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

I was straining to hear the other parties to the conference call as the two sides debated a sensitive issue with significant ramifications. The matter at hand was a large corporate sale spanning several states, two separate buyers under family control, and one seriously ticked off lender. 

The professionals on the phone – meaning the lawyers, accountants, and one person with the vague title of “consultant” – knew that the deal was about to blow up.  And that’s when my client chimed in with something just this side of insane. There was a long pause during which all we could hear was breathing and a muffled cough.  And then the buyer began to talk.

My first thought as I listened to the buyer stammer through a response was “dear God, they’re actually considering this.” Thirty days later, the completely unreasonable point raised by my client during that conference call became part of the deal with only minor variations. 

I’ve reflected a great deal on that conference call. The experience was not singular in my career as I’ve had other moments like it. But this one really resonated, perhaps due to the stakes involved.  We had spent months and significant dollars negotiating this deal and everyone seemed at the end of their proverbial rope. One more jostle, it seemed, and the deal would unravel. Well, my client not only jostled the arrangement, he put his entire weight on it and jumped. In the end, he got precisely what he wanted.

In sports, we often hear that the winner is the one who “wants it more.” I have always found it hard to believe that there was a locker room in which the desire to win was markedly lower than was present in room across the hall. But here’s what I’ve learned in business: the winner is frequently the one who wants it less. My client had the other side convinced that he could walk away at any time – that he was slightly more than ambivalent about the deal and that he could take it or leave it.  The other side wanted it…and my client dared them to prove it. By closing on my client’s terms, that’s just what they did. 

In my experience, too many business owners, even (especially?) those who pride themselves on their negotiation skills, sustain the other side’s objections. They take a look at possible terms and remove them before the other side’s review because there might be an objection. Now, I’m not suggesting that every document be drawn up to reflect the hardest possible line, but I am proposing that you “pay yourself first.” Take a good hard look at the things you want to get out of the agreement and beyond. Then ask for them. 

Sure, you may have to back off a few key demands, but time and time again I have seen my grandmother’s wisdom pay off: “If you don’t ask, you don’t get.” And if you do ask…well…sometimes you’d be surprised.

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The American people, we are told, want their government to be more transparent. Whether or not that’s actually true, one thing is for sure: when the subject is business, rather than government, we strongly prefer old-fashioned secrecy. Customer lists, patents, processes, tools, pricing, marketing strategies, product formulae, prospects…you name it. We, as business owners and managers, want the outside world kept in the dark.

As counsel, I tend to come in when this desire for secrecy has already been frustrated – when the proverbial cat has been let out of the bag; that’s when business owners look for the responsible parties and a way to lay blame and collect damages. 

Maryland, like most states and the Federal government, affords companies protection against the misappropriation of trade secrets. In addition to remedies which may arise out of contractual relationships, the Maryland Uniform Trade Secrets Act (“MUTSA”)[1] provides a strong remedy for misappropriation of a trade secret. MUTSA defines a trade secret as:

“Information, including a formula, pattern, compilation, program, device, method, technique or process that:

a)      Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

b)      Is the subject of efforts that are reasonable under the circumstances to maintain secrecy.”

It is this final section that insurmountable hurdle for many companies looking to go to war over what they see as the wrongful taking of their trade secrets. Imagine a judge looking down at you from the bench and asking two related questions – one rhetorical, one not:

1. What steps did you take to safeguard what you now claim to be trade secrets?
2. If you didn’t treat this information like a secret, why should I?

Full disclosure: I am one of those small business owners who drive IT people nuts. I hate changing passwords, I fight the inconvenience that comes along with IT security, and I bristle every time NetGear blocks my access to my fantasy football site of choice as “inappropriate or tasteless.” (I’m guessing because of the “fantasy” tag.) The lawyer in me recognizes, however, that, even from a legal perspective, our IT guy has a point. If I don’t take even the most minimal safety precautions by restricting access to what I deem to be sensitive material, what right do I have to ask the court to rectify my error after the horse and the barn have separated? 

Stop for a minute and think about the information your company holds dear. That information may already be the subject of Confidentiality Agreements or other restrictive covenants. The sensitivity of that information may be emphasized in company memos and personnel manuals. But regardless of what it is – customer lists, pricing structure, marketing strategy, or anything in between, honestly answer my hypothetical judge’s questions. (And if you need help figuring out what I mean by an honest answer, you may want to check out Don’t Lie to the Dog.) 

Your challenge, of course, comes after you self-grade your two-question test. If you fail, what are you going to do about it?

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"Our lives begin to end the day we become silent about things that matter.”

-- Dr. Martin Luther King, Jr.

Yesterday, on the federal holiday that is Martin Luther King Jr.’s birthday, I went to work. And, truth to tell, I was too consumed with client concerns and various front-burner issues to give much thought to Dr. King during the day. Last night, however, I found myself in a dinner table discussion arising from my youngest son’s inquiry about; (i) why the schools were closed; and (ii) what the Google doodle for the day meant. 

For those of you who may have missed it, the Google doodle highlighted Dr. King’s “content of their character” quote. In our discussion, however, I found that that expression did not resonate with my children as much as some of his others. Perhaps so because it is expressed in the passive voice – “they will be judged” – rather than in an active voice which would make the listener the thought’s protagonist. In either case, the quote at the outset of this entry made our conversation much more concrete. It was here that the conversation turned from what they (the people who judge others by color) should do to what we should do if we witness a wrong that matters.

Last year, I recorded a video centered on the idea that “you teach what you tolerate.” My focus, then as now, was on business practices. Now I know that Dr. King’s message was crafted to raise the consciousness of a nation, rather than the productivity of a workplace, but the same truth applies. As business principals and managers, our businesses begin to decline the day we become silent about things that matter. 

In the Republican debate last night, Newt Gingrich and Rick Santorum once again directed their fire at frontrunner Mitt Romney over his tenure at Bain Capital. It was fascinating theater, made even more so by the backdrop of the seeming Party of business frantically trying behind the scenes to get the candidates to tone down the attacks on the free enterprise system. The controversy begs the question: Is there an inherent conflict between the ideal unbridled self-interest that is the capitalist system and the universal truth that turning a blind eye to things (including things other than money) causes ourselves and our companies to diminish? 

I don’t think so. I believe that adherence to core values is, in and of itself, good business. I would submit that, in business, what causes most companies to begin to die is not a conscious decision to turn away from core values, but rather a reluctance to take action when witnessing transgressions or problems that matter. From the seemingly trivial (dress code) to the indisputably significant (price gouging, customer disservice, and policy indifference), we as business owners teach what we tolerate. 

In the running of a company, just as in the redemption of a nation, silence is fatal in the face of things that matter.

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It seems like every year I have read articles (now blogs) condemning the practice of making New Year’s Resolutions. The critics charge that efforts to change for the better should not be reserved for one day on the calendar, but rather should be an ongoing effort throughout the year. 

Personally, I like the New Year’s Resolution habit. While I embrace ongoing change, I’ve always welcomed the blank space in which to reflect and make renewed commitment. In no endeavor is this more necessary than in business.

With that in mind, I submit the following Resolutions for your consideration:

• Arrive at a new focus on brand discipline. Farrah Fawcett, Steve Jobs, and the Lessons of Apple...in 2 minutes
• Use the time over the holidays to write your higher level strategy planning time into your 2012 calendar. Note that I did not say “pencil” it in. Use a Scripto. The Importance of the One Night Stand
• Scrap your annual review process and find a better way to coax the best out of your people. Employment Law’s Dirty Little Secret
• Personally visit every single one of your customers in 2012…no exceptions. Do Your Clients Still Know You?
• Look at your most important forms – contracts, purchase orders, etc. – and make sure they actually say what you think they say and that they actually protect you the way you think they do. How to Document a Transaction
• Make sure your company has locked down its streams of income through enforceable restrictive covenants like Non-Compete Agreements. What Thomas’s English Muffins Can Teach You About Non-Complete Agreements and Why You Need a Non-Compete, Non-Solicitation, or Confidentiality Agreement for EVERY Key Employee
• Pay attention to the little things that could make or break your contracts. Contracting Basics: Why Boring Things Like Venture and Jurisdiction Matter
  
• Get better at basic small business financial management. Basic Small Business Financial Management 
  
• Make your company a little bit more embezzlement proof. 5 Ways to Prevent Fraud and Embezzlement
  
• Make sure your company follows Rule Number 1
  
• Don’t just learn the Lessons of My Father, commit to putting them into practice.

Please accept our best wishes for every personal and professional success in 2012.

Do you have any other suggestions for small business owners?

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I am always attracted to the edge of the flame – the flickering boundary between the candle and darkness, where the fire seems to dim to a burnt orange. My eyes hover there, and it is in that place that I find the most meaning. 

Chanukah is known as the Festival of Lights, but Christmas and Kwanzaa could also carry that label. Through its trappings and teachings, each holiday compels us to focus on light and warmth; the light of shared values, the warmth of family, and the brightness of hope and peace. We are told in the verses of our worship that, unlike so many candles, our holiday lights need not flicker and die in the space of a few hours, provided we make it a point to carry their light with us throughout the year to come.

I am writing this blog in a bleak time of economic uncertainty. So many families are under stress and our leaders seem incapable of giving more than lip service to the commonality of our purpose.  But it is precisely this commonality of purpose that marks the readership of this blog and others like it. 

The website of the advisory group Vistage features the statement: “wherever you see a business, someone once made a courageous decision.” That statement resonates with me, and I have cited it in other entries. I see those courageous decisions as individual choices to keep the darkness at bay. These choices…these decisions to start and persevere with businesses – especially in times uncertain – live on the edge of the flame and each, in its own way, carries with it hope.

The coming year will bring us large events to consider and experience. But in the midst of the tumult which will, no doubt, characterize a good part of 2012, let us remember the brightness of this holiday season, conspire together to push back the darkness, and find within ourselves the courage to live the words we pray.

Happy Holidays from Eliot Wagonheim and Wagonheim Law.

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In  March 2010, my accountant told me I was a bad client. I’m not saying he implied that I was a bad client or hinted at his meaning. He looked me straight in the eye, sighed, and told me flat out that I was a bad client. He was right.

I had been with my accountant, Mike Weinberg of Weinberg, Griffith, Tucker & Jones PA, since starting this firm in 2002. Over the years, I have come to value his insight, his genuine concern for his clients, and his principled approach. But valuing those things is not the same as utilizing them. 

Every year, I would gather my information from the past year – internally generated general ledger, payroll reports from ADP, personal information and receipts, etc. – and turn them over to Mike…usually somewhere around March. Mike’s firm would prepare the requisite returns, I’d pay the taxes, pay my bill, and put the process to bed for another year. 

But a strange thing happened over the years. The firm grew, added employees, and became what one might call a “real” business. We had employees depending on us to help pay for their homes, their children’s education, and contribute toward their long-term security. We had a diverse and growing client base. We had become, in other words, a “real” business. 

Unfortunately, I wasn’t acting like I ran one. Even while guiding clients through some extremely complicated situations, I was running my business like it was a start-up. Certainly, I had all the trappings of a real business – I had an insurance agent, an accountant, a benefits advisor and an IT consultant – but that wasn’t Mike’s point. 

When Mike called me a “bad client” he was telling me that it was not enough to engage consultants if I was not willing to put forth the effort to use them properly. He wasn’t after a fee; what he wanted was communication. He wanted me to work with him during the year so we could do some tax planning and discuss the strategies he could employ to help us reach our goals as a firm. What he needed was for me to make it possible for him to bring me his best; when I failed to do that, year after year, I earned my label as a “bad client.”

I’ll never forget this discussion. It took all of 2 minutes and it contained one of the most important lessons I’ve learned as both a lawyer and a business owner. I’ve given that speech to my clients – those who pay me to be reactive, rather than allow me to be fully engaged in the pursuit of their goals. I gave the speech last week to a client who made an appointment to see me this week after many months of silence. I’ll probably continue to give this speech to carefully selected audiences for the rest of my career.

As we approach 2012, perhaps you may want to consider the advisors you value and ask yourself if, objectively speaking, you too have been a bad client. If so, maybe the new year brings with it a chance for you to do better.

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“I got a phone call this morning from one of our oldest customers. He fired us. After 20 years, he fired us. Said he doesn’t know us anymore. I think I know why.” 

The speaker recounted his phone conversation to his account reps, saying “we used to do business with a handshake, face-to-face. Now it’s a phone call, a fax, ‘get back to you later,’ with another fax, probably.” 

This United Airlines commercial was originally aired before e-mail and the advent of social media.  First aired twenty years ago, in 1990, it still resonates. So many businesses are started by an entrepreneur, skilled in the producing the product or service that spawned the company.  Customers came because of the skill and stayed because of the attention. As the owner of a small business, the founder could track every project and knew every client. When someone was upset; he knew it.

Growth has a way of making that kind of personal attention obsolete. Time passes and a founder looks around to realize that whole projects are being performed for customers he never met. And what about the ones he knew – the ones who built his business or who inspired him to go into business in the first place? Chances are, they’ve been delegated. Delegated to talented people, to be sure, but delegated just the same. 

Sooner or later, the thought has to occur to these customers – your old friends -- that if they mean little enough to your company that they can be delegated, your company means little enough to them that they can go elsewhere.  

Looking ahead to 2012, most business owners set targets for growth  -- more revenue, more customers, bigger projects, better distribution. But how many set goals reflecting stronger relationships, customer retention, and expressions of gratitude? 

Many years ago, I read a book, Raving Fans by Ken Blanchard, in which the author urged business owners to “pay attention to the ‘fine’s.’” He meant that people rarely voice their complaints. When asked about service or the particular product they purchased, even when dissatisfied, they’d normally respond that things were “fine.” Not every customer can be counted on for enthusiasm.  After all, there isn’t an infinite amount of enthusiasm to go around. But the silence and the “fine’s” speak volumes to those with a keen enough ear and enough focus to notice. 

So what are you doing to focus on client retention, rather than just growth? Studies indicate that a new client is 7 times more expensive in terms of marketing and advertising dollars than existing clients. The point is that it is much cheaper and more efficient to keep the clients you have than spend every ounce of energy trying to bring new prospects in the door. 

If you do not already track trends in returning business, 2012 is an ideal time to start. After all, nothing speaks to customer satisfaction more than repeat business. Even more than tracking it, look for the things that increase the pace of returning business over time. 

Perhaps, like those executives in the United Airlines commercial, you can forgo e-mail, faxes and phone calls, and, just once in a while, put in the time to travel even great distances for a handshake.

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I had an interesting conversation with my wife this morning. This, in and of itself, is nothing new. The topic, however, was.

We were discussing the latest in a string of allegations focused upon the interaction between GOP presidential candidate, Herman Cain, and various women with whom he had become acquainted. Some had accused him of sexual harassment. The most recent person to come forward, however, told a story of an alleged extra-marital affair spanning some 13 years. 

In response to this story, Cain’s attorney dismissed the inquiry as irrelevant, saying:

"This is not an accusation of harassment in the workplace. This is not an accusation of an assault, which are subject matters of legitimate inquiry to a political candidate," he said. "Rather, this appears to be an accusation of private, alleged consensual conduct between adults -- a subject matter which is not a proper subject of inquiry by the media or the public.

"No individual, whether a private citizen, a candidate for public office or a public official, should be questioned about his or her private sexual life," Wood said. "The public's right to know and the media's right to report has boundaries and most certainly those boundaries end outside of one's bedroom door." Source

The question presented was whether Mr. Cain’s attorney was right. Whether the fact that someone may or may not make a lousy spouse had any rightful bearing on whether that person would make a good President. In other words, can one compartmentalize the two? Does honor matter? 

It struck me that business owners face this question all the time…and nowhere more often than in the realm of social media. Does it matter what an employee says or does on his or her own time, provided that: (1) no laws are broken; and (2) the company and its management are not disparaged? 

Whether the issue in question is pirated cable, a narrowly averted stop for driving while impaired, or just bad social judgment, does a business have a right to look behind the doors guarding someone’s private life, even if those doors have been left unlocked and ajar? 

There are, without doubt, reasonable arguments on both sides. This is, after all, an issue on which intelligent people can and do disagree. But the question remains, and it is a nagging one: Does honor matter or, more to the point, does it always matter everywhere equally?

The purpose of this column is not to answer those questions, even if I were qualified to do so. I raise the subject, however, because it is something that cries out for discussion and direction from business owners before they are involuntarily confronted with it.

I’d be interested to know your comments.

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This week we've decided to give you a better idea of who we are through video. Take a look and tell us what you think!

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We live in an age of cheapened language -- an age in which people become “superstars” at 15 and most every baseball game features an “awesome” hitter, pitcher or manager. But even allowing for the devaluation of language – adjusting for inflation, if you will – Joe Paterno is an icon. 

Paterno has been head coach of the Penn State Nittany Lions since 1966. He has amassed the most wins in college football history. (I hate the pseudo-word “winningest,” but it is often applied to Joe Paterno.) Although still active, he has already been inducted into the College Football Hall of Fame. Paterno has led Penn State to two national championships (1982 and 1986) and five undefeated, untied seasons (1968, 1969, 1973, 1986, and 1994).

This is the career of the man being evaluated in the press and found wanting. This is the career of an icon.

In the developing story about former Penn State Defensive Coordinator and Assistant Coach Jerry Sandusky, the most prevalent question asked of Paterno has been:

“What did he know and when did he know it?”

Sandusky has been accused (and some say confessed) to unspeakable crimes -- crimes which are regarded even in the caste system of prison as being reprehensible. Sandusky preyed on children. And for that, there are no gray areas. There can be no redemption. There are no mitigating circumstances.

Joseph Vincent Paterno, however, is a different story. He is a man who, by all accounts, has done a world of good for his university and for the young men in his charge over the past six decades. He was told, sources say, of inappropriate contact between Sandusky and a minor. I suspect that the extent of that contact and the question of exactly what Paterno was told will be fodder for a tabloid-focused dispute. But this much is clear: Paterno knew Sandusky victimized at least one child. 

Paterno issued a statement saying that he “referred the matter to university administrators” when it came to his attention that one of his coaches witnessed Sandusky sexually abusing a child. That was the end of it...for Paterno, anyway.  Paterno continued to associate with Sandusky and demonstrated through his conduct that Sandusky was still a welcome and accepted fixture at Penn State.

As for the victim of the specific incident witnessed in 2002 and the victims of incidents yet to come -- they were made no better for Paterno's involvement...and that, in and of itself, is deeply disturbing.  Paterno failed those people. He failed them in a deep and profound way. He failed them in a way I’m betting he would pray no one would ever have failed him had it been Sandusky with his son. 

Legally, he may be in the clear.  As a coach, he may be in the clear. But he failed as a man. And as a father, he is indictable. Such is the limit of a legal blog. Paterno seems to have complied with state law but he failed where it most counted.  He failed to comply with the value system he championed.

As a business lawyer, I encounter these issues much more often than you might imagine. Not the precise fact pattern of child abuse and the turning of a blind eye. Rather, I work with companies which encounter circumstances in which their legal duty and their moral duty follow different paths. Clients in these situations will inevitably ask me “what is our legal obligation?” And I tell them. 

But I’m not doing my job – or at least the job I want to do – if we don’t also have a conversation about what should be done in addition to what has to be done. I believe very strongly that core values only mean something when it is inconvenient. 

Earlier this week, I found myself working with a client to make one of its employees whole in a tax situation not of the company's making. It was the right thing for my client to do, though it certainly had no legal obligation. Two weeks ago, I listened to the CEO of a company on the other side of the table explain why he would pay more rent than that called for in the signed lease because he recalled that, in a private conversation, he had actually agreed to more than the document reflected.  That’s the deal he made with my client when no one else was in the room and no one ever doubted that he would honor it.

In both of these instances, hard-nosed, rational business people made the decision to look beyond their legal obligations in order to remain true to their values. Such is the hallmark of great companies and people worth knowing. 

With Paterno and the Penn State administration, we see the reverse. We see a person of status and a powerful institution rendering meaningless the values they claim to promote.  And when the stakes are at their highest, such as in a case involving the protection of children, the failure is writ large and is all the more damning. 

