Your Business Definitely Needs a Standard Form Contract

Most, if not all, successful businesses that provide services and products to other businesses or consumers have a standard form contract. This contact essentially spells out the terms of any deal with a client or customer, as well as includes protections and contingency planning for your business.  A well-drafted business contract by a skilled business lawyer can provide substantial benefits to your organization, particularly when something "goes wrong" and a dispute arises.  I had litigated numerous cases where a business owner has justified their disregard for a contract by stating that "I have never had any issues before so why should I expect one in the future?" This is a short sighted approach to the reality that operating a business involves a substantial amount of legal liability.  Almost every business during its life cycle will encounter a legal issue, and when it does arise, a well-drafted contact will become a worthy investment and help protect your business if you end up in litigation. 

The words "standard form contract" is really a flexible term, and it is highly likely that each contact will be tailored to a particular deal or customer. The "standard" component will incorporate a contract structure, essential terms and conditions, as well as a deal structure. This contract will become part of your business best practices and will help your managers and employees enter into agreements that will not cause you additional legal headaches. Some of the "standard" components of a business contract include: 

 - Specific Services / Products  

- Pricing and Payment 

- Representations / Warranties / Limitation of Liability  

- Dispute resolution - Arbitration, preliminary injunction, and other rights. 

-Choice of Law / Venue 

These are just a few areas that should be addressed by any "standard" form business contract. If you have not yet invested in a business contract, please contact the Law Office of Stefan Cencarik, PLLC, business and contract lawyers that works closely with closely held businesses.  Or if you would like to ensure that your existing business contract meets your business and legal needs, please contact our contract lawyers at 617-669-9780 for a free consultation. 

Small Business Owners and the Personal Guaranty - How Can You Avoid Liability?

The easiest method of avoiding personal liability for a debt as a small business owner is to never sign a personal guaranty. However, banks and other institutional and private lenders are mindful that most start up businesses, entrepreneurs, and young businesses have very few valuable assets, thin capital, and unpredictable revenues to obtain sufficient security when issuing a loan. In other words, it is nearly impossible for a small business to obtain a loan without providing the lender the security of a personal guaranty in addition to other commonly used types of security, such as a collateral assignment of leases and rents, security agreement and UCC- 1 Financing Statement ("UCC-1"), or a mortgage  on the commercial property, and, sometimes, the owner's personal residence. 

It is all too common an occurrence that when a business owner decides to exit the business, wind down operations, or sell the assets of the business to a third-party, the personal guaranty may become a significant issue.  For example, if a business debt is owed to a bank for a commercial loan, and the business owner or partners decide to terminate business operations while the debt remains unpaid, it is highly likely that the bank will demand payment from the guarantor under the terms of the personal guaranty.  As another example, a business owner may be personally liable on a loan or lease agreement, and the assets of that business are being sold to a third party.  Not only does this create an issue if the bank holds a UCC lien on those assets, the question arises, for the business owner, as to how the debt will be satisfied so that he/she may be released from the obligations of the personal guarantee.  No business owner should sell a business or its assets, and remain personally liable on any of the business debts, particularly if the debt is tied to those assets.  

How does a business resolve the liability associated with a personal guaranty? 

The easiest way to manage a personal guaranty is to make payment arrangements, or negotiate a payoff of the debt and release of the guaranty.  In this instance, the lender will look for cash and may be willing to accept some type of equity or other type of security as consideration.  It all depends on the circumstances, as well as the viability and nature of the acquiring business. 

The other method of dealing with a personal guaranty is litigation.  If you fail to pay a debt upon reasonable demand of the lender under the terms of the personal guaranty and promissory note, then it is likely that you will be dragged into a state court legal proceeding. Litigation is costly, time consuming and expensive for all participants.  If you are defending the enforcement of a personal guaranty, the best method of defense is equitable principals. In this instance, you are relying on the lender's acts and omissions during loan issuance and administration to provide you with an equitable defense to enforcement. For example, has the lender negligently handled the loan by failing to notify the guarantor of material changes in the loan, such as loan amounts, credit line increases, term, and the like? Did the lender take actions that indicate that it waived its rights to enforce the guaranty, or did it enter into another agreement that satisfies the debt, in full or part? Did the lender fail to adequately provide adverse information concerning the business financial affairs that somehow increased the guarantor's risk?  Did the lender allow the default and permit the debt to accumulate interest and principal? These are all questions that any Boston area business owners should ask when faced with a personal guaranty. 

