Dispute Resolution: Set the Rules When Contracting To Save Money and Time

Good fences make good neighbors. Clear, concise contracts make good business relationships. And, good dispute resolution provisions can make resolving future disputes quicker, cheaper, and even preventable.

Generally, disputes in the United States take one or more of three tracks after negotiation fails: mediation, arbitration, and litigation.

• Mediation adds a third party neutral, often a retired judge, to shepherd negotiations. It can resolve disputes before a business relationship becomes
• Arbitration involves a third party decisionmaker, who is paid to hear each side’s case and This is usually a lawyer, and the arbitration process places limits on discovery and procedure that results in a quicker and less expensive dispute resolution process. In exchange, the parties surrender certain due process and discovery rights.
• Litigation is the court process, either before a judge or a

Additionally, a toolbox of contract provisions can help fend off and reduce the cost of future disputes, such as:

• Attorneys’ fee shifting provisions where the losing party pays the attorneys’ fees of the winning party;
• Venue and jurisdiction provisions to require that lawsuits can only be brought in certain courts to prevent being sued in a distant or unexpected place; and
• Waiving the right to a jury trial so that complex business relationships remain with judges, often business court or federal judges, who have experience resolving complex, and often esoteric, business disputes.

These rules should be set at the time of contracting – when the parties are agreeable – and not left to the time their relationship deteriorates when the parties may be inclined to take advantage of the litigation process (and gaps in their previously agreed dispute resolution process). Working with counsel, businesses should consider, among other things:

• Is any confidential information being shared? If so, the sharing party may wish to retain the right to quickly file a lawsuit to put a stop to any improper use if the information is sensitive.
• Is there a prior relationship or is the other business well-established and respected? If so, agreeing to first mediate any dispute may reduce costs and save the relationship in the case of a future issue.
• Is the contract particularly complex or does it involve technical details? Arbitration before an arbitrator who is well-versed in the industry may be ideal, or, at the least, ensuring that the right to a jury trial is waived can keep any future dispute from spinning out of control before a jury of laypeople.
• Are trade secrets involved? Arbitration may be ideal to avoid such details being discussed in open court or in public filings.

Further, considering the interplay of the above tracks and tools can pay dividends. For example, in smaller disputes, businesses are often forced settle litigation given outsized attorneys’ fees for the amount in controversy. But, if the parties had agreed to mediate or arbitrate claims under a certain amount (i.e., $50,000 or $75,000), then the party in the right can short circuit expensive and time-consuming litigation and need not unjustifiably compromise to avoid paying the cost of litigation, including an expensive jury trial. Or, the parties may elect to progressively apply mediation before arbitration or litigation to increase the chances that parties can resolve issues before their relationship (and ability to make money together) becomes irreparably damaged.

If you haven’t considered these options, it may be time to dust off your old contracts and consider updating them. Burke, Warren attorneys have experience drafting such provisions with the insight that comes from extensive litigation, arbitration, and mediation experience. Contact Rachel Bossard at rbossard@burkelaw.com or (312) 840-7029 or Josh Cauhorn at jcauhorn@burkelaw.com or (312) 840-7055 for assistance in evaluating or drafting ideal dispute resolution provisions in your business’ contracts.

Getting Yourself Ready To Buy Or Sell

Over the past three years, Cray Kaiser has continued to assist clients on the buy-side and sell-side of their transactions, even amidst the challenges of COVID-19. 

As key advisors to these transactions, we observed some best practices in getting your team ready to buy or sell. 

On the Buying Front  

Whether you have acquired a business over the tenure of your company or are looking to expand your footprint, there are nuances to buying a business and readying yourself for the process.  

