Build it, then sell it

People often ask if they can sell an idea for a new product or service to a company that will implement it. But ideas that can’t be protected are worth relatively little. I don’t mean necessarily legally protected, but at the very least, protected with marketing momentum, image, and awareness.

Relatively few of the well-known successful start-ups depended on the ideas. What matters is doing it, starting it up, getting it done. For example, when Apple Computer started in 1976, thousands of people had the same idea. Altair and MIPS were already producing. Every hobbyist club in the country talked about it in their meetings. Steve Jobs and Steve Wozniak, however, did it. They found the resources, contracted people, took the risks, and started it up.

There are plenty of good examples. Was Federal Express patentable? No, but they did it. Look at Amazon.com—it was a good idea, but very copiable. In that case they knew they had to move fast and gain visibility very quickly to pre-empt competition. McDonald’s?

There are companies whose main advantage is the idea. Kodak, Polaroid, and Xerox are examples, but these are exceptions, not the rule.

By the time you’ve had a good idea, so have hundreds or thousands of others.

So how do you approach a large company with a good idea? I say, simply, don’t; not until you have momentum. Sure, some ideas need larger companies to move them forward, but if your idea is that good and not legally protectable, why shouldn’t the big company move on it? Managers are charged with enhancing the value of the company they work for, and you’re saying there’s no patent, so why not? They aren’t bad people, it’s just that you don’t own the idea.

Besides, larger companies move very slowly, and unless you’ve proven the idea and developed the concept, it’s even harder to think they’ll do it better.

My advice is to build some advantage first, develop this idea, bear down, and make it work. After that, then you will have something to sell. Even without patents, you could have trademarks, service marks, and legal protection against people trying to trade on your company’s name and trademarks.

Think of it from the buyer’s point of view, for a while. Which would you rather buy, an idea, or a business? Turn your idea into a business that works, with sales and employees and a market position, and then you have something to sell.

Remember that there are almost always people proposing ideas to large companies, and you’ll have to make sure the contact in the company understands that you might have something that’s very worthwhile. It’s hard for me to think you can do that without building it first, then selling it.

Think about what it is you own that they would need your participation for—perhaps it’s your expertise or name in an industry.

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

Crafting Simple Agreements

Although lots of contracts are filled with mind-bending legal gibberish, there’s no reason why this has to be true. For most contracts, legalese is not essential or even helpful. On the contrary, the agreements you’ll want to put into a written contract are best expressed in simple, everyday English.

All that is necessary for most contracts to be legally valid are the following two elements:

• all parties are in agreement (after an offer has been made by one party and accepted by the other)
• something of value has been exchanged, such as cash, services or goods (or a promise to exchange such an item) for something else of value.

In a few situations, a contract must be in writing to be valid. Some laws often require written contracts for certain transactions such as property sales or contracts that will last more than one year. You’ll need to check with your solicitor to figure out which contracts must legally be in writing. Of course, because oral contracts can be difficult or impossible to prove, it is wise to write out most agreements, even if not legally required.

Let’s look a bit more closely at the two elements — agreement between the parties and exchange of things of value — necessary for a valid contract.

1. Agreement between parties, a.k.a. offer and acceptance
Although it may seem like stating the obvious, an essential element of a valid contract is that all parties really do agree on all major issues. In real life there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, the law has developed some rules defining when an agreement legally exists.

The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing. Let’s say, for instance, you’re shopping around for a print shop to produce brochures for your business. One printer says (or faxes) that he’ll print 5,000 two-color flyers for £200. This constitutes his offer. If you tell him to go ahead with the job, you’ve accepted his offer. In the eyes of the law, when you tell the printer to go ahead, you create a contract, which means you’re liable for your side of the bargain (in this case, payment of £200). But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you clearly haven’t accepted his offer and no agreement has been reached. Or if you say his offer sounds great, except that you want the printer to use three colors instead of two, no contract has been made, since you have not accepted all of the important terms of the offer — you’ve changed one term of the offer. (Depending on your wording, you may have made a counteroffer, which is discussed below.)

Sure enough, in real, day-to-day business the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes when you make an offer it isn’t quickly and unequivocally accepted; the other party may want to think about it for a while or try to get a better deal for himself. And before he accepts your offer, you might change your mind and want to withdraw or amend your offer. Delaying acceptance of an offer and revoking an offer, as well as making a counteroffer, are common situations in business transactions that often lead to confusion and conflict. To minimize the potential for a dispute, here are some general rules you should understand and follow.

