On a weekly basis I represent individuals who are buying and selling small businesses. Occasionally, these clients employ the services of a business broker who, like a real estate broker, brokers the sale of the business, often representing the interests of both buyers and sellers in setting up a deal.
I've met some very knowledgeable brokers who have found niche specialties--such as one with whom I worked last month who only brokers the sale and purchase of pharmacies. However, just as with real estate brokers, there are very good ones, and then there are those who add little value to the deal other than putting a willing buyer with a willing seller.
The purpose of this post is not to discourage business buyers or sellers from using a business broker (after all, the broker can sometimes put you in touch with another party and connect you in ways you could not do yourself). However, there are at least two areas in which you need to be careful and protect yourself when using a business broker.
1. Do not let the business broker draw up your contract. Going back to the real estate analogy, in residential (and often commercial) real estate transactions, the broker often draws up the contract to be signed by the parties. However, these contracts have often been developed over time and adopted by your state's realtors association as well as the state bar association. These contracts have been used and revised enough that they can fairly well cover the exigencies involved with real estate.
A business sale, however, is far more complicated and multi-faceted, and does not lend itself well to a one-size-fits-all form contract. Furthermore, a business broker (unless he is a specialist broker, and often even not then) will not have sufficient legal understanding of all of the issues which are involved (and the laws governing them), to adequately protect the buyer and seller in a business sale contract.
Take, for example, a form contract I recently reviewed for a client in the construction industry. He'd agreed to sell his business for a price certain, and the buyer had agreed to purchase my client's building, within 60 days of the business sale, for an additional price. The parties had also agreed in theory--as is often the case--that my client would stay on as a consultant on an as-needed basis for a certain length of time. Pretty simple, isn't it? Perhaps, but the form contract drafted by the broker left some glaring holes:
1. First, though the broker was only responsible for listing the business (and thus receiving a commission on the business), he'd written the real estate sale into the form contract such that the broker would receive a 10 percent commission on the sale of the real estate as well--more than doubling what his commission would have been!
2. The purchaser wanted my client to sign a 100-mile radius non-compete for three years, which the broker had written into the form contract. However, such a wide-ranging non-compete would likely not be upheld in the state of North Carolina. The broker didn't know this.
3. The contract provided that my client would work as a consultant, but didn't specify his hours or his rate of pay.
In addition, the broker attempted to steer both parties to one attorney who would close the deal for both of them (more on that later). By the time my client came to me, the two parties were arguing over all the gaps which had been left in the contract but were now needing to be filled in.
A broker's form contract for the sale of the business is inadequate unless it is to operate merely as a non-binding letter of intent which just ensures the parties, in theory, have an agreement.
A well-written business purchase agreement is large, often contains lots of legalese, and will sometimes take quite a bit of negotiation. However, the beauty of it is that, once it is signed, the parties know exactly what the terms of the deal are, and now can move forward to closing with a clear understanding of what the seller is selling and the purchaser is purchasing. In the last two closings I handled, the actual "closing" of the business, in the attorney's office, took about 30 minutes each!
A good purchase agreement should be clear on the details, and, once signed, allow the purchaser to move forward with his due diligence and the seller to prepare for the conveyance of his business without having to haggle over details.
In the case above, the parties were able to sign an agreement quickly, but over the ensuing months of trying to fill in the details, have now become somewhat at odds with each other. This doesn't need to happen.
2. In a business purchase or sale, each side should have his own attorney. Often, brokers attempt to funnel both buyer and seller to a supposed "neutral" attorney, who simply draws up the conveyance papers based upon what was agreed upon in the form contract. Often, I've found, these forms state something like, "You should hire your own attorney to review these documents," but in practice, my clients tell me that the broker has discouraged them from doing this, saying one lawyer is enough.
Sure, it sounds self-serving, but in a business transaction each side should have his own counsel. In many real estate transactions, one lawyer can adequately (and, at least in North Carolina, legally) represent both sides. However, a business sale is much more complicated.
