Making It Legal:

A written contract doesn’t have to be filled with legal mumbo-jumbo in order to bind your business. That was a hard lesson learned by a Missouri company, in the case of Baum v. Helget Gas Products, Inc.

In the Baum case, the prospective employee (Baum) took copious notes during his interview, including descriptions of salary, benefits and the length of his contract. He wrote “Contract With Helget Gas Products St. Louis Mo. Market” across the top and handed it to the Helget manager, who signed it. When Helget fired Baum a year later, Baum sued and won, saying he had a three-year contract. The court agreed.

The moral of the story: Don’t sign anything employee-related without first running it by legal counsel or HR. What the Helget manager could have done is to make a copy of Baum’s notes and tell him that they’d be provided to corporate counsel, who would draw up the appropriate documents in accordance with company policy.

Remember the days when real estate seemed invincible, defying the laws of gravity? Well, the joke’s on us, and now many real estate investors are scrambling to dump their properties so that they don’t go down the valuation toilet with them.

Q: I bought some property and put 25 percent down; the owner financed the balance. After three years, the mortgage is down to $190,000, but the property may be only worth $190,000. The property is sort of break-even with tenants in, but if I lose them or can’t fill it in the future, it could start to drain me. Can I simply give the property back to the owner?

A.: The extent of your exposure depends on the wording of the mortgage note and other documents that sealed your deal when you bought the property. If you bought it in your name individually, it’s possible that the former owner/current mortgagor could come after your other assets (namely, your other real estate investments) depending on whether you own those individually as well. In these times, the former owner may not want the property back–after all, if you’ve found it enough of an albatross, the former owner might prefer the regular (cash) mortgage payments to owning property on which there will be maintenance obligations and expenses (not to mention taxes). Depending on the interest rate of your owner financing, you might want to explore other mortgage (bank) options–just to get a sense of the going rate that’s being offered. Review the documents with a real estate attorney to get a clear (and realistic) sense of your options–and what they’ll cost you.

From my dear colleague, Jennifer Schiff, comes this intriguing article on “Why now is the time to optimize and freshen up your website.”

It’s tempting to want to throw money at SEO specialists.  While I “get” the optimization thing, I have my niggling doubts as to whether the hordes who say they know the secrets really do.  Is SEO a magic bullet or snake oil?

That’s where small businesses need to be very careful in their agreements with these companies.  Ask for references (and check them!).  See what kinds of guarantees (or disclaimers) they put in their contract with you.  Make it very clear what they will be doing for the fee you’re paying them and whether this is on a project basis or will be an ongoing expense for as long as you have your website.

Cash (flow) is king, especially in a challenging economy. But there are ways you can ensure that you get paid in a timely manner.  Jamie Herzlich’s article in Newsday gives some handy pointers, including:

• Staying on top of unpaid invoices
• Developing a system for handling them
• Putting payment plans in place ASAP (if full payment is not forthcoming)

Another suggestion: Make sure you have your agreements with your clients and customers in writing. Whether it’s a full-blown contract or a purchase order, anything written that confirms the terms of your arrangement can help you. It sets the expectations up front and provides a basis for a lawsuit if you need to collect.  Same goes for any payment plan arrangement–make sure you document those agreements.

It’s so easy to get sucked into an awkward spot when doing business with friends. It can start out as an exchange of expertise (a barter of the minds, if you will). Add in a dollop of friendly advice and MasterMinding. Mix together in a bowl . . . and watch the uglies emerge.

One colleague (”Joanne”) spent months helping her college friend, “Darla,” develop her website and blog. Joanne shared all sorts of valuable information about how to drive traffic, target influencers and handle the process of blogging so that itwouldn’t overwhelm the rest of Darla’s business. Joanne also thought she’d get something out of it: Darla has a lot of expertise in an industry that Joanne wanted to break into. So Darla seemed the perfect case study.