The failure in this case warrants the fall of an icon.

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After I turned 40 (quite some time ago), I realized that my fantasies had changed. The fantasy goes like this: 

One day, I’ll leave my office and check into a hotel. I will tell no one where I’ve gone. I will turn off my cell phone and be completely inaccessible. My wife will simply think I’m at the office. My office will, of course, simply think that I’m at a meeting. But I’ll be shacked up in a hotel instead. 

And for the rest of the day, and perhaps into the night, whether I watch mindless television or check out the hotel pool, I’ll do precisely nothing.

I have recorded data, but were I to hazard a guess, I’d say that 90% of the most important, top-level planning I’ve done for this firm has been accomplished outside of work hours. I crystallized our mission and wrote a good portion of the 2011 business plan while on a six hour layover in the Dallas/Fort Worth airport in the summer of 2010. Our Empty Hourglass Program was born in a hotel lobby in Fort Lauderdale. Our mobile app? That can trace its origins back to a GameStop with my kids in Shrewsbury, PA. I see these examples as neither accident nor coincidence. 

I was recently introduced to Mike Brooks, a person of achievement and insight, who happens to be an extremely accomplished financial planner. He told me, and I hope I’m not speaking out of school by revealing one of his bedrock principles, that he has a quarterly “retreat” (my word, not his) hardwired into his calendar. It could be a week, it could be a long weekend, but regardless, it always constitutes a break from his day-to-day business routines. 

Why? 

Because of the Dallas/Fort Worth layover. Because of the Fort Lauderdale hotel lobby. Because of the Shrewsbury GameStop.

Too many business owners become overwhelmed by the trees to contemplate a view of the forest. Whether it is concern about keeping the lights on, meeting payroll, or just over-commitment, the possibility of a day or two reserved to contemplate the business as a whole remains…well…a fantasy.

For myself, however, I resolved – perhaps a bit too early for a New Year’s resolution – that I will not rest on the hope that my next big idea will come to me unbidden in the Dallas airport. Instead, I plan to follow a well-considered example and hard wire some time for innovation. 

Sign up for our webinar on Business Planning!

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“So, what’s your 5 year target?”

My client responded quickly: “$7,000,000 gross revenue in 5 years.”

“OK, so let’s drill down. What is your average salesperson generating now and what kind of inside staff do you need to support each outside salesperson?”

The answer was sobering. Eight new sales people, five new inside people, two more warehouse people and one administrative person – 16 new hires overall -- would be needed to reach the company’s 5 year goal. This would come close to doubling the size of my client’s company. The answer was sobering not because it couldn’t be done; but rather because he’d never actually sat down and done the math. 

Having arrived at a picture of what the company would look like in 2016, we then began to trace the steps we would need to get there. In other words, we had to figure out what 2012 would look like:

• How many people she would need to hire;
• What kind of business would have to be brought in to support them; and
• The sales and marketing effort necessary to bring in the requisite business.

This is a subject near and dear to my heart, and to explain why, I have to give you a little window into the business of practicing law.

Ask any business lawyer (any lawyer, really, other than a personal injury, bankruptcy, or tax relief attorney) and he or she will tell you that business comes in by referral. “We don’t advertise,” is the typical refrain. 

Well, that’s true. Neither do we. But at the end of 2008, I realized something. I realized that when I point to referrals as my marketing strategy, I was really doing nothing other than crossing my fingers and hoping that the phone rang the next day with the right person at the other end of the line. I had no plan. And when I asked myself how I was going to make the next year better than the one that was just ending, I had no plan other than…well…prayer.

So I changed things. I made marketing a priority and, more importantly, made a number of significant improvements to how we do things and what we offer so that we could tell the story I wanted to be able to tell. After all, what good is it to stand on a soapbox and broadcast the same, tired message? In my view, if you’re going to invest in a bullhorn, you damn well better have something to say. 

For our part, we:

• Introduced the blog you’re reading now (now in our second year) to focus on exactly what our name says – Bottom Line Business Insights;
• Started an e-mail series offering insights into business philosophy, best practices, and legal issues that now reaches over 1,200 business owners per week;
• Introduced the non-billable hour Empty Hourglass® Program to make client communications effortless, without limit, and free of charge;
• Produced the Business Owner’s Pocket Guide and the new Commercial Real Estate Pocket Guide for clients and friends of the firm…free of charge;
• Developed our first-of-its-kind interactive business diagnostic, BizRX for download on PC, iTunes, Blackberry and Android; and,
• Beginning last week, began sending weekly interactive mind map pdfs to each of our clients offering status updates and highlighting priority issues…at no charge.

While there are more changes to come, we have traveled a long road in the past 3 years to get beyond hope as our primary growth strategy. We have a plan, target numbers to hit, and initiatives we can point to as a basis for projecting growth. 

Over the next few weeks, in our e-mail series, I will be delving into key business building insights from some of the best business growth consultants in the region and in the country.  I will also be discussing this in more depth in our free upcoming webinar. If you have not yet signed up for one (or both), now’s the time. 

I’m hoping that blog posts like this one and our newest e-mail series may inspire you to do more than just jot down projections. I’m hoping that they inspire you to commit on paper to a way of attaining them. And of course, if I can be of any help, please contact me. That’s what I’m here for.

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[Listen Online]

I was sad when I learned Farrah Fawcett had died. In my youth, she was a symbol borne of an iconic poster, great hair, and a really bad TV show. Princess Diana had that smile. The death of each (and many other notables) make you pause. If you’re a business owner, the death of Steve Jobs made you think.

The difference is akin to the divide between a good movie and a great one. A good movie will make you think back on great scenes and smile. A great move stays with you. It may even alter your perspective.

The business life of Steve Jobs was a great movie.

I’ll leave the litany of achievements to others. I want to focus on the lessons. There are others, but I’ll mention three that every entrepreneur should adopt as a mantra:

1. Clarity of purpose. Why do you do what you do? What makes you…you? If someone could take your logo from your restaurant, law firm, or landscaping company, slide someone else’s in there and there would be no difference, you’re doing something wrong. 
   
   
2. Discipline of how you do it. Once you figure out who you are, it must permeate everything you do in a way that’s true to your vision. I mean everything from your office space to how you advertise job openings.
   
   
3. Consistency. Your brand must transcend your products or current offerings. Can anyone doubt that Apple achieved this?

You see, his passing notwithstanding, the last thing Steve Jobs would want an entrepreneur, innovator, brand manager or business owner to do is rest.

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Tim Robbins opined that there were two types of people: Those who, upon hearing that a storm is coming, simply pray that it passes them by, and those who prepare for it. The Shawshank Redemption

It’s no secret what the smart Maryland businesses should be doing.

A recent Baltimore Sun article expresses the view that it’s no time to panic, that Maryland enjoyed a surge of federal spending of late and that the cuts explored thus far are just returning us to 2007 levels – hardly a wholesale slaughter. However, I think that’s a small consolation to businesses who’ve hired over the past 4+ years to keep up with the workload. It sure isn’t any consolation to the families of employees who may be on the chopping block.

I think businesses need to do more than just console themselves.

Businesses need to retool – position themselves for work in the private sector or even overseas and it must be the business of the State of Maryland and our own community of entrepreneurs and educational institutions to help them.

And in contemplating that, my mind naturally turns to…healthcare.

We all know that healthcare costs have soared out of control; technology, an endless line of specialists for any given ailment, medication, malpractice insurance…all of it. But in all of this, there has been one radical change of perspective that has been dramatically successful in reducing costs – wellness visits; the thought that the medical profession should emphasize prevention rather than just react to problems.

I’d write the same prescription for Maryland businesses. Now is the time for the City, State, and Maryland’s private businesses to implement programs to help businesses reposition themselves for a different kind of competition, for a different kind of customer. 

I’m not urging the State or City to come out with financial incentives – the businesses already have a big one. But, I am urging the State and City to play a leadership role. The risk of doing nothing, in the path of the oncoming storm, is that we’ll look around at the wreckage of higher unemployment and a diminishing tax base and wonder why we didn’t better prepare.

How should we prepare?

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By Michael Lentz

In an unfortunate rite of fall, Maryland law requires the State Comptroller “immediately after September 30 of each year,” to prepare, and send to the State Department of Assessments and Taxation (“SDAT”), a list of every Maryland corporation that has not paid any tax due (other than a purely local tax) by October 1 of the year following the year in which the tax was due. The requirement also applies to Maryland Limited Liability Companies (LLCs), and includes a failure to make any required unemployment insurance contributions or reimbursement.

When SDAT receives the list from the Comptroller, it sends each entity on the list a notice that the entity’s charter will be forfeited if the taxes due are not paid by the date stated in the notice. Unfortunately, mailing of the notice is sufficient – failure to receive the notice does not affect or delay the forfeiture or annulment of corporate existence. 

Most companies, though, find another aspect of the forfeiture law even more troubling, as it is a trap for the unwary business owner. Maryland entities, as well as those formed outside of Maryland but subject to jurisdiction in Maryland (which likely means doing business in Maryland) must file an annual report, and pay the annual report fee.  Because the form, found here, is called a personal property tax return, many business owners understandably believe that they need not file the form unless the business owns property in Maryland. 

Unfortunately, this is not so. The filing requirement (and $300 annual fee) apply to domestic and foreign corporations, limited liability companies (LLCs), limited liability partnerships (LLPs) limited partnerships (LPs, Business Trusts, and Real Estate Investment Trusts (REITs), whether or not they own personal property in Maryland. Immediately after September 30 of each year, the Comptroller certifies to the SDAT a list of entities that have not filed their personal property returns. The SDAT then issues a “proclamation” forfeiting the charters of all non-compliant entities. When a forfeiture occurs, the SDAT will mail notice of forfeiture to the affected entity, at the entity’s address on record with the SDAT.

There are two significant consequences to forfeiture: first, any person who knowingly transacts business in the name of a corporation whose charter has been forfeited and not revived is guilty of a misdemeanor “and on conviction is subject to a fine of not more than $500.” Second, once a corporation’s charter is forfeit, the corporation in its own name can no longer maintain or defend any suit in any Maryland court. Rather, the directors of the corporation become trustees for the assets of the corporation. 

Revival of a forfeited charter is a fairly simple matter. First, the forfeited corporation must correct the problem that led to the forfeiture. Once this is done, the corporation should file Articles of Revival (form and instructions here). For an LLC, LLP, or LP, file Articles of Reinstatement (form and instructions here).    

As a matter of careful housekeeping, the forfeited entity should, after revival, adopt resolutions expressly ratifying all actions taken during the period for which it was without a charter. 

Bottom Line:  Make sure that your business has paid all necessary taxes and has filed a Personal Property Return for 2011, even if the business does not own any property. If you are unsure, you can check the SDAT website listing entities subject to forfeiture.   You can also check whether your company entity is in good standing via the SDAT’s Charter Search Page.  If your entity has been forfeited, revive it promptly; this will avoid many headaches later.

Check out our Mobile App, BizRx in the Apple Store to see how your business checks out!

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This week, we decided to reintroduce one of our archived, popular blogs. Let us know what you think!

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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By Guest Blogger, Robert Porter, Attorney

Hurricane Irene left my family without electricity like millions of others along the East Coast. On Sunday morning, at exactly 7:00 am, a neighbor’s tree crashed down on the power line  that serves our house and a few others. Unlike many, our outage lasted for over a week (roughly 7 days, 13 hours and 35 minutes – not like we were counting or anything). We were better off than some during that week however – our kind and generous neighbors ran an extension cord through our back yards, which allowed us to keep our refrigerator, cell phones, computers and re-chargeable batteries going.

We made the best with what we had – we made pancakes and bacon in a skillet on the grill, we “explored caves” with our sons and their flashlights and finally got to use the weather radio that we bought years ago. By Day 7, though, we had had enough, and we started thinking that someone (more specifically, the neighbor whose tree fell) should be responsible for the damage done.

The law in Maryland regarding damage done by trees is both clear and unsettled. Marylanders have a clear right of self-help in cases where a neighboring owner’s tree endangers their property. A land owner has the right to “cut encroaching branches, vines and roots back to their property line” to prevent the neighboring owner’s tree from causing damage; Melnick v. C.S.C. Corp., 312 Md. 511, 514 (1988). Self-help does not allow an owner to enter onto the neighbor’s property or cut down the neighbor’s tree, but it does allow an owner to cut limbs and braches up to the common boundary.

The unsettled question that the Court of Appeals did not address in the Melnick case is whether a tree’s owner should or would be held responsible for damage to another’s property if the owner knew or had reason to know that the tree was dead or dangerous. It’s certainly possible that a court would hold the neighbor responsible in that situation. What is definite, however, is that any attempt to find out by filing suit would be expensive…in both money and goodwill.

Before the crew from Florida restored electrical service to our house, the question of who was to blame seemed important. As soon as the lights came on, though, we decided not to focus on the inconveniences of being (mostly) without power for a week. Instead, we decided to clean up the branches that fell on our side of the fence, to thank our wonderful neighbors for their generosity and to enjoy the memories of pancakes and bacon on the grill. Being without electricity can certainly make you feel powerless, but it also can empower positive choices and decisions, and the choice is ours.

Did you find yourself in a similar situation? Tell us what happened!

Bob is a real estate and business lawyer concentrating his practice on commercial, investment, and institutional property. He handles business planning and implementation strategies, including business entity (ownership structures) and real estate transactions. Bob also concentrates on projects involving development and conservation of real property, including development agreements, easements, restrictive covenants, and contracts.

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Unlike many, I don’t see the Baltimore Grand Prix as defined by a few races and the Labor Day weekend. The Baltimore Grand Prix, if we are determined to do it right, is about the branding of a still great city. It is a step in taking back our image from Homicide and the Wire. And the success or failure of the Baltimore Grand Prix will not be determined by a tally of weekend hotel stays and restaurant tabs. It will be determined by follow up.

Much has been written about the downsides. We’ve heard from disgruntled residents, people worried about the noise, the perceived misdirection of funds, and the diversion of government from “what it should be doing.”

I get all those things…and I respectfully disagree.

Government is about larger things; and larger things do not get accomplished without ruffled feathers. But it’s more than that. Thanks to HBO, Baltimore has become known as a place where exciting things happen…but most of them are unsolved. That’s not how it should be.

The Mayor has to be Baltimore’s champion – not just its steward. And it takes more than slogans on repainted benches. It takes some excitement – something eye-catching.

Now I know that there are people out there anxious to report the verdict on the Grand Prix first thing Tuesday morning. Those people remind me of folks who step on the scale after one workout expecting to see a measurable difference. You can’t. You get results by continuous effort over a long period. And you begin to notice results in little ways. A looser collar here, a bit more energy there. Not risking collapse by walking up the steps to the third floor. 

Similarly, the Grand Prix is (or should be) part of an effort to showcase the city as a destination. A place where businesses should be. Anyone with any understanding of marketing knows that one initiative does not establish an identity – not for a company and not for a city. 

I applaud the Mayor for taking a chance; for giving Baltimore a shot to be known for something beyond the headlines.

There is an old saying that sports headlines trumpet man’s successes while news headlines only trumpet his failures. 

 

If that’s the case, can anyone argue that Baltimore needs more sports?

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My father’s red, wooden bat stands propped up in one corner of my office. He died on April 1, 2007, but I still think of it as his. The paint is faded and it is on the verge of splintering in spots. By today’s standards, it is toothpick thin – almost like a toy.

It was gigantic to me 40 years ago.

I keep my father’s bat to remind me of two of my father’s most important lessons – one good, one bad. I’m not sure he intended to teach either one. He certainly wasn’t conscious of it if he did. It doesn’t matter, though – what he intended to teach. I learned them just the same…and they shape how I have built this law firm and relate to the people in it.

Lesson #1: The Importance of Balance

Every Sunday morning, spring through summer, my Dad would play softball on one of the fields behind my elementary school. My sister and I would walk up to the school at about eleven o’clock, as his game would be winding down. We’d watch the last few pitches and then, after his friends had left, he’d play ball with us. Then we’d walk home for lunch. 

It was all as unhurried as it sounds.

My father was a lawyer and he ran his own firm. At its height, it was a 4 employee operation, but more typically it was just my father and a secretary. If work didn’t get done, he didn’t get paid. And there was no one but my father to do it. 

But still, we went to Ocean City for vacation just about every year, he came home for dinner with the family, and played unhurried softball with his friends and with his children. My father knew the importance of balance.

I cherish those Sunday mornings, and their memory reminds me that I cannot let my practice become all that I am. They remind me that time with my family cannot become a stepchild to the demands of my business. And regardless of the pressure of retirement, saving for college, and a thousand other life expenses, they remind me that my firm will never cause me or anyone associated with it to become a six plus day per week, 2,000 billable-hour slave.

Lesson #2: The Importance of Planning

As I mentioned, my father died on April 1, 2007. Shortly afterward, I found myself going through paperwork from his practice, trying to tie up the loose ends of his business. Among them, I found an Engagement Letter dated March 1, 2007. He signed up a new client exactly a month before he died. He was already pretty far gone with leukemia by that time, and all but the most fervent deniers would have acknowledged that he faced the coming end of his life. And still he was working to sign up another client.

Why would he do that? 

Some would say that he loved what he did and to give it up would mean…well…giving up. But that’s not the real reason. The real reason was that he did not feel financially secure enough to cut the strings to his business. He was 74 and, if he survived, would not have had the financial stability to retire. He had to keep working until almost literally on his death bed. 

Ira J. Wagonheim was a great father, but a poor planner. And here, I refuse to follow his lead. He never stopped to envision his future and work his way backward to figure out exactly what he had to do this year, next year, and the year after that in order to attain his goal. I keep his red bat to remind me that relaxation is not just something to squeeze in on a Sunday morning, but that it is also something to work toward in a retirement my father never took the time to envision.

My financial planner knows the lessons of the red bat. So too does my accountant and each one of my employees. 

Now you know them too.

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By Guest Blogger: Michael J. Lentz, Esquire

The other day, a friend sent me a mass e-mail containing a document that he had run across on the internet and found funny and/or shocking. Like most of us, I get many of these mass-forwards, and I rarely if ever open them. This one, though, was followed immediately by a personal e-mail to me from the sender, assuring me that I’d be well advised to read the pseudo-spam.

The document was an opinion from the Family Court in Ontario, Canada. In something of a preamble to its opinion, the Court noted that the parties were characterized by “a harmful, high-octane hatred” of each other, and that, as a result, “the likelihood of an amicable resolution is laughable (hatred devours reason); and a satisfactory legal solution is impossible (hatred has no legal remedy).” The judge was of course correct; when emotions run high and litigation becomes intensely personal, the chance of a negotiated resolution becomes tiny. The parties’ animosity almost always condemns them to the time and expense (both emotional and financial) of a trial. Then, when the trial does happen, neither side leaves feeling fully vindicated, no matter who “wins,” because no court is equipped to address emotional and personal issues. A court simply cannot force people to like each other, or even to act like they do. Litigation is expensive and time consuming under the best of circumstances; when driven by personal animus instead of sound business judgment, it becomes even more so, with a substantially reduced chance of producing a satisfactory outcome.

Notwithstanding all of the foregoing, the most significant piece of the opinion for me was the Judge’s character determination, and how he reached it. He reduced the wife’s spousal support award to $1 per month, based largely on vituperative, hateful text messages that she sent to the children about their father. In his opinion, the judge sounded a cautionary note that we would all do well to heed:

Trials [now] typically include reams of text messages between the parties, helpfully laying bare their true characters. Assessing credibility is not nearly as difficult as it was before the use of emails and text messages became prolific.

The judge’s words should ring true, and sound a note of caution, to us all. We now live in an age where it seems that literally everyone carries a smart phone. Text messages and emails, containing photos and video at the option of the sender, can be sent and received in seconds. The technology allows us to remain connected to our world virtually wherever we go, and presents wonderful opportunities to share information. But, it also provides dangerous temptation. Words dashed off innocently but thoughtlessly in a text or e-mail, can (and often do) appear in quite a different light when printed out and presented during a deposition or trial years later.

