In this episode we’re going to be talking about Six Agreements Every Successful Business Needs with Business Attorney Mark F. Mueller. Mark practices general business law and real estate law at The Law Office of Mark F. Mueller, L.L.C., representing small and medium sized businesses, as well as individuals. Mark earned his J.D. and Certificate in International and Comparative Law from Saint Louis University School of Law, where he served as a Member of the Saint Louis University School of Law Ethics Committee, a Student Bar Association Representative and as an Editor of the Saint Louis University Law Journal. Mark’s legal career has entailed both litigation and transactional work. This unique background allows Mark to analyze clients’ matters from various key perspectives and offer creative solutions.
Mark is a Board Member of Good Shepherd Children and Family Services, a division of the Catholic Charities Federation, and the St. Thomas More Society of St. Louis. In addition, he is the organizer of the Saint Louis Solo and Small Firm Attorneys Networking group. Mark is a native Saint Louisan and resides in Richmond Heights with his wife and three children.
Ken Tucker: Hello. This is Ken Tucker with Changescape Web. Today, I’m really excited to have Mark F. Mueller here to talk about general business law and real estate law.
Mark is the principal at the Law Offices of Mark F. Mueller, LLC, and he represents small to medium-sized businesses as well as individuals. Mark earned his JD and certificate in international and comparative law from Saint Louis University Law School where he served as a member of the law school ethics committee, the student bar association representative, and as an editor of the Saint Louis University Law Journal. Mark’s career has entailed both litigation and transactional work, and this unique background has allowed Mark to analyze clients’ matters from a variety of key perspectives and offer creative solutions. I’m really excited to have you here today, Mark.
Mark Mueller: Thank you. Thank you for the invitation.
Ken Tucker: This is a topic that I think is important for a lot of small business owners and a lot of medium-sized business owners.
Mark Mueller: Absolutely.
Ken Tucker: You and I have talked a little bit about contracts and the importance of those and whatnot. I guess the first thing I would like to talk to you about today is what agreements do you think are really important in the early stages of a company, and just explain why you think those are.
Mark Mueller: Sure. Sure. Nowadays, the most prominently used entities are limited liability companies, or what we might call LLCs commonly, or corporations. Corporations have been around for hundreds of years, and they’re a separate legal entity which can provide that limited liability and protect the owners, shareholders as they’re called. Limited liability companies have only been around as an entity for about 20 years, but they’ve really become a great workhorse for the small business owner and even for medium-sized business owners. I think even the St. Louis Cardinals, I believe, are a limited liability company these days.
Ken Tucker: Okay.
Mark Mueller: So, it’s not just for the small business. The LLC can also provide that limited liability that we could talk about later if you choose. Whichever entity you may choose nowadays, which those are really … The bulk of the new entities are one of those two structures. If you have a limited liability company, you’re going to need what’s called an operating agreement, the equivalent of the corporation’s bylaws. What that is, that’s an agreement amongst the owners of the company, be them shareholders or what it called members for a limited liability company.
Those are important, number one, to have that memorialized what the terms of this agreement are that you and your partners are going into this business under, but it’s also important that, in most circumstances, at the beginning of a business, there’s not going to be any money to cause disruptions and fights. If you can’t agree on the terms of your business at the outset when there’s nothing to fight over, it’s going to get all the more complicated when there is, hopefully, money to be concerned about and assets to be concerned about.
Ken Tucker: Sure. Yeah. Absolutely.
Mark Mueller: The operating agreement and the bylaws typically address similar issues. Who are the members? Who are the shareholders? How much do they own relative to the company? How much of the equity? How much of the equity is going to be withheld for future members? What are the voting rights of those persons, the shareholders or the members? What are the terms under which a new member can be brought in? What kind of vote is needed to pass a certain issue that comes up before them, be it merging with another company or making a substantial purchase? Does it need to be a simple majority, or super majority, or even a unanimous decision? Those are the sorts of things that need to be included in those documents.
Ken Tucker: Okay.
Mark Mueller: Again, if you can’t agree on those items at the very outset, this probably doesn’t bode well for your future dealings with each other.
