Selling Your Online Business, Part 3 – Who else is involved?

You’ve engaged a broker to help sell your business. Who else should be on your team, and who else is involved in the sale process?

Obviously, it is in your interest to find good legal representation that specializes in providing legal counsel to businesses, particularly in the area of mergers and acquisitions of online businesses. That is where we come it.

It is also in your interest to get your CPA involved for the business appraisal process. Although it might seem time consuming and costly to have a business appraisal done, we highly recommend that you have an appraisal conducted by a professional experienced in business appraisal techniques; a professional with experience in your particular industry is ideal.

An accurate business appraisal has several benefits. If your asking price is too high, you might scare away potential buyers. If your asking price is too low, you risk leaving money on the table. Also, having an appraisal conducted adds credibility to your ask. It shows where your figures are coming from.

It is important that your financials are in good shape in order to have an accurate appraisal.

Who else is involved in the process? The potential buyers and their respective counsel. A potential buyer could be an individual or perhaps a private equity group, each having its own benefits and detriments. A potential buyer may also have financial experts involved in the due diligence process. A potential buyer may have a lender involved that could impact the transaction and the relationship between you, the Seller, and the buyer. For example, if there is a seller finance component with a security interest, the Buyer’s lender may require you to subordinate your lien, and may place other restrictions on repayment of the seller loan.

We can help. The attorneys at Walk Law Firm, PA are experienced in assisting clients with navigating these various relationships. We understand the sale process and can guide clients throughout the transaction. Please feel free to call one of our attorneys at (813) 999-0199, or contact us via our website at www.WalkLawFirm.com.

© 2017 Matt Welker – This article is for general information only. Nothing contained in this article should be construed as legal advice or the formation of a lawyer/client relationship.


Selling Your Online Business, Part 2 – Who is this broker?

So, you have decided to sell this thing you’ve built from a hobby in your garage or a side-business to a multi-million-dollar online business. What happens now?

Many online business sellers engage a business broker. You could engage a general business broker or a broker that specializes in the brokerage of online businesses. We’ve found that the brokers that specialize in online businesses are more familiar with the nuances of online businesses and the different challenges that online business sellers face when selling their businesses. Obviously, there is a cost to engaging the services of a business broker. And any good business broker will require you to execute a contract that at the very least addresses their commission. It might be called a broker agreement or an engagement agreement, but it is generally a one-sided agreement in favor of the broker. We highly recommend you engage legal counsel to have this agreement reviewed before signing.

Don’t be fooled. The broker is a salesman and hopefully, for your sake, a good one, but keep in mind that he is selling you too. He is in this for the commission. Generally, the broker’s commission is based on a percentage of the overall purchase and sale price, or some percentage scale formulae (e.g., Lehman Formula, Double Lehman, Reverse Lehman, or some alternative or progressive fee schedule, which each warrant a separate blog article unto themselves). It may or may not have floor – i.e., it includes a proviso that the commission will not be less than a certain amount. A lot of online business sales include seller promissory notes, consulting agreements, earn-outs, and other methods putting value on the purchase and sale of the business. Many brokers will insist that their commissions be based on the entire purchase price, including any amount due under a seller note, consulting fee, earn out payment, etc. Keep in mind, the brokers agreement is a negotiable document, and you can structure it in such a way that it makes sense for you and your business.

We can help. The attorneys at Walk Law Firm, PA are experienced in assisting clients with the review and negotiation of brokers agreement when clients are seller their businesses. We understand what brokers expectations are regarding these agreements and we will balance these expectations with our client’s best interest in the sale process. Please feel free to call one of our attorneys at (813) 999-0199, or contact us via our website at www.WalkLawFirm.com.

© 2017 Matt Welker – This article is for general information purposes only. Nothing contained in this article should be construed as legal advice or the formation of an attorney-client relationship.


Selling Your Online Business, Part 1 – Selling Your Baby

You’ve birthed this awesome online business. For whatever reason (hopefully because you’re going to make a boatload of cash), you’ve deemed it to be in the best interest of the company (and in your best interest) to sell. It is important to have a general understanding of the sales process in order to: (i) simplify the overall selling process; (ii) make yourself, your company, and your advisors more efficient during the process; and (iii) to ensure a successful business closing.

