April 2011
W-2 & 1099 Information

Small Business Blog

Brought to you by Steve Strauss

April 2011

Write It Right

I once had a job in a law firm where all of the junior lawyers had to take a legal writing class once a week. I struggled to learn the firm's style which was, like the firm, formal, dry, and boring. In the end, I was fired because I was told that I didn't write well enough (right before my first book was published - ha!)

It was a fortuitous experience, however, as being fired forced me to start my own business (a law firm) and that in turn changed my life; voila! Here I am fortunate enough to writing about business to you today.

But I must confess that I was indeed not the greatest legal writer around. I had a hard time confining what I wanted to say into the structures dictated by precedent and expectations. I have had far more success and enjoyment writing about business. But even in business I find too many people who think there are writing Rules that Must Be Followed.

There are, but they may not be the ones that you think. So here then are my Top 4 Rules for effective business writing, whether it be for a brochure, a proposal, a business plan, a blog, or whatever.

Rule No. 1: Check the Jargon at the Door. Lawyers love Latin, because, among other reasons, they think that Latin makes them sound smarter than everyone else. What they don't realize is that it usually just makes them sound arrogant.

Business people also can fall into the same trap, only we use jargon instead of Latin in an attempt to impress. For example, how many times have you read or heard about someone wanting to "interface" when what they really mean is talk? Or what about something like the "need to leverage investments in our IT infrastructure to drive profits." What does "leverage" in that sentence really mean? You got me. The worst culprits are words that have been bastardized: Actionable, incentivize, operationalize, and so on.

Jargon sometimes has its place, but too often it is simply used as a lazy shortcut that adds nothing to the synergy of the point. See?

Rule No. 2: Keep It Simple: Of course your writing sometimes has to be complicated, but more often than not, if you want people to understand what you are trying to say, simplicity carries the day.

Think about it. When someone is reading your business writing, they have no idea where it is going or what the point is. The easier you make it for them to understand, the better. Here's an example of how to do it wrong:

"The SonicBlast Millennium Co. takes the latest in state-of-the-art communication technologies and 24-bit encrypted software and uses them to create a world-class safety infrastructure. The top-down value proposition for you is that your communications management systems and internal proprietary processes will be more secure."

Versus:

"The SonicBlast Millennium Co. safeguards communications. 100% guaranteed"

Rule No. 3: Writing is Re-writing: I always tell my kids that "writing is re-writing." They don't like it, but it's true. Good writing, especially good business writing, usually requires a few drafts before it is easy to understand, interesting, and carries a punch.

Rule No. 4: Make it Snappy, Pappy! The greatest sin in business writing, yet the easiest one to commit, is to be boring. But your business writing need not be boring. In fact, the more you use your creativity, the more interesting it is for your biz, the more memorable your writing will be, and the better results you will get.

Protecting Trade Secrets

The very nature of a small business is that employees learn a lot about your business, for instance, the names and contact information of your best customers, what they pay, and what they need and want for starters.

Not a few employees have parlayed that knowledge into their own business by taking valuable customers with them when they go off on their own. For the employer, it can be a devastating set back. But this potentially devastating loss can be avoided if you take proper precautions.

First some background: Certain confidential information that you have, and that employees may learn while employed at your place of business, is sometimes considered a "trade secret." That is, it is legally protected, private information.

Specifically, a trade secret is an "idea, formula, pattern, process, or compilation of information that provides you with a competitive advantage and which is kept private."

The key to protecting your trade secrets is to inform employees about what you consider them to be and the way to do that is to have employees sign one or several agreements. Ideally, they will sign such agreements as part of your hiring process, but even if you have never had employees sign such agreements, you should consider having current employees do so too.

(Note: The following is general information. The rules in your particular state may vary and you should check with your lawyer to see what the laws in your particular state are.)

A Non-Solicitation Agreement: This contract forbids ex-employees from soliciting your customers or employees. While it would allow a former employee to go to work for a competitor, it would forbid them from soliciting your current clients before or after they do so.

While an actual ban on allowing an employee to take a job with a competitor is often unenforceable (called a "non-compete" agreement), a tightly-crafted non-solicitation agreement may do the trick.

A Non-Disclosure Agreement: Also known as an NDA, this contract states that during the course of their employment with you, staff may learn confidential information and that they promise not to use that information or share it with anyone without your permission for, say, five years. NDAs are probably the best way to protect the integrity of your confidential trade secret information. They are in wide use and typically upheld by courts.

In addition, it is important that you make a substantial effort to keep your trade secrets secret. If you don't make efforts to keep them confidential, don't expect an employee or court to treat them that way either.

Trade secrets are enforced both in both civil and criminal courts. Civilly, each state has enacted a version of the Uniform Trade Secrets Act, and getting an injunction preventing someone from using your trade secrets is the first step under that law. In addition, theft of a trade secret may be a crime, both under individual state laws, and well as under the federal Economic Espionage Act of 1996. Make sure your employees know about these laws, and more importantly, make sure they know that you know about them.

