Category: Business Law Blog

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.

Succession Planning Cheat Sheet

Succession planning can seem like an overwhelming process, especially when you’re in the early stages of considering the transition.  The following list of questions is designed to help you organize your thoughts as you determine the proper strategy for transitioning your business.

Personal Goals

  • What are your goals for retirement and how much money will you need on an annual basis to achieve these goals?
  • Besides your retirement savings, what sources of income will you have in retirement (e.g. rents, social security, pension, etc.)?  Will these sources be sufficient to meet your retirement goals?
  • If not, how much additional retirement savings will you need to ensure that you can meet your goals?  -Do you already have a sufficient nest egg or, if not, how far short are you?
  • Are you comfortable spending a portion of the principal of your retirement savings each year or do you desire to simply let earnings on those savings make up the shortfall?
  • When do you want the succession planning process to begin?  When should it be completed?

Business Goals

-Do you know how much your business is worth?  Do you have an independent estimate of value?  When was it completed?

-How important is it to you that, after your retirement, your business remains an independent entity?  Is that an emotional or perceived financial issue?  Do you want your business to remain in your family?

-If your deisre is for the business to remain independent:

-Who are your successors (managers and owners)?

-What roles will they play?

-What training will be required?

-Will you remain involved?  In what capacity?  For how long?

Estate Planning

-Is your estate plan updated (i.e. living trust, powers of attorney, etc.)? Does it ensure your that your estate will avoid probate?

-If there are other owners in your business, do you have a buy-sell agreement?  When was it last reviewed?

-If you have a family owned business, are there family members who are not active in the business?  If so, will they inherit an equitable share of assets?

Tax Considerations

-How will the transfer of the business affect your taxes? The business’ taxes? The successors’ taxes?

-Will you run into estate tax issues upon your death?  If so, have you figured out how to pay for those, or how to avoid them?

Method of Transfer

-If you’re planning to sell the business to a third party, will you sell the actual stock or the assets of the business?  How will the buyer finance the purchase?

-If you’re planning to retain the business, can you take advantage of gifts?  Bequest?  Discounted sales?  Options?  Combination of choices?

You don’t have to have all the answers before you start putting your plan in place, but the more you consider these issues, the easier the process will be.  Ultimately, a proper succession plan will: 1) leave you in control for as long as you wish, 2) set expectations for all involved, and 3) avoid unnecessary taxes on the transfer.

Difficult Debtors: Tips from the Front Line

Bad debts are a source of irritation, and sometimes ruin, for all companies.  According to a July 15, 2008 article by Melanie Lindner on Forbes.Com, a business can expect to collect nine out of ten dollars of a debt within the first 90 days of the due date- after that the numbers begin to plummet.  While most debtors are simply good people who have fallen on hard times, there are exceptions.  We all know the ‘professional debtor’; that person who has so much debt he or she has ceased to care.  The professional debtor has collectors knocking down his or her door while continuing to buy new clothes, go on exotic vacations and live it up.  The professional debtor is one of the most difficult debtors to deal with as he or she has a litany of excuses and tactics to turn the situation into something that’s your fault.  At Epiphany Law we’ve dealt with all kinds of debtors, either through experiences with our own various business ventures or by helping our clients get the money they’re entitled to.  We’ve heard all the excuses in the book, from the mundane to the downright outrageous.  We’ve compiled a list of tips that you can use everyday in your own business.  By using what we’ve learned, you can make dealing with difficult debtors less stressful and increase your chances of getting paid.

Be Prepared

The professional debtor is always prepared.  He or she will have a list of excuses as to why you can’t be paid right now or why you didn’t receive the payment that he or she sent last week.  The professional debtor might even go into a story detailing the many blows he or she has been dealt by life.  If you’re unprepared for these excuses, you’ll easily be blown off.  Write a list of the most common excuses that you hear and then match each one up with an effective rebuttal.  If a debtor says that he or she mailed the check, ask for the check number and the date of mailing.  If he or she says your invoice has been lost, say you’ll fax a copy over immediately and ask when you can expect the payment to be mailed.  Be sure to have all the information you’ll need ready so you can answer any questions.  Have the exact amount that’s owed, any terms or conditions of the sale, what was provided or purchased and anything else pertinent to your transaction at your fingertips.

Be Professional

Having a professional demeanor demands respect.  Treat the conversation as if it were a job interview.  Speak a bit more slowly and enunciate so you can be easily and clearly understood.  Remember that this is business, not personal.  Never raise your voice, swear, or threaten the debtor.  The professional debtor may try to fluster you or make you get angry; he or she may yell, swear, and threaten you.  Don’t retaliate.  If the debtor yells or becomes excessively belligerent, ask when a better time to call him or her would be or put the debtor on hold for a few seconds.  This gives the debtor time to calm down and, hopefully, respond to you in a more appropriate manner.

Take Control of the Situation

Don’t make the debtor go on the defensive- that won’t get you anywhere.  Using language centered around you, such as “I understand that you’re frustrated” or “I see how upsetting that would be,” instead of language centered around the debtor, like “You’re getting too upset over this” will help keep the debtor from getting defensive.  Stay focused on the task at hand.  If the debtor tries to get you off topic, be polite but always bring him or her back to the focus of the conversation- getting paid for the goods or services you provided.  Take notes every time you contact the debtor.  Keep track of what date and time you called him or her, the key points of what was said, and any promises that were made by the debtor.  This will come in handy if you have to contact the debtor again.

Get a Commitment

Do not end the conversation without summarizing the results.  Reiterate what he or she has committed to (payment amount, payment plan, etc.), your expectations (receiving payment by X date), and the consequences if the debtor does not follow through (turning the matter over to an attorney, etc.).  Depending on your relationship with the debtor, it may be a good idea to follow up with a letter recapping the conversation.  If the debtor still fails to follow through on his or her commitment to pay you, you must make sure to put your consequences into action.  If you constantly issue empty threats, the debtor will never take you seriously.

As with any situation, use your best judgment when deciding how to handle a debtor, and consult an attorney if needed.  However, don’t allow yourself to feel there is a stigma associated with collecting money that is rightfully owed to you.  The bottom line is that you have a contract, the goods or services were delivered and you have a right to expect payment.  If you have questions about collections for your business, call us at (920) 996-0000.

Navigating the New Law of the Land: How Concealed Carry Affects Your Business

On July 8, 2011, Governor Scott Walker signed Senate Bill 93 (“Concealed Carry Bill”) into law, meaning the law will likely go into effect on November 1, 2011.  Though it may not seem like it, this new law will affect every business in Wisconsin, from bars to doctor’s offices and everything in between.  Now is the time to re-examine the policies in place at your business as choosing whether to prohibit weapons may impact your liability.

Anatomy of the Concealed Carry Bill

Under the Concealed Carry Bill, a weapon is defined as “A handgun, an electric weapon […], a knife other than a switchblade knife […] or a billy club.”   Anyone who wants to carry a concealed weapon may apply for a license, which is good for a period of five (5) years, as long as he or she meets the following criteria: 1) At least 21 years old, 2) Not prohibited under State or Federal law from possessing firearms, 3) Not prohibited by a court from possessing firearms, 4) Is a resident of the State of Wisconsin, and 5) Has provided proof of adequate training.   Anyone carrying a concealed weapon on property that is not owned, leased or otherwise legally occupied by that person must have a valid license and photo identification on his or her person.

The Concealed Carry Bill specifically prohibits weapons, concealed or not, in the following places:  1) A police station, sheriff’s office, state patrol station, or the office of a criminal investigation special agent, 2) A prison, jail, or other correctional facility, 3) A mental health facility, 4) A county, state or federal courthouse, 5) A municipal courtroom if court is in session, and 6) Beyond the security checkpoint in an airport.  Violators are subject to a fine of up to Five Hundred Dollars ($500.00), imprisonment for up to thirty (30) days or both.

The Effect of the Concealed Carry Bill on Liability

Business owners must now decide whether to allow concealed weapons on their property.  As a business owner, if you decide to allow concealed weapons on your property, you are immune from any liability stemming from that decision.   Therefore, if a customer or employee is carrying a handgun that accidently discharges, causing an injury, you cannot be held liable simply because you allowed concealed weapons on your property.

However, if you want to prohibit weapons, there are a number of factors to take into consideration.  The first factor is that by prohibiting concealed weapons, you, as the business owner, lose your immunity.  That’s right- if you choose not to allow weapons on your property, you could be held liable for an action occurring on your property.

The second consideration is that an establishment that prohibits weapons must effectively put customers and employees on notice by posting signs on the premises or in the building.  The sign should 1) Be at least 5” x 7”, 2) State that weapons are prohibited on the premises or in the building, 3) Identify the portion of the building or premises on which weapons are prohibited (if applicable), 4) Include the name of the individual giving the notice and 5) Include the word “owner” or “occupant” after the name of the individual giving notice.  This sign must be prominently posted near all entrances and/or access points to the restricted building or premises.

Another factor to consider is your employees.  If you decide to prohibit weapons in your building or on your property, we strongly recommend changing your policies and employee handbook to reflect that prohibition.  Any change in policy should state which specific weapons are prohibited, where weapons are prohibited and the consequences of violating the policy.  However, you cannot, as a condition of employment, prohibit an employee from carrying or storing a concealed weapon or ammunition in his or her car, even if the car is used for work.

The final aspect to take into account is consistency.  If you want to prohibit weapons on your property or in your building, you cannot disregard employee violations of the prohibition.  A violation must result in the same disciplinary action across the board, each and every time.  Since employers prohibiting concealed weapons have no immunity to liability, being consistent will lessen the likelihood that an employee will disobey the policy and reduce potential liability.

Making the Decision

No matter how you feel about the Concealed Carry Bill, it will have impact your business.  Whichever way you decide to go, now is the perfect time to revisit your employment policies and make sure you have measures in place to protect your business, customers and employees.  For more information on the Concealed Carry Bill or your employment policies, contact our office at (920) 996-0000

Giving Property to Children or Adding Them to Title

An extremely common mistake people make with regard to estate planning is the assumption that you can avoid estate taxes and probate simply by retitling your property in the name of your children or loved ones – i.e., giving it away.  Or, if you don’t want to give the property away, the idea of adding children as joint tenants or even adding them as joint bank account holders seems like it could solve the problem.

Don’t give your property away during your lifetime

Let’s clear this up.  It’s inevitable that at some point your property will not be yours any longer.  That is the nature of things.  But if you are reading about estate planning, chances are that you care about what happens to your property when you pass away.  And if you care about what happens to your property, you care that it benefits the people you want it to go to.

If you give your property away while you are alive, there are a number of risks that could strike.  First, there is the issue of taxes.  If you have held a piece of property for a number of years, it is likely that the property has appreciated in value.  If you die, your heirs won’t be taxed on how much your home has increased in value.  But, if you transfer your house to someone else other than your spouse during your life, when they sell the house they will be taxed on the difference between how much you paid and the fair market value at the time of the sale.

For example, imagine that you purchased a home 30 years ago for $30,000.  The house is now worth $330,000.  If you transferred title to your children during life and then your children sold the house, they would pay taxes on $300,000 worth of gain – or $60,000 when the capital gains rates are 20%.  If you transfer the house at death, the basis would “step up” to $330,000, so the gain and the tax would be zero.

Another obvious problem is that when you change title to your property, it is no longer yours.  If your children have money troubles, divorce or enter bankruptcy, their creditors could take the property.  The same problem exists if your children are joint tenants.

Don’t add children to your property deeds or bank accounts

The other common estate planning “solution” is to add children to bank accounts or as joint tenants (where property passes automatically upon death).  Although there are circumstances where this could be appropriate, those situations are rare.  You should consult with an estate planning attorney before retitling any of your property.

One problem with joint tenancy is that you have effectively given a share of the property away.  So bankruptcy, divorce and other creditor issues could arise even if your child is a joint tenant and not 100% owner.  If the child doesn’t have money to pay the creditors, it is possible that the creditors could have the house sold off to pay their debts.  You would get your half of the proceeds, but lose the house.

Joint bank accounts are another problem area, especially in families with multiple siblings.  In some families, a parent chooses one sibling as joint bank account holder.  This sibling then has the “expectation” to distribute the bank account evenly to the others when the parent passes away.

I wouldn’t want to be that sibling!  Not only is there potential income taxation on the entire bank account, there might be gift taxes on the transfer as well.  That is, of course, assuming that the sibling doesn’t just decide to keep the bank account for him or herself.  It happens.

The moral today is that you should not transfer title or add children to joint bank accounts for the purposes of estate planning without the advice from an experienced estate planning attorney.  While these transfers and changes might seem like a good idea at first glance, there are simply too many risks behind the scenes.