capellelaw

Selling a Business- Part Two

Wed, 21 Oct 2020 01:26:14 GMT

The Process

Executing a Confidentiality Agreement

This is like dating- the parties begin to find things out about each other.
These are commonly signed before any information is given out about the Seller.
While not a “standard” form, these agreements are generally all similar.
After confidentiality agreement is signed the Buyer normally receives a significant amount of information about the Seller.

Executing a Letter of intent

This is like going steady or dating exclusively- there is a significant interest in entering into the relationship.
It is normally non-binding (either party can still walk away from the transaction)
Some transactions do not include a letter of intent.
This establishes the broad parameters of the transaction.
Price- Normally 4 to 6 times 3year average adjusted taxable income.
Terms of payment.
Outlines, in broad terms, additional agreements (Seller consulting agreement; Seller non-compete; leases)
Outlines, in broad terms, contingencies to closing such as obtaining bank financing or franchisor approval.
Be careful of broker provided documents. Sometimes these create a binding agreement before Buyer is ready to commit to the transaction.

Due diligence (not really an isolated step)

Due diligence refer to the Buyer’s investigation of the Seller and the confirmation of the information provided by the Seller. The investigation should be quite thorough and should include discussions with:
Key employees- and former employees
Key customer/clients
Key vendors
Key industry individuals
Seller may restrict due diligence until there is a contract in place to avoid upsetting Seller’s employees, Seller’s customer/clients, and or Seller’s vendors/creditors.
The due diligence investigation is- by far- the most important part of the transaction.
Often the CPA firm of the Buyer takes the lead in conducting the due diligence.
Regardless of when the due diligence period commences, Buyer should not close the transaction until they have fully satisfied itself with the results of the investigation and/or the future action Buyer may take as the result of the findings.
Remember: past results may not reflect future performance.

Executing a Contract

This is like the engagement of the parties to the transaction.
This is the legally enforceable document which outlines ALL of the fine points of the deal...
The contract will specify the terms of payment.
Normally there is some nominal payment at the time of signing the contract for sale.
Often about 75% of the total sales price gets paid at “closing”.
Often about 25% of the total sales price gets paid in the form of a promissory note from the buyer.
Terms and interest rate vary from deal to deal but 3-5 years is not uncommon.
If this loan is subordinate to other financing, it gets paid last and has the highest risk of non-payment.
Because this often represents a significant portion of the “profit” on the transaction, it is important that it gets paid. Hence, the importance of having a qualified buyer will be able to conduct the business in a manner which will provide payment.
A significant part of the document are the representations and warranties
These are the written assurances the parties give each other as part of the transaction.
These normally include statements as to:
Proper formation
No undisclosed liabilities
No pending legal actions (either governmental or private action)
Compliance with laws rules and regulations
Title to assets
Payment of taxes
Required approvals of the transaction
Responsibility for pre sale and post sale liabilities
Many other issues
Although Buyer checks into many of these matters as part of due diligence, Seller can be liable for representations and warranties which turn out to be untrue.
There are often disclosure schedules attached to the contract which provide additional information. Example: a disclosure statement may supplement whether there are any outstanding contracts.
There are often revisions before a contract is finalized.
The contract may establish post closing obligations. These might include:
A covenant that the Seller not compete.
An agreement that the Seller will help train the Buyer.
A requirement that the Seller favorably introduce Buyer to customer/clients and vendors/creditors.
A requirement that the Buyer provide the Seller with information about the business’ operations until the full purchase price is paid.

Closing of the Transaction

Takes place after all conditions have been met and approvals have been obtained.
This is when the “real” money changes hands, the transfer documents are signed and exchanged and the buyer takes control of the business.
Most transaction “problems” come to light in 6-24 months following closing.

Conclusion:

Selling a business is more of a multi-step process than an event. Although there is no assurance that the sale of your business will provide you the benefits you anticipate, attention to the successful completion of each step will reduce your risk of failure.

Selling a Business – A General Primer

Tue, 20 Oct 2020 16:07:23 GMT

Most businesses are sold by first time sellers. This blog is intended to provide you some insight on the process of selling your business.

