I don't pretend to be a political pundit, and frankly, many of those who do make such claims are about as reliable in their predictions as stock analysts. Nonetheless, as an attorney who represents businesses, entrepeneurs, and high-net-worth individuals, I do think the recent election results have the potential, if those on the left carry out their desires, to affect businesses, entrepreneurs and capitalists--as well as capitalism in general. Here are some of the effects you might see:
1. The curbing of civil liberties infringement in the name of anti-terrorism. One of the possible positive outcomes of these elections is that the now-split government in Washington will either roll back or at least curb the last few years' intrusions into privacy and civil liberties. The Bush administration, in the name of the War on Terror, created broad powers to pry into electronic communications, banking and other areas in which U.S. citizens typically expected privacy. The American Left, for all of its flaws, at least tends to value some issues of privacy, and is leary of Big Brother. Hopefully, the new Congress can at least stop if not roll back the Bush Administration's incursions.
The unfortunate thing about Leftists, however, is that though they think Americans deserve the freedom of privacy and civil liberties, they believe that freedom stops--and good Leftist Government should begin--when the Left does what it knows is to be in everyone's best interests. Here are some of the more worrying possibilities that capitalists may face:
2. Socialist Healthcare.
Prior to coming into power, some of the bolder Democrats were already beginning to voice the same old story about socialized medicine--termed "Universal Healthcare." Like all free things promised by the Left, it's not free; just paid for by someone else. Potential targets feeling the pain of this leftist scheme could be doctors, insurance companies, and small businesses that are asked to subsidize the Left's generosity to its voters.
3. Paternalistic Intrusion into Personal Choices.
For all the Left's talk of civil rights, those rights stop when the Left can make better choices for the individual than he can make for himself. Leftist pseudoscientists, the media, and leftist politicians are slowly preparing Americans mentally for the once-ridiculous idea that the government should financially penalize us for the choices we make with which it doesn't agree--such as the foods we eat. Businesses which sell disfavored products or items--that is, items from which the Left wants to protect individuals from their own choices--should be prepared for attempts at penalty taxes and investigations of a type once reserved for the tobacco industry.
4. Free Breakfasts.
Entrepeneurs, businesses and capitalists may feel the "tyranny of the majority" with the Left attempting to provide "free breakfasts"--literally--by stealing from the most productive members of our society. Recently, I read an article by someone with an apparent activist bent who reported in the media that studies recommended that all schoolchildren--not just poor ones--should be provided free breakfasts, because they'd eat healthier than they'd eat at home.
This type of thinking is the mantra for Leftists. There are many disturbing aspects about this study. First, that it would use the word "free" instead of subsidized, because that's what it is. It would only be "free" because parents of public school children--regardless of how wealthy they might be--would have their kids' food paid for by taxpayers--regardless of their own financial status or whether they themselves had children to support. Second, it reaffirms Leftist thinking that the government should get involved with individual choices because "it can do better." Finally, it's unclear exactly where the Leftists would attempt to extract the money for this. "There's no such thing as a free lunch?" What about a free breakfast?
5. Heightened Distrust of Entrepreneurs.
Finally, business owners, capitalists and entrepeneurs need to prepare themselves for a Leftist mentality that is derisive of them and refers them as "corporate America" as if that term is itself a self-evident term of derision. Be prepared to deal with individuals who treat with suspicion all of the following:
1. Attempts to make the most efficient and profitable operation possible (the Left says you should pay everyone as much as possible and then see if you can actually make your business work).
2. Attempts to pay only the smallest amount of taxes you're legally required (the Left calls that "tax loopholes").
3. Attempts to protect your assets in foreign or offshore accounts (the Left--and even some on the Right--think nothing good can come from investing or protecting your money outside of this nation).
If you asked me what one step you could take to hedge against some of the uncertainty of the Left, I'd advise you to "have a plan B." Good business owners and entrepeneurs know that the unforeseen can sometimes happen. Sometimes you need a backup plan in place. Now, I believe, is that kind of time. The dollar is weak, freedom in our country is being restricted like never before, and the new government coming looks scary. Speak to your financial advisor, your tax advisor and your legal advisor. Look at investing offshore. Look at moving some assets offshore. Look at investing in foreign properties in nations that still respect business and freedom.
That's the way things look from where I stand.
Sabtu, 11 November 2006
Minggu, 05 November 2006
Second Passports
After discussing our meeting with a St. Kitts solicitor in my last post, I thought it might be helpful to discuss the purposes and benefits of a second passport, as well as try to answer some questions you might have about a second passport.
1. Second Passports don't require you to give up your primary citizenship. You can be a dual citizen of the United States and another country (unless that country's laws state to the contrary). If you were, say, to obtain a Panamanian passport, you'd still be a citizen of the United States as before. You've not had to give up your rights as a U.S. Citizen. You've just now obtained the rights of citizenship in a second country.
2. Conversely, Second Passports don't let you escape United States obligations. As a U.S. citizen, you're obligated to pay federal income tax on income earned anywhere in the world. Though there are some credits you'd be entitled to receive, this is the general rule. Just as your second passport doesn't strip you of your U.S. rights, it also doesn't alleviate any of your obligations in the U.S. If you truly wanted to escape those obligations (such as high taxation), you'd have to renounce your U.S. citizenship. Before you do that, you should talk to a legal specialist.
