Carpenter Gandhi

Law Done Differently

6 Common Missteps When Buying a Business

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So, you’re thinking of buying or selling a business.  It’s exciting – and it’s a huge milestone in your life… but be careful, there are some common mistakes that are made in the rush of excitement and opportunity.  Namely, it’s the rush part of the equation.

In today’s economy, businesses, particularly small businesses, are starting to see a renewed growth, and that means there’s opportunity for sellers to cash in on the equity they’ve built in their business ventures and an opportunity to take advantage of continued growth for buyers.  However, given all this fervor, it also means that the details can get lost in the mix.  No, it isn’t necessary to involve brokers and attorneys, but it can certainly be helpful.  For the purpose of this article, we’ll let the brokers give their advice.  But, from an attorney’s standpoint, there are 6 common missteps we see business buyers making – from the first-time buyers to the seasoned buyers.

Rush to Closing

The most common mistake we see as attorneys are buyers coming to us with unrealistic closing dates because they are afraid the seller will find someone else.  Of course, the seller wants a quick closing date.  And, they would really love it if you paid cash and asked no questions.  But, that’s also how you end up in an attorney’s office months later wanting to sue the seller saying that you got swindled (when you probably didn’t).  The buyer should plan for a realistic closing date that allows for due diligence to take place.  Due diligence depends on the purchase and the industry, but generally, you want to allow at least 1-2 months on the short side with potentially 2-3 months if the due diligence is more complicated.  You want to see financials, get records, dig into any potential liabilities (EVEN IF IT IS AN ASSET ONLY PURCHASE), check out the vendors, and look into as much about the business as possible.  This is where a team consisting of an attorney, accountant, etc. can come in very handy.  Importantly, to overcome the fear of losing out on the deal, you can create contracts that solidify the intent to purchase.  This can be through a separate agreement or can be incorporated in the overarching purchase and sale agreement that details the timelines and events of the purchase, including the closing date.

Management transition

This is a common mistake of new buyers especially.  But, even a seasoned buyer can fall into this trap if they are new to the industry or even the area of the business.  To overcome this misstep, it is helpful to negotiate a transition period where management will provide some training and consultation to the new buyer.  Often, this is thrown in as an incentive – usually for a short period of a couple weeks, maybe a month.  If the buyer needs a longer transition, many will look to compensate the outgoing seller to keep them on as a consultant for a time period of any where from a couple months to a year.

Inventory/Relationship Management

Don’t make assumptions about what you are purchasing.  If the business has inventory, it needs to be outlined and in an agreement as to what is included.  The last thing you want is to close and find out you have no inventory when you assumed you purchased it.  Likewise, in a service industry, if you are buying a business for the clientele, make sure it is included and make sure you have some sort of non-compete agreement in place so that you are protected from being sold a book of business only to have the seller open up down the block under a different name and start taking their old clients back.

IP/Name transfer

Again, no assumptions – if you are buying the business with the intent to use their systems and the goodwill of the name, make sure you are purchasing all of it, including things like licenses, the website, logos, etc.  This is often overlooked and just assumed.  Many successful businesses are successful because of their intellectual property and the systems they have in place.  Make sure you have a written agreement as to what it is you are purchasing.  And, with names, make sure the seller has the ability to sell the name and make sure you have preventions from the seller opening back up with the same or similar name.

Landlord-Tenant/Supplier Relations

Not all contracts just switch over because you buy the business.  Likely, most will, but some may have things like personal guarantees where you will need approval of the other party to assume the terms of the contract.  And, for some vendors and/or suppliers, you may want to renegotiate the terms depending on how you intend to run the business.  These negotiations can be complicated, so it is helpful to have an attorney on your side that can review these agreements and advise you as to the terms and facilitate transfers.  One of the most common transfers is getting the landlord to transfer the lease to the new buyer.  Just as often, this is an opportunity to negotiate new terms.  This is tricky territory so be careful, but just make sure it is addressed early because these transfers and negotiations take time.

Not reading the sales agreement

Finally, let’s say you’ve followed the overarching advice and hired an attorney to draft up a beautiful purchase agreement.  So, what mistake can you make, right?  Well, the big mistake is failing to actually read what the attorney wrote… and, more importantly, to ask questions where you may not understand what the agreement says.  As attorneys, we tend to use jargon – if your attorney puts something in your purchase agreement you don’t understand, ask him/her to explain and see if there’s a simpler way they can word it.  Also, make sure what is written is what you actually want in there.  Your attorney is there to advise and to facilitate – at times, that means providing suggestions.  Suggestions are just suggestions, you need to understand and agree to the substance.

In the end, buying a business is a very exciting event in your life.  It should be a great experience, and it can be with some attention to detail.  If you assemble the right team of advisors to guide you through the process, and you avoid the common missteps, you’re well on your way to a successful purchase and great new business venture.

Piercing the Corporate Veil – Are you sure you’re a corporation?