• Review your own internal HR and financial reporting policies and procedures. Your ability to absorb another financial operation and its people will be a challenge. Having sound policies and procedures in place will enable you to implement your procedures with the target entity and obtain results sooner post-close. 
• Review your loan agreements and have conversations with your bank to ensure you have the lending capacity. With new debt, new financial covenants may be created with additional debt extended to you. Your bank may need to participate in reviewing the target’s financial statements and may have its own due diligence procedures. 
• Leverage your legal advisors to assist you in this process. They should be involved in any of the legal agreements, from non-disclosure to the purchase agreements and through the closing date. Trying to navigate these agreements solo could lead to a misunderstanding with the target entity and more legal review later in the process. 
• Engage your outside accounting professionals in this process. While you can divide and conquer the due diligence procedures, having your CPA assist with specific tasks will allow you to stay focused on the operations and people aspects of the acquisition. The CPA can provide you with objective analytics of the deal and ensure you are optimizing your cash flow (pre and post-tax). 
• Create a timeline for your internal team and external advisors to create reasonable expectations on your side, which will enhance the communication and experience of the target entity’s team as well. 
•  View the letter of intent (LOI) as the framework of the ‘deal.’ While these are non-binding agreements, it does set the ‘sail’ for how you see the target. If you cannot get past agreeing on the LOI objectives, it’s likely the target is not a good fit for your company’s financial and operational culture. 

On the Selling Front  

Selling your company may be the single largest transaction of your career. You’ve created a legacy for your clients and employees and will be leaving them in the hands of your buyer. So, preparing for this event may take longer than you think. 

• Get your financial house in order. You may need to consider increasing the financial attestation services with your outside CPA. If your outside CPA is only preparing your annual tax returns, you may need to engage them to perform a financial review or audit. A buyer looks to your financial statements as the start of any conversation. Seeing that your financial statements have been reviewed or audited enhances the buyer’s ability to rely on the financial statements, reducing due diligence procedures and may even shorten the timeline to close. 
• Know WHERE you do business. Your brand and facilities may be in one location however you may sell your services or products throughout the United States. Have your CPA review the state nexus issues to ensure you are compliant with all state tax reporting. With the Supreme Court decision in the Wayfair case in June 2018, how each state views how you do business within their borders may have changed since you last reviewed the requirements. (https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf)  
• Review your lease agreements to better understand the timing requirements of communicating with your landlord or other lease arrangements. These agreements may need to be transferred or terminated and there may be costs associated with doing so.  
• Create job descriptions for each level of your team. People are one of the most important assets associated with a company’s value. The buyer is looking to determine your team’s tenure, expertise, and integration into their team. 
• Involve your legal advisors as early in the process as possible. Dinner conversations are one thing, but starting to share your financial statements with a potential buyer is another. 
• Leverage your CPA to assist you in determining your after-tax cash flow of the sale of the business. Not all transactions are treated the same for tax purposes. The allocation of the purchase price will determine your after-tax cash flow. Having these computations done early in the process will allow you to communicate your expectations to the buyer. 
• Prepare to negotiate how and when you receive your cash. You might get a full cash deal at closing, or you may have the opportunity to receive more cash (earn out) after the closing. 
• Share this opportunity with your executive team sooner than later. The potential sale may create concern and they may require significantly more time to assist in the transaction. Keeping the process confined to the executive team will require a level of confidentiality and trust. Select your internal team wisely. 

Whether you are looking to expand your footprint or sell to the right synergetic buyer, these best practices can help you prepare for the process and keep you on track throughout what is bound to be an emotional transaction (for either side!).  Should you have any questions or need assistance in your process, Cray Kaiser is here to help. 

-Deanna Salo, CPA, Cray Kaiser

Understanding Inflation & What To Do About It As An Investor

Inflation is headline news in the US and around the world. Consumers are experiencing price increases on new cars, used cars, housing, food, energy and more. The US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) was up 8.5% in March and 8.3% in April, the highest increases since December 1981. Inflation reduces consumers’ buying power and often generates increases in interest rates, which impact stock and bond markets.THE HIGHEST INFLATION IN A GENERATION

 

To help you make the right decisions in your portfolio, as markets react and alarming headlines abound, gaining a firm understanding of inflation and its implications may prove useful. Here are answers to key questions to help, including: What is inflation? What causes it? How can it be managed? How do markets react to it?

What Is it? Defining Inflation

Inflation is defined as the rate of price increases of goods and services in the economy. In the US, we follow several measures of inflation:

 

CPI

which measures prices for a basket of goods and services over time

CORE CPI

which excludes food and energy, whose prices tend to be more volatile, from the CPI calculation

PRODUCER PRICE INDEX (PPI)

which reports changes in the prices of inputs for US producers (e.g., fuel, commodities)

 

What Causes Inflation?