• How long an offer stays open. Unless an offer includes a stated expiration date, it remains open for a “reasonable” time. What’s reasonable, of course, is open to interpretation and will vary depending on the type of business and the particular fact situation. To leave no room for doubt as to when the other party must make a decision, the best way to make an offer is to include an expiration date. And if you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s no doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer — called the offeror — may revoke it. Revocation is discussed below.
• Counter offers. Often when an offer is made, the response will not be to accept the terms of the offer right off, but to start bargaining. Of course, haggling over price is the most common type of negotiating that occurs in business situations. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept, decline or make another counteroffer shifts to the original offeror.For instance, if your printer (here, the original offeror) offers to print 5,000 brochures for £300 and you respond by saying you’ll pay £250 for the job, you have not accepted his offer (no contract has been formed), but instead have made a counteroffer. If your printer then agrees to do the job exactly as you have specified for £250, he’s accepted your counteroffer and a legal agreement has been reached. While it is true that a contract is only formed if the accepting party agrees to all substantial terms of an offer, this doesn’t mean you can rely on inconsequential differences to void a contract later. For example, if you offer to buy 100 chicken sandwiches on one-inch-thick white bread, there is no contract if the other party replies he will provide 100 emu fillets on brown bread. But if he agrees to provide the chicken sandwiches on one-inch-thick white bread, a valid contract exists, and you can’t later refuse to pay if the bread turns out to be a hair thicker or thinner than one inch.
• Revoking an offer. Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means if you make an offer and the other party says she needs some time to think it through or makes a counteroffer with changed terms, you can revoke your original offer. Once she accepts, however, you’ll have a binding agreement. Revocation must happen before acceptance.An exception to this rule occurs if the parties agree that the offer will remain open for a stated period of time. This type of agreement is called an option, and it usually doesn’t come for free. Say someone offers to sell you a forklift for £10,000, and you want to think the offer over free of the worry that the seller will withdraw the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time, say thirty days. Often, however, the offeror will ask you to pay for this 30-day option — which is understandable, since during the 30-day option period he can’t sell to anyone else. Payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.

2. Exchange of things of value
In addition to both parties’ agreeing to the terms, a contract isn’t valid unless both parties exchange something of value — in anticipation of the completion of the contract. The “thing of value” being exchanged — which every law student who ever lived has been taught to call “consideration” — is most often a promise to do something in the future, such as a promise to perform a certain job or a promise to pay a fee for that job. For instance, let’s return to the example of the print job. Once you and the printer agree on terms, there is an exchange of things of value (consideration): the printer has promised to print the 5,000 brochures and you have promised to pay £250 for them.

The main importance of requiring things of value to be exchanged is to differentiate a contract from generous statements and one-sided promises that are not enforceable by law. If a friend offers you a gift, for instance, such as offering to stop by and help you move a pile of rocks, without asking anything in return, that arrangement wouldn’t count as a contract because you didn’t give or promise him anything of value. If the other party never followed through with his gift, you would not be able to enforce his promise. However, if in exchange for helping you move rocks on Saturday, you promise your friend you’ll help him weed his vegetable garden on Sunday, a contract exists.

Although the exchange of value requirement necessary to form a valid contract is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work can also satisfy the rule. If, for instance, you leave your printer a voice-mail message that you’ll pay an extra £100 if your brochures are cut and stapled when you pick them up, the printer can create a binding contract by actually doing the cutting and stapling. And once he does so, you can’t get out of the deal by claiming you changed your mind.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

What the sole trader needs to know

A sole trader is a business that is owned by one person (and sometimes his or her spouse) and that isn’t registered as a corporation or a limited liability company.

Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. For instance, if you are a freelance photographer or writer, a craftsperson who takes jobs on a contract basis, a salesperson who receives only commissions or an independent contractor who isn’t on an employer’s regular payroll, you are automatically a sole trader.

However, even though a sole trader is the simplest of business structures, you shouldn’t fall asleep at the wheel. You may have to comply with local registration, license or permit laws to make your business legitimate. And you should look sharp when it comes to tending your business, because you are personally responsible for paying both income taxes and business debts.