Ken Tucker: Yeah, exactly. I guess one thing that comes to my mind then is what if you’re a single owner of a company? Would you still want to have an LLC or even be a corporation? I mean, I think I know the answer, but do corporations or certain organizational structures legally provide protection from the individual versus the company?
Mark Mueller: Well, I would answer that no person should want to be engaged in their business as a sole proprietor. The startup cost to get your business organized with Missouri Secretary of State or whatever state you may be in is very minimal compared to the risk that you’re running without having that corporate or LLC shield in front of you. You don’t want to necessarily stay as a sole proprietor, even if you are a solo. I myself am a solo, but I still have my LLC set up and I’ve got my operating agreement. It’s quite simple to do that.
The reason you want that entity set up is because when you set up a corporation or a limited liability company, it can be looked at as a contract with the state of Missouri that you, state, will give me limited liability in exchange for me doing certain things that I need to do, such as not using the corporation or the LLC to commit fraud. Think of what is often called the storm chasers who follow the tornadoes, often through the South, and say, “Give me $5,000 today, Grandma, and I’ll come back and fix your siding.” They never come back. Even though they have a corporate entity, they’re still committing fraud with it. That’s not permitted, obviously. Co-mingling personal and business funds … You can’t take the family to Disney World on the corporate dime and call it a business expense.
Ken Tucker: Okay.
Mark Mueller: That’s improper. With a corporation, you need to have annual meetings of the shareholders and the directors. With limited liability companies, you do not need to have those annual meetings, but I always recommend that my clients do that just for the sake of being thorough and keeping a good record, which will only help them in the event of an audit or if somebody is looking at purchasing them. If they follow those items and others, which are called corporate formalities, the state will provide them that limited liability, which means if the company is sued and there’s not enough assets in the company, be it the bank account or solid assets, tangible assets such as real estate or maybe a fleet of trucks … If there’s not enough assets to satisfy that judgment, often times a plaintiff’s attorney will ask the court to do what’s called pierce the corporate veil, which means they want to get directly to the individual owner’s assets, their family bank account.
Ken Tucker: Yeah. Okay. Okay.
Mark Mueller: If a person has satisfied all those corporate formalities, a plaintiff’s counsel will not be allowed to pierce the corporate veil.
Ken Tucker: Okay.
Mark Mueller: That’s where that shield of limited liability comes in.
Ken Tucker: Okay. Yeah.
Mark Mueller: It doesn’t mean you can get off from not paying your loans back or anything like that.
Ken Tucker: Yeah. Okay. All right. Yeah. No, that’s very helpful. I’d heard the phrase piercing the corporate veil quite a bit. Had an idea of what it meant as a business owner, but that’s … When I started my company back in 2005, that’s been a long time ago. So, it’s always good to be reminded of that.
Mark Mueller: Right.
Ken Tucker: I mean, I certainly would encourage anybody to have a conversation with their business attorney on a regular basis just to validate what you’re doing and make sure that it’s still on track and accurate.
Mark Mueller: It’s kind of like going to the doctor and getting …
Ken Tucker: Yeah.
Mark Mueller: … an update or a physical.
Ken Tucker: Yep. Absolutely.
Mark Mueller: It doesn’t hurt to make sure you’re on the right track. To use your terminology, if the attorney validates what you’re doing, then you can sleep a little bit more comfortably.
Ken Tucker: Yeah.
Mark Mueller: If he says you’re on the wrong track, then perhaps change course a little bit or change your practices.
Ken Tucker: Yeah. Yeah. Okay. That really sounds like it’s really talking about a lot of the things that you need to do and think about when you first get a business entity or a company up and running. What about the types of agreements you need to have after you’ve established your business?
Mark Mueller: Sure. After that, after you have your name, and your brand, and know where you want to go, and you’ve worked things out amongst your partners, hopefully you’re going to be selling something, be it a service or a tangible item, a widget, whatever that might be. So, you’re going to be dealing with the public on a regular basis in most circumstances. You’re going to need a contract that is specifically tailored for your business and your needs because that’s going to be used over and over and over, hopefully, with each of your customers. Since the repetition of use is so great, the likelihood of there being any issue that’s going to be interpreting that contract is increased.
