July 10

How One Client “Earned” Six Figures by Not Doing a Deal

As a business attorney who has also personally grown, sold, and purchased businesses, one of the first things I tell my clients is that sometimes the best deal you will ever make is the one you don’t make.

I recently I represented a client in the purchase of a technology business, and they client engaged with me after making a non-refundable deposit. When they called they were just about to sign a purchase agreement and wire an additional six-figure deposit to the seller.

While the client told me they had run a background check online on the seller prior to making their first deposit, I started with a check of my own and quickly discovered that the seller’s entity was suspended in California.

After making a connection between the seller’s current entity and several previous entities I found two cases filed against the seller for breach of contract and fraud. The facts in both cases turned out to be strikingly similar to the current transaction, but because one had settled and the other had gone to arbitration there was no record of a judgment in the online background check my client had run himself.

My client was preparing to wire the additional six-figure deposit to the seller when I reached them with the bad news.

Fortunately, they stopped the transaction and rescued the deposit funds shortly before they would have been lost forever.

While no one starts a transaction hoping for a result like the one my client had, sometimes the best deal is the one you don’t do. They were not happy to lose their initial deposit, but the client was thrilled that they had dodged a six-figure bullet– as well as the cost and time of the years of litigation that would have likely followed.

March 24

44 Reasons Small Business Buyers Should Not Rely on a “Standard” Purchase Agreement

I recently represented a client who was preparing to enter escrow on a small business purchase. The broker (who was working with both my client and the Seller) wanted to use a “standard” business purchase agreement, along with some additional provisions escrow would provide. After taking a look at the escrow provisions I suggested to my client that there were a number of key areas that neither the standard form agreement or the escrow provisions covered.

“Is there really that much that isn’t covered by the ‘standard’ agreement that it’s worth drafting a separate agreement?”, my client asked. It was a valid question, and I told them that I would send over my thoughts on what I’d like to see included, and he could decide whether any of my suggestions were important enough to include. When my client received my proposed rider, he told me, “I can’t believe that none of this is in either the standard agreement or the escrow provisions.” And those were just the forty-four provisions (out of hundreds of possible provisions we could have possibly included) that mapped directly to his transaction.

While he understood the protective value of each of the provisions I was proposing, my client was concerned that the seller might not agree to include everything. “Proposing provisions like these serves two purposes,” I explained, “First, if you do consummate the transaction and run into issues down the line, you’ll have a much broader set of protections than if you had to rely on the “one-size-fits-all” approach of the standard agreement. Second, proposing a detailed set of seller representations and warranties will often reveal hidden problems in a deal before it ever goes through.” My client agreed, and proposed the complete rider to the seller, who immediately balked and backed away from the transaction without even really looking at it.

While my client was disappointed, he quickly saw how valuable it was to simply propose a detailed set of representations and warranties even if they weren’t accepted. We discussed whether there were any specific provisions the seller was concerned about that we might be able to modify, but it quickly became clear that something “just wasn’t right” with the transaction. As I told my client, “None of these provisions are particularly complicated—if the seller won’t even consider walking through them then this transaction is probably not the right fit given that you want to minimize your risk.”

If you’re buying a business, before you sign anything, remember that there are at least forty-four good reasons not to simply rely on a “standard” purchase agreement.

July 24

Top 5 Myths of Independent Contractor Classification

I have had a wide variety of experience with independent contractor classification issues for years as both a business owner and attorney and I’m still surprised by how many people get it completely wrong when they decide to “1099” someone who should clearly be an employee. With the IRS and other agencies cracking down on independent contractor worker classification issues, this guide will steer you clear of the 5 most prevalent and dangerous myths.

Myth #1. “My business is fine…we use independent contractor agreements and our workers agree that they’re independent contractors.”

Reality: Having an independent contractor agreement with workers won’t prevent the IRS or government labor agencies from treating them as employees if the working relationship fails to meet the tests each agency uses to determine employee classifications. Lack of an independent contractor agreement is evidence that workers are employees, but having a contract–even if it clearly outlines both the intent of both the company and the worker to form a contractor relationship–will not protect the business.

Myth #2: “The IRS classified our workers as independent contractors, so I won’t be liable for any state or local labor agency employee regulations.”

Reality: State and local labor agencies use different classification rules than the IRS. Passing the “test” of one agency doesn’t ensure that another agency will classify the same workers the same way.

Myth #3: “Hiring workers as independent contractors is less expensive than hiring them as employees.”

Reality: To determine whether a worker is truly an independent contractor the IRS and other agencies look at a range of factors that include your ability to dictate how and where work is done, whether the worker does work for other companies, and whether you provide training and equipment. While you may save money on payroll taxes or benefits in the short run by using contractors, in the long run the lack of control, loss of focus, and inability to train contract workers can easily cost more than the expense of hiring those same workers as employees.

Myth #4: Even if a contract worker decides to sue me as an employee, I am protected if they signed a waiver or release.

Reality: By law, workers cannot waive their right to bring claims for a wide range of employment discrimination and wage and hour violations. If a worker has been improperly classified as an independent contractor they can still bring many claims regardless of what they may have agreed to in a waiver.

Myth #5: “I can terminate an independent contractor relationship at will.”

Reality: While this may be true under the contract you have, if your agreement with an independent contractor calls for you to be able to terminate them at will, this will weigh against you if you’re ever audited on a classification issue. The requirement for a specific project length and penalties if you terminate a project early help point to a true contractor relationship. The ability to terminate at will points to an employment agreement.