Early-stage companies: Get your patent attorney involved early

Intellectual property (IP) drives value, especially in industries like robotics or medical devices. However, engineers would rather be developing new products. They dislike spending time on invention disclosures. Carl Ronald, shareholder at Babst Calland, believes patent attorneys can help fill this gap in younger companies that have started taking on outside investors.

“Sometimes, I will get a call from an engineering manager who just approved an employee request to present a poster at a conference. They’re wondering, ‘Is this is something that could affect patentability? Can you look at it? The conference is in five days,’” Ronald says.

It’s better to be proactive and strategic, where an attorney works with your engineering team — reducing the barriers to getting disclosures on paper, identifying what you should patent and what you should keep secret.

Smart Business spoke with Ronald about developing relationships between engineers and attorneys to build up an IP portfolio.

Why is it important to involve a patent attorney early in the development pathway?

It is critical to set the tone early. Executives that position the business as an innovative company need to make sure their employees are educated about IP, and that the organization is utilizing patents, trade secrets and other forms of IP to protect that value.

Let’s say, a Ph.D. student working with a company wants to publish an article. Some magazines have confidentiality around peer reviewers and some do not. So, a submittal to peer review could be a disclosure that could destroy novelty, thus destroying patentability. While in the U.S., you can disclose something and still file a patent within a year, overseas that is not the case.

Some engineers know about IP but do not understand the nuances around publication or the differences between U.S. and foreign patent laws; others know very little. And some feel hopeless, that the idea will be stolen anyway. If a patent attorney is brought in early, he or she can educate the R&D team about the IP process and pitfalls, while helping establish invention disclosure and incentive programs. This also applies to companies with in-house counsel; they typically prefer to work with an expert who deals with IP every day when these issues arise.

What are invention disclosure and incentive programs? How can an attorney help?

Invention disclosure programs are an organized way to identify and evaluate IP. An invention disclosure document is usually completed by an engineer if the group thinks it has solved a problem in a novel way. This starts the process to see if it infringes on someone else’s IP and protects the advancement if the team is creating something new.

In incentive programs, employees are rewarded, through money or stock, if the company files a patent application that lists them as the inventor. Employees may get another reward if a patent issues. Once incentives are attached to disclosures, the number of disclosures typically increases.

Traditionally, a three- or four-page invention disclosure provides an explanation of the problem being solved, along with the proposed solution. Some members of an engineering team lack interest in finding time to take on the burden of completing this document; having a patent attorney the engineer already knows can help. The attorney can touch base at critical junctions, such as a sprint review, to see what problems have been solved and take verbal disclosures, if appropriate. Or, engineers could email minimal disclosures as they go, and the attorney reviews those with the engineering manager or chief technology officer.

If these procedures are easier to follow, and properly incentivized, then the R&D team and attorney can work together to ensure IP value is maximized.

Why aren’t more companies working closely with an IP attorney early in the product development lifecycle?

While some companies feel they can handle IP on their own, others are concerned about cost. Many law firms, however, are starting to think outside the box with alternative fee arrangements, such as a flat fee for service or a lower initial rate until an agreed-upon amount of capital is raised. If you have an innovative company in a competitive market, it’s never too early to introduce a patent attorney to your engineering team.

Insights Legal Affairs is brought to you by Babst Calland

What businesses should know about the federal wage and hour changes

The amendment to the Fair Labor Standards Act (FLSA) proposed by the Trump administration will likely impact more than 1 million American workers who are set to become eligible for overtime pay. As a result, some employers will be faced with a choice: Increase employees’ salaries beyond the new salary threshold to potentially avoid overtime pay, or pay more in overtime. As employers consider this question, they will still have to navigate the duties test for each of the white-collar exemptions so as to not misclassify employees as they try to avoid the obligation to pay overtime. The Department of Labor’s duties test determines if any employee’s specific job duties meet all of the department’s regulations for exempt employees.

Smart Business spoke with Christopher J. Carney, partner and chair of the Labor & Employment Practice Group, and partner-in-charge of the Cleveland office of Brouse McDowell, about the rule changes and what businesses need to know to stay in compliance.

What are the more significant changes to the government’s new overtime rules?