You want a contract that protects you yet is still fair. You don’t want it so one-sided that a court would throw it out and say, “This is unconscionable.” You want something that is still fair but still protects your interests more than anybody else. Every industry is so unique, and every business is so unique, you really need to spend some time, and it’s worth the investment to get a contract that is going to be tailored specifically for your needs and practices. Again, it’s worth the effort because you’re going to be using it so frequently that the investment return is going to be so great on it.
Ken Tucker: Okay.
Mark Mueller: That’s the first thing I would do once they’re up and running. In addition to that, often times they’ll have similar contracts with vendors or their suppliers that are used on a repeat basis.
Ken Tucker: Okay.
Mark Mueller: You would want to make sure that those are properly drafted or at least reviewed to make sure that your interests are protected.
Ken Tucker: Mm-hmm (affirmative). Okay. What about things like nondisclosure agreements, or protection of intellectual property, and things like that?
Mark Mueller: Right. That’s an excellent thing, because maybe you’re looking at engaging in a joint venture or a strategic partnership, or maybe bringing a new employee on and they want to learn a little bit more. Any circumstance where you’re divulging any of your personal business information, be it your trade practices, customer lists, anything like that, finances, you would want what’s called a nondisclosure agreement, or often just called a confidentiality agreement, executed by the other side before you start sharing that information.
Because if you don’t have that in place, and they find out, for instance, what your financials are or who your customers are, they can take that and maybe go to a competitor and use that against you. That’s not to say they couldn’t do that with a contract in place. A lawyer can’t stop somebody from doing something wrong, from breaching a contract or from suing you, but they can try to put you in the best position contractually that if something does go south, you have the proper contract language to protect yourself and your entity.
Ken Tucker: And, at least potentially, some means of recourse to …
Mark Mueller: Right, right. For instance, it could spell out in that contract what the damages might be or give you permission and agreed that it’s signed off on by the other side that if there is a perceived breach, then they can go to court and have a temporary restraining order issued. So, those are very important. Then, often times, especially in the context of like an employment agreement and an independent contractor agreement, not only would you have the confidentiality aspect, but you would also have a non-competition and/or non-solicitation of, you know, can’t solicit my customers, or you can’t solicit my employees and essentially poach them from me. A lot of times those three covenants are put in the same document, the non-disclosure, non-solicitation, and the non-competition.
Ken Tucker: Okay. All right. Yeah. I mean, this is probably a topic that you might get a little pushback from some of the folks that you talk to, but really, I guess the way I think about it is this is all about dealing with risk and protecting yourself from potential situations that probably will never occur. But if they do occur, it could be catastrophic for your business. So, while it may seem like sometimes it’s some detail that you really don’t need to get down to or is inconvenient to document, it certainly does carry a lot of importance.
Mark Mueller: That’s an excellent point. I often tell clients that in an ideal world, you’ll sign this contract, whatever form it may be, be it a lease, or an operating agreement, or a customer contract, and everyone performs so well, and everyone’s being so successful under its terms, and everyone’s so happy that you never have to refer back to it.
Ken Tucker: Yeah. Yeah.
Mark Mueller: Because once you sign a contract, it doesn’t necessarily have to be referred back to, but if there is a problem, that’s when you need to pull it out.
Ken Tucker: Mm-hmm (affirmative).
Mark Mueller: That’s an excellent point that you brought up.
Ken Tucker: Yeah. Yeah. Well, and it just sets the expectations and make sure that everybody really understands what’s happening as you’re moving into a new venture, whether it’s starting that new business or whether it’s working on that first project for a customer or the product warranty that you might decide to offer, or any of those kinds of things.
Mark Mueller: Right.
Ken Tucker: It just sets the expectations and defines what those are.
Mark Mueller: And it lets the other side know that you’re serious and you take your business seriously, and you’re professional about it.
Ken Tucker: That’s a great point. Yeah.
Mark Mueller: To talk about the risk that you brought up, I’ve got friends who’d say, “You think lawyers are expensive now, wait till you’re in court because that’s when it really gets expensive.” If you can minimize that risk early on, that would certainly overall help you.
Ken Tucker: Yeah.
