Bottom Line Business Insights : Maryland Business Lawyer & Attorney : Wagonheim Law Firm : Mergers & Acquisitions & Contractual Negotiation

 I visited Ground Zero on April 21^st. Even the process of getting to the memorial added grace to the experience.   It took just about an hour, but there came that one moment when the long slog and inconvenience of security gave way to the open quiet of the memorial itself. The memorial is wide open enough so that the crowd could separate once again into individuals, each left to contemplate the carved names bordering the waterfalls and deep pools set inside the footprint of each fallen tower. No laughter here and hushed tones. 

We pressed our faces up against the Plexiglas to see the preserved and twisted girders from that day. They are encased in the shadow of what is now the tallest building in Manhattan, the skeletal beams having surpassed the Empire State Building this past week. 

Our country has a passionate need to remember.  We turn these places into national parks and, as crass as the term may sound, even tourist attractions. Ground Zero, the tangible reminder of one of our greatest tragedies, takes its place beside Little Big Horn and Wounded Knee, Ford’s Theatre and The Texas School Book Depository as well-trod paths leading down into the nation’s deepest wounds.

I have heard it said that professional athletes are trained to have a short memory – to forget the previous play’s missed tackle or yesterday’s defeat . The memories, they say, are baggage, not to be carried into the contests to follow. I think, however, that the “short memory” statement is an over-simplification. Athletes are trained to have no short-term memory, but in order to be great, they must preserve and revisit the lessons ingrained in long-term memory. Those would be the hard-won lessons of practice.

The construction of something lasting, whether a building, a career, a business, or a legacy, requires a keen recollection of failure. Last week, I wrote that a well-drafted contract represents, with apologies to Tom Clancy, the sum of all fears.   My point here is to illustrate that fear is only part of the analysis. The other part is history or, to be blunt, failure.

If success were guaranteed, no contract would be needed. A handshake would suffice. Contracts are at their most valuable when things go south. They are called into question, analyzed, followed or contested in the wake or expectation of a failure. 

When a client asks me to review or draft a contract, the first part of the discussion focuses on what the client has seen go wrong in similar circumstances. It is only after we scrutinize the failures that we can begin our work to avoid them. Failure and fear represent the two sides of a very somber coin – containing within themselves lessons of past traps and the specter of lost opportunities to come.  

My advice, as unconventional or depressing as it may be, is to create a failure file. A diary of what went wrong, what you wish you had done, where things began to go south. The goal is not torture, but rather redemption. 

You see, in my mind, that’s the great thing shared by dedicated athletes, growing businesses and a healthy, thriving nation – the chance to do something better the next time. The chance, in other words, to draw a lesson from hallowed ground.

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True to its name, Consolidated Flooring, Inc. provided and installed a variety of flooring products for both residential and commercial projects. CFI, like many contractors, began to take a pounding, beginning in 2008 when the recession hit in full force. The margins on commercial contracts became razor thin – when you could win the work at all – and residential jobs became practically non-existent. 

CFI was a solid company, in business for over 25 years, and prided itself on its work.  It didn’t want to stray out of its comfort zone, and it didn’t want to submit bids it knew to be flawed in order to try to make up the money on Change Orders. What CFI did want was government work.

Here in Baltimore, we’re located 50 miles or less from the hub of the world’s largest customer.  There are, to be sure, a lot of hoops to jump through, but the reward at the end of the process could be substantial.  The government has significant projects, programs to help smaller businesses, and is a secure pay. For CFI, as well as countless businesses of every size and description, government contracts are the silver bullet that will kill woes brought on by the recession. 

Unfortunately, CFI was getting barely a nibble.  It had done its homework and submitted bid after bid.  It had come close, but had yet to hit on that one door-opening project.  That’s when CFI decided to change its name. While retaining CFI as a trade name, it changed its formal corporate name to Specialty Government Flooring. Not flashy (like say…Qwikster), but it said what they did. 