In order to be exempt from overtime, an employee must meet both a minimum salary threshold and a duties test. The Trump administration’s Department of Labor has proposed increasing the salary level threshold for the white-collar exemptions — i.e., administrative, executive and professional employees — from the current annual level of $23,660 to $35,308 (or $679 per week). The proposed rule also seeks to increase the total annual compensation amount for employees who are deemed to be highly compensated from $100,000 to $147,414 per year. Consequently, employees who may not meet the duties test for any of the white-collar exemptions would still be exempt from overtime if their salary meets or exceeds the $147,414 threshold.

Just as significant as the proposed salary increase is what is not in the proposed amendment. The proposed amendment does not alter the highly fact-specific duties test for each white-collar exemption. In addition, the proposed amendment does not have an automatic adjustment to the salary threshold and it does not create different salary levels based upon the region of the country where an employee lives. The automatic adjustment and different regional salary levels were both part of the Obama administration’s attempt to rewrite the salary-level threshold in 2016.

If enacted — the new salary threshold would go into effect on Jan. 1, 2020 — the proposed rule will significantly increase the number of employees eligible for overtime.

How do the new federal overtime rules reconcile with existing Ohio overtime laws?

The proposed amendment to the Fair Labor Standards Act (FLSA) really does not have any effect on Ohio’s wage laws, as the Ohio law follows the federal law. There is one exception: the 2019 Ohio minimum wage of $8.55 per hour is higher than the federal minimum wage of $7.25 per hour.

What do employers need to do in order to be in compliance with the new rules?

Basically, employers need to decide whether to increase an exempt employee’s salary to the $35,308 threshold or convert them to nonexempt status and pay them overtime if they work more than 40 hours in a particular workweek.

Where might employers face legal heat because of the new overtime rules?

Employers will not face new legal heat because the salary threshold is increasing. That is straightforward. The complicated issue for employers is determining whether the employees’ duties actually meet the duties test for exempt status. The natural inclination for employers is to shoehorn as many employees into one of the white-collar exemptions as possible. However, the duties test for each of the white-collar exemptions is narrowly construed against employers, and that is where employers get into trouble.

What should businesses understand about the overtime rule changes?

Meeting the salary threshold does not automatically make an employee exempt from the overtime requirements of the FLSA. The proposed amendments do not address the duties test for determining who is and who isn’t exempt.

Insights Legal Affairs is brought to you by Brouse McDowell

Artificial intelligence is changing the way lawyers practice

Artificial intelligence (AI) is adding efficiencies and transforming businesses everywhere, and legal practices are no exception.

“General counsels and executives that are hiring lawyers need to understand that this technology is available now, so they can make sure their lawyers leverage the latest technology tools,” says Christian A. Farmakis, shareholder and chairman of the board at Babst Calland. “AI can increase speed, increase efficiency and lower costs for clients — if the law firm has the right tools, but more importantly knows how to use those tools.”

Smart Business spoke with Farmakis about the advancement of AI technology in the legal space, which business executives may want to take advantage of.

How is AI technology disrupting the legal industry?

AI is a term generally used to describe computers performing tasks normally viewed as requiring human intellect.

AI legal technology won’t replace lawyers, but these tools will drastically change the way lawyers provide services for their clients. While estimates vary, 23 percent to 35 percent of a lawyer’s job could be automated. As a result, lawyers will need to be more strategic and supervisorial, able to act as project managers and supervise the information being fed into systems, and knowledgeable about the assumptions underlying the machine learning algorithms.

So far, projects that classify data have been impacted the most, allowing those projects to be done faster and more efficiently. This includes:

  • E-discovery.
  • Due diligence.
  • Research.

Law firms can already pass these savings on to clients, but this is only the beginning of the transformation.

What will be the next wave of AI legal technology?

The next generation, which is starting to hit the market now, will be document automation and legal research and writing tools, as well as predictive technology tools. For example, a contract can be put through an algorithm in order to identify how risky it is. It could be used to determine how likely is it to go into litigation or if it complies with the company’s internal contract procedures and policies.

Another use is analytic tools that can measure efficiency and pricing of the legal services. E-billing and practice management tools could measure whether a service contract should cost $2,500, not the $7,500 that’s being charged. In other instances, AI could help firms do estimates for alternative fee arrangements.

Why is it so important for lawyers to use the right tool for the job?