This blog series on the legal considerations for selling your online business will provide an overview of the business sales process. Further, the series will touch on various phases (in relatively sequential order) of the selling process, including: engaging a broker; engaging a financial advisor or valuation expert (or both); negotiating the letter of intent; the due diligence process; negotiating a definitive sales agreement (and ancillary transaction documents); the closing process; and post-closing matters, including restrictive covenant arrangements.

The attorneys at Walk Law Firm, PA are experienced in assisting clients sell their online businesses. Please feel free to call one of our attorneys at (813) 999-0199, or contact us via our website at www.WalkLawFirm.com.

© 2017 Matt Welker – This article is for general information purposes only. Nothing contained in this article should be construed as legal advice or the formation of an attorney-client relationship.


Deadlock is Often the Ultimate Demise of Good Business

Consider this common scenario.

You’ve entered into business with your spouse, friend, or relative. At the inception of your business, you agreed that both of you would serve as the directors or managers of the Company, and you would be equal partners, each allocated fifty percent (50%) of the shares or ownership interest in the Company. Your relationship with your partner is healthy; you trust them; you trust their judgment; you’re excited about your idea, about your business. And life is great until…….

….. You have your first real dispute. The one that does not solve itself nor does it resolve with a drink at the bar.

As the business develops, you’re faced with decisions about the future direction of the business, about major business activities. Eventually, there may be a decision on which you simply cannot agree. And because you have equal control of the Company, your conflicting views ultimately stalemate or deadlock the business until you come to some agreement or decision.

Unfortunately, more often than not, people in this common scenario do not properly plan for or consider the potential for corporate deadlock, and it can lead, not only to the deterioration of a personal relationship, but also a business relationship and a business.

 HOW TO RESOLVE CORPORATE DEADLOCK

Planning for the Future.

The best way to avoid corporate deadlock is to plan ahead.  This should be a major consideration when you enter into a business relationship with anyone.  Sit down with your partner and discuss setting up a procedure for what happens if a deadlock arises.  It may not be an easy conversation to have – it may be difficult to imagine disagreeing with your partner. But sit down with your partner early and really consider the following things: (i) the nature of the business; (ii) your business plan; (iii) you and your partner’s individual ideas of the direction of the business; (iv) what problems that could arise in the business, financial or otherwise; (v) each person’s individual skill set. All these things can play a role in your deadlock discussion and the most appropriate procedure for resolving a potential deadlock. These frank conversations are even more important when one party is providing the money and the other is providing sweat equity.

Shareholders’ Agreements and Operating Agreements.

We find a lot of times that people who enter into business with a family member or close friend don’t even have a Shareholders’ Agreement or an Operating Agreement. This might be for a variety of reasons – they didn’t plan for initial legal costs and fees; they feel that they will be able to run the business through oral agreements and understandings; or, they find it uncomfortable to discuss the issues found in corporate governance documents, like transfer upon death, disability, divorce, debt, dissolution, or simply the desire of one partner to monetize and be paid out etc.

We recommend to all our clients, regardless of relationship between partners, shareholders, or members (even husband and wife), that they have some form of Shareholders’ Agreement or Operating Agreement in place establishing the governance of the entity, the rights, duties and obligations of the parties, including, if necessary, provisions addressing potential deadlock scenarios in management or between members or shareholders.

Alternative Provisions.

There are a number of different ways that an entity can resolve deadlock, and, in fact, it may be beneficial to a Company to implement multiple or hybrid deadlock methods. These methods can easily be incorporated into a Company’s governance documentation. Here are a few ways to resolve deadlock:

  1. Create a third party advisory board – either with other Members or Shareholders of the Company, or even an outside third party knowledgeable in the business and/or decision subject to deadlock;
  1. Consider implementing automatic mediation or arbitration – this may not be feasible for all companies or for all deadlocked scenarios – it can be costly and time consuming – but it can be quite effective in preventing dissolution when there is a deadlock for a major decision;
  1. Consider splitting or designating certain decisions to each partner – for examples, this partner has the ultimate decision making authority on banking and property, and the other partner has the ultimate decision making on sales and marketing – this method requires the partners to determine strengths and weaknesses and delineate accordingly – this method is useful when doing some form of hybrid deadlock provision;
  1. Consider a buy-out provision – if the partners cannot agree, one partner can buy the other partner’s shares or membership interest – there are a number of ways to structure a buy-out provision;
  1. If nothing else works, provide for a definitive right to withdraw or force dissolution or liquidation without court intervention. In this instance, you may be left relying on the default solutions contained in the Florida Statutes [Sections 605 and 607] or the decision of a judge who is unfamiliar with your business.

