There are more than a few agreements that need to be in writing. Based on your business you’ll need a contract for:

• Ownership Agreement
• Intellect Property Agreement
• Standard Terms and Conditions
• Website Terms
• Social Media Policy
• Buy-Sell Agreements
• Supplier Agreement
• Non-Compete Agreement
• Non-Disclosure Agreement
• Independent Contractor Agreement

We’ll give an overview of these documents to give you an understanding of what they are and what they contain.

You’ll need an ownership agreement whether you are operating as a partnership, an LLC, or a corporation. Depending on your business type, you could have a partnership (operating) agreement or a shareholder agreement. These are by far the most important document for business owners to develop as it protects against costly litigation.

This document describes the goals, expectations, responsibilities, and relationships of the business partners. The different sections of the document can include:

• The details of how much each partner contributes
• What each partner gets paid
• How decisions will be made
• Exit strategies
• What happens in the event of a dispute
• Other agreements such as non-compete agreements

The best thing to do is to get everyone’s thoughts on paper to reflect the true intent of all the parties. Also, consider what happens if a partner dies or becomes disabled. Even if you go into business with your child, spouse, parent, or friend, this agreement needs to be drafted.

Your IP, such as your trade name, should be one of your most protected assets. Agreements with independent contractors, employees, and anyone else who may have access to your confidential and proprietary information should sign a written agreement protecting your company’s rights.

When dealing with any transaction, whether a product or service, it’s important to have your standard terms and conditions in writing. Be sure to include them in estimates, purchase orders, supply agreements, and more. You need to have a contract that allows you to recover reasonable attorney fees and costs if the client fails to pay.

Terms and conditions need to describe:

• The product or service so the customer understands what they are receiving
• How much the product or service will cost
• When the customer can expect to receive the product or when the service will be completed

It should spell out the collection policy and how and when the customer is expected to pay. If you’re extending credit, you should consider adding a clause indicating any interest that will be attached if the client does not pay on time.

Even though most people don’t take the time to read these, they are still important. They form a relationship with each visitor to your website. Make sure you are aware of current privacy requirements regarding the information you collect and how you plan to use it. The FTC website is a great resource to refer to.

An NDA ensures that the company’s proprietary information is protected. The document describes what is considered to be confidential material, knowledge, or information. Making new employees sign an NDA allows you to maintain your competitive advantage.

Use broad language when disclosing what information needs to remain confidential. Make sure employees sign NDAs when they are hired. You do not want a disgruntled employee (former or current) disclosing private information to others. Generally, companies are expected to offer a candidate for employment something in return for their cooperation.

The Blue Pencil Doctrine

Recent court decisions have weighed on the side of specific, well-defined limits on non-compete agreements including the use of the blue pencil doctrine. The blue pencil doctrine is a legal concept where a court finds that a portion of the contract is void or unenforceable, but the other part of the contract is enforceable. In that case, the court may order the parties to follow the enforceable part and can delete the voided portion, such as one would do with a “blue pencil”.

Though not all states adhere to the blue pencil laws for non-compete agreements, Louisiana is a blue pencil state and specifies in its statutes that non-competes:

• Should be no more than 2 years
• Specify the exact geographic region (by parishes, municipalities, or other respective parts)
• Define the employer’s business

Unless there is strict compliance with the statute, the court will consider the non-compete to be void.

A buy-sell agreement is created for the continuity of the business and to resolve business partner disputes.

When a business owner passes away, becomes disabled, or otherwise cannot sell the business, the buy-sell agreement helps the business continue. If necessary, the agreement can force the business owner’s estate to sell the business to a third party who agreed to buy the business. It also puts the business and its customers and employees in a position where the third party can continue to operate the business.

If the business is owned by a partnership, there may be a buy-sell agreement that allows a partner to exit the business in case a dispute arises, if one business owner no longer wishes to be in the business, or if one business partner falls on hard times (i.e.: bankruptcy or felony conviction).

The buy-sell agreement helps ensure that you and your partners aren’t forced to work with strangers. It gives the remaining owners the right to determine who they want to work with and helps determine the price for the buyout. You probably don’t need a buyout agreement if you’re the 100% owner, or your business partner is your spouse or child. You can do these things yourself when the time comes or consider getting an agreement if you pass it on to an employee.

You won’t need one if you’re married because it’s going to go to your spouse if anything happens. Consider one if you feel that marriage is on shaky ground or if you haven’t been married long. Being in business with your parent or child won’t require one either. The business can be transferred to them in a will or trust.

A buy-sell agreement should address the following points:

• Identify who is buying and who is selling
• Identify the exact assets that are being sold
• The circumstance that triggers the buy-sell agreement (death, divorce, the conviction of a felony, bankruptcy, a certain age, etc)
• A method to determine the value of the business (such as relying on the company’s CPA, agreeing to set a value, or relying on the opinion of the business valuator)
• The procedure that the parties need to follow to effectuate the transaction
• How to resolve a dispute if it arises
• How to cancel the buy-sell before it’s triggered

Buy-sell agreements consist of several legally binding clauses. Sometimes they appear as a component of an operating agreement, other times they stand as a separate document. The standard clauses denote who is eligible to purchase a departing partner’s ownership interest. Most of the time this is limited to other owners, but sometimes it includes outsiders and relatives.

