Why You Need to Create a Business Succession Plan NOW

Why You Need to Create a Business Succession Plan Now

Even when all owners of a company plan to work until the very end of their lives, there’s still a need for a viable business succession plan. After all, anyone can become totally or partially disabled as a result of a serious car accident or die of a deadly disease on almost any day.

When business owners hide from this reality, they often create havoc for all surviving partners or family members. Instead, it’s better to move forward at a calmer time to carefully address these types of possible future events.

Your Houston business law and estate planning attorney can help you decide on the best way to either pass your business on to others — or liquidate all the assets to meet your own needs and those of your survivors.

General questions you must answer yourself about any succession plan

  • What is the current market value of this business and all its assets?
  • Who is the best possible buyer? Do I prefer to sell the business to a co-owner, family member, employee or a third party?
  • Am I more likely to sell the business sooner rather than later? Am I interested in selling the company now due to health, retirement or other reasons?
  • Is this business tied to its current location? If not, would it be reasonably simple for the business to be moved elsewhere and successfully run by someone there?
  • What preferences do I have about how the sale should be financed? Am I willing to personally finance the loan? If so, what type of collateral should I require?
  • Which business advisors should I consult with while securing all the required contracts and other paperwork? Besides business and tax lawyers, do the specific assets of my company require me to consult with real estate agents, insurance and business brokers, bankers and financial advisors?

It’s often wise to start this process by locating and reviewing all your current business contracts and deeds. Next, give some thought to your company’s most productive and respected employees. Then, carefully determine the current market value of every business asset. Finally, schedule confidential, preliminary talks with any co-owners, family members who work for you, other key employees and perhaps one or two other potential buyers of your company.

Once these initial tasks have been handled – or while you’re completing them – it’s wise to meet with your Houston business law attorney.

Advantages and disadvantages of selling to different parties

Unless you’re the sole owner of the company and simply want to liquidate all the business assets and not sell (or transfer) the company to others, you must carefully evaluate each potential buyer and decide which one is best qualified to run the company in your absence.

  1. One or more family members. In most instances, it’s usually best to sell to only one family member, preferably one who is already involved in the business and respected by your employees. Ask your attorney about the best ways to prevent future challenges to any decision you make. One approach might involve drafting a buy-sell agreement that clearly states who is going to be running the company — and asks all others who currently work there (or own shares) — to sell their shares to the person you’ve named as your successor. This approach often helps minimize future family disagreements.

When selling a business to a family member, you may want to execute a self-canceling installment note (SCIN). Your attorney can explain why that may be useful;

  1. A key employee who is highly knowledgeable and well liked by other workers. The most common drawback to selling to a key employee is that the person may not be able to give you a large down payment in cash. Be prepared to execute a buy-sell agreement that clearly lists all the valuable collateral for any loan you may be willing to finance. You can also suggest that this employee try to obtain an SBA (Small Business Administration) or bank acquisition loan that will provide you with up to 70% or more of the purchase price upfront;
  2. You can sell your shares to your co-owners. Be sure to clearly indicate the sale’s price and all purchase terms;
  3. An outside third-party or competitor. Be very careful when selling to this type of buyer if you’re financially depending on the person to keep running the company. Due diligence is critical when evaluating every potential buyer.

Since this article only provides a broad overview of the types of issues involved when drafting a business succession plan, you’ll need to obtain competent legal help to handle this entire process. Should you already have some type of succession plan, we can help you decide if it’s time to update it.

All our Murray Lobb attorneys have the necessary experience to help you create a business succession plan that’s specifically tailored to your company’s unique needs. We look forward to helping you draft all the contracts and other documents you’ll need while selling your business.

 

Obtaining A Mechanic’s Lien in Texas

Once your company has been hired as a contractor or subcontractor to build, repair or renovate a structure for others, it may become necessary to file a mechanic’s lien on the property to ensure that you’ll be promptly paid for all your labor and materials. This type of lien must be filed with the County Recorder or Clerk in the county where the property is located. When a company fails to file this type of lien before the property worked on is sold – it can become more difficult to enforce your rights against the party who contracted with you.

As the State Bar of Texas explains in one of its publications addressing mechanic lien rights, shortly after you begin your work – and long before you ever need to send out any invoices  — you should also consider sending out two notices to the other parties to your contract. These are known as a Notice of Contractual Retainage Agreement and a Notice of Specially Fabricated Materials. 

Since mechanic’s liens can be rather detailed and are drafted a bit differently in most states, it’s always wise to obtain legal advice on how this document should be appropriately worded. However, it’s usually not best to begin trying to collect all funds owed to you by filing this type of lien. Your first step in the process of seeking payment should be to simply mail your final invoice and other pertinent statements to the party that hired your company.