Need help in putting in place a shareholders’ agreement or an operating agreement?

Need help revising your current agreement with some alternative deadlock provisions?

The Walk Law Firm is available to review your current Shareholders’ Agreement or Operating Agreement in order to help you determine if, in fact, it’s appropriate for you and your partner(s).  Document review and drafting can be handled on a Flat Fee or Fixed Fee basis. To learn more, please contact us at the Walk Law Firm.

 

Is this Non-Compete Enforceable?

You’ve invested a lot in your business.  It’s becoming successful. You even have trade secrets and know-how that give you a leg-up on your competition. And you have personnel that you have invested time and money acquiring, training and maintaining.  Your confidential information and your personnel are major assets of your business and big reason for your success. As such, you require all employees and contractors to sign a non-compete or restrictive covenant agreement. But, is it enforceable, or are you just wasting time and energy with these agreements?

The enforceability of non-compete agreements (or restrictive covenant agreements) is determined by state law.  Florida has a fairly strong valid restraint on trade or commerce statute (Fla. Stat. Section 542.335).  According to Florida Statute, a non-compete agreement that restricts or prohibits competition during or after the term of employment or engagement is not prohibited, provided that the agreement is reasonable in duration, geography, and line of business.  So, what’s reasonable?

What is reasonable in duration?  For a former employee, agent, or independent contractor, a term of six (6) months or less is presumed reasonable and a term greater than two (2) years is presumed unreasonable.  However, both of these presumptions are rebuttable, which means that the other party can provide factual evidence to defeat the presumption of reasonableness or unreasonableness.  These numbers increase for persons that were distributors, dealers, sellers, and licensees; and they increase even higher for restrictive covenants predicated upon the protection of trade secrets.

What is a reasonable geographic scope?  The geographic scope should not be broader than is necessary to protect the legitimate business interests of the company. For some companies, the geographic scope might be limited to a five mile radius or a small town; whereas, for other larger companies, it might be reasonable to have a nationwide geographic scope.  This will be factually dependent upon the size of the business, the nature of the business, and the type of engagement the company has with the person.

What is a reasonable limitation for line of business?  The line of business prohibited in the non-compete should also not be broader than is necessary to protect the business. The agreement does not necessarily need to be limited to exactly what the employee does; but it does need to be narrowly defined.  For example, a sales person in a pharmaceutical sales company might have a non-compete that prohibits a former sales person from taking employment with a pharmaceutical manufacturing company or distributing company. In this example, it might not be enforceable to prevent or prohibit the former employee from gaining employment with any manufacturing or distributing company, but it might be enforceable to prevent or prohibit the former employee from working for or with specific manufacturing or distributing companies, especially ones with a close relationship.

In many cases, if the limitations relating to duration, geographic scope or line of business are not reasonable, a court will not modify the agreement to make it reasonable, it will simply void the agreement or make the agreement entirely unenforceable, so it is extremely important that you narrowly define these terms when you are drafting your non-compete.

In Florida, the non-compete must be in writing and it also must be signed for it to be enforceable. If the language is simply included in an outdated employee handbook, and it is never signed, a court will not enforce the agreement.

Also, you must have a legitimate reason, a legitimate business interest, in order for your non-compete to be enforceable.  According to Florida Statutes, the company seeking enforcement of the non-compete must be able to show that the non-compete was or is being used to protect one of the following legitimate business interests: to protect (1) trade secrets; (2) valuable confidential business or professional information that otherwise does not qualify as trade secrets; (3) substantial relationships between vendors, manufacturers, distributors, etc.; (4) customer, client or patient goodwill; (5) extraordinary or specialized training.

Any non-compete or restrictive covenant not supported by a legitimate business interest is UNLAWFUL and is VOID and UNENFORCEABLE, so it is extremely important that you have a good reason for using a non-compete agreement.

