With companies beginning to feel more optimistic, now is the perfect time to tie-up these loose ends
Before the Great Recession, many closely held businesses were operating very profitably. The risk with good times, however, is that great income statements can hide a lot of sloppiness, or at least make business owners care less.As our economy emerges from the economic struggles of the previous few years, those businesses that survived should take this opportunity to return to basics. Breathe a collective sigh of relief for having made it, and start off on the right foot.With the worst hopefully behind us, and businesses beginning to feel optimistic about the future, now is the perfect time to tie up these loose ends: • Written lease: If you rent your premises, what is the status of your lease? Has it expired and are you now a tenant-at-will on a month-to-month basis?If so, you run the risk of hearing from your landlord one day soon that your premises have been sold with a request to vacate it ASAP as the new owner wants to take occupancy. Many commercial real estate owners are still in a tough spot with their bank, and with the commercial real estate market slowly coming around, selling the property is oftentimes the way out of choice. That exit strategy could work out well for everyone -- everyone except for you, that is.If your lease has expired, get your occupancy back under contract by signing a new lease or a lease extension. If your lease has renewal options, but you never formally exercised one, do that now. Bear in mind, however, that market-rate rent under triple-net leases for commercial space in New Hampshire has actually decreased in recent years, so if your renewal option has automatic rent increases based on an index such as the CPI, you should resist any increase in the base rent amount. • Shareholder agreements: Many closely held companies were founded by business partners who got along well and thought they shared common goals. With the passage of time, this euphoria fades, and sometimes partners find themselves at odds. Any closely held business with multiple owners is well advised to pause long enough to work out the details of what should happen if one of the owners wants to exit, dies or becomes disabled, or wants to sell his or her stock or such stock is subject to an involuntary transfer (i.e., divorce or a bankruptcy). Parting ways is smoother, faster and the source of smaller legal bills if the parties have first entered into a shareholder agreement or buy-sell agreement. • Promissory notes for shareholder loans: When cash is tight, many business owners are forced to lend back to their companies any earnings distributed as compensation. This represents a loan by the shareholder to the corporation, yet it often does not receive the respect it deserves. Any such loan should be memorialized in writing with a written promissory note. The note will support an argument when the loan is repaid someday that the repayment is not compensation, but rather is the return of the principal loaned.If the shareholders have lent disproportionate amounts and the business is a Subchapter S corporation, the note would also help substantiate that the corporation is not in effect having two classes of stock in violation of its S corporation requirements. • Noncompetition agreements: Noncompetition agreements are one of those legal nuisances that most business owners know they should think about, but rarely take adequate time to focus on. There is a hope that a form downloaded from the Internet, or some other "one size fits all" approach, will be adequate.Unfortunately that is not the case. First, the law governing the enforceability of noncompetition agreements is constantly evolving as courts strive to reasonably balance competing interests. Additionally, there is a legal requirement that the restrictions be narrowly tailored in light of the employee's circumstances. (This requirement would prevent, for example, a noncompetition agreement drafted for use with a sales representative from being used for an employee who may know the business and its proprietary information very well but never has customer contact.) Having noncompetition agreements periodically revisited by a lawyer to be updated in light of developments in the law is a good idea.With a little time and thought, you can probably think up more opportunities unique to your own business which would benefit from some attention.Scott W. Ellison, a partner in the law firm of Cook Little Rosenblatt & Manson, Manchester, can be reached at 603-621-7122 or email@example.com.