AI technology is not going away. It’s here to stay, and it’s increasing exponentially. While the AI legal tech revolution is still in its infancy, the tipping point is around the corner. In 2016, the industry spent $8 billion on AI technology; that’s predicted to hit $46 billion by 2020.

However, many of these products are single-tasked products and not integrated tools that can perform multiple tasks. And many of the products’ pricing models do not yet meet the market needs.

While pricing adjustments are already starting to occur and integration should happen over the next five years, AI technology is nothing more than a tool. Just like other technology, purchasing the new tool is only a small part of what needs to happen to gain efficiency and lower prices. The organization has to be behind it, the employees need to know how to use it and the entire project must be managed properly.

Lawyers who have an open mind and an ability to use these new tools effectively are already passing cost efficiencies on to clients, and this should only increase in the future.

Insights Legal Affairs is brought to you by Babst Calland

What to consider ahead of the sale of a closely held business

There is an emotional bridge business owners need to cross as they consider selling their company, says Joshua G. Berggrun, an associate attorney at McCarthy, Lebit, Crystal & Liffman Co., LPA. 

“After decades of dedication to growing their business, the decision to sell is difficult and should be taken seriously,” he says. “As they make that decision, owners need to consider both their business and personal goals before the company is put on the market for sale.”

Smart Business spoke with Berggrun about how owners should prepare their business, and themselves, for a sale. 

What do business owners need to address as they prepare to sell their company?

Business owners must be ready to address tough questions: Why are you selling? What are your priorities? Are you being realistic? What do you need in order to put your business up for sale? The answers to these questions may not be so simple and could take time to develop. 

It is important for sellers to map out legal and tax implications triggered as a result of a sale or change-in-control, and determine whether their goals are best achieved through an asset sale, stock sale or a different transfer vehicle. They should also decide whether it makes sense to carve out certain assets or liabilities from the deal.

What should a seller know about a buyer’s approach to buying a business?

A seller should figure out what motivates the buyer. A seller should ask: Why are they buying? What value does my business add? Does the buyer want to strike a deal? Are they flexible and willing to compromise? 

A seller should understand different types of buyers. For example, there are strategic buyers looking to acquire the seller’s company and merge it into their portfolio of similar companies. There are also individuals looking to buy a business because they are tired of working for someone else and want to be their own boss.

A business valuation may be the main selling point for one buyer, whereas another buyer may also strongly consider the value and treatment of existing management and loyal team members.

What are the mistakes sellers make that most often lead to diminished sale value or difficulty finding a buyer?

When a major life event occurs — a death, divorce or loss of a key customer — some business owners rush to put their business up for sale. If sellers do not have their corporate records, key contracts and financials together, this inadequate planning and preparation leads to diminished sale value. Smart sellers will also consider their industry and have their finger on the beat of market developments. Technical innovations, new products and channels of distribution and the regulatory environment can all impact the perceived value of the business.

Who should business owners turn to for help as they prepare to sell their business? 

Buyers will want three to five years of financials, so business owners must have their legal and financials buttoned up in order to bring their company to market for potential buyers and attract top-dollar offers. Having attorneys and accountants on your team can help accomplish that. 

Owners will need to have a solid go-to-market strategy that targets the right buyers, without letting the whole world know. The right network is critical to this process and a trusted adviser, such as an investment banker, can help an owner tap networks of local, national and international buyers.

Keep in mind that when selling a company, the goal is to make the best deal for the owner, his or her partners and key employees. That means spending time and resources with a group of dedicated and creative professionals who are capable of acquiring and processing all of the information necessary to make informed decisions.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co., LPA

When picking your company structure, it requires more than Googling

Founders should understand that choosing a business entity isn’t one size fits all. That’s why founders should consult with legal and tax advisers to make sure that they choose the entity that works best for their circumstances.

“A big issue is that clients don’t always consult legal and tax advisers. They Google ‘start a company’ and go with one of the first links they find,” says Kevin T. Wills, shareholder at Babst Calland.

People also will call and say, ‘I want to start a company. Everyone says I should be a Delaware corporation,’ he says. That may be the case, but it’s important to talk it through first. A different structure may be better for your business.

Smart Business spoke with Wills about legal structures for startups.

What are some potential entity types?

When starting a business, most founders tend to consider three options.

