Four Tips for Master Supply Agreements

Whether a business is just beginning and needs the necessary supplies to start production, or an existing business is simply looking to renegotiate terms or find a new supplier, business owners face a specific set of challenges when figuring out how to best deal with supply agreements.  In the aggregate, master supply agreements, or MSAs, are generally contracts that come into existence when a company maintains several contracts with the same supplier, and therefore seeks to streamline the process by merging them into a single agreement.  MSAs are also commonly utilized to provide consistency across an organization so that purchasing/procurement teams have a guideline on how to systematically deal with various needs. MSAs provide many advantages, but for those of you considering an MSA or if you are wondering whether you’ve considered all of your options in your current MSA, here are a few tips for navigating them:

  1. Evaluate Fair Pricing. Cost is usually at the top of everyone’s list when considering a contract.  Especially when an MSA is centered around raw material, fair pricing of the good is crucial.  Consider having the supplier base his or her contract price of the material around a market-based, published price or index for the good.  Goods such as previous metal are represented on a commodity price index which averages prices for the good based on futures and spot prices and often trades on an exchange.  This in turn allows investors to trade in the underlying commodities without having to be directly involved in the futures market.  By basing the cost of the good off of this real-time average price, it increases the fairness of the contract by providing the cost based on what countless others are paying for the same material.
  2. Consider Exclusivity. Perhaps if you elect to make a certain supplier your exclusive provider of a certain good, or a certain type of good, this could potentially convince the supplier to grant you a discount or even guarantee your supply over others.  However, exclusivity may also become problematic if an issue arises between you and your supplier, leaving you with little recourse under your contract to make up for your lost supply.  It’s advisable that you carefully analyze a contract and ensure certain legal provisions are in place before entering into such agreements.
  3. Expect a Denial of Goods. Whether you’re getting a raw material or a packaged product, as a buyer you should consider the consequences of receiving an incorrect or damaged shipment.  Buyers often have the right to refuse a product if it is unsatisfactory but of particular note is the situation in which the buyer does not take notice of wrong or damaged goods right away, but rather waits months to discover the issue.  This could be due to the nature of the business, for example buying batteries to operate machinery in bulk, only to realize a few months later that a few of the batteries are defective.  In this situation, you should look to your MSA to discover whether you have the right, at that time, to deny the goods and either get monetarily compensated or sent replacements.
  4. Have an Exit Strategy. No matter what the relationship is between your business and the supplier, contractually, you should always consider what the end of that relationship will look like.  Put in writing things like:
    1. Will this MSA renew automatically or terminate upon completion?
    2. What are acceptable termination causations?
    3. Who will pay for certain termination costs and what requirements will you need to survive?

All of the above questions are important factors to consider when creating a new MSA or renegotiating existing relationships with vendors. 

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

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What to Consider When Buying a Business & Some Recent Changes That Can Help

Whether you’re interested in expanding your existing business or looking to get in to an entirely new sector, purchasing a business comes with a complex set of issues, not the least of which is financing.  After most formalities have been dealt with—such as purchase price, investigating the inner-workings of the business, and so forth—the question remains as to how the necessary money needed to purchase the business will be acquired.  If the money is not on hand, or available via family and friends, you will most likely have to go through the process of getting a loan from a traditional lending institution, such as a bank or credit union.

A Small Business Administration (SBA) loan is one of the most common types of loans for acquisition financing, especially if you’re looking for a longer-term repayment contract and a low interest rate.  The process of obtaining such a loan, however, can be complicated due to rigid qualification measures and the increased amount of time it takes for the process to finalize.  With that said, the SBA recently released modifications to its Standard Operating Procedure (SOP), drastically changing some of the guidelines used in determining whether someone qualifies for an SBA loan.  Of particular importance were the following changes:

  • Equity requirement reduction from 25% to 10%. The SBA now requires that the lendee put down only 10% of the total project cost in order to meet their equity requirement.  Though the previous amount was just on the acquisition cost, the 15% reduction nonetheless makes it easier to qualify from a money-on-hand perspective.
  • Faster seller note collection. Previously, sellers could only collect on notes after two years; the new SOP allows such payments starting day one after a sale unless the note was used as part of the 10% equity requirement.  If that is the case, the note will be on standby for a period matching the SBA loan.  This effectively increases the burden of seller financing.

