Board of directors member Y.I. Gnough, who is also president of Algae Company, is in a pickle. Although denying any knowledge of sexual harassment and misconduct by the company founder and deal-maker Iam Algae, three co-board members resigned fearing for their reputational and financial survival. Employees are fueling the rumors of women who complained of unwanted touching, sexual harassment and other over-the-line behavior. Even Algae’s former counsel discloses that several years ago the board and the company were told of three or four confidential settlements with women. Company investors suggest that Y.I. and fellow officers and directors breached their fiduciary duty. Should Y.I. be concerned about his pocketbook and his reputation?
“Big” Bob Brothers is concerned that his company, Big Brothers Security Systems, is losing out on customers because his salesmen and installation teams are slacking when they are out of the office. Brothers reads a newspaper article about another company that is putting microchip implants containing radio-frequency identification tags (RFID) into his employees in order to make sure they aren’t doing “off the clock” stuff while on the clock. Brothers sends a memo to employees explaining that they will all be chipped the next month, and anyone refusing to chip will be terminated. Can Brothers “big brother” his employees like that?
A number of years ago John Drane, owner of Drane Plumbing & Supply, executed a Power of Attorney (POA) naming his eldest daughter LaTrina Drane as his attorney in fact. John’s debilitating stroke last weekend risks placing him in rehabilitation for months. Determined to continue the family business that offers its customers “Let Us Drain Your Swamp,” LaTrina dusts off John’s POA. Will Latrina have any problems? Continue Reading Returning “Power” to the Power of Attorney
For over a decade On the Skware Toy Soldiers and its owners, Boo & Woo, the Skware brothers, have enjoyed the shopping traffic brought to their retail store that’s located in the same shopping center as Athletics Authoritiez, a popular sporting goods retailer. However, over the last couple of years the Skware brothers have seen their overall numbers of shoppers go down and, with slowing traffic, their gross sales revenue has dropped by over 15% – straight off the bottom line. Now, blaming E-Commerce woes, the news media (supported by local scuttlebutt) is suggesting that Authoritiez is on the ropes and may close its store. Can Boo & Woo do anything to save On the Skware? Continue Reading E-Commerce Disruption – Tenant’s Tizzy
Beginning as a part-time college job walking friends’ dogs, Cary Barker’s full time business now employs over 30 college students to walk neighborhood dogs and to deliver them for daily activities to and from his Barkingham Palace Doggie Day Care Center, LLC. Although not yet ready to seek investors and begin franchising, Cary wants to grow Barkingham Palace, protect its blind spots, get alternative perspectives from other’s experiences and expand his network of friends. Cary’s friend Bayh Lawz suggests that Cary should select a board of directors. Should he? Continue Reading Selecting an Advisory Board – Do’s & Don’ts
Spurred by the frenzy of mid-century modern furniture of the 1950s and 1960s returning in popularity, a growing number of collectors are investing in and holding vintage furniture. Capitalizing on that craze, N. Stile Sune’s start-up Mothbalz Antiques cannot grow fast enough to meet demand. To buy more old warehouses and re-fit them into climate controlled spaces, N. Stile must raise over $2 million and is willing to give his investors an equity interest. Can N. Stile use crowdfunding or must he go the old fashioned route of a private placement memorandum (PPM)?
Due to Sune’s $2 million in capital needs (and more) crowdfunding is not a viable option.
The JOBS Act 2012 (Jumpstart Our Business Startups) was designed to encourage funding of U.S. small businesses and to ease various U.S. securities regulations affecting business investment. Enticingly entitled the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” Title III of the JOBS Act had visions of giving small individual investors access to early-stage investment and the enhanced ability to raise money beyond “friends and family,” through social media and from unknown investors like other sites such as Kickstarter.
When compared to other forms of private placements, crowdfunding is not a feasible option for our friend N. Stile Sune and Mothbalz Antiques. As explained in Forbes, here are ten reasons why:
- Issuers are capped to raising $1 million in any 12-month period.
- Shares issued are subject to a one-year restricted period.
- Crowdfunding is capped over a 12-month period at amounts depending upon net worth / income.
- Crowdfunding must be done through a registered broker-dealer or registered “funding portal.”
- The disclosure document (PPM) must be filed with the SEC prior to first sale and N. Stile Sune would have to file audited financial statements.
- Unlike JOBS Act changes affecting accredited investors, crowdfunding does not allow advertising except in narrow exceptions.
- Annual reports and possibly more frequent reports must be filed with the SEC.
- Legal prospectus liability applies to disclosures.
- Extensive due diligence is required, including background checks on management and large stockholders.
Tilting the Scales in Your Favor
Beware. Crowdfunding is far from a start-up fund raising panacea. You can still be sued for fraud for an actual or perceived misrepresentation or omission. One of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest. Disclose as much information as possible about your business, ensuring that if things begin to fall apart and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense – through the traditional Private Placement Memorandum – or PPM for short.
