Contracts are important documents and make the business world go round. Contracts are used to ensure that both parties understand the agreement and terms of that agreement. But the underlying importance of a contract is to answer the second question of “What If? Then What?”

A contract should answer as many of the What If? scenarios as possible. I am not suggesting having a two hundred page contract for painting a house. But a two page contract should not be used for selling your business either. Contracts are tools for protecting both parties and become like law in the eyes of a court when there is a dispute. A contract can specify the court allowed to bring action and even choose which state’s laws to apply once in court. For example, a Texas court is bound by Alaska state law if Alaska was the state law specified to be used in the contract.

If there is something in a contract that you do not understand, do not just take the word of the other party. They may not know the answer either. Retaining an attorney for contract review, BEFORE signing a contract, can save you money, business relationships, and headaches. It is best to be knowledgeable regarding your company’s obligations and risks associated with a contract.

After a contract is signed, negotiations are usually out of the question. You are proactive with providing products/services and marketing those products/services, be proactive in the middle step as well. A common mindset of entrepreneurs is the folly that a large monetary contract is worth all of the risk; and it may be but the entrepreneur should always know what those risks are BEFORE signing and this can be accomplished by having a skilled lawyer conduct a contract review.

There are numerous aspects to buying or selling a business. But the following are general areas to be carefully evaluated during the business deal.

(a)                  Non-Disclosure Agreement: The non-disclosure agreement is important to protect the seller’s information regarding financials, intellectual property, business practices and other insider information. At first glance the agreement looks as only a benefit to the seller. But this also allows the buyer to offer to purchase a similar business, in the event of not closing the current deal, without having a prior offer exposed.

(b)                  What is Being Bought/Sold? This may seem like a simple answer: the business. But digging deeper the question expands - are you going to be selling the stock of your corporation/membership units of your LLC or the assets of the business? The way the business is sold determines risk allocation of potential liabilities.

(c)                  Valuation & Due Diligence: There should be enough general background information provided about the business that you can start to determine a fair purchase price. Don’t just look at the reports provided by the company; ask for tax returns and bank statements to support the financial reports. Financial information is not the only documents that need to be evaluated; the stability of the customer base, potential accounts receivable issues, and employee relations should not be overlooked. Be sure to get a true picture of how the business runs.

(d)                  Purchase Agreement: The documents that are signed will control sale and post-sale responsibilities. Make sure that the complete agreement made verbally is translated into the written documents. In general, anything not included in the written agreements disappears once the contracts are signed. The agreements must be done correctly to help avoid future problems and misunderstandings between the buyer and seller.

(e)                  Closing of the Deal: If only the assets of the business were exchanged from seller to buyer each party has a few more responsibilities. Prior to the closing of the deal the buyer should form their own LLC or corporation. Resulting in the entity being the purchaser and not the buyer as an individual. After the close of the deal the seller needs to consider whether it is time to shut down their LLC or corporation, report final tax returns, etc. thus the seller can move on.

If this is the first business you are purchasing in the particular industry be informed regarding the laws and regulations that control the business operations. The current owner may not be adhering to those regulations (double check environmental compliance) thereby subjecting the purchaser to liability after the deal closes. What is the most stressful part of buying or selling your business? What do you wish you did or knew before a deal closed?

The taboo and risk of purchasing environmentally degraded property is declining; all thanks to city, state and federal programs. These programs may not only allow for limiting financial liability but also funding opportunities during the purchase and development phases. EPA defines brownfield as “abandoned, idled, or under-used industrial or commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination.” These properties hold a high potential for redevelopment since the value usually has been significantly harmed by the brownfield label, making the purchase price favorable.

Houston, Dallas, Fort Worth, Austin and San Antonio have all established Brownfield Redevelopment Programs. The aforementioned cities use grants from TCEQ and the EPA to fund redevelopment of brownfield properties. Financial incentives can include: (1) free environmental site assessments, Phase I & II, (2) tax incentives, federal and state, (3) grants for cleanup, and (4) decreased legal liability. The Texas Railroad Commission also has funding from EPA to remediate brownfield sites contaminated by oil and gas E&P activities.

Purchasing a brownfield property is not for every real estate investor or business owner. There are several considerations to make before taking on such a project. The most important being the availability of resources. Some properties may only have the perception of environmental problems or be a small area, while others constitute large, several year commitments before completion of clean up. Be sure to properly assess your time available for commitment to the project, and funding resources, both your own and governmental. This will allow you to investigate if brownfield investing really is the best avenue to take.