Remember, as you text, Skype, and e-mail, that you’re creating a record that will certainly exist in some format long after you have stopped thinking about the conversation. The next time you’re confronted with the urge to send a hateful, nasty, or explicit text or e-mail, imagine your reaction at having the text read to you on the witness stand in court. Pause a moment if you’re able to, and perhaps you’ll hit “Delete” instead of “Send.”

Have questions about text messages and court? Leave comments below!

 Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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Perhaps one of the most misunderstood aspects of drafting documents relating to corporate transactions is the function of the documents themselves.  Many business owners believe two widely-held myths: (1) that the contracts signed in connection with a transaction are documents designed to be used in court if and when the deal goes sour, and (2) that in litigation over a contract, it is as least as likely that the jury or judge will find in their opponent’s favor as in the company’s favor. For these reasons, many business owners feel that the cost/benefit analysis when deciding on whether to hire and pay a lawyer to accurately document the transaction comes down clearly on the “costly” side. After all, the reasoning goes, there’s only a 50/50 shot that the company’s interpretation of the contract will prevail in court, so why pay lots of money to a lawyer up front for only a 50/50 shot of recovery later on?

However, corporate transactional documents are less road maps to litigation than they are memorializations of the transaction and guides to performance in the future. If a transactional document is drafted well, it will precisely delineate the responsibilities of each party going forward, and serve as a written reminder of exactly what the parties have agreed to do. This may seem self-evident, but it is surprising how often a poorly drafted or incomplete contract will actually result in confusion or bitter arguments over which party is responsible for what performance and when, all of which can lead to, rather than prevent, litigation.

Whether you conduct business with estimates, proofs, invoices, electronic orders, or purchase orders, you must identify the crucial terms for each transaction and make sure they are contained in a writing signed by the customer. These terms include:

• What each party is supposed to do (or not do)
• When the deadline is for doing it
• What happens if one party doesn’t do what it is supposed to do
• How much you are to be paid
• When you are to be paid
• What happens if you are not paid (e.g., are there interest charges or reimbursement for attorneys’ fees, etc.)
• Who is responsible for payment

In many cases, businesses would do well to develop a “Master Account Agreement” which contains the so-called boilerplate terms which are common to each transaction. These terms would include such things as finance charges, reimbursement for costs of collection, limitations on your company’s liability in case something goes wrong, and where suit must be filed, among other provisions unique to your business. Once the customer signs this Master Account Agreement, each subsequent transaction can be documented by a much more simple purchase order, estimate, or even invoice containing information more specific to that particular matter. Well coordinated documentation will confirm that each transaction is governed by the terms and conditions set forth in the Master Account Agreement.

The decision to examine and reinvent the way a company does business is one of the most important decisions an owner can make. With very few exceptions, the expenditure of some upfront time and money in this effort will save tens, if not hundreds, of thousands of dollars in the years to come.

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There is perhaps no facet of business management that is more critical, yet more intimidating, than financial management. Most business owners would sooner spend a day playing in traffic than trying to read and interpret the confusing array of numbers that make up their company’s balance sheet or income statement. Yet the fact of the matter is that playing in traffic is probably less risky than ignoring the company’s numbers. Being able to interpret a financial statement will enable your company to better plan for its future and efficiently allocate valuable resources. It is also essential because your company should never enter into a major transaction with another company (say, a vendor or a customer) without confirming the other company’s ability to fulfill the contract. That means reviewing and understanding the other entity’s financial statements.

So, what’s the best way to make quick work of financial statements while taking the intimidation factor out of the picture? Simply put, it is understanding certain basic Financial Ratios. Most people have heard of “Earnings per Share” or “Price to Earnings,” which are two of the more common financial ratios regularly discussed on networks such as CNBC and other financial programming. But fewer business owners are familiar with the more obscure (and for most privately held companies, infinitely more useful) financial ratios which measure the four basic attributes of any business:

1. Liquidity: a short-term view of the ability of the company to satisfy its currently maturing obligations
2. Leverage: a longer term view of the use of debt by the company and its ability to service that debt
3. Activity: a measure of the efficiency of the utilization of the company’s resources, such as measures of inventory turnover
4. Profitability: as compared with investment, or profit margins based on sales

What are acceptable ratios in each of these four categories of measurement? Generally, there are no hard and fast rules. Ratios are valuable because of what they can tell you about the current state of your company and the direction it is moving, rather than whether a company is in imminent danger of failure or can coast without another sale for the next two years. In that sense, it is useful to compare ratios over time.

What constitutes an acceptable ratio also depends on a number of outside factors, including (1) the company’s industry, (2) its accounting practices, (3) its goals, and (4) quite simply, what the company’s owners feel are acceptable ratios in light of those goals. Most business owners should have a discussion with their financial advisor or accountant in order to set acceptable ratios within the four attributes described above, and then formulate a plan to adhere to those ratios.  

While many business owners simply slough these matters off onto their accountant, the savvy business owner will understand (and should want to understand) the numbers that make his or her business work. Additionally, and no less important, not understanding the numbers is an invitation to corporate fraud and embezzlement by less than scrupulous company officers, directors and accountants (and believe it or not, these folks are out there).

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Before signing someone else’s contract, every business owner should train his or her staff to S.T.O.P.

Scope of Work

Termination

Other Obligations

Payment Terms

Scope of Work.  What is it you are obligating your business to do by signing the contract? The vast majority of problems on a project can be avoided by a precise and well drafted scope of work.  Alternatively, if the scope of work is vague or contains items for which you do not intend to be held responsible, no amount of verbal assurances or agreements can make up for the problems lying-in-wait as a result of a signed contract containing an imprecise scope of work. Do not sign a contract until you are pleased with and intend to be held to the letter of this provision.

Termination.  What are the circumstances under which each side could get out of the contract? In other words, are the exits clearly marked? Depending upon the duration of the work to be performed under the transaction, this can be one of the most important provisions in the document. Often, one party or another can elect to terminate the agreement if one or more key assumptions are not met. For example, a commercial lease may be amended to provide that the prospective tenant may terminate the agreement if the space is not fully ready for occupancy by a date certain. Similarly, an obligation to perform work may be nullified if the other side fails to provide all necessary materials by an established deadline. In deals gone wrong, termination provisions are often the only way to stop the bleeding. 

Other Obligations.  Contracts often make reference to other documents containing information or terms to be included as part of the parties’ agreement.  As an example, this is typical in the construction industry where an agreement between a subcontractor and the general contractor specifically states that the parties are also to be governed by the terms in the general contractor’s contract with the owner, the project plans and specifications, and other documents such as the General Conditions.  Outside of the construction industry, many standard contracts refer to terms and conditions in so-called master agreements, or even those posted on websites. Make sure you know ALL of the terms of the deal before signing on the bottom line. 

Payment Terms.  This is, of course, where the rubber meets the road. Few questions in business are more important than:

• Who is responsible for paying you?
• How much will you get paid?
• When is payment due?
• What are your rights if payment in full is not received?

Surprisingly, many businesses leave the answers to these questions open to chance.  Contracts often do not clearly identify the actual person or company responsible for payment, and the payment terms are often deliberately vague.  In this case as in no other, two sentences in writing outweigh all the verbal assurance in the world.

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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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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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Newt Gingrich has been a fixture in the news cycle for a while now.  It seems he’s doing that “will-he-or-won’t-he” run for President dance. One the news shows recently, he had to confront the issue of infidelity. The former Georgia Congressman has been married three times and has often been criticized for the less-than-clean transitions between those marriages.

The former Speaker’s latest round of Sunday morning interviews got me thinking about the cost of infidelity – not just in a presidential run, or even in divorce court, but rather as seen every day in my business practice.

You see, when a person commits to a company – as an officer, director, or even sometimes as an employee under contract, the law and various contracts impose duties; the higher the post in the company, the greater the duty. Chief among those duties is the duty of loyalty. Called different things in different states, the result is the same – you breach it at your own peril. 

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity.

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possibly.

Sometimes, to be sure.

But what of those left on the outside looking in?

Simply put, they can sue. They can go after, and often take, those appealing, better-than-expected profits.  In Maryland, one of the causes of action is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company. 

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation.  Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning.  DEF then snared the contract for itself.  In so doing, it wrongfully claimed one of ABC’s opportunities for itself.  In other words, it took money that ABC could have earned.  It is a safe bet that Susan’s former employer is not going to go quietly into that good night.  They will hold Susan accountable. 

In so doing, the law (as is not always the case) tracks ethics.

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence.  She owed ABC her loyalty.  When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery.

And in business, just like in marriage, there is usually a price to pay.

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By Guest Blogger: Michael J. Lentz, Esquire

In November, 1787, James Madison, writing under the shared pseudonym Publius in the New York Packet, published one of the watershed documents in the constitutional development of our nation. In the tenth essay, in a series that later became known as The Federalist Papers, Madison argued that political factions were vitally necessary in a republic, because: “Enlightened statesmen will not always be at the helm.” Madison was concerned that competing interests were vital in the absence of an ability to control the qualifications and interests of the elected decision makers. 

Not long ago, I was reminded of Federalist #10 by a question posed by a colleague on a listserv: 

“Can a minor serve as a director of a corporation?”

I think the answer to this admittedly-novel question is probably “Yes, but it probably isn’t such a good idea.” In the course of the discussion, though, I was struck by how little consideration is given to what “statesmen” will guide the helm at most corporations. 

The only qualifications that directors of a Maryland corporation must meet are those set forth in the corporation’s Charter. Many, if not most, Charters are completely silent on the issue, meaning that no one is statutorily prohibited from serving as a director. 

For many small business owners, the qualifications of their company’s board of directors may not seem immediately relevant, since the owner(s) and/or their family members are often the only directors. However, director qualifications can be an important consideration, either as part of a succession /contingency plan or when considering equity financing. 

If an owner-director were to become seriously ill, so as to be unable to discharge the duties of the office, the corporation would likely have to function without that person as a director until his term expired. Directors’ duties are generally non-delegable, so even someone otherwise authorized to manage the director’s financial affairs (such as through a power-of-attorney) would likely not be able to serve as a director. Absent a qualification in the Charter, there would be little the corporation could do to remove the director in the interim.

Perhaps a more common concern arises when a corporation chooses to consider equity financing. The decision to take on an equity investor is a significant one that should not be undertaken lightly . . . see our earlier piece on the risks of getting married without dating first.

If your company decides to take on an equity investor, most substantial investors will request, in addition to equity in the company, some measure of control over the company. This control will usually come in the form of preferred stock that gives its holders the right to elect a certain number of directors. Such directors usually can only be removed by a majority (or super-majority) of the votes cast by holders of the shares that elected the directors. So, equity investors will often request what are essentially unassailable, permanent directorships. 

While the investors own self-interest will usually lead him to elect competent, qualified individuals, there’s neither any guaranty nor any legal requirement that the investor do so. In such cases, the company’s easiest control over such board seats for the long term is a Charter provision setting out the qualifications that such individuals must possess.

Does this situation sound familiar?

Contact us for a free consultation! 

Raise this issue for discussion on Twitter, Facebook, or LinkedIn.

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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Not long ago, I released a Podcast exploring employee motivation beyond money. In his book, Drive, Daniel Pink asserted that, given fair compensation, what really motivates employees is:

• Autonomy
• Opportunity for Mastery
• Purpose

 And it is these motivational elements that decrease turnover, increase productivity, and have a direct impact on customer satisfaction.

Last year, Maryland’s legislature turned its collective attention to the notion of corporate purpose. In 2010, Maryland became the first state in the nation to recognize Benefit Corporations, or so-called “B-Corporations” as a new corporate structure category for mission-based, for-profit organizations.  In other types of for-profit business organizations, officers and directors could potentially be held liable for taking actions which did not directly relate to maximized shareholder value. Organization as a B-Corporation protects officers and directors from such shareholder actions and lays the groundwork for companies to “do well by doing some good.”

In 1996, I joined a law firm in which one of the four partners viewed it as his mission to mentor minority, primarily African American, lawyers. We discussed this when we formed the firm. He wanted to actively seek out opportunities to hire people he did not feel were given a fair shot by the majority of law firms in town. In many ways, we felt at the time that profit was secondary. Sure, we wanted to earn money, but we also bought into my partner’s sense of mission. Had the structure existed, we might well have registered as a B Corporation.

The commitment to registering as a B Corporation is not something done lightly. Nor is registration an easy or streamlined process. In order to gain B Corporation status in Maryland, organizations must first register as a Benefit Corporation and report their stakeholder impact according to a third party standard such as the non-profit charity B Lab. Only after certification is awarded will the structure be recognized. 

The reward, however, exemplifies the concept of a “win-win.” The community wins through the impact envisioned by the B Corporation – whether it is hiring the disadvantaged or positively impacting community infrastructure in some way. The company wins…and not just spiritually.   When an employee arrives at a B Corporation, s/he is already pre-screened for mission. In other words, the average job applicant is not just looking for a job, but is someone who already buys into the mission. Right out of the gate, the employee is committed to the company. This stands in stark contrast to the often indifferent workforce which populates many “ordinary” for-profit companies. 

Productivity is higher.

Customer satisfaction is higher.

Turnover falls through the floor.

Win-win

Should your company be acting as B-Corporation? Do you know of a successful B-Corporation?

 Raise it for discussion on Twitter, Facebook, or LinkedIn.

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 Guest Blogger: Michael Lentz, Esquire

It’s that time of year again. The NCAA’s annual tournament to determine college basketball’s national champion, colloquially known as “March Madness®,” started last week. In one of Thursday’s games, tiny Morehead State upset traditional powerhouse Louisville, in a true David-vs.-Goliath outcome. Trailing by 2 with roughly twenty seconds left, Morehead State had the ball and called its final timeout.

            Morehead State’s coach told his team to deliver the ball to Demonte Harper and just wait. The plan was that Harper would hold the ball for one final three-point attempt, as time expired. The game would be decided then and there. At the time, Harper had made only two of his nine shots, none of his five three-point shots, and by all accounts was having a terrible game. Of course, Harper made his shot, and Morehead had its Hollywood ending. 

            In interviews after the game and the next day, Morehead’s coach said that he planned to use Harper in an all-or-nothing spot because he was generally an excellent shooter, and he was several inches taller than the players likely to be guarding him. As a result, he would likely have an easier time taking a shot. The coach knew his players’ respective strengths, put them in position to succeed, and trusted them to do their jobs.

            That’s great advice for any small business owner. Figure out what every member of your team does best, and put him or her in a position to do that, as often as possible. If you’ve got a genuinely wonderful “people person” who would be an excellent ambassador for your company, get him in a position to interact with the people that matter to your company. Similarly, a shy, quiet wallflower type is probably best not being your receptionist or leading a sales team. Let your speakers speak and your writers write. 

Of course, once you’ve identified each person’s strength, keep asking them to use it, even if they’re in a bit of a slump. This is true even when the outcome really matters – in fact, it’s especially true when the outcome really matters. That’s (probably) why you hired them in the first place.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

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In my post on February 1, 2011, I wrote about the benefits of dating before one gets married. I was writing specifically to warn against the danger of inviting someone into your company as shareholder or director based solely on hope or expectation. My strong recommendation was (and always has been) to work with the person, see how s/he:

• Reacts under pressure
• Interacts with company personnel
• Affects the general work environment
• Works on a day-to-day basis
• Actually performs the job you s/he has been brought on to do.

Only after “dating” can a business owner be even reasonably certain of the advisability of a long-term relationship. 

But that’s not the end of the company-as-marriage analogy. There is still infidelity to deal with.

When one participates in a company, as an owner, officer, director, or even some other variety of “managing agent,” the laws of most states impose certain duties on that person. Chief among them is the “duty of loyalty.” One would think, just as with marriage vows, that one would only breach the duty of loyalty at one’s own peril.

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity. 

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possible. Sometimes, to be sure. But what of those left on the outside looking in? 

Maryland Law, like that of most other states, has made actionable what is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable to compensate the corporation for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company. 

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation. Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning. DEF then snared the contract for itself. In so doing, it wrongfully claimed one of ABC’s opportunities for itself. 

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence. She owed ABC her loyalty. When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery. 

 And in business, just like in marriage, there is usually a price to pay.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

For more information on our free e-mail series, click here. 

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Guest Blogger: Michael J. Lentz, Esquire

Last October, CNN ran a story about a Pennsylvania woman mauled by a pet bear that she kept in her backyard. When I saw this story, my first thought was “well, that was a headline waiting to happen.” CNN also reported that, in addition to the 350-lb. black bear, the woman kept a Bengal tiger and an African lion. Apparently, she had the necessary permits from the Commonwealth, and “the property routinely passed inspection and had no violations.” Even doing everything right, the poor woman was obviously still at risk. After all, the bear, even in a cage in a Pennsylvania neighborhood, was still a bear. 

Of course, almost all small businesses have bears in their backyards, too. Whether it’s a client or customer who persistently fails to pay, or an employee who shows up late, leaves early, and habitually fails to produce, or a vendor that consistently fails to deliver as promised, business owners often accept, and even seem to welcome these rascals. Despite well-honed instincts warning of potential problems, many business owners disregard these instincts, for a variety of reasons, some sound and some not. With proper care and feeding, the delinquent customer, incorrigible employee, or unreliable supplier may, for a while, appear pleasant to have around and a worthwhile addition to the business. 

Eventually, though, damage to the business is inevitable. The customer will abandon the business with an enormous receivable, the employee will disappoint a significant client in a critical situation, or the supplier will fail to deliver vital materials. 

Bottom Line: Trust your instincts, and remember that the things that threaten your business now will threaten it as long as you welcome them, even if they appear to be under control for a while. 

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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I have this very clear memory of standing with parents and incredibly excited children on the sideline of a windswept soccer field.  The last game had just ended.  Our team, that is to say my 6 year old son’s team, The Green Goblins, lost 6-0.  We had won one game that season – a gripping 7-6 contest in which the excitement of the win for all but the coach was still easily overshadowed by the arrival of the snack parent.

But here we were, after the final game of the season, and something even more exciting than snack distribution was about to happen.  It was trophy time.

As each name was called, the child of the moment would walk up, grab the trophy, slap high-five with the coach and grin.  Parents clapped, occasionally yelled (“YEAH, JUSTIN!!!), pictures were taken, and the next trophy was pulled out of the box.  And even as I clapped and cheered for my son, and my wife angled for just the right shot at the precise moment David received his trophy, it still bothered me.

We have raised a whole generation of people accustomed to receiving  trophies for losing.

Beginning somewhere around the late 1980’s to early 1990’s, they stopped keeping score.  We were told that everyone’s a winner, just for having participated.  There were no losers.  
And, truth to tell, maybe there was something to that.  I’m no psychologist, and I’ll allow for the possibility that eliminating the label of “winners” and “losers” from early sports or extracurricular involvement (they also stopped giving out blue ribbons at the science fairs) prevented the destruction of the egos and self-esteem of a generation.

Yet even with this as a possibility, the more sober among us has long realized that everything comes at a cost.  The cost of this self-esteem saving strategy, it seems to me, is that we are now welcoming into the ranks of the newly employed young, vital, talented, and knowledgeable twenty-somethings with a pronounced sense of entitlement.

As Don Rheem, principal and co-founder of Engagient, one of the country’s leading employee performance and engagement consulting firms, describes millenials as people who:

• Go to work at GE and, within a week of having been there, send an e-mail to the CEO and expect an immediate response;
• Have a pronounced need for immediate feedback, praise, and recognition;
  
• Are constantly motivated (often into impulsive action) by a need to discover what else is out there
  

The challenge for companies across all industries, therefore, is how to keep these people – “millenials” they’ve been called – fully engaged and fully committed to the organization without: (1) disenfranchising more established workers; or (2) losing focus on the business at hand.

Now, upon reaching this point in the article, you may think that I would take the easy way out and point to “innumerable” solutions to this problem posited by countless experts.  There are countless experts, to be sure, but the studies, articles, and anecdotal evidence points to only one answer.

I will repeat that.  There is only one way to keep millenials fully engaged in and loyal to your company.  And the millenials are not alone.  This one rule applies as the single solution for client loyalty and the retention of older or more established workers.