Mark Mueller: Look at it as insurance is how I tell people, that hopefully you’ll never have to make a claim. Hopefully you’ll never have to pull that contract out and refer to its terms, but in the meanwhile, it’s peace of mind knowing that you are as protected as you possibly can under the circumstances.
Ken Tucker: Yeah. Okay. That’s great. Any other agreements that you see typically being needed as a business that has been around and matures over a period of time?
Mark Mueller: Sure. One of those things is a lease, or a purchase agreement for real property if they’re going to buy a building.
Ken Tucker: Okay.
Mark Mueller: That’s something that comes up quite frequently. Another item that comes up quite frequently, and they kind of come up in threes, and it’s a bit of a generic set of agreements … They can come up in any given context, but it’s a loan, or what’s called a promissory note. You might need a loan from the bank to buy your building or to buy equipment to get your widgets made.
Ken Tucker: Okay.
Mark Mueller: Those things are negotiable. Often times, people might see the boilerplate and say, “Oh, we can’t negotiate this.” A lot of times you can. You might be surprised.
Ken Tucker: Okay.
Mark Mueller: Along with that, especially in today’s world and economy, if a business owner is taking out a loan, they’re also going to be required by the lender to sign a personal guarantee. Even though they might have that corporate entity or limited liability company in place, that does not protect them from the obligations under a personal guarantee because that’s a separate contract between the person, the shareholder or the member, not the entity, and the bank or whatever the lender might be.
Ken Tucker: Okay.
Mark Mueller: Guarantees can often be tailored, also. They can be limited to maybe a couple years just so that the lender can get a comfort level with the borrower.
Ken Tucker: Okay.
Mark Mueller: They can be limited to a certain dollar amount as opposed to the full amount.
Ken Tucker: Okay.
Mark Mueller: So, there’s ways to get creative with those. I would never sign exactly what’s handed to you thinking you don’t have any recourse. Then, the third part that often goes along with those two is the security agreement, which would be, for instance, what’s commonly referred to in the real estate world as mortgage or Missouri deed of trust, which is the agreement which allows the lender to essentially foreclose on the property that was purchased with the loaned money in order to satisfy the debt in case the payments are stopped.
Ken Tucker: Mm-hmm (affirmative). Okay.
Mark Mueller: Even your credit card statements. If the receipts that you sign when you go buy something at lunch, for instance … It says, “I agree to pay in accordance with the terms of the credit card agreement.” That credit card agreement often has … Well, that’s unsecured debt, but again, if you purchased expensive equipment, that’s going to be secured. If you stop making payments, the bank will have the right to foreclose and take that equipment, sell it to try to pay off that debt. Or the foreclosures you hear about in the paper every day.
Ken Tucker: Yeah.
Mark Mueller: The bank is saying, “Okay, you stopped making payments. We’re going to take that property and sell it and apply it to the debt that you owe us.” Now, in Missouri, they still have … If, for instance, somebody owed $200,000 on a loan or their office building and they stopped making payments because business went bad, and the bank forecloses and they only got $150,000 for the building at the foreclosure sale, the bank can still sue for that extra $50,000 that’s still owed. It’s called a deficiency. So, there’s a lot of things that you need to pay attention, make sure that they’re properly drafted to best protect you. A lot of it always comes down to how much leverage do you have? Somebody’s always going to have more leverage, but that’s not to say every case is hopeless, that you need to just sign what’s handed to you.
Ken Tucker: In that example, then, even though you have a corporate veil protecting you, in this case, what you’re saying is if the foreclosure only pays off a portion of that from the business aspect, they may still be able to come … Because you had to sign as an individual to kind of back that …
Mark Mueller: With the guarantee, correct.
Ken Tucker: Yeah, okay.
Mark Mueller: Correct.
Ken Tucker: Well, that’s good to know. I’ve never been in a situation where I’ve looked at buying property for my business, but that … Yeah. I would’ve never known any of that.
Mark Mueller: Yeah.
Ken Tucker: That’s fantastic. Okay. Well, I think we’ve talked a lot about why a lot of these agreements are important. Anything else that jumps to your mind? I mean, I guess one thing that I did want to talk to you a little bit about is just as you’re wrapping up your business and deciding what you want to do with it, either shutting it down, or selling it, or passing it on to your heirs, what about those kinds of agreements?
