Business Law

Congratulations on thinking about going into business. Having an idea or a dream for a business is the first step. To get your business off and running on the right foot, there are a lot of things to think about. You may be overwhelmed by everything there is to do, or you may be wondering what you don’t know. Here are 10 things to know about how to start a business venture from our North Carolina business attorneys:

How do I start a business in North Carolina?

To start a business in North Carolina, you need to choose a business name. You decide on a business entity, and you register your business. You might register your business in your county, or you may register your business with the North Carolina Secretary of State. Once the Secretary of State approves your filing, you’re in business. Be sure to comply with tax laws, employment regulations, workers compensation and other regulations as you operate your business.

1. Choosing a business entity for your business

Not all businesses are created equal. The type of business that you choose determines how your business operates, how you pay taxes and whether you’re personally liable for the debts of the business. If your business is a sole proprietorship or a general partnership, you’re personally liable for the debts of the business.

If you start an LLC, your liability is more limited. You may also want to start a corporation or a non-profit. It’s important to consider the taxes, management structures, risks and potential benefits for each business entity in order to choose the structure that’s best for you.

In North Carolina, the filing requirements depend on your type of business. If you start a sole proprietorship or general partnership, you file with your county. For other business entities, you file with the North Carolina Secretary of State. In North Carolina, there are lots of business entities to choose from. You should carefully consider which type of business structure meets your needs.

2. How to choose a name for your business

Every great business needs a great name. When you register your business, you must be sure to avoid a name that’s already in use by another business. Just like your business has legal protections, other businesses have protections, too. Be sure to choose a name that’s available in order to avoid complaints from other businesses.

3. How to minimize risks as an employer

If you’re going to hire employees, there are a few special things that you need to do. You must comply with federal and state employment laws. There are laws that prohibit discrimination. You must follow wage and hour laws. Health and safety laws are also important when you have employees. If you have three or more employees, you need to purchase worker’s compensation insurance.

Beyond regulations, it’s important to think about what your business can do to minimize risks. You may be wise to implement training programs for employees. It may be a good idea to adopt official policies and a corporate handbook. Following official employment laws and identifying other ways that you can be a good employer can help you avoid problems before you hire your first employee.

4. How to protect your intellectual property in business

When you go into business, there’s a good chance that you’re going to have some ideas, designs and other works that you need to protect. Even your business name or logo may be worthy of a trademark. If you have an invention, you may need a patent. If you make creative works, you may need to brush up on copyright enforcement laws. Protecting your intellectual property is key to your business success. Learning about the types of intellectual property that may impact your business can help you protect the assets that can make your business thrive.

5. What kinds of contracts do you need to run a business?

Most businesses rely on contracts. You might have contracts with suppliers. You may have contracts with purchasers. You’ll also need insurance contracts that may include worker’s compensation.

In business, disputes are inevitable. A contract may not seem important until you have a disagreement. Determining when you need to use contracts in business and what they need to say can help you start your business on the right foot.

6. What government laws and regulations do I need to follow?

There are federal, state and local laws that apply to your business. You may need permits or a license for your particular business venture. Knowing the laws and regulations that you must follow is critical to avoiding bumps in the road. Identifying the laws that apply to your business can be a big task. An experienced attorney can help you determine what you need to do in order to stay on top of laws and regulations that apply to your business venture.

7. How do I raise capital for my business?

When you start a business, you must think through the finances related with running the business. You must determine how you’re going to get funding. Is your funding going to come from personal sources, are you going to take out a loan or are you going to find investors? How much do you need to make in order to break even? Thinking through the finances involved in starting and operating your business can help you make sure that you take the best steps to help your business grow.

8. How do I pay taxes for my business?

Your business must pay taxes. If you sell anything, you need to register to pay North Carolina sales tax. Employers must pay unemployment and employee withholding taxes. When you start a business, it’s important to understand what taxes you need to pay and how you’re going to pay them.

9. What else do I need to know?

When you’re in business, it can be hard to know what you don’t know. An experienced North Carolina business attorney can help you identify things that may create trouble for your business. A business lawyer can help you both avoid problems before they start and react if unexpected issues arise during your business venture.