A variety of factors can cause prices to rise, and we believe that the current inflationary environment is a result of many of those factors acting together:

• Supply chains remain disrupted, making it more difficult to ship and receive both raw materials and finished If demand stays stable but supply is constrained, prices tend to rise.
• Increases in demand when supply is relatively constant or constrained can cause prices to The global pandemic changed many shopping and living patterns, which in turn changed demand patterns for a wide range of goods from groceries to housing.
• The pandemic also put a strain on labor, as many people who left the workforce have chosen to stay out of it, even as the economy More jobs and fewer workers mean that employers need to pay higher wages, which are typically passed on in the form of higher prices.
• Geopolitical issues, especially the Russia/Ukraine conflict, have put a crimp in the global supply of oil, driving energy prices higher.
• Fiscal policy can drive inflation, as government spending and subsidies create more demand for goods, services and labor, making them more scarce and consequently more
• Monetary policy can drive Under some circumstances, when the Federal Reserve takes action to increase the supply of money by reducing interest rates or purchasing bonds, consumers and businesses have more money to spend, and they drive prices higher.

 

MORE JOB OPENINGS THAN UNEMPLOYED WORKERS

“Non-farm” refers to Nonfarm payrolls, the Bureau of Labor Statistic’s measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications.

“Thous Persons” = thousands of persons “SA” = seasonally adjusted

What Can Be Done To Control Inflation?

Controlling inflation is one of the most important mandates for the Federal Reserve, the central bank of the United States. It has a variety of tools at its disposal, but the most critical ones are the federal funds rate (fed funds rate) and quantitative easing. Both of those tools relate to regulating interest rates.

The fed funds rate is the interest rate that commercial banks use to borrow or lend their reserves overnight. This rate can influence short-term interest rates for credit cards and a variety of different loans. When interest rates are low, borrowing money is inexpensive, and consumers and businesses tend to spend more, driving prices up. When rates go higher, borrowing is more expensive, which tends to slow spending and, in turn, can slow price increases.

Quantitative easing (QE) takes place when the Fed (or any central bank) purchases financial assets — typically bonds but sometimes including stocks — on a large scale. This practice, first employed during the Great Recession, increases the amount of money in circulation, stimulating economic growth, and keeps long-term interest rates low by creating demand for bonds. After employing QE, the central bank may move to quantitative tightening

(QT), when it sells the bonds that it has purchased. This increase in supply should cause an increase in long-term interest rates, which, in turn, slows economic activity and reduces inflation.

The Federal Reserve is employing both of those tools to manage the current inflationary environment in the US. In March, it announced that it would increase the fed funds rate by 25 basis points (abbreviated bps; each basis point is 1/100 of one percent), and in April they announced an additional 50 bps increase — the largest such increase since 2000. With inflation still running high, most economists believe that the Fed will increase the fed funds rate by another 50 bps in June, with additional increases to come depending whether data shows inflation has slowed. In general, the Fed tries to keep inflation in the 2% range — which is dramatically lower than the 8+% that we have seen during the first four months of 2022.

 

How Do the Markets Typically React to Inflation?

STOCKS: Rising prices can benefit earnings of

 

companies, which can pass on increasing costs to their customers and maintain their margins. At the same time, inflation and rising rates make borrowing and investing more expensive for businesses, which may hamper capacity and growth going forward.

According to a recent CNBC article, “When inflation exceeds 7%, the median return of U.S. stocks over the next year was 7.3%, compared to 10.3% when inflation was below 7%. And if we examine every yield curve inversion since August 1978, the median inflation-adjusted return of

U.S. stocks was only 4.7% over the next year, compared to 9% during every other period.”1

“Inflation and rising rates make borrowing and investing more expensive for businesses, which may hamper capacity and growth going forward.”

 

1 Maggiulli, Nick. “Op-ed: Will high inflation hurt stock returns in the long run? Not really,” CNBC, April 5, 2022, retrieved from https:// www. cnbc.com/2022/04/05/high-inflation-wont-really-hurt-stock-returns-in-the-long-run.html on May 13, 2022.

 

BONDS: Does that mean that investors should reduce exposure to equities in favor of Treasuries? Not necessarily.

Bond prices inversely correlate to interest rates, so as rates rise, bond prices go down. Since inflation usually generates higher interest rates, it is typically bad for bonds. We note, though, that while this short-term shock is bad for the market, the higher interest rates paid by bonds can make them more attractive to investors, especially to investors focused on income rather than capital appreciation.

