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

The addition or removal of a principal in any business, especially one with fewer than 500 employees, is one of the most important events in a company’s development. How well it is accomplished, both from a moral and a financial perspective, often dictates whether the business will succeed or fail. For this reason, every business owner should know two things: (1) such change is inevitable; and (2) the question of success or failure hinges upon advance preparation.

First and foremost, it is imperative that if a business has more than one owner, the principals should create and sign written agreements detailing:

• When and how any principal can go about leaving the company;
• The amount of money (either stated outright or derived through an agreed formula) the departing principal is to receive, if any;
• How a buyout is to be structured;
• Post-separation obligations;
• The conditions for bringing on a new principal.

When the subject of Buy/Sale Agreements or Stockholders’ Agreements comes up, most people envision a 50 page single spaced contract written in Latin by an attorney at the cost of tens of thousands of dollars. Fortunately, unless we are talking about a Fortune 500 company, this is simply not the case. A skilled attorney will work with the company’s principals to create an agreement which reflects their beliefs and company culture and, most importantly, is written for the non-lawyer.

The necessity for these documents is especially true where the principals are family members or close friends. Where money is concerned, few things preserve a relationship like a clear written agreement prepared well in advance of any issue that may arise.

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It’s every business owner’s worst nightmare: the company bookkeeper, who has been a loyal employee for eight years, has suddenly disappeared – along with $250,000 of the company’s money. Unless the company has the resources and know-how of the FBI, there is little that the company can do in such a situation. For the year, the company will end up taking a charge against earnings (which will affect its bottom line), and may have some explaining to do to agitated shareholders (who will wonder where their annual dividend is) and upset employees (who will not be receiving Christmas bonuses).

Yet as bad as this situation may be, it could be worse. In fact, having a one-time fraud committed by an employee or officer who then disappears will at least provide the business owner with a finite loss and a red flag with respect to gaps in company procedures that need to be remedied. Infinitely worse is a “creeping fraud,” a situation where your company’s Chief Financial Officer has been quietly diverting $5,000 each month into an out-of-state bank account which he controls, and after 10 years retires and buys himself a villa in Italy. In a creeping fraud, a dishonest employee exploits a continuing company weakness over an extended period of time; which is a bigger violation of the company’s trust, not to mention its financial position.

However, it is not only a company’s employees who may have the impetus and wherewithal to commit fraud or embezzlement. Often, fraud is committed by other entities with whom the company does business, including the company’s contractual or transactional partners, vendors, and even customers and clients.

It doesn’t have to be this way. In fact, it should never be this way. With proper planning and certain simple and easy-to-implement procedures, a business can make itself virtually “fraud-proof.”

Here are 5 ways to Protect your company from Fraud and Embezzlement:

1)      Ensure that all disbursements over a certain amount (say, $1,000) require the signature of more than one company officer

2)      Check (and re-check) your company’s numbers every month with your accountant to ensure there is no “creeping” fraud or unexplained irregularities

3)      When signing a material contract with a contractual counter-party, consider using an escrow arrangement for any sums to be advanced prior to completion of work or services

4)      Resist attempts by contractual counter-parties to be paid in advance for work to be performed or products to be provided – instead, set benchmarks for performance and pay in installments once benchmarks are achieved

5)      Do some basic due diligence on your contractual counterparts. Do they have any judgments against them? What do other companies who do business with them say about them? Does your customer have an in-state bank account? Have you done a credit bureau check on your counter-party?

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This past weekend, my wife and I stopped in at the Great Grapes Wine Festival at Oregon Ridge. Beautiful day, live music, smiling people all around, great gathering of Maryland wineries…what could be better? Only one thing to complain about as we entered the festival – the business analyst part of me wouldn’t shut up. 

The voice started up when we walked up to buy our tickets -- $25 for each adult, $20 per child. Cash only. 

Those of you who remember my post, Rule #1, will recall that I believe the first imperative in just about any endeavor is that you make it easy for people to do what you want them to do. Great Grapes wanted paid attendance; the more people, the better. 

First Violation

Great Grapes had implemented a cash only policy in a card-centric world. How many people do you know who routinely carry $50 in cash? If you factor in payment for food, guests would need more cash than just the admission price. Equally as important, the policy seemed to come as a surprise to many of those walking up to purchase tickets to the festival. Some turned around and walked out.

Second Violation

There was one ATM machine on site. The machine charged a $3.50 service fee and was set at a $40 maximum cash outlay. Translation: If someone wanted cash for two tickets, he or she had to process two transactions, resulting in double the time spent at the machine and an irritating $7.00 total service fee. So now, Great Grapes had an increasingly long line of grumbling would-be patrons waiting to be robbed by the one ATM on site so they could comply with the irritatingly narrow ticket purchasing policy. (At least the festival served alcohol.)

Third Violation

Having made it past the ticket counter, we were directed to a tent where we could pick up our wine glasses. There were pre-printed signs along the table reading (as best I can recall):

“So you’re the jerk who dropped your glass. Instead of creating a scene, please just pay the $5 charge for an additional glass and try to drink responsibly.”

Now, I get that the festival shouldn’t have to replace broken wine glasses free of charge. But do you really want to alienate paying customers from whom you want repeat business at future festivals by assuming them to be drunken jerks…and then labeling them as such in pre-printed signs?  