3. Second Passports allow you to travel more anonymously. One of the biggest benefits touted of second passports is that they would allow you to travel under a different nationality, when that would be to your advantage. Specifically, for U.S. citizens, this would allow you to go to places where being an American might carry a stigma, and represent yourself as a citizen instead of, say, St. Kitts. This is similar to what many backpackers in Europe had done for years when they would purport to be Canadian so that they wouldn't carry the "American" stigma. Though this has some validity, this alone shouldn't be your motivation for a second passport. Ask yourself: is it worth paying thousands (or hundreds of thousands) of dollars just to make a Frenchman be your buddy? If you're a white man with a Christian name who travels to Pakistan, would they care that you claim to be from Grenada rather than the U.S.? Would it not be simply easier and cheaper not to travel to those types of places?
4. Second Passports give you traveling privileges of your second country. This reason has more advantages. In many countries, you must have not only your country's passport, but a Visa from the host country. However, the host country often waives the visa requirement to some of its closest allies. Also, even entry, duty and residency requirements are lessened among some allied countries. For example, if you had a St. Kitts passport, you'd be given easier travel all around the Caribbean, since most of the Caribbean countries are part of a cooperative known as Caricom (sort of a Caribbean Union), which means that when you went through Customs and Immigration, you'd be going through the shorter line designated for the "locals." Though this, in itself, might not justify purchasing a second passport, it would sure be a nice perk.
5. Second Passports can make you more "anonymous." Though there are many dubious reasons why someone would want to become anonymous (e.g., running from a crime), many folks, especially those who are paranoid of our government, like the idea of giving themselves a lower profile with a second passport. This would, theoretically, occur in two ways. The first would be that you'd be less likely to register if using a second passport. For example, if the airport authorities were looking for U.S. Citizen Wesley Deaton, I could pass through with my St. Kitts passport in my name. With computer sophistication being as high is it is, I don't know if that's realistic.
The second way would be by using a different name on your second passport--I'm told, for example, that individuals will often use their mother's maiden name as their own on the passport. So in the example above, if the airport authorities had U.S. Citizen Wesley Deaton on some sort of "list," when Panamanian Citizen Wesley Dycus appeared, he'd pass through undetected. Two caveats about this: first, I can't tell you in what countries this would be legal and in which countries this would be illegal. More importantly, I can't advise you (because I don't know) which passport programs allow assumed or changed names. If this is something that interests you, you'd need to contact an attorney or solicitor specializing in obtaining second passports.
6. A Second Passport gives you the right to live and have citizenship rights in another country. The most basic, yet most important, aspect of a second passport is that it allows you to live in the country of the passport. This, for many people, is what makes the passport so important. Perhaps the individual simply wants to try life in another locale (if you've endured decades of cold winters, moving to Panama or St. Kitts sounds pretty inviting, doesn't it?). In other cases, individuals want to escape persecution--or at least be able to escape, if need be. In countries offering second passport programs, for example, many of the applicants are wealthy former citizens of either Hong Kong or Taiwan, who fear the impending power of the Chinese state. In addition, many Americans--often who have financial wealth--also fear our government's increasing sue of coercive power, surveillance and taxation, and want a "Plan B," in case things get bad enough.
Simply moving and living in another country legally is not always simple. Often, countries require visas of anyone wanting to live there for more than 30 days. Furthermore, as an outsider, it's not always easy--or legal--to obtain gainful employment. In Belize, for example, newcomers are not legally allowed to obtain jobs for one year after moving there.
In short, a second passport allows the holder to move, without barriers, inside the adopted country, without all of the barriers often placed on outsiders.
1. Second Passports don't require you to give up your primary citizenship. You can be a dual citizen of the United States and another country (unless that country's laws state to the contrary). If you were, say, to obtain a Panamanian passport, you'd still be a citizen of the United States as before. You've not had to give up your rights as a U.S. Citizen. You've just now obtained the rights of citizenship in a second country.
2. Conversely, Second Passports don't let you escape United States obligations. As a U.S. citizen, you're obligated to pay federal income tax on income earned anywhere in the world. Though there are some credits you'd be entitled to receive, this is the general rule. Just as your second passport doesn't strip you of your U.S. rights, it also doesn't alleviate any of your obligations in the U.S. If you truly wanted to escape those obligations (such as high taxation), you'd have to renounce your U.S. citizenship. Before you do that, you should talk to a legal specialist.
3. Second Passports allow you to travel more anonymously. One of the biggest benefits touted of second passports is that they would allow you to travel under a different nationality, when that would be to your advantage. Specifically, for U.S. citizens, this would allow you to go to places where being an American might carry a stigma, and represent yourself as a citizen instead of, say, St. Kitts. This is similar to what many backpackers in Europe had done for years when they would purport to be Canadian so that they wouldn't carry the "American" stigma. Though this has some validity, this alone shouldn't be your motivation for a second passport. Ask yourself: is it worth paying thousands (or hundreds of thousands) of dollars just to make a Frenchman be your buddy? If you're a white man with a Christian name who travels to Pakistan, would they care that you claim to be from Grenada rather than the U.S.? Would it not be simply easier and cheaper not to travel to those types of places?
4. Second Passports give you traveling privileges of your second country. This reason has more advantages. In many countries, you must have not only your country's passport, but a Visa from the host country. However, the host country often waives the visa requirement to some of its closest allies. Also, even entry, duty and residency requirements are lessened among some allied countries. For example, if you had a St. Kitts passport, you'd be given easier travel all around the Caribbean, since most of the Caribbean countries are part of a cooperative known as Caricom (sort of a Caribbean Union), which means that when you went through Customs and Immigration, you'd be going through the shorter line designated for the "locals." Though this, in itself, might not justify purchasing a second passport, it would sure be a nice perk.