The Walk Law Firm is available to review your current non-compete agreement in order to help you determine if, in fact, it would be enforceable should you ever need to use it.  Document review and drafting can be handled on a Flat Fee or Fixed Fee basis. To learn more, please contact us at the Walk Law Firm.

This article is not intended as legal advice; rather, it was written for general information purposes only.

 

IP Basics for Start-Ups and Business

When you start a businessintellectual property protection should be a primary part of your start-up business plan.  What intellectually property (IP) has your business developed?  Why should you protect it? And, more importantly, how do you go about protecting the various types of intellectual property that your business owns?  Every business is different and will have different intellectual property considerations, so it’s important to develop a strategy on how your business intends to protect its unique inventions, innovations, and information. It is important to remember that your trade name, ideas,  concepts and customer lists are important assets of your business — assets that need protection.

 

What is your intellectual property?

Intellectual property refers to creative and innovative inventions, marks, designs, or works of authorship that you or your business independently created.  Ask yourself this question, “If you gave this product, information, or design away, could it hinder or prevent you from competing in your industry’s market; would it prevent or impact your profitability?” If the answer is yes, then it is more than likely some form of intellectual property.

 

There are several different types of intellectual property that your business should consider when taking an inventory of its IP for business planning purposes, including: (i)patents, or new or improved inventions, including products and processes; (ii)trademarks, or logos, brands, and designs; (iii) copyrights, or unique works of authorship, including software, articles, books, brochures, artwork, music, etc.; and (iv)trade secrets, or formulas, patterns, compilations used in a business to gain an economic or commercial edge over competitors.

 

In the early stages of your business plan, you should take an inventory of what types of intellectual property that your company owns and which intellectual property is worth protecting.  In other words, examine your business to see what might be eligible for intellectual property protection, including patent, trademark, copyright or trade secret protection, and determine the value that these inventions, innovations, or information provide to your business.  The state and federal protections afforded to intellectual property owners are designed to reward your creativity and provide you with an economic or commercial benefit, so take advantage of these protections.

 

Why should you protect your intellectual property?

Your intellectual property is an asset of your company just like your office, or your bank account.  In fact, depending on the size of your company, and the importance or value of the intellectual property, you can easily include your IP as an asset value on your corporate balance sheet.  Your intellectual property distinguishes you and your product or services from those of your competitors and their products and services.  Just like any other corporate asset, you need to safeguard your intellectual property.  If you fail to adequately protect and police your intellectual property, your competitors, and even worse, your own employees or contractors, can study, steal, and improve upon your product or service and run you right out of the market.

 

Also, social media has exponentially increased the speed of informational posting and exchanges.   This is important for a number of reasons – one, the simplicity of these social media outlets allows you to quickly and easily put information out there that you may have failed to adequately protect that is accessible to consumers, clients, and competitors; and two, a competitor can just as easily steal, improve, and disseminate the information, which could seriously impact the economic benefit of the intellectual property to your business.

 

Additionally, registration is sometimes a requirement for pursuing a legal remedy (e.g., copyrights), so it is extremely important to register early.  And finally, another reason why you should invest now in your IP’s adequate protections is because a lawsuit later will be far more costly than the application and registration fees and the attorneys’ fees for consultation and filing.

 

How do you protect your intellectual property?

It is extremely important to consider and build intellectual property concerns into your business plan. You should educate yourself and your team on the basics of trademarks, copyrights, patents, and trade secrets, so at the very least, you know when something has been created that has the potential to be afforded protection.  Next, you will want to register your IP, either at the state or federal level, depending on the level of protection you desire.  Because of the unique nature of your business, and because the various types of intellectual property are protected in different ways through various registration processes, it is good idea to at least consult with an intellectual property attorney who is familiar with start-up businesses and familiar with your industry.  An attorney can help you file the appropriate state or federal registration, and often such tasks can be completed on flat or capped fees.  They can also help you protect your IP while registration is pending.

You should also establish corporate policies regulating ownership of your business’s new and existing intellectual property.  Often times, it’s not a competitor stealing a business’s IP; it’s a former employee, independent contractor, or partner who undermines the business. Have your employees and contractors execute adequate protection documentation, including well-drafted non-disclosure and confidentiality agreements, employment agreements, independent contractor agreements, etc.

