Most business people retain lawyers for “specific tasks,” such as forming an LLC, drafting employment contracts or negotiating commercial leases. However, the world of business is usually not a la carte. Typically, one business issue leads to and impacts several others. At Goldman Gruder & Woods, our Strategic Business Counsel practice takes a solutions-oriented, holistic approach to your business because we understand that’s the way business operates. Managing partner, Michael Goldman and Attorneys Neil Lippman and Descera Daigle bring a wealth of experience and knowledge to this practice.
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This type of practice requires good listening skills, the ability to identify different available strategies, playing the “chess game” to determine how adverse parties or affiliates might react, pragmatism and the ability to distinguish between important issues and those which are less important.
In addition to their extensive strategic business counsel experience, Attorneys Goldman, Lippman and Daigle bring a wealth of valuable contacts throughout Connecticut.
Among the types of problems our attorneys have solved are:
- The New Venture: How to fairly structure a new business when one partner contributes all the working capital and the other brings a wealth of valuable contacts
- The Breakup: How to structure a sale between two quarreling partners with differing objectives
- Making Referrals: How to use quality contacts in accounting, commercial real estate and banking to help a local retailer get out from under the weight of an onerous mortgage.
- Succession Planning: How to structure your estate and affairs when only one of several children is involved in a successful family business.
On account of attorney/client privilege and confidentiality, these cases are representative of the types of matters that this firm has handled. The particular facts and circumstances described in these case studies are compilations of different types of issues and matters that this firm has handled, with changes made in such facts as the parties’ names and occupations and relationships, figures, etc.
CASE STUDY CLICK-THRUS
1. The New Venture:
Case: Two unrelated parties (“Jones” and “Smith”) wanted to form a new business that would provide consulting services. Jones and Smith each had separate consulting contacts in the same industry and thought that if they brought their talents together, they would be able to maximize their income. Smith came to see Attorney Goldman, thinking that he needed a simple, one-page agreement to form a limited liability company. At the initial meeting, Attorney Goldman asked Smith the following questions:
Are you each investing the same amount of money and time into the business?
Since each of you is responsible for making sales and servicing client work, should your compensation always be equal, or should a party receive an override on sales revenue and/or time billed?
What happens to the business if one of you wants to leave? Can each of you go back to your old contacts for business, or will there be a non-competition period?
It turns out that Smith was going to fund 100% of the initial $100,000.00 of working capital needed by the business because Jones lacked the funds to put into the business. He would start working at the business immediately, and Jones would finish up some client work that he was presently doing and would join the business once it was going full swing. In Smith’s opinion, Jones had better sales contacts, but Smith’s work product was more respected in the industry. This is what made them a good team.
Issue: After listening to Smith, Attorney Goldman determined that if times got tough, Jones, who wasn’t investing any money in the new business, would be pretty quick to jump ship and seek out employment offers from clients he had brought to the firm.
Solution: As a result, Attorney Goldman advised Smith to structure the company as follows:
a.The company should sign a promissory note to evidence Smith’s loan to the business and give a lien to Smith secured by its accounts receivable. This would protect Smith from claims of creditors in the event that his loan was not repaid.
b.All cash flow earned by the members in excess of $10,000 per month would be paid to Smith, together with interest on the loan at prime plus one percent, until Smith’s loan was paid in full.
c.Jones and Smith would each receive a ten per cent (10%) commission from the company for all sales. This way, if Jones achieved significant sales, he would be earning good cash flow and not be tempted to leave the business. Also, Jones wouldn’t feel underpaid for having made more sales than Smith.
d.Both Smith and Jones should agree to a non-competition agreement, prohibiting each party from working for any existing client for a period of 1 year after he leaves the company. Furthermore, anyone leaving the company within the first 5 years would lose a share of the company’s receivables (in an amount that would decline over the 5 years) as a way of incentivizing the parties to stay with the business if times get tough.
In retrospect, both Smith and Jones (who are still together) agree that without having discussed these items in full and documenting them in writing before the venture started, the venture would have most likely failed almost immediately after it started.
Case: Able and Baker had run a successful manufacturing company for a number of years. However, they had a falling-out when Able was unwilling to hire Baker’s son-in-law to an executive position for which he was arguably unqualified. Able and Baker both agreed that not only did they have to separate, but if they failed to do so quickly, their infighting would hurt a very profitable business.
Able came to see Attorney Goldman, thinking that he needed to determine how to buy out Baker.