In the example above, the attorney recommended by the broker was good and was honest. In fact, he was so honest that he felt he should only represent the purchaser's interests and not try to represent both sides. My client came to me with proposed closing documents that included:
1. A consultation agreement requiring him to work at the purchaser's will for less than half of his normal hourly pay rate;
2. A property lease that allowed the purchaser to lease--with no obligation to purchase--the seller's real estate, notwithstanding the provisions of their form contract.
3. A non-compete that was so overbroad and vague, it would have prevented my client from getting work that was realistically not in competition with the purchaser's acquired business.
Furthermore, if both parties go to a supposedly "neutral" attorney, what is that attorney's obligation to point out (or even correct) legal flaws created in the original form contract? In this case, the hired attorney pointed out that the originally agreed-upon non-compete was overly broad and unenforceable in our state. But what if he had not? Would he have overreached against the seller? Or would he have been negligent and committed malpractice as to the purchaser, who, if he needed to enforce the non-compete, would have been unable to do so?
In sum, though business brokers are a valuable source of information when buying and selling your business, you'd be best served to hire counsel to advise you through the process.
If you need help or representation in buying or selling your business, you can set up a consultation with me by calling 704-735-0483.
Sabtu, 15 Maret 2008
Sabtu, 23 Februari 2008
The Family Business -- Finale
In the last few weeks, I've been discussing what to do with your family business, specifically focusing on the issues inherent to passing the business on to your family members. Today I'll go through a few of the remaining issues to consider.
1. (If you're selling) Should you sell for cash to your family or owner-finance? As a practical matter, your family will likely be unable to pay for the business unless you can owner finance. If you really want to cash out, you'll probably need to find an arms-length third party buyer.
2. Should you stay or should you go? One issue to consider is, when you convey your business to your family, should you request or offer to stay on in some limited capacity (e.g., as a part-time employee, a consultant, etc.)? When selling your family business to an outsider, the buyer usually should have a desire to keep you on, if for no other reason than to (1) help retain the business's good will and (2) create a smoother transition period.
Family businesses offer different dynamics, however; no matter how much you love your family, can y'all work together?
Anecdotally, from my past experiences, most parents do not stay on after conveying their business to their children. I suspect that, by the time they hand it over, they're ready to see if the business can sink or float on their children's efforts, and quite frankly know that they would drive themselves (and their children) crazy if they hang on and offer advice. A small exception to this, however, is that some parents I've seen stay on as "consultants" (usually, at most a nominal title) so that they're able to stay "employed" by the business and keep some type of needed medical insurance.
3. Anything else I should consider? Most likely, but your business is special, and it's unique to you. One of the joys of my practice is that I've learned the quirks and specialties of numerous small business, as well as the idiosyncracies of each of their individual owners. No two businesses--even within the same industry--are alike, so you need to make sure you're represented by competent tax and legal professionals. Preparing a succession plan for your business will only happen once in your lifetime--make sure it's treated importantly. If you would like to talk further about your specific situation, contact me at 704-735-0483, and set up an appointment.
1. (If you're selling) Should you sell for cash to your family or owner-finance? As a practical matter, your family will likely be unable to pay for the business unless you can owner finance. If you really want to cash out, you'll probably need to find an arms-length third party buyer.
2. Should you stay or should you go? One issue to consider is, when you convey your business to your family, should you request or offer to stay on in some limited capacity (e.g., as a part-time employee, a consultant, etc.)? When selling your family business to an outsider, the buyer usually should have a desire to keep you on, if for no other reason than to (1) help retain the business's good will and (2) create a smoother transition period.
Family businesses offer different dynamics, however; no matter how much you love your family, can y'all work together?
Anecdotally, from my past experiences, most parents do not stay on after conveying their business to their children. I suspect that, by the time they hand it over, they're ready to see if the business can sink or float on their children's efforts, and quite frankly know that they would drive themselves (and their children) crazy if they hang on and offer advice. A small exception to this, however, is that some parents I've seen stay on as "consultants" (usually, at most a nominal title) so that they're able to stay "employed" by the business and keep some type of needed medical insurance.