  • C corporation (C-corp). A traditional corporation that is run by a board of directors, owned by stockholders and subject to federal income taxation.
  • Limited liability company (LLC). More of a contractual arrangement that is governed by an operating agreement and offers pass-through taxation.
  • S corporation (S-corp). This is a corporation, but the company’s revenue passes directly through and is only taxed at the shareholder distribution level.

What about limited partnerships (LPs)?

LPs are still prevalent in certain industries, but LLCs have limited the utility of LPs. Generally, you can structure an LLC to operate like an LP, where a board of managers runs the company and members are passive investors who get distributions.

What are the advantages and disadvantages to each structure?

C-corps work well for startups that need to raise capital from professional investors or plan to give employees stock grants to supplement compensation. They can be more attractive for investors because many venture capital funds have tax-exempt members that cannot invest in entities with pass-through taxation.

One of the largest challenges with C-corps is the potential for double taxation, i.e., income taxes owed both at the corporate and shareholder distribution levels. However, in practice, when companies first start out, profits tend to be minor and often can be offset by expenses like salaries. Additionally, C-corps require more paperwork and cost more to set up.

For new companies, an LLC offers a lot of flexibility. There are fewer corporate formalities and it’s less expensive to form with less paperwork than a corporation.

An S-corp is a hybrid approach, with the structure of a corporation that avoids double taxation. S-corps are a good option if a limited number of people are starting a business. However, they only allow one class of stock to be issued and there are limitations on the number and nature of shareholders.

How hard is it to adjust the structure?

You can change corporate form as the business’s needs evolve, but there are costs associated with most conversions. Going from LLC to a corporation isn’t difficult, and S-corp status is a tax election, so you can convert either to a C-corp if the company enters a growth phase. If you start as a C-corp or S-corp and convert to an LLC, however, it can have adverse tax consequences.

It’s also not uncommon for third-party investors to require a particular structure before investing.

What other issues can pop up if the structure isn’t set up correctly?

You’ll want to work with your legal and tax advisers to curtail potential problems, which may include asking awkward questions. For example, stock and LLC membership interests are personal property, so you will want to make sure to account for what happens if one of the members gets divorced, passes away or wants to sell. Further, you will want to try to avoid requirements for unanimous consent because such requirements means one person can hold the business hostage.

Founders have numerous decisions they must make when starting their businesses, and it is important that they seek out professional advice to weigh the legal and tax considerations to ensure that they choose the best entity structure for their business.

Insights Legal Affairs is brought to you by Babst Calland

How port authorities can finance development projects

Economic development is a significant part of the mission of port authorities. Originally formed to assist counties, municipalities and political subdivisions with transportation, including rail lines and waterways, their roles have expanded to foster and encourage business investment among private enterprise and other political subdivisions.

“Port authorities have become more of a tool that enables counties and municipalities to foster economic development, as well as job retention and growth,” says Daniel L. Silfani a partner and co-chair of the Corporate & Securities Practice Group at Brouse McDowell.

Smart Business spoke with Silfani about how closely held private businesses can harness the financing capabilities of port authorities.

How are port authorities able to finance small development projects?

Ohio law gives port authorities broad investment and economic development powers to do business with private enterprises. These are powers that counties, municipalities and other political subdivisions may not have or are restricted from exercising in certain ways, which inhibits public-private investment projects. It means port authorities can:

  • Acquire and improve real property.
  • Hold title to new facilities for off-balance-sheet financing.
  • Receive and apply for state and federal grants and loans.
  • Receive property from other local governments so it does not go to public bid.

Port authorities, which are exempt from having to use prevailing wage structure for projects, can also issue bonds and other gap financing to help business owners fill various layers of capital. They can often do this with loan or credit terms, such as interest rates, that are advantageous because of the credit rating of the port authority, and which companies may not necessarily qualify for under traditional commercial lending standards.

What makes this topic relevant now?

Port authorities today are being utilized for more than just the biggest economic development projects. Recently, there’s been more emphasis on local financing efforts, and port authorities are the preferred mechanism for federal and state agencies because they have flexibility to transact financing deals and programs. This flexibility means port authorities can administer and act as middle-men with respect to a broad range of loan or grant programs from those other agencies, helping business owners fill much needed layers of capital to complete a project. As a result, targeted loan and grant programs, such as those for manufacturing equipment upgrades, energy efficiency improvements or other projects are becoming available for the closely held business owner. Depending upon the program, there still may be an underwriting process to unlock financing through port authorities, but there’s more flexibility for a business owner to target select programs to fill those much needed layers of capital for their anticipated project.