Additional Steps That Should Precede the Filing of a Mechanic’s Lien

It’s a good idea to send your initial invoice and statements via certified mail so you can later document the amount of time the other party has had to pay all that’s owed. If you receive no response, you should directly call the party who initially agreed to pay your company for its work. If you still cannot obtain the money owed, you should ask your Texas business attorney to send a formal yet polite demand letter using the law firm letterhead, seeking immediate payment of all sums owed.

Once a late-paying client is aware that you have a law firm acting on your behalf, they will often submit prompt payment. If you still cannot recover all sums owed to you, be sure to ask your attorney how quickly you must file a mechanic’s lien – so that a sale of the property on which you worked cannot occur so quickly that it might compromise your rights.

Consider Filing a Lawsuit after Filing a Lien

As your lawyer will tell you, Texas is a bit different than many other states because our state’s laws providing the right to file a contractor’s lien are set forth in our state constitution. In fact, Article XVI, Section 37 of the Texas Constitution protects the rights of all mechanics, artisans and others who handle materials while building, repairing or renovating another party’s property. These rights are further set forth in Chapter 53 of the Texas Property Code.

Unfortunately, Chapter 53 is rather long and its description of your mechanic’s lien rights can be difficult to interpret at times. Nevertheless, an experienced attorney can provide you with answers to your questions that cannot be readily answered by reading that material. Common questions regarding liens often revolve around the types of contractors and subcontractors who can file a valid mechanic’s lien.

Texas law clearly indicates that most companies – even those who only briefly work on the property while planting a few trees or providing their landscaping skills — are entitled to file a lien.

Should You Also File a Lawsuit?

This is always a matter that you must discuss with your attorney. When it’s recommended, it’s normally done in addition to filing a mechanic’s lien against each of the appropriate parties to your contract. If you pursue this remedy, your lawyer will present several arguments. Chief among them will be the assertion that the party who directly hired you has breached your contract by failing to timely pay all reasonable amounts owed.

Our firm recognizes that it’s often difficult to understand all Texas mechanic’s lien rights, even if you’ve been working as a contractor or subcontractor for many years. Therefore, we welcome the chance to meet with you, so we can provide all the guidance you may need to obtain full and timely payment for all the services you have rendered to others.

Think Twice Before Hiring Close Family Members & Friends

Creating a positive work environment always requires careful planning. Everyone must feel equally valued to do their best work. While it can be tempting to hire a close family member or friend who’s highly qualified, you must carefully consider how well the new person might fit in with your current employees.

Fortunately, there are some steps you can take to minimize potential problems. However, before making this type of choice, you should always confer with your business partners and hiring manager about the types of risks set forth below.

Unexpected employee jealousies & tensions can lower workplace morale

  • Current employees may fear they’ll never be given a fair chance again to compete for choice assignments and promotions once the new person comes on board;
  • Many or most of your conversations with this new individual may cause others to fear that their competing opinions will cease to matter or be respected;
  • Employee morale may suffer if your family member or friend is granted any special privileges regarding work hours, early promotions or salary;
  • Your new hire must be prepared to receive the “cold shoulder” from others. He or she must be prepared to avoid reacting in an angry or defensive manner;
  • Regular chains of command should be honored so that even your friend or family member must remain open to job performance feedback from other employees.

Ways you can try to minimize problems and help your family member or friend succeed

  • Openly discuss this hiring possibility with any equal partners in the business, as well as your hiring manager. If any of these people have serious misgivings, always consider hiring a well-qualified newcomer instead. If you’re the company’s only higher-level boss, talk about this hiring idea with another close family member or friend who will confidentially let you know if you’re being reasonably objective;
  • Plan on introducing the new person in a staff meeting, clearly noting who he or she will work with on a regular basis. Also, note that the new person is eager to obtain helpful advice from all those already onboard;
  • Have a private meeting before hiring the person, explaining the fact that the two of you must exercise strong boundaries at work each day. Topics only important to the two of you concerning family members or other friends should only be discussed during non-work hours to minimize conflicts;
  • Require your family member or close friend to sign a binding work contract if all others had to sign one when hired. If no written contracts are being used, make sure this person knows that they’ve been hired for a set trial period, especially if this holds true for all other employees. Clearly explain how you’ll need to end the work relationship if too many special privileges are requested — or sub-standard work is turned in;
  • Provide early and regular feedback to your family member or regarding their work. Let this person know that you’ll probably need to let the regular supervisor also offer constructive criticism;
  • Do not tolerate any special requests that go beyond what you grant to other employees. This type of activity will undermine your good relationships with other staff members.
  • Be realistically prepared to fire this person– sooner rather than later – if others are having to do extra work since your family member or friend isn’t working hard enough.