5. Second Passports can make you more "anonymous." Though there are many dubious reasons why someone would want to become anonymous (e.g., running from a crime), many folks, especially those who are paranoid of our government, like the idea of giving themselves a lower profile with a second passport. This would, theoretically, occur in two ways. The first would be that you'd be less likely to register if using a second passport. For example, if the airport authorities were looking for U.S. Citizen Wesley Deaton, I could pass through with my St. Kitts passport in my name. With computer sophistication being as high is it is, I don't know if that's realistic.
The second way would be by using a different name on your second passport--I'm told, for example, that individuals will often use their mother's maiden name as their own on the passport. So in the example above, if the airport authorities had U.S. Citizen Wesley Deaton on some sort of "list," when Panamanian Citizen Wesley Dycus appeared, he'd pass through undetected. Two caveats about this: first, I can't tell you in what countries this would be legal and in which countries this would be illegal. More importantly, I can't advise you (because I don't know) which passport programs allow assumed or changed names. If this is something that interests you, you'd need to contact an attorney or solicitor specializing in obtaining second passports.
6. A Second Passport gives you the right to live and have citizenship rights in another country. The most basic, yet most important, aspect of a second passport is that it allows you to live in the country of the passport. This, for many people, is what makes the passport so important. Perhaps the individual simply wants to try life in another locale (if you've endured decades of cold winters, moving to Panama or St. Kitts sounds pretty inviting, doesn't it?). In other cases, individuals want to escape persecution--or at least be able to escape, if need be. In countries offering second passport programs, for example, many of the applicants are wealthy former citizens of either Hong Kong or Taiwan, who fear the impending power of the Chinese state. In addition, many Americans--often who have financial wealth--also fear our government's increasing sue of coercive power, surveillance and taxation, and want a "Plan B," in case things get bad enough.
Simply moving and living in another country legally is not always simple. Often, countries require visas of anyone wanting to live there for more than 30 days. Furthermore, as an outsider, it's not always easy--or legal--to obtain gainful employment. In Belize, for example, newcomers are not legally allowed to obtain jobs for one year after moving there.
In short, a second passport allows the holder to move, without barriers, inside the adopted country, without all of the barriers often placed on outsiders.
Selasa, 24 Oktober 2006
Buying a Second Passport--St. Kitts and Nevis
On my recent trip to St. Kitts and Nevis (see http://investtheworld.blogspot.com) I scheduled an appointment with David Rawlings, an attorney who specializes in, among other things, offshore corporations and economic citizenship in the islands.
“Economic Citizenship” is the name for a procedure in St. Kitts by which an investor, through fees paid and money invested in an approved real estate investment, can receive a passport and second citizenship in St. Kitts and Nevis. The benefits of such citizenship would be easier traveling through some countries, a possibly lower profile of travel (than, say, traveling with a U.S. passport) in some countries, and a “backup” home country to which one could escape if one’s own country became inhospitable.
By purchasing a piece of “approved” real estate property (i.e., one which has been officially declared “investment property” by the Federation Government of St. Kitts and Nevis), an individual can qualify. The approved property will consist of a condominium or villa, but not raw land. According to Mr. Rawlings, this is because the government desires to encourage the development of residential and tourism projects. The property also must sell for at least $350,000 (changed as of one month ago from $250,000) in U.S. dollars. In addition to purchasing the property, the applicant must also pay a one-time fee of $35,000 for one person (more for a couple or family, though they can all be qualified by one property purchase).
In addition, there will be some other incidental costs that add up, such as transfer tax fees which, though technically set as a seller’s cost, will as a practical matter raise the price of the property (a 12 percent tax), and attorney’s fees. According to my calculations, the cost for purchasing a piece of property for one person would be, at a minimum, about $420,000 US.
One positive note, however, is that the citizenship rule places no restriction on how long an investor must hold a property. This means that an individual could, conceivably, purchase the property, obtain his citizenship, and immediately resell it the next day.
Also, the property can only be used as an investment property once, meaning that once you’ve purchased it as an investment property, you cannot re-sell it to someone else also as a qualified investment property.
There has been talk in the past about Nevis seceding from St. Kitts, and Mr. Rawlins informed me that if this indeed happened, Nevis would have the right, in its constitution, to decide who to recognize as a citizen, meaning theoretically that if you purchased your citizenship for the purpose of living on Nevis, its status could be changed if Nevis ever seceded. Mr. Rawlings, however, believes secession to be unlikely, saying that there have been concessions made with Nevis giving it more autonomy such that the threat of secession has been reduced.
In addition, we discussed banking privacy with Mr. Rawlings, who states that the Federation’s laws have been made stricter such that privacy is respected and, for the government to be able to inquire into a private account, it bears the burden of showing cause.
Mr. Rawlins informed us that St. Kitts and Nevis allowed offshore corporations with relative low cost and expense. Basically, a company could be set up in the Federation that isn’t taxed, so long as it doesn’t transact business in the Federation (other than incidentally). For a $900 attorney’s fee, a $200 registration fee, and small annual fees, an investor could set up a St. Kitts offshore corporation.
Finally, we discussed the purchase of real estate in the country. Apparently, the country has two concurrent systems of real estate registration: typical conveyance registration, common to most English common law countries and U.S. states, and the “title” system of registration.
The conveyance system is the traditional system of recorded deeds, and “checking title” (i.e. looking through outconveyances for a period of years) to determine any encumbrances thereto. The “title system” however, is more similar to a state’s vehicular title registration method. The document is a title, and lists on its face and back all items that encumber it—restrictions, liens and any other matters. Banks generally require properties used as collateral to be titled. The process, apparently, requires notice to be published in the paper and to neighboring property owners that requires anyone objecting to the title (i.e., claiming an encumbrance, right of way or overlap) to respond. Upon hearing no response, the government will allow the property to be titled. As you can see, the process of titling likely does quite a bit to clean up old encumbrances of record, such as uncanceled judgments, rights of way, and other defects.