Personal liability for business debts
A sole trader can be held personally liable for any business-related obligation. This means that if your business doesn’t pay a supplier, defaults on a debt or loses a lawsuit, the creditor can legally come after your house or other possessions.

Examples

Example 1: Lester is the owner of a small manufacturing business. When business prospects look good, he orders £50,000 worth of supplies and uses them in creating merchandise. Unfortunately, there’s a sudden drop in demand for his products, and Lester can’t sell the items he’s produced. When the company that sold Lester the supplies demands payment, he can’t pay the bill.

As sole trader, Lester is personally liable for this business obligation. This means that the creditor can sue him and go after not only Lester’s business assets, but his other property as well. This can include his house, his car and his personal bank account.

Example 2:

Shirley is the owner of a flower shop. One day Roger, one of Shirley’s employees, is delivering flowers using a truck owned by business. Roger strikes and seriously injures a pedestrian. The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley as a co-defendant. After a trial, the jury returns a large verdict against Roger — and Shirley as owner of the business. Shirley is personally liable to the injured pedestrian. This means the pedestrian can go after all of Shirley’s assets, business and personal.

By contrast, the law provides owners of corporations and limited liability companies (Ltd’s) with what’s called “limited personal liability” for business obligations. This means that, unlike sole traders and general partners, owners of corporations and limited companies can normally keep their house, investments and other personal property even if their business fails. If you will be engaged in a risky business, you may want to consider forming a corporation or an limited company.

Paying taxes on business income
In the eyes of the law, a sole proprietorship is not legally separate from the person who owns it. The fact that a sole proprietorship and its owner are one and the same means that a sole proprietor simply reports all business income or losses on his individual income tax return.

As a sole trader, you’ll have to take responsibility for withholding and paying all income taxes, which an employer would normally do for you. This means paying a “self-employment” tax, which consists of contributions to National Insurance/ P.R.S.I, and making payments of estimated taxes throughout the year.

And if you do business under a name different from your own, such as Custom Coding, you must register that name — known as a fictitious business name — with Companies House. In practice, lots of businesses are small enough to get away with ignoring these requirements. But if you are caught, you may be subject to back taxes and other penalties.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

Expect imitations

I don’t think you really can protect a business idea in any practical way. If it is a good idea it will be copied. That’s in the nature of business. Your only hope is to launch it yourself and execute the idea so well that your imitators are scared off.

Please, Business ideas aren’t protected

In 30 years of business and consulting, I’ve never heard of any laws to protect business ideas. Laws protect inventions with patents, creative works with copyright, and trade names with trademarks.

The closest thing to it that I’ve ever heard is recent rulings on “business model” patents related to the Internet and Internet businesses. What I’ve heard is that some patents have been granted for specific flow of information and commerce on specific Internet sites. If you’re serious about that you’d have to talk to a patent lawyer.

Real investors don’t sign NDAs

You also hear a lot about “non-disclosure” agreements (NDA), legal documents in which parties agree not to tell secrets that they disclose to each other. These are used a lot in business development and are a good idea in many business occasions. Non-disclosures are often impractical and hard to enforce, but they are used anyhow.

Real investors don’t sign NDAs. They don’t have to because ideas are cheap and plentiful. They don’t want to because an NDA could be used against them for nuisance lawsuits, even if they didn’t disclose. And they really can’t sign an NDA because they can’t afford to promise they won’t do a similar business with somebody else. The next person in the door, right after they turn you down, might have a similar idea and a more convincing business plan. Each time they signed an NDA they would be ruling out some kind of future business, and they can’t afford to do that.

Please remember, however, that I’m not a lawyer.

My view on NDAs is not a lawyer’s opinion. Furthermore, do understand that I am not saying that you should forget about NDAs entirely, I’m just sharing my disappointment for how often they are rejected and how little protection they really afford. It’s a fine point, but important. Do work with a lawyer on this.

Good ideas will be copied
So in the business world good ideas are copied all the time. Most successful businesses are copies. Look at MP3 players, or fancy coffee shops, or websites selling books or CDs, or web-based free email. Every good idea gets copied. Expect it.

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

When starting a new business you may need start-up funds but lack the money to invest yourself. What are your options, can it be done without losing equity in the company?