10. What do I need to do once I’m in business?

Even once you’re in business, there’s important work to do. You need to file an annual report with the North Carolina Secretary of State. You need to pay all of your taxes. It’s important to continuously asses areas where your business may need to make changes in order to thrive. The team at Wilson Ratledge can help you start your business in the best way possible and identify ways to help your business thrive. Fill out our online form or call us today to schedule a consultation about how to get your new venture started off on the right foot.

Selling your business is a serious undertaking. You need to agree on terms of the sale. You also need to agree on a selling price.

When you’re ready to sell your business, you might immediately wonder what your business is worth. There are several ways to value a business. It’s important to understand the most commonly used business valuation methods so that you can choose the right one for your business.

Choosing a valuation method for your business

Valuing a business is an art. It’s not a science. Business valuation methods vary based on the type and size of the business. There are several different methods, and they can produce wildly different results.

Ultimately, your goal is to agree on a purchase price with a potential buyer. When you settle on a business valuation method, it’s important to be able to justify your choice. Here are the most commonly used business valuation methods:

Business Valuation Method – 1. Profit Multiplier

The profit multiplier is a business valuation method that looks at the profits that a company makes over a period of time. First, you determine the company’s profit or their gross income minus expenses. Once you arrive at an annual profit, you multiply that amount by a multiplier that you determine. The result is the value of the business.

For example, say a business has an annual gross income of $500,000 per year. They have $350,000 in total expenses including supplies, rent, employee salaries and more. They make $150,000 each year in profit. To value the business, the owner applies a multiplier of 3. The total value of the business using the profit multiplier method in this example is $450,000.

How do you choose a multiplier for your business valuation?

A critical question in the profit multiplier valuation method is settling on a multiplier for your case. Multipliers can range from two to 12. Because there’s a big range for possible multipliers, the multiplier that you choose can make a big difference when it comes to the value of the business.

A small business might use a multiplier between three and five. A large, public company typically uses a multiplier between seven and 12. The reason for the difference is that a large, publicly-traded company likely has more growth potential than a small business. The profit multiplier method assumes that the business is going to continue to make the same profit in future years.

Considerations for the profit multiplier valuation method and a small business

When you apply the profit multiplier valuation method to a small business, there are some special considerations to keep in mind. A small business might operate out of the owner’s home. That can help the business save on rent. If the cost of rent isn’t factored into the business valuation, the value of the business can be too high using the profit multiplier method.

Similarly, a small business owner might not take a salary. If someone buys the business, they may have to pay an employee to do the work that the owner used to do. To create an accurate valuation estimation, it’s important to account for a salary for the owner. An accurate profit multiplier valuation has to consider and account for unique circumstances that may be present in a small, closely-held company.

Business Valuation Method – 2. Comparables

Another way to value a business is by looking at sales of comparable businesses. To use the comparables method for selling a business, you find similar businesses that sold recently. You compare their selling prices in order to determine the value of your business.

There are both pros and cons to using the comparables method. The comparables method has merit in that it looks at actual sales of real businesses whereas other valuation methods may be purely speculative. However, the comparables method is based on similar businesses, but no business can be exactly like the one that’s being valued for a sale. Even differences that seem small like location or assets can make a big difference when it comes to placing an accurate value on a business. In addition, there may not be enough examples available to use effectively, as most small business acquisitions do not have publicly disclosed terms. The comparables method may result in comparing dissimilar businesses, but it’s based on real sales rather than estimations.

Business Valuation Method – 3. Discounted Cash Flow

The discounted cash flow method of valuing a business projects future cash flow and discounts it to current-day values. The discounted cash flow method is similar to the profit multiplier method, but it reduces the total amount to present-day value in order to account for inflation. To use the discounted cash flow valuation method, you estimate cash revenues and deduct expenses. Once you determine your profit margin cash flow, you apply the appropriate multiplier. Finally, you reduce the amount to a present-day value. The result is the estimated value of the business.