Mark Mueller: Sure. Sure. Hopefully, you started your business. You’ve run it for however long, and you’re getting ready to retire or whatever the situation might be. I mean, I wouldn’t wait till you’re at that point. You’d want to plan in advance, also, but there’s-
Ken Tucker: Well, yeah. Probably three to five years if you can, right?
Mark Mueller: Oh, at least.
Ken Tucker: Because you want to maximize the value of the business, you want to try to get everything as appealing as possible to …
Mark Mueller: That’s exactly right. You’ll have various options at that point. One of the agreements you would need to have, or I strongly recommend, is called a buy-sell agreement. That, again, is kind of a generic term. There’s numerous different ways to achieve it, but that is also an agreement amongst the owners of the company as to what would trigger the right or the obligation for the other partners to purchase your interest in the company.
For instance, imagine Bob and Tom started a company and ran it for 40 years. They’re getting older and concerned about their health, so they might enter into a buy-sell agreement where when one of them passes away, the other either has the right to purchase the decedent’s shares or perhaps even has the obligation. There’s different reasons you would do it. Maybe you want to have it that they have a right to so that the survivor doesn’t get stuck doing business with his partner’s widow who … Maybe they didn’t get along.
Ken Tucker: Yeah.
Mark Mueller: They might set it up so that there’s an obligation to in order to provide money for the surviving widow upon her husband’s death. This can be funded with life insurance, properly done. That is part of the exit planning you need to do. In addition to that, there’s general succession planning, that perhaps maybe there isn’t multiple owners, but there’s one owner. He’s getting up there, and does he pass it on to his children? Are they even interested in being owners of it? Are they doing something else altogether?
Ken Tucker: Right.
Mark Mueller: Do they pass it on to an employee who’s been there from day one and loyal and could run the business also? All the factors involved in that could be what’s the value of the company? How do you structure the payment terms?
Ken Tucker: Mm-hmm (affirmative).
Mark Mueller: How do you give up that power? Is it a little bit of equity over so many years, or is it an outright sale?
Ken Tucker: Okay.
Mark Mueller: Or perhaps you put yourself on the market and competitor buys you, in which case you’re going to have either an asset purchase agreement or a stock purchase agreement.
Ken Tucker: Yeah. Well, it seems to me as a business owner, and I’ve had my business since 2005 … Over the course of running my business over that timeframe, I get unsolicited requests about, “Hey, you know, we’ve got somebody who might be interested in buying your business,” this, that, and other. What advice would you have for a business owner like myself who … I mean, first of all, if it’s unsolicited, I’m going to be pretty suspicious of it anyway. But there are people who obviously, I think, play like a business broker role where they find businesses that might want to acquire another business and kind of cultivate that relationship. That’s not exactly what you do. You’re really more on the side of protecting the business entities as those opportunities come and go, right?
Mark Mueller: Right.
Ken Tucker: What words of advice do you have for folks …
Mark Mueller: In that context, I would recommend, and actually through the whole process, recommend having a great team in place with those relationships in place. By team, I mean everything from your attorney, your accountant, your financial planner. Even earlier on, you’re going to need a marketing person and all the various other roles, client development people. But towards the end as you’re having these discussions on succession planning and selling your business or winding it down, which hopefully you’ve created enough value that you just don’t want to shut it down, that there is a … somebody else would be interested in purchasing it. You’re going to have your attorney, accountant, and even your financial planner to an extent, working closely to maximize the value, minimize the risk, and minimize your tax headache down the road.
Ken Tucker: Okay. Even if you decide you’re working with a business broker in some capacity, I would assume you still would want to work with that team.
Mark Mueller: Right. Business brokers are great, but they are not lawyers, accountants, or financial planners, necessarily. They are brokers, just the same as a real estate broker, who’s focused on finding a business to sell and then finding a buyer to purchase it, not so much on the intricacies of what the contract says, or how the finances play out, or what’s it going to do to your retirement account.