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A great man named George Costanza once said ‘it’s not a lie… if you believe it…” And this is just what many small business owners do – they lie to themselves by calling their business a corporation and then they say it and write it down so much that they believe it’s true. Well, the problem is that to properly be a corporation, you have to follow procedures. You have to have meetings to take certain actions, you have to take minutes at those meetings, keep records, and you have a fiduciary duty to the business. So, think about it –

  • Are you having meetings with your business partners (a.k.a. the directors)?
  • Are you recording votes and decisions?
  • Are you making sure that you aren’t usurping business opportunities that could benefit the business?

If you aren’t, then you just might find yourself on the business end of a lawsuit, and no veil to protect you.

It’s true that a Court will take into consideration many factors when deciding whether or not to pierce the corporate veil (i.e. allow you to be sued individually), it all really comes down to whether or not you’re calling yourself a corporation or whether you’re acting like a corporation. And this can be expanded to cover other entities like limited liability companies and limited liability limited partnerships. You can’t just file the paperwork and operate outside of the statutory procedures. When you file that paperwork, you’ve created an entity that is separate from yourself and your business partners. Frankly, step one is to know exactly why you’re creating the entity as you are, for example:

  • How does it protect you?
  • What do you have to do?
  • What are your duties to the entity?
  • What records must be kept?

These are questions that must have answers before you step out into the business world. This is also precisely why the initial investment in an attorney to help you choose and get set up for success is vitally important. Ask the attorney as many questions as possible. Ask him or her about the procedures, about the statutes, about the records, and ask for opinions on how to execute all of these activities to best protect you and remain efficient.

Here’s the point – you created a business to make money. You chose a business entity for tax purposes and for liability purposes. You can’t just call yourself a corporation, LLC, or limited whatever without following the proper procedures. If you don’t follow the proper procedures, you can find yourself being sued individually. Also, consider your fiduciary responsibilities… if you start treating business assets as your own or start taking business opportunities without the approval of your business partners, you may just find yourself being sued individually for a breach of your duties owed to the business entity. I know this may sound like I’m trying to scare you into a lawyer’s office, but that isn’t the point. The point is that you should at least seek legal advice so that you know all of the procedures and you can get set down a track that will allow you to operate within the law so you can focus all of your attention into making profits. It may not seem like a big deal today, but next time you start lying to you, don’t believe it. I can give you something to believe – when you get sued individually, and you lose that motion to dismiss, you’re going to regret not keeping those records and following those procedures.

How a good business plan can keep your money in your pocket (and out of your lawyer’s…)

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Business plans are tedious, time-consuming, and ever-evolving. And sadly, they are rarely read…even by the creator. When we meet with a new client, no matter what the reason for their visit, we will ask if they have a business plan. More often than we’d like to mention, we are met with puzzled looks and dismissive answers. Basically – ‘what does that have to do with anything? I’m in here for x, y, or z lawsuit.’ Well, here’s the reason we ask – if you had planned better to start, you probably wouldn’t be sitting in our office.

It seems the planning problem largely comes down to the perception of a business plan. It seems that if a business owner doesn’t need to chase down capital investments, they see no need to go out and do hours of industry and market research and meet with accountants and financial professionals to develop years’ worth of financial pro-formas. Why spend 200+ hours developing and writing a business plan when you could spend that time ‘doing’? Sure, that sounds like a valid argument… until you see what you’re missing and what headaches you will save down the road.

The business plan is more than just a tool to attract investors. This is your roadmap. This is your opportunity to research and understand the nooks and crannies of your industry and your market. You shouldn’t be in our office showing us a lawsuit against you for running your business without the proper permits and licenses. You should have researched this before you opened. You shouldn’t be in our office with a lawsuit against you violating environmental regulations. You should have researched this before you opened. And I could go on and on.

Here’s the deal – when you do your research early, you are able to see if there are legal hurdles to overcome. And that is when you should be showing up at our office. When you come into the office during the planning stages, we can explain what needs done and the costs involved. You can then budget time and money appropriately. As a note – we’ll be able to charge you a heck of a lot less during this phase because getting the proper permits before you break any regulations is a whole lot easier and a whole lot less time consuming.

So, what should you do if you’re already in business and don’t have a plan? DRAFT ONE! Never throw your hands up and say ‘well, too late for us.’ Business plans are fluid by nature – they change and evolve. If you haven’t drafted one, take that extra time to do the research and run the analytics. This will help you see both opportunities and potential dangers. Consult with an attorney to discuss your business and see if there’s something you’re missing. If you already have a plan, don’t just put it on a bookshelf. At least once a year you should be updating the plan. This will help you keep your business going down the road to success. It will help you stay focused on maximizing what works and leveraging your opportunities while minimizing your risks and dangers.

As a final note – if you need help, there are plenty of professionals that dedicate their careers to helping with this very thing. Additionally, there are many wonderful free resources online and in the community to help small businesses grow and succeed.

The Business Divorce – Who Gets the Kids?

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Just like a newlywed couple, you and your business partners never go into a venture expecting it will end. Instead, the business starts with excitement and dreams of success. Sure, the statistics say you’re likely to fail, but that won’t ever happen to you, right? Here’s the problem – it does happen. And it happens a lot… More importantly, in a business divorce, it may not even happen because the business failed. In fact, sometimes it happens because of the business’ success and not its failure.

Here’s the problem – just as many newlyweds have failed to draft a prenup, so too have many business partners. Then, when the foundation starts to crack and the problems arise, they’re left guessing what to do. No matter what business form you choose, you should always have a good operating agreement drafted. And this agreement should do more than just describe what to do if something goes wrong. It should be the document that is the roadmap to your success. It is your opportunity to set up the guidelines that will help you and your partners build the business in such a way that everyone stays happy and reaps the rewards of the venture.

So, what should your operating agreement cover? Here are a few essentials:

  1. Who’s managing the thing and what are his or her responsibilities?
  2. Are you going to allow more members? If so, how can they be added?
  3. What are the contribution requirements and how does that translate to ownership percentage?
  4. How are you going to deal with transferring ownership interests? Do you want to place limits? Do you want the business to have first crack at buying an exiting member’s interest?
  5. Voting – How? What? When? Where? …and the big one – who’s responsible for counting and keeping records?
  6. What are the triggering events for dissolving the business? Procedures? Who gets what?

These are just a few starting points – this is your agreement and can cover (basically) whatever you want it to cover…that’s the beauty of it! Our advice – invest the time and money to have a skilled business attorney draft your agreement to your unique needs. Don’t settle for a template document. Even if you’ve been in business for twenty years, if you don’t have an operating agreement, get one! You never think you’ll need one until you do – and then it’s too late. And, unlike marital divorce, a business divorce doesn’t even have the benefits of residual love, no kids to preserve the relationship – just anger and confusion. Save yourself the headaches and make the investment early.

3 Things Your Business Should Learn from the IRS…

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So, it looks like the IRS got caught for targeting certain groups based on political affiliations, largely conservative. And while some claim that politics had no motive, it sure looks that way. Now, the advice you take away from the IRS debacle shouldn’t be that you should just avoid having “patriot” in your business’ name or that you shouldn’t seek non-profit status or anything like that. Instead, I think there are some good management and procedural lessons to take away:

  1. Nearly any business coach, professor, consultant, etc. will advise that you craft a mission statement to guide your business’ activities and help guide your employees in their everyday decisions. Well, the IRS has the following mission statement according to its website: “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Arguably, the agency may have missed this by a notch or two. So, lesson number one – FOLLOW YOUR MISSION STATEMENT. You should not only have one, but you should follow it. Set goals and benchmarks so that there’s some measure as to how well you’re doing. And employees shouldn’t feel like machines; get them involved! With more folks on the same page, following the same mission, you have a lesser chance that a few will get off track and set you on a course for embarrassing disaster.
  2. Acknowledge mistakes when mistakes are made. In the latest coverage of the IRS’ handling of, at the very least, a severe lack of judgment and oversight, it seems a common answer to questioning about the mistakes, is some form of ‘I dunno,’ (paraphrasing pretty liberally, of course). Whether you have one employee or 1,000, at some point mistakes will be made – and sometimes those mistakes will be hugely embarrassing blunders. And you can’t just pretend nothing happened or just try to pass the blame. The buck stops with you whether it was your mistake or not. The mistake, while problematic in itself, is only one part. How you handle it is really the test. Your employees should never have to make guesses as to what to do when a mistake happens. If you don’t have guidelines or a structure that allows for open, honest communication to deal with blunders, then I’d say get ready for some embarrassing moments somewhere down the line. So, lesson two – take the time to develop procedures and provide the proper leadership so that your employees know what is expected when a problem comes up. Most mistakes are learning opportunities—even the big blunders can be useful with proper handling.
  3. Know what the hell’s going on in your own business. As I mentioned, it seems that so many people in the IRS just keep with the ‘I dunno’ refrain. Well, sure, that may be true, but why? And in your business, if you don’t know what’s going on at ground level then you aren’t steering the ship, it is steering you. No, you shouldn’t be preoccupied with making widgets, you should be focused on growing your business. But, that said, if you don’t have a clue what’s going on with those employees, you are setting yourself up for some real pain down the road. Your employees should know who you are and should know your expectations. That way, no confusion – no one is making up policies and work-flow procedures that are off course. And if they are, you can get it set right before everything blows up. So, lesson three – take time to know what’s going on in your own business. Take time to be a leader and set the right course.

So, in conclusion, if you decide that these lessons are nothing but a bunch of bologna, that’s fine. In reality, not listening to this advice probably won’t land you testifying before Congress. However, it may just land you in an embarrassing news article or, at the very least, sitting at home without a business to worry about. Of course, it may just land you in a lawyer’s office – paying big bucks to clean up the mess in litigation…

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