Start off by thinking about it from the other side. If you had £500,000, what would make you want to give it to you and your business? You don’t want to give equity but you want somebody to take a huge risk for your business. Are you ready to pay extremely high interest rates, and offer a big equity kicker too? How are you going to convince somebody to take that kind of risk without an upside?

That’s why start-up investment usually involves equity. Why else does somebody risk that kind of money?

In your case, the signed contracts may be a bit of an advantage. Are they “bankable” (meaning that the documentation is strong enough that you might be able to borrow off the value of the contracts)? If so, that would be very unusual, but that would also be your easiest route for financing—using the contracts as security.

However, bankable contracts are extremely rare. Banks need to have real security.

Start-up entrepreneurs and small business owners are too quick to criticize banks for failing to finance new businesses. Banks are not supposed to invest in businesses- the government prevents banks from investment in businesses because society, in general, doesn’t want banks taking savings from depositors and investing in risky business ventures; obviously, when (and if) those business ventures fail, bank depositors’ money is at risk. Would you want your bank to invest in new businesses (other than your own, of course)?

Furthermore, banks should not be loaning money to start-up companies either, for many of the same reasons. Regulators want banks to keep money safe, in very conservative loans, backed by solid security. Start-up businesses are not safe enough for bank regulators, and they don’t have enough security.

Why then do we say that banks are the most likely source of small business financing? Because small business owners borrow from banks. A business that has been around for a few years generates enough stability and assets to serve as security. Banks commonly make loans to small businesses backed by the business’ stock or debtor book. Normally there are formulas that determine how much can be loaned, depending on how much is in stock and in debtors.

A great deal of small business financing is accomplished through bank loans or overdrafts based on the business owner’s personal security, such as the family home. Some would say that home equity is the greatest source of small business financing. This is a hard route to go, but still quite common. I have personally taken out a second mortgage more than once, in keeping my own business afloat, and I know how scary that is because I speak from experience. Still, I did it, the business survived the hard times, and later I paid the second mortgage off and took the lien off my house. The trouble is that if I didn’t come through, we would have lost that house.

Some companies are financed by smaller investors in what is called “private placement.” For example, in some areas there are groups of potential investors who meet occasionally to hear proposals. There are also wealthy individuals who occasionally invest in new companies. In the lore of business start-ups, groups of investors are often referred to as “doctors and dentists,” and individual investors are often called “angels.”

Sometimes you can get a private investor to give you money as a loan, but if so, you better be ready for a very high interest rate and a huge equity kicker if you default. That is a lot of risk they’re taking, and they want to get a lot of money back, or they simply take their money elsewhere.

Some investors are a good source of capital, and some aren’t. These less established sources of investment may be necessary, but they should be handled with extreme caution.

Your next question of course is how to find the “doctors, dentists, and angels” who might want to invest in your business. Look for lists, government agencies, business development centres business incubators, and similar organisations that will be tied into the investment communities in your area. Turn first to the local business link or search online via organisations such as the British Venture Capital Association (www.bvca.co.uk).

Aside from standard bank loans, an established small business can also turn to accounts receivable specialists to borrow against its debtors. The most common debtor financing is used to support cash flow when working capital is hung up in debtors. For example, if your business sells to distributors that take 60 days to pay, and the outstanding invoices waiting for payment (but not late) come to £100,000, your company can probably borrow more than £50,000. Interest rates and fees may be relatively high, but this is still often a good source of small business financing. In most cases, the lender doesn’t take the risk of payment—if your customer doesn’t pay you, you have to pay the money back anyhow. These lenders will often review your debtors, and choose to finance some or all of the invoices outstanding.

Some additional warning:

Be very careful in dealing with anybody who offers to help you find financing as a service for money. These are shark-infested waters. We are aware of some legitimate providers of business plan consulting, small business finance consulting, and related assistance, but the legitimate providers are harder to find than the sharks.

Many entrepreneurs turn to friends and family for investment. I recommend against it, frankly. Avoid turning to friends and family for investment. The worst possible time to not have the support of friends and family is when your business is in trouble. When the business is financed by friends and family, you risk losing friends, family, and your business at the same time. I know an entrepreneur who stuck with a losing business for six years longer than he should have because he started it with money from friends and family.

Never, NEVER spend somebody else’s money without first doing the legal work properly. Have the papers done by professionals, and make sure they’re signed.