3. Anything else I should consider? Most likely, but your business is special, and it's unique to you. One of the joys of my practice is that I've learned the quirks and specialties of numerous small business, as well as the idiosyncracies of each of their individual owners. No two businesses--even within the same industry--are alike, so you need to make sure you're represented by competent tax and legal professionals. Preparing a succession plan for your business will only happen once in your lifetime--make sure it's treated importantly. If you would like to talk further about your specific situation, contact me at 704-735-0483, and set up an appointment.
Sabtu, 16 Februari 2008
The Family Business, Part 3: Give or Sell?
I've been blogging in the past few weeks about the "family business"--i.e., that small business set up by an entrepeneur, and nourished to fruition--and issues that any successful small business owner should consider when getting closer to retirement age.
First, I discussed the issue of whether the family members had the desire or even the ability to carry on the family business, because in my anecdotal experience, fewer than half of entrepeneurs have families who are both willing and able to carry on the family business.
But for this week, let's assume your family falls into that category. If a member of you family has both the desire--and the ability--to keep the family business running, what you should consider next? Based upon my experience with family businesses, I would suggest that you next consider whether you should sell your business to your family, or whether you should give your business to your family.
The average non-entrepeneur I'd hazard would be be a bit aghast at the idea of selling his business to his family. The average non-entrepeneur believes that his or her job should be to share his wealth with his children, to the extent possible. However, entrepeneurs--many of whom came by success with some difficulty--are more open to the idea. There are many non-legal reasons why perhaps you should consider the issue of sale versus gift (i.e., anything worked for is much sweeter, in an entrepeneur's mind), but I'm going to focus on legal and tax implications for considering this question. As always, there is no generally right or wrong answer--the issue needs to be carefully considered, with the help of both tax and legal counsel. Here are just three things to think about when considering this issue.
1. ESTATE PLANNING. One thing to consider is the tax consequences of your conveyance to your children (both income and estate). Chances are, the actual "book" value of your company (i.e. the value of its hard assets) is much less than you'd actually accept for it if you sold it on the open market. Perhaps, if you own a golf course, your land is worth $1 million, and your equipment is worth another $1 million. However, if your golf course is wildly successful, you might not be willing to sell it for less than $6 million (this value added to the hard value is what is commonly referred to as "good will"). Sometimes, tax lawyers or accountants will advise a sale of the company to children in order to reduce estate taxes.
Using the above example, even if you aren't willing to part with your golf course for less than $6 million, suppose your tax advisor tells you that--since you've never received an offer for your company and it has a book value of $2 million--you could legitimately sell it for $2 million to your children. You have effectively--and legally--gifted $4 million to your children without having to pay estate taxes.
Again using the above example, had you gifted your children the golf course with a book value of $2 million, that would not, at this time, create an estate tax consequence, but if you died leaving them much more property, you might very well create an estate tax burden for them (the subject of estate taxes is too lengthy and complicated to go into at depth; if you have any questions, please contact me and I will refer you to an excellent tax attorney).
Therefore, arms-length sales are sometimes an effective means by which to reduce your estate tax burden before you die.
2. REDUCING INCOME TAXES. Sometimes, a sale versus a gift can reduce the income taxes your family may pay on its property in the long run. This is especially important if you are considering, in the short term, a sale of the business to an outside investor. Using the golf course example, again, let's say that, when all the equipment and land were purchased, their book value was $300,000. If you were to sell the business right now for $6 million, you would pay taxes on your gain (Sales price of $6 million, minus original basis of $300,000 = taxes on $5.7 million). If, however, you could in good faith sell your family business to your family for its book value ($2 million, in my example), your family would pay taxes on the gain of $6 million minus $2 million, which would reduce its taxable basis. (Understand that I'm using simplistic examples: a tax advisor may tell you to hold your business until you die so that your children could get a "stepped up basis"--in this case, $6 million; so please understand there is no one formula that fits all).