My traveling buddy and I, however, did further investigation of the real estate market, and have come up with these conclusions:
Upon research and consideration, the passport program might not be such a great deal as is touted. The theory is that you buy a piece of qualified property, pay a fee on top of it, and, for the cost of the $35,000 fee, you’ve got a passport and for the price of the real estate a newly developed home or condominium. Our own inspections reveal that the investment-applicable properties are priced higher than similarly built non-applicable properties. Furthermore, associated lawyer’s fees and transfer taxes (whether paid by the buyer or built into seller’s purchase price) can add another ten percent or more. Therefore, the reality is that if you bought a minimum-level investment property ($350,000), in our estimation, you’ve really bought a $250,000 or $275,000 property with a $75,000-$100,000 premium added, and in addition to the $50,000 government fee have expended another $20,000-$30,000. Given that, you might want to consider Panama’s different investor and passport programs, which don’t appear to require so many costs.
“Economic Citizenship” is the name for a procedure in St. Kitts by which an investor, through fees paid and money invested in an approved real estate investment, can receive a passport and second citizenship in St. Kitts and Nevis. The benefits of such citizenship would be easier traveling through some countries, a possibly lower profile of travel (than, say, traveling with a U.S. passport) in some countries, and a “backup” home country to which one could escape if one’s own country became inhospitable.
By purchasing a piece of “approved” real estate property (i.e., one which has been officially declared “investment property” by the Federation Government of St. Kitts and Nevis), an individual can qualify. The approved property will consist of a condominium or villa, but not raw land. According to Mr. Rawlings, this is because the government desires to encourage the development of residential and tourism projects. The property also must sell for at least $350,000 (changed as of one month ago from $250,000) in U.S. dollars. In addition to purchasing the property, the applicant must also pay a one-time fee of $35,000 for one person (more for a couple or family, though they can all be qualified by one property purchase).
In addition, there will be some other incidental costs that add up, such as transfer tax fees which, though technically set as a seller’s cost, will as a practical matter raise the price of the property (a 12 percent tax), and attorney’s fees. According to my calculations, the cost for purchasing a piece of property for one person would be, at a minimum, about $420,000 US.
One positive note, however, is that the citizenship rule places no restriction on how long an investor must hold a property. This means that an individual could, conceivably, purchase the property, obtain his citizenship, and immediately resell it the next day.
Also, the property can only be used as an investment property once, meaning that once you’ve purchased it as an investment property, you cannot re-sell it to someone else also as a qualified investment property.
There has been talk in the past about Nevis seceding from St. Kitts, and Mr. Rawlins informed me that if this indeed happened, Nevis would have the right, in its constitution, to decide who to recognize as a citizen, meaning theoretically that if you purchased your citizenship for the purpose of living on Nevis, its status could be changed if Nevis ever seceded. Mr. Rawlings, however, believes secession to be unlikely, saying that there have been concessions made with Nevis giving it more autonomy such that the threat of secession has been reduced.
In addition, we discussed banking privacy with Mr. Rawlings, who states that the Federation’s laws have been made stricter such that privacy is respected and, for the government to be able to inquire into a private account, it bears the burden of showing cause.
Mr. Rawlins informed us that St. Kitts and Nevis allowed offshore corporations with relative low cost and expense. Basically, a company could be set up in the Federation that isn’t taxed, so long as it doesn’t transact business in the Federation (other than incidentally). For a $900 attorney’s fee, a $200 registration fee, and small annual fees, an investor could set up a St. Kitts offshore corporation.
Finally, we discussed the purchase of real estate in the country. Apparently, the country has two concurrent systems of real estate registration: typical conveyance registration, common to most English common law countries and U.S. states, and the “title” system of registration.
The conveyance system is the traditional system of recorded deeds, and “checking title” (i.e. looking through outconveyances for a period of years) to determine any encumbrances thereto. The “title system” however, is more similar to a state’s vehicular title registration method. The document is a title, and lists on its face and back all items that encumber it—restrictions, liens and any other matters. Banks generally require properties used as collateral to be titled. The process, apparently, requires notice to be published in the paper and to neighboring property owners that requires anyone objecting to the title (i.e., claiming an encumbrance, right of way or overlap) to respond. Upon hearing no response, the government will allow the property to be titled. As you can see, the process of titling likely does quite a bit to clean up old encumbrances of record, such as uncanceled judgments, rights of way, and other defects.
My traveling buddy and I, however, did further investigation of the real estate market, and have come up with these conclusions:
Upon research and consideration, the passport program might not be such a great deal as is touted. The theory is that you buy a piece of qualified property, pay a fee on top of it, and, for the cost of the $35,000 fee, you’ve got a passport and for the price of the real estate a newly developed home or condominium. Our own inspections reveal that the investment-applicable properties are priced higher than similarly built non-applicable properties. Furthermore, associated lawyer’s fees and transfer taxes (whether paid by the buyer or built into seller’s purchase price) can add another ten percent or more. Therefore, the reality is that if you bought a minimum-level investment property ($350,000), in our estimation, you’ve really bought a $250,000 or $275,000 property with a $75,000-$100,000 premium added, and in addition to the $50,000 government fee have expended another $20,000-$30,000. Given that, you might want to consider Panama’s different investor and passport programs, which don’t appear to require so many costs.