Business Valuation Method – 4. Asset Valuation

Another method to determine the value of a business is the asset valuation method. Unlike other methods that focus on incomes and profits, the asset valuation method looks at all of the physical assets of a business. A business might have real property, fixtures, machinery, electronics and other tangible assets. All the assets are included in the asset total for the business. Then, you deduct debts from the value of the business. The total market value of your assets minus debts is the value of the business.

The asset valuation method must address depreciation. An object loses value over time. It’s impractical to appraise an item with the amount the company paid to purchase it. You need to rely on appraisals in order to determine the current value of an item. The asset valuation method is the most practical when a business has a large number of physical assets. Even though a business may not have many assets, they might have a large client base. It’s important to consider the type of business that you have when you decide what valuation method to choose and what adjustments to make.

Business valuation must be reasonable based on the true circumstances

When you’re selling your business, you want the selling price to be as high as possible. It’s important to work carefully and thoroughly when you perform a business valuation. You must be able to justify your methods to the person that you want to buy the business. You might use only one business valuation method, or you might use multiple methods. Ultimately, an accurate business valuation can help you find a willing buyer and determine the right sale price.

A merger or acquisition is a large business undertaking. It’s common for the parties to enter into a preliminary agreement before they negotiate the final terms. A preliminary agreement allows the parties to determine the parameters for their negotiations. They make sure that negotiations are fruitful for both parties.

Binding provisions of a preliminary agreement often include terms about confidentiality and exclusivity. Confidentiality and exclusivity terms help preserve the business interests of one or both parties during the negotiations process. Here’s what you should know about confidentiality and exclusivity in a mergers and acquisitions transaction from our mergers and acquisitions attorneys:

Do I need a confidentiality agreement for a merger or acquisition?

In a merger and acquisitions transaction, each party needs some information about the other party in order to make an informed decision about whether to go forward. Often, the information that they need is private. A confidentiality agreement lets you exchange the information you need without any negative consequences that might come along with public disclosure.

A confidentiality agreement states what information must be kept secret during the negotiations process. Both sides to the transaction may promise to keep information secret that they receive from the other side, or only one party may disclose information that needs to be kept secret. Keeping information confidential can protect trade secrets and secretive business information. It’s important to think about what information you want to be released to the world. It’s almost always in your best interests to keep at least some information confidential during and after the negotiations process. Confidentiality and exclusivity can protect your business especially if the negotiations process isn’t successful.

Should I just use a boiler plate confidentiality agreement?

A standard or boiler plate confidentiality agreement isn’t specific to your situation. There are a lot of different options for a confidentiality agreement like mutuality, rules for the destruction of sensitive information after negotiations, the scope of confidentiality, exclusions, choice of law and penalties in the event of a breach. Because a merger or acquisition is a major undertaking that involves a large sum of money, it’s always in your best interests to tailor your confidentiality agreement to meet the best interests of your business.

Things to include in a merger and acquisitions confidentiality agreement

In your confidentiality agreement, there are a number of terms to include. You want to address all of the following key provisions of a confidentiality agreement:

Identification of the parties

The parties in a confidentiality agreement are the buyer and the seller. You may call the parties the disclosing party and the recipient. Sometimes, both the buyer and the seller disclose information.

You may also want to address whether the confidentiality agreement applies to other related parties and organizations. For example, most companies need to involve attorneys and accountants in their business negotiations. You may also include your financing sources or affiliate companies in your confidentiality agreement.

Scope of confidentiality

Your confidentiality agreement should carefully define what’s confidential and what’s not. Oral statements may not be confidential, or there may be follow-up procedures that clarify if oral statements must be kept confidential. There may be handling procedures required by both parties in order to prevent unauthorized access to information. There may be exclusions for publicly known information and information that a party acquires without using confidential disclosures.