Finally, once you have registered your IP, you should actively police it.  Collaborate with your clients, vendors, merchants, and anybody else who helps you get your product or service into the stream of commerce and keep your eyes open for illegal duplication of your product and/or services.  It is the owner’s responsibility to police its own intellectual property and to insist on legal compliance of the respective laws, rules, and regulations when you find someone infringing upon your IP rights.

 

Florida Legislature Passes New Revised Limited Liability Company Act – Important Reading for Members and Managers of LLCs

Intro

On May 3, 2013, the Florida House of Representatives unanimously passed the new Florida Revised Limited Liability Company Act (the “New Florida LLC Act”).  The Florida Senate unanimously passed a companion bill a week earlier.  Governor Scott approved the bill without issue or opposition on June 14, 2013.  Since LLCs are the most common form of business in Florida, this article is important reading for all business owners, especially owners seeking to protect their LLC assets and personal assets as soon as 2014. The New LLC Act will be codified as Chapter 605 of the Florida Statutes and will govern limited liability companies (“LLCs”) within the state of Florida.  The New Florida LLC Act is materially different, in both form and substance, than the Existing Florida Revised Limited Liability Company Act (the “Existing Florida LLC Act”), which is codified in Chapter 608 of the Florida Statutes.  If you or your company is an existing Member or Manager of a Florida LLC, or if you plan to become one in the near future, it is extremely important to understand the New Florida LLC Act and how it may impact your existing and future operating agreements and other governance documents.   The summary below is not a comprehensive review of the new LLC Act and is not intended to replace the advice of an attorney, but rather is designed to help you assess your own LLCs and potential need to take action.

When will the New Florida LLC Act become effective?

 The New Florida LLC Act becomes effective on January 1, 2014 for all LLCs formed in Florida on or after January 1, 2014.  For all LLCs in existence prior to January 1, 2014, the New Florida LLC Act will not become effective until January 1, 2015; however, the members of an LLC may elect to have the New Florida LLC Act become effective as early as January 1, 2014. To do so, the governing documents of the LLC will need to be amended.

How will the New Florida LLC Act impact my LLC?

 The New Florida LLC Act, like the Existing Florida LLC Act, and like most business organization statutes, is a default statute, which means that it provides a set of standard rules governing LLCs and how they are organized, how they operate, and how they are governed.  These standard rules may be modified, with limited exceptions, through specific language contained in either the Articles of Organization or the LLC’s operating or management agreement.  Like all LLC statutes, the New Florida LLC Act specifically prohibits the LLC from including language that modifies or supersedes certain statutory provisions (these are often referred to as “non-waivable provisions”).  This is significant because the New Florida LLC Act expanded the number of provisions which are now,  non-waivable and may not be altered by agreement of the members.

What changes were made in the New Florida LLC Act?

Expanded Non-Waivable Provisions.  The New Florida LLC Act has clarified that an LLC’s operating agreement may not remove certain rights, obligations and authority granted by the Act. Some of the provisions which an operating agreement may not change include:

  1.  The ability of the LLC to sue and be sued in its own name
  2. The right of a member to maintain a direct cause of action against the LLC, another member, or a manager in order to enforce such member’s rights and otherwise protect such member’s interest
  3. The right of a member to maintain a derivative action
  4. The right of an LLC to refuse to relieve persons, including members and managers, from liability if such persons acted in bad faith or committed willful, or intentional misconduct or a knowing violation of the law
  5. A Member’s or Manager’s duty of care, duty of loyalty, or obligation of good faith and fair dealing The  power of a member to dissociate from the LLC
  6. Statutory requirements with respect to the  contents of a plan of merger, plan of interest exchange, plan of conversion, or plan of domestication, plan of dissolution, articles of organization, statutory agents and other similar provisions
  7. The applicable governing law of the Florida LLC

Managing Member Eliminated.  Under the Existing LLC Act, there are three potential management options:  (1) Member managed, (2) Manager managed, and (3) Managing Member managed.  The New Florida LLC Act has effectively eliminated the concept of Managing Member managed.  It is possible that your operating agreement may need to be amended in order to avoid confusion, unintended results, and unintended personal liabilities, and to make very clear which of the remaining options you intend to use for your LLC.  For example:  once the New Florida LLC Act becomes effective, for those LLCs that are Managing Member managed, the Managing Member may no longer be able to act alone and may require all authorized actions to be subject to a member vote in accordance with the operating agreement.  In order to avoid an unintended result, you should revise your operating agreement and governance documents to reflect the intent of the members.