Fortunately, carefully chosen family members and friends will try hard to succeed if you insist they treat everyone else with respect.  Just remember to remain open to what other employees may tell you about the quality of the new person’s work – and do all you can to help your friend or family member stay open to suggestions for improvement.

Please feel free to contact one of our Murray Lobb attorneys regarding any questions you may have about both routine and complicated employee management issues. We’ve had the opportunity to provide useful legal guidance to businesses of all sizes for many years now.

Brief Overview of Texas and Federal Whistleblower Laws

All employers must respectfully interact with employees who report alleged wrongdoings in the workplace. Often referred to as “whistleblowers,” these individuals are trying to correct illegal practices or behaviors they believe are harmful to many. Although some whistleblowers may have improper motives, you always ignore them at your own peril – especially since there are Texas and federal laws designed to protect them under certain circumstances.

The following information about whistleblower laws and related activities can help you better understand why an employer must obtain timely legal advice from a Houston business law attorney once any employee threatens to file this type of complaint.

The Texas Whistleblower Act

This statute is found in Sections 554.001 (and following) of the Texas Government Code. It only provides protection against employer retaliation for public employees – not private ones. The law expressly forbids public employers from suspending, terminating or otherwise imposing adverse personnel actions employees who report alleged legal violations by the employer or co-workers.

However, the complaining party – who must report the alleged wrongdoings to the appropriate law enforcement authority – must undergo (exhaust) all employer grievance or appeals processes before being allowed to sue the employer. Under the Texas statute, all whistleblower lawsuits must be filed within 90 days of the reported wrongdoing.

Damages may include obtaining a legal injunction against the employer – as well as receipt of all back pay owed if the employee was terminated (or demoted) in a retaliatory move. Successful whistleblowers (who meet all statutory requirements), are also entitled to receive full reinstatement, all fringe benefits owed, full seniority rights, actual damages, reasonable attorney fees, court costs and a set maximum of possible other compensatory damages.

Furthermore, a supervisor found to have violated the complaining employee’s rights under this Texas statute (Section 554.008) can be forced to pay up to a $15,000 civil fine.

While the burden of proof is on the whistleblower, the possible penalties can be formidable.

Federal laws often relied upon by various whistleblowers

  • The Sarbanes-Oxley Act (passed shortly after all the illegal Enron activities). It mainly addresses the penalties available in the wake of fraudulent accounting practices.
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act.
  • OSHA violations. Many construction workers and other employees file “whistleblower” complaints based on these Occupational Safety and Health Administration statutes and regulations.
  • Various Department of Energy laws and statutes.
  • Environmental Protection Agency (EPA) laws and regulations.
  • Federal airline regulations.
  • The False Claims Act (as recently updated).
  • The Fraud Enforcement and Recovery Act of 2009.
  • Hazardous waste regulations.
  • The Patient Protection and Affordable Care Act — and other government statutes related to the provision and receipt of proper medical care.

While this list isn’t intended to be comprehensive, it provides a general overview of the types of statutes and regulations often referenced in many whistleblower complaints.

The following information reviews the most common types of illegal retaliation some employers take upon learning that a whistleblower complaint has been filed.

Forbidden, retaliatory actions taken by some employers

  • Job termination. Far too many employers look for “clever” ways to fire complaining employees once they learn a whistleblower complaint may be filed.
  • Demotion. An aggrieved employee may be called in and told that there have been long-standing complaints about his/her performance – requiring demotion to a lower position with considerably lower pay.
  • Thinly disguised harassment on the job.
  • Retaliatory discipline. This may include the placement of highly negative performance reviews in an employee’s file – making it much harder for the workers to receive any future promotions or favorable recommendations upon leaving the job.
  • Blacklisting. Some employers will “discreetly” contact their peers throughout the same industry, purposefully designating the specific, complaining employee in hopes of preventing that person from every landing another job in that same field.

Two high-profile whistleblower events help explain how such actions often unfold

One of the best ways to gain a stronger understanding of whistleblower activities is to read all you can about how former Enron employee Sherron Watkins reported her concerns about her employer. You may also want to learn more about all the late FBI agent W. Mark Felt (“Deep Throat”) did to expose President Richard Nixon’s illegal activities tied to the Watergate scandal.

As one Texas Monthly article puts it, the Enron scandal involved highly questionable financial practices that included the creation of financial entities to help Enron conceal the company’s growing debt from Wall Street, regulators and the general public. The book Power Failure provides an in-depth look at how all of Enron’s troubles began and how its illegal activities ruined the lives of so many.

Conclusion

Always make sure your company (or government office) provides all supervisory personnel with comprehensive training on the proper ways to respond once a whistleblower complaint has been filed (or is referenced by an employee). And remember that retaliatory acts must be avoided since they’re illegal and often very costly.