What should small businesses know about port authority financing before applying for financing?

Port authorities usually have descriptions on their websites of the programs they offer, and many provide applications online that can help business owners or advisers describe their projects and the financing they’re looking for.

It’s good to work with an attorney who understands how port authorities function and who have economic development project experience. Experienced attorneys, however, can put the process into perspective so companies can better understand what port authorities offer and the programs for which companies are likely to qualify.

Don’t overlook what a port authority can offer when it comes to project financing. There are many different programs available that can provide the needed capital with preferred financing terms, or through under-recognized grants.

Insights Legal Affairs is brought to you by Brouse McDowell LPA

As boomers age, it is important to be aware of age bias

Age discrimination is any adverse employment action taken against an employee that’s motivated by the person’s age. It’s far more prevalent than most employers realize. And it’s also illegal.

“There’s a lot of talk about gender or racial diversity, but little to no talk about age diversity,” says Ann-Marie Ahern, a Principal and head of the employment law practice at McCarthy, Lebit, Crystal & Liffman Co., LPA. “But just like sex and race, age is a protected category, so it’s important to be aware of age bias in the workplace.”

Smart Business spoke with Ahern about employer age discrimination — what forms it takes and the laws that protect against it.

How does age discrimination typically manifest in the workplace? 

Age discrimination in employment has a typical pathology. Typically, one or more of the following are present:

  •   Long term employee.
  •   Most often, around age 55 or older (even though the protected age category technically begins at 40).
  •   Previously rated as meeting or exceeding expectations.
  •   Valued for many years for knowledge and contributions.
  •   Sudden shift in perception of value or effectiveness of employee’s work.
  •   Often coinciding with a change in management or leadership.
  •   New emphasis on the part of the company on succession planning or hiring younger, fresh employees.
  •   Unreasonable scrutiny or wholly subjective criticism of employee’s work.
  •   Feelings of being marginalized or ostracized.
  •   Inquiries about retirement intentions.
  •   Older employee is singled out for discipline for conduct that goes unpunished in younger colleagues.
  •   Suspicious reorganization or reduction in force that appears to be driven by a desire to remove certain employees rather than to accomplish organizational needs.
  •   Successive departures of a number of older employees, either involuntarily or after pressure to leave.  
  •   Vague, disingenuous or previously unmentioned performance concerns are the stated basis for separation.  

What laws exist regarding age discrimination?

There are two primary sources of protection against age discrimination. At the federal level, there’s the Age Discrimination and Employment Act (ADEA), which provides protection from demotions or other adverse employment actions based on an employee’s age. Ohio has a corresponding law that provides an independent source of protection from age discrimination. 

Damages available to someone who has been terminated because of their age include lost pay, the value of lost benefits and any fringe benefits, as well as damages caused by emotional distress. 

How do severance agreements play into age discrimination? 

When a person losing a job is offered severance pay — severance is only required under the law if a company has an existing policy or plan that provides for it when an employee is terminated — its payment is typically contingent on the full release by the employee of any legal claims against the employer, including a claim of age bias.

In other words, in order to pursue a claim, an employee would be required to forgo severance pay. This is a difficult decision and an employee who agrees to severance should only do so after a careful evaluation of whether age bias has been a factor in the decision-making.

Under federal law, the employer must offer 21 days for the employee to consider the severance agreement, as well as seven days to revoke acceptance. That law also requires that the employee be offered something of value to which the employee is not otherwise entitled.

For instance, an employer can’t withhold a bonus that has already been earned or commissions unless the employee signs a release of claims. Additionally, the employer has to advise the employee to talk with a lawyer to evaluate the agreement and fully understand their rights. 

The baby boomer generation now spans from age 55 to 73. Whether you are an employee or an employer, being aware of age bias and the laws that prevent it in the workplace is important to protect yourself.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

The importance of succession planning in estate planning

Succession planning and estate planning are interrelated strategic issues that merit thought and action. However, many business owners make the mistake of creating one plan without accounting for the other.

“It is critical to undertake succession planning and estate planning as a joint effort,” says William J. Stein, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. “Business ownership has the potential to complicate an estate and requires careful planning to make a successful transition.”