Employment Contracts

So the question of the day is, do you need an employment contract for your staff members? I say the answer is yes. It only makes sense. When you hire people, there are typically several forms and contracts you need to fill out, including of course your W-2s. Let me suggest that a well-crafted employment agreement should be near the top of the list, but only if you draft it right.

Here's why: Almost all employees are considered "at will" - this means they can be fired at any time for any legal reason (i.e., you cannot fire someone because of the race, religion, etc., but almost all non-discriminatory reasons are OK.) A poorly drafted employment contract has the ability however to change someone from an at-will employee to a "cause" employee, meaning you must have a valid cause to fire him or her.

Therefore it is critical that the contract state clearly and boldly words to the effect that "nothing in this agreement is intended to guarantee employment or alter the fact that [name of the employee] is an at-will employee." Once you do that, the document can certainly help clarify your relationship with the employee, while also being an important defense in any future litigation; it is hard for an employee to sue you for wrongful termination when he signed his name to a contract stating he knows he was at-will.

The agreement could also cover:

  • Compensation: This section details the employee's base salary, and benchmarks for bonuses or commissions.
  • Job Description: Here, you explain in detail what is expected of the employee, his hours, duties, sales quotas, everything. Be expansive and explain that other responsibilities may be added later on.
  • Benefits: Your benefits package should be explained. You should reserve the right to change the benefit plan.
  • Stock Options: If you offer stock options as part of your benefits or incentive program, the process by which they are attained and exercised needs to be explained.
  • Arbitration: Litigation is expensive, and many employers have mandatory arbitration clauses in their employment agreements.
  • Immigration Status: The employee needs to verify that he or she is a citizen of the U.S., or has the proper work visa.

Both you and your employee need to sign the contract, and you should keep a signed copy in a safe and secure place.

You should also consider having an employee handbook that explains important policies and procedures, such as workplace safety, anti-discrimination policies, anti-sexual harassment policies, how complaints are handled, discipline, sick leave, and vacation policies. This handbook should also reiterate that employees are considered at-will. Have the employee sign a document stating that he received a copy of the handbook. All in all, I think it is almost always best to put agreements in writing.

Selling a Business

One thing small business owners like to noodle on once they become successful is their so-called 'exit strategy' - that is, what will they do with the business once it is time to move on Options abound: Close the doors, give it to a child, and of course, sell it.

If that last option intrigues you, let me suggest that you begin by reading a great book written by a colleague of mine, John Warrillow, called Build to Sell. In it, John explains the various hoops you need to jump through in order to create a business that others want to buy and then how to do it.

Beyond that, by way of primer, when it comes to selling a business I think that there are basically three questions to consider:

  1. What does the business own? A business that has invested a lot of money over the years in assets is obviously more valuable than a business that has not. Assets can take many forms. Of course they cover things like trucks and equipment, but also must take into account valuable contracts, intellectual property rights, and goodwill (i.e., the reputation that the business has in the community.)

    Sellers tend to overvalue goodwill and buyers tend to undervalue it. The important thing then is to realistically calculate the value of the name and brand of the business.
  2. How much does the business earn? Again, the same principle applies - a business that makes a profit of $100,000 a year is much more valuable than one that nets $35,000.
  3. Are there any intangibles to consider? What makes the business unique, profitable? Do you have a great location, a favorable lease, great employees, a long-term contract? These are the last things to consider.

These three items are then taken into account and used to determine the value of your business and there are essentially three ways to go about doing so. The first is called price building. The second method is called return on investment. The third is the multiplier.

Price building is a valuation method that simply looks at the hard facts - assets, goodwill, leases, real estate, etc. Essentially what you do here is list every asset and give it a reasonable dollar value. For example, yours might look like this:

  • Real estate: $150,000
  • Equipment: $15,000
  • Inventory: $25,000
  • Goodwill: $10,000
  • Total value of the business: $200,000

Return on investment (ROI) looks at the business profit, per year, to help the buyer see what the return on his investment will likely be. For example, let's say that you decide that $200,000 is the asking price. Is that fair? Using the ROI method we would see that:

  • Net profit: $100,000
  • Business sale price: $200,000
  • Return on investment ($100,000/$200,000): 50%

Using this method, and these numbers, the buyer would be making out like a bandit, getting a 50% return on his investment. There are few investments out there that allow a 50% ROI. Thus, a higher amount for the business is probably in order.

The last method is the multiplier. Here you would again look at the net profit, but you would then multiply it by some factor - it varies depending upon the industry - to get a final price. A factor of 3 would result in a $300,000 asking price. Of course, the battle is what that factor should be.

Another option is to simply hire a business appraiser. Though you will pay one a decent commission, it may be worth it to ensure that you get a fair price.