Though the foregoing guideline changes will undoubtedly change the SBA loan landscape over time, because banks are still free to set many of the terms associated with the SBA loans they make, the changes will neither be sweeping nor immediate.  The changes should therefore be read as simply allowing banks more room to work with in the often-ridged setting of loan processing and approval.  It is also advisable that, when considering the purchase of a business, adequate legal counsel is consulted.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Personally Identifiable Information

In recent years, as an increasingly large amount of our information is stored on computers and throughout the internet generally, the notion of cyber security, especially in relation to Personally Identifiable Information (PII), has become a progressively important and even daunting concept.  Under Minnesota statute 325E, “personal information” means an individual’s first name or first initial and last name in combination with (1) their social security number, (2) their driver’s license or MN identification card number, or (3) their account, credit, or debit card number when in combination with any required security code or password that allows someone access to an individual’s financials.  In other words, it’s information that, if in the wrong hands, can do a lot of damage to someone, especially in a financial sense.

On the front end, there are many ways in which a person or company can limit their exposure to the risk of others accessing PII.  Generally, third-party vendors carry a particularly huge risk and because of this, contracts pertaining to privacy, indemnity, and the right to audit are widely recommended.  Additionally, and perhaps most basically, when dealing with a third-party vendor, be inquisitive—ask about their security processes, the firewalls that are in place, and encryption methods.  Questions like these may not only lead to increased confidence in a given third-party vendor, but also could result in a larger conversation about risk management or even new ideas for your own security of PII.  More internally-based precautions to consider would be getting some kind of cyber security insurance, looking into the actual physical security of certain hardware, properly training personnel on network security protocol, and having an identifiable plan for if things go wrong.

But just what happens when a breach actually occurs and PII is exposed?  A widely accepted six-step incident response cycle was developed by Kurtis Holland in 2014 with this very question in mind.  First, it is ideal to have prepared for an incident, as evidenced through a plan.  Second, you must be able to identify the breach, usually by way of an anomaly or detection software.  Third, contain the breach as much as possible in order to mitigate the risk.  Fourth, utilize either internal or external IT professionals in order to eradicate the malware.  Fifth, resume normal functions and fully recover.  Sixth, and perhaps most importantly, evaluate the incident that occurred and if necessary, make the proper adjustments to avoid it happening again.  It is also worth noting that when PII has been acquired by an unauthorized person, it is statutorily required that the person or business breached sufficiently disclose the incident in a timely manner. How to do so in compliance with the law, while still protecting your business is an important process.

When data breaches do occur, one can expect things such as lawsuits to follow not long afterwards.  For example, when the infamous Target breach of 2013 happened, effecting approximately 41 million people and thus one of the bigger data breaches in recent history, what resulted was that the company had to pay $18.5 million settlement to 47 states and the District of Columbia.  It is for this reason that it is highly recommended that you discuss things such as PII, cyber security, and breach liability with an experienced lawyer.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Strategic Thinking for Leases & How Lawyers Can Help

In the wake of Amazon’s latest acquisition of Whole Foods, the fate of traditional, brick-and-mortar retailers may not be as bleak as it once seemed.  The world’s largest online retailer is facing certain difficulties in the realm of lease agreements, the same kind of difficulties that any tenant may face when entering into such a lease.  Oftentimes clients have a perfect location picked out, with an excellent business and marketing plan worked out, and clients and customers ready to go, however, they get a major surprise when they receive the lease from the Landlord.  Many tenants as well as landlords forget about the implications that a lease agreement holds down the road for future competition of subsequent tenants.

Stores such as Bed Bath & Beyond, Best Buy, and Target all have legal rights to halt certain operations proposed by Amazon by way of Whole Foods markets when it comes to where they may open or what they can do at various locations across the country because of their leasing rights and restrictive covenants in related agreements.

The carving out of certain provisions in leases such is a routine practice in the industry.  Tenants with enough leverage will negotiate with Landlords to have some protections put in place in order to avoid certain competition.  It is common to see proposals of various restrictions, such as no other grocery stores, electronic stores, toy stores, or discount retailers allowed in a mall so long as the tenant is leasing there.  Landlords frequently give up their business rights to substantially alter malls and therefore sacrifice tenant mix – but they do so as part of a careful negotiation.

The main issue that Amazon is facing, however, is that of neighboring retailers having clauses that, although do not bar the retailer completely, substantially limit its capabilities newly offered by Amazon.  Such limitations have the capability of vastly altering, or in some cases, prohibiting, the things that make a company unique.  Though the future for Amazon and Whole Foods is unclear, I think there will be a lesson learned of heightened focus on negotiations in general.