Solution: After speaking at length to Able and studying the business’ financial statements and infrastructure, Attorney Goldman determined that Baker would probably be willing to pay Able more for the business than Able would be willing to pay to Baker, mostly because Baker wanted to the business to be available for his son-in-law. With this in mind, he structured an agreement for sale by Able to Baker, whereby Able would receive a lien on the company’s equipment, inventory and receivables. Able was to be paid over a five-year period. Able would be further compensated in the event that the business was sold to a third party within the five-year period by receiving a share of the sales price. Baker agreed to this because he intended on passing the business to the son-in-law when Baker was ready to retire. Able agreed not to compete against the business, but Able was also permitted to use the company’s vast customer list for non-competitive businesses.
Able ended up using the customer list as a springboard for a new business that was moderately successful and, when coupled with the very large buy-out payments from Baker, provided him with a better income than he earned from the business. After 2 years, Baker realized that the business was too much for the son-in-law, and he sold it for a very good price, which was shared with Able.
Case: Mr. Williams was the sole owner of a retail business located in a building owned by him and several family members. This building was located next door to a larger building that was also owned by Williams and his family members. This building was leased to an unrelated third party. Both buildings formerly housed a business run by the family members. Due to poor planning by the prior generation, both buildings were mortgaged together, under very onerous terms. The mortgage was coming due, and since the tenant of the adjacent building was not doing well, Mr. Williams did not know how to proceed.
Issues: Attorney Goldman referred the client to a new accountant, who was able to give meaningful financial information reports to Mr. Williams about his business and the adjacent business. Attorney Goldman also put Mr. Williams in touch with a commercial realtor, who determined that the large adjacent building could likely be leased within a period of six to nine months if the present tenant went out of business. Armed with this information, Attorney Goldman found a new bank that was willing to make separate loans on the two buildings and close them simultaneously, in order to pay off the onerous mortgage loan.
Solution: The bank lent enough money to escrow over a year’s rent to pay the mortgage on the large building in the event that the tenant went out of business, thus giving time for the broker to remarket the building if necessary. With the onerous mortgage replaced by a reasonable loan, the family members’ cash flow improved significantly. In addition, with these problems resolved, Mr. Williams was able to concentrate his time running his retail business, which he was able to improve due to the elimination of the distractions and stressed caused by the onerous mortgage and adjacent building.
4. Succession Planning:
Case: Mr. Rubin (“Rubin”) owned a successful wholesale supply business. Although he had four children, only one (“Simon”) was active in the business. Rubin was at the point of slowing down, and Simon had already become the key person in the business. Rubin wanted to leave an equal amount of money to each of his children but also wanted Simon to run the business without interference from his other 3 children. Rubin also did not want to part with control over the business at this time, although he had been pretty generous with all of his children in the past and expected to continue to be. Rubin had never bothered to incorporate his business, so he had been running it as a sole proprietorship. This meant that Rubin was personally liability for anything that happened with the business, including personal injury, breach of contract and product liability lawsuits).
Solution: Attorney Goldman suggested that Rubin form a limited liability company. He could continue to hold all of the LLC’s interests for as long as he wanted. This LLC entered into an employment contract with Simon, providing for an appropriate salary, as well as bonuses based upon appropriate metrics. If Rubin died, all children would inherit an equal share of the LLC, but the employment contract survived Rubin’s death and limited the circumstances under which Simon could be fired by parties other than Rubin (Basically, so long as the company reached certain metrics, Simon could only be terminated for theft.). Furthermore, Simon was given an option to purchase the business upon Rubin’s death or retirement. The option price was calculated based upon an appraisal formula, such that Rubin’s other children would receive fair market value minus a small discount for Simon so long as the business’ value was above a certain minimum. The thinking was that if Simon ran the business so well that he added value for his siblings, Simon deserved a discount. Simon would pay for his siblings’ interests over time, to be evidenced by interest-bearing promissory notes, secured by the LLC interests that Simon was purchasing. This allowed all siblings to share in their father’s wealth, while allowing Simon to run the business without undue interference and profit from his good stewardship.
The key ingredients to strategic representation include the attorney’s ability and willingness to ask the right questions, gain an understanding of the particular business and situation, and already possess familiarity with numerous types of scenarios that can occur within a type of business and among the key people in a business. The solution must be something that is attractive to all parties involved, that the client and his or her counterparts can understand (as opposed to trusting the lawyer with a “black box”), and that can be created within a reasonable budget.
Michael L. Goldman, Chairman of the Business/Corporate Law Department, combines years of legal practice with his extensive personal business experience to give effective representation in a variety of business settings and transactions.
Attorney Goldman is a graduate of The Wharton School of Finance and Commerce at The University of Pennsylvania and has taught accounting at The Wharton School. Furthermore, Michael serves on the Board of Directors of a public corporation and devotes significant time to non-profit entities to which he renders business and management advice. Call 203-899-8900.
By Michael Goldman