One day, Darla told Joanne that she had a potential client for her–another company wanting to start a blog. But there was a hitch: Darla wanted a finder’s fee. This got Joanne’s nose out of joint, given all she had done for Darla. For free. After a lot of back-and-forth, Darla says, “Oh, never mind–I’ll just help the client do it on my own. I’m not really competing with you, anyway, for the business.” Joanne was furious . . . and bewildered. After all the time she had spent with Darla–had she unwittingly ended up training her next competitor?

Here are some ways that Joanne could have managed the relationship better:

• Put a limit on the amount of time she was prepared to spend for free.
• Make it clear (ideally, in writing) that this would be a barter relationship and determine how she wanted to be “paid.”
• Given Darla just enough information to understand the process, but not so much that Darla could build a business on it.
• Treat Darla like any other client and have her sign a non-compete, saying she won’t use the infomation in connection with a competing business.

Any other suggestions?

Just when you thought it was safe to use your business credit card to buffer the not-quite-robust-cash-flow experience you’ve been having, check again. This recent article from the Wall Street Journal online indicates that companies such as American Express are slashing credit lines–even for solid customers–when they are deemed a “credit risk.”

If you check your credit terms, you’ll probably find a “fine print” provision that allows the credit card issuer to make changes at any time. If you think you’ll have a need to rely on your credit cards or credit lines a little more than usual over the next few months, it might be worth confirming the amount of your credit lines with your credit card issuers.

There’s more to doing business with your nonprofit organization than just the disclosure required for “interested transactions” and avoiding a conflict of interest when making decisions on the organization’s behalf.

As a board member, your status is similar to a trustee. The organization’s money is not yours to spend as you please. You are a “steward” for the organization. You must make prudent financial decisions. And generally, you must use a higher level of care and caution than you do with your own business. Your board will also want to make sure that the membership doesn’t feel excluded from any paying contract opportunities that arise (remember, they’re not illegal; you just have to handle them carefully).

These issues are referred to as “arm’s length transactions” and “procedures.” Hopefully these scenarios will illuminate them:

1. Board member “A” submits a proposal to draft a strategic plan for organization XYZ. She prices the proposal at $500,000. (Most people with her experience level in the industry would charge $50,000.) “A” discloses that her firm would receive the funds. She recuses herself from the room for voting. The board votes in favor.

There’s no violation of the conflict of interest (some would say) because of the disclosure. However, XYZ was not given a reasonable, fair price for the project, such as would be given by an outside third party. So this was not handled as an “arm’s length transaction.” In addition, given the enormously inflated price tag, the board members might (if anyone got wind of the full story) be accused by membership (or donors) as squandering XYZ’s money and could find themselves on the wrong end of a lawsuit for mismanagement of organization funds.

2. Same as above, but “A” prices her proposal at $50,000. It’s a fair price for the industry. She discloses the financial gain. She recuses herself from voting. The board votes in favor. They’ve avoided the conflict of interest and the transaction is arm’s length–no better and no worse than working with an outsider. Membership gets wind of this. Every member who’s in the same industry as “A” goes bananas because he or she wasn’t given an opportunity to be considered, and there was no open/transparent RFP process. The board is accused of cronyism and favoritism, and membership falls precipitously.

A common suggestion for effective networking is “Get involved.” So we join organizations and nonprofit groups with the hope that, as we serve in a leadership capacity, we are also piquing the interest of others who might want to use our services–or be willing to refer us to others who do. When the opportunity does come to deliver our services on a paying (rather than volunteer basis), it can seem like we’ve hit “pay dirt.”

But these kinds of opportunities are not as straightforward as they look. Board members in particular need to make sure that, if hired, they have followed the laws of their state concerning the conduct of nonprofit organizations.

Let’s say your business provides web design services. You serve on the board of your local chamber of commerce. The chamber happens to need a new website, and hires you to design and host it–for a fee.

Those kinds of transactions are known (not surprisingly) as “interested transactions” because the board member (you) has a financial interest in the outcome. Under many state laws, if a board or committee member has any financial interest in a business opportunity being presented to the organization, that financial interest should be disclosed to the board. This is different (although related) to having a “conflict of interest.”