CFI branded the new name, developed and trademarked a logo, and marketed the heck out of their new identity to every contracting officer, general contractor, and government agency it could reach.  It began to work.  In conversations, contracting officers told them that they were really looking for small businesses with an affinity for performing government work. Not that CFI hadn’t marketed this aspect before, but now, it seems that with “government” in their name, they were getting noticed. More importantly, they began to win contracts and secured a lucrative partner for several joint ventures.

Whenever I run across companies struggling to open up a new business channel, I am reminded of the CFI story. In my practice, I have seen several examples of re-branding enables companies to make significant inroads into niches and industries which had long been denied them. I have learned that success awaits those companies insightful enough to see the world through the eyes of others…and then do something about whatever it is that they see.

It is, after all, a two-step process: Perceive then execute. Perceive then execute. If you or your management team has the gifts to do the first, it would be akin to committing a cardinal sin were you to fail to do the second.

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Spouses can help you with many things, but only siblings can go way back into your past and remind you of the times when you really screwed up. My sister, who works with me as both a practicing attorney and our controller, recently took time out of her busy schedule to do just that.

She harkened back to the time when my father had instructed me, as a new driver, to make sure to affix the up to date registration stickers to my license tag. As a careful man and at times, meticulous, he cautioned me to wash the tag first with a damp wash cloth so that the sticker would stick to tag and not just dirt. He then gave me the envelope containing the sticker.

I had good intentions of following his instructions. I really did. Only, I never seemed to have a damp wash cloth with me and when I remembered his instructions, no such thing seemed to be in my vicinity. I put the stickers in the glove compartment, where they stayed until that cold, windy evening many months later when I parked my car in the wrong place.  

I can almost see the steam coming from my father’s ears as he left work early to pick me up and take me to the impound lot underneath the JFX. The fine for parking illegally was high…but it was nothing compared to the fine for not displaying the proper registration.

“Where are the registration stickers,” he asked?

I tried to swim upstream with my explanation as to why they were in the glove compartment, but he was hearing none of it. We drove home in silence, I’m sure. He fumed and I, glad to be in a separate car, simply contemplated my fate when we got home.

This was my first conscious exposure to two rules which I encounter time and time again:

1. Make it easy for people to do what you want them to do; and.
2. Don’t allow perfect to be the enemy of the good.

I’ve covered Rule #1 on many occasions, but it is the second rule that I find causes problems again and again. Almost every time I work with a client where a notice, bid or claim deadline becomes an issue, part of the reason for missing it was not that the deadline slipped by unnoticed, but rather because the client ran out of time trying to make its compliance perfect. 

Clearly, perfect is the goal. One never knows when the gap between good and perfect will cause a problem or result in a missed opportunity. But the answer is not to let slip the deadline. The answer is to scrutinize the gap and create a system to eliminate the shortfall…on time.

In my experience, it is that scrutiny and the resultant will and effort to put the system in place, that ultimately separates the stars from the also-rans.

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 As a business attorney, one of my most important jobs is to guide clients in the execution of their exit strategy. Long ago, however, I realized that attorneys engaged to assist in this regard are like flowers at a funeral – they always arrive too late. 

In the column I recently turned in for the June issue of SmartCEO[1], I quoted a proverb (that I could have sworn was given voice by Winnie the Pooh) that “the best time to plant a tree is 20 years ago; the second best time is today.” Nothing more true than this could be said about planning one’s exit strategy.

I was reminded of this yesterday at lunch with Mark Cissell, CEO of Katz Abosch, one of Maryland’s leading accounting, valuation and consulting firms. We discussed the question of what I call transferable value – meaning whatever it is that gives value to a business in its sale to an unrelated buyer. 

The question was first brought home to me many years ago when I served as seller’s counsel for a massage therapy business. The business had provided a good living for my client, but she had tired of it and wanted to sell. She had 4 massage therapists, excluding herself, and had visions of riding off into the sunset after closing.