The key to employee retention, client loyalty and a strong marriage is the ability to develop and sustain a relationship at an emotional level.  In other words, there must be a deeper connection between the employees and the business than just salary, perqs and a holiday bonus.  There must be a belief in the purpose of the enterprise and the employee’s place in it.  Each employee must be able to answer the key question “why do I keep coming to work?” with something more than just a reference to salary.

In addition to fair (if not downright attractive) salary and benefits, the organization must have a vision beyond just an increase of profits for the owner.  There must be buy-in – meaning everyone, including those crucial (and temperamental) millenials – must be on board the bus.

The company must work to establish trust, rather than just assume it’s there.  
There must be feedback well beyond just an annual review.
The company must create traditions, events or other visual touchstones to keep employees anchored to its vision.  

In essence, a company coming to terms with the challenges of keeping today’s workforce fully engaged has no choice but to take its cue from those non-scoring, participation-trophy games by providing approval, feedback and a connection – not just to the actual activity, but to the overall value that comes with being part of the team.

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Guest Blogger: Terry Weller, CPA

Did you know that the typical 5-year-old asks 65 questions a day, while the typical 44-year-old asks only six?  Children are curious as they are developing. I believe that businesses should be curious as they continue to develop.  Unfortunately, over time many organizations settle into a ‘know-it-all’ mentality; they get stuck in the business models, processes and cultures typical to their industry.  Most organizations are not asking questions regularly to initiate true innovation, nor are they digging into the core of what makes them unique. As Tim Brown, CEO of IDEO and well known innovation speaker states, “organizations focus more on optimizing the business machine rather than creating value.” If you don’t innovate around your products and services then you aren’t optimizing your ability to successfully grow your organization and expand in the marketplace.

So, what does it take to spur innovation?

While not all inclusive, there are two common resources for leveraging your differences and establishing authentic innovation within your organization.  I focus on these two because they provide a substantial return on the effort expended:

• Drawing inspiration and learning from industries and markets that are tangential to or different from your own
• Hiring or selecting a “diverse” team of talent

Innovation is not about understanding your common ground, it’s about celebrating your differences. Take the Volkswagen Beetle for example; when first released in the United States in the mid-fifties, the car design was considered ugly and not functional. These failures only made the company consider upgrading and refining the car’s utilities. Mmm...they respectfully ignored the obvious criticism from consumers. Then, at the height of the criticism, their 1960s advertising campaign was launched. Each ad embraced and celebrated the car’s unique design and features.  The attributes of the Beetle were simple - it was a small, well-made car that was inexpensive. The ads created used these facts, but never used the words themselves; they simply used the concepts to illustrate (typically in a humorous way) the aesthetic differences and functionality. This “innovative” campaign made the brand stand out in a marketplace crowded with cookie-cutter ads showcasing stylish cars and the ideal lifestyle you can have by owning one. What is especially amazing is that even today, the success of the Volkswagen Beetle brand stems from its now iconic design.

How we view our opportunities and make decisions is largely based on the lens through which we view the world.  Taken on a grand scale this encompasses every observation we have amongst all the areas of our lives.  When we are in the mode of viewing things from a preset angle we can miss opportunities that are right in front of us.   Joel Arthur Barker was the first person to popularize the concept of paradigm shifts relative to organizational behavior. He began his work in 1975 and pioneered the concept to explain the importance of vision to drive change within organizations. His model suggested that the “outsider,” someone who really doesn’t understand the prevailing paradigm in an organization (sometimes they don’t understand at all!), is one of the individuals who can affect change and innovation within an organization. Barker goes on to explain, “The outsider has the advantage of asking the dumb questions...They don’t realize they shouldn’t challenge the present practices because they haven’t learned those prohibitions yet.”  Many business leaders throw deaf ears on suggestions from outsiders. Their experiences and teachings have trained them to think of these ideas as “absurd” or “too radical of a change.”  However, what may sound ridiculous could actually be the origin of a new business model, product or service.  Take for example KUKA Roboter GmbH. Since building its first industrial robot in 1977, KUKA has become one of the world´s largest manufacturers of industrial robots. KUKA robots are utilized in a diverse range of industries including the appliance, automotive, aerospace, consumer goods, logistics, food, pharmaceutical, medical, foundry and plastics industries among others. So, when your organization has saturated the marketplace – how do you keep growing? Where do you go next? The answer for KUKA was the amusement park. Yes, born out of demand for more interactive theme park rides, KUKA brought the “Robocoaster” to market in 2003.  This was the first robot in the world to be approved for carrying human passengers. The interactive ride can be designed to match customer’s requirements in theme, intensity and realism. It is more cost effective than a traditional ride since customers can change themes to adjust to rider appeal and create an infinite number of rides by using one programmable industrial robot. With large theme park corporations such as Walt Disney incorporating robotics into their stage entertainment since the early 70s, it’s amazing that someone did not combine the industries sooner. That’s why it’s important to continually observe and look outside your industry to see how other strategies, resources, and practices could be used within your organization to enhance or even differentiate products/ services.

Your innovation muse does not have to be externally driven either. As a business leader, you should also look internally. Hiring or selecting a “diverse” team when it comes to driving innovation means not following your organization’s or industry’s culture of defined technical talent.  You want to look for individuals who demonstrate strengths in other business areas and/or offer a different set of skills. For example, another interesting fact about the Volkswagen ads is the composition of the advertising agency team that put them together. The firm selected and used a diverse creative team of writers and art directors. In most agencies at this time these functions were separate. By bringing these functional areas together the firm was able to draw from the interdisciplinary perspective of the entire team. Along the same lines, in one of my endeavors I had the opportunity to hire a group of people whose primary goal was to provide the outside of the box thinking and fresh ideas that would lead to innovation within the organization I was working with. They were true “outsiders” with no industry knowledge, let alone any deep business experience.  The team was made up of recent college graduates. Since they were not limited by preconceived notions, they quickly solved the challenges provided to them. The observations they made and solutions they posited led to changes within the company’s business model and processes.  Many of these changes could be directly tied to increasing customer satisfaction and growing the company’s bottom line. When you get a chance, I recommend reading my full account, “skunk works.”

These examples go to show you that teams of exceptional and diverse talents can work together to create amazing, novel ideas.  So, to get you motivated today to start true innovation, I’ll ask the first questions: What areas of your organization could benefit from being reviewed through a new lens? What products or services can benefit from or be created by brainstorming with a strategic partner? What teammates can you cultivate within your organization to solve current business challenges?

Any new ideas or thoughts on innovation? Please share them in the comment section. I’d enjoy reading about them and who knows what fresh idea you may spark for someone else.

Terry W. Weller, CPA is a Partner of McLean, Koehler, Sparks & Hammond and a member of the firm’s Executive Committee. Terry Weller’s many years of experience have been devoted to assisting family and owner-managed businesses on sophisticated financial planning issues and providing comprehensive help with business and interpersonal issues. His clients cover a wide range of industries, including wholesale/distributors, contractors, professional practices and service-related businesses. Terry’s services include business planning and consulting, accounting and auditing, and the integration and dealing with owner and company concerns often prevalent in family/owner-managed businesses.

Terry is a graduate of the University of Maryland. He received his certification as a CPA in 1970 and was admitted to the partnership of McLean, Koehler, Sparks & Hammond in 1975. An accomplished public speaker, Terry is a member of the AICPA and the MACPA.

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In a disturbing development, the New Jersey Supreme Court ruled that an employee may take confidential files for the purpose of helping in the prosecution of a discrimination claim. The Court, ruling in Joyce Quinlan v. Curtiss-Wright Corporation, found that the employee’s use of the confidential materials was a protected action for which termination would be improper.

Joyce Quinlan had worked for Curtiss Wright for approximately 20 years when she came to believe that she had been wrongfully passed over for promotion in favor of a male employee. She then devoted herself to the collection and copying of over 1,800 documents from personnel files and project work files to which her position gave her access. 

Selecting documents she believed were helpful to her assertion of gender bias within Curtiss Wright, Quinlan turned the documents over to her attorneys. The documents were admitted at trial and served as the basis for a significant award against Curtiss Wright, including punitive damages.

The Supreme Court of New Jersey upheld the verdict.

In its ruling, the Supreme Court attempted to balance the interests of aggrieved employees with those of employers seeking to preserve the confidentiality of their information.   In so doing, the Court acknowledged the competing interests of each party, stating:

In making these evaluations, the court must be mindful that both employers and employees have legitimate rights. Employers have the right to operate their businesses within the bounds of the law and legitimately expect that they will have the loyalty of their employees as they do so. Employees have the right to be free of discrimination in their employment and the right to speak out when they are subjected to treatment that they reasonably believe violates that right. Balancing all of those considerations is a difficult and important task.

Applying a 7 point balancing test, the Court made it clear that employees are generally safe copying and using an employer’s confidential documents if: (1) the employee acquires the documents in the normal course of his or her job duties; (2) the documents are delivered only to counsel; (3) the employee has a good faith basis for believing s/he has a meritorious case; and (4) the copying of the documents does not interfere in the employer’s business. 

What made the Quinlan ruling so alarming was that it was rendered after a thorough review of applicable federal and state case law. The prospect that the Quinlan decision could be adopted by Maryland and other states should send a shock wave through employers seeking to protect their trade secrets and confidential records. 

While certainly not urging employers to shield illegitimate or improper discriminatory behavior, we would highly recommend that companies review their document management and security policies with an eye toward preventing unauthorized access. Our recommendations are as follows:

1. Ensure that applicable written policies place employees on notice that copying or scanning documents as well as removal of documents from the workplace without proper authorization is a termination-level offense.
   
   
2. Review security measures for personnel files – both medical and administrative – as well as other confidential documentation, including trade secrets, pricing, and customer lists. Determine: (a) who has access; (b) when access is permitted; (c) whether unauthorized access is possible; and (d) how management would know if there was unauthorized access, copying, or removal of files.
   
   
3. Update any security measures, document control technology, and access procedures necessary to ensure that your documents only go where you want them to go.

Sure, I know this may sound a bit alarmist, but consider one thing about document management and security: 

It is better to have it and not need it, than need it and not have it.

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Guest Blogger: Michael J. Lentz, Esquire

I’ll admit it – I used to be profoundly annoyed by, and more than a little bit uncomfortable with, the notion that Twitter could be a useful tool in the development of my commercial litigation practice. I envisioned Twitter as the latest unwelcome step in the drive-thru-ification of America, where fast and easy often replace, and are often deified at the expense of, thorough and thoughtful. I viewed Twitter as nothing more than one of many ways for the self-absorbed to tell the rest of the world about their lives - it seemed unnecessary at best, and shallow and self-aggrandizing at worst. 

Last week, though, I attended an excellent webinar on the use of Twitter for client development, presented by Kevin O’Keefe, the founder of LexBlog (full disclosure: LexBlog hosts this blog). I’m not going to attempt to reiterate Kevin’s points here – you can follow his blog or follow him on Twitter. At the start of the webinar, I was largely Twitter illiterate – I didn’t know a hashtag from a hash brown. More to the point, I literally could not fathom that Twitter could be useful to me, so I didn’t see any reason to attempt to become literate. 

An hour later, though, I had specific examples of ways in which Twitter might be useful to a busy litigator trying to develop a practice. Certainly, some of the suggestions were inapposite. Others were sensible in theory, but might be difficult for me to put in to practice, given a finite amount of time to devote to the effort. There were other suggestions, though, that made sense immediately, and that I knew I could put into place immediately. Receiving fairly simple, concrete examples of what Twitter can do for me made me change the way I thought about Twitter. I’m still not convinced that it’s the eighth wonder of the world, as some of its advocates seem to believe, and I’ll probably never use it as fully as Kevin and others like him do, but I am convinced that it has its place. 

This epiphany reminded me of an important marketing lesson: when you’re marketing, whether verbally or in writing, and whether your audience is an enormous group or a single individual, make the presentation not merely about you, and your skills and talents, but about what you can do for your audience. Leave your audience with simple, concrete examples of how your business, product or service can help them.  No matter how good your business is at what it does, prospective customers and clients will not become actual clients and customers unless and until you can explain, simply and completely, how your business will benefit them. 

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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Yesterday at 5:00, I found myself sitting in our conference room across from a very interesting gentleman. He was in his upper fifties, maybe 60, and carried himself as a professional. He explained that he had been in business for upwards of 40 years – that he had made some big mistakes, learned from them, moved on, and built a fairly successful business. 

He told me that the business that he had started had run its course and he wanted to start a new one, having learned from the mistakes of the old. In order to start the company, he decided to bring in 3 additional people. These people were friends of his, experienced in his industry, and possessed of the skill sets necessary to make the new venture run. My visitor had decided to divide 40% of the stock among them, retaining 60% for himself – enough, he felt, to keep control of the company.

He was convinced that giving out shares of the company was the only way to keep the group motivated, absent money to pay each person’s going rate. My visitor was wrong.

Recently, I wrote a piece in our e-mail series discussing the mistake of offering partnership at the outset of a business relationship. And whether the discussion concerns true partnership or co-ownership of a corporation or LLC, the fact of the matter is that co-ownership is a business marriage. And make no mistake, just like the real thing, a business divorce can be expensive and emotionally draining. 

For his part, my prospective client was asking his friends to invest their time and skill in a new business for little or no compensation. What he wanted was a way to show his friends that they would reap the benefits of their investment.   We explored a number of possible solutions, but what we decided upon was offering stock options.

People, you see, are unpredictable. Some may be highly skilled and great friends, but start working together and it’s a trainwreck. Different business philosophies, work ethic, or personalities can destroy a team that could not possibly look better on paper.   Stock options and a vesting schedule are two ways to put together an arrangement now which takes effect later. 

In this case, we could commit to an option to purchase stock in the company beginning in 3 years, discounted for each year the person had been with the company. Moreover, as incentives, other discounts to the purchase price could also apply, provided we took care not to trigger any unwanted tax consequences.

In other words, my prospective client could date before he got married. And in my experience, that’s a pretty good plan.

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Guest Blogger: Joel Charkatz, CPA, CVA, CFE

In my prior post I discussed the importance of internal controls as a safeguard of a business’s assets and provided a real life scenario. The case discussed was an excellent example of how a few minutes per month would have saved the company penalties and interest payments to the IRS, untold headaches, and a trip to the precipice of disaster, from which they luckily returned.

I also reported the most recent study performed by the Association of Certified Fraud Examiners indicated the median fraud loss in small business (less than 100 employees) was double the loss in large business. While there may be many reasons for this discrepancy, my experience indicates lack of internal controls is a significant cause of this anomaly.

In the current business climate, many businesses have pared employment rolls, leaving fewer personnel to perform the same or more tasks. As a result, internal controls have taken a back seat to servicing the customer. Even where good solid internal controls were once in place, I generally find the change in personnel has not been accompanied by an evaluation of its impact on the controls of the business.

What can be done? For starters, there are a few simple controls which can be accomplished with very little effort. And whether your business has three or ninety three employees, they will work very effectively.

The first procedure is the simplest – the monthly bank statement(s) should be given to a responsible party, unopened. A responsible party is the owner, owner’s wife or other family member, or someone in the organization that has nothing to do with finance. Typically, we find the owner to be the most credible person for this task. Mr. (or Ms.) stockholder opens the bank statement and looks at each check making sure:

• the payee is legitimate
• the amount is not out of character for the payee
• there are no erasures or other apparent changes on the document
• the authorized person’s signature is legitimate
• the endorsement on the back appears correct
• the address the payment was mailed to is where the vendor is located
• everything else on the document appears to be correct

An additional function would be to compare the check payee and amount directly into the company’s disbursement system to make sure the payee and amount are recorded in sync with the document. This procedure is generally only performed when a question arises, but it is a good idea to spot check, on an occasional basis, a few disbursements.

The key to protecting any business’s assets is internal controls. While small business may see this as a challenge, the fact is the smaller the operation, the easier it is to exert control over the assets.

Joel Charkatz, a Shareholder with KatzAbosch, has served the Maryland business community for more than 40 years. He is Chairperson of the firm’s Business Valuations & Litigation Support Group and a member of the Medical Practice Services Group.  He is also the past Chairperson of the Maryland Association of Certified Public Accountant’s Business Valuation, Litigation, Fraud and Forensics Group. Mr. Charkatz provides a full range of accounting and tax services for clients including business valuation, forensic accounting, litigation support/expert witness, real estate development, management advisory services to closely-held businesses and tax planning.

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Guest Blogger: Joel Charkatz, CPA, CVA, CFE

We hear this phrase over and over. Why? Because it is almost inevitable that when we are called in to investigate an employee embezzlement case, the entire venture could have been caught very early. Once we begin to probe, and determine the fraud was easily discoverable, management sighs and says “If I had only looked.”

Statistics from the Association of Certified Fraud Examiners reflect small business is more vulnerable than large business when it comes to fraud. Why? Because big business “looks” more than small business. The median loss in small business (less than 100 employees) was reported to be $200,000, while the median loss in large business was just $97,000. Because they look.

Really large businesses many times have a Loss Prevention Department. This area’s responsibility is to catch and stop fraud and embezzlement in the company. While they may interface with the internal auditors, they are usually not accountants. Most likely the personnel in this department have investigative backgrounds – either in police work, insurance loss investigation, criminal work, etc. As a result, these folks have a mindset that is much different from an internal auditor, and very much different from the company’s outside CPA firm.

Depending on the size of a business, there are several very simple procedures that can be performed, usually only taking minutes per month. These procedures will uncover most employee embezzlement at or near the outset.

A good example is the fraud we investigated where the bookkeeper embezzled hundreds of thousands of dollars over a period of several years. She was able to cover up the theft by not paying payroll taxes the company owed for its employee withholdings. Of course, when a non-payment notice was received in the mail from the IRS, the mail clerk would give the IRS notice to Sally (not her real name) because it was “tax stuff and Sally gets all that mail.”  The tax notice was hidden from everyone, and the fraud continued.  This resulted in a significant loss to the company, and once discovered, were required to pay taxes, late payment penalties, and interest to the IRS. It almost put them out of business.

This type of employee action would have been discovered almost at the outset except for one mitigating factor. Sally had been with the company for many years and was a trusted employee. Consequently, there were very few controls in place on her position. Were the owner to, once a month, simply receive the bank statements unopened, and peruse the canceled checks, he would have seen the checks payable to his bookkeeper, and discovered the embezzlement in the very early stages. If only he had looked.

One final word….trust is not a control. Just because an employee is trusted does not mean common sense (read internal controls) can be suspended.

Joel Charkatz, a Shareholder with KatzAbosch, has served the Maryland business community for more than 40 years. He is Chairperson of the firm’s Business Valuations & Litigation Support Group and a member of the Medical Practice Services Group.  He is also the past Chairperson of the Maryland Association of Certified Public Accountant’s Business Valuation, Litigation, Fraud and Forensics Group. Mr. Charkatz provides a full range of accounting and tax services for clients including business valuation, forensic accounting, litigation support/expert witness, real estate development, management advisory services to closely-held businesses and tax planning.

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“There is a difference,” I was taught, “between ten years of experience and one year of experience repeated ten times.”   I thought about this the other day as I contemplated the calendar change to 2011 and the fact that next year will mark my 25th year in practice. 

Everyday it seems like I see too many examples of companies celebrating survival, rather than progress. We regularly receive letters adorned with “our 10^th anniversary” ribbon stickers and see businesses using the phrase “since 1956” or some such instead of an actual message.   When I was a young attorney (maybe for ego’s sake I should say “younger” attorney), I was hoping to be made partner when the management committee told me instead “we’ve decided that you have to wait 3 more years before we extend an offer of partnership.” 

Now, granted I was young – younger than any of the partners by a long shot – but I had just as many clients and generated more revenue than most.   “Why,” I asked, “does it matter how many more sunrises I see between now and an offer of partnership?” I urged them to give me something different such as a revenue, performance, or even billable hour target to hit. But no, to them it was time. To me, this made no sense.

One of the real values of seeing another sunrise is the ability to leave behind the mistakes and absurdities that had, no doubt, been a part of your yesterday. But equally as important, with the sunrise comes the opportunity to build on yesterday’s lessons. Sometimes that’s painful in business.

