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

Every month, I ask our Empty Hourglass Clients to meet with me, free of charge, so that I can keep a better handle on their businesses and answer any questions they may have. You see, many business owners have questions that arise in the day-to-day operation of their companies which, while important, do not seem to rise to the level of immediacy required for the payment of legal fees. So the questions sit…unanswered. The issues remain unaddressed. And frequently, though not always, large problems grow out of what could have been minor inquiries.

I have noticed a trend in these meetings. In more than half of them, my clients ask me if I would review their Personnel Manual/Employee Handbook. 

In view of this trend, I thought it might be beneficial to list and comment on one of the most common issues I have found in company after company … industry after industry:

The Manual Should Reflect Policies, Not Aspirations

The purpose of the Manual is to describe the rules by which the company operates. Time and time again, after reading a company’s Manual, I find myself asking clients “is that really what happens in your company?” Often, the answer is “no.” Maybe there is no formal procedure such as that described in the Manual.  Many there are no written forms or step-by-step investigatory approach. 

That’s OK. Many companies have not formalized their processes. My recommendation, however, is that management take the time to figure out small, doable steps to put into place and describe them.  By spending page after page describing procedures which everyone in the company knows will never take place, the company has generated a Manual that is simply not worth the paper it’s printed on.  Other than double checking paid holidays and the amount of vacation, the rest of the Manual is just wasted words on useless paper.

If you’re wondering whether your Personnel Manual needs an overhaul…or even if you’re thinking of writing one for the first time, take a look at any sections which detail company procedures – from requesting Paid Time Off to describing disciplinary procedures – and ask whether the words on the page reflect what happens in reality.  If not, change one or the other.

Because when it comes to Personnel Manuals, Shakespeare was right: 

To thine own self be true.

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To many business owners, the question of “legal structure” begins and ends with the completion of a pre-printed form from Office Depot and the payment of a nominal filing fee to the State Department of Assessments and Taxation. The fact of the matter is that many business owners leave money on the table by failing to select the right business entity when they start out or by forgetting to reexamine their choice at different stages in the company’s development.

There are three primary reasons to select a business entity:

1. Tax considerations;
2. Day-to-day operations; and
3. Exit strategy. 

Sole proprietorships, limited liability entities, S corporations and partnerships are the so-called pass-through entities in which profit and loss are taxed at a personal level for the owners. Other entities, of which there are many, are subject to different tax treatment. The failure to match the type of business to the legal structure can result in significant (and often unnecessary) tax liability.

Depending upon the type of business, limited liability entities and corporations are often vastly preferable to other structures inasmuch as they insulate their owners from personal liability for acts of the entity. An owner’s personal assets (such as a house, cars, bank accounts, and personal property) are often directly at risk when business is being conducted through a sole proprietorship or in a partnership setting. Protection from risk constitutes a fundamental basis for selecting a business structure. 

All good things must come to an end. Whether the business owner is anticipating a 40 year career or a two year cash-out in the business, exit strategy must always be considered in business formation. If one is looking to approach the investment community for a capital infusion, anticipate banks financing or hopes to sell to employees at a later date, it is best to select a business structure most amenable to the particular option envisioned. 

Finally, regardless of their current business entity, business owners can decide to change their structure at any point in the company’s evolution. Although there may be tax ramifications and other challenges involved in such a restructuring, the benefits of the end product often outweigh the convenience of standing pat. 

Bottom line: The business owner must know and understand the pros and cons of the legal structure in which he or she is conducting business.

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This past weekend, I found myself building three raised garden beds for my son’s elementary school. One could easily tell that the project was as low-tech and unsophisticated as construction could possibly be by the simple fact that I was doing it. But there I was, tucked by the side of the school while remainder of the school population was out back enjoying the annual May Day carnival.

The project provided a good opportunity for me to work with my sons, 12 and 8, on some basic woodwork and construction techniques. You can have absolute faith that the word “basic” comes fairly into play because, again, I was doing it. As the morning wore on, it became apparent that the piece of advice I most often doled out was “measure twice, cut once.” I began to reflect on how important this homily is and how often it is ignored in most every walk of life…including business.

Projects are usually entered into with a sense of urgency. It may be because of the need to get started, the rush to beat a deadline or the imperative to show something productive. Whatever it is, the desire to produce something seems often to produce something… well… mediocre. Over the weekend, I couldn’t help but reflect on the fact that so many of the problems crossing my desk can trace their origins to this dynamic.

A few cases in point:

1. Plans and specifications are issued half-baked, kicking significant issues down the road because of the need to get started. The result? Change Order after Change Order after Change Order.
2. Parties to a transaction refuse to spend the time drafting a clear Letter of Intent spelling out their agreement on material terms, only to waste money down the road as attorneys exchange draft after contractual draft attempting to negotiate what should already have been resolved.
3. Banks fail to spend adequate time on commitment letters, preferring to present their borrowers with full loan documentation at the last minute, containing never-before-negotiated terms, severely straining their relationship with the customer
4. Web designers and business owners fail to take adequate time in the planning stages before coming up with the first mock-ups. (Because, as we all know, the design unveiling is the fun part.) The result is almost inevitably less than a perfect match with the client’s hopes, vision, and expectations.

In How Did that Happen?: Holding People Accountable for Results, coauthor Roger Connors submits that successful outcomes hinge upon “effective formation, communication, and alignment.” He explains that success hinges upon:

• Formation of the full plan;
• The investment of time to communicate that plan to all necessary participants; and,
• The need to receive assurance that the plan is aligned with the owner’s vision and the available resources.

Too many short-sighted organizations give in to the temptation of showing results before investing in the planning stage. Banks do it; so do developers, constructions companies, graphic designers, and (in a frightening realization) doctors. 

Instead: On your next project, fight against this temptation. Pay heed to deadline and client expectations, to be sure, but put off the instant gratification of the unveiling for just a little while longer to do things well. 

Chances are you will have built not only a successful project, but a lasting relationship as well.

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Many companies have personnel manuals they've worked hard to put together and have not looked at for 5 years or more. If you're one of those companies, or are simply looking to put together a personnel manual for the first time, here are some things to consider:

•  Do you have a section addressing social media and how entries reflecting badly on your company can result in disciplinary action?
•  Do you have a section on post-termination references that actually reflects what you do in real life?
•  Does the Manual address the last several problems or termination-level offenses your company experienced?
• Have you placed your employees on notice that the company reserves the right to monitor their online activities and even e-mail if company equipment is being used?

As with many things, it is better to have these policies in place and not need them, than to need them and not have them.

Want to further discuss this issue?Let's talk about it on Facebook, LinkedIn, or Twitter.

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