The CNBC article also notes that “when inflation exceeds 7%, the median inflation-adjusted return on five-year US Treasuries was -2.6% over the next year, far below the 7.3% return on US stocks during the same time period. And, following every yield curve inversion since August 1978, the median inflation-adjusted return on five-year US Treasuries was 3.9%, compared to 4.7% for US stocks over the next year.”1

 

Investor Considerations

As discussed above, inflationary periods have historically put pressure on short-term equity returns and on short-term bond returns — and we know that inflation reduces the buying power of cash. So, what should investors do when facing an inflationary environment? Here are some time-tested suggestions:

• Consider your investment horizon: Conventional wisdom suggests that staying the course usually benefits investors — provided they have an investment horizon that can tolerate short-term Nobel laureates Eugene Fama and Kenneth French, in their famous paper describing their three-factor model, note that investors who can tolerate short-term volatility and who have an investment horizon of 15 years or more are often rewarded for their short-term losses.
• Have a Plan: Inflation and rising interest rates happen, and a good financial plan anticipates and protects against such Too often, investors without a plan may engage in the “panic trade” and sell indiscriminately when markets are down.
• Focus on Quality: Rocky market environments often create During turbulent times, we believe it is more important than ever to seek to invest in companies with strong market positions, experienced management teams, strong balance sheets and the ability to generate free cash flow.
• Most Importantly, talk to your advisor: First and foremost, turbulent markets can be confusing and We suggest investors have frank, open conversations with their financial advisors at all times, and especially during stressed markets when the advisor’s experience provides crucial perspective.

 

-PRIVATE VISTA, EFBC STRATEGIC PARTNER

You Can’t Handle The Truth

Famous Jack Nicholson line from the 1992 movie, “A Few Good Men.”

The question for us is, “can we handle the truth? and from whom will we accept the truth?”  In these days of political correctness, and not wanting to rock the boat, how many people in your life are willing to give you the truth?  How many bosses, colleagues, direct reports are you willing to give the truth to?

Performance improvement requires feedback.  Continuous learning is built on measurements/judgements/conclusions and communication of such, providing the opportunity for improvement.  The fact is you can’t improve if you don’t know!

You can improve the chances of knowing what other people think by doing the following:

• Communicate your intentions – you want their feedback, opinions and perceptions
• Listen with the intent to understand when feedback is given
• Ask clarifying questions – differentiating the content and the packaging
• Do not defend or try to excuse the communication or behavior being discussed
• Show appreciation for the feedback provided

You can improve the chances of others wanting to know what you think by doing the following:

• Communicate your intentions – you are interested in their improvement and success
• Confirm the confidentiality of the conversation and the associated trust
• Communicate specifics including statements and behaviors
• Do not try and assume their intentions – ask for intention if appropriate
• Show appreciation for the feedback request

Everyone with whom you come into contact has a perception of you and an opinion of how you are performing in your professional or personal roles.  In your multiple life roles, stakeholders (people who expect something from you) have heard you say things, seen you do things and have at least some questions, if not preliminary conclusions based on those observations.  Their perceptions directly influence the status of your relationships with them today and into the future.

Can you handle the truth?  How easy have you made it for others to tell you the truth?  At least their truth?  How easy have you made it for others to accept your truth?

Be a person who can not only handle the truth but be trusted with the truth.  Get Psyched about the Truth!

-George Karavatuveetil, President, Psyched!

The Importance of Having Critical Conversations with Employees Regarding Workplace Performance

No one enjoys engaging in difficult conversations with employees regarding workplace performance. However, putting it off or avoiding it altogether can have serious ramifications and even lead to legal liability. Too often, clients come to me with a desire to make a termination decision when they have failed to properly set the stage. When clients inquire about the potential for discharging an employee, I always ask whether the employee has been placed on notice of the performance issues. Were there any warnings issued or any progressive discipline? What does the last performance evaluation show? In many instances, the answer I receive is that there is no documentation to support such a decision. 