Print out your customer list. Not a list of your most active or largest. Print out a list of all of them. Don’t just read the names, ponder them. As to each, are they enthusiastic about your work or did you make a cringe inducing mistake? Were you late? Were you, perhaps, a bit less responsive than you should have been? Are they loyal to you or are they casting a wandering eye across the business landscape wondering if they can do better? 

I have yet to find a business owner who, in his heart of hearts, can honestly say that he did right by 100% of his customers 100% of the time. 

So here are the questions: What are you going to do about the failures? Are you committed to learning? Have you created a company culture open to improvement? Can you begin a lasting and productive dialogue about your failures? Have you ever conducted a bloodless autopsy – one with a mission of education rather than the identification of a scapegoat?

In other words, in 2011, what will you have learned by the sunrise?

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There is no such thing as privacy. You would know that if you were inclined to take even a casual glance at Sports Illustrated as 2010 ran down. The sports world was consumed with stories about Brett Favre’s alleged texts to Jets sideline reporter, Jenn Sterger and now two massage therapists as asserted in recent court filings. Not to be outdone, Jets head coach, Rex Ryan, found himself on the sidelines while all of New York seemingly became obsessed about his wife’s internet persona. 

Now, a Michigan court is preparing to weigh in on the subject of online privacy. According to the ABA Journal, a Michigan man is facing felony charges for reading his wife’s e-mail in an effort to determine whether or not she was having an affair. He was charged under a statute intended to apply to computer hacking, but is read to apply to a circumstance in which someone uses another person’s password, without permission, to, in this case, do a little investigative research.

Given the prevalence of online activities in our society, the issue of online privacy has almost universal ramifications.   A week doesn’t go by when we do not hear a question from one of our clients involving employees texting, using Facebook accounts, or simply shooting e-mails around the office. The legal issues can run the gamut from unauthorized use of equipment to sexual harassment and the creation of a hostile work environment.

But what are the employer’s rights?

There are three statutes which have to be considered when an employer contemplates monitoring the employee’s use of e-mail, telephone or the internet: (1) the Electronic Communications Privacy Act of 1986; (2) the Maryland Wiretap Act; and (3) the Maryland Stored Communications Act.   Maryland courts have consistently explained that the purposes of Maryland law on the subject is to prevent the unauthorized interceptions of conversations where one party has a reasonable expectation of privacy. 

If asked, many employers would maintain that no employee has a reasonable expectation of privacy if company equipment is being used for the communication. But that is not always the case. The question can turn on the type of monitoring at issue and the employer’s goals in taking the offending actions. For example, videotaping employees is different than recording their phone conversations or perusing their e-mail after they have left for the day.

In each case, there may be a legitimate business purpose behind the company’s actions. We’ve all heard the recorded message that “calls may be monitored for quality assurance.” Another reason for monitoring, this time relating to e-mail, is that companies can be sued for copyright infringement or even sexual harassment, depending upon information downloaded by employees onto company systems. 

By far, the best policy for any business where monitoring will take place or even where employees have access to e-mail and the internet is to create and distribute a written policy explaining the company’s right to engage in the specific type of monitoring anticipated by the company. The warning alone, if well drafted and universally distributed, will serve to limit or eliminate the employee’s expectation of privacy. And in the end, that’s what it comes down to – fair warning, reasonableness, and the question of what a normally intelligent person’s privacy expectations should have been.

We’ll just have to see how the court defines “reasonable expectation of privacy” where Brett Favre and the Michigan husband are concerned.

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Guest Blogger: Adam Schechtman, VP of Business Development & Marketing, Eye Catching Creative

To brand or not to brand? That is the question so many small and mid-sized businesses tend to overlook in the early phases of their development. The problem is there’s a tendency to keep shuffling this linchpin of marketing success to the dark corners of the priority list. Then one day, we read an article or hear someone talking about a competitor and cringe in uneasiness because they did something we didn’t…built a solid brand.

Like marketing in general, branding is easy to lose focus on, especially when we have experienced some degree of success. If you agree that today’s markets have changed and the way businesses DO business has changed, then it’s time to recalibrate some of your own marketing efforts. That means its back to basics! Like the “butterfly effect,” small improvements in your branding strategy can have a tremendous impact on growth over time.

We know from marketing 101 that your brand is your identity. Beyond the visual or physical makeup… name, logo, advertising, a brand is quite simply the psychological impact you have on customers. Branding is so important because people buy emotionally and then logic steps in to support their buying decision. Your brand is essentially a part of the ongoing relationship you have with customers. It is a compilation of messages that differentiate (or don’t differentiate) your business, product or service from everyone else who plays in the same space as you do. Take a second look at the competition of today. If someone stands out, why do they stand out? Who doesn’t stand out? Which category does your company fall into and who might be able to help you to improve on that position?

From your email address to your website, to how the phone is answered to the relevance of your marketing materials, your brand must be professional, consistent and CURRENT.  What the company stands for and what you’re offering should be different and clear. When is the last time you really dissected how you are perceived in the market and what your market position truly is? One easy way is to run a survey using existing customers or even some customers that you lost. Resources like SurveyMonkey.com are fantastic, free, e-survey questionnaire tools that are easy to use and easy on the budget.  So let me ask you… what perception do your customers have of your business? What does your presence in the market “feel” like to customers and professional peers (aka competitors) and more importantly… are you being felt?

Adam Schechtman is an entrepreneur and co-owner of Eye Catching Creative, providing virtual, on-call design, advertising and marketing solutions to budget-conscious small and mid-sized businesses. With more than 15 years in marketing, business development and sales, he is also the former owner of Achieve Senior Home Care and former co-owner/franchiser of Advance Realty Solutions. Adam holds an MBA in marketing from Johns Hopkins University. Visit www.eyecatchingcreative.com for more information.

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“I got a phone call this morning from one of our oldest customers. He fired us. After 20 years, he fired us. Said he doesn’t know us anymore. I think I know why.” 

The speaker recounted his phone conversation to his account reps, saying “we used to do business with a handshake, face-to-face. Now it’s a phone call, a fax, ‘get back to you later,’ with another fax, probably.” 

This United Airlines commercial was originally aired before e-mail and the advent of social media. First aired twenty years ago, in 1990, it still resonates. So many businesses are started by an entrepreneur, skilled in the producing the product or service that spawned the company. Customers came because of the skill and stayed because of the attention. As the owner of a small business, the founder could track every project and knew every client. When someone was upset; he knew it.

Growth has a way of making that kind of personal attention obsolete. Time passes and a founder looks around to realize that whole projects are being performed for customers he never met.   And what about the ones he knew – the ones who built his business or who inspired him to go into business in the first place? Chances are, they’ve been delegated. Delegated to talented people, to be sure, but delegated just the same. 

Sooner or later, the thought has to occur to these customers – your old friends -- that if they mean little enough to your company that they can be delegated, your company means little enough to them that they can go elsewhere.  

Looking ahead to 2011, most business owners set targets for growth -- more revenue, more customers, bigger projects, better distribution. But how many set goals reflecting stronger relationships, customer retention, and expressions of gratitude? 

Many years ago, I read a book in which the author urged business owners to “pay attention to the ‘fine’s.’” He meant that people rarely voice their complaints. When asked about service or the particular product they purchased, even when dissatisfied, they’d normally respond that things were “fine.” Not every customer can be counted on for enthusiasm. After all, there isn’t an infinite amount of enthusiasm to go around. But the silence and the “fine’s” speak volumes to those with a keen enough ear and enough focus to notice. 

So what are you doing to focus on client retention, rather than just growth? Studies indicate that a new client is 7 times more expensive in terms of marketing and advertising dollars than existing clients. The point is that it is much cheaper and more efficient to keep the clients you have than spend every ounce of energy trying to bring new prospects in the door. 

If you do not already track trends in returning business, 2011 is an ideal time to start. After all, nothing speaks to customer satisfaction more than repeat business. Even more than tracking it, look for the things that increase the pace of returning business over time. 

Perhaps, like those executives in the United Airlines commercial, you can forgo e-mail, faxes and phone calls, and, just once in a while, put in the time to travel even great distances for a handshake.

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My wife is a product of Oregon.   So is her favorite beer, Bridgeport Coho Pacific Extra Pale Ale. Years ago, when she first made the move to join me in Maryland, I tried to surprise her with a case of Oregon’s finest. Unfortunately, the brewery did not ship product farther east than Colorado. It was not willing to make an exception in my case. 

Maryland law required that I first obtain a distributor’s license to facilitate the transaction. I did not qualify for one. I tried to get a few of our retail stores interested in serving as my proxy, but no one would bite. And as much as I revere Baltimore’s Natty Boh roots and tradition, the two products were hardly interchangeable. 

My memory of this failed gift came flooding back to me yesterday when I read Scott Calvert’s article in the Baltimore Sun reporting on the possible loosening of Maryland’s prohibition against direct shipment of alcoholic beverages. The Sun cited Maryland’s wine industry lobbyists as basing their opposition to direct-shipping on two arguments: (1) that direct shipment to consumers would make it easier for minors to obtain wine; and (2) aggressive out-of-state competition would imperil Maryland’s own wine retailing industry. 

We’ll leave the first argument by the wayside, saying only that on its face it makes no sense, given that how alcohol gets into the dining room liquor cabinet is much less significant an issue than the parentally-imposed controls over how it gets out.

It’s the second argument that attracted my attention.  According to the Sun, the Maryland wine industry lobby favors the existing statutory environment because it limits competition.   Now, I completely understand why an industry lobbying group would want to insulate its members from competition. In fact, I’m certain that there are very few businesses in the country that wouldn’t benefit from a little statutorily-imposed exclusivity.  

But that’s hardly the point.

The point is that a business in our economic system should be constructed to beat the competition, rather than rely on the law to do it for them. If a company is not able to articulate to its prospective customers at least one (and ideally three) clear benefits to doing business with it as opposed to its competition, then it deserves to lose those potential customers. Price, service, selection, trust, relationships, knowledgeable sales staff, value-added services, an expanded product line…something. These are the elements of successful competition – regardless of industry.

Friend of the firm, Mitch Pressman of Chesapeake Wine Company was exactly on point when he was quoted in the Sun article as saying that he welcomed the competition. He welcomed anything that would bring about an increased interest in his product. And it is precisely his confidence in his business, staff, selection, knowledge, etc., rather than a reliance on antiquated statutory protections, that positions him to overcome the competition. 

And that’s the way it should be.

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Guest Blogger: Michael J. Lentz, Esquire

Ordinarily, employment in Maryland is “at will,” meaning that in the absence of a contract that says otherwise, an employer can fire an employee at any time, for any (non-discriminatory) reason, or for no reason at all. Of course, a written employment contract will govern the relationship between the employer and its employee. 

However, in some circumstances, Maryland courts will interpret a shareholders’ agreement to be an employment contract. If a shareholder, who also happens to be an employee, enters into a shareholders’ agreement with the employing corporation, and the agreement includes the employee’s duties, compensation, and other employment related terms, the terms of the shareholders’ agreement will govern the employment of the employee-shareholder. A shareholder’s agreement that doesn’t speak to the issue will not change an employee’s at-will status, or provide post-termination benefits, but courts will enforce all written terms. Also, Maryland law requires all parties to a contract to deal with each other fairly and in good faith, even if no such requirements appear in the parties’ agreement. Since a shareholder’s agreement that addresses terms relating to employment will be construed as a an employment contract, this implied covenant of good faith and fair dealing will be implied in the parties’ employment relationship. 

As a practical matter, this means that if you have employee shareholders, their shareholder agreements should include either nothing relating to their employment or all pertinent terms of their employment.

Perhaps just as significantly, even in the absence of a written employment contract, shareholders in closely-held corporations may be entitled to rights similar to those found in employment contracts. This is because a shareholder who invests in a closely held corporation may, depending on the nature and size of his investment, expect to be involved in the management and day-to-day operations of the corporation. Maryland courts have held that a shareholder in a closely-held corporation is entitled to “reasonably expect that ownership in the corporation would entitle him to a job, a share of the corporate earnings, and a place in corporate management.”  

Corporations, and their majority shareholders, should take care to respect these reasonable expectations of minority shareholders. Maryland law suggests that courts have a wide variety of remedies available to them to ensure that the investment expectations of minority shareholders are protected, including the appointment of a receiver to run the corporation and, if no less drastic measure will protect the minority shareholder, the dissolution of the corporation. 

Bottom Line: In closely-held corporations, minority shareholders present challenges not faced by publicly-traded corporations and other corporations with large numbers of shareholders. The corporation, its majority shareholders, and any minority shareholders are well advised to reach explicit, concrete agreements regarding their expectations for the venture, and to commit those agreements to writing thoroughly and precisely. 

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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Newton’s First Law of Motion, though revolutionary in its day, is simple enough: An object in motion will stay in motion and an object at rest will stay at rest, unless acted on by an outside force. 

This Law has helped legions of students understand physics and has shaped the world view of generations of scientists. And it works, too, until one gets down to the subatomic world where quarks, fermions and baryons dwell. There, as Daniel Pink says in his revolutionary book Drive about employee motivation, “things get freaky.” In other words, things don’t work the way logic and history teach us they should.

Surprisingly, the same can be said for employee motivation. 

The quest for employee motivation is about control and the application of external force. Speaking as an employer myself, I am constantly thinking about what I can do to control the outcome I desire. I think: “What can I do to raise our revenue by increasing the rate at which files are opened or the efficiency with which work is performed.“  

My mindset, in other words, tends to reflect conventional wisdom of “pay more, get more.”  If you want more widgets produced, hours billed, or projects completed, create a bonus structure that rewards production.   When I took Introductory Economics at Duke in 1982, our textbook instructed us that in a world of perfect information, the parties will work toward a wealth-maximizing result. In other words, wealth was the determinative factor in human motivation. And if wealth is the determinative factor, business owners like me could manipulate wealth, thereby increasing motivation.

The problem is that it just doesn’t seem to work that way with anything but repetitive piecework. Where creative, problem-solving work is concerned, things tend to get freaky.

Time and time again, people leave lucrative positions to take lower paying jobs doing what they truly like. They’ll forgo a W-2 environment for the much riskier (and more work-intensive) entrepreneurial undertaking. They’ll spend hundreds of hours playing clarinet when they don’t have a hope of getting to the stage. They’ll spend hours on Sudoku or puzzles without any kind of incentive or reward. 

My brother-in-law has spent his career as a long-haul truck driver, now working for UPS. From his observation of several large, nationally known companies, he concluded that most people wanted to do a good job. But when companies began installing incentive programs, long-term productivity plummeted. In the short run, of course, the drivers worked to attain the bonuses. Then, as the company began raising the targets and installing more incentives to hit, people began to tie their motivation to the bonus(es) they hoped to achieve. Once they determined that an incentive was out of reach or unimportant, their productivity dropped off to a point far below pre-incentive levels. 

Pink comes to this same conclusion by traveling a different path. Pink refutes the historical incentive laden bonus structure by pointing out such seeming anomalies as the rise of open source products such as Firefox and Linux, the triumph of all-volunteer Wikipedia over the heavily funded Microsoft Encarta, and the pervasive presence of non-compensated, open resources offering everything from car repair advice to recipes. 

In 1999, thirty years after his groundbreaking work as a psychology graduate student at Carnegie Mellon University, Edward Deci, reviewed 128 separate sociological experiments and came to the conclusion that tangible rewards tend to have a substantially negative effect on intrinsic motivation.    Why? Because the creativity and sense of accomplishment that people once enjoyed had, when presented with productivity bonuses, suddenly become “work.” As Pink stated, “over and over again, they discovered that extrinsic rewards – in particular contingent, expected “if-then” rewards – snuffed out the third drive [of internal motivation].”

The challenge, therefore, is a daunting one. It is easy, after all, to figure out the results we want and provide a monetary reward based upon achievement. The challenge, however, is to create an environment that sparks each producer’s internal drive to succeed. 

As we approach the New Year and contemplate, as business people, what we can do to make our own enterprises better in 2011, nothing merits consideration more than the question of employee motivation. We have to determine:

1. What outcomes do we want to inspire; and
2. What can we do as managers to incentivize the outcome without snuffing out that all-important self-motivation?

I’ll write more on this subject in upcoming blogs. Please feel free to weigh in with your comments.

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I have to admit that I’m a sucker for a good, old fashioned sarcastic remark. I’m the type of guy who’ll actually compliment someone who directs a sarcastic remark my way, as long as the sarcasm is sufficiently artful. I admit that this is a little weird, but I think I can trace its origins back to one of the most sarcastic guys ever to put pen to paper, and someone who intimately understood the absurdities of life: British mathematician and novelist Lewis Carroll. Carroll, you may recall, wrote Alice’s Adventures in Wonderland (but to everyone except English professors, it’s just plain old Alice in Wonderland). One of my favorite passages from the book also happens to involve my favorite character, the Cheshire Cat. It goes something like this:

Alice:   “Would you tell me, please, which way I ought to go from here?”

Cheshire Cat: “That depends a good deal on where you want to get to.”

Alice:   “I don’t much care where . . .”

Cheshire Cat (grinning, no doubt):     “Then it doesn’t much matter which way you go.”

Alice:   “ . . . so long as I get somewhere.”

Cheshire Cat: “Oh, you’re sure to do that, if only you walk long enough.”

I can hear the wagering in the room now: “$50 bucks says there’s no way he connects Alice in Wonderland to anything remotely resembling a legal issue.” Oh, Grasshopper! Watch this:          

Anyway, where was I? Oh, right. The Cheshire Cat. I like this passage as much for the Cat’s lethargic, disdainful sarcasm as much as for what the Cat teaches us about knowing where we’re going – and where we’ll end up if we don’t know: “somewhere.” Well, if “somewhere” isn’t good enough, then planning is required. This applies not only to a trip to the supermarket, but to careers, family life, business plans, and “succession planning” – which, conveniently enough, is what I want to focus on in this week’s blog. 

So, what’s succession planning? Fundamentally, it’s deciding early on in the life of your company what happens to the ownership interests – the equity -- if something happens to you or your fellow partners or stockholders. What could that something be? How about a decision by one of your partners to just stop working, for whatever reason (such as an illness, retirement, a lifelong desire to move to Bangkok, or just plain boredom). Would this leave your company in the lurch? Would the company be obligated to continue to pay distributions or dividends to a partner who just stops working? In the absence of a well-drafted succession plan, the answer is highly likely to be “yes.”

Or, let’s take another example. One that most people would prefer not to think about: the death of one of your partners, or your own passing. It’s not pleasant to contemplate, but the reality is that the deceased partner’s equity in the company lives on. Something has to happen to it. Succession planning will determine what that something is. Unless you would prefer for a probate court or your deceased partner’s last will and testament to determine who succeeds to her equity in the company. In which case it’s as likely to end up in the hands of her husband as her crazy sister who lives in an Ashram in Kathmandu. How would that affect your company’s operations and its cash flow? Better to avoid these possibilities altogether and come up with a written succession plan or agreement.

A well thought-out succession plan will determine what happens to each stockholder’s or partner’s ownership interests and rights in, as well as obligations to, the company in the event something happens. In the case of a corporation, the succession plan is usually made part and parcel of the Shareholders’ Agreement (which would make a good topic for another blog – making mental note to self). In an LLC or partnership, the succession planning language is generally included in the operating agreement or partnership agreement. In any case, it can also be a separate, stand-alone agreement if not included in either of these documents.

Most succession plans give the company itself, or the other partners or shareholders, the right (but usually not the obligation) to buy the departing (or departed) shareholder’s equity. It will also determine whether the company or the other partners have a right to buy out a seriously ill partner, or to oust a non-performing partner. The succession plan will also determine who else has a right to buy or inherit the equity in the event the company or the remaining partners decide not to buy it. And, perhaps most important, the plan will provide for a methodology for valuing the equity. Different types of businesses lend themselves to differing valuation techniques, which your financial advisor, accountant, and attorney (me, remember?) will discuss in order to select the proper valuation method.  Because the absolute worst time to attempt to value equity is when a partner dies or leaves. (By way of example, what do you suppose the odds are of arriving at an amicable agreement with your recently deceased partner’s sister with respect to the value of her equity interest? Which the sister now owns, incidentally.)     