But massage therapy is one of those businesses that lives or dies on personal service. There isn’t much inventory or equipment to speak of – maybe some lotions for resale, tables and such – but nothing that would fund a stress-free retirement. 

The question that I couldn’t quite wrap my head around was “what does my client actually have to sell?” The clients were not loyal to the sign on the door; they were loyal to their chosen therapist. What was it that a third-party buyer would pay a premium for?

The answer, as it finally occurred to the buyer, was “not much.” I urged my client to take a longer road, turn down the deal that was offered, and work to transition her business to her therapists while consistently building her brand. She refused, having set her time table for withdrawal.

In the end, she did get out. Her proceeds were much less than she had hoped for and she still had to spend time to transition business to the buyer in order to maximize her earn-out. Even then, she had to fight to retain her therapists (and their business) as she had not locked down her streams of revenue in advance.

My client was an entrepreneur – that species of person I admire in business like no other. She did what so few people in our society are actually capable of doing. She built her living from a business of her own creation. I hope the readers of this blog appreciate how rare and special that is. 

Unfortunately, she made a critical mistake. She allowed front-burner issues to consume her, rather than step back and focus down the road on her exit strategy. In so doing, she fumbled the ball at the goal line. She lost her best opportunity to cash in on her years of hard work on her own terms. 

She failed to consider the question of exit strategy and transferable value.

If you would like to set a plan in motion to reap the rewards of your efforts, either by preparing your company for sale or by maximizing value (and stability) in a transfer to a partner or employees, talk to us. (It never hurts to ask.)

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 By Michael Lentz, Wagonheim Law Attorney

Just over a week ago, Bobby Petrino (the head football coach at the University of Arkansas) was injured in a motorcycle accident. Petrino initially reported that he had been alone in the accident, and that a female passerby had flagged down assistance. 

Last Thursday, Petrino confirmed swirling rumors that he had not, in fact, been alone at the time of the accident. At the time of the accident, Petrino, married and 51, was with Jessica Dorrell, 25-year-old alumni of the University, married to another athletic department staffer. Petrino had recently hired Dorrell as fundraiser for the Razorback Foundation, a booster club of sorts for the University’s athletic teams. 

Several days after the accident, Petrino admitted, and apologized for, a relationship with Dorrell that he termed “inapproporiate.” Of course, Petrino’s post hoc mea culpa also amounted to an admission that he had lied to his family and his employer. 

Petrino now finds himself on administrative leave, on the precipice of unemployment, put there not by his indiscretion, but by his foolish attempt to cover the matter up. 

Petrino is probably one of the most recognizable public figures in Arkansas. He was seriously injured in a one-vehicle motor accident on a major highway. Certainly, dozens of motorists passed the wreck before Petrino and his passenger had even regained their faculties. In this, an era in which nearly everyone carries a phone capable of taking still pictures and videos, “cover-ups” of public incidents are well nigh impossible.

This is particularly so when litigation is threatened, or certain. Bad news is virtually certain to be discovered eventually. The “cover-up” often makes the bad news seem worse, and always gives opponents something else to focus on. 

Unfortunately, in the middle of a crisis (real or perceived), individuals often respond as Petrino did in the aftermath of his crash. The best of intentions can abandon even the soundest of minds in time of crisis. For most small businesses, significant litigation, or public embarrassments, rightly counts as a crisis. Every small business with more than one employee would do well to consider a policy for responding to public missteps. 

Most significantly, the business must speak with one voice, be it an employee of the business, an outside law firm, or public relations firm. For the spokesperson to function effectively, all of the business’ employees must refrain from speaking, and must ensure that the company’s officers and directors have timely, complete, and accurate information. Employees who can’t be honest and forthright should rightly find themselves where coach Petrino does today – facing an evaluation of whether his employer can or should function without him.