3. SELLING YOUR BUSINESS TO FAMILY CAN PROVIDE YOU INCOME. Let's say that you family is willing and able to run you business, and your tax advisor believes that an arms-length book-value transaction is the best idea for your business. There's another good reason to sell your business versus giving it away: it can provide a steady stream of income. First, an assumption: almost no sale of family businesses to another family member involves an actual cash purchase. Instead, they typically involve selller financing. In addition to providing you tax savings, selling to your family can provide you a steady stream of income in the form of seller financing payments back to you on a promissory note. This is often important anyway, but if I am representing the spouse of a deceased entrepeneur, often this is even more important. Selling to the children, and owner-financing the sale, can provide to the seller a steady stream of income during the seller's golden years, while at the same time giving his or her children tax benefits and a leg up in this world.
If you have any questions, please call my office and set up an appointment at 704-735-0483.
First, I discussed the issue of whether the family members had the desire or even the ability to carry on the family business, because in my anecdotal experience, fewer than half of entrepeneurs have families who are both willing and able to carry on the family business.
But for this week, let's assume your family falls into that category. If a member of you family has both the desire--and the ability--to keep the family business running, what you should consider next? Based upon my experience with family businesses, I would suggest that you next consider whether you should sell your business to your family, or whether you should give your business to your family.
The average non-entrepeneur I'd hazard would be be a bit aghast at the idea of selling his business to his family. The average non-entrepeneur believes that his or her job should be to share his wealth with his children, to the extent possible. However, entrepeneurs--many of whom came by success with some difficulty--are more open to the idea. There are many non-legal reasons why perhaps you should consider the issue of sale versus gift (i.e., anything worked for is much sweeter, in an entrepeneur's mind), but I'm going to focus on legal and tax implications for considering this question. As always, there is no generally right or wrong answer--the issue needs to be carefully considered, with the help of both tax and legal counsel. Here are just three things to think about when considering this issue.
1. ESTATE PLANNING. One thing to consider is the tax consequences of your conveyance to your children (both income and estate). Chances are, the actual "book" value of your company (i.e. the value of its hard assets) is much less than you'd actually accept for it if you sold it on the open market. Perhaps, if you own a golf course, your land is worth $1 million, and your equipment is worth another $1 million. However, if your golf course is wildly successful, you might not be willing to sell it for less than $6 million (this value added to the hard value is what is commonly referred to as "good will"). Sometimes, tax lawyers or accountants will advise a sale of the company to children in order to reduce estate taxes.
Using the above example, even if you aren't willing to part with your golf course for less than $6 million, suppose your tax advisor tells you that--since you've never received an offer for your company and it has a book value of $2 million--you could legitimately sell it for $2 million to your children. You have effectively--and legally--gifted $4 million to your children without having to pay estate taxes.
Again using the above example, had you gifted your children the golf course with a book value of $2 million, that would not, at this time, create an estate tax consequence, but if you died leaving them much more property, you might very well create an estate tax burden for them (the subject of estate taxes is too lengthy and complicated to go into at depth; if you have any questions, please contact me and I will refer you to an excellent tax attorney).
Therefore, arms-length sales are sometimes an effective means by which to reduce your estate tax burden before you die.
2. REDUCING INCOME TAXES. Sometimes, a sale versus a gift can reduce the income taxes your family may pay on its property in the long run. This is especially important if you are considering, in the short term, a sale of the business to an outside investor. Using the golf course example, again, let's say that, when all the equipment and land were purchased, their book value was $300,000. If you were to sell the business right now for $6 million, you would pay taxes on your gain (Sales price of $6 million, minus original basis of $300,000 = taxes on $5.7 million). If, however, you could in good faith sell your family business to your family for its book value ($2 million, in my example), your family would pay taxes on the gain of $6 million minus $2 million, which would reduce its taxable basis. (Understand that I'm using simplistic examples: a tax advisor may tell you to hold your business until you die so that your children could get a "stepped up basis"--in this case, $6 million; so please understand there is no one formula that fits all).
3. SELLING YOUR BUSINESS TO FAMILY CAN PROVIDE YOU INCOME. Let's say that you family is willing and able to run you business, and your tax advisor believes that an arms-length book-value transaction is the best idea for your business. There's another good reason to sell your business versus giving it away: it can provide a steady stream of income. First, an assumption: almost no sale of family businesses to another family member involves an actual cash purchase. Instead, they typically involve selller financing. In addition to providing you tax savings, