Month: December 2011

You’re Ready to Buy a Business – Now What?

Starting a new business from scratch requires a lot of work and expense, so for many entrepreneurs buying an existing business is more appealing. An established customer base, employees and suppliers, and the notion that someone has already done all the heavy lifting, are just a few of the reasons “pre-owned” can rival “new.”

But buying an existing business is still a complex process. Typically, potential buyers have preliminary discussions about terms of the sale with the seller. After a preliminary agreement is reached between buyer and seller, a Letter of Intent, or LOI, is often the next step. The LOI sets forth the rudimentary terms of the deal and establishes confidentiality. It also establishes whether the seller has to deal with you exclusively during the next phase, or if he can entertain other offers.

Following the LOI, you will need to do your homework, or conduct “due diligence.” Due diligence is a detailed review of the business that will help you uncover potential problems. Consequently, you will want to review and verify all of the information the seller has provided to you. The items you will need to review include the record book, historical and current financial data, tax returns, business plans, minutes of directors’ and shareholders’ meetings, all contracts with suppliers and customers, and all information relating to employees and contractors.

Commercial Leases: Find the Right Space – Without Surprises

You have a lot of options when it comes to choosing a commercial space for your business. In fact, with the economic downturn, it’s definitely a buyer’s market.

But before you sign on the dotted line, there are a few things you should know. Legally speaking, commercial leases are extremely complicated documents often heavily weighted in the lessor’s (aka: landlord’s) favor. There are also a number of differences between commercial and residential leases.

For example, commercial leases are not subject to most consumer protection laws that govern residential leases. There is no “standard form” (despite what you might hear!), so a commercial lease is generally customized to fit the lessor’s needs – not the lessee’s (aka: tenant’s). That’s why it’s critical you understand the fine print for every commercial lease agreement you’re offered.

There are a number of issues that you should be concerned about with a lease. While each business’s needs are unique, there are a number of common problem areas that arise in commercial leases. A few examples include:

Maintenance & Repairs – If the $20,000 boiler goes out in the last month of your lease, do you   have to buy a new one?

Exclusive use – Can the landlord lease adjacent space to your competitor?

Calculation of Rent – Is rent based on rent-able or rented square footage? The difference could mean thousands of dollars.

Permitted Use – Will your business be able to expand its service offerings?

Personal Guarantee – As a business, you should have established a business entity (i.e. LLC, Corporation, etc.), so the lease should be in the name of the entity. Personal guarantees should be avoided or, at a minimum, limited to a reasonable time.

Options to Renew – What happens if the business is a success and you want to stay?

Notice Before Default – Make sure the landlord tells if a rent payment was inadvertently skipped or lost in the mail so you don’t end up in default without even knowing.

Common Area Maintenance (CAM) [charges in a multi-unit building] – Will the clothing store and hair salon share the water bill equally, or are the utilities separately metered?

  • Also, be aware of the difference between a “gross lease” and a “triple net lease”. A gross lease should mean that all expenses are included in the rent payment, and triple net leases require the lessee to pay a smaller rental amount and all additional charges separately. Either might work depending on the circumstances, but exactly which expenses will be yours is dependent on the precise language of the lease and can vary widely, regardless of what it is called.

Remember – a lease is a binding legal contract, so thoroughly review and understand the terms before signing!

Buy-Sell Agreements: Protect Your Business From The Unexpected

As a business owner, have you ever worried about what would happen to your business if one of your partners became disabled, got divorced or died? If you had a Buy-Sell Agreement in place, you could sleep a little easier.

Simply put, a Buy-Sell Agreement is a contract that dictates how, when and for how much a company or its remaining owners will be required to pay to acquire the interests of a departing owner. This kind of agreement is essential if your business has two or more owners, but it makes sense for any kind of business entity, from LLCs to corporations and everything in between. In addition to the peace of mind it provides, business owners with a Buy-Sell Agreement in place can avoid costly court battles, or worse, total business failure.

An effective Buy-Sell Agreement should address how the funds needed to buy out an owner will be provided. This funding needs to align with the triggering events. Often, insurance is maintained to fund purchases in the event of death or disability. Other situations are often covered by structuring a purchase over 5 to 10 years.

There are different types of triggering events that Buy-Sell Agreements address. For example, if an owner dies, the surviving business owners may inherit heirs for business partners who care little whether the business survives. The death of a spouse, disability, bankruptcy, termination of employment and retirement are other types of triggering events that put a business at risk.

There are also three forms of such an agreement. They include Cross-Purchase, Entity-Purchase and a hybrid of the two. An experienced business attorney can help you determine the appropriate type for your situation. To have an effective Agreement, the owners must agree upon a mechanism to set the future value of the business. Possibilities include: book value, multiple of earnings, appraisal and annual valuation by owners. Again, these are things you should discuss with your attorney.

Your business needs protection from the unknown and ensuring that critical events are properly covered is essential to the long-term survival of your business. A Buy-Sell Agreement can provide just that.

It is an essential requirement to the long-term survival of your business.