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 By Michael Lentz, Wagonheim Law Attorney

In two days, the world’s best golfers will tee off at Augusta National Golf Club for this year’s iteration of the Masters. Augusta is the toniest of tony country clubs; extremely expensive and equally selective.  It’s also a place steeped in tradition and history, especially for golfers; among other things, it’s the only club that hosts the same major championship every year. Not all of Augusta’s history is history to be proud of, though. Founded in 1933, it admitted its first African American member in 1990. It has yet to admit its first female member.[1] In 2003, the club responded to protests challenging its overtly sexist policy by asserting that women could “go start [their] own club.”

Now, it seems that there may be some crow on the menu at the Masters this year. Every year, Augusta has traditionally offered membership to the CEO’s of each of IBM, Exxon, and AT&T (the 3 principal sponsors of the Masters). In October, 2011, IBM appointed Ginni Rometty its new CEO.  As of this writing, Augusta has not offered her membership. With its annual weekend in the national spotlight fast approaching, Augusta has a decision to make. More importantly, though, so do IBM and Ms. Rometty.

If Augusta wanted Ms. Rometty as a member, it would have made the offer long ago. To deny her membership after offering it to so many of her predecessors would be patently offensive and would rightly subject Augusta to scorn, vitriol, and ridicule. Offering it to her now, though, seems little better. 

On a daily basis, Ms. Rometty certainly makes decisions that dwarf this controversy. So, I can’t imagine she’s devoting a whole lot of time or energy to thinking about it. Nonetheless, she and IBM have the chance to be good corporate citizens. I hope she’ll reject the membership if it’s offered, or (even better) politely announce, before it’s offered, that Augusta doesn’t deserve a member of her caliber. 

What IBM should do poses a question more directly relevant to this blog. Personally, I’d like to see IBM extricate itself from sponsorship of the tournament as soon as possible without exposing it to litigation. Corporate directors and officers, though, don’t have the luxury of governing according to their personal feelings. In Maryland, a director must, among other things, act in the best interests of the corporation, acting as a reasonably prudent person with the director’s skill, education and experience would act in the same or similar circumstances.[2] In particular, this duty requires directors to become reasonably informed about their decisions before making them. Of course, the amount of information required varies with the importance of the decision being made. The point, though, is that even if certain individual directors at IBM might want to get the company out of its association with Augusta, they may be duty-bound not to. Terminating the sponsorship might very well cost the company substantial money in the long run, and might alienate many of its vendors and clients. 

If I were counseling the directors of a Maryland corporation in a similar situation, I’d advise them to gain as much information as reasonably possible about the effect that each course would have on the corporation, then carefully consider all that information. I’d advise each director to (1) vote to terminate or continue the sponsorship based on what he or she honestly and in good faith believed to be in the best interests of the corporation, and (2) document the reasons for his or her vote (or at least the factors and information considered) in the meeting minutes. Doing so would ensure not only that each director met his or her duty, but could prove that he or she had done so in the event of a challenge.

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 By Michael Lentz, Wagonheim Law Attorney

The Twitter-verse and the blogosphere are all, well, atwitter, this week over the growing number of employers that are asking for or requiring Facebook and other social media passwords from current or potential employees. 

This trend should certainly remind us all to be extremely cautious with what we put online. In fact, we’ve previously addressed the issue in this blog, citing a Canadian divorce case in which the presiding judge ruled against one of the parties based in part on character determinations he made in reliance on the party’s postings.

Nonetheless, the idea of inspecting the online worlds of current and future employees is a terrible idea, for at least two reasons. First, and most importantly, a business should make hiring, retention, termination and promotion decisions without regard to age, race, gender, national origin, disability, sexual orientation, or physical appearance. Considering such factors in employment decisions will almost certainly leave the business on the wrong end of a successful lawsuit; even appearing to consider impermissible factors will likely lead to a lawsuit. While the business ultimately may prevail, the costs of such a lawsuit, both in dollars and in reputation, would certainly be enormous. 