Smart Business spoke with Stein about the intersection of estate planning and business planning, and strategies for the successful execution of each.

What is the correlation between succession planning and estate planning?

Succession planning is the careful identification and training of those who will not only take over the day-to-day operations of a company, but also lead it forward to future growth. The owner’s family members and other heirs will likely be affected by these decisions, as will the company’s business partners, employees, vendors and customers.

Estate planning involves, in broad terms, determining whom you want to receive your property, what you want them to receive and when they are to receive it. The people affected by it are family members and other heirs. For a business owner where a primary asset of the estate is the business itself, ensuring the future success of the business and preserving its value for the family is necessarily a key piece of the estate plan.

How can succession planning be made to have a positive impact on estate plans?

A good business succession plan should address both the management and ownership functions of the business. Management succession planning should include development, training and support of successors. It is also important to retain key employees to provide continuity in business operations.

Ownership transfer planning considerations include coordination between future owners and future managers of the business, consideration of the best interests of the business and the owner’s family, and whether there will be a transfer of the business during the owner’s lifetime. Structuring ownership to separate control from value can create significant flexibility in the owner’s estate.

Liquidity needs must also be addressed. Business owners are often highly illiquid because of the magnitude of business value compared to other assets. Ensuring that there is adequate liquidity plays a critical role in providing for family, replacing earnings and paying potential taxes. If liquidity is insufficient, the business may need to be sold prematurely.

What should the planning process look like?

Communication with and buy-in by core constituents is crucial to a successful planning process. Both succession and estate planning require honest discussions about an owner’s values, family and legacy, all of which become the basis for an integrated business succession and estate planning strategy. Family business stakeholders need to hold meetings and consult with their advisers to determine whether family members who might enter the business have a shared mission, vision and commitment to common values. Where there is a lack of skills and interest needed for management and leadership roles, successors must be identified and developed. For larger businesses, identifying and developing successors may take years. Smaller businesses may just need someone to oversee a sale or liquidation.

What mistakes should business owners avoid when creating their plans?

Business owners tend to engage in estate planning and ignore succession planning. However, until the succession planning questions are answered, it is difficult to implement a comprehensive estate plan. Also, it is important to have a written plan. Too often, business owners fail to put their plan in writing, leading to confusion and putting the business at risk when the owner is no longer there to be the driving force. With an integrated succession and estate plan in place, business owners can be confident that their company will continue down a path of success and their estate planning goals are achieved.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Know what you’re getting into before you sign the loan papers

It’s not always easy for business owners to find financing. Most business owners will, at some point, turn to conventional bank lending to help finance their business or fund growth, like acquisitions. There are, however, many different types of financing products available in the commercial lending market. But whatever type of financing you settle on, it’s critical to know exactly what you’re risking.

“Business owners often focus more on ‘getting the loan’ than on the specific terms and covenants of the loan, which in many instances can hinder the ongoing operations of the business,” says Christian A. Farmakis, shareholder and chairman of the board at Babst Calland.

Smart Business spoke with Farmakis about the lending environment and legal risks to keep an eye on.

What are loan options for small and mid-sized business owners?

Since the Great Recession, traditional bank lending has competed with other forms of lending. For instance, business owners are increasingly turning to private equity funding and family office lending rather than traditional, asset-based lending. These options may require sacrificing significant ownership and control over the business.

Other loan types include U.S. Small Business Administration loans backed by the federal government but underwritten by banks, small business loans for real estate financing and equipment loans.

Credit unions and regional and community banks sometimes offer different and more flexible terms and do smaller loans because they service the loan in their portfolio, where a larger bank might have stricter underwriting requirements.

What legal issues could crop up in the term sheet and loan documents?

Loans can include affirmative and negative covenants, but it’s usually the negative ones that trip people up.

Most loans require you to give a personal guarantee, provide certain information on a yearly basis, keep you from spending above a particular threshold on capital expenditures without prior approval, or stop you from taking out more debt. Most financial covenants require compliance with certain ratios, such as a debt to equity ratio; if you exceed those, the lender can theoretically default the loan. A larger loan also may require annual audits or reviewed statements, which can be disruptive and costly if the company is not already having those statements done by a CPA.

Another item to consider is pre-payment penalties, which can be significant but might decline over the first few years of the loan. It’s also not uncommon for a burdensome pre-payment penalty to stall, end or defer the business owner from doing a deal until the penalty is gone.