Having an attorney well-informed in both real estate, environmental law, and the governmental processes involved is essential when dealing with brownfield properties. Your lawyer’s knowledge will allow for smoother dealings with several agencies, clean up contractors, etc.; as well as ensure that all possible funding resources are being utilized. Another benefit to brownfield remediation is public relations. During the course of remediation, press releases should be common to advertise the milestones that have been accomplished thus far. Be sure to advertise to the community about your success at the completion of the project as well.

Starting a new business is exciting and time consuming. The exciting part is materializing your new idea into a business and ultimately into a profit. The time consuming parts are usually boring; choosing the entity type, forming the entity, and writing the company policies, etc. It’s much easier to borrow policies from other businesses; owners ask themselves – “why re-invent the wheel?”

The wheel does not need to be re-invented but it does need to be modified to fit. Having company policies in place are essential for every business. When a business has written policies regarding employees, vendors or customers this can protect not only the business but the other parties as well.

All too often new business owners will cut and paste policies from other companies or “do-it-yourself” software. These resources can be helpful to identify the types of policies a business should have in place but cut and paste without further review is a potential for increased liability. Adopting company policies that are unique to your business are important. When a business adopts policies that are too cumbersome for the business to follow to a “T”; this opens the door to liability issues.

Managing potential liability is an aspect of risk management. Even if a new business cannot afford to have an attorney draft all of the company policies, at the least an attorney should be consulted to review the policies to ensure the policies fit the business. Company policies should fit the business in size, industry and in other arenas.

There is risk in everything we do. From crossing the street, driving a car or running your own business, each carry some sort of risk. Risk is not always negative. The key is finding a balance between the negative risks and the opportunities of operating your business.

A goal is to minimize risk when possible and mitigate risk when avoidance is not an option. Insurance is only one resource, yet imperative, in risk management. Risk reduction is minimizing the risk or the loss from the risk if it occurs. For example, sprinklers installed in a building reduce the loss if a fire occurs but does not reduce the risk of the fire in the first place. The only way to minimize and mitigate risk is to be knowledgeable about the potential risks.

Without knowing the risk, a proper plan can not be developed. Business owners have their personal level of risk adversity. The amount of accepted risk by the business owner is a business decision and is best made by management. Being informed of the possible risks is vital to making business decisions that fit you and your business. Outsourcing legal risk by retaining an attorney allows you to focus on your business and develop your business without being distracted. An attorney can assess you business’ legal risk and is better versed at finding solutions to reduce or eliminate those risks.

Once risk plans are in place, management should periodically review the plan and meet with risk management team to evaluate the external business environment. A few questions to ask include -- Are there changes regulatory changes that affect our industry? Have any new employment law passed? Is the business categorized differently, thus subjecting the business to more/less regulations? Risk management plans should not be purely theoretical; the plans should include financial elements so business decisions can be made to maximize the value of the business. This approach to risk management was developed by Robert Courtney Jr. of IBM.

How often do you evaluate your business’ risk? Do you have a schedule for reviewing your business’ risk and management plans? Would quarterly legal updates specific to your industry or general monthly newsletters on new legislation from your attorney be helpful?

Contracts are as much about what is there as they are about what is missing. Most contracts have boilerplate language i.e. merger, notice, and arbitration provisions, are all common. Another provision that is usually lumped in with the boilerplate is indemnification. The indemnification provision should not be skimmed over lightly. The assignment of liability is tucked within this provision.

Entrepreneurs need to be careful when assuming nothing “bad” will happen when signing a contract. The future is unknown; knowing who is going to pay when “bad” happens is better than being stuck in a “bad” and now having to dispute over which party pays. A common strategy for new entrepreneurs is to research and copy contracts from industry “how-to” books. This can be even more risky than not having an indemnification provision at all.

When using industry sources make sure to look at the author. The viewpoint of the author can be categorized easily by finding out if the author is the service provider or the purchaser of the services. I had a client who had written a great indemnification provision into his service contract; that is if the client was the purchaser and not the provider. The provision allocated all risk to the client’s company and none to the purchaser, even for outcomes related to decisions purely made by the purchaser!  Fortunately, nothing “bad” happened during the contract terms containing the client’s provision. The renewal contracts included the new indemnification provision; shifting as much risk as possible away from my client.

So, when drafting your own contracts be cautious about copying provisions from “how-to” books. If you cannot afford to have an attorney draft your contracts at the least I suggest having an attorney review your contracts, even form contracts; the value of minimizing risk is worth it. Do you have any suggestions regarding using business “how-to” books and other industry sources? Are there any books that you would recommend to new entrepreneurs?

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