Ken Tucker: Well, I would actually think that a business broker would, one, work with a business that already had a good team in place because that’s probably going to drive the value of the business up.
Mark Mueller: Absolutely. Absolutely. One of the things that, in the case that they’re selling their business towards retirement, one of the things that a potential purchaser will be looking at in what’s called a due diligence period which, for lack of a better description, is when they’re kind of kicking the tires and seeing how things look, they’re going to look at what sort of contracts are in place? Are all of their customers under contract?
Ken Tucker: Mm-hmm (affirmative).
Mark Mueller: What do those contracts say? Are they-
Ken Tucker: What’s the value of the customers under contract?
Mark Mueller: Exactly. Yeah. Are those contracts for one year long, or could they all be canceled within 30 days, and there goes the value of your customers, perhaps.
Ken Tucker: Yeah.
Mark Mueller: But if they’re under contract for several years,
could be good, because that’s a stream of revenue coming in. What do your corporate books show? Have you kept adequate minutes? Have you dotted your i’s, crossed your t’s?
Ken Tucker: Mm-hmm (affirmative).
Mark Mueller: All those sorts of things get scrutinized.
Ken Tucker: Yeah.
Mark Mueller: Obviously, then, also your financials. Is this a hodgepodge of Post-it Notes that have been thrown into a file drawer, or is it a legitimate spreadsheet, accounting, and regular statements, everything else? Those are very important things that are going to be scrutinized, so you want to make sure everything’s aboveboard. Do it as it comes up so you don’t get hit with a headache down the road.
Ken Tucker: Mm-hmm (affirmative).
Mark Mueller: It’s also one of those things that I would recommend somebody focus on what they’re good at and have the wherewithal to admit, “I don’t know how to do this. I don’t know how to do that. I need to get somebody in place to assist with these things so I can focus on my specialty.”
Ken Tucker: That’s right, and I think that’s a big challenge for a lot of folks who are small business owners. I mean, part of the appeal is you want to have control and autonomy to do what you want to do. That’s probably why you started your business in the first place. You probably have a pretty strong idea about what it is you want to do and how you want to do things, but I can’t emphasize enough what you just said, that there are good investments of your time and good things to work on, and there are things that you just clearly need to give up and go to somebody who’s truly an expert on.
Mark Mueller: Right, and spend your time doing what you’re good at, generating the revenue to justify paying your team.
Ken Tucker: That’s right. I’ve had you here for quite a while. I really appreciate your time
Mark Mueller: Oh, absolutely. Thank you.
Ken Tucker: I guess, just one last thing is do you have any other advice for successful businesses in terms of agreements or just any other words of wisdom from the perspective that you bring to the table for us?
Mark Mueller: Proper planning.
Ken Tucker: Okay.
Mark Mueller: Don’t wait till the last minute.
Ken Tucker: Earlier the better?
Mark Mueller: Earlier the better, and don’t be penny wise, pound foolish.
Ken Tucker: Okay.
Mark Mueller: You have to go with the mindset that it’s an investment. I don’t like paying my insurance premiums, or my accounting fees, or other things that are, at the end of the day, a cost of doing business, but to be successful, I have to do that.
Ken Tucker: Yeah. Yeah.
Mark Mueller: That’s just really the way to approach it.
Ken Tucker: Okay.
Mark Mueller: Don’t be penny wise, pound foolish.
Ken Tucker: Yeah.
Mark Mueller: That’s not to say you need to break the bank. You can get quality work at reasonable prices, also.
Ken Tucker: That’s right. Yeah. Just one last thing. If anybody is interested in trying to get a hold of you, what’s the best way to do so?
Mark Mueller: Sure. My telephone number is 314-610-2526 which is my cellphone, which I use for my business line because I want to be accessible. I pride myself on being accessible and working closely with my clients, so I give them my cellphone all the time. Then, my email is Mark, M-A-R-K, at muellerlawstl.com, which is M-U-E-L-L-E-R-L-A-W-S-T-L.com.
Ken Tucker: Okay. Great. Well, thanks very much, Mark. I really appreciate it. This was awesome.
Mark Mueller: You bet. Thank you.
Ken Tucker: All right. Thanks. Take care.