several others.  The result is a contract that clearly sets forth the parties’ rights and obligations and anticipates and addresses the circumstances that might otherwise result in disputes.  In other words, a contract that facilitates and builds their business relationship rather than threatening it.

Keep in mind that contracts between related parties often present the same (and sometimes even more) risks as other contracts.  Make sure you take care when entering into them – for everyone’s benefit.

Litigation From the Business/Transactional Perspective

My last blog post discussed the importance of contemplating litigation risk (or at least the likelihood of disagreements arising from time to time) in structuring business entities and relationships and in drafting contracts – in other words, anticipate and draft for the potential downside. By doing so, you can actually reduce the likelihood of disputes, and even if they do arise, they will hopefully be resolved in a quicker, less costly and more predictable manner. All of this allows clients to focus on running their businesses and making money rather than fighting legal battles and spending money.

Of course, not all disputes can be avoided or settled.  Sometimes you’re forced to litigate or arbitrate.  Even in those circumstances, however, my experience shows that substantial time, money, opportunity costs and emotional damage can be saved if those disputes are approached from a business/transactional perspective.  So, here are a few very brief thoughts on litigating “from the business/transactional perspective”:

• Approach every disagreement with a “problem-solver” rather than a “warrior” mentality.
• Try to compartmentalize disputes – disagreement about one issue doesn’t always need to poison the entire relationship.
• Never litigate over “a matter of principle” unless your business is able to afford whatever it may cost – and it always costs more than you expect.  Principles cost money and don’t generally enhance profitability.
• Don’t get hung up on who’s right or wrong – focus on the impact to your bottom line.
• Settling early costs a lot less than settling late.
• Consider mediation – it really does work sometimes.
• Litigating and winning almost always still costs you a LOT in legal fees, opportunity costs, and sometimes even reputational damage.
• Even in litigation, conduct yourself in a professional manner and with integrity – you never know who or what will lead to your next business opportunity.
• Just because you didn’t have an arbitration clause doesn’t mean you can’t agree to arbitration later on – it still may save both parties time and money.
• While in litigation, there’s no need to fight over everything.  Fight only the battles that matter – you look better in the judge’s eyes, and you don’t waste money on meaningless victories (or losses).

The bottom line is disputes cost money and take you away from your business.  Choose and conduct your battles wisely – from a business perspective.

Transactions From the Litigation Perspective

The law, like most disciplines, has very few absolute truths.  However, it is my firm opinion that a good business transaction is always better than a lawsuit.  Therefore, it’s critical that business transactions and the underlying contracts be structured to maximize value, reduce risk and avoid uncertainty.  After all, risk and uncertainty often lead to disagreement and sometimes litigation.  Therefore, I recommend that parties approach business transactions and contracts with the mindset (but not necessarily the goals) of a litigator – and then use that mindset to avoid litigation.

I do not mean that parties should be argumentative or take one-sided positions.  Rather, what I mean is the deals should be structured and contracts should be drafted as simply, clearly, consistently and comprehensively as possible.  And once you’ve done that, they should be re-examined, and the following question should be asked:

• Is this the right deal, at the right time, with the right party?
• Is the deal structured as simply as possible?
• Is the contract drafted as clearly and simply as possible?  Is it consistent?
• Which provisions invite differing interpretations?
• Have you covered as many variables/contingencies as possible (you generally can’t cover them all)?
• Have you allocated between the parties as many of the risks/responsibilities as possible (again, you may not be able to cover them all)?
• Have you included appropriate insurance, indemnity and escrow provisions?
• Have you allowed for termination or some other type of walk-away if the deal doesn’t work out?  If so, have you anticipated the likely issues, disagreements and entanglements that can arise at this stage (they can be much different than those at the outset)?
• Have you considered how disputes will be resolved?  Mediation?  Arbitration?  Litigation?  Appraisal?  By whom?  Where?  Who pays?  What law/rules govern?  Etc.
• In light of all of these questions, and even assuming you’re comfortable with all of the answers, is this a deal that should be done?

Thinking like a litigator may be the best way to avoid litigation over your business deals.