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

The Letter of Intent ("LOI") set the price at $22,000,000.  The Asset Purchase Agreement, known as the "APA", executed just six weeks later set the price at $21,750,000.  At closing, the purchaser wound up paying $20,200,000.  The sole reason for this 10%, two million dollar haircut was the seller's lack of inventory control. 

Particularly in a tight economy, due diligence is the order of the day.  Savvy purchasers will look for audited financials and recently documented full, physical inventories before coming to the settlement table.  In that same vein, savvy sellers will address this issue well before even putting their company on the block.  The price of overlooking inventory controls is steep. 

If the Buyer ever gets to the point of knowing more about the company than the Seller, the Seller will take a hit.

Too many companies, particularly family owned companies, try to sell the business while relying on the strategies and procedures which served them well over the years while building the company.  They don't work.  A successful sale depends upon the seller's ability to view the company through the eyes of the buyer.  Most notably, this includes absolute verification of inventory.  

So, before seeing their lawyer, business broker or investment banker, sellers hoping to realize full value at closing, would be best advised to take a stroll back to the warehouse...and stay there for a while.

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Yesterday, I found myself at a traffic light behind a company truck.  The truck belonged to and advertised a dog waste removal company.  I pondered this.  For a while, I wondered what the job interview was like.  But as the light turned green and traffic started to move, I noticed something else.  The truck was sporting a bumper sticker that read:

Your Life is not My  Problem.

I turned my pondering up a notch.  "How is it," I wondered "that in this one moment, frozen in time, the dog poop guy seems to be looking down on my life?"  Now, don't get me wrong.  This guy, perhaps even the owner, had a company, did honest work, and maybe even made a killing performing a service hordes of people would pay to avoid having to do.  But why was his employee insulting me.  And did the company's owner know it?

And this led me to my question:

How many owners realize the hidden (and not-so-hidden) messages their employees are sending?

Several years ago, Walgreens faced a lawsuit over just this issue -- only in more extreme form.  It seems that Walgreens pharmacy employees entered their thoughts on various customers in the comments field of the company's perscription software.  There, stapled right to a perscription for a customer's anti-anxiety medication, was a print out featuring some anonymous employee's assessment "She's CRAZY." 

Now maybe she is, and maybe she isn't.  But one thing we know for sure.  Walgreens has spent millions of dollars on a campaign to convince the public that it is a friendly neighborhood pharmacy.  How much money, then, did this one errant employee flush down the drain with one careless, or in this case, incredibly stupid example of personal expression?

Appearances matter.  If your employees have customer contact, check every aspect of the interaction.

• What do the outgoing voice mail messages say?
• Look for bumper stickers on vehicles used for delivery -- political, religious, or even humorous.  What's funny to one is insulting to another.
• Listen to how your employees express themselves.  Do they have a penchant for telling ethnic jokes or making sexist comments in an attempt to be funny?  Some people do  these things so often they don't even notice them anymore.

Can you see your company through your prospective customer's eyes?  If the dog waste company could, they might have taken the time to ponder that bumper sticker.

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Employees are expensive.  Misclassifying them as independent contractors is more so.

Most state laws require employers to pay for their employees' workers' compensation coverage and unemployment insurance...at a minimum.  The Federal government imposes additional (and very expensive) requirements.  Specifically, employers must:

• Pay Social Security contributions of 6.2% of salary up to $106,800 (in 2009),
• Withhold 1.45% of all earnings for Medicare,
• Pay overtime to eligible employees
• Provide unpaid leave under the Family and Medical Leave Act for those companies to which the Act applies.

Independent contractors, on the other hand, receive 1099 forms at the end of the year and are responsible for their own taxes.  Employers contribute nothing.

It is tempting, therefore -- particularly in difficult economic times -- for employers to classify people as independent contractors and save both the money and the headache of withholding taxes insurance payments, and contributions.  But it's not that easy.  The IRS looks very carefully at each situation to determine the exact nature of the relationship between the company and the individual.  For the most part, it comes down to a question of control. 