There also may be issues with the personal guaranty document itself. The document may fail to properly identify the parties; capacities in which the parties have signed; failure of consideration; the guaranty could be a payment guaranty or a collection guaranty;  or some other type of technical issue with the personal guaranty. However, it is highly likely that lenders have learned from mistakes of their own, mistakes of others, and/or have hired skilled lawyers to draft the personal guaranty.  In this instance, the best hope for some type of technical issue is that the lender obtained the guaranty from an unqualified attorney or used downloadable form obtain from an Internet legal form retailer. 

Finally, there is reorganization and/or liquidation in a bankruptcy proceeding.  This is typically the final option for most business owners, and is not desirable for those wishing to keep their financial affairs out of public view, and out of the hands of a bankruptcy trustee. 

As outlined above, there are narrow circumstances that permit a Massachusetts business owner to avoid personal liability for a business debt and/or personal guaranty.  If you or any business owner or a group of business partners have questions about liability under a personal guaranty, Attorney Stefan Cencarik, a business lawyer serving the Boston area, is available for consultation at 617-669-9780. 

Letter of Intent – What Benefits Can This Agreement Provide My Business?

A carefully drafted letter of intent is typically the “agreement in principal” entered into between two parties entering into a business transaction.  A letter of intent (“LOI”), or sometimes referred to as a Memorandum of Understanding (MOU”) or Term Sheet, is a document used to memorialize some of the basic terms of a prospective transaction, as well as express the parties’ commitment to entering into a formal purchase and sales agreement.  A letter of intent is typically used for asset and business purchases, stock or membership interest purchase and sales, equipment purchase and sales, as well as company mergers. The letter of intent is an effective tool of making a seller more comfortable in dealing with the buyer, and will encourage the seller to discontinue any efforts to market and sell the asset.

The most traditional feature of a letter of intent is that the agreement is non-binding. In other words, the parties are not yet entering into a valid and enforceable contract that commits both sides to the deal.  Typically, a letter of intent will outline certain conditions and contingencies that will allow the parties to walk away from a potential deal without any liability.  These conditions and contingencies can range from financing to inspection of the books and records to other due diligence issues.  The letter of intent should have a firm deadline, with conditions for extensions, for entering into a formal purchase and sale agreement.

If the letter of intent, or memorandum of understanding, is non-binding for both parties, then what benefits does this document provide to your business? 

A letter of intent can assist a Buyer by agreeing to an exclusivity period that will preclude the Seller from negotiating another deal with third party buyer or competitor.  The longer and more restrictive the exclusivity covenant, the Seller is more likely to demand more refined deal terms, and resolve some significant issues early on in the negotiation process.  The Buyer and Sellers can both obtain the benefits of setting the essential deal terms, such as: the deal structure, payment or consideration, non-disclosure/confidentiality, exclusivity period, indemnification, hold backs and adjustments, retention of management or key employees, as well as the timeframe for signing the purchase and sale agreement, due diligence and closing. The letter of intent provides both parties the opportunity to resolve substantial deal issues and obtain an ethical commitment from each party to those terms. So, the Letter of Intent will serve as the framework for the ultimate transaction. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting business owners with all aspects of business and asset purchase and sales, or often termed buy-sell agreements. If you are in the negotiation stage, and have questions about a Letter of Intent, please contact Attorneys Stefan Cencarik at 617-669-9780.  

The Sword and Shield - Non-Disclosure Agreements in Massachusetts

What purpose do Non-Disclosure Agreements (NDAs) serve, and why would I want to "complicate" my relationships with employees, other businesses, and investors?  The time for hand shake deals and unspoken understandings is over. No matter how strong your relationship with any individual or company, relationships and attitudes can change in an instant.  It is, therefore, impossible to predict how employees, other businesses, and investors will treat your private discussions, sensitive information, and intellectual property when a relationship suddenly deteriorates.

