Wisconsin Business Law Blog : Waukesha, New Berlin, Oconomowoc Corporate & Real Estate Lawyer & Attorney

A recent Wisconsin Supreme Court opinion filed June 25, 2010, Ehlinger v. Hauser and Evald Moulding, Inc., 2010 WI 54, is a candid reminder that co-owners of a business should not only take the important step of entering into a written Buy/Sell Agreement to determine how important issues such as death, disability, divorce, bankruptcy, etc. will be dealt with between them, but also in doing so, should take the important steps of discussing fully the ramifications of their agreement so that they have a clear understanding of its key terms and conditions.

In Ehlinger, the Wisconsin Supreme Court upheld the lower courts' rulings that, among other things, a Buy/Sell Agreement between the co-owners of a Wisconsin Corporation was unenforceable because the court determined that the undefined term "book value" rendered it so.  The buyout agreement stated that if one of the shareholders becomes totally disabled, the non-disabled shareholder is entitled to purchase his shares at "book value."  In this case, the contract did not define "book value" and because the records of the corporation were so deficient that a special magistrate skilled in accounting could not determine a value which accurately reflected the corporation's assets and liabilities.  From the court record, the Supreme Court noted that not only was "book value" not defined and not determinable due to deficient corporate records, but it was also clear that the parties did not really understand each other when they entered into the buyout agreement as to what "book value" would actually mean should one of them become totally disabled.  Ultimately, this decision, after over seven (7) years of protracted litigation, resulted in the appointment of a receiver for the assets of the business.

Ehlinger again highlights the need for  co-owners of a business to take the time to ask each other the hard questions with the guidance of their accounting and legal professionals and come to a well considered agreement among themselves before moving ahead too far with the business operations.

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What duties do officers and directors of a closely held business owe the company’s creditors when the company is failing?  Unfortunately, this has become a common question during these troubling economic times.  The answer in Wisconsin appears to be bit different than other states at this point if the failing business is still a “going concern.” In Polsky v. Virnich, thecourt held that officers and directors do not owe a fiduciary duty to creditors unless the company is BOTH: (a) insolvent; and (b) not a “going concern.” The court is quite critical of the “going concern” element reasoning that officers and directors in a closely held business can easily keep a failing business “going” and then drain the insolvent company of all cash via bonues, etc… while the company is insolvent thereby enriching themselves who also happen to be the owners. This appears to be at odds with many other jurisdictions where the rule is that a duty is owed creditors when the company is merely insolvent.

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As a business "deal" is coming together, the parties often wrestle over whether to start the documentation with a "letter of intent"  (LOI) or simply proceed to the actual contracts. While different situations demand different answers to that question, here are some important considerations with respect to what may work best for you.

Using a LOI has the advantage of usually being much less costly, quicker and simpler to draft. While it usually only sets forth the basic terms of an agreement, it is usually not a binding contract, except for certain provisions, such as confidentiality provisions that are intended to protect both parties and take them back to their respective starting points without damage, should the deal fall through.

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A recent Court of Appeals case, Town of Cross Plains v. Kitt's Korner, Inc. 2008AP546 illustrates the risk involved in opening a new business on the assumption that a possible change in zoning will not effect its operation if the business is already up and running.

In that case, an adult entertainment business was opened on a parcel which, at the time it commenced operation, was zoned in such a fashion that such a business was not a prohibited use.  The owner of the business naturally incurred costs in the start up of the business.  The owner was aware of the fact that an ordinance amending the zoning to prohibit such a business on the land in question was coming up for vote, but apparently believed that his expenditure, and the actual operation of the business for a period of time prior to any adoption of the proposed ordinance, would create a situation in which his business would be "grandfathered in" even if the amendment to the zoning ordinance was adopted.

Although the law does recognize that, in certain fairly rare circumstances, expenditure of funds based on a reasonable reliance that zoning will not be changed can create vested rights which will not be impacted by zoning changes, the Court of Appeals held in this case that there could be no reasonable reliance because the owner was aware of the pending vote on the ordinance amendment, but chose open the business regardless.  Expenditures made were made despite the fact that the owner new that zoning prohibiting the business was contemplated and could be adopted.

When opening a business, it would be prudent not only to review current zoning, but also to inquire whether any modifications in zoning are being considered.

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A common, but important, mistake that business owners make when selling their business is failing to adequately investigate what their and their spouse's health coverage will be after the sale of the business.  Obviously, many prior owners will sell their business before they are eligible for Medicare leaving them facing the high costs of obtaining private individual insurance if their spouse is not covered under another group plan.

Commonly, as a potential solution, the prior owners will negotiate to stay on with the new owners as consultants under a consulting agreement or as employees under an employment agreement with the proviso that they be added to the new owner's group health plan until the prior owners are eligible for Medicare or some other pre-negotiated timeframe. 

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1. How do I deal with problems?

Business is a chain of decisions. A good business person has to be able to make decisions. You don't always have to be perfect: the teams that make the World Series can win two and lose two, but they then win the critial next game to be at 60% for the season. The same is true in business: mistakes will be made, but you have to be right more than wrong, and on critical issues, you have to be right most of the time. So if you don't have the ability to deal with problems and make decisions, either pick a partner who does, or work for someone else who has that ability.

2. Am I a good  judge of people?

A good business person starts by selecting the right people. As Jim Collins says in Good to Great, you pick the right people to put on the bus, and then they will tell you what direction the bus should go. If I'm not willing or unable to be very focused on getting others who will work well in my business, then maybe I should see who has a business that I could help if I were on their team.

This goes beyond selecting good employees. It goes to selecting good customers and good vendors. If you have something to sell and only need to sell it to someone once, then maybe customer relations isn't important. But, most businesses grow based on  long term relationships and referrals. Seek customers who need you as much as you need them.

Seek vendors who want long term relationships, as well, so that as you start out or if things get tough, they will extend accommodations to you to assure your business remains strong and healthy.

3. Am I passionate about what I want to do?

There are hot dog vendors and cupcake makers that are awesomely successful. They are passionate about their products and have developed a "core concept" to make their customers just as passionate. For example, "the best deal on two dogs and a drink in America, for just $4."

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Once coupled to a development idea, every entrepreneur faces the challenge of deciding which business entity would best suit his or her needs.  While one would think that there is one right answer to this dilemma, in fact, the answer depends on a number of factors that are unique to each business, resulting in many different entities being the "right" choice, depending on the circumstances.

Factors affecting entity choice include:

• Liability Protection
• Owner Relations
• Income Tax Consequnces
• Other Tax Consequences
• What Others are Doing
• Cost

Considering these factors, the owner has the following choices:

• Corporation (S-corp or C-corp)
• Partnership
• Sole Proprietorship
• Limited Liability Company (LLC)
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Others, such as Joint Venture, etc.

Perhaps the best way to compare all these choices is through a table which sets forth some of the most common advantages and disadvantages of each type of entity in comparison to the above factors:

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