Growth in the DFW metroplex is booming, and the City of Flourish is one of the driving forces. Unfortunately, the City has had a difficult time keeping up its infrastructure with the growing population. Recently the City selected a bid from Slab Mixer Co., a concrete pipe manufacturer, for culverts for a project widening some of the City’s streets. After the City and Slab signed their contract, a group of Flourish citizens, concerned with how the City’s spending might affect their taxes, requested a copy of the contract under the Texas Public Information Act (TPIA). When the City notified Slab of the request, Slab asserted that some of the terms in the contract needed to be redacted because they would give Slab’s competitors an advantage in future contracts. Does Slab have the right to do that?
Background on the Texas Public Information Act
The Texas Public Information Act provides the public with the right to access information the government collects, subject to approximately 60 exceptions. Tex. Gov’t Code §§ 552.221, 552.101-.154. One exception is “information that, if released, would give advantage to a competitor or bidder.” Id. at § 552.104(a). Historically, the Texas Attorney General’s Office, which is charged with interpreting the Act and maintaining its uniformity, has taken the position that this exception only protects the governmental body, and not a private party. In other words, the AG believed the Act only allowed a governmental body to protect information that would place it at a disadvantage with other governmental bodies inside and outside of the State of Texas.
Do Private Parties Have a Right to Protect Their Bid Information?
Yes. In 2015 the Texas Supreme Court in The Boeing Company et al. v. Paxton held that “a private party may assert the exception to protect its competitively sensitive information.” The Court found that the plain language of the exception was not limited to a governmental body’s right to protect that information. It also noted that the governmental body had the right to defer to the private party to assert its competitive interests were at stake and request that the competitively sensitive information be withheld. Thus, Boeing had standing to assert the exception, but would have to show that the information requested, “if released, would give advantage to a competitor or bidder.”
What about Citizens’ Right to Know How Much Their Government is Spending?
Some have claimed the Texas Supreme Court’s decision in Boeing has given governmental bodies a carte blanche loophole to avoid turning over any information about their contracts. According to these critics, the Court’s decision allows the governmental bodies to assert that disclosing that information would give an advantage to the successful bidder’s competitors in the future.
While it’s a superficially appealing position from a taxpayer’s perspective, it ignores another argument that the governmental bodies assert to protect disclosure of this information. As mentioned above, the governmental bodies have asserted the exception protects disclosure of sensitive information that the body believes will give other governmental bodies an advantage.
For example, the Boeing case points out that the Attorney General ruled the exception protected disclosure of information concerning the Texas Governor’s marketing meetings with businesses in other states because the State is competing with other states to recruit those businesses to relocate. The release of that information would give other states the advantage to approach those businesses with competing or better incentives.
Companion bills (HB 792 and SB 407) have been filed in the Texas House and Senate to address the Texas Supreme Court’s decision in Boeing. If enacted, the legislation would make clear that the exception only allows a governmental body to protect information that it believes would harm its competitive interests. It would also apply an “exception to the exception” that would require governmental bodies to disclose that competitive information after the body awards the contract. HB 792 was recently referred to committee. SB 407 was referred to committee, where it was discussed but not voted upon yet.
Tilting the Scales in Your Favor
That depends on how your business has been affected by the competitive bidding process. If you have won bids in the past, and your proposals contain proprietary information that gives you a competitive advantage, you should ask the governmental body to redact that information if anyone requests it under the TPIA. On the other hand, if your business has consistently lost out in the bidding process, you may want to press the Legislature to pass HB 792 and SB 407 this session so that you can see your competitor’s proposals and try to figure out how you can match, or beat, them in the future.
This is the last installment of a series discussing potential pitfalls relating to selling your business. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer; Selling Your Business: Why Accurate Financials are Important; and Selling Your Business: 5 Critical Deal Points. Today we’re going to discuss why it’s important to have a business plan.
It’s the end of the year and you have made that decision: you want to sell your business next year and retire. Congratulations! Previous installments in this series discussed the importance of deal points, accurate financials and having any legal issues resolved to avoid any pitfalls when you sell your business. But to get to the point of making a deal with a buyer, you first have to have a marketable business. A business plan is the essential tool you need to help market your company.
Business Plans are Road Maps for Buyers
The question on every prospective buyer’s mind is “What makes your business so special that it’s worth $_____________?” A business plan helps buyers understand your assets and why someone would want to buy your business. For example, a business plan can summarize historical and projected financial data, market share, marketing strategies and analyze your competition. Your business plan should also summarize what key intellectual property your business owns, as well as any proprietary licensing that is in place. This information attracts prospective buyers to dig deeper – especially if the business plan is packaged well because it conveys a sense that you run a disciplined business.
Putting it All Together to Tilt the Scales in Your Favor
We’ve talked about a lot of important issues in this series. If you are looking to sell your business remembering these key points will help your sales process get off to a good start:
- Prepare or update your business plan to market your company to prospective buyers.
- Have your accountant audit your financials.