The question remains then, how can retailers adequately protect themselves from the e-commerce giant that is Amazon, or any competitor for that matter?  In general, a lawyer can aid tremendously in the process by providing the know-how, skills, and ultimately the language necessary for such protection.  As evidenced by the above, carefully drafted lease agreements are key and are able to withstand even the biggest and most powerful companies.  In a world where Amazon is seen as a dominant and intimidating player in a multitude of markets, this instance has taught us that companies much smaller can not only survive, but thrive in an environment where physical Amazon stores exist, albeit with adequate lease agreements.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Key Areas of Concern When Dealing with a New Vendor

Whether you are a well-established company or just starting out, outsourcing certain services may be in your best interest; big box retailers, for example, need not concern themselves over the creation of a customer-facing app to sell their products and all of the intricacies that accompany the technological world.  In order to create said app, or do virtually any other service for that matter, businesses often hire other companies better suited to do so, whose job it is to specialize in such matters.  When engaging in these outside vendor hiring processes, it is important to take into consideration a multitude of different factors, such as reliability, insurance, assurances, and termination rights.

A vendor’s reliability is perhaps the most important factor to take into consideration when first addressing whether to do business with them.  Make sure you conduct due diligence on the company and assess their past record of entering into contracts such as yours.  Have former clients of customers favorably or unfavorably reviewed them?  Are they rated by the Better Business Bureau?  Take a look at such testimonials and ratings in order to gauge the company’s reputation and overall reliability going forward.

Another way to protect your business from the potential harm of outside vendors is to require them to obtain multiple kinds of insurance coverage.  In particular, cyber insurance can be especially helpful if the vendor in question is to have access to private electronic data, such as the personal information of customers or employees.  Cyber insurance typically covers such things as computer and data loss recovery, credit monitoring, notification expense, and other related forms of liability.  Additionally, businesses oftentimes require certain amounts and other types of insurance coverage, even conditioning their vendor contracts on being named as an additional insured party in those policies.  Paying attention to how such requirements are drafted within the contract are just as important as requiring them in the first place.

Third party service providers, perhaps now more than ever, are being required to provide a multitude of assurances to their clients, promising such things as confidentiality, risk management, compliance with expectations, and integrity.  Companies are more frequently appointing people within their organization to attend to the management of the quality of service rendered.  It is important to lay out your expectations and required assurances at the outset of any vendor-vendee relationship, as it provides a permissible roadmap of situations to come, specifying what is and is not acceptable practice.  Contractual requirements and carefully laid out details help manage expectations. Details are always helpful because the parties can help ensure that everyone understands the “rules” and alleviate concern with new relationships on how the other party may act.

Likewise, and relatedly, the termination rights of parties are also important to consider.  As a business, it is important that you have the legal right to move on from a contract that is, for a valid reason, unfavorable to you or later on becomes unfavorable to you.  Try to anticipate potential issues that may arise, such as a material breach by either party, and provide for that in contract form.  Businesses may even wish to discuss the termination of a contract based purely on inconvenience, with a potential expense being incurred on the terminating party.  In essence, you want to make sure that you are not stuck in a bad situation by predicting future problems, and figuring out a way to settle them in a way both parties can agree to, in contract form, before they ever arise.  Likewise the vendor may require fallbacks to protect their interests. Such provisions can be negotiated by both parties to achieve an agreement which works for everyone involved.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Beware the Oxford Comma

Upon first glance, the fact that the US Court of Appeals for the First District recently upheld an appeal by five Maine delivery truck drivers of dairy products may not seem like a huge deal—it was essentially held that the drivers in question were entitled to overtime pay, something that their employer had thought they were exempt from because of Maine’s applicable law.  However, the reasoning behind the actual irrelevance of the law in the circumstance lay within its use, or rather lack thereof, of a comma separating the last two items of a list, otherwise known as an Oxford comma.  Though this case did not take place in Minnesota, the lesson it provides is manifestly true in all areas of contract law and drafting, that being: grammar truly does matter.

According to Maine’s wage and hour law, as set forth in Chapter 7 of Title 26 of the Maine Revised Statutes, an employer is not compelled to disperse overtime pay if its employees are engaged in the following activities:
The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of:
(1) Agricultural produce;
(2) Meat and fish products; and
(3) Perishable foods.

The issue arose with regard to the lack of a comma after the word “shipment” above, meaning the drivers argued that it should be interpreted as meaning “packing for shipment” or “packing for distribution” and that since the work performed dealt only with distributing milk and not packing it in any way, their employer was not exempt from paying them overtime.  Conversely, the employer believed that the law should be read as if there was a comma after the word “shipment,” therefore splitting the tasks not eligible for overtime pay into “packing for shipment” and “distribution” generally.  An alternative version of the law, with the Oxford comma included, would in pertinent part read: “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment, or distribution of . . . .”  This interpretation would better delineate the fact that both those involved in packing for distribution as well as simply distribution are subject to the law, rather than two kinds of packing.  Without it, however, the law as it stood remained unclear.