Never, NEVER spend money that has been promised but not delivered. It is amazing how often companies get investment commitments and contract for expenses, and then the investment falls through.

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

What to think about when incorporating

Most people have heard that forming a corporation provides “limited liability” — that is, it limits your personal liability for business debts. What you may not know is that there’s more to creating and running a corporation than filing a few papers. You’ll need to keep excellent records to handle the more complicated corporate tax return, and in order to retain your limited liability, you must follow corporate formalities involving decision-making and record keeping. In short, you’ve got to be organized.

Limited personal liability
One of the main advantages of incorporating is that the owners’ personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor £100,000, you normally cannot be forced to use personal assets, such as your house, to pay the debt. Because only corporate assets need be used to pay business debts, you stand to lose only the money that you’ve invested in the corporation.

Exceptions to limited liability
There are some circumstances in which limited liability will not protect an owner’s personal assets. An owner of a corporation can be held personally liable if she:

• personally and directly injures someone
• personally guarantees a bank loan or a business debt on which the corporation defaults
• fails to deposit taxes withheld from employees’ wages
• does something intentionally fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or
• treats the corporation as an extension of her personal affairs, rather than as a separate legal entity.

This last exception is the most important. In some circumstances courts can rule that a corporation doesn’t really exist and that its owners are really doing business as individuals who are personally liable for their acts. This might happen if you fail to follow routine corporate formalities such as:

• adequately investing in capitalising the corporation
• formally issuing stock to the initial shareholders
• regularly holding meetings of directors and shareholders, or
• keeping business records and transactions separate from those of the owners.

Business insurance
Incorporating should never take the place of good business insurance. Even though forming a corporation normally protects your personal assets, you should use insurance to guard your corporate assets from lawsuits and claims.

A solid liability insurance policy can protect you against many of the risks of doing business. For instance, if you operate a clothing store, good business insurance should adequately cover the bill if someone slips and falls in your store. Also, insurance can protect you where the limited liability feature will not — for example, if you personally injure someone while doing business for the corporation, say by causing a car accident, liability insurance will usually cover the accident so that you won’t have to use either corporate or personal assets to pay the bill. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed.

Paying corporate income tax
If an owner of a corporation works for the corporation, he is paid a salary, and possibly bonuses, like any other employee. He pays taxes on this income as do regular employees, reporting and paying the tax on his personal tax return.

The corporation pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead and other expenses. To do this, the corporation files its own tax return, and pays taxes at a special corporate tax rate.

Forming a corporation
To form a corporation, you must file “articles of incorporation” – see the Companies House website for further details. For most small corporations, articles of incorporation are relatively short and easy to prepare. There is a simple form for you to fill out, which usually asks for little more than the name of your corporation, its address and the contact information for one person involved with the corporation (often called a “registered agent”).

Finally, you must issue stock certificates to the initial owners (shareholders) of the corporation and record who owns the ownership interests (shares, or stock) in the business.

Retaining corporate status
Corporations and their owners must observe certain formalities to retain the corporation’s status as a separate entity. Specifically, corporations must:

• hold annual shareholders’ and directors’ meetings
• keep minutes of shareholders’ and directors’ major decisions
• make sure that corporate officers and directors sign documents in the name of the corporation
• maintain separate bank accounts from their owners
• keep detailed financial records, and
• file a separate corporate income tax return.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes.

How a partnership agreement helps your business
A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines.

Don’t be tempted to leave the terms of your partnership up to local laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation. It’s much better to put your agreement into a document that specifically sets out the points you and your partners have agreed on.

What to include in your partnership agreement
Here’s a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:

• Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Wesson, or you can adopt and register a fictitious business name, such as Hammersmith and Kennsington Home Repairs. If you choose a fictitious name, you must make sure that the name isn’t already in use.
• Contributions to the partnership. It’s critical that you and your partners work out and record who’s going to contribute cash, property or services to the business before it opens — and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.
• Allocation of profits, losses and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.
• Partners’ authority. Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before binding the partnership, you must make this clear in your partnership agreement.
• Partnership decision-making. Although there’s no magic formula or language for divvying up decisions among partners, you’ll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.
• Management duties. You might not want to make ironclad rules about every management detail, but you’d be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you’ve got everything covered.
• Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
• Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement.
• Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

As you can see, there are many issues to consider before you and your partners open for business — and you shouldn’t wait for a conflict to arise before hammering out some sound rules and procedures.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

Partnership Buy-outs

Many business partners overlook a critical element of their partnership agreement that can save them both money and angst: buy-sell provisions. When you create buy-sell, or buyout, provisions for your partnership agreement, you and your partners can prepare for events that have been the downfall of more than a few successful small businesses — namely, the death, divorce, bankruptcy or retirement of one of the owners.