First do an analysis of the business

Does the business have established systems and procedures?
Do you have regular, reproducible results?
Do you have reoccurring clients, products or services?
Are there any indispensable employees (including you)?
Consider a before the sale audit
Do a strengths, weaknesses, opportunities and threats assessment
Do an appraisal of the business
Do an internal review of your legal infra-structure
Employment agreements with key employees including non-compete agreements
Agreements with key vendors and continuing customers
Lease agreements
Can you assign key contracts (including the foregoing)

Why Are you selling?

move on to new opportunities
pocket the increase in the value of the business
burnout, retirement, looming industry changes

Who is your ideal buyer?

Identify Qualified buyers. This is usually based on experience in your industry or finances or both.
Who are the most likely buyers for the business?
An internal buyer (family member or key employee)
An external buyer (including a competitor or someone in the industry seeking to enter your market)

Determine an asking price for the business

A history of profitable operation has a very positive impact on the asking price Unprofitable businesses rarely sell. Usually they simply close.
An appraisal provides some indication of and independent assessment of the value of the business. These can be as much art as they are science.
Sellers most often establish pricing based on:
How much they think they “need” to sell the business in order to:
Fund their retirement
Meet their subjective valuation of their efforts
Although no one wants to “leave money on the table,” it is important that the buyer is able to make a reasonable income.
The tax implications of the deal structure can influence the asking price
A Seller may take/get less for a stock sale versus an asset sale.
Allocations of total consideration among non-compete agreement, consulting agreement, lease or other assets can influence the asking price and after sale taxes.

Should you use a business broker?

Business brokers exist and can perform a valuable service (for which they intend to be paid)

Usually the Seller (or the Seller’s business) pays the broker.
Usually the broker represents the Seller
Brokers can sometimes provide industry insights due to specialization (example a broker who deals primarily with restaurants may have insight into the local restaurant market).
Brokers primarily provide potential Buyers with information given to them by Seller. Brokers sometimes verify Seller information.
As with all professionals, some brokers/brokerage firms are better than others.

Avoiding Lawsuits

Wed, 16 Sep 2020 16:20:13 GMT

Tips for Avoiding Lawsuits

Get it in writing.

Communicate.

Have adequate liability insurance.

People don't sue people or companies they like.

Lawsuits from employees

Adopt internal written policies and procedures, job descriptions, employment contracts and employee manuals and follow them even if you don't want to. Policies which are not enforced or enforced selectively may not be policies at all. Document the reasons for termination for cause, as well as the steps taken prior to termination. Be careful with humor, social media, non work related opinions.

Lawsuits from customers, suppliers and contractors

Use written contracts with specific terms. Be careful with “form” contracts from the internet. Read and understand the terms, and modify them for your Texas business. Include in all contracts a provision that if a problem arises, the parties will try alternative dispute resolution or mediation before going to the courthouse. The best prevention tool is open communication. Put it in writing. Oral conversations can be followed by a confirming email.

Lawsuits from the public

The key here is avoiding lawsuits against the business owners PERSONALLY. Pay attention to your business structure and the protection from individual liability it should provide. Keep your corporate or LLC records up to date. You should have at least written minutes of annual meetings of directors and equity owners, an operating agreement, bylaws and records of ownership changes.

How To Leave Your Home To Your Children

Mon, 24 Aug 2020 16:24:40 GMT

How To Leave Your Home To Your Children

Many parents want to know the best way to leave a home to their children. Before you make a plan, you should first be sure that your children actually want the property. We have seen too many parents take on unnecessary financial hardship in order to keep a home as an inheritance their children do not truly want.