If you believe an employee is preparing to file a “whistleblower” complaint against you, please contact one of our Murray Lobb attorneys right away. We can explain your legal rights to you and help you take the proper steps to respond appropriately. Timely intervention can prevent critical misunderstandings and unnecessary litigation.

Why It’s Often Wise to Moniter Employee Computer Usage

While all employees benefit from believing that their companies trust them, they must still accept the modern workplace reality that certain privacy interests must be carefully weighed against protecting valid business interests. Furthermore, employers have a need and a duty to make sure that all employees are putting in their fair share of time while completing assignments. No one should be allowed to waste valuable work time surfing the Internet or responding to personal emails while others are shouldering their proper tasks.

Do many employers regularly monitor computer and Internet usage?

At present, about 80% of large companies carefully monitor how their employees use workplace computers. They also routinely review all company website and social media postings and randomly review email exchanges and software downloads. Internet usage is also closely monitored. These practices can often help businesses avoid future lawsuits and financial losses.

Once your company decides to begin monitoring practices, you really should talk with your Houston business law attorney about all the legal concerns that can develop.

Before addressing other key issues involved with monitoring your employees, it will be helpful to note how many companies provide notice to their workers that their computer usage and Internet activities will soon be regularly reviewed.

When and how do employers bring up computer and Internet monitoring to employees?

  • At the time of hiring. You can make this a condition of accepting employment;
  • When all periodic performance evaluations are conducted. At the end of these sessions, you can produce a carefully worded document, asking for the employee’s written consent for monitoring their computer usage and business communications. It may be helpful to note how this can help protect some of their own interests — and limit the harassment that some employees might otherwise engage in if no such monitoring existed;
  • Include several paragraphs on the topic in your employee handbook. Always be sure that you later ask each new employee if they have any questions about this policy;
  • Place a warning above the company’s computer network sign-in page. This warning might reference the employee handbook – or the written consent form you should have already obtained from each employee;
  • Include a very clear and obvious “Notice” paragraph at the bottom of each outgoing email. This is an attempt to provide notice to third parties (such as non-business contacts who may include workers’ friends and family members who write to them at work – that any or all such emails are subject to monitoring and review).

Your signed consent forms should remind employees (along with the company employee handbook) that certain types of improper communications and usage of the Internet can result in disciplinary actions – and even firing.

As the following information indicates, your careful review of how employees are using their computers can prevent many serious workplace conflicts.

Harmful activities pursued by some using company computers, email and the Internet

  • Harassing behaviors. Making illegal and damaging statements in emails may constitute sexual, racial – or other forms of harassment;
  • Likewise, some types of email (or typed letters) may contain defamatory comments or illegal threats against others. No employee has the right to make serious threats against other employees or outside email recipients. These negative communications may simply imply that a specific person may lose his or her job if certain improper demands aren’t met;
  • Critical company information (like trade secrets and intellectual property) may be stolen and then shared with others;
  • Employees may download and then share copyrighted material or software, allowing others to make additional copies. This can also include the illegal download of porn materials — that are then sent off to others – or stored on your business databases;
  • Workers may accidentally share harmful email and general computer viruses while using their computers in unauthorized ways;
  • Employees may spend lengthy time periods surfing the net — unrelated to legitimate work assignments. Many companies wind up paying significant amounts of money each year for time that employees spent playing online games or enjoying other unauthorized Internet activities;
  • Some workers may maliciously sabotage company files and data for no apparent purpose;
  • Other employees may use their work computers and printers to complete tasks for their separate, private business needs.

Do employers have broad rights to monitor all employee activities at work?

Federal, state and even global laws can limit these rights. Also, most employers do not have the right to invade employee privacy by placing intrusive cameras or audio devices in restrooms or lunchrooms. However, they do have some specific rights to monitor how employees use equipment provided to them. And under certain circumstances, companies can even monitor how employees use their own personal computers while logged on to company networks and databases.

In general, any efforts you make to monitor employee communications must agree with the provisions of the federal Electronic Communications Privacy Act (ECPA). Fortunately, it does allow certain types of monitoring that fall within an acceptable “business purpose exception.” In other words, your monitoring efforts must have a direct tie to protecting a “legitimate business purpose.”

As already noted above, it’s crucial to discuss all these matters with your attorney to be sure your approach to computer monitoring will not subject your company to any employee or third-party privacy lawsuits.

What global, federal and Texas laws address all these various legal topics?

Keep in mind that companies regularly interacting with international clients or companies must be prepared to observe all the following types of governing laws.

  • The European Union General Data Protection Regulation (GDPR) – and the laws passed by many of its members’ individual states;
  • The Electronic Communications Privacy Act (ECPA)
  • The Stored Communications Act
  • Various federal wiretapping laws
  • Texas statutes and case law that your lawyer can review with you

Some general guidance is also available on the Texas Workforce Commission website.

