Iowa Corporate Lawyer & Attorney : Rush Nigut of Brick Gentry Law Firm : Serving Des Moines, Cedar Rapids, Davenport, & Sioux City

Anita Campbell of Small Business Trends shares her thoughts about how to avoid the contract from hell on the Build a Solo Practice site. 

As a former general counsel and now a small business owner, Anita has been on both sides of the fence when it comes to contracts.  According to Anita, here are some things to avoid in your next contract:

• Too much legalese.
• Using adverbs like "whereas" and "heretofore".  It's kind of like using "COMES NOW" for pleadings.  Does anyone really talk like that?
• More than 5-7 defined terms.
• Attaching multiple exhibits.  I can speak from experience that multiple exhibits is a real pain for the drafter so I can't imagine what it is like for the reader.
• Making it so hard to understand that it leads to avoidable litigation just because no one can understand it.

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I love this post from New York business lawyer Imke Ratschko regarding the best practices in executing a contract.

Her tips (and my comments):

1. Don't let technology or anyone else fool you.  This is a great lesson.  Once I negotiated a employment contract with another lawyer for several hours.  The last version of the day contained language that had been inserted for the first time and not discussed previously.  If I had not read the entire agreement (for what seemed like the tenth time) we would not have caught it.
2. Date the contract.  It goes without saying but it often does not happen.  It is important to date contracts for a variety of reasons including statute of limitations and it puts the dealings between the parties in chronological context.
3. Both parties should sign the agreement.  Again, it is surprising how often this does not get done.  While the contract still may be enforceable without both signatures it is obviously best to have the signatures and avoid a potential dispute about whether a party agreed to the terms.
4. Initial last minute changes to the contract.  Sometimes changes occur at the last minute.  If this occurs each party should initial by each change.  If time is available rewriting the language is always the best alternative.
5. Sign in your correct capacity.  If you are a corporate officer, you should sign in your corporate capacity such as President or Vice-President.  If you have an LLC sign using "Member" after your name or use your title.  This helps limit personal liability and indicates to the other side that you are signing the agreement on behalf of your company and not personally.  Similarly, make sure the entity is the party to the agreement and not you individually.
6. Check the other party's authority to sign.  You should make sure the person signing the agreement on behalf of the other party has authority to do so.  It is often a good idea to include language in the signature block that indicates the agreement is signed by an authorized representative of each party.
7. Get an original executed contract of the contract for your files.  It is generally not required under the law but it is often helpful to make sure that each party to the contract has an originally executed agreement.  So if there are two parties you will sign two sets of the agreement.  (Update:  See below for a comment from David Wall on electronic signatures - he makes a great point and offers some wise information).

Photo on flickr by diylibrarian

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Let's say you are the owner of a manufacturing company.  You've decided to sell your business and you are presented with a Letter of Intent to buy the business.  It's everything you wanted with respect to the price and the buyer is financial sound. 

You may be excited about the potential sale but a word of caution.  Do not forget to address the environmental issues up front.  In many instances a bank will require the buyer to obtain a Phase I assessment by an environmental consultant.  The cost varies but you are looking at approximately $2,500 for such a report.  If recognized environmental conditions (REC) are present the consultant could recommend a Phase II report.  The Phase II report is usually much more expensive and could easily approximate $10,000 and up.

So who pays for these environmental inspections?  It is a negotiable item that you should address from the outset of your Letter of Intent or business purchase agreement.  The seller must carefully consider the environmental issues.  Some of the things to think about include:

1. Who pays for the environmental inspections/assessments?
2. What happens in the event a Phase II is recommended?  Again, who pays?
3. Have you included a provision that allows you to back out of the sale in event the Phase II is not something you are willing to do?
4. What if there is a likelihood of groundwater contamination?  You may be required to notify the DNR after the Phase II.
5. What steps are necessary for clean up and who will pay for those recommendations?
6. Will you be required to indemnify the buyer?
7.  If you don't take care of the environmental issues with the current sale are you only delaying the inevitable problems in the future?
8. If the buyer walks won't you be required to disclose any recognized environmental conditions to another buyer?

I am not an environmental lawyer but fortunately Mark Landa from our office has been particularly helpful in this area.  Mark's previous experience in working with the Iowa DNR has proven invaluable.  Environmental issues could make or break a deal in certain business sales.  I have had make or break issues come up in the sale of manufacturing companies, gas stations, implement dealerships, and more.  If you are selling a business with potential enviromental hazards carefully consider your options from the outset and reach a preliminary agreement with the buyer before due diligence begins.

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I ran across this list of tips for new small businesses.  Some terrific advice.  Here are the ten tips as listed:

1. Save up as much money as possible before starting.
2. Start on a shoestring.
3. Protect your personal assets.
4. Understand how--and if--you will make a profit.
5. Make a business plan, so matter how short.
6. Get and keep a competitive edge.
7. Put all agreements in writing.
8. Hire and keep good people.
9. Pay attention to the legal status of your workers.
10. Pay your bills early and your taxes on time. 

I especially appreciate the emphais placed on paying your payroll taxes on time, particularly the portion you withhold from your employees' wages. (See the commentary on No. 10).  It is critically important to understand that a corporation or LLC will not protect you from personal liability in the event these taxes are not paid.  (For an example, see a post from my favorite blogging accountant, Joe Kristan).

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