There’s much more to succession plans that I’ve touched on here, of course. But I think I’ve covered the major issues with a broad brush. A good succession plan will let you sleep easier at night. And the sooner you implement the plan, the more comfort it provides.

So, now that we’re all comfortable with succession planning and grinning like Cheshire Cats, let’s get down to business and make a succession plan. Before you end up “somewhere,” rather than where you want to be.

If you enjoy reading our blog, please vote for us for the Baltimore Sun's 2010 Mobbie Awards under the category of "Business & Technology" blogs.  Voting starts at 8:00 a.m. Nov. 2 and ends at 5:00 p.m. Nov. 12.  Thank you to all who nominated us!

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My client was a car guy…and he was terrific. A gifted mechanic, to say he loved what he did was an understatement. He was passionate about it. He reveled in the mystery of that unknown knocking sound and prided himself on being able to fix problems that defied even description. People kept telling him to open his own shop. “You’ll have them lined up around the block,” they told him.  

After 15 years, he did.

And there was a bank to find, a line of credit to work out, employees to hire and shifts to create, policies to form, a lease to sign, equipment to install, and marketing to do. Months went by and the only car my car guy saw was the one he drove him home at night exhausted.

You see, my mechanic had promoted himself to the level of his own incompetence – running a company. And in doing so, he took himself away from his highest and best use which was fixing cars.

So if you know someone in this situation, or think it even sounds a little like you (maybe sometimes?), what do you do?  

I don’t have a quick, ten word answer to this. But after 23 years practicing business law, here’s what I do know: Every business owner should have someone – may a few someones – outside the company to whom she can pour out her soul – all the angst of running a company, together with the stress and doubt that goes with it. Ideas come from give and take. And when they promote themselves to CEO, the give and take is the one thing most entrepreneurs seem to accept has been lost. 

My advice: Don’t lose that give and take without a fight. Keep it. Make it a priority by putting sessions on the calendar.   After all…love takes work.

If you enjoy reading our blog, please nominate us for the Baltimore Sun's "Mobbie" awards under the category of "Business & Technology" blogs. The nominations start Oct. 20 at 8 a.m. and will end Oct. 29 at 5 p.m.

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Those of you who’ve been following my blog over the past 10 weeks or so (or at least the 3 of you who are still awake and haven’t yet slit your wrists) know that I’ve been discussing how to finance a new or existing business. I’ve been spending a lot of time on this topic for 3 reasons:

1. it’s one of the most important issues business owners face,
   
2. it’s a topic about which I receive a significant number of questions, and
   
3. it’s worth understanding the legal and business ramifications of the various methods of financing a business.
   

Alas, every journey must eventually come to an end, as must this one. With that in mind, let me briefly discuss 3 additional financing sources that I haven’t yet talked about to tie up our financing miniseries: using credit cards, funds from your IRA, or home equity loans.

• HOME EQUITY LOANS:  The advantage of taking out a Home Equity Loan is that you’ll pay a relatively low rate of interest and get a long term loan. Disadvantages? The obvious one is deciding whether you believe in your business enough to risk your house (have you done a business plan and some basic financial projections?). The less obvious one (but perhaps more problematic one) is that your spouse will have to co-sign the loan (I’m assuming that if you’re married, you hold title to your house jointly with your spouse). Is your spouse willing to be liable for the debts of your business if things don’t work out? More important, what happens if the two of you get divorced? In the absence of an up-front written agreement with your spouse dealing with this issue, it’s not going to be pretty. If you go this route, talk to me first.
  

• CREDIT CARDS: Again, are you confident enough in your business plan to risk your personal credit and the inevitable lawsuits and collection efforts should the business fail? If so, there are a number of advantages to using credit cards, including the lack of a need to put up security, the lack of spousal involvement, and the possibility of very low “teaser” rates (which are worth shopping around for). Once the teaser expires, it’s possible to roll the balance over to another card with another low “teaser” rate. 
  

Disadvantages? The risk, of course. Also, credit card financing is and should be short term due to the inevitable interest rate hikes once the teaser period expires. Plus, you will almost certainly have to personally guarantee the card.

Finally, remember all the ink I spilled a couple of months ago blogging about the limited liability gained via incorporating, and the various transgressions that could give rise to a loss of that limited liability? Funding a business using your personal credit cards implicates some of those issues (specifically, segregation of funds issues). Call me so we can discuss if you’re thinking of going this route.

• IRAs: This is the financing technique that I find to be simultaneously both the most appealing and the most terrifying.   So here’s your question: Should you take money out of your IRA to finance your new business?
  

For me, the 2 most important threshold issues related to IRA financing are these: (1) how much of your IRA you’ll be tapping, and (2) your age. Here’s a long but important sentence: If the remaining funds in your IRA (after you pull out whatever you’re going to pull out to fund your company) would be sufficiently small such that living on those funds would have a significant adverse effect on your quality of life at retirement, AND you’re over the age of, say, 45 or so, I’d have a serious heart to heart with both your spouse and your accountant (not necessarily in that order) before pulling the money out. I also personally believe (and you can take this for whatever you think it’s worth) that it’s best to be ultraconservative and assume that the funds remaining (if any) in your IRA after you tap it to finance your business will be all that you’ll have left for retirement. In other words, assume that the remaining funds will NOT grow significantly between now and your retirement (and could possibly decrease), and that you WON’T be able to contribute any additional funds to your IRA between now and retirement.

However, once you decide to take the plunge, you’ve actually got several advantages over virtually any of the other financing techniques I’ve been discussing in my financing miniseries. Debt financing (banks, SBA, home equity, credit cards, etc.) can put a serious strain on your business’s cash flow – not to mention your personal financial situation, since you’re likely giving personal guarantees or security for the loans. Venture capital financing can result in the loss of control over your own company and your eventual personal obsolescence. And financing using the 3Fs can result in family discord, estrangement, disappointment, and broken relationships. But utilizing IRA financing eliminates all of these pitfalls. And, you can avoid early withdrawal penalties and taxes if you employ an IRS approved financing plan.

So, how does it all work? First, you’ll form your new company (and, of course, you’ll form the right kind of entity because you’ve read my blogs on corporate formation). Second, your new company will set up a “qualified retirement plan” in accordance with IRS regulations. (You’ll need an experienced and reputable benefits firm to do this for you. I can help with recommendations, if necessary). Third, you’ll roll over the desired amount of your personal IRA funds into the company’s new “qualified retirement plan.” Last, your company’s newly-established “qualified retirement plan,” fresh with funds from your personal IRA, will use those funds to buy stock in your new company. Your company is now funded with equity from the stock sale (rather than cash flow -draining debt), and the “qualified retirement plan” owns all (or some) of your new company.

The following goes without saying (but since I’m anal retentive AND a lawyer, I’ll say it anyway):  I strongly recommend that you work with an experienced corporate attorney when setting up the new company and when consummating the stock purchase by the qualified retirement plan. Someone like me, perhaps. These are sophisticated corporate transactions and need to be treated as such.

Next up: ever think about what would happen to your company if your business partner died? What if he decided to sell his interest in the company to a third party?  Or suppose she decides to just stop working (can she do that)? If you haven’t thought through these issues, you should. Succession Planning is on deck.

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Last week, I discussed why your chances of getting venture capital (“VC”) financing are probably less than your odds of being struck by lightning twice (click here if you missed it). This week, in the interests of piling on, I’m going to discuss why you probably wouldn’t want VC financing even if you could get it.

Most of my corporate clients who run their own businesses decided to strike out on their own for one of two reasons: either they were tired of the headaches, bureaucracy, and limited prospects of working for others, or they’ve got a dream of successfully building, running, and growing a business. In either case, there’s no better way to send these two goals up in smoke than by accepting VC financing. If you started or are running your own business for either of these reasons, then working with VCs probably isn’t for you.

I think there’s a general misconception about what happens when a VC firm makes an investment in a company. In the interests of dispelling myths, here’s what DOESN’T happen:  the VC firm strokes a check, hands it over, and asks you to send them an email every six months to let them know how things are going. In fact, the reality of a VC investment is quite the opposite.

Once the VC investment is made, the VCs will: (1) take positions on your new and expanded board of directors (after they convert your LLC or S Corporation into a C Corporation and reincorporate it in Delaware), (2) install their own candidates as executive officers in key positions, (3) change the equity structure of your company completely (and I do mean completely), (4) provide for special rights for themselves as preferred shareholders of your company, (5) restrict the ability of other shareholders to sell their shares (that means you and your original co-owners and management team, among others), (6) restrict the ability of the company to raise more equity or bank financing, (7) require monthly financial statements and management reports, (8) require you and other key executives to enter into employment agreements (which will include terms governing your salary, hours, vacation time, benefits, dismissal events, and such), (9) restructure the operations of the company, (10) retain broad governance and voting rights within the company, and (11) grant themselves the ability to gain majority control over the board and convert their preferred shares into a majority of the outstanding common shares in the event certain trigger events occur (such as not meeting anticipated financial goals or exit strategies).

What all of this means to you as an entrepreneur is that “your” company is effectively no longer yours. You’re now working for someone else, in accordance with the employment agreement they’ve required you to sign, even if you do remain a large shareholder and an executive officer after the VC investment. Which is why I said that if the autonomy and excitement of working for yourself and being your own boss are the primary reasons you went into business, then accepting VC financing may not be for you. Once the VCs make that investment, the entire culture of your company is going to change (and not for the better, in the minds of most entrepreneurs). 

Incidentally, you’ll have to deal with the actual negotiations and legal and accounting work leading up to the closing and the investment itself. The legal documentation governing a round of VC financing usually runs hundreds of pages, and in order to get to those final, agreed-upon contracts and filings, your company (and its executives and attorneys) will spend up to two months and hundreds of hours negotiating and meeting with your potential investors. In the process, the company will incur tens of thousands of dollars in legal and accounting fees. Good thing there’s a large investment at the end of the process!

And by the way: if you thought I was kidding when I blogged a few weeks ago about the importance of choosing the right corporate form and corporate domicile, and about the importance of adhering to corporate formalities, just wait ‘til you start working with the VCs. There is little that’s more important to them from an operational and administrative standpoint than adhering to corporate formalities. Why? Because VCs never make an investment in any company without an exit strategy, and that exit strategy is either going to be a sale of your company to another company or an initial public offering (IPO). In either case, keeping meticulous books and records is essential to a successful exit.

And what of that exit strategy? Given the state of the equity capital markets these days, the VCs are more likely to sell your company or merge it into or with another company rather than go the IPO route. In all likelihood, this means you’re probably going to get fired from your own company, or be marginalized at best.  Perhaps you’ll end up significantly richer, if you’re lucky, but the odds are good that you’ll end up forced out. There are always redundancies when companies merge or when they’re acquired by larger players, and layoffs are virtually inevitable. Don’t assume that you’ll be immune simply by virtue of the fact that the company was once yours.   

So that’s basically the anatomy of a VC investment. While the upshot is that your company will have the resources (both capital and intellectual) it needs to give it the best shot of becoming a major player in its market space while potentially making you a significant sum of money, the down side for most entrepreneurs is the effective “loss” of their company to the investors.

And just to be clear: I’m not trying to imply that VCs are insensitive, intellectually-challenged bureaucrats who don’t know what’s best for the company. In fact, quite the opposite is true. The VCs I’ve dealt with (and I imagine this is true of most VCs) have been some of the sharpest, most financially savvy people I’ve ever met. They are undoubtedly a huge asset to any company in which they invest. But from the point of view of the entrepreneur, working in the post-investment company can present genuine challenges.

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A few weeks ago, I discussed several different methods of financing a new business or providing for the ongoing capital requirements of an existing business (click here to read the blog). I touched on the difficulties inherent in trying to get bank or venture capital (“VC”) financing, and promised to discuss those issues further in a future blog. Not one to break a promise, this is that blog.

Let’s start with bank financing before we get to VC financing.  I’ll be blunt: generally speaking, most start-ups aren’t bankable (meaning they’re not good candidates for a bank loan). Banks tend to require an operating history, several years of audited tax returns, net operating income at a specific multiple of the anticipated debt service, accounts receivable or hard assets that can be pledged as security, and spectacular credit scores by the principals. Not to mention personal guarantees. If your company (or you, as the case may be) isn’t/aren’t able to produce most or all of these things, guess whose house is going to be mortgaged as collateral on the loan (assuming you’ve got equity in your house)?

That said, there are certainly lending programs at most banks that are geared towards specific types of startup businesses. Dental and medical practices come to mind, which are bankable for a variety of reasons that are beyond the scope of this blog. However, most new businesses simply won’t qualify for bank financing, particularly in light of the new-found lending conservatism brought on by the latest recession. 

Which brings us to VC, and why your odds of getting VC financing are slim.

Venture capital financing is, for the most part, limited to Silicon Valley technology wonks whose companies can deliver scalable businesses, proprietary technology (i.e., patented or patentable), and a minimum 35% pro forma return on equity with an ironclad exit strategy in 5 years or less. In other words, unless you’ve got a biotech, software, or alternative energy company with a defensible patent (VCs hate competition), you’re unlikely to be attractive to a VC firm.

Additionally – and I can’t overemphasize this – VCs are looking for stellar management whom they trust implicitly. The way they get to trust you is by knowing you. And the way they get to know you is by being introduced to you by someone they already trust. So if you’ve got a couple Wharton MBAs and a Stanford electrical engineer with 4 fuel cell patents to his credit on your executive management team, and you know a guy who works for Draper Fisher Jurvetson, congratulations! You might actually stand a chance of getting a VC firm to actually read your business plan. Continuing the theme, it also wouldn’t hurt if you’ve run and successfully sold or gone public with a previous company. And made lots of money for your previous investors in the process.

Finally, it’s useful to recognize that most VC investments don’t occur at the startup phase, but rather in a later round of financing, and most often in an amount equal to several million or tens of millions of dollars. This means that even if you do eventually get VC financing, you’d still need to rely on the 3 F's in the earlier stages of financing your business. Now, I realize that the idea of getting an infusion of capital amounting to several million dollars from a VC would make the principals of most small to medium sized businesses salivate, but consider this: could you produce a realistic business plan and a full set of pro forma spreadsheets demonstrating to the VCs how you plan to turn an $8,000,000 investment in your construction framing business into a $4,000,000 profit, PLUS return of their initial investment, PLUS a successful IPO or sale of your company, all in 36 months? Probably not. 

The simple math of the matter is that very few people, or companies, will qualify for VC financing. Factor in the sheer volume of business plans and elevator pitches that the typical VC sees and hears in a given year, and the fact that the volume of all VC financing has been severely reduced as a result of the recession, and the odds of a successful VC investment in your company become slimmer still. Which is why I pointed out in my last blog that the most likely source of funds for your business is the 3 Fs.

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Last week, in response to popular demand, I discussed one of the two major types of SBA loan: the Section 7(a) Loan (if you missed it, click here. This week, I wanted to finish the discussion of SBA programs by talking about the other popular SBA loan program, the Section 504 Loan. 

The Section 504 Loan is limited to very specific corporate purposes. The loan funds can only be used to acquire major fixed assets for expansion and modernization, such as purchasing land and improvements, construction of new facilities or modernizing obsolete facilities, or purchasing long term machinery or equipment. For these reasons, the 504 Loan is less likely to be the right loan for a startup company.

 A 504 Loan is really two separate loans involving two lenders, but it’s treated as a single transaction and both loans are closed at the same time. One of the lenders is a bank, which takes the 1^st lien position and lends up to 50% of the loan amount. The other lender is a Certified Development Company (or CDC for short), which is usually a nonprofit or local governmental economic development entity. The CDC takes the 2^nd lien position and lends up to 40% of the loan amount. Each lender’s loan will be secured by the assets being acquired.  The SBA’s role, as in the 7(a) Loan, is to act as a guarantor. Here, the SBA guarantees 100% of the 2^nd lienholder’s loan, but doesn’t provide any guarantee to the bank (the 1^st lienholder). The theory behind this guarantee structure is that the bank has greater security for its portion of the loan via its 1^st lien position on the assets being acquired and therefore doesn’t need the SBA’s guarantee. 

Additionally, the principal owners of the business are required to provide personal guarantees to both lenders (are you willing to pledge your house, car, savings, etc. for your business loan?). And since the 504 loan only covers 90% of the financing (50% loaned by the bank and 40% loaned by the CDC), the company must contribute 10% of its own money in order to be eligible for the loan. Thus, the increased likelihood that the 504 Loan is not going to be the right loan for a startup.

So, again, we come full circle to the difficulty of obtaining bank financing and the “theoretical” nature of SBA loans. The 7(a) loan can be difficult enough to qualify for, but in the case of the 504 loan, the company actually has to come up with 10% of its own money, provide personal guarantees, and provide liens on its equipment and real estate to the lenders.  Plus satisfy the underwriting standards of the bank and the CDC.

Now that I’ve touched on the main SBA loan programs, I think it’s important to point out that no bank is required to make an SBA loan. Banks are still free to reject any SBA loan application based on their own lending and underwriting standards, even though the loan would be partially guaranteed by the SBA. In addition to all this, there are also eligibility factors that businesses must meet in order to qualify for any SBA financing. I’ve represented many regional and national banks in lending transactions, so I’ve usually got a pretty good idea which lenders are most likely to make SBA loans. It’s probably worth a discussion if you’re interested in exploring SBA financing.  

Let me add here that I am not trying to discourage any business from applying for an SBA loan. I’m merely trying to illustrate what’s involved in the process, provide some details as to how these loans are structured, and perhaps stimulate some thought by business owners and clients. I think the SBA program can be a wonderful tool where a business can meet the lender’s and the SBA’s credit and eligibility criteria.  I encourage my clients to apply for SBA financing if they meet those criteria, and I am more than happy to help present my clients’ applications in the best possible light.

Finally, let me briefly mention a couple of other SBA initiatives that are geared towards small business: the SBIC program, which is a venture capital program sponsored by the SBA, and the SBG program, which is a surety bond program geared towards construction and contracting firms (SBG stands for Surety Bond Guarantee).

A few words about the SBG program: under this program, the SBA will guarantee a certain percentage of a surety bond where the contractor cannot get the bond issued through ordinary channels (and frequently, new or startup contracting businesses will have trouble obtaining surety bonds). This gives sureties an incentive to issue surety bonds in situations where they might not otherwise have done so. Which in turn gives startup construction businesses greater access to contracting opportunities. Theoretically, of course.

Next week, I’m going to discuss one more possible (and sometimes overlooked) way to finance your startup or business, which will conclude what I have to say about the legal aspects related to financing your company.

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Over the past few weeks, I’ve been using this blog to discuss various ways of financing a business, whether a startup or an ongoing enterprise. One question that seems to be on the minds of my clients and readers of this blog is the lowdown on SBA financing (i.e., financing under the auspices of the U.S. Small Business Administration, which is an agency of the Federal government). So here’s my take on it.

First off, let me clarify a widespread misconception: the SBA does NOT make loans to small businesses. Rather, the SBA guarantees a portion of a loan made by a bank to a small business, as long as the bank participates in the SBA program and adheres to SBA guidelines when making and servicing the loan. By guaranteeing a portion (usually 50%) of the bank’s loan, the SBA eliminates some of the risk undertaken by the bank. This risk reduction is intended to make it easier for the bank to decide to lend to a startup or small business.

You may recall that a few weeks ago I wrote that getting a bank loan was virtually impossible for a startup business. So, can the SBA’s guarantee help a startup get a bank loan? The answer is “theoretically, yes.” I hate to wax metaphysical in my weekly blog, but in this instance it’s sort of unavoidable. Allow me to explain.

There are essentially two types of loan programs for which the SBA will provide a loan guarantee:  the Section 7(a) Loan and the Section 504 Loan. Let’s first look at the 7(a) loan.