Buy-sell agreements can be funded by a life insurance policy. If your buy-sell is triggered it could be a large cost. For example, if you are a 50% partner of a company valued at $500,000, then your buyout price for your partner’s share will be $250,000.

Valuation Formulas

There are many different formulas used to determine valuation. Members or shareholders would agree on one and incorporate its use in the buy-sell agreement.

Some common valuation formulas include the book value formula and liquidation value formula. Book value is the net asset value of the company, calculated by total assets minus tangible assets (i.e.: patents or goodwill) and liabilities. Liquidation value is the total worth of a company’s physical assets when it goes out of business or if it were to go out of business. Liquidation value is calculated by tangible assets the company owns, not including intangible assets.

There are 2 basic valuation methods used to determine the value of each partner’s share and the purchase price of their interest. These aren’t the only three methods, but these are the most common methods Spera Law has come across.

Agreed Value

Using the agreed value method, the members and shareholders set a specific price per share or membership unit when they first enter a buy-sell agreement. That value can be adjusted annually or every few years, and amend the original agreement by attaching a signed certificate of value to the buy-sell agreement.

Some companies use this method because they believe that the members or shareholders are in the best position to judge the company’s value. This method is also common to use when a life insurance policy is funding the buy-sell agreement.

Appraisal

This valuation method is determined by an independent certified public accountant. In most cases, the buy-sell agreement has a specific clause that dictates that an assigned accountant in private practice or the company’s corporate accountant conduct the appraisal.

Buy-sell agreements can also layout specifics of the appraisal method or any adjustments to earnings or assets of the company. The most complicated versions of this agreement also spell out contingencies in case either party objects to the valuation.

These agreements are put in place when small businesses hire temporary workers such as contractors or freelancers. It’s a smart way to get additional help when needed. Business owners could establish a formal contract with their temporary workers because the IRS monitors employers who misclassify their workers to avoid payroll taxes.

Suppliers consist of the manufacturers and distributors (more commonly known as vendors). Most suppliers are going to hand over a contract and expect you to sign. Don’t sign these contracts blindly and let an attorney review it. Try to negotiate to get some terms in your favor.

Non-compete agreements are put in place to prevent employees from learning your business systems and taking them to a competitor if they ever leave. However, broad non-compete agreements could possibly effect a former employee for making a living after leaving your business. Therefore, the courts tend to heavily scrutinize these types of contracts. Louisiana has specific laws for non-compete agreements so be sure to have a Louisiana attorney to draft the contract.

There should a policy in place for employees when using social media at work and what they post about the company. Make sure they understand the pros and cons as well as to refrain from harassing or threatening anyone.

Here are some basic things to remember about contracts:

• Do not sign any contract without first asking how that contract protects you. If the contract does not protect you, it may be time to renegotiate your contract.
• Don’t ever start work without a contract. Sometimes people are anxious to get started on their new job.
• Don’t ever blindly accept terms of the contract. Fully understand the contract and ask any questions you have.
• Anticipate negotiation and know what your key points are. Expect that parties will want to negotiate, and know what points to make in negotiating. These points usually include:
• What customer will receive
• When payment is due
• What happens if the customer wants to terminate
• Any liability that might arise
• Know when to get your lawyer involved with contracts and agreements. If they should use their lawyer, then you need to have yours. You don’t want to be taken advantage of.
• Always be specific and confident about money. Never say that you aren’t sure so if you don’t know, tell them you’ll get back to them.

There was a Reddit post that caught our attention from a user about a legalese paragraph that a business partner wanted to add to the partnership agreement. The user explains that the agreement was recently signed, but the other partner wants to add another language on the advice of the “company” attorney. The suggested language is:

ACQUITTED and FOREVER DISCHARGED, and by these presents do for NAME OF MY PARTNER and for and on behalf of my heirs, executors, administrators, and assigns hereby ACQUIT, RELEASE, and FOREVER DISCHARGE NAME OF MY PARTNER and any and all other entities in which NAME OF MY PARTNER owns an interest, his agents, servants, and employees, hereinafter called PARTIES RELEASED; and any other persons, firms, and corporations, of and from any and all claims, demands, debts, liens, causes of action, or liabilities, at law or in equity, in which the NAME OF THE COMPANY and MY NAME’s involvement within the past, present, or future.

Here at Spera Law, we tend to call this “over lawyering”. Even as an attorney, reading that can cause a headache. The issue behind a scenario like is unnecessary legalese and lack of communication between partners.

Many contracts don’t have to have a magical, special language to be legal. Yes, certain phrases need to be worded in a certain way, and they can be important. However, contracts should be mostly worded in a way that a reasonably educated person can read, understand, and explain to a third party.

The clause was poorly drafted because it’s unnecessarily complicated. It’s so confusing that the other business partner decided to post it to Reddit to get help. Chances are that it’s copied and pasted out of another deal.

Also, who would talk like that in person? Can you imagine if you walked up to a lawyer and they said this?

If your lawyer is drafting contracts for you in a language that you don’t understand, then you need to seek a new lawyer. Complicated legalese is an inconvenience and the Reddit user should discuss with the other partner and an attorney.