An obligation to destroy confidential information

If the merger or acquisition ultimately doesn’t materialize, the parties must decide what to do with the confidential information that has been disclosed. Naturally, the seller wants to keep the information confidential, but the buyer may need to keep some information to comply with laws and regulations. The seller might want confidential information returned but in the digital age, it may be hard to return electronically stored information. Printed information might have the opinions and mental impressions of the buying company jotted down in the margins. It’s important to agree on how to handle all of these issues as you draft your confidentiality agreement.

Choice of law in a confidentiality agreement

While you hope you don’t have to litigate your confidentiality agreement, you want to think about what happens in the event of a breach. The buyer and seller may operate in different states. You should determine what body of law you want to decide the dispute if you have to litigate your confidentiality agreement.

Penalties for breach in a confidentiality agreement

It’s important to think about what you want to happen if either party breaches a confidentiality agreement. Possible remedies might be injunctive relief or a financial penalty. Defined penalties in the event of a breach can take the uncertainty out of the process. It can also give the parties an incentive to follow the terms of the confidentiality agreement.

Exclusivity agreements in mergers and acquisitions contracts

An exclusivity agreement prevents a seller from negotiating a sale with other buyers during an agreed upon period of time. The exclusivity agreement puts a buyer in a better position because they don’t have competition during the exclusivity period. In addition, the buyer can have faith that the seller is serious about negotiating the sale. If the buyer backs out of the sale, an exclusivity agreement has cost the seller time to negotiate other offers. An exclusivity agreement is also called a “no-shop” agreement.

How to prepare an exclusivity agreement for a merger or acquisition

To prepare an effective exclusivity agreement, you must think about how much you want to agree to early on as you enter into negotiations. A seller wants to keep the exclusivity agreement as short as possible. The seller might look for an exclusivity agreement of not more than 14 days.

A buyer wants a longer exclusivity agreement like 30 or 60 days. The length of the exclusivity agreement depends on the amount of time you need to conduct due diligence and negotiate the final details. You may also negotiate automatic renewals of exclusivity as negotiations continue or even termination of exclusivity if certain events occur.

Preparing confidentiality and exclusivity agreements in mergers and acquisitions transactions

There’s no one-size-fits-all remedy for a mergers and acquisitions transaction. It’s important to think about the specific needs and interests of your business as you negotiate confidentiality and exclusivity. Both provisions are critical to protecting your business interests as well as the interests of employees, customers and other related parties.

Agreeing on the terms for negotiating an acquisition or merger can be a significant undertaking by itself. Taking the time to tailor your confidentiality and exclusivity agreements can help ensure that your business interests are protected whether or not the merger or negotiation is ultimately successful. Experienced legal counsel can help you draft an effective agreement as you enter into negotiations for your merger or acquisition contract.

Call us today or fill out our online contact form to speak with our team about your specific situation.

Most mergers and acquisitions begin with a non-binding agreement on primary terms. If you’re considering a business transaction, you might wonder how non-binding agreements on primary terms work. Primary agreements are critical to the negotiations process, but it’s important to draft them carefully in order to ensure that they have their intended effect. Here’s what you should know about non-binding agreements on primary terms in mergers and acquisitions:

What is a non-binding agreement on primary terms?

In a merger or acquisition, a non-binding agreement on primary terms is a document that lays out the rough terms of the business transaction. It allows the parties to put some terms on paper and then work to iron out the details. A non-binding agreement lays the framework for additional negotiations in hopes of finalizing the merger or acquisition.

What’s the purpose of a non-binding agreement on primary terms?

Parties enter into non-binding agreements as a way to facilitate business negotiations. A preliminary agreement allows the parties to ensure that they’re generally on the same page when it comes to the terms of the agreement. In that way, the agreement helps them ensure that there’s a good chance that their negotiations are going to be worth their while. A preliminary agreement also helps the parties agree on terms for negotiating.

What’s in a non-binding agreement on primary terms?

A non-binding agreement on primary terms may contain any number of terms. The exact language depends on the preference of the parties. A non-binding agreement on primary terms might include any of the following provisions:

• Timeline for negotiations
• Goal timeline to reach a final deal
• Scope of negotiations – what entities, goods or services are up for discussion
• A general purchase price
• Confidentiality
• Exclusivity
• Choice of law for interpretation of the agreement
• Defined damages for a violation of the agreement
• A statement that the parties are not required to reach an agreement

Is a non-binding agreement ever binding?