The best way to avoid (or prevail upon) a claim that your business considered an impermissible factor in its employment decision is to ensure that your business does not even have such information unless the information is absolutely required. Personnel folders and resumes should generally not include photos of the employee / applicant. Interoffice correspondence about the employee or applicant must exclude all reference to membership in any protected class. Your business should carefully document all its reasons for employment-related decisions. 

Even seeking an employee’s Facebook password seems (to this litigator) to be an outright litigation magnet. When you ask for a Facebook or other social media password, you’re asking for a trove of information that should never be considered in making an employment decision. Imagine interviewing a potential employee and finding that he or she was just a terrible fit for your business and not right for the job in any way. Now imagine that a few weeks later, the same potential employee sues you and your business, claiming that you made your decision because of something you saw on his or her Facebook page. Again, you might ultimately prevail, but that’s just not a headache you want any part of. 

Secondly, not only are you more likely to get your business sued if you solicit passwords, you’re also sending the wrong message to current and prospective employees. You’re sending the message that you don’t trust current or prospective employees, either to exercise good judgment or to properly segregate their work and personal lives. Imagine what your workplace will look like after a few years of hiring employees who learn, before you hire them, that you don’t trust them.

Urge your employees to post and tweet responsibly, always mindful of their association with your business. Consider whether your business would benefit from the adoption of a written social media policy. But leave your employees’ (and prospective employees’) passwords in their hands – doing otherwise can only get you in trouble and alienate your employees.

Need a refresher on best employment practices? Check out the 'Avoiding Landmines' in the Employment section of our Business Owner's Pocket Guide!

Update (5/3/2012): From Time.com

"Today, Maryland Governor Martin O’Malley is signing into law the first piece of legislation designed to prevent employees or prospective employees from being forced to turn over their login credentials for social networking sites.

Sponsored by a bipartisan group of state senators and delegates, the new law will prohibit employers from punishing or firing workers who don’t want to share private Facebook profile information, and prohibits companies from not hiring a job applicant based on their refusal to provide information like their user name and password.

The new Maryland law, which goes into effect Oct. 1, is likely to be the first of several similar state-level laws. According to the American Civil Liberties Union, which supports this type of legislation, similar bills are working their way through the legislative process in Illinois, California, Minnesota, Michigan, and Massachusetts. According to local news outlets in New Jersey, state assemblyman John Burzichelli also plans to introduce a password privacy bill in the next legislative session."

Read More

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 “The world breaks everyone and afterward many are strong at the broken places.” So wrote Ernest Hemingway in A Farewell to Arms. I think businesses are like that, too. Scan down the membership list of your trade association or take a moment to look at the businesses passing by your car window. Every one of them is a survivor. Every one of them, at one time or another has collided with the world and come out broken. The question is whether, eventually, they became stronger at the broken places. 

Several years ago, one of my clients experienced a shareholder break-up. One of the shareholders, after five years in the business, wanted out. They turned to the Stockholders’ Agreement which had been signed at the formation of the company. It did not serve the company well. Apparently, the founders had decided that they would be overly generous to a departing member of the group – each having envisioned himself as the one to leave. Now that the others wanted to carry on, they were burdened with an agreement that placed the company in a very precarious cash situation because they had to pay the withdrawing stockholder much more than the true value of his share. 

They put the issue on the back burner for three years, but they finally came together to discuss the issues. Each shareholder evaluated each scenario of departure – death, disability, voluntary withdrawal, termination for cause, and retirement – from both sides of the equation. They considered what would enable the company to move forward and what arrangements would constitute a fair return for the departing shareholders. It took a bit of soul searching, but they finally executed a new agreement that made them stronger in their broken place. 

Breaks come in every conceivable form.