Therefore, it’s critical to know how the loan terms might restrict your operations and burden you with requirements. Take time to truly understand what events could trigger fees or penalties.

How much room is there to negotiate these terms?

Your negotiating room depends on the financial strength of your business, your growth model and if the bank sees opportunities to cross sell other fee-based services. Healthier, stronger businesses may be able to get items minimized or eliminated, such as fees. In addition, sometimes loans require borrowers to use services like payroll, lockbox or credit card processing. You may be able to disassociate the loan from these services.

You also want to get several quotes because banks have different underwriting requirements. For instance, one lender may require less collateral than others. And while a lot of this relates to the strength of the borrower, it also connects to the bank’s focus. If a lender isn’t interested in lending to a certain industry, it might not give the best terms.

Generally, a first-time, smaller borrower’s loan terms will be standard. You can take it or leave it, so you’re left negotiating interest rate and whether there’s a pre-payment penalty. But bigger borrowers with a solid balance sheet and strong business can prioritize the most costly or burdensome items and see if better terms are possible.

Insights Legal Affairs is brought to you by Babst Calland

How to use mediation rather than litigation to resolve business disputes

Civil litigation very often is mediated, sometimes twice, so that parties in conflict can avoid fighting out a dispute in court. 

“Businesses should think long and hard about moving forward with litigation without first trying to reconcile their differences through mediation,” says David Schaefer, Esq., a principal at McCarthy, Lebit, Crystal & Liffman Co., L.P.A. and a member of the National Academy of Distinguished Neutrals. “It’s a tried-and-true process that’s inexpensive when compared to the cost of litigation. And it’s a process that can save companies both time and money.”

Smart Business spoke with Schaefer about the mediation process and how it can be used in place of litigation to resolve business disputes.

When is mediation a good choice for businesses in dispute? 

Mediation typically is undertaken after a dispute has been ongoing for some time. At the very beginning of a dispute, the ability to resolve it through mediation is lower than after it has gone on for, say, a few months — statistics on early mediation indicate the settlement rate pre-lawsuit is lower than during the lawsuit. Still, there are a good number of mediations that occur before a lawsuit is filed, and some of those pre-lawsuit mediations work out, but not often. 

What is involved in the mediation process? 

Typically, the process is initiated by one party’s lawyer. A conference call with attorneys on both sides follows to discuss the procedural details: when, where, who will attend, the written materials the mediator would like to receive from the parties before the mediation, and the cost. 

The parties in conflict, along with their lawyers, meet at a neutral location — usually an office — where they’re split into separate rooms. The mediator goes from one party to the other getting information that will be used to find a resolution to the dispute. 

How can the parties be sure each is negotiating in good faith?

If one side is using mediation as, say, a means of inexpensive discovery, it becomes apparent quickly — within a couple hours of the start of mediation. But that doesn’t happen very often.

There are also instances in which a party might be ‘hoop jumping.’ That’s when a party has either been ordered by a court to mediate or needs to use mediation for dispute resolution because of a contractual obligation and is undertaking the process with little or no intention of settling the case and just wants to clear the legal or contractual hurdle.

What obligation do the parties have to abide by the mediator’s determination?

Mediators don’t make a final, binding decision like a judge or an arbitrator. Mediators, instead, make an objective suggestion to resolve the dispute. In monetary disputes, he or she can provide a mediator’s number, a suggested amount to settle the case. If both sides reject that number, then there is no agreement, and the parties and their counsel will need to decide on a future course. If both accept the mediator’s suggestion, a deal is reached and mediation is a success. 

What can parties do post mediation if they’re unsatisfied with the outcome?

When an agreement is reached through mediation, there should be a short document written up during the mediation and signed by both parties that binds them to the agreement. That document is an enforceable agreement. If one side tries to back out, which is rare, the other party can file a complaint in court to enforce the mediation settlement agreement.

There are a variety of steps that can be taken if the parties fail to reach settlement at the mediation. Probably the most common is the parties go back to litigation and engage in discovery. Sometimes the mediator will follow up with the parties’ lawyers and see if a resolution can be reached over the phone. Other times, the parties will pause and reconsider the offered resolution, and possibly accept it if it’s thought to be better than undertaking litigation.

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