Take care when
leaving firm to
start own business
DEAR INFORMER: I want to leave my company to start my own business. But I don’t want my first task to be a lawsuit from my employer. Are there ways to protect myself?
DEAR SNEAKY: First, put on dark clothing. Second, rifle through company files and take whatever you find. Third, ask your best clients to do business with you, on company time.
Just kidding. Although ditching your employer to start your own company is a tried-and-true method of going into business, there are right ways and wrong ways to do it. Don’t tip your hand to anyone until it’s time to leave — they won’t like you even a little bit after you say you’re starting a competing business. But do submit all your actions to your personal smell test. Your business will be much better off if it’s started honorably.
Now that Dear Informer is done channeling her mother, let’s lawyer up. Stacey DeKalb, an attorney with Lommen Nelson Law Firm in Minneapolis, says to get your non-compete agreement to thine attorney. “Courts are loath to enforce a non-compete if they can help it,” DeKalb says. “A non-compete is a restraint of trade, so courts disfavor them.”
That means prohibitions placed on you may or may not be a barrier. If it was not signed before the first day of work, for example, it may not be valid at all. If it’s too restrictive in time frame or geography, for another example, Minnesota courts may “blueline it,” that is, cut the number of months or size of region in the prohibition.
Check the language on confidential information. It will probably say you can’t divulge so much as the office favorite restaurant list. But a company has to have guarded its confidential information closely in order for courts to agree that it’s in fact secret, DeKalb says. A customer list may or may not be confidential. If it’s a list of elevator repair customers, say, when anyone can walk down a street and see which buildings have elevators, it’s probably not. If it’s a closely guarded list of when those contracts come due and how much the customer is paying, it probably is.
Also check provisions for non-solicitation of employees, which is lawyer-speak for a rule that you can’t rob all your best friends from your firm.
In the clear? There’s more. “Separate and apart from a non-compete agreement, an employee has a duty of loyalty as well. She should not start soliciting business while she’s still employed there,” DeKalb says. “Even if she didn’t have a valid non-compete she might still be running afoul.”
Finally, take a step back and do risk analysis. Does your company commonly sue people who leave, or commonly sue people at all? “Some employers are very vigilant about that and others aren’t because of the expense. It involves going to court and obtaining restraining orders and so on. Fees for just the first part of the case can run up to $20,000,” DeKalb says. On the other hand, a well-financed company with a lot to lose is more likely to pursue.
Stacey DeKalb, Lommen Nelson Law Firm: 612.336.9310; stacey@lommen.com
DEAR INFORMER:I completed my first acquisition a year ago, but fear I overpaid for advice. The fees seemed really high.
DEAR PAYING THROUGH THE NOSE: If you’re not embroiled in a lawsuit, if you actually own the assets you purchased, and if you’re not headed for bankruptcy because of a tax hit, you did not overpay for advice.
So assures Sandra Broekema, a business broker with Bostwick LLC of Minneapolis, who points out that acquisitions are complex transactions that need the care of specialists. She says it’s common for business owners to think they overpaid for the assets themselves — that’s just buyer’s remorse.
As for consultant fees, “Normally the advice you get more than pays for itself in a better transaction,” Broekema says. “So unless he paid some exorbitant amount, I’d say it’s well spent.”
There aren’t any rules of thumb regarding fees, and advice isn’t proportional to the size of the transaction. In fact, for a small transaction you’ll actually pay a relatively higher price for advice. Comparing cost quotes before hiring anyone is always a good idea.
Absolutely essential advisers, according to Broekema: An attorney to draft and review the documents and for overall legal counsel. An accountant for valuation and to help you through due diligence. A tax specialist, because “tax consequences are different between the buyer and seller and often at odds,” Broekema says. A closing attorney to check liens and such to make sure the assets can be transferred.
“Look for both accountants and attorneys that have experience in small-business transactions. It may not be your personal attorney or accountant,” Broekema says. She also recommends hiring a business broker (she admits she’s biased) because they’ve seen it all and can say what the market is paying for your type of business.
Sandra Broekema is an M&A consultant with Bostwick LLC in Minneapolis: 952.525.2290; sandra.broekema@ebostwick.com ; www.ebostwick.com
REAL ESTATE
DEAR INFORMER: I got behind on my rent by a couple of months last year. Now I’m back on track but my landlord said he’s sick of me and won’t renew my lease. Is there anything I can do?
DEAR SPACELESS: It’s too late for you now, sorry about that, but Jim Vos of CRESA Partners in Minneapolis offers advice for others in the same spot. “The only thing he could have done is put a renewal option in the lease,” Vos says. “Typically those options say as long as you’re not in default you can renew.”
Many landlords today will grant a renewal option at the time of signing, and it’s common to get a three- or five-year lease with the option. “We tell tenants even if you think you don’t want it, get it. It’s just a negotiating chip later on,” Vos says. Even if tenants had trouble paying in the past, as long as they’re up-to-date when the lease comes due the option should hold.
For you, Spaceless, it’s still worth a try to offer the landlord a security deposit in the form of two additional months’ rent (to be returned later), or a letter of credit, or some other instrument to show that you’re financially sound. If you’re having a seasonal cash flow problem, open up those books and show your landlord that revenue always picks up come summer or the holidays.
“You can be creative,” Vos says. “If the landlord is just worried about your ability to pay, this might work. If they really want you out of there, because the tenant next door wants to expand or whatever, without some sort of option you don’t have leverage.”
Vos advises tenants to call the landlord early if they foresee a rent problem. “Maybe they’ll have options. Maybe they could take some of the space back,” Vos says. The response you’ll get depends widely on the landlord. “If they’re a large institution with the decision-maker in New York, they may not care. If it’s a local owner, they might be sympathetic.
“Landlords aren’t eager to take space back, but they’ve been more cooperative on letting tenants adjust payment. They’ve even taken less money for a while because some money is better than nothing,” Vos says. “Two years ago if you said you couldn’t pay rent they’d bounce you out. Today the market conditions are such that landlords are willing to talk.”
Vos ends with philosophy: “It’s never a bad idea to be honest.”
Jim Vos, CRESA Partners in Minneapolis: 612.337.8498