Make no mistake about it; we enjoyed our time at the festival, once the original irritation wore off.   We sampled some new wines and even bought a few bottles to take home. Unfortunately, that’s when we unwittingly began the course of events leading us to observe the…

Fourth Violation

As we prepared to leave one of the tents with the 2 bottles we had just purchased, the cashier asked if we wanted to take the bottle with us or simply pick them up at will-call. Pleased that someone would hold them for us, we accepted our voucher and decided on will call. Two hours later, the clouds swept in.

Here’s the scene: The band was playing, looking out on the crowd under fairly blue skies. The crowd was looking back, over the bandstand, to the rather ominous looking clouds gathering above and behind the band. People began packing up; first a trickle, then a flood toward the exits. That’s when we discovered that there was one will-call tent for all the wineries at the festival. The tent was manned by severely overwhelmed staff ill-equipped to deal with a large crowd, now being soaked by a serious downpour. Rumors of coming “golf ball sized hail” (that never came) swept over the line, causing already wet people to become anxious. 

The festival organizers had wanted people to view will-call as both a convenience and as another reason to patronize future festivals. Because it was organized in such a way that it was incapable of handling a closing-time exit (even if closing time came earlier because of the weather), it became yet another area of dissatisfaction.

Bottom Line: Each time the attendees touched the infrastructure of the festival, they came away unhappy. The sole reason for this dissatisfaction was the organizer’s failure, at each point of contact, to observe Rule #1. They clearly knew what they wanted people to do. The organizers understood, at each step of the way, what path they wanted patrons to take. They simply failed to make it easy, enjoyable, or memorable -- in a good way.

I’m wondering if they’ll do better next year. I may never know, of course, because I won’t be there to find out.

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The running of a successful business is a play in three acts:

1. Getting the business in the door;
2. Providing the goods or services in an exemplary manner; and
3. Getting paid…on time, every time.

The third and closing act – getting paid – is what separates a business from a hobby. When you do work, you deserve to be paid everything you are owed, on time, every time. How far short your company falls from this standard constitutes the measure of your receivables problem. What you do to make up the difference measures your determination to benefit from the fruits of your labor.

In most cases, the art of getting paid can really be defined as the achievement of balance between the customer’s tolerance for legal paperwork and the business owner’s exposure to the risk of non-payment. Every business, with the exception of those which conduct 100% cash on the barrelhead transactions, should be protected by standardized forms and a well trained office staff. 

The forms, ranging from master account agreements, account applications, estimates, or invoices all accomplish two vital missions: 

1. Protection of the business from the risk of non-payment; and
2. The provision of an incentive to slow paying customers for prompt payment. 

These terms include finance charges on overdue balance, the right to collect court costs and attorney’s fees in the event more formal collection efforts must be pursued, the selection of a friendly and convenient location for litigation, and the limitation on possible counterclaims. 

Each of the terms listed above, and a number of others custom tailored for each business, not only provide protection for the business owner, but also provide an incentive to slow-paying customers for prompt payment of your account. The incentive can best be described in reverse. I once had a client who incorporated a finance charge of 6% per annum on all balances due and unpaid after 30 days. 6%! This means that my client was actually providing non-paying customers with a loan at 2% below prime. He was, in short, not a squeaky wheel.

Slow paying customers must be given an incentive to put your invoice at the top of the pile. That incentive can be a discount for prompt payment or serious penalties for non-payment. Either way, your invoice is often in stiff competition for the attention of customers of limited ability to pay. Your goal as a business owner must be to position your account to win that competition. 

Toward that end, there is no substitute for persistence. Follow up calls within 15 days after the passing of a due date are mandatory. It is equally mandatory that the tone of these calls be professional and friendly. Anyone who has ever been on the receiving end of such a follow up call knows the difference between a call requesting attention and one guaranteed to lose a customer for the caller’s business. Nevertheless, those calls must be made, along with well worded follow up letters and consistent efforts to remain in contact with trouble accounts. 

Finally, each business owner must continuously fine tune his or her approach to collecting past due accounts based upon quantifiable results. In essence, each business owner must perfect for themselves the art of getting paid.

Get a Free Copy of my book "The Art of Getting Paid" by clicking here 

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A Business Plan is a living, breathing document that is assembled by a skillful business owner or manager with input from all sectors of his or her business. Correctly assembled, the Plan serves as a yardstick of progress in the short, medium, and long term. 

The most effective strategic business plans drill down from Vision to Mission to Goals to Tasks to Deadlines. For internal planning purposes, the Plan should project out no more than 18 months, should be examined every six months, and should be rewritten annually.

The best plans are often developed during a specifically scheduled and planned Strategic Planning Session. Depending upon the nature of the company’s management team, an independent and experienced facilitator can be invaluable in developing an effective strategic business plan that pays for itself many times over.

Despite many thoughts to the contrary, it is the small business (i.e. those with fewer than 500 employees) that can reap the most rewards from effective strategic planning. Unfortunately, too many business owners feel that strategic planning is either too expensive or a necessity only for larger enterprises. Nothing could be farther from the truth.

Bottom Line: Whether hand written at the kitchen table or developed using word processing and rich media, a Strategic Business Plan can be a business owner’s most valuable tool. What’s more, it works in the real world, not just in business school theory.

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