That said, here are some of the most common ways to leave your home to your kids:

Will. You can leave real estate to anyone in your will. Once the will has been probated, your children will receive title to the property.
Trust. Using a trust is a convenient way to transfer property without having to go through probate. Title is transferred automatically upon a triggering event — in this case, the death of the original property owner.
Joint tenancy with right of survivorship. This method allows you to add your children to the property title while you are still alive. When you pass, the children become owners of the property as surviving joint owners.
Transfer on death deed. This allows you to name a beneficiary for your property without giving a present interest in it to the beneficiary. Upon your passing, the beneficiary takes title.
Life estate. You can transfer title to the property while you are still living, and retain the right to live there during your lifetime. After your death, the beneficiary owns the entire interest in the property.

There are pros and cons to each of these opti ons. Deciding on the best option for you and your family should be done with the assistance of an attorney knowledgeable in this area.

Asset Protection

Wed, 05 Aug 2020 16:47:38 GMT

Asset Protection

Many business owners and professionals fear losing wealth as a result of creditors and lawsuit judgments. With proper advance planning, everyone can protect some or most of their assets, making it hard for creditors to reach them. Here are some strategies to consider:

1. Review liability coverage, limits and exclusions

If you’re a homeowner or automobile owner, you should obtain maximum homeowner’s or automobile insurance coverage and have an excess liability (“umbrella”) policy that provides additional protection beyond the underlying policy limits. For optimal protection, an umbrella policy of at least several million dollars should be purchased. In addition, review liability policy exclusions. Some homeowners impacted by Hurricane Katrina were denied claims on the basis that their homeowner’s insurance did not cover flooding.

2. Avoid conducting business as a sole proprietor or as a general partner

A general partner or sole proprietor is personally liable for all business obligations. If you’re a business owner, conduct business as a LLC (Limited Liability Company) or a corporation. Generally, your personal assets will be protected from the claims of creditors of the business. Keep in mind that you should operate your company as a business and not commingle personal assets and affairs with the business.

3. Have business owned employment and fiduciary insurance

Your business should purchase liability coverage to protect the company against employee claims for discrimination or wrongful termination. If you are trustee of the company’s qualified plan, you may be able to purchase insurance to protect you and the company against employee claims regarding violation of a trustee’s fiduciary responsibility.

4. Create wealth in employer sponsored qualified retirement plans

Under ERISA (Employee Retirement Income Security Act of 1974), participating employer sponsored retirement plans are generally not subject to claims of personal or business creditors.

5. Create an IRA or rollover qualified retirement plan money to an IRA

Most states have enacted statutes protecting IRAs (Individual Retirement Accounts) entirely from creditor claims. Others protect up to a certain amount of money. Claims by the IRS, spouses and children owed alimony and certain child support payments are typically not protected.

6. Create wealth in exempt assets

When it comes to protecting your assets from creditors, you couldn’t live in a better state than Texas. In general, our debtor-friendly state shelters many components of an average family’s wealth from creditors, including, your residence, improvements and surrounding land (with limits), current wages, retirement accounts, college savings plans and $100,000 of personal property if married, $50,000 if single. Consider paying down your house mortgage loan or placing assets in exempt accounts. There are some complexities and exceptions to this general list. Always consult with someone knowledgeable in this area if you have questions.

15 Most Common Reasons to Do Estate Planning

Wed, 22 Jul 2020 16:49:25 GMT

15 Most Common Reasons to Do Estate Planning

Designate who will manage your affairs if you become disabled and when you pass away.
Plan for Medicaid and its impact on your estate if you must go into a nursing home.
Avoid guardianship/ conservatorship, during your lifetime and probate when you pass away.
Protect children from a prior marriage if you pass away first.
Protect assets inherited by your heirs from lawsuits, divorces and other claims.
Impose discipline upon children (and/or grandchildren) who may not be capable or experienced in managing money.
Provide for special needs children and grandchildren.
Insure that a specific portion of your estate actually gets to grandchildren, charities, etc.
Protect a portion of your estate if you pass away first and your surviving spouse remarries.
Address different needs of different children.
Prevent or discourage challenges to your estate plan.
Reward/encourage heirs who make smart life decisions, and prevent the depletion of your estate by those who do not make smart choices.
Assure an education for children/grandchildren, despite what they (or their parents) dream of doing with the inheritance.
“Brady-Bunch” family estate planning: assure the step-parent doesn’t spend your childrens inheritance and/or provide for a spouse by sacrificing the intended legacy for children of a prior marriage.
Pursue charitable goals you may not otherwise feel you can afford. Considerably cutting probate expenses allows you to also leave a legacy to a charitable organization you admire.