New Statement of Authority.

The New Florida LLC Act allows an LLC to file a statement of authority with the Florida Department of State as a way of providing constructive notice to third parties regarding persons authorized to act on behalf of the LLC.  The Statement of Authority will be effective for five years from the last amended or filed Statement of Authority, unless terminated earlier in accordance with the New Florida LLC Act.  You should consult with an attorney to determine the implication of filing a Statement of Authority and whether such Statement of Authority would be beneficial for your LLC.

Other Changes.

  •  Non-US entities are now permitted to domesticate as a Florida LLC
  • Non-economic members (members that don’t or are not obligated to contribute) are now permitted
  • The new Act includes specific service of process rules for LLCs

What should I do with my existing operating agreement?  Moving forward, how will my operating agreements be different?

If you or your company are a member or manager of an existing LLC, or are planning to enter into a new LLC, you need to understand the New Florida LLC Act and all the changes that were recently made.  At minimum, you should review your operating agreement with a qualified business attorney. LLC Agreements need to reflect how the members desire to operate the business. An experienced and practical business attorney will help you navigate the new Florida LLC Act in a way to help you amend your operating agreement to be consistent with your intent and operations.

The Walk Law Firm is available to review your operating agreement and help you understand the impact the New Florida LLC Act will have on your Florida entity. Operating reviews can be handled on a Flat Fee or Fixed Fee basis.   As experienced Florida business and commercial law attorneys, we have studied the New Florida LLC Act and can work with you to revise, amend, restate and draft new provisions for your LLC management and operating agreements eliminating unintended confusion or results.

 

Business Identity Theft: What is it? And how do I protect my business assets?

What is it?

Business identity theft is the fraudulent and unauthorized use of an entity’s identity.  It’s not just an information security breach. Rather, like consumer identity theft, business identity thieves impersonate the business or hijack the business’s identity in order to steal money or property, often by establishing lines of credit with banks and/or retailers. A corporate identity is an asset that needs protection!

Who is targeted?

The potential for more lucrative results has spawned an evolution of identity theft.  Rather than targeting a consumer, identity thieves are targeting unsuspecting businesses because businesses tend to have larger bank account balances, higher credit limits, and larger purchases made on behalf of a corporate entity generally don’t set off bells and whistles.  Small businesses are particularly vulnerable because they don’t have resources to constantly monitor accounts and records, and because they don’t have the structured security that large businesses have.

What is the result?

Generally, the damage that results from business identity theft is more severe than the results from consumer identity theft.  In consumer identity theft, the consequences tend to reach only the consumer targeted.  In business identity theft, the consequences affect the targeted business, but also the business’s employees and subcontractors, the business’s creditors, and the economy at large.

You might struggle obtaining a line of credit, which could impact operations. The cost of repairing or cleaning up the aftermath of a business identity theft can be costly with legal and accounting fees.

The terrible irony is that few businesses and business owners think about identity theft prevention as asset protection. But it actually is the most important asset protection plan a business can have.

How to prevent it?

At the Walk Law Firm, as Tampa small business attorneys, we advise our clients to take the same actions that public companies take:

  1. Protect your business information records – treat your EIN and Tax ID numbers like they are your social security number and limit access to all corporate records
  2. Monitor your corporate filings – many secretaries of state, including Florida, have email alert systems that notify you of any and all activity – enrolling in this service can provide early fraud detection
  3. Segregate Duties – accountants and auditors will tell you that no employee should be given access to all banking information as well as typical bank logins and passwords; segregate the duties relating to account access from those handling payroll and accounts payable
  4. Monitor your accounts and bills – frequent monitoring and reporting of suspicious transactions will limit your liability significantly
  5. Monitor the business’s credit report – routinely obtain a business credit report and review it for suspicious activity
  6. Train your employees to protect business information and to be aware of these crimes
  7. Be wary of phishing scams
  8. Install and utilize a firewall on your business computer and network
  9. Contact your creditors to ask about unusual activity