The 7(a) loan can be used by a business for virtually any purpose (working capital, equipment & machinery, land & buildings, etc.). The 7(a) loan involves a sharing of risk between the bank and the SBA. The SBA will guarantee 50% of the loan, while the remaining 50% carries no SBA guarantee. If the borrower (the small business) defaults on the loan, the SBA will make good on the SBA guaranteed portion of the loan by indemnifying the bank for 50% of the bank’s loss. Which means that the bank is still on the hook for the remaining 50% of the loan, which is the portion not guaranteed by the SBA. 

Hence, the “theoretical” availability of the SBA loan to small businesses. Since the bank is still on the hook for at least 50% of the loan in the event the borrower defaults, the bank will still require the borrower to meet all the same credit and lending criteria it would have had to meet were the loan NOT guaranteed by the SBA. Which brings us full circle back to my admonition that getting bank financing for a startup business is difficult. While in theory the SBA guarantee can make it more palatable for a bank to make a loan to a startup, in reality it’s still tough going, especially in “Great Recession” America.

And by the way: if the business defaults on the loan, it is legally liable to both the SBA and the bank for the defaulted loan. The SBA and the bank can (and you can bet your life they will) sue the company after a default. They can also sue the owners personally, if the owners provided additional guarantees. If being on the business end of a lawsuit by the Federal government and a major bank isn’t palatable to you, don’t default on an SBA loan.

Now, a brief word about the logistics of starting the SBA Loan process. Virtually any major bank, and most of the local and regional banks, participate in the SBA loan program. There’s an excellent chance that if you walked into your local bank branch and inquired about SBA loans, they’d direct you to a loan officer who handles them. There’s not much mystery to it. 

Next week, in Part II of this discussion on SBA funding, I’m going to discuss the 504 loan, which is the more complex of the SBA loans. I’ll also have some additional comments on SBA loans and some thoughts on a couple of other SBA programs that don’t involve loans.

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I’m of the opinion that the best way to finance a new business is via the “3 F’s”: Friends, Family, and, for lack of a better term, Fools. Of course, the risk and headache you undertake when you accept money from relatives and close friends is often more aggravating and gut-wrenching than simply taking money from a faceless third party, like a bank or a venture capital firm. Unfortunately, however, because bank and venture capital financing is usually not viable for startups (and I’ll discuss why next week), new businesses are often left with no other alternative than to hit up the 3 F’s.

So, do you like your friends, family members and relatives? Want to continue to have a warm, fuzzy relationship with them? (I’m perhaps assuming too much here, but stay with me.) If the answer is yes (or even if it’s no), and if they’re considering providing funds for you to get your business off the ground, or to keep it running through a rough patch, then take heed of the advice I’m going to discuss here: come to an agreement with them in writing. BEFORE they give you the money.

Perhaps the best way to explain why you need to arrive at an agreement in writing with your family members or friends before they stroke you a check is by discussing what the agreement should, at minimum, include. Here are just a few of the issues you’ll want to focus on while you’re putting together some sort of document to memorialize the arrangements: 

• Did you discuss whether the money was going to be classified as debt (a loan) or as equity (an investment) in the company?

Debt and equity are treated very differently for tax and legal purposes, and they have very different characteristics with respect to repayment and expected returns. Lenders won’t (or shouldn’t) expect much more than 6% - 12% annual interest, plus return or amortization of principal on some agreed-upon schedule. Equity investors, however, often have visions of buying a Greek island with the triple digit returns they expect to make via an investment in your company. Which would certainly help out the Greek economy, these days.

If the money is a loan, you’ll want to deliver a Note to your lender (yes, even if that lender is a relative or friend) which includes, at minimum, the principal amount, interest rate, maturity date, default provisions, repayment/amortization schedule and terms, possible collateral (in which case you’ll also need a security agreement and a UCC filing or a deed of trust), and dispute resolution terms. If the money is an investment (equity rather than debt), you’ll want to include the family member or relative as a shareholder or member of your corporation or LLC, and the rights and obligations of both the company and the equity investor must be spelled out in detail in the company’s constituent documents.  If you want to avoid problems both legal and personal, that is

• Did you provide anything in writing describing your business and the expected return on an investment in your business (e.g., a business plan or a more sophisticated document, such as a Private Placement Memorandum)?

Bear in mind that even the smallest startup is bound by the antifraud provisions of federal and State securities laws with respect to the raising of equity capital, as opposed to debt financing. There are filings to make (such as a federal Form D and state Blue Sky filings), documents to deliver (such as subscription agreements, accredited investor questionnaires, and shareholder or operating agreements), and regulations to follow. Each investor must receive exactly the same information as each other investor, so if you delivered a business plan or PPM to any investor, you’ll need to deliver the exact same document to ALL potential investors. Running afoul of any of these requirements could result in serious problems for your business if you ever find yourself in the middle of a dispute with your investors.

It would also be very useful to prepare a set of pro forma financial projections demonstrating the expected return on an equity investment. This is not only useful for managing expectations, but it’s also important, from a legal perspective, that you disclose any and all material facts about your company and its prospects to your potential investors.

• If the company goes belly-up (and lots of startups do), what are the rights of your lenders or investors? Remember, we’re talking about your friends and relatives here. Will they expect you to personally make good on their losses? Will they silently seethe and exclude you from all future family functions while badmouthing you within the business community? Are you sure you’ve discussed these issues with them and that your documents accurately reflect both your intentions and your investors’ or lenders’ expectations?
  
• Suppose the company needs additional cash. Do you have a right to subordinate the loans of your family members to subsequent lenders (such as other family members)? Can you subordinate their Notes to a bank? (It would be a very good idea to retain this flexibility in case it’s ever necessary to utilize it.) Or, in the case of equity, do you have the ability to dilute the shares or equity interests you issued to your family members or friends by issuing additional equity to third parties?
  

These are just a few of the many issues you’ll need to consider as you raise money at the startup phase or for ongoing operating expenses. Which is why it bears repeating: if you’re going to be raising money from third parties (even if, or especially if, they’re relatives or friends), be sure you put the terms in writing. A very detailed writing. When all parties understand up front what their rights and obligations are, it’s much less likely that you’ll end up estranged from your family members down the road. Remember that you’re going to be married to your relatives and friends for an extended period of time via your mutual business interests in the company. There are rarely any divorces, and courts are not sympathetic to family issues in corporate disputes.

So, before you take money from the 3 F’s, ask yourself: Are you ready to get married? And is the necessity of financing the business worth the potential family issues that could arise down the road? If the answers are yes and yes, be sure you put the arrangements in writing at the outset, and be sure all parties sign that agreement before any money changes hands.

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Limited Liability Company, “C” Corporation, “S” Corporation, General Partnership, Limited Partnership . . . or something else? When you start a business, your first order of business should be choosing a corporate form.

But what to choose? And where to domicile your company? And what are the potential consequences of your choices? Or rather, what are the potential consequences of bad choices?

Generally speaking, I form more LLC’s for my clients than anything else, and with good reason: for many (but not all) small to medium sized companies, particularly startups, it’s the most flexible corporate form in which to do business.

At the startup phase, you usually don’t know how far your business will go, how much capital it’s going to need to fuel its growth, whether it will need to reorganize to accommodate growth down the road, or how many investors or equity partners you’re going to end up with. LLCs are ideal under these circumstances. They keep your options open while shielding the members’ personal assets from liabilities of the company. Plus, LLCs are relatively easy to operate (more nimble than Corporations and less startup paperwork than Partnerships). They can also end up costing you less in taxes each year than Corporations, and are easier to convert into another corporate form down the road if it becomes advantageous to do so (and I can tell you if and when it would be advantageous to consider a format conversion as your company grows). 

On occasion, though, I’ll recommend that a startup client use an “S” Corporation or a “C” Corporation, particularly if paying salaries to the stockholders is important, or if bank or venture capital financing is essential to capitalizing the business from the getgo, or if offering stock options in order to attract top talent is important. Most banks and venture capital investors will want the permanence and stability of a Corporation before they’ll lend or invest money, and investors particularly like the ease with which a Corporation permits transferability of shares once the business is profitable. However, you’ll pay for these powerhouse advantages: corporate earnings are taxed twice. The Corporation itself is treated as a taxable person, so it will pay taxes on its overall income (the 1^st level of taxation). Then, after the remaining income is distributed to stockholders as dividends, the stockholders will pay income tax on those dividends (the 2^nd level of taxation).   Thus, choosing to operate as a “C” Corporation can be expensive, and a major issue when determining whether to choose this corporate form is whether the company will generate sufficient cash flow to make this double taxation worthwhile.

Whichever corporate form we choose, we also need to decide where to domicile your company (i.e., in which state). Decisions on domicile will depend on the type of business you’re in, the states in which you anticipate providing goods or services, and the complexity of your operations. For most Maryland-based companies, a Maryland domicile is satisfactory. However, your company may present circumstances that would warrant a hard look at another state. Ever wonder why virtually every Fortune 500 corporation and quite a few LLCs are domiciled in Delaware? (Yes, I know this burning question keeps you up at night). Let’s talk about it.

A few weeks ago, I wrote about what sorts of nightmares lawyers have (if you missed it, click here). Here’s the worst nightmare of all: you start a company but don’t use a lawyer and an accountant to help you choose and properly set up a corporate form. You make no filings with the proper governmental agencies (or you make inadequate filings) and you draft no documents evidencing your intended operating format. You adhere to no corporate formalities and keep no records of corporate decisions and actions. Instead, you simply open up your doors for business, sign a lease, enter into contracts with a few vendors and suppliers, put the letters “Inc.” or “LLC” or “Corp.” after your company’s name, and begin servicing customers or clients.

Guess what?   Under these circumstances, the law presumes you’re operating a General Partnership. And I’m here to tell you that you NEVER want to be operating a General Partnership without talking to me first. Why? Because, among other things, General Partnerships do NOT shield their partners from the liabilities of the company. Which means that if anyone sues your company for any reason and wins a judgment against it, your personal assets (your house, your car, your savings, etc.) could be used to satisfy that judgment. Was that something you planned on?

Of course, there’s a lot more to selecting a corporate form than space and time allow me to discuss here. If you’ve got questions about what type of entity your company should be, or if you want to review whether your current corporate form is best for your business going forward, feel free to give me a call. I’d be happy to discuss it with you. [Free of charge, as always.]  

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I have this recurring nightmare. I don’t have it every day, or even every month, and to be truthful it usually doesn’t even happen when I’m sleeping. It’s more of a daytime occurrence, but in substance and fear factor, it’s every bit a nightmare. And I have it often enough that it merits writing about here.

If you read my blog last week, you know that I’ve turned my attention to the legal issues surrounding the startup of a business. My nightmare relates to the scenario that occurs when a new client comes to me for the first time and tells me that he’s been running his business for a few months, things are going well, and he needs some sort of legal help with a new line of credit, or with a contract he’s about to sign with a new vendor or joint venturer, or something similar.

When I ask this hypothetical client what kind of company he’s formed, and whether I can see his formation documents, he gives me a blank stare. That’s when the nightmare begins. Both for me and, often enough, for my client as well.

When you form a new venture, it’s not enough to go to some online company or to OfficeMax, fill out a few forms, and file them with the designated state office. Sure, technically, you can do it that way. But there are too many issues (legal and accounting being only two) that need thoughtful consideration out of the gate, and a do-it-yourself kit isn’t going to adequately prepare you to think through those issues.

Instead, you need legal help.

Here are just a few of the issues that I’d ask a new client to consider and discuss with me before he opens his doors for business:

• What type of business are you going into?

• Did you sign any documents or commence any business operations before coming to me to discuss forming your company?

• Are you raising money from third parties (i.e., investors or lenders), or just from the “three F’s” (i.e., family, friends, and fools)?

• Do you have investors? Are they people or companies? Did they lend you the money, or invest it? Is there anything in writing evidencing their investments or loans to you?

• Are you minority or woman owned? How do you make that determination if you have several owners? Can you take advantage of contracting and funding programs related to your ownership status?

• Did you prepare a business plan? If you raised (or intend to raise) outside money, did you prepare an offering document? Did/does your investment offering comply with Securities and Exchange Commission regulations?

• In what state will you conduct the bulk of your business?

• Did you speak with your accountant about tax issues related to operations and the various corporate forms?

• Have you signed any documents in the name of the company?

• Do you have office space? Did you sign a lease, or do you intend to sign one?

• Did you open a bank account? Who has signatory authority on checks?

• What happens if one of the business partners decides to leave the business, or dies? Or one of your partners just decides to stop working on the business but continues to collect profit distributions? Can he do that?

It only took me about 45 seconds to think of the issues above, and I’m just getting started. My point is that when you start a business, there’s a lot to think about. Startup issues will affect the remainder of your business’s life, and your personal life (and mental health) as well. Your lawyer and your accountant need to be part of the process from the very beginning.

There’s an old saying: “Junk in, junk out” (the saying is actually a bit more, uh, “colorful” than this, but I think we all get the gist of it). In other words, it’s best to put high quality legal and accounting work into the startup phase of your business so as to avoid a lot of “junk” (in the form of liability, headache, tax, and other issues) later on down the road when you’re up and running.

I’m going to explore a number of the bulleted issues above in my next several blogs. In the meantime, feel free to call me if you’ve got any questions about any of these issues, or other legal issues affecting your business.

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One of my favorite lawyer jokes goes like this:

Q:  What’s the definition of a corporate lawyer?

A:  Someone who prevents exciting things from happening.

Unfortunately, and all too often, the joke is true.  Many corporate lawyers fail to see the forest for the trees.  They get so wrapped up in focusing on every possible thing that could go wrong in your business or transaction that they “overdraft” your corporate documents and contracts and scare off the other party to your transaction.  Moreover, they often adopt an adversarial stance vis a vis your business partners, customers, and contracting counterparties, which ends up souring what is supposed to be a positive business experience for the companies involved.  All this extra time and extra analysis ends up costing you time, unnecessary anxiety, and more money in legal fees.

 In short, corporate lawyers too often act like overly wordy litigators.  And that’s not what we’re supposed to be.  We’re supposed to help you build, not to tear down.  We’re supposed to help you perform cost-benefit analyses with respect to your contract language, not throw in everything but the kitchen sink.  And building and benefiting should always be a cooperative and forward-looking endeavor, not an adversarial and retrospective one.  It’s not about your lawyer’s ego.  It’s about your business.

However, there’s at least one time during the life of your company when letting your lawyer get analytical and obsessive is actually more beneficial than detrimental, and when there’s a quantifiable benefit to the money you’re paying him for his services.  And that time is when you decide to start a new business.

You’ve got to get your ducks in a row, make sure the language in your formation documents is tight, and keep your gaze steely.  You don’t want your lawyer to stop this exciting thing from happening, but you DO want him to slow it down enough for you to make some serious decisions that will affect the financial and operational future of your new enterprise.  Decisions such as choice of corporate form, tax considerations, investor rights and obligations, corporate governance, banking relationships, and a host of other issues.  Some can be put off until a few months after you’re up and running.  Most cannot.  This is one time when preventing an exciting thing from happening too quickly is actually desirable.

 Are you going to part with some money in legal fees, as the title of this blog states rather forcefully?  Probably.  You might be able to spend a bit less, but you might end up spending more.  It depends on the type of business you’re starting, your financing, your facilities, your investors, your choice of corporate entity, certain tax considerations, and your appetite for risk, among other things.  It won’t cost you an arm and a leg, but it’s going to cost you something.  And it’s going to be some of the best money your business ever spends. 

 I’m going to explain why over the course of the next several weeks of blogging.  Stay tuned . . . .

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A week or so ago, I came across a story in the legal press that reminded me of something I wish more of my clients would focus on: Non-Compete Agreements. The story was about a lawsuit filed against Chris Botticella, a former Senior VP of the company that owns Thomas’ English Muffins. It seems that Mr. Botticella had accepted a new position as a senior executive at Hostess, one of Thomas’ competitors in the baked goods space. Thomas’ sued to prevent him from taking the job, and won.

Why? Well, it seems that Botticella is one of only 7 people on the planet – yes, the planet – who knows the secret to how Thomas’ English Muffins are made. And Thomas’ certainly didn’t want him taking that knowledge to one of its biggest competitors. As a result of the court’s decision, my guess is that Botticella is going to have a tough time finding work as counter help at the corner bakery, much less as a senior executive at a large, national baked goods company.

How does a lawsuit over English Muffins relate to YOUR business? Simple:  your people are your greatest asset, and, when they leave, potentially your greatest liability. They literally have the power to make or break your business. Every business guru will tell you this, but then you’re left to your own devices to figure out what it all means, and how to protect your business’ reliance on this sometimes unpredictable asset.

Perhaps the most important way you can protect your business’ customer accounts, secrets, processes, plans, and the like from traveling to a competitor after the defection of a key employee is to require key employees to sign a well-crafted Non-Compete or Non-Solicitation Agreement.

A Non-Compete or Non-Solicitation Agreement will prevent your best sales executive (you know, the one whose accounts resulted in 68% of your gross income last year) from leaving your company for a competitor, and taking her business with her to boot. Additionally, if you’ve got any proprietary systems or technologies, it’s imperative that you protect them. Your competitors will likely pay top dollar to lure away your key sales executive, information systems guy, CEO, or key manufacturing process employee. The loss of such an employee (and your competitor’s gain of that employee) will be felt where it hurts the most:  your bottom line.  Equally as important, they are enforceable.  As recently as 5 weeks ago, Judge Richard D. Bennett of the United States District Court for the District of Maryland reaffirmed in TEKSystems, Inc. v. Bolton not only that a Non-Compete is enforceable if reasonable in scope, but also that it will be automatically extended for the period the employee is found to have been in breach. 

Do you have employees whose loss would or could have a devastating effect on your revenues or your business? If you do, or even if you’re not sure, feel free to give me a call or shoot me an email and we’ll discuss it. I’ll be happy to answer your questions and point you in the right direction. Free of charge. And with no obligation.  You can also read more about Non-Competition Agreements in our recently released Business Owner's Pocket Guide. 

In the next entry, I’ll be writing about some of the important provisions a Non-Compete or Non-Solicitation Agreement should contain, and the real effects of these agreements. Stay tuned.

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Recently I was asked some pointed questions about my inspiration and motivation for writing The Business Owner’s Pocket Guide and I thought I’d share those thoughts here:

What was the motivation behind writing The Business Owner’s Pocket Guide?

The purpose of The Business Owner’s Pocket Guide was to help owners of small to medium sized businesses build stronger companies. As a small business owner myself, I know that these companies are the lifeblood of our economy…and I wanted to help make them better. Through The Business Owner’s Pocket Guide, I wanted to provide business owners with answers before it was too late by focusing on areas of critical importance throughout the life of their companies. I wrote the Guide to address bottom line concerns – even legal issues – in an easily relatable way in the hope that it may not only help business owners avoid unnecessary risks, but also travel well down their chosen path.

How was the content selected for The Business Owner’s Pocket Guide and what makes this guide different?

Having counseled businesses of nearly every size and description for over 20 years, I've gained an understanding of what’s important to business owners. Many of the major concerns cut across industry lines:

• What do I need in my contracts to ensure that I’m going to get paid?
• Should I ask my salespeople to sign a non-compete agreement?
• What should I do if I want to bring on a new investor?
• What happens if the owners of the company can’t agree on critical issues, and how can we prevent the problem before it arises?
• How do I position my company for sale when I’m ready to retire?

I drafted the Guide based on the questions and concerns I saw over and over again. Then I sent the rough copy out to a group of business owners to get their feedback. I think that’s what makes it different – it’s not a textbook and it’s not written to sound “like a lawyer.” It addresses real world issues in an easily accessible way…and it’s free!

Who can and will use The Business Owner’s Pocket Guide? 

In the few days since it has been out, it’s been downloaded by business owners in industries ranging from landscaping to catering, professional service firms, and even some folks in local government. Basically, I see the Guide as a valuable tool for business owners and managers, regardless of industry, and whether the business has 5 people or 500. 

I wrote it to address issues across the board…and it seems from the enthusiastic early reception as though it is doing just that.

Visit www.wagonheim.com to download The Business Owner’s Pocket Guide and come back here to leave your thoughts and comments.

