Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Although Hollywood portrays the best lawyers as purple-faced, fist-pounding litigators, the true test of a great lawyer is whether he or she can prevent such courtroom drama scenes, say small-business owners.
“I’m a very strong believer that the role of the law firm is not to protect you when there is a cataclysmic event; it’s to avoid the cataclysmic event,” says Jim Leslie, CEO of Midwave Corp., a Chanhassen-based information technology company.
That requires lawyers and their clients to handle a lot of unglamorous paperwork. An attention to detail in contracts during the early stages of a small business can help owners steer clear of costly litigation down the road, say attorneys.
If handled competently, routine documents such as vendor and lease agreements are stuffed into a lock box or file folder to collect dust. If handled incorrectly, they can quickly spring back to life to cause many, many problems.
When it comes to their legal affairs, emerging businesses must be precise, much like a tank gunner, says Andrew Humphrey, an attorney with Minneapolis-based Faegre & Benson, who works with high-growth, venture-capital-backed small companies. Even the slightest miscalculation can impede growth and prevent owners from realizing their goals.
“You can sight a target from a mile away. But if you’re off by just a hair of a degree, by the time it actually hits a mile it can be hundreds of feet off,” he says. “The importance of getting things right at the beginning is much greater.”
Leslie, whose company posted $44 million in revenue for fiscal 2004, says it’s been rare for a month to go by without generating billings from his law firm, Faegre & Benson. The legal advice he’s sought since founding the company in 1999 has been almost entirely preventative, he says, estimating that about 80 percent of his contracts are reviewed by his lawyers.
When advising small-business clients on how to handle contracts, attorneys offer a number of guidelines to keep in mind and point out several pitfalls to avoid.
Overall, they preach formality in contracts over a friendly handshake. Deals and promises jotted cryptically on the back of envelopes can come back to haunt owners, even if they’re made in all seriousness, says Humphrey.
A lack of precise language can lead to disagreements about what the original agreement entailed. A founder may pledge one percent of his company’s profits to an early-stage investor on scratch paper, but the devil lies in the details — or lack thereof.
“Maybe the founder was thinking that’s one percent of the profits for the first five years, or had defined profits differently in his or her own mind,” says Humphrey. Casual contracts can wreak havoc once a company has become successful and there are more people involved, he says.
Intellectual property is an arena where a laid-back approach to contracts can be disastrous, says Humphrey. Owners who don’t get early contributors to assign all their rights to the company may find themselves awkwardly playing catch-up. “You’ll have to go back to founder Joe who left in a huff a year ago because he didn’t get promoted, and say, ‘Oh by the way…’” says Humphrey.
When signing outsiders’ contracts, small-business clients should be careful to distinguish between those they should sign as individuals, and those that should be signed in the business entity’s name. An owner who signs his or her own name may end up personally guaranteeing liability, instead of the company, says Rick Salmen, a transaction attorney with Felhaber, Larson, Fenlon & Vogt, in Minneapolis.
Mixing personal business with corporate affairs, however unwittingly, can lead to “veil-piercing,” says Humphrey, referring to the thin shield that protects an owner’s personal assets from those of the company. When a company runs out of money, lawsuits are often redirected toward the owners. “If you set up [a corporation] and honor it and respect it as a legal entity, you as a shareholder don’t have personal liability,” says Humphrey. “The law only respects that … if you can show it is a real corporation, and it isn’t just your alter ego.”
Some small-business owners sign contracts that aren’t in their best interests because they think their companies can “grow out of their problems,” says Michael Gibbons, an attorney with Capitol Heights Law Group, St. Paul. They may agree to an expensive deal with a supplier, thinking they’ll get more leverage to negotiate for a lower price later on when their companies are bigger.
What they don’t realize is that contracts are binding and very difficult to change, regardless of any change in a company’s circumstances, says Gibbons, who works primarily with sole proprietorships and companies with a handful of employees.
Attorneys also tell their clients to be aware of provisions that can put companies at a disadvantage, thus hampering their growth and flexibility. Some are hidden, easy to miss. Nestled deep in some lease agreements, for example, are provisions that saddle occupants with responsibility for building improvements, or lock them into unfavorable lease rates, says Salmen.
Others are so out-in-the-open that they seem innocuous, such as the one Leslie came across while founding his company six years ago.
To create Midwave, Leslie bought a portion of Omaha, Nebraska-based Inacom, a Fortune 500, personal-computers distributor that a year earlier had acquired the smaller company he had worked for as president. Leslie turned those assets into Midwave, and Inacom became a minority shareholder.
A clause in the purchase agreement stated that Leslie would grant Inacom preemptive rights, an entitlement that gave it first dibs on any stock intended for sale by Leslie or any other shareholders.
To him, it seemed like an innocent request, says Leslie. But his lawyer — Humphrey of Faegre & Benson — had a more skeptical view. He pointed out to Leslie that such a provision would complicate any sale of his shares to a different party, who might not take him seriously if they thought he was merely trying to set a price to negotiate with Inacom.
It also tied his hands if he wanted to raise capital for an expansion. “It would have been hugely damaging to my freedom of movement in the future,” says Leslie.
As a result, Leslie refused to accept those terms, and made it clear he was willing to walk away from the negotiation if Inacom remained adamant. After three episodes of haggling, Inacom agreed to give up the provision.
“What a good lawyer does is help you understand the subtleties of the options that you are evaluating,” says Leslie. “You may have two agreements that appear on the surface to state exactly the same thing. But the subtleties of the language may in fact provide very specific options to the client of the more sophisticated attorney that are absent in the contract of the less sophisticated attorney.”
[contact] Michael Gibbons, Capitol Heights Law Group: 651.310.0400; gi*****@********up.com; www.chlawgroup.com. Andrew Humphrey, Faegre & Benson: 612.766.7000; ah*******@****re.com; www.faegre.com. Jim Leslie, Midwave Corp.: 952.279.5600; jl*****@*****ve.com; www.midwave.com. Rick Salmen, Felhaber, Larson, Fenlon and Vogt: 612.339.6321;*****@******er.com“> rs*****@******er.com; www.felhaber.com.