Ideally, when you serve on a board, you put the interests of the organization ahead of your own. It’s in the organization’s interest to get the highest quality web design services at the lowest possible price. It’s in your interest to get paid as much as possible for providing the web design services. Therein lies the conflict.

The “conflict” doesn’t arise in performing the services; it arises when the opportunity is presented to the board. If you receive a financial gain but your proposal has been vetted fairly, there’s been full disclosure of the financial interest and the proposal has been deemed in the objective best interests of the organization to pursue (with other members having had the fair opportunity to participate and offer proposals of their own), it’s not a conflict. However, you will have to recuse yourself from the voting when the proposal comes to the board for a vote.

To protect yourself (and the organization), make sure there are minutes of the meeting where your proposal is discussed and a record of the vote taken.

More naches and brag–this time on the issue of extending credit to customers. See Melanie Lindner’s piece in Forbes.com on “How Much Credit do Customers Deserve?” She and I talked about the changing economic climate (euphemism) and whether it made sense for businesses to extend credit to customers.

Whenever you extend credit (which occurs any time you don’t get paid at or before the time you provide your product or service), you take a risk of not getting paid . . .  at all. It doesn’t take a Harvard MBA to understand the negative impact that has on your cash flow.

One way to lessen the blow is to charge interest or late fees on outstanding balances. However, you can’t do this without letting your clients or customers know in advance–and courts won’t grant you interest (or late fees) unless they’re part of your written contract. So make sure you have this provision in your agreements . . .  and create a system for collecting debts so they don’t fester. The longer it’s outstanding, the less likely you are to collect the money that’s rightfully yours.

Today, I feel vindicated. I just came across Laura Bell’s post, “Business Law Basics,” which reminds me of my apartment after it’s cleaned: neat, fresh and pleasant. Her point, delivered gently, is that too many entrepreneurs do deals without having a written contract. It’s like bringing a knife to a gunfight: You may be prepared for trouble, but not well enough to avoid serious injury.

Bell outlines the elements of a contract (important, if you want to understand when the deal is actually “struck”) and why a cancellation clause is helpful.

Exit strategies (the “how-do-I-get-out-of-this-deal-if-it’s-really-not-working-for-me?” language) are a vital part of any business relationship; otherwise, you risk being stuck in a bad situation with no easy (or inexpensive) way out.

Want a quick an easy way to learn more? Check out my booklet guide, Term$ and Condition$, so you’ll know the highlights of what to put in your agreements.

From the “I-couldn’t-have-said-it-more-thoroughly-myself” department, here is a series of helpful posts from Texas attorney Ryan Roberts (”The Startup Lawyer”) on the ins and outs of leasing office space (and not getting ripped off in the process).

Part 1: Why much of what is in a lease is not boilerplate, despite the microscopic print. Understanding the ways that commercial real estate brokers (whom Roberts refers to as “tenant reps”) can help your business… and when they might not be putting your interests first.

Part 2: Fourteen provisions to consider negotiating before your company signs a commercial lease for office space.

Part 3: Eight of the not-so-obvious terms that can bite you if you don’t address them.

Franchises can be an attractive way to start a business. There’s already a system in place; you know (if you’ve done your due diligence) it’s a proven, profitable model; and the franchisor provides you with ready resources.

But “fools rush in where angels fear to tread,” said English poet Alexander Pope. And franchises can be a particularly thorny business model if you don’t investigate them carefully. They are subject to a lot of regulations, and the fine print (you know, that microscopic text filled with legalese) will hurt you if you are not aware of its provisions. As Iowa business attorney Rush Nigut points out in his post on franchises, “Four Things That Make You Go Hmmm . . . ,” there are some red flags that should make you not only think twice about investing in a particular franchise, but stop in your tracks, turn 180 degrees, and walk the other way. Read on to find out that they are!