How Can I Protect My Intellectual Property?

Fri, 24 Jan 2020 16:52:14 GMT

How Can I Protect My Intellectual Property?

You potentially have trademarks that you use to identify and distinguish your business. Your business name, logo, labels, slogans and packaging can all be trademarks, but you must take steps to protect them. You may decide to register a trademark with the Texas Secretary of State or the U.S. Patent and Trademark Office. You may have copyrights in any original works of authorship, including such things as photographs, brochures and websites. Copyright protection is particularly important if you are in a creative field. And if you have an invention, you may need to apply for a patent. We partner with specialists in these fields. If you would like to discuss any of these subjects, contact us for a free consultation.

How Do I Minimize My Risks as an Employer?

Tue, 19 Nov 2019 16:53:30 GMT

How Do I Minimize My Risks as an Employer?

As you probably know, there are a ton of federal and state employment laws may apply to your business, and you risk fines, penalties and/or employment-related litigation if you don’t know the laws you must follow and the steps you need to take to stay in compliance. Anti-discrimination laws, health and safety regulations, wage and hour laws, medical and maternity leave, harassment and many more.. You may need policies and procedures, handbooks and training to ensure that you don’t inadvertently violate them. You must also comply with state laws relating to such things as the minimum wage. And if you employ people who are not U.S. citizens, you may face immigration issues. If you would like to discuss any of these subjects, contact us for a free consultation.

What Contracts Does My Business Need?

Mon, 28 Oct 2019 16:58:15 GMT

What Contracts Does My Business Need?

Contracts protect your business by describing the rights and responsibilities of the parties to the agreement. A well-written contract can reduce the number of disputes that arise, ensure that you get paid for the work you do, and provide a clear remedy if one party doesn’t hold up its end of the deal. Your business might need contracts for routine transactions, to protect confidential information, to describe employment relationships, or for leases and other major transactions. If there are any important deadlines in your agreements, such as renewal or termination notices, you or your attorney should have these as reminders on his or her calendar. If you would like to discuss any of these subjects, contact us for a free consultation.

What Do I Need to Know About Choosing a Name for a New Business?

Thu, 03 Oct 2019 17:03:22 GMT

What Do I Need to Know About Choosing a Name for a New Business?

You probably already have ideas about the name you’d like for your business. But you need to consider legal issues before you start ordering signs and business cards. Every state has rules about the names that new business entities can use, and in general, you can’t choose a name that is the same or is deceptively similar to a name another business is already using. If you operate or plan to operate in multiple states, your name search and registration should cover all of your potential markets. If you would like to discuss any of these subjects, contact us for a free consultation.

What Should Be In My Operating Agreement or Bylaws?

Fri, 13 Sep 2019 17:05:51 GMT

What Should Be In My Operating Agreement or Bylaws?

Corporate bylaws and LLC operating agreements provide important guidelines for operating your business. These documents explain such things as how decisions will be made, when and how shareholder meetings are held, how to handle LLC ownership changes, and how shares of stock are issued. If you have more than one owner, you can also set the rules in case one wants to leave the business, sell their interest or dies. You can put your business succession plans into your operating agreement.

If you would like to discuss any of these subjects, contact us for a free consultation.

What Business Structure Should I Choose?

Mon, 26 Aug 2019 17:07:40 GMT

What Business Structure Should I Choose?

In Texas you can choose from many different structures – sole proprietorship, corporation, limited liability company, general and limited partnerships, etc., Whether you are starting a business or have a successful one in place, you can organize your business entity for the best ease of operation, asset protection and reduced tax liability. This decision is very subjective and depends on a number of factors. If a different structure is right for you at this time, in Texas it is relatively easy to change your business structure to the one that suits you best. If you would like to discuss any of these subjects, contact us for a free consultation.