Illinois is an at-will employment state, meaning that an employee can be discharged for any reason or no reason, as long as it is not against the law. In my experience, when an employee is discharged with no notice of performance problems, the employee frequently jumps to the conclusion that reason must be an unlawful one. The universe of protected classes under the law that gives employees a basis to claim discrimination continues to expand. In addition, there are a number of attorneys willing to take disgruntled former employee cases when the personnel file contains no evidence to support the termination decision. This can be avoided if employers stay ahead of the game and think about what the personnel file of a discharged employee should look like. This is just one of the reasons that engaging in critical conversations with employees and documenting those conversations is so important.  

Failing to have those critical conversations about workplace performance can also send a damaging message to other employees. When one employee is allowed to arrive to work late or their performance is not up to par, it can cause morale problems. If an employee is allowed to behave badly, it can be perceived as bullying or even unlawful harassment, which can lead to liability.  Imagine a situation where an employee is allowed to violate the dress code or has poor hygiene, causing other employees to gossip about it. By avoiding these uncomfortable conversations with employees, the issue can morph into an even bigger problem. For these reasons, and many others, it is important for employers to face these situations. The following are some tips for preparing and engaging in these difficult situations.   

Prepare 

Preparation is key. The more prepared you are, the less uncomfortable you are likely to feel. Prior to meeting with the employee, make sure that you have outlined the workplace performance issues and any policies that are applicable to the situation. Be specific. Generalized negative feedback is not very helpful. Draft bullet points of the matters that need to be discussed in the meeting. Set clear expectations of what the next steps are. It can never hurt to practice what you plan to say, especially if you are dealing with a sensitive topic or sensitive employee.  

Be Positive 

No one likes to be told that they are not doing a good job. These meetings can be very emotional. If you act like this is the end of the world, your employee will feel like it is as well. Think of the meeting as a coaching and counseling session, not a doomsday experience. It often helps to also provide positive feedback on areas where the employee is succeeding. The employee should leave the meeting empowered with the knowledge of what it takes to succeed and feeling as though they have the ability to do so.  

Listen Actively 

After you explain to the employee the issues that need to be addressed, make sure to take great care to listen. Remember, it is your job to help the employee succeed. There could be a reason for the performance issues that may need to be addressed. The employee may be the subject of harassment from another employee or customer or client, or the employee could be experiencing a medical or family issue that requires time off or a reasonable accommodation. Each of these issues can have serious legal implications if not properly addressed.  

Consistency is Key 

All employees should be held to the same performance standards and employment policies. When one employee falls behind or fails to abide by the rules, it is necessary to intervene for the sake of all employees. This is true whether the issue is attendance, performance, or failing to dress professionally. Allowing one employee to fail can have the effect of bringing down the entire team and can also lead to claims of discrimination. 

Have a Witness 

You should never make the mistake of having a critical conversation with an employee one on one. While these meeting are confidential and can be emotional, it is important that there is a witness to what was discussed. That witness will be very important if the matter ever leads to a legal claim. The witness can also be helpful in keeping emotions in check. Employees may react more rationally and stay more composed if there is a third person in the room. 

Document, Document, Document 

In serious situations, a written or final warning should be presented to the employee and the employee should be asked to sign acknowledging that the employee has been advised of the deficiencies and that failure to improve will lead to termination of employment. However, not every critical conversation warrants that type of documentation. Early counseling sessions can be just as critical, but do not require the same documentation. Rather, you can simply type up a memorandum summarizing what was discussed and place it in the employee’s personnel file. That document will be very important if the performance does not improve and the conversations escalate.   

Follow Up 

Make sure to set a time to meet with the employee again, whether it is to advise them that you have witnessed improvement and the employee is on the right track or to advise them that additional improvement is needed. Giving positive feedback keeps the lines of communication open, is good for the company culture, and may in fact help the employee to succeed. If additional improvement is needed, continue to follow these steps. By doing so, you will be placing the employee on notice that their job may be in jeopardy and you will be generating the necessary evidence to support further action, including a termination decision. 

Having critical conversations with employees regarding workplace performance is never easy. However, if you follow these steps and are prepared and consistent, you will find the conversations to be less difficult and your efforts will serve to better protect the company from legal liability.  

Rachel E. Bossard, a partner at Burke, Warren, MacKay & Serritella, P.C., chairs the Firm’s Labor and Employment law practice group. She represents employers in all aspects of the law including client counseling, training, litigation and benefits. She can be reached at 312-840-7029 or rbossard@burkelaw.com