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Memphis Business & Commercial Law Blog

Assigning partnership value in Tennessee

Tennessee startups and joint ventures require special planning. Among the other facets of starting a business, one must also consider the relative value of each person's contributions in the past, present and future. Assigning relative value is simple because individual perceptions may color how contributions are weighted. This step is important to preventing potential problems or legal disputes later, but is frequently overlooked in the planning process.

For example, two people entering a partnership may elect to establish equity at 50 percent each. However, the partner who had the original idea may be considered more valuable to the company, because without the idea, the business would not exist, which might change how interest is divided. In addition if on partner is established as CEO while the other remains at arm's length as a consultant, this would change the equity equation.

The importance of buy sell agreements

As Tennessee residents may know, business owners may benefit from having a buy sell agreement in place at the outset of the company's existence. Operating a business with multiple owners may be risky without one. Having a previously structured agreement may prevent problems when one of the owners dies, gets divorced, goes through a bankruptcy or is no longer able to work. Commonly called a buyout agreement, it is used to control when and to whom an owner can sell all or part of its interest and at what price. The remaining co-owners are allowed to buy out the individual's share of the business using one of several formats.

Often, a buyout agreement is activated when an owner is divorcing. Under Tennessee law, marital property is divided in an equitable fashion. If the owner operated or started a business while married, the ex-spouse may thus be entitled to a share of the business. In this case, the spouse would become a future business partner, which the current owners may not want to see happen. Accordingly, the current owners, using a buyout agreement, may have the ability to offer to buy out the divorcing owner's interest.

Liability and tax considerations in partnerships

Starting a business with two or more people can provide a large number of benefits. The venture may benefit from contributions from multiple sources, and money, property and ideas may be shared between the entrepreneurs, spurring growth. However, it may be important for the parties to choose a formal structure that defines the venture. General partnerships, limited partnerships and limited liability partnerships all provide different benefits and drawbacks and affect liability and management rights.

Typically, general partnerships are straightforward arrangements that allow parties equal rights and responsibilities. In addition, the liability for debts incurred by the business are the responsibility of each party. However, this structure might provide owners with a lower tax rate because all proceeds generated by the venture are reported at an individual level.

How to increase the value of a company before a sale

Business owners in Tennessee may benefit from having a basic understanding of what factors influence the valuation of a company. Using this knowledge, a business owner could plan the sale of a company in advance by making business decisions that are meant to increase their company's market value.

One of the most important numbers that potential buyers look at is a company's earnings before interest, taxes, depreciation and amortization, or the EBITDA. This number will be compared to a company's annual revenue and viewed as a percentage of that revenue. If sales are steadily increasing at a company each year, a potential investor will look at a multiple of the EBITDA to determine the future cash flow at a company and the real value of the investment.

Trademarks for Tennessee businesses

When you are in business, a trademark can be the key way in which your company is recognized by the public and potential customers. As such, your trademark should be memorable, and after you obtain it, it will necessarily need to be protected in order to prevent others from co-opting it.

You will need to research your intended trademark to make certain it is not already in use. This may involve an extensive investigation. After you have established it, you may need ongoing representation to protect yourself from trademark infringement, as it could cause your business significant losses.

Beastie Boys awarded $1.7 million in copyright case

Tennessee residents might be interested in a lawsuit that the Beastie Boys filed against Monster Energy Co. The hip-hop group, well known for their hit song "(You Gotta) Fight For Your Right (To Party!)", sued the makers of Monster energy drinks for $2 million after the company used five of their songs for an online commercial that ran for five weeks.

Although a jury ordered Monster to pay the Beastie Boys $1.7 million in damages, lawyers for the group say that the Beastie Boys spent more than that in the copyright violation case. After over two years of litigation and an eight-day trial, the Beastie Boys' lawyer's fees added up to a total of $2.38 million. Lawyers for the group say that these costs were mostly the result of Monster's refusal to negotiate a pre-trial settlement and the company's effort to overturn the jury's original verdict.

Avoiding litigation in connection with employee disputes

Because a lawsuit can be financially burdensome, Tennessee employers may seek methods for limiting the risk of litigation by employees. This is often accomplished by requiring employees to sign arbitration agreements in which they waive their rights to sue. From an employee's perspective, however, arbitration can be a difficult alternative to legal action. Many such agreements require the losing party to pay for any related costs in arbitration, and this could total thousands of dollars in some cases. Additionally, an employee's access to company records and other resources may not be as complete as in litigation.

In the case of a San Francisco man who worked as a legal secretary, the law firm for which he worked for fired him for refusing to sign such an agreement. In seeking a job at a separate law firm, he found that his refusal to sign an arbitration agreement resulted in his employment offer being rescinded. He has sued both firms in connection with what he deems to be wrongful termination. Although his suits have been dismissed at both the state and U.S. Court levels, he has taken the fight to the federal level with the help of the Equal Employment Opportunity Commission. His claim is that the actions were retaliatory due to his exercise of a civil right.

Name dispute at Yosemite may lead to changes

People in Tennessee may be interested to learn about a legal dispute currently brewing between Yosemite National Park and the concessionaire company that currently runs historic park properties including the Ahwahnee and Curry Village. The dispute stems over Yosemite's consideration of offering the concession contract to another company.

Delaware North Companies, a business based in Buffalo, New York, is the current concessionaire at the park. Upon learning that the park is considering contracting with a different provider, the business has indicated that it owns the names of the historic businesses. The company has demanded payment of $51 million from Yosemite in the event a different company is awarded the concession contract.

Taking steps to keep business secrets in Tennessee

Companies have many tools at their disposal when it comes to protecting trade secrets. An easy way to do this is to keep the information away from anyone who does not need to know about it. For those who do need to see certain proprietary information, it may be a good idea to have that employee agree to a nondisclosure agreement. A nondisclosure agreement between an employer and employee prohibits the employee from using the information to help himself or herself or a competitor.

In addition to a nondisclosure agreement, a business owner could decide to register a trademark. Although certain information may be protected as soon as it is used in public, a registered trademark provides a wide array of protection. Most notably, a company with a registered trademark could prevent another company from using any names, logos or other marks that are too close to that of the trademark holder.

Ensuring an agreement protects minority shareholders

Many shareholders in Tennessee own less than half of their company's stock, even in a startup or small business. Being a minority shareholder means that an investor may be outvoted in an important business decision. However, a well-constructed shareholders' agreement can protect a minority shareholder's rights, helping them maintain their investment and remain as closely involved with the company's actions as desired.

The Houston Chronicle lists several clauses in a shareholders' agreement that a minority shareholder may wish to pay attention to and even insist on their inclusion if omitted. The right to appoint directors is essential for a minority shareholder, allowing them to remain relatively hands-off in the assurance that somebody is fighting for their interests on the board. Preemptive rights help minority shareholders maintain their percentage of ownership, allowing them primary claim on any new stock the company issues. Right of first refusal is the inverse of preemptive rights, giving shareholders the opportunity to buy any stock another shareholder sells before it enters the public market.

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