Minggu, 15 Oktober 2006
Buying a business, Part 4--Keeping Your Business Sound
Now you know a little about how to finance a business and perform your due diligence, what do you do after a closing? Although the below list is not exclusive, here are some tips; some of these contain legal advice, and others come from my experience in watching business acquisitions.
1. Learn from the Seller. Hopefully, during the negotiations to purchase the business, you included a clause that required the Seller to either work for you or be available for consulting during the initial period after closing. In my experience, the Seller's expertise is a sorely underused resource after the purchase. Most Sellers are willing to offer their advice--and in fact, expect to be able to offer their advice, if they're owner-financing the purchase. Too many purchasers come in with the idea that they're going to take it, with no experience, and turn it into a goldmine. Remember: it was a going concern before you bought the business, so learn first the way the seller did it. Then improve on it if necessary.
2. Incorporate. If you didn't prior to closing, take the time to incorporate your business into some sort of liability-protected entity, so that your personal assets are not at risk for the actions of the business or its employees.
3. Watch your cash flow and debt service. Another thing that I've seen cause new business purchasers to crash is their failure to watch their cash flow and their debt service. Often the individual who has grown a business and then sells is now financially successful. But that success often came after much initial sacrifice of time and enjoyment, and a period of lean years where the business owner had to forego some material comforts in order to grow the business. The buyer, however, sometimes just sees the end result (a wealthy business owner), and expects to walk right in, have a positive cashflow, and begin making a wealthy living immediately. Remember, you're probably paying more money out at the beginning (if nothing else, in loan payments) than what the Seller had been paying when he sold it to you. Those first few years should not be a time of purchasing lots of material items; they should be spent learning the business, growing the business and paying down the debt so that the business can one day may you more money. Don't buy every new item that you think your business might need that first year; don't get heavier in debt. Make sure the bills are paid, then grow the business, then you can one day profit on a more personal level.
4. Surround yourself with professionals. If you're taking over a business, you are in a sense a business professional. You're asking the public to come to you and purchase specific product or service which you claim to be more qualified than the average public to provide. If you want to help your success, therefore, you need to surround yourself with advisors and professionals who are similarly outstanding. At the very least, you need a good certified public accountant (CPA), and an attorney who specializes in business representation. Going to the guy down the street who "does books" might cost you a smaller fee, but a genuine accounting professional will save you money in the long run--I've seen it: my clients with professionally certified accountants come out better on their taxes and bookkeeping than with nonprofessionals. Similarly, the lawyer who goes to you church and did your daughter's traffic ticket may be a nice guy, and give you some good general advice, but you need to find someone whose day-in and day-out practice consists of representing people like you. You're a professional--now surround yourself with other professionals. Your business depends on it.
1. Learn from the Seller. Hopefully, during the negotiations to purchase the business, you included a clause that required the Seller to either work for you or be available for consulting during the initial period after closing. In my experience, the Seller's expertise is a sorely underused resource after the purchase. Most Sellers are willing to offer their advice--and in fact, expect to be able to offer their advice, if they're owner-financing the purchase. Too many purchasers come in with the idea that they're going to take it, with no experience, and turn it into a goldmine. Remember: it was a going concern before you bought the business, so learn first the way the seller did it. Then improve on it if necessary.
2. Incorporate. If you didn't prior to closing, take the time to incorporate your business into some sort of liability-protected entity, so that your personal assets are not at risk for the actions of the business or its employees.
3. Watch your cash flow and debt service. Another thing that I've seen cause new business purchasers to crash is their failure to watch their cash flow and their debt service. Often the individual who has grown a business and then sells is now financially successful. But that success often came after much initial sacrifice of time and enjoyment, and a period of lean years where the business owner had to forego some material comforts in order to grow the business. The buyer, however, sometimes just sees the end result (a wealthy business owner), and expects to walk right in, have a positive cashflow, and begin making a wealthy living immediately. Remember, you're probably paying more money out at the beginning (if nothing else, in loan payments) than what the Seller had been paying when he sold it to you. Those first few years should not be a time of purchasing lots of material items; they should be spent learning the business, growing the business and paying down the debt so that the business can one day may you more money. Don't buy every new item that you think your business might need that first year; don't get heavier in debt. Make sure the bills are paid, then grow the business, then you can one day profit on a more personal level.
4. Surround yourself with professionals. If you're taking over a business, you are in a sense a business professional. You're asking the public to come to you and purchase specific product or service which you claim to be more qualified than the average public to provide. If you want to help your success, therefore, you need to surround yourself with advisors and professionals who are similarly outstanding. At the very least, you need a good certified public accountant (CPA), and an attorney who specializes in business representation. Going to the guy down the street who "does books" might cost you a smaller fee, but a genuine accounting professional will save you money in the long run--I've seen it: my clients with professionally certified accountants come out better on their taxes and bookkeeping than with nonprofessionals. Similarly, the lawyer who goes to you church and did your daughter's traffic ticket may be a nice guy, and give you some good general advice, but you need to find someone whose day-in and day-out practice consists of representing people like you. You're a professional--now surround yourself with other professionals. Your business depends on it.
Senin, 09 Oktober 2006
Buying a business, Part 3--Don't buy a lemon
At this point, you've found a business you think you'd like to buy, and you think you know how you're going to pay for it. How can you "kick the tires" to make sure that beauty you're buying isn't a lemon? First and foremost, have a specialist attorney draw a contract to purchase. This isn't like purchasing a boat or a pull-behind trailer, where a handshake and change of title might be all it takes. It needs to be put in writing, and put in writing by an expert who is aware of all the issues that can come up! Here is a list of items which, at the very least, you need to consider putting into your offer to purchase.
1. A sufficient due diligence period. More than anything, you need time to research the business to verify it really is in fact what you thought you were going to buy. So in your offer, make sure that there is a sufficient period to examine the business--often called an "examination period" or "due diligence period." You need to build in enough time to accomplish the following (which is not an all-encompassing list):
--Getting your related paperwork (loans, corporate papers, etc.) set up.
--Having a CPA review the profit and loss statements, as well as tax filings and other papers, in order to ensure the business really was as profitable as the seller claims.
--Having a real estate attorney check the title of any real property being purchased, as well as having the property potentially surveyed and inspected for structural issues (if it is a building).
2. Non-competition agreements. If the real value to "Bob's Superette" was the high level of quality that came to be associated with "Bob," you don't want to by Bob's business and then have him set up "Bob's Quick-Mart" the next day down the street. You need to consider from the outfront whether a non-compete is desirable (it almost always is), and have the basic terms put into the contract at the beginning, so that at the closing, when a non-compete agreement is handed to the seller, he knew it was coming.
3. Representations. The contract needs to contain affirmative representations of the seller, so that the seller warrants the business in many different ways, such as:
--no mistatements have been made about the business;
--there exist no outstanding lawsuits or claims against the business;
--the business is not in violation of any laws;
--the seller has good title to al business property being sold;
--the business' real property is not in violation of any environmental or zoning laws.
4. Employment of the Seller. You need to consider whether you should have the seller agree to remain employed at your company for a period of time after sale, to help as a consultant and to ease the transition. If so, at least the basics need to be in the offer to purchase.
5. The right to terminate. Your contract should state that you have the right to terminate and receive back any earnest money you've given if you discover that the business, prior to purchase, is not what you'd thought it would be.
This ist isn't exclusive, but should get you thinking. If you need more help, contact me at wldeaton@vnet.net or 704-460-7398.
1. A sufficient due diligence period. More than anything, you need time to research the business to verify it really is in fact what you thought you were going to buy. So in your offer, make sure that there is a sufficient period to examine the business--often called an "examination period" or "due diligence period." You need to build in enough time to accomplish the following (which is not an all-encompassing list):
--Getting your related paperwork (loans, corporate papers, etc.) set up.
--Having a CPA review the profit and loss statements, as well as tax filings and other papers, in order to ensure the business really was as profitable as the seller claims.
--Having a real estate attorney check the title of any real property being purchased, as well as having the property potentially surveyed and inspected for structural issues (if it is a building).
2. Non-competition agreements. If the real value to "Bob's Superette" was the high level of quality that came to be associated with "Bob," you don't want to by Bob's business and then have him set up "Bob's Quick-Mart" the next day down the street. You need to consider from the outfront whether a non-compete is desirable (it almost always is), and have the basic terms put into the contract at the beginning, so that at the closing, when a non-compete agreement is handed to the seller, he knew it was coming.
3. Representations. The contract needs to contain affirmative representations of the seller, so that the seller warrants the business in many different ways, such as:
--no mistatements have been made about the business;
--there exist no outstanding lawsuits or claims against the business;
--the business is not in violation of any laws;
--the seller has good title to al business property being sold;
--the business' real property is not in violation of any environmental or zoning laws.
4. Employment of the Seller. You need to consider whether you should have the seller agree to remain employed at your company for a period of time after sale, to help as a consultant and to ease the transition. If so, at least the basics need to be in the offer to purchase.
5. The right to terminate. Your contract should state that you have the right to terminate and receive back any earnest money you've given if you discover that the business, prior to purchase, is not what you'd thought it would be.
This ist isn't exclusive, but should get you thinking. If you need more help, contact me at wldeaton@vnet.net or 704-460-7398.
Minggu, 08 Oktober 2006
Buying a Business Part 2--How can you Purchase a business?
Let's say you've found a business that, at first glance, looks like it could be a winner. In my next installment, I'll discuss ways in which you can help determine whether the business you want to buy really is a profitable business. But for now, there's a more pressing concern: How can you pay for this business you want to buy?
Simply put, there are only four ways to buy a businses:
1. Pay cash.
2. Obtain financing from an outside source.
3. Obtain funds through partners/shareholders.
4. Have the owner finance all or a portion of the purchase price.
Often, purchasing a business involves using a combination of the above sources. From a purchaser's standpoint, however, there are advantages and disadvantages to each method, depending on your own personal situation and the details of the business you want to buy.
Let's go through them one at a time:
1. Paying Cash. The main advantage to paying cash for a business is that you'll have an easier time reaching a positive cash flow. After you've bought the business, you'll have to pay taxes, salaries and wages, insurance, lease payments and other costs. Buy cutting out the necessity of a loan payment (and the interest that comes with it) you've reduced your overhead, and made it more likely that you can turn a profit. Often, by paying cash, you've got more bargaining power and can perhaps negotiate a lower purchase price.
There are, of course, some downsides to paying cash for a business. The first is a practical one: as with purchasing a home, many would-be buyers simply don't have the financial wherewithal to pay a lump sum for a going concern.
There are other disadvantages as well. Even if you do have the cash, tying it up in a business reduces your ability to invest your money in other endeavors. You are, as the cliche goes, putting your eggs in one basket. You're also risking a lot. What if your business fails? Then all the cash you've tied up could go with it.
Finally, there's one large disadvantage to paying cash that many would-be purchasers don't consider, but I'll discuss it further down below.
2. Obtain financing from an outside source (such as a bank).
As opposed to tying up a lot of your cash, a bank loan allows you to use less of your own capital, and more of other people's money, to get your business started.