The Business Owner’s Pocket Guide is the third in a series including The Contractor’s Pocket Guide and The Banker’s Pocket Guide, which were released over the past several years by Wagonheim & Associates.

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In Have a Little Faith, Mitch Albom quotes a sermon so important to business owners that I have reprinted the entire excerpt below:

A man seeks employment on a farm.  He hands his letter of recommendation to his new employer.  It reads simply, 'He sleeps in a storm.'

Several weeks pass and suddenly, in the middle of the night, a powerful storm rips through the valley. 

Awakened by the swirlining rain and howling wind, the owner leaps out of bed.  He calls for his new hired hand, but the man is sleeping soundly. 

So he dashes off to the barn.  He sees, to his amazement, that the animals are secure with plenty of feed.

He runs out to the field.  He sees the bales of wheat have been bound and are wrapped in tarpaulins.

He races to the silo.  The doors are latched, and the grain is dry. 

And then he understands.  'He sleeps in a storm.'

Running your own business is an exercise in piloting to safe harbors through strong and unexpected storms.  And as business owners, the storms rage all around us. The bankruptcy of a major customer is a storm.  So too, the loss of a major salesperson, along with the customers who elected to follow her.  A job gone south, the loss of key support personnel, and one's own unexpected absence from work -- all are gales of sudden and untold destructive force. 

To many, the state of our economy this past 18 months has been a storm of epic proportions. 

The question then becomes:  "Can you sleep in a storm?"

Have you:

• Secured lines of credit with terms and limit appropriate to your business?
• Protected your streams of revenue by locking down key salespeople with restrictive covenants? 
• Limited your risk by negotiating manageable damages and indemnification provisions -- particularly in those contracts governing your largest projects?
• Trained your replacement?
• Documented key procedures so that a new person could step into a job knowing key passwords, resources, and procedures?

Too often, these types of preparations are like flowers at a funeral -- they arrive all at once, and too late.  Prudent business owners prepare.  They schedule regular meetings with their management team and key advisors, whether quarterly, every 6 months, or even annually, to consider and prepare for what storms may come. 

And when those storms arrive, as they most certainly will, the prudent business owner sleeps soundly.

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It’s not hard to find a relative or friend willing to offer a personal opinion on a professional problem. There is really no cheaper advice than that coming from your neighbor. But with the discounted price, one risks listening to uninformed advice from a possibly sophomoric source.

Every month, I consult with business owners who have received wrong, incomplete and sometimes catastrophic advice from friends or relatives who happen to be professionals, albeit with the wrong kind of experience. Often, such advice is simply unfit for the specific business or situation at hand. Advice that is irrelevant to you and your business, although well intended, is more harmful to you than harmless. 

For example, let’s say that you had a good fiscal year and need some additional accounting assistance. Your Uncle Joe has volunteered his services since he used to own his own small business and had to file tax forms for years. What your retired Uncle doesn’t know is that tax laws have changed drastically since he was last in business 20 years ago and filing these principle forms wrongly would result in damaging consequences. 

One of the great truths I have learned in my 20 years of experience counseling businesses is that paying for quality advice is never a mistake. Professional consultants are experts in their fields and have built their businesses and reputations on giving solid, experienced guidance in their areas of expertise. The time and expense it can potentially cost to correct any problems caused by misguided advice is an unnecessary one. Consulting with the right person from the beginning will save you time and money.

When you are sick, don’t you go to a doctor? When you have a toothache, don’t you go to a dentist? Reputable specialists are so for a reason. If you have a legal matter, consult a respectable attorney as you would consult a brain surgeon, if needed be. Your business is important and the counsel you seek to nurture it should reflect that worth. Consult with the right people: professionals with experience directly relating to your business.

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I may be a bit younger in years, but I can still recall when a “handshake and a promise” deal actually meant something. Perhaps some of my confidence in another’s word stems from my small-town Mississippi roots. Nonetheless, in today’s economy, your business will need a lot more than a handshake if you want to get paid. Luckily, only a few hours spent with a reputable attorney can present you with a sound contract based on solid terms and conditions, which will save you time, stress and money, should a client try and stiff you on down the line.

Without a mutually agreed upon legal contract in place, any terms agreed upon with a handshake are moot. Entering into a handshake agreement could put a business at risk for losing money not only in the original agreement but also in court fees for legal action against a deceitful client (unjust enrichment, quantum meruit, and the like).

Since we’re not in 1950’s southern Mississippi, and few millennials even know the meaning of such hospitality in business transactions, a good rule of thumb for any business is to ditch the handshake and ask for a signature acknowledging an ironclad contract, complete with terms and conditions. Those terms and conditions should include the most basic items such as:

• Compensation and payment terms
• Changes/ additional services
• Emergency services
• Reimbursable expenses
• Provisions of default
• Dispute resolution
• Governing law

Legal considerations, as stated above, are extremely important to help ensure appropriate compensation for hard work. Some businesses believe that something in writing, though not in legal contract form, is just as dependable. The reality of the situation is a lack of clearly stated legal terms and conditions could leave a business with a higher level of risk for a transaction.

While developing long-standing relationships with clients is important, don’t forget to protect yourself and your business in the process. Shake your client’s hand and exchange the promise to fulfill the contract, but also take a couple of hours with your attorney to put a “gentleman’s agreement” into writing. For the most part, your company’s terms and conditions can and should be standard with every contract, so this will not be an ongoing legal expense. Rather, it will ensure you peace of mind in knowing that should an agreement not go as planned, you have a contract to protect your business. 

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We all know the resolution drill. The new year marks the welcome of new beginnings and a commitment to resolutions focused toward adopting healthier lifestyles. Come the new year, gyms and fitness clubs across the country will be filled with people sweating off the holiday pounds.  Yet, by spring many of those same people are on the way to the office without a workout in sight. With one bite of a calorie-filled blueberry muffin, the resolution once made with dedication is no longer a priority.

Marketing your business can easily be compared to this all-too-common scenario. As soon as a new product is rolled out or new service offered, a business quickly plans a strategy to get the word out to consumers to increase sales and visibility to target audiences. Spending merely a few weeks working to get your business or product noticed, building your brand, and expanding your network will most likely not offer you the same results as making a constant, consistent effort.  

Think about the results you get from exercising. A few weeks of dedication at the gym may result in a pair of pants one size smaller, but months later they aren’t going to fit if you haven’t maintained a consistent workout regimen.   The same can be said for your business. You may feel good when business is busy and profits are up, but you must put yourself and your business at the forefront and keep marketing to consumers to stay visible.  It takes commitment.  It takes a plan.
 

An easy way to commit to marketing your business year-round is by creating a marketing plan. If this is your businesses’ first attempt, consider consulting a professional or start small by creating a short-term marketing plan with smaller, attainable goals that can be reached in shorter time.  Near the end of the short-term marketing plan, evaluate your goals and consider expanding to a long-term marketing plan with annual goals.
 

As daunting and time-consuming as a marketing plan may seem, the following are a few simple activities that can be done every week to help increase your brand awareness in the community: 

• Attend industry networking events
• Volunteer to lecture or speak at appropriate professional associations or community organization meetings
• Write editorial pieces based on recent news affecting your industry for your local newspaper
• Sponsor local events or charities

While a plethora of practices can be considered for use, the invariable ingredient to a successful marketing formula is consistency and rhythm.  Allotting the time for habitual marketing will help to steadily build a company’s brand visibility. Additionally, the regularity in practices will help to avoid making resolutions to get a business back in shape. Let’s face it…resolutions are tricky to keep, especially if they involve going to a gym, but if it’s better marketing you want, take the time and make the commitment to a solid marketing plan and adopt a proactive mentality. It could be as simple as turning on your computer once a week and researching opportunities online, blueberry muffin in hand.

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Last week, I found myself reading up on Chanukah -- the Jewish Festival of Lights -- as my family and I prepared for the holiday.  As I looked for a new way to talk about the meaning of the holiday with my children, I began to realize the business lessons to be drawn from the symbolism used in the celebration.

Each night, a new candle is lit on the menorah.  On the first night, only the shamas (literally "servant") or highest candle is lit, along with one other, symbolizing the first night.  On the second night, the shamas is used to light two candles, and so on.  

It is written that the celebration is really about overcoming darkness, whether it be physical or spiritual.  A parallel can be drawn to business condition.  Particularly in these economic times, every business -- successful or not -- must fight to overcome inertia, old/bad practices, routine, or complacency.  Every business leader has to work each day to embrace and master new challenges, sometimes radically altering the way his or her company had done business for years before.

Overcoming the weight...and yes darkness...that constitutes resistance to change is a very real and daunting challenge.   The first light on the menorah, therefore, symbolizes how one candle, representing even the smallest positive change, is enough to overcome a world of night and darkness.

The lighting of the second candle shows how the light represented by that one small prior act now spreads.  This is a reminder that a single act -- a single positive change -- while not sufficient to accomplish a significant goal, can lay the foundation for more change.  The second light shows that we must redouble our efforts, even after the success of the last initiative.  

The lesson of the third light is consistency.  As the saying goes: "We did it once because we were inspired and a second time because we were encouraged by the first. This third time, we push back at the darkness because we are committed."  It is this third effort that expresses persistence and commitment to dispel darkness with light.

Upon reaching the fourth light on the menorah, we would find that we are halfway to fulfillment of our purpose.  This is point at which many worthwhile efforts find themselves sidetracked by distractions.  It is here that a leader must help the organization maintain focus by constantly asking the question:  "Does this help me achieve my goal?"

On the fifth night, we have achieved a majority.  The balance has been shifted from the old (darkness) to the new (light).  This is the most dangerous point in any process -- when the goal is in sight and people can become complascent, knowing that the path is now downhill.  Should the team spend too much time reveling in its accomplishments, it will ultimately fall short of its goal.  So it is here that the leader must demonstrate the importance of bringing light (change) to even the most remote corners of the company.  It is not enough to achieve a majority -- the goal must be completely fulfilled.

It is the sixth and seventh nights that are the richest in symbolism.  The Judeo-Christian heritage teaches that the world was created in six days.  By reaching the symbolic sixth night of any initiative, the leader has maintained a path long enough to bring about monumental change.  This is the time to check benchmarks.

Traditionally, the seventh day is a time of reflection.  Consequently, even though we may be in view of the goal, we have not quite reached it.  Near (but not at) the endpoint is a time to take stock.   Enough has been accomplished for us to review progress and make course adjustments to continue on. 

Finally, we reach the eighth night -- the time at which we have accomplished our goal of bringing about significant change.  Over the years, I have learned that nearly every culture has a holiday or festival that revolves around lights, whether electric (Christmas), candles (Chanukah, Kwanzaa and the season of Advent) or even lanterns in certain Asian traditions.  These festivals almost always seem to take place at the darkest time of year and serve to remind us of hope and of our own ability to spread light where there is none.

In the tradition of Chanukah, the use of the menorah through the eight nights of the festival, the teaching is that miracles can happen even though the road is long and arduous. 

In the management of any business, it strikes me that the teaching is the same. 

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Not long ago, Duke University Men's Basketball Head Coach Mike Krzyzewski and the Duke athletic department developed a list of nine principles that defined Duke athletics.  Coach K described these principles as "the things that are essential to who we are." 

The nine principles were revealed to a gathered crowd of 850 student-atheletes, coaches and administrators in Cameron Indoor Stadium by former Duke student-athletes who represent great success stories in their respective fields.  The words selected by Duke to define Duke were: (1) education; (2) respect; (3) integrity; (4) diversity; (5) sportsmanship; (6) commitment; (7) loyalty; (8) accountability; and (9) excellence.

As I read Coach K's description of Duke's guiding principles, I could not help but focus upon the applicability of the same methodology and mindset to my own small business and those I am fortunate enough to counsel.  I wondered whether one could gather a roomful of often cynical employees around a conference table, discuss values, and have it actually mean something tangible. 

In other words, I wondered "what were the keys to a successful company vision?"

Tony Gattari, an Australian corporate consultant wrote in Good Ezines that successful corporate visions share three attributes:

1. It's infectious.  Just like a disease, a vision is at its most contagious when it is alive and active in the host.
    
2. It  comes from within.  Rather than having management swoop in and tack a poster in the lunchroom or spend $1,000 at Successories, the vision is tied to the employees and created from the real passions and desires of the company's leadership.
    
3. It goes beyond the company's 4 walls.  A company with a successful corporate vision extends that vision to vendors, colleagues, customers, and the business community at large -- not in an evangelical way, but rather simply by the way the company interacts with the outside world. 

In the privacy of their own homes and hearts, people often find themselves doing some soul-searching in December in contemplation of resolutions for the coming year.  Perhaps, and maybe even especially, in these economic times, December may be a good time for some corporate soul searching as well. 

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Yesterday, we received the catalog from Despair.com. One of their demotivators featured the legend: “Hard work often pays off after time, but laziness always pays off now.” I thought about this as I was working with a client on revamping her company’s employee handbook. We discussed everything from dress code to paid-time-off, to the point where she was so tired that she asked, “Do you think that all of these details really matter? Can’t we be a little more vague and worry about addressing some of these issues when they come up?” 

But the point is, you can't -- not if you want to avoid unwanted results from your employees or claims from DLLR.  As time-consuming as the redrafting effort was, we needed to get it right.  The devil is in the details.

It’s easy for this idea of the devil being in the details to be lost on some. In this economy, we are tempted to rush, rush, rush to get the end product completed. We’re stretched thin, and our only goal tends to be the almighty dollar. However, we have got to stop and be reminded that, in any endeavor, the devil – the difficult part – is getting those small details just right, so that the end result is excellence. 

When we neglect the details, people notice. For instance, in that employee handbook, if we failed to note that jeans were impermissible for office staff, you can bet that employees would notice and would expect that jeans were acceptable attire. What’s worse, the client who walks through the door to your business and sees the office staff wearing the jeans may be turned off by the lack of professionalism. And if you later tried to enforce a “no jeans” policy, or ultimately let an employee go as a result of the lack of professionalism, not having this detail documented in the handbook may allow that employee a legitimate claim for wrongful discharge and/or continued benefits.

Of course, the flip side is also true. Sometimes the more details you tend to, the less that people really notice. But this is a good thing. Allow me to explain:

You come home from work today, check your mail, and find an invitation to a party in a few weeks. The date comes along, and you go to said party, where you eat, drink, mix and mingle for a few hours, and then head home. Do you really think about all of the details that went into the party?

If I were your hostess, here’s what would have gone into that party (at a bare minimum!): 

• 2 hour to select the perfect theme (season, occasion, etc.), date (no Ravens home game, or other obvious conflict), time and location (backyard, fancy restaurant, art gallery, you name it!)
• 30 minutes forming a guest list (taking care to stay within proper friend and family circles and to be as inclusive as possible),
• 2-3 hours to select the perfect invitation (considering everything from the theme to the font, because the invitation sets the tone of the event),
• 30 minutes choosing stamps and timely mailing the invitations (there is such a great selection of stamps out there, you may as well find one that works well with your event!),
• 2 hours selecting decorations (even more if some decorations are homemade or require any kind of legwork)
• 3 hours selecting a menu
• 2 hours shopping for decorations and food (if you aren’t using a caterer)
• 4 hours preparing food (again, if you aren’t using a caterer)
• 5 hours cleaning and/or setting up the space (placecards or nametags… labels to identify food selections… fresh flowers on tables and in the powder room…)
• 2 hours assembling my own wardrobe for the event

And then, the guests arrive.

Paying attention to all of these details is exactly why the party will go off flawlessly. And exactly why not one guest will think twice about everything that went into making the party fabulous. But guess what? It’s exactly why every guest will remember the evening.

Both personally and professionally – whatever your business, give great care to those details! 

• Tuck in your shirt. Look the part.   
• Proofread. Yes, even emails.
• Avoid saying “um.”
• Remember people’s names.
• Make eye contact. Smile!
• Create an outline before your next presentation. Practice.
• Ditch the AOL, Yahoo, or Gmail account and get your business its own domain name! For $75, two guys in a pickup are transformed into a solid company you can trust.

If you take the time to battle those devilish details, they are sure to produce returns tenfold.

I wore maroon, patent leather, pointed-toe, crocodile-printed pumps to work today. They pick up the hint of burgundy in my brown checked suit and truly complete the outfit. They even make me feel more confident as I attend my morning, lunch, and dinner meetings today. 

As I said…the devil is in the details.

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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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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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Two months ago, our copier vendor called to tell us that our lease was almost up.  The purpose of the call was obvious -- they wanted to sell us a new copier.  The result of the call was a business lesson that we will use to guide us over the life of our firm. 

The end of our copier lease left us with three options:

1. Pay off the lease
2. Upgrade to a new copier
3. Explore our options. 

Paying off the lease would require one final payment equivalent to about 8 of our normal, monthly payments.  By month nine, absent an unexpected mechanical meltdown, we would be home free.

Our vendor (we'll call them Oldco) clearly wanted us to choose the second option.  They were offering a lease on a newer, faster copier for a slightly lower monthly cost.  The problem was, we had no problem with the old copier.  It was fast enough, scanned well, and a slight upgrade in speed, with perhaps a better stapler, did nothing for my bottom line. 

Our choice came down to either keeping the current copier or exploring our options.  Upgrading machines with no discernable benefit made no sense. 

Our search for other options took us to Advance Business Systems.  We invited both Advance and Oldco to make a presentation.  (Not that we're offering a million dollar copier contract, but whatever the money is, it's important to us.)  Our Oldco salesman walked into the presentation with the company's president and showed us some very nice brochures on the copier upgrade.  We could slightly reduce our monthly payments while increasing the speed of our copying and scanning.  (And maybe add a hole punch...I mean who's to say?)

Advance, on the other hand, scheduled a meeting at their showroom after asking us detailed questions about how we run our practice.  At their office, we were ushered into a conference room where we were given a demonstration of how their copier could integrate with our practice management software while helping us achieve the kind of document control system we had envisioned. 

The companies provided a stark contrast.  Oldco sold copiers.  Advance sold a document management solution that happened to work through copiers.  What became apparent was that somewhere in its development, Advance had decided that anyone could sell copiers and that anyone can claim to have reliable service.  To avoid becoming a commodity, Advance had to identify how it fit into its customers' development.   It had to figure out how it was more important than the other guy and then make that distinction apparent to its customers.  

Therein lies the lesson. 

When I now look at companies, I find myself asking:  "Are they Oldco or are they Advance?"  I've asked that of my own.  In so asking, I think I've found my answer and charted the road we, as a law firm, have to travel to ensure that we never become a commodity.  

My law firm's answer to that challenge as well as my request for feedback concerning other companies and the roads they've chosen, form the basis for future posts.

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I hate meetings.  To me, they usually seem like 5 minutes of substance packed into 2 hours.  In fact, the best part of any given meeting is time just before everyone gets there -- when you get a chance to chat with those who arrived early.  But then the "Agenda" starts, and anything resembling a productive use of time comes to a screeching halt.

And yet...some companies thrive on them -- in fact, thrive because of them.  The theory being that, done right, meetings can become short bursts of adrenaline, becoming a company's rhythm and tone. 

Verne Harnish, author of Mastering the Rockefeller Habits, writes:

One of the most successful practices any would-be gazelle  [Harnish's term for a nimble, fast-growing company] can implement is that of a daily huddle -- nor more than 15  minutes per group, in a room or on a daily conference  call, just to celebrate progress toward goals or identify barriers blocking that progress.

What too often goes without saying, is that it takes months of soul searching and sometimes years of experiments and failures for a company to discover its goals, barriers, and measurable "metrics" upon which to base its 15 minute boost.   

The latest statistics out of the Small Business Administration bear out that the vast majority of businesses fail within the first 7 years.  To excel, however, a business must focus beyond a question of mere survival. 

So if we accept, for the sake of discussion, that a daily 15 minute huddle, done right, would keep your company moving forward, the question then becomes: "what should be distilled into that 15 minutes?"  What is so important to your business that it should take up the only 15 available all-company minutes per day?  

My hunch is that if you find that, you would find the kind of adreneline boost that would turn your business into one of Verne Harnish's gazelles.

Question:  What is the central idea or them around which you would plan your 15 minute daily huddle for your company?

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