Although it might seem ironic, a non-binding agreement can be binding. The entire agreement may be binding, the entire agreement may be non-binding or portions of the agreement may be binding. When you draft a non-binding preliminary agreement, it’s critical to take into account whether you want the agreement to be binding in any way. If you don’t want to require that the parties reach a final agreement, you should also consider whether you want any preliminary terms to be binding while you work on negotiating a final deal.

What parts of a non-binding agreement may be binding?

Some of the parts of a non-binding agreement that may be enforceable include:

Confidentiality

One part of a non-binding agreement on primary terms that’s often binding is a confidentiality requirement. A confidentiality agreement requires the parties to keep the negotiations a secret for a period of time. The reason for a confidentiality agreement is to prevent third parties from trying to compete for business. Even if the agreement doesn’t ultimately require the parties to reach a final deal, a confidentiality clause in a non-binding agreement can be enforceable.

Exclusivity

Most non-binding preliminary agreements require the parties to negotiate exclusively for a period of time. A party in negotiations generally can’t shop the offer around to third parties until the parties involved in negotiations have time to fully explore the possibilities for a final agreement. In addition to confidentiality requirements, exclusivity provisions require the parties to negotiate only with each other for a set period of time.

Good-faith negotiations

If a non-binding preliminary agreement contains a good-faith clause, the parties must negotiate with each other in good faith. A good-faith clause ensures that neither party wastes their time preparing information or conducting due diligence if the other party isn’t really interested in the deal. Good-faith clauses are typically binding during a negotiation period if they’re a part of the preliminary agreement.

How do I know if a non-binding preliminary agreement is enforceable?

A non-binding agreement can specifically state what terms are terms are binding and non-binding. If the agreement explicitly states what provisions are enforceable, that can go a long ways to determine whether the agreement or any of its provisions are binding. In addition, the courts look at the intent of the parties and their behavior. They look at whether the contract is ambiguous. The court interprets a non-binding agreement in the same way that they interpret any other kind of contract.

What’s the penalty if a party violates enforceable terms in a non-binding agreement?

A non-binding preliminary agreement can include liquidated damages. The parties can agree on an amount that a party has to pay if they breach the enforceable provisions of the agreement. Damages for a breach might seek to compensate the non-breaching party for the time and expense that they invest in negotiations. Damages might also try to give the non-breaching party the benefit of the bargain. The damages that apply might depend on the body of law that applies to the agreement.

Choice of law considerations

Because interpretation of a preliminary agreement often depends on the body of law that applies, each party should carefully consider whether to include a choice of law provision in their agreement. An agreement may be governed by the laws where either party is located. An agreement may be interpreted by the laws whether either business is incorporated. The parties can choose the body of law that applies by stating a choice of law provision in their agreement. A choice of law provision can take some uncertainty out of how damages might be calculated in the event of a breach. Each party to a non-binding agreement should consider how each state interprets contracts and what law they want to apply to the agreement.

Be wary of emails and electronic signatures

One thing to be aware of when you’re negotiating a preliminary non-binding agreement is emails and the prevalence of electronic signatures. Most states have laws that are quite permissive in terms of using an electronic signature to execute a binding agreement. Parties negotiating or discussing through email shouldn’t assume that what they state in email is non-binding just because it’s in an email. Remember to be clear in preliminary emails in order to avoid surprises and misunderstandings that can turn into litigation.

Using a preliminary, non-binding agreement to your benefit

A non-binding, preliminary agreement is a common and important part of most mergers and acquisitions. As you draft an agreement, it’s important to carefully consider whether you want each provision of the agreement to be enforceable. Then, it’s important to effectuate your wishes in the agreement. An experienced mergers and acquisitions attorney can help you pursue your goals and avoid pitfalls in the negotiation and drafting process. Call us today or fill out our online contact form to speak with our team about your specific situation.