Ultimately, the court came down on the side of the dairy drivers, declaring that “ambiguities in the state’s wage and hour laws must be construed liberally in order to accomplish their remedial purpose[.]”  To longstanding proponents on either side of the classic Oxford comma debate, this comes as a weighty precedent in its favor.  A non-legal example of the comma’s relative importance can be seen in sentences such as: “This book is dedicated to my parents, Elvis Presley and God.”  With that said, opponents say the use of it is oftentimes unnecessary and generally displeasing in a visual sense.  In general, however, it is important to note that what should be aimed for is clarity, not blind adherence one way or the other.  This is perhaps especially true in the legal field where so much can be misinterpreted or misunderstood from an outsiders’ perspective already.

In brief, though the events that took place and the legal consequences that followed did not occur in Minnesota, they certainly could have.  The ramifications of the dairy employers’ reliance on a single missing comma ended up costing them approximately ten million dollars, and as such it goes to show us all about the importance of transparency in writing overall good grammar.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Ten Things to Consider When Taking a Product or Service to Market

1. Basic business structure. First and foremost, it is important to make sure that your enterprise is incorporated correctly, whether that be as a sole proprietorship, partnership, LLC, or otherwise.  Making sure that you have completed the applicable governing documents in order to legitimize the overarching business is essential to making sure that a product launch runs smoothly and without legal issue.

2. Separating yourself and employees from competition. Many products or services grow out of pre-existing ones, however, it is critical that those in charge of the operation, as well as any employees, separate themselves from possible conflicts of interest or potential competitors of the product or service in question.  Doing basic background checks of employment history is a common way in which new employers come to know of any hindrances of an employees’ ability to work, such as non-compete agreements or confidentiality agreements.

3. Clear contracts. Contracts with processors, retailers, suppliers, and otherwise all need to be in good standing and properly executed by the time a product goes to market.  Ideally, they should be kept up to date and crucially specific, going well beyond the basics of what is being bought or sold, for how much, and when.  They should also abide by all applicable laws and customs and therefore consulting a reputable attorney is critically important when accomplishing this task.  All too often companies will utilize a generic contract that provides miniscule amounts of protection (if any) and that leaves clients with too much exposure to risk.

4. Licensing. If you are a relatively small company and would perhaps like to broadly expand yet you don’t have the resources to do so, you may want to consider licensing as an alternative approach to taking your product to market yourself.  Licensing is a tool that allows you to essentially enter into a legal agreement with another and have them pay you for your ownership of a product or idea.  It’s important to note here, however, that licensing agreements bring with them a myriad of other legal considerations to think about in and of themselves so it is important to not think it is the perfect legal solution.

5. Laws around sales and marketing. Sales and marketing are integral parts of making a new product launch a successful one.  However, even though the ever-expansive internet may make reaching target markets exceptionally easier than ever before, the laws surrounding just what you can and can’t do are equally broad.  For example, you must be careful not to include copyrighted infographics or photos in marketing as well as make sure any user data you may be collecting or using for such purposes is, in fact, legal.

6. Confidentiality. It is generally a good idea to keep new products or services, especially those of a “new” or “unique” nature, relatively private in order to preserve them until they are ready for the broader market.  From a legal perspective, it is important to prevent public disclosure, otherwise you may lose your ability to file for intellectual property rights protection.  Non-disclosure agreements are also commonplace in such scenarios, even when dealing with information that is merely sensitive and not specifically product-related.

7. FDA approval. If you are considering taking a market that is generally susceptible to applicable United States Food and Drug Administration Laws, it is very important to make sure you are abiding by all applicable rules in relation to that enterprise as well.  The FDA approval process is notorious for being not only costly but time-consuming, so make sure to allot for such provisions in both your overall budget and timeline.

8. Trademarks and patents. Trademarking and patenting certain concepts or ideas is often a good idea in terms of protecting your own interests, though it also reassures you that your business is unique in nature and is not already trademarked or patented as well.  It is a good idea to comb through the website of the United States Patent and Trademark Office, either by yourself or with the help of a lawyer, at https://www.uspto.gov/ and do a bit of background research.  You might also consider looking internationally in this regard if you plan to expand as well.

9. Understanding liabilities. Be sure to know the risks associated with your product, and reasonably protect yourself against them.  For instance, it may be in your best interest to specifically limit your liability in contracts by placing carve out clauses relating to such in the various agreements you use.  Likewise, indemnification clauses are another common way businesses protect themselves, namely by stating that if a specific action occurs, a different party, like a supplier for instance, is held responsible.

10. Hiring and experienced lawyer. Lastly, and as you’ve seen, partially woven throughout this list, it is important that you consider consulting with an experienced business attorney when embarking on taking a product or service to market.  Entrepreneurs face specific challenges when beginning a business venture, and receiving adequate, competent legal advice is vitally important to starting off on the right foot.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.