What Is a buy-sell agreement?
Contrary to popular belief, a buy-sell agreement is not about buying and selling companies; rather, it is a binding contract between business partners. A buy-sell agreement is made up of several clauses in your written partnership agreement (or it can be a separate agreement that stands on its own) that control the following business decisions:

• who can buy a departing partner’s share of the business (this may include outsiders or be limited to other partners)
• what events will trigger a buyout (see the list below), and
• what price will be paid for a partner’s interest in the partnership.

It may help to think of a buy-sell agreement as a sort of “premarital agreement” between you and your co-owners.

What events should you cover under a buy-sell agreement?
Your buy-sell agreement will instruct and remind you and your partners how you have agreed to handle the sale or buyback of an ownership interest when one partner’s circumstances change. Typically, the events that trigger a buyout of a partner’s interest under a buy-sell agreement are:

• an attractive offer from an outsider to purchase a partner’s interest in the company
• a divorce settlement in which a partner’s ex-spouse stands to receive an ownership interest in the company
• the foreclosure of a debt secured by an ownership interest
• the personal bankruptcy of a partner, or
• the disability, death or incapacity of a partner.

If you don’t create a buy-sell agreement
When starting a new business, you may think that the last thing you have time for is worrying about what will happen when you or another owner wants out — or worse, dies. But it’s a huge mistake to ignore the fact that sooner or later your business will change. If you doubt this even for a minute, think about what would happen if you don’t create a buy-sell agreement and one of the following occurs:

• One partner quits to move to another city or leaves to start another business. Without an agreement, your partnership might, by law, be dissolved, forcing you to divide any assets and profits among the partners and decide whether to start a new partnership with the remaining partners. Even if your partnership doesn’t end, you will still have to decide whether you should buy out the departing partner’s ownership interest, and for how much.
• One partner dies, gets divorced or becomes sick. In this case, you might have to work with the spouse or other family member of a deceased, disabled or divorced owner. There is a substantial possibility that the family member would be inexperienced or otherwise unable to act in the best interests of the business. On the flip side, you (or your family) might get stuck with a small business interest that no outsider wants to buy and for which no insider will give you a decent price.
• One partner sells his or her share to a stranger or to someone you know well and can’t stand. In this case, you may be forced to share control of the company with an inexperienced or untrustworthy stranger — or you’ll be faced with the struggle of running a business with someone you’d rather not even see on the street.

Just looking at this list, it should be obvious that if you don’t anticipate and plan for circumstances like these, you’re risking serious personal and business discord — perhaps even court battles and the loss of your business.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

The Shareholders Agreement

While diligently filing articles of incorporation and adopting bylaws, many company owners overlook a critical element of their business relationship: buy-sell, or buyout, provisions. By creating a shareholders’ agreement with buy-sell provisions, the owners of a small, privately held corporation can prepare for events that have been the downfall of more than a few successful small businesses — namely, the death, divorce, bankruptcy or retirement of one of the owners.

What are buy-sell provisions?
Contrary to popular belief, buy-sell provisions don’t have anything to do with buying and selling companies; instead, they control when and how shares in a company can be bought and sold. Shareholders include these provisions in a written document called a shareholders’ agreement or a buy-sell agreement. (Although you can also include these provisions in your company bylaws, it’s easier, and more legally sound, to create a separate agreement.) Typically, this agreement controls the following business decisions:

• who can buy a departing shareholder’s stock (this may include outsiders or be limited to other shareholders)
• what events will trigger a buyout (see the list below), and
• what price will be paid for a shareholder’s interest in the company.

It may help to think of a buy-sell agreement as a sort of “premarital agreement” between you and your co-owners.