Also, a bank loan, if granted, often comes at a better interest rate than, say, owner financing, discussed more below.
Finally, if you can obtain a bank loan for your purchase, usually some disinterested third party (the loan officer) is in effect giving you a second opinion on the business you're wanting to buy. You will need (as will be shown in further discussions) to do your own due diligence, but having an extra set of eyes look over the business and think it can work will at the very least reduce your chance of failure.
What are the disadvantages?
From a practical perspective, you'll still need to come up with some of you own money, because banks will usually not loan 100 percent of the purchase price on a business. Unlike a piece of real estate, which is dirt, bricks and mortar, a business is the value of something less tangible--the cash flow.
Also, of course, having to make loan payments of principal and interest will reduce your cash flow, making it harder to turn a profit.
Finally, if you borrow money from a bank and fail, you stand a greater risk of financial ruin. If, for example, you paid cash for a business and it failed, you'd at worst lose your cash you invested (though perhaps you'd get some of your money back simply by selling inventory and equipment). If, on the other hand, you borrowed the money and your business failed, you'd have to repay a bank note. If you could note, the bank could potentially repossess and foreclose on your business, and then go further and file a suit for any remaining unpaid money. More than once I've seen a wide-eyed would-be entrepeneur buy a business with bank money hoping to strike it rich, only to fail, and suffer foreclosure, financial ruin and bankruptcy.
3. Bring on partners or shareholders. One way to bypass some of the risks associated with borrowing money for a business venture is to raise your needed cash through partners or shareholders. Basically, each individual contributes money with the understanding that the money isn't a loan, and that there's risk involved, but also with the hope that the money will be a good investment through dividends, profits or perhaps increased equity and a sale in the future. This lowers the risk of a disastrous failure. If the business doesn't make it, at least you won't have put up all the cash (or be subject to foreclosure and repossession).
The down side, however, is that now you owe duties not just to yourself (or yourself and your lender), but to other owners of your business venture. Savvy investors will want a say in how your business is governed, and might even want a guaranteed dividend if the business turns a profit.
Furthermore, though you might have had the vision for the business's success, you've now got to get along with and cooperate with other investors whose visions may differ from your own.
4. Owner Financing. Under this scenario, the business seller finances all or a part of the purchase price by accepting payments, with interest, on the purchase. Some naive purchasers, ready to take the business to the moon, don't like the idea of a continued relationship with the seller after closing. However, I think this option can often provide the best chance of success. Why? Because the owner has a continued stake and interest in your business success!
In all of the other three situations, the owner would successfully be able to "cash out" and walk away from the business. To be sure, the owner couldn't intentionally deceive you about what you were buying, and a good lawyer might recommend that as part of the sale you make the seller sign certain agreements (a non-compete and an employment agreement) to help your success. But nothing will give the seller more incentive to help you succeed than the knowledge that if you fail, he doesn't get paid!
When I represent business sellers, I try if at all possible to discourage sellers from owner financing, because they will remain in essence a business partner for years to come, without the benefit of getting the profits. But from a purchaser's viewpoint, owner financing is very desirable.
Sometimes (though not always), the interest charged might be higher than a bank's rate. On the other hand, sellers often are willing to finance a larger percentage of the purchase than a bank, because the sellers have greater confidence in the business which they're selling.
If your seller has taken his cash and gone, you sometimes run the risk that he will not be around if you have questions, or that, absent an agreement to the contrary (or sometimes in spite of one) he will open up a competing business.
However, when the seller is receiving his sales price month by month, from the fruits of your business success, he has little incentive to not help you, and even less incentive to work against you or compete with you.
If you're looking at purchasing a business, before you sign a contract--or even a non-binding letter of intent--let a business attorney advise you. If you would like to meet with me, please contact me at 704-460-7398 or wldeaton@vnet.net .
Simply put, there are only four ways to buy a businses:
1. Pay cash.
2. Obtain financing from an outside source.
3. Obtain funds through partners/shareholders.
4. Have the owner finance all or a portion of the purchase price.
Often, purchasing a business involves using a combination of the above sources. From a purchaser's standpoint, however, there are advantages and disadvantages to each method, depending on your own personal situation and the details of the business you want to buy.
Let's go through them one at a time:
1. Paying Cash. The main advantage to paying cash for a business is that you'll have an easier time reaching a positive cash flow. After you've bought the business, you'll have to pay taxes, salaries and wages, insurance, lease payments and other costs. Buy cutting out the necessity of a loan payment (and the interest that comes with it) you've reduced your overhead, and made it more likely that you can turn a profit. Often, by paying cash, you've got more bargaining power and can perhaps negotiate a lower purchase price.
There are, of course, some downsides to paying cash for a business. The first is a practical one: as with purchasing a home, many would-be buyers simply don't have the financial wherewithal to pay a lump sum for a going concern.
There are other disadvantages as well. Even if you do have the cash, tying it up in a business reduces your ability to invest your money in other endeavors. You are, as the cliche goes, putting your eggs in one basket. You're also risking a lot. What if your business fails? Then all the cash you've tied up could go with it.
Finally, there's one large disadvantage to paying cash that many would-be purchasers don't consider, but I'll discuss it further down below.
2. Obtain financing from an outside source (such as a bank).
As opposed to tying up a lot of your cash, a bank loan allows you to use less of your own capital, and more of other people's money, to get your business started.
Also, a bank loan, if granted, often comes at a better interest rate than, say, owner financing, discussed more below.