Conclusion

Companies of every size must give all these issues considerable thought before buying any types of computer monitoring software. You’ll also need to decide which DLP (data loss prevention) solutions or strategies are most likely to meet your company’s unique needs. For example, do you want to prioritize software that helps with network traffic monitoring, keystroke logging, natural language processing – or other methods? You’ll also need to consider what types of data encryption practices may be useful to you.

Fortunately, there are many outside consultants who can help you carefully evaluate all the current computer monitoring software that’s available – so you can find the best products that fall within an affordable price range for your company.

Please feel free to contact one of our Murray Lobb attorneys so we can address your current questions about monitoring your employees’ business communications and usage of the Internet. We can also help you draft the types of privacy consent forms and other paperwork that can help you more proactively safeguard your company’s business interests.

Tenants: Beware and Negotiate

In a matter of first impression before the Texas Supreme Court, the Court ruled that a Residential Lease provision that obligated the Tenant to pay for any damages that result from “any cause not due to Landlord’s negligence or fault” was not void and unenforceable.

The background facts:  A young lady, Carmen White, got her first apartment and signed a standard Texas Apartment Association (“TAA”) lease.  Her parents gave her a washer and dryer set as a gift.  While using the dryer, it caught fire and burned her apartment and others nearby.  The damages to the apartment complex exceeded $83,000.00.  The source of the ignition was unknown and no fault was placed on White or the Landlord.  The landlord’s insurance company paid the claim, subrogated, and demanded reimbursement from Ms. White.  When she refused to pay the insurance company brought suit against her. 

The Procedural facts:  The case was tried to a jury.  After trial, the jury answered “no” to a question asking if White’s negligence proximately caused the fire.  However, the jury answered “yes” to the question whether White breached the lease agreement by failing to pay the casualty loss.  The jury awarded the landlord $93,498.00 in damages.  White moved for judgment not withstanding the verdict which was granted and the trial court rendered a take-nothing judgment.  The Court of Appeals affirmed the trial court ruling holding that that the Reimbursement Provision was void as against public policy.  The Appeals Court found a fatal conflict between the Reimbursement Provision’s broad language and Chapter 92 of the Texas Property Code restricting a Landlord’s ability to contractually allocate repair responsibilities.

The Supreme Court ruling:  The Supreme Court was to determine, as a matter of first impression, whether public policy embodied in the Texas Property Code precludes enforcement of a residential lease provision imposing liability on a tenant for property losses resulting from “any other cause not due to the landlord’s negligence or fault”.  In so holding the Supreme Court (in a 5-4 decision) repeatedly stated the well known legal axiom that “Parties in Texas may contract as they wish, so long as the agreement does not violate the law or offend public policy, recognizing the the Legislature has limited the freedom of a landlord and tenant to contractually allocate responsibility for repairs materially affecting health and safety.  Interestingly in footnote 4, the court acknowledged that above the signature block, the lease prominently states that the lease can be modified by agreement of the parties, but neither party requested modifications to the Reimbursement Provision. 

The Lease contained a reimbursement provision standard in the TAA lease which obligated the Tenant to pay for any damages that result from “any cause not due to Landlord’s negligence or fault”.

As we all know it is almost impossible to get a Landlord to revise any provision in a standard form lease, but if you are to avoid the tragedy that happened to Ms. White, you must negotiate a modification of the Lease.

Be aware that the TAA Lease is a legal document and forms a binding contract.  You should consult an attorney for help revising the Lease. 

We would first add a sentence to Section 10, Special Provisions.  We would write in the blanks a sentence to limit my liability.  For instance, “Notwithstanding anything to the contrary, Tenant shall never be responsible for repair, or liable for damages to Landlord’s property, including other units in the complex, unless such damage is proximately caused by the negligence of Tenant, Tenant’s guests, or invitees.”

Secondly, we would strike out certain language contained in Section 12. We would strike out “or any other cause not due to our negligence or fault”, at the end of the first sentence of Section 12.

We firmly believe that no residential Tenant should be held responsible to repair other units damaged or for property losses “resulting from any other cause not due to the landlord’s negligence or fault.”  Do not let this happen to you.

How the Texas Business Opportunities Act Seeks to Help Consumers

One the main goals of the Texas Business Opportunity Act is to protect consumers interested in starting their own businesses from scam artists eager to defraud them out of their money. When ads appear on TV or via email — promising large profits in exchange for a small, initial investment – it’s never wise to assume a valid offer is being made.