What events should you cover in a shareholders’ agreement?
Your shareholders’ agreement will instruct and remind you and your co-owners how you have agreed to handle the sale or buyback of shares from a shareholder whose circumstances have changed. Typically, the events that trigger a buyout of a shareholder’s interest are:

• an attractive offer from an outsider to purchase a shareholder’s interest in the company
• a divorce settlement in which a shareholder’s ex-spouse stands to receive all or part of a shareholder’s stock of the company
• the foreclosure of a debt secured by a shareholder’s stock
• the personal bankruptcy of a shareholder, or
• the disability, death or incapacity of a shareholder.

Why you need a shareholders’ agreement
It’s a huge mistake to ignore the fact that sooner or later your business will change. If you doubt this even for a minute, think about what would happen if you don’t create a buy-sell agreement and one of the following occurs:

• One shareholder quits to move to another city or leaves to start another business. Without an agreement, you must decide whether you should buy out the departing shareholder’s ownership interest, and for how much. If you’re the shareholder who wants out, without an agreement you won’t be able to force your co-owners to buy you out.
• One shareholder dies, gets divorced or becomes mentally or physically incapacitated. In this case, you might have to work with the spouse or other family member of a deceased, disabled or divorced shareholder. There is a substantial possibility that the family member would be inexperienced or otherwise unable to act in the best interests of the business. On the flip side, you (or your family) might get stuck with a small business interest that no outsider wants to buy and for which no insider will give you a decent price.
• One shareholder sells his or her share to a stranger or to someone you know well and can’t stand. In this case, you may be forced to share control of the company with an inexperienced or untrustworthy stranger — or you’ll be faced with the struggle of running a business with someone you’d rather not even see on the street.

Just looking at this list, it should be obvious that if you don’t anticipate and plan for circumstances like these, you’re risking serious personal and business discord — perhaps even court battles and the loss of your business.

Creating a shareholders’ agreement
To create the buy-sell provisions for your shareholders’ agreement, you can use either a self-help resource such as those available online or see a solicitor — or both.

Copyright © 2008 Nolo

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.

Starting your own business can be a daunting task. Here are seven steps that can start you in the right direction.

Step 1: Personal evaluation.
Begin by taking stock of yourself and your situation. Why do you want to start a business? Is it money, freedom, creativity, or some other reason? What skills do you have? What industries do you know about? Would you want to provide a service or a product? What do you like to do? How much capital do you have to risk? Will it be a full-time or a part-time venture? Your answers to these types of questions will help you narrow your focus and pick a business.

Maybe you don’t know what kind of business fits your goals. If that’s the case, there are many places to get business ideas. Look through the Yellow Pages. Go to trade shows. Buy industry magazines. Check in with the business link. Read the business section of the newspaper.

Step 2: Analyse the industry.
Once you decide on a business that fits your goals and lifestyle, you need to evaluate your idea. Who will buy your product or service? Who would be your competitors? You also need to figure out at this stage how much money you will need to get started.

Step 3: Make it legal.
There are several ways to form your business—it could be a sole trader, a partnership, or a corporation. Although incorporating can be expensive, it is well worth the money. A corporation becomes a separate entity that is legally responsible for the business. If something goes wrong, you cannot be held personally liable.

You also need to get the proper business licenses and permits. Depending upon the business, there may be regulations as well as permits and licenses to deal with. This is also the time to check into any insurance you may need for the business and to find a good accountant.

Step 4: Draft a business plan.
If you will be seeking outside financing, a business plan is a necessity. But even if you are going to finance the venture yourself, a business plan will help you figure out how much money you will need to get started, what needs to get done when, and where you are headed.

Step 5: Get financed.
Depending on the size of your venture, you may need to seek financing from an “angel” or from a venture capital firm. Most small businesses begin with private financing from credit cards, personal loans, help from the family, etc. As a rule of thumb, besides your start-up costs, you should also have at least three months’ worth of your family’s budget in the bank.

Step 6: Set up shop.
Find a location. Negotiate leases. Buy stock. Get the phones installed. Have stationery printed. Hire staff. Set your prices. Throw a “Grand Opening” party.

Step 7: Trial and error.
It will take awhile to figure out what works and what does not. Follow your business plan, but be open and creative. Advertise! Don’t be afraid to make a mistake. And above all, have a ball—running your own business is one of the great joys in life!

*Disclaimer. NB these articles are for informational purposes only. They are not designed to be used as a substitute for legal advice.