Finally, if you can obtain a bank loan for your purchase, usually some disinterested third party (the loan officer) is in effect giving you a second opinion on the business you're wanting to buy. You will need (as will be shown in further discussions) to do your own due diligence, but having an extra set of eyes look over the business and think it can work will at the very least reduce your chance of failure.
What are the disadvantages?
From a practical perspective, you'll still need to come up with some of you own money, because banks will usually not loan 100 percent of the purchase price on a business. Unlike a piece of real estate, which is dirt, bricks and mortar, a business is the value of something less tangible--the cash flow.
Also, of course, having to make loan payments of principal and interest will reduce your cash flow, making it harder to turn a profit.
Finally, if you borrow money from a bank and fail, you stand a greater risk of financial ruin. If, for example, you paid cash for a business and it failed, you'd at worst lose your cash you invested (though perhaps you'd get some of your money back simply by selling inventory and equipment). If, on the other hand, you borrowed the money and your business failed, you'd have to repay a bank note. If you could note, the bank could potentially repossess and foreclose on your business, and then go further and file a suit for any remaining unpaid money. More than once I've seen a wide-eyed would-be entrepeneur buy a business with bank money hoping to strike it rich, only to fail, and suffer foreclosure, financial ruin and bankruptcy.
3. Bring on partners or shareholders. One way to bypass some of the risks associated with borrowing money for a business venture is to raise your needed cash through partners or shareholders. Basically, each individual contributes money with the understanding that the money isn't a loan, and that there's risk involved, but also with the hope that the money will be a good investment through dividends, profits or perhaps increased equity and a sale in the future. This lowers the risk of a disastrous failure. If the business doesn't make it, at least you won't have put up all the cash (or be subject to foreclosure and repossession).
The down side, however, is that now you owe duties not just to yourself (or yourself and your lender), but to other owners of your business venture. Savvy investors will want a say in how your business is governed, and might even want a guaranteed dividend if the business turns a profit.
Furthermore, though you might have had the vision for the business's success, you've now got to get along with and cooperate with other investors whose visions may differ from your own.
4. Owner Financing. Under this scenario, the business seller finances all or a part of the purchase price by accepting payments, with interest, on the purchase. Some naive purchasers, ready to take the business to the moon, don't like the idea of a continued relationship with the seller after closing. However, I think this option can often provide the best chance of success. Why? Because the owner has a continued stake and interest in your business success!
In all of the other three situations, the owner would successfully be able to "cash out" and walk away from the business. To be sure, the owner couldn't intentionally deceive you about what you were buying, and a good lawyer might recommend that as part of the sale you make the seller sign certain agreements (a non-compete and an employment agreement) to help your success. But nothing will give the seller more incentive to help you succeed than the knowledge that if you fail, he doesn't get paid!
When I represent business sellers, I try if at all possible to discourage sellers from owner financing, because they will remain in essence a business partner for years to come, without the benefit of getting the profits. But from a purchaser's viewpoint, owner financing is very desirable.
Sometimes (though not always), the interest charged might be higher than a bank's rate. On the other hand, sellers often are willing to finance a larger percentage of the purchase than a bank, because the sellers have greater confidence in the business which they're selling.
If your seller has taken his cash and gone, you sometimes run the risk that he will not be around if you have questions, or that, absent an agreement to the contrary (or sometimes in spite of one) he will open up a competing business.
However, when the seller is receiving his sales price month by month, from the fruits of your business success, he has little incentive to not help you, and even less incentive to work against you or compete with you.
If you're looking at purchasing a business, before you sign a contract--or even a non-binding letter of intent--let a business attorney advise you. If you would like to meet with me, please contact me at 704-460-7398 or wldeaton@vnet.net .
Minggu, 01 Oktober 2006
Buying a Business, Part One: Introduction.
If you've always fancied yourself an entrepeneur, at some time in your life you might want to purchase an existing business. Though traditionally, business owners created their own business, there are some valid reasons to purchase an already-created business (or an "ongoing concern"). Here are a few reasons:
1. An established name recognition (sometimes referred to as "goodwill") can provide immediate income and cashflow, which is usually not available when creating a business from scratch.
2. An established set of processes and employees which will hopefully make the business run more smoothly from the beginning.
3. A chance to reduce some of the risks of starting up a new business by purchasing something with a proven record of success.
On the other hand, purchasing an existing business comes with certain risks:
1. What if the business you were sold isn't what it was made out to be (i.e., what if you purchase a lemon?)?
2. What do you need to do to protect yourself once you buy the risks?
And most importantly:
3. Even if the business is good, how do you keep it good?
In the next few blogs, I'll be writing about things to consider if you purchase a business. I'll be answering questions such as:
How do you make sure you're buying what you really think you're buying?
How can you get the money to purchase the business?
How do you protect your rights as a business owner?
Stay tuned....
1. An established name recognition (sometimes referred to as "goodwill") can provide immediate income and cashflow, which is usually not available when creating a business from scratch.
2. An established set of processes and employees which will hopefully make the business run more smoothly from the beginning.
3. A chance to reduce some of the risks of starting up a new business by purchasing something with a proven record of success.
On the other hand, purchasing an existing business comes with certain risks:
1. What if the business you were sold isn't what it was made out to be (i.e., what if you purchase a lemon?)?
2. What do you need to do to protect yourself once you buy the risks?
And most importantly:
3. Even if the business is good, how do you keep it good?
In the next few blogs, I'll be writing about things to consider if you purchase a business. I'll be answering questions such as:
How do you make sure you're buying what you really think you're buying?
How can you get the money to purchase the business?
How do you protect your rights as a business owner?
Stay tuned....
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