• Companies lose money on projects every day. The good ones figure out why. Did the problem lie in poor estimating, poor execution, an inefficient workforce, indifferent supervision, or an inequitably drafted contract?
• What if an employee leaves for a competitor and takes a boatload of business with her? Is there a non-compete in place and, if so, is it strong enough to accomplish what you want it to do?
• Years after signing a lease, the business owner listens to her peers discussing landlord/tenant issues and realizes she could have negotiated a better deal. There’s no going back. The question is “what is she going to do about it when her lease comes around for renewal?"

Consider the history of your own collisions. Examine the breaks. Ask why they occurred and describe the outcome you would have wanted. 

Now ask the real question: “What have you done to make yourself stronger in the broken places?”

Download our article “5 Ways for a Principal to Leave a Company” for more information.

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• The Employee will receive 10% of net profits realized on all contracts delivered.
• Final payment will be rendered upon completion of work to the Owner’s satisfaction.
• Insubordination will be grounds for termination with cause.

Just about anyone who has ever managed a business has run across terms just like those listed above. The terms are simple enough and readily understood. Who hasn’t shaken hands on a deal like this, only to let the lawyers paper it later? And that’s where things, it seems, go horribly, horribly wrong.

But before I continue on this theme, I’m going to take a brief detour back to my distant past as a sixth grader. Our language arts teacher (and why can’t they just call it “English”) asked us to write an instructional essay, giving the reader step-by-step instructions on a process. The process could be anything, but she stressed that it be something simple. The subject of my essay was “How to Make a Peanut Butter & Jelly Sandwich.” (Next to making egg nog and a killer chicken noodle soup, this was and remains one of the very best things I can do in a kitchen.)

My essay was probably about a page and a half long – a veritable doctoral dissertation for a sixth grader. I went through the expected steps: (1) get out two slices of bread, peanut butter and a jar of jelly; (2) place the bread slices on a cutting board; (3) take a knife from the drawer; (4) open the peanut butter jar, etc. all the way through to eating the sandwich and clean up. 

I was proud of my essay, meaning it was neat enough to be read and I had turned it in on time and remembered to put my name at the top. My teacher did not return it with a grade. Instead, she had written in red ink on the top of my paper “what if you dropped the knife? Resubmit.”

After learning what “resubmit” meant, I had to add a section stating that “if you drop the knife, pick it up, clean it off, and resume step number ___.” By addressing that simple contingency, my essay got longer. Other contingencies such as running out of a supply or spilling something would have made my essay longer still. 

That entire story is the reason behind legal contracts seemingly longer than they have to be. The better drafted contracts address the failed expectations and the things that don’t quite turn out as the principals expected them to be. Equally as important, reasonable people can disagree about key terms and where, besides in the original contract and in a court of law after the expenditure of serious legal fees, would one turn to determine who is right? 

Take a look at the questions at the start of this blog post. A well drafted contract, no doubt longer than the business owners hoped it would be, would address:

• The exact definition of “net profit” and possibly include an example of its calculation.
• The objective meaning of the subjective word “satisfaction,” most probably by tying it to objective standards such as plans and specifications. (Better yet, the word “satisfaction” should be eliminated from the contract entirely in favor of something more precise.)
• A list of what constitutes “insubordination” and an understanding of how that could be distinguished from a simply disagreement.

It is the job of the business principal and the attorney to work hand-in-glove to ensure that the contracts are written in plain, understandable English and strike a balance between being thorough and being so impenetrable that no one would ever sign on the dotted line. After all, a 50 page installation contract might cover all possible risks, but who would ever present, let alone sign it? 

As a business lawyer, I get that. I understand the need for clarity and, believe it or not, brevity. What I try to explain to my clients, however, is that a well written contract is measured not in length, but in the number of possible disputes it avoids. Most of all, what I hope my clients come to understand is that, if I do my job correctly, the contract may sometimes have to be longer than they envisioned, but then never have to wonder “what happens if I drop the knife?”

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