- Make sure a prospective buyer signs a confidentiality and non-competition agreement before you allow them to conduct any non-public due diligence.
- Qualify your buyer. Why waste time allowing a buyer who can’t meet your payment terms or get financing from a lending institution?
- Use a lawyer to prepare, review and advise you on all letters of intent or sales agreements.
- When negotiating back and forth with a prospective buyer, make sure all of the terms are documented in writing!
Hope you have enjoyed this series. Merry Christmas and Happy New Year! See you in 2017.
This is the fifth installment of a series discussing potential pitfalls affecting the intended sale by JR and Sue Ellen Pawlenty of their business Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer and Selling Your Business: Why Accurate Financials are Important. This month we discuss the Top 5 Critical Deal Points and Recommendations.
Get to the Offer Stage Quickly by Term Sheet or Letter of Intent. Before signing any written understanding, JR and Sue Ellen should consult a trusted representative to assist them in preparing a well drafted non-binding Letter of Intent, which is critical to setting goals and expectations for a clearly understood, viable offer that represents a good probability of closing.
- Payment Terms – Price and Timing. Unless you are paid in cash in full at closing, there’s more than setting price. Expect to negotiate both time and money – deferred and/or contingent payments such as earn-outs, seller notes and stock all depend upon whether your buyer is strategic or financial. Taking a modest down-payment with a note secured only by your company assets and giving the buyer control over your company’s operations, for example, is a recipe for probable disappointment, if not certain disaster.
- Reps and Warranties. These are essential statements of fact made by the buyer and seller to each other about various aspects of the transaction, typically including finances, customers, taxes, contracts, ownership, legal issues, intellectual property and more. While both pledge their statements to be true, difficulty of proof and ability to collect realistically impact any agreed upon remedy. Making sure that the statements (promises) you make are clear and accurate is critical.
- Indemnification. If a representation or warranty of either you or the buyer is incorrect, the transaction documents address who is responsible and how damages are determined; attorney’s fees are frequently assessed against the loser. Careful attention to contract language addressing both the promises made and the scope of liability imposed for misstatements is crucial.
- Transition. Expect the buyer to require your continuing participation to transition the sale. Delaying negotiation of your role and compensation risks an undesirable commitment of time at an almost certainly reduced compensation.
- Employees. What assurances does the buyer require about key employees? What is the buyer’s plan for both key and support employees post-closing? Will the buyer retain them with the same compensation and benefits? Be careful when you tell your team. Wait for a solid plan and a solid buyer so you can answer– what does this mean to them?
Tilting the Scales in Your Favor
Beyond the deal points there are some lessons learned that are worth knowing, particularly if this is your first “rodeo”:
- Your first “buyer” likely won’t.
- Run your business as if you were going to own it forever – it improves your negotiation position.
- Due diligence is a two-way street. Check out your buyer’s ability to perform.
- Run a litigation check on your prospective buyer.
Gunner Gunter employs dealership manager Sayles and computer technician H. Packard (“Pack”) at Falconaire’s Fine Ford and pays these “white collar” employees $40,000 per year. In busy sales months, each averages 50-60 hours a week without paid overtime. Do the new FLSA regulations affect Gunner?
Yes. Effective December 1st, Sayles and Pack must either be paid for their overtime hours or to avoid this mandate, their minimum annual salary must be $47,892 (up from the current $23,600 minimum per year) assuming they are Fair Labor Standards Act “white collar” employees (i.e., executive, administrative or professional) under the exemption, and not otherwise entitled to overtime pay.
The Labor Department estimates the new rules affect some 5 million exempt workers, predominantly in Texas, California, Florida, Illinois, New York and Pennsylvania, which have the largest number of newly eligible workers – 200,000 or more in each state. Of those numbers, hardest hit are lower-wage businesses and service industries like hospitality and retail, which identify the new rules as “Career Killers.” Rather than increasing salaries, many business may elect to reclassify professionals as hourly workers and reduce hours, adjust or remove existing benefits and flexibility (including loss of their more prestigious titles) or cut base salaries. “Comp time” (working overtime for future days off) is not an option for these newly eligible overtime workers. Even with labor reductions, the projected additional administrative costs to businesses to track hours of more employees and updating payroll systems are estimated to cost $745 million.
Employers who fail to comply after December 1st risk Department of Labor (DOL) investigation. More daunting, perhaps, is the threat of private litigation, including class action litigation – a risk with substantial downside potential.
Tilting the Scales in your Favor
Evaluate your current employees and salary levels to assess your company’s possible DOL exposure. If you elect to reclassify employees from “overtime exempt” to “overtime eligible”, develop comprehensive plans to (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes. Congress may attempt to redirect these changes with legislation, but it’s more likely that the results of the November election will dictate whether that momentum is sustained. Consider using a Checklist.
For more insight on cutting edge employment issues, including federal changes to overtime exemptions, visit the Texas Employer Handbook blog, written by Gray Reed employment partner Michael Kelsheimer.