September 20, 2016

Do I Have a Valid and Binding Contract?

          Is the agreement I just entered into a legally binding contract? In general, a valid contract requires four elements: offer, acceptance, consideration, and performance. The process begins when one party offers the terms for the contract. Next, the other party can accept, reject, or request to modify the contract. At this step there is often back and forth, with negotiation on the terms of the contract. If the parties agree to the terms, then consideration or something of legal value must be offered and accepted. This could be and is often money or services. If the above are met, the next step is performance. In order for the contract to be completed, there must be performance according to the terms of the contract.

            But before you can have a valid contract you must also have parties who have "capacity." In Maryland, this means that the parties must have reached the "age of majority," or 18. In addition, a party must not be under a disability that would prevent them from understanding the contract. They cannot be under "duress," which means unlawful coercion or force, taking away the voluntary consent to contract. A contract with willful misrepresentations may be  fraudulent and nonbinding. Instead, the basis of a valid contract is a mutual agreement, sometimes referred to as "mutual assent," and a "meeting of the minds." Contracts, to be valid, must be entered into freely.

            There are many issues that may arise after a valid contract is entered into. There may be issues such as what contract terms mean, the scope of the contract, the manner of performance, the consideration and the time frame, among others. The language used in a contract is critical. People drafting or signing contracts may not realize the legal implications of terms used.

            Most contracts can be oral or written. Certain contracts, however, such as those under the Uniform Commercial Code for the sale of "goods" must be written. Nevertheless, it is usually advisable to have a written contract. It is important to know that a written contract is interpreted from "the four corners," of the page, and cannot be modified or explained by "parole evidence," or outside evidence regarding what the contract really means. Consequently, it is critical that the written contract accurately says what you intend. There can be many legal issues with both the drafting and enforcement of a contract. If there is a "breach" of contract, or failure of one party to uphold the terms of the contract, legal action may be required.

            If there is a proven breach of contract, another issue is the measure of damages. This can be complicated and may require experts.

            The statute of limitations, or time in which to file suit for a breach of contract in Maryland is generally three years. However, there are some exceptions. Consult an attorney for the specific statute of limitations in any breach of contract case you face.

            Whether you are the promisor (person making the offer) or promissee (person to whom the offer is made), it is advisable to contact an attorney. Often doing so at the negotiation stage can save a lot of headaches and ensure that the contract says and does what you intend.

September 15, 2016

How Do I Sell My Small Business?

            You own a small business. It may have been a good experience or a headache but for whatever reason, you've decided to sell it. You've never done this before and aren't sure what's involved.

            The first thing is to carefully analyze your business from every angle. Get all of your business documents organized. These could include financial records, profit and loss statements, accounts receivables, tax returns, transferable leases, contracts and agreements, pending orders, furniture and equipment lists, warranties, covenants not to compete, and consulting or management agreements, among many other possible things particular to your business. If the business operates as an LLC, make sure you have your articles of organization and any operating agreement available. If the business operates as a corporation, make sure all of your governing documents are in one place and up to date.

            Before you attempt to sell your small business you want to have a clear handle on what you are selling and be able to present it accurately and to your best advantage. Doing the above organization will help you ensure that you have covered each aspect of your business.

            Early on, you will need to decide whether you will be selling the assets of the business or whether you will be selling the ownership interests (LLC interests or corporation stock). You should consult with a tax professional at this point because the type of sale can affect your tax situation. This can be tricky. Since there are tax ramifications in the sale of a business, you not only want to be sure that you sell your business for the right price, you also want to know what, if any, tax liability you will have after the sale closes.

            Next you want to be sure that you have accurately valued your business and/or the assets of the business. You will likely need to hire a business appraiser. Often a broker is hired to help in this process. A broker will be able to develop a marketing plan and sales strategy.  You will want to be sure you have research supporting the value of your business and your sales price, with supporting information tailored to your type of business and location. 

            It is likely that the sale of your business will be more complicated than you think. You should have a purchase agreement or letter of intent for the proposed purchaser. With this is hand, you know you have a prospective buyer but you are not done yet. You need to do your "due diligence,' meaning to check the finances and representations of the prospective buyer to see if you wish to move forward with this buyer. If not, the whole process starts again.

            Once you have found a buyer that meets your criteria, you will want to have a detailed contract for the sale of your business drawn up. This is a critical document with all the important terms and details of sale. Therefore, it is very important that it is accurate, complete, and covers all areas. Not doing so can invite costly litigation or disputes after the closing. It's wise to have an attorney draft the contract. You'll want an attorney you are comfortable dealing with to do this, and one who understands your business and objectives in the sale.

            If you sell the ownership of the LLC or corporation, after the sale the entity will continue under new ownership and you, as the former owner, can enjoy the fruits of your years of labor. If, however, you sold only the underlying asset of the business, then after the sale of assets you will continue to own the entity. A knowledgeable business attorney can also help you file necessary legal documents to dissolve your business. For example, if you own a corporation, it you may need to file articles of dissolution. This is an important step to ensure that there is no lingering liability or obligation for you as owner.