The IRS and most states examine the following factors to determine the nature of the relationship:

1. The company's right to direct or control how the work is being performed
2. Who establishes training programs and whether they are mandatory
3. The source of the tools (including computers and software) used to perform the work
4. The location where the work is performed
5. Whether the company has the right to assign additional projects
6. Whether the hired party hires and pays his or her assistants or support staff
7. THe company's right to determine when the work is performed and/or set certain hours

Bottom line, if your company has the right to control or direct what is being done, how it is being done, and when it is being done, your company is most likely and employer.  

Most importantly, a wrong answer can be extremely expensive.  Companies which misclassify employees and independent contractors can be subject to huge tax bills for unpaid taxes as well as penalties for failure to file required tax forms and, in certain circumstances, failure to adhere to Federal and State statutes such as the Family and Medical Leave Act and Title VII of the Civil Rights Act of 1964, as amended (applicable to employers who have 15 or more employees).  In addition, misclassified employees can pursue their own claims against the company for any losses they may have sustained.

Both companies and individuals can ask the IRS to make a determination of employment status by filing with the IRS Form SS-8:  Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  

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It is a simple lesson learned by those good at what they do.  The world's best software designers use it as their primary focus, as do diplomats, the nation's top deal-makers, and (believe it or not) legislators evaluating U.S. tax policy.  Whatever the path, there are many roads to a successful outcome, but they all start with Rule #1:  Make it easy for people to do what you want them to do. 

Allow me to illustrate.

Two weeks ago, my 10 year old came down with strep throat.  Once he spiked a fever, my wife took him to our neighborhood urgent care center.   To date, I've received three statements from my insurance carrier.  Three separate envelopes.  Three detailed statements.  I still don't know what I owe.  I presume these people want me to pay them.  (Why else would they send me the statements?)  I want to pay them.  But they're not making it easy.  Instead, they are making it almost inevitable that I will do one of three things:

1. Delay paying them until I can sort out their bill
2. Call  their customer service number and tie up a representative for a while, thereby raising their employment costs by making such people necessary in the first place
3. Pay the wrong amount, forcing their accounting people to deal with the discrepancy

Not one of these things is what the insurance company wants. They want their payment promptly; and they're not going to get it.  This company has failed to follow Rule #1. 

Every facet of your business, from employee policies to marketing and customer service, should be created from the ground up in service to Rule #1.  In other words, for each part of your business, figure out what you want and then develop policies which make it easy for people to give it to you. 

• If you want people to pay you timely, make your bills easy to understand, stick religiously to a schedule when sending them out, make sure they do not contain unpleasant surprises,  give people a variety of ways to pay, and submit your invoices or requests for payment in a form readily acceptable by your customers.
   
• If you want your customers to use you as a resource, make it easy for them to find and contact you on at their convenience.   (If your business serves construction contractors, for example, you better be reachable at 7:00 a.m. because that's when they're on the job site.)
   
• If you want to know what your employees are thinking, create policies which incent them to provide their input and make it easy for them to do so. 
   
• If you want someone to keep sending work your way, figure out how you could make sending you work a no-brainer for them.   For example, see if you can send referral sources a quick reference which would serve the dual purpose of making their job easier while keeping your company's contact information front and center.  Another example would be to offer free services such as assessment or contract review to enable your referral sources to get the ball rolling on a project without cost.  After all, once you're in; you're in. 

Rule #1 applies equally to customers, employees, partners, and investors. Too many company policies exist simply because they always have.  As noted by despair.com

"just because you've always done it that way doesn't mean it's not incredibly stupid." 

If that's where you are, change. The tough part, of course, is actually examining each facet of your business -- from HR policies to website design -- to figure out what response you want, and what kind of responses are counterproductive.  Once you have that figured out, discard the policies that do not serve Rule #1 and build on those that do.

Good luck.

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