A non-disclosure agreement (NDA) drafted by a qualified Boston business lawyer will act as your shield and sword. What types of instances call for a NDA, and what types of benefits do these agreements provide your business? There are numerous situations that call for a non-disclosure agreement (NDA): 

- Protection of intellectual property internally - What measures to do you have in place to protect your contact lists, special methods,  unique processes,  knowledge base and best practices, formulas, and other trade secrets from your employees?  What is preventing your employees from quitting their position at your business, and then starting a new competing business in your market? What is precluding a key employee or manager from working for your competitors?  Intellectual property, in general, can be the essence of any Massachusetts business, and the exposure or misuse of this information could negatively impact the revenues of a business.  

An NDA can preclude internal misappropriation of intellectual property by entering into a contract that specifies the ability of a party to disseminate, use, copy, or appropriate intellectual property.  Typically, an NDA will provide the business a right to seek an injunction from a local Court so as to obtain an order to prevent the party from violating the terms of the NDA.  This Court order will compel the party to abide by the terms of agreement, or face any penalties for contempt of court. 

- Protection of intellectual property externally - What types of limitations do you place on external entities or individuals who may need to use your intellectual property from time to time? What rights do your consultants, strategic partners, and other parties have to your intellectual property, and what happens when  you stop doing business with one another. A well drafted NDA can set parameters on the use of your intellectual property outside of your business. And you will have an enforceable contract with pre-determined remedy for enforcing your rights to prohibit misuse of your property.  

-Confidentiality of sensitive discussions - How would your key employees, managers or minority shareholders or members react if they discovered that you were considering offering your ownership interest for sale? What do you think your competition would do if they found out that you were considering merging with another company, or planned on laying off a portion of your workforce? Would you want your proposal disclosed to a party other than your potential new customer? The list of the types of sensitive business discussions that need to remain confidential are endless.  A well drafted NDA can restrain other parties from disclosing information that may provide other parties a competitive advantage, or the disclosure of information that could negatively effect a business.  

The few examples above show that the benefits of an NDA far outweigh any concerns for complicating or scaring others while doing business in Massachusetts. It is, therefore recommended that you have a qualified business lawyer review your non-disclosure agreement, and other business contracts to ensure that your rights are protected and that they comply with Massachusetts law. And, if your business is not using a NDA, it is highly recommended that you accept that this protective measure is a best practice.  

So, You Want to Buy a Business and You Have Never Done This Before . . .

Would you perform a root canal, or other surgical procedure on yourself?  The most common (and rational) answer is: NO.  Most Boston area businesses and residents will hire a professional to assist them when they have a highly complex, specific need. What makes a business purchase different from a surgical procedure or even the purchase of a new home? What type of prudent business decision are you making when you do not hire a qualified business lawyer to protect your interests and make sure you are receive the fruits of your deal? Hiring a business lawyer serves as the shield and sword for your financial interests in any business transaction.  This is neither a "do it yourself" task for an experienced entrepreneur or savvy business person, nor a person entering the world of business ownership for the first time.     

A new business owner may consider exercising fiscal discipline by deciding not to hire an attorney to assist them with their business purchase.  Often new Massachusetts business owners want to avoid having to borrow or obtain additional funds, and/or have to pay out more funds to attorney in addition to the purchase price.  This decision can be fatal for a number of reasons. You do not have an experienced third party to provide you with an outside counsel that is based on experience, best practices and tribulations. You will not have an individual that is not personally vested in your deal to provide you with objective advise, opinions, and  advocacy (if necessary) during a transaction.  You also will not have an independent party to assist you in the due diligence and legal relations that you will invariably enter into. 

Non-employee companies, main street businesses, suppliers, and venture funded, high growth companies all can benefit from a business lawyer who can ensure that you make a strong start out of the gate.  As soon as you make an offer (or even earlier in the negotiation process) you should consult with a qualified Boston business lawyer to ensure that you are protected each step of the business transaction.  Attorney Stefan Cencarik works closely with experienced and new entrepreneurs alike, and is committed to helping you close the deal on-time and on budget.