Some of the most common business opportunity ads often claim that you’ll need to do very little work before you’ll start receiving your first profits. That’s rarely an honest offer since running a business is often hard work. Now that so many older Americans (and others) have been laid off from their jobs, it’s critical to carefully review each offer and look for “red flags” warning you of possible fraud.

The following information will help explain some of the different ways that the Texas Business Opportunity Act tries to regulate the way that many programs go about seeking investors and operating in this state.

Types of business offers governed by the Texas Business Opportunity Act

  1. Those that require the buyer to pay at least $500 to begin setting up the business that’s being sold;
  2. Where the seller claims that you’ll earn back your initial investment (or more) in profits; and
  3. The seller promises to do one or more of the following acts to close the deal:

a). Provide you with a location – or help you find one (that’s not currently owned by you or the seller) where you can use or operate the goods or services being leased or sold by the seller;

 b.) Help you create a marketing, sales and production program (unrelated to a formal franchise business governed by separate laws);

 c.) Promises to buy back products, equipment or supplies (or goods made from them) provided to you so you can run the business.

To further protect the public from dishonest business offers, the Attorney General of Texas requires parties making offers that meet the description above to first register with the Secretary of State and provide any applicable bond or trust account required.

Whenever you become interested in investing in any business opportunity that even vaguely appears to be covered by the Texas Business Opportunity Act, it’s always best to review the matter with your Houston business law attorney. Our firm can check to be sure the seller’s company has formally registered with the Texas Secretary of State’s Office and posted all required funds.

As a potential investor, you should also be provided with key information (required by law) about any company – before ever tendering any money.

Legal disclosures companies must provide

When a business offer is made in Texas and is covered by the Texas Business Opportunity Act, the seller must provide specific information to the buyer ten (or more) days before any contract is signed by the parties and before any money is paid to the seller.

Here are some of the disclosures that must be provided.

  • Names and addresses of all parties directly affiliated with the seller in the business being marketed;
  • A specific listing of all services the seller is promising to perform for the buyer (such as setting up a product marketing program);
  • An updated, current financial statement covering the seller’s finances;
  • All details covering any training program being offered by the seller;
  • How all services will be provided by the seller regarding the products and equipment being sold – and all key terms involved with the leasing agreements covering business locations being provided to the buyer;
  • Information pertaining to any of the seller’s bankruptcies (or civil judgments obtained against the seller) during the last seven years.

The importance of distinguishing multi-level marketing offers from pyramid schemes

Make sure the business you’re interested in requires you to do some type of work (such as selling products or services) before paying you any profits. If you are only being urged to solicit additional participants in the business, there’s a strong chance that you’re being “tricked” into building a pyramid scheme that may earn you short-term gains before the entire investment program collapses.

Always obtain legal advice regarding any business that sounds too much like a quick way to earn a lot of money. Attractive shortcuts to huge profits – especially those promoted in many weekend hotel and restaurant seminars – are often sham operations.

Please contact our law firm so we can provide you with the legal advice you’ll need before investing in any new business opportunities.

Buying a New Company:  Conducting Due Diligence

Depending on the nature and size of the business you’re interested in buying, the process of completing due diligence can be straightforward or complex. Fortunately, the basic steps you’ll need to follow are rather standard.

After your lawyer has negotiated a Letter of Intent (LOI) with the seller –  covering each party’s duties and responsibilities involving confidentiality, exclusivity and other matters – you’ll be ready to begin the due diligence phase of possibly buying the company.

The Main Reasons for Performing Financial Due Diligence

This process is partially designed to help determine if the initial evaluation placed on the business is fair and if the company is both stable and viable. Time must also be set aside to review all current contracts and potential legal and regulatory liabilities.

Some of the specific aspects of the business you’ll want your Houston business law attorney and personal accountants to carefully review and examine are set forth below.

  • All accounts receivable and payable
  • At least the last three years of the company’s tax filings
  • All current payroll obligations
  • Most or all the major banking transactions for the past year or more
  • The full nature and extent of any outstanding loans on the books

As this initial list of matters indicates, this process can take many months with some businesses. Normally, the parties negotiate the timetable for completing all due diligence examinations in their Letter of Intent (LOI).

Special Inquiries You Must Include Regarding Other Financial Matters

Hopefully, your review of all the financial accounts won’t turn up any troubling questions that can’t be answered. However, since a small percentage of business sellers may be dishonest, your due diligence team must carefully watch out for certain types of “red flags” or irregularities. These can include some of the following concerns.

  • Missing funds
  • References to non-existing accounts
  • Improperly filed tax returns
  • A varying degree of bad debt that’s regularly written off
  • Unstable profit margins

Your lawyer’s due diligence inquiry must also include carefully reviewing all current contracts with other businesses or corporations.

Key Concerns Involving Executory Contracts

  • When are they each due to expire? (This is important since this information can affect the company’s current valuation and other issues). For example, if current supplier contracts are ending soon, you may soon find yourself having to pay far more for critical supplies;
  • What’s the status of all customer contracts? You need to be sure all funds owed to the company are being collected regularly and all goods and services promised are being delivered in a timely manner. Failure to carefully monitor all contract terms can cost you valuable customers and open you up to major legal liabilities;
  • Are all Service contracts being carefully monitored? Nearly every business is dependent on outside service vendors to keep their manufacturing and other equipment working properly. Likewise, contracts are often in place to secure the professional services of lawyers, accountants, computer repair technicians and others. You must make sure the company is properly honoring all these contracts and renegotiating them in a timely and responsible manner;
  • Are all current leases being properly maintained? Companies can’t afford to accidentally let leases lapse on buildings or other property that are essential to their daily operations.
  • Employee Agreements? Do current employees have employment agreements with non-compete clauses? These must be carefully examined because they cannot be assigned if you are only buying the assets.

Due diligence can also extend beyond merely reviewing key financial documents and contracts. It should also include a detailed review of all actual or threatened litigation and regulatory investigations.

Your Lawyers Must Review All Current or Likely Lawsuits & Regulatory Challenges

Each of the following issues must be examined regarding all current or anticipated litigation. They may prove crucial if you decide to still buy a specific company since you’ll probably need to request contractual indemnity for all future liability (and litigation expenses).

  • How costly might each case eventually prove to be? In other words, what potential liabilities are involved?
  • Has the business received formal notice that any of its operations may be operating in conflict with any state or federal statutes or regulations?

You must be willing to sit down with your lawyer and the target company’s current legal counsel to sort through all these legal and regulatory concerns since they directly bear on the business’ current valuation and the wisdom or folly of buying it.

While the due diligence concerns referenced above are not intended to be fully comprehensive, they should help you understand many of the critical matters that must be examined. Once you make it through this due diligence stage, you can then either decline to buy the company or move forward into the “closing” or final transactions phase.

Please feel free to contact our law office so we can help guide you through the various stages of due diligence as you try to decide whether you should buy a specific company.

How Should You Respond to Potentially False I-9 Documentation?

At present, the federal government expects companies to carefully examine all I-9 documents presented by job applicants and to ask questions about required paperwork that looks like it may have been altered. Once you receive proper documents that look valid, you must keep your copy of the completed I-9 form on file, ready to share it with ICE (Immigration and Customs Enforcement) upon request. In some cases, you may be given only three days’ notice to produce these documents for all your employees.

To help employers fulfill their duties, ICE provides general guidelines that describe how all I-9 document reviews should be handled. These guidelines are further referenced below, along with topics you should address with your human resource staff to help them avoid accidentally discriminating against applicants and employees while simply trying to obtain fully updated, accurate documents.

What federal law established the need to obtain I-9 documents from job applicants?

Congress passed the Immigration Reform and Control Act (IRCA) back in 1986. It requires employers to obtain job applicant documents that validate each person’s right to work in this country. This task is handled by fully completing a Form I-9 document for each job applicant. To help establish their legal status, applicants can produce such items as:  a driver’s license, a Permanent Resident Card, a US passport, a birth certificate and a Social Security card.

Can some I-9 documents be acceptable even when they initially look questionable?

The simple answer to that question is “Yes.” However, you should always keep notes in your file concerning any odd documents that you first believed might be false – and keep a copy of them. As ICE notes on its website, there are times when a worker may show you documents indicating different last names – and that may be acceptable if the job applicant can provide you with a reasonable explanation for the varied listings.

While employers must be respectful and open-minded while handling required I-9 tasks, they should be acting in agreement with previously established, written employee guidelines clearly noting that all new hires and established employees can be fired for providing any false job applicant documents. When you haven’t already created such written guidelines and acceptable standards of employee conduct, you may later find yourself accused of discriminating against an applicant or employee based upon his or her immigrant (or special ethnic) status.

This type of scenario often unfolds when an employee informs you after being hired that one or more documents given to you before being hired was fraudulent or invalid. This tends to occur when the employee is trying to provide you with newly updated, valid documents.

This specific type of issue was presented to the Department of Justice (DOJ) back in 2015. Unfortunately, instead of issuing an advisory opinion, the DOJ simply noted that employers should already be prepared to handle these types of issues — based on established employee conduct guidelines. Otherwise, they risk being sued for one of at least four employment-related forms of discrimination.

Is it true that some employers have been heavily fined for I-9 violations?

Yes. One of the largest fines recently imposed by the Office of the Chief Administrative Hearing Officer (OCAHO) involving I-9 irregularities was against Hartmann Studios. That company was required (in July of 2015) to pay $600,000 in civil penalties. (That amount had been reduced from the original penalty sought of $812,665.) When Hartmann was undergoing a new inspection back in 2011, the company employed over 700 workers.

While that large sum of money is quite high, it’s important to recognize that Hartmann Studios was unable to provide any I-9s for some of its employees who had been terminated and needed an extension of time to produce documents for others.

What steps can our office (or company) take now, to make sure were fully complying with all current I-9 document guidelines?

If you haven’t already done so, give serious thought to signing up for the US government’s
E-Verify program that can help you properly process all your I-9 documents. By visiting this government website, you can learn more about how this program works. Your usage of this service may help establish your good-faith attempt to properly handle all I-9 duties.

You may also want to ask your lawyer if you should require all newly hired (and established) employees to sign a form that clearly indicates their awareness that they may be immediately fired for their dishonesty if you ever learn that they’ve provided you with any fraudulent I-9 documents. If you do this, you’ll need to strictly apply this standard.

Please contact our Murray Lobb law office so we can answer any other questions you may have about properly handling all I-9 documents. We can also provide you with advice on drawing up a general employee handbook — that also fully alerts all employees to the possible consequences of supplying your company with fraudulent I-9 documents.

Starting a New Business: Avoid These common Mistakes

Starting a New Business: Avoid These Common Mistakes

Few activities in life are more challenging and exciting than starting a new business. So, if you’re determined to succeed, always accept advice from those who’ve been where you are now and know what often works best. Careful early planning can pay you back many times over later when your properly marketed goods and services motivate satisfied customers to tell others about your unique offerings.

By making the hard choices described below during your start-up phase, you can avoid many errors that often prevent hard-working people with great ideas from carving out a highly profitable niche in today’s marketplace.

The Key Early Decisions New Business Owners Must Make

  • Choose your co-owners wisely. Always look beyond each person’s academic degrees and decide if their experience is strong enough to withstand the challenges of running a business. Clearly define each owner’s responsibilities and how you’ll regularly monitor each other’s performance. Consider requiring every major stakeholder to undergo professional personality testing so you’ll know if you can each offset the specific strengths and weaknesses of one another that high-stress situations often reveal.
  • Fully track all money being spent and coming in. Be sure to hire a competent, in-house accountant. Agree in writing how all funding will be spent.
  • Have your lawyers draft one or more standard form contracts that fully protect your company’s rights. They should be thorough, but not so burdensome or one-sided that customers will refuse to sign them.
  • Meet early on with your trustworthy Houston business law attorneys. Carefully listen as they describe the various business structures that might best suit your company and the different tax consequences that accompany each one. Learn all you can about the state and federal employment laws and regulations you must follow. Ask for help drawing up your first employee handbook (spelling out all employee benefits) and decide if your employees should all sign “at-will” employment offer letters. Obtain advice on choosing the best available name for your company. Inquire about having everyone sign NDAs (non-disclosure agreements) protecting company secrets. And learn all you can about properly handling sexual harassment issues and claims of discrimination;
  • Create a flexible business plan with reasonable goals. This should normally be drawn up after you’ve decided on your business structure (such as a “C” corporation or “LLC”) and created a written operating agreement that clearly defines all key partners’ general duties and responsibilities, financial contributions, and liabilities. Be sure everyone knows that added responsibilities may be added to each person’s assigned tasks as unexpected needs arise. You should also agree in writing whether you must obtain help through arbitration or mediation services when internal problems cannot be readily resolved;
  • Hire the best employees you can afford. Just as you need to choose co-founders with proven records of making ethical business decisions, you also need highly flexible employees who are told up front that they may need to “wear many hats” as new duties must be assigned.
  • Check out your competition ahead of time and properly fund adequate marketing of your goods and services. Never assume all your company’s offerings are completely unique. Fully handle all due diligence tasks in a timely manner so you can hopefully determine how your competitors have been successfully reaching the very customers you hope to win over. Be sure the market (or location) you’re targeting can handle all the current competition – and make adequate plans to distinguish your brand from all the others.

While the suggestions shared above should help you, always be ready to consult with others as you broaden your web of industry experts and colleagues. If you need to raise more capital for your business, keep in mind that it’s often wise to befriend employees at companies currently funded by the specific venture capitalists you hope to meet with in the future.

Always Place a High Value on Customer Feedback – Readily Making Changes as Needed

No matter how good your in-house experts may be, your customers can often offer you invaluable information about how you may need to periodically change specific products or services. You should also ask them for their ideas on how you might improve your marketing efforts. Consider offering fee discounts to current customers if they’ll undergo brief interviews about your company. You might also simply ask customers to complete brief online surveys about your products and services.

If you’ll meet regularly with your co-founders and openly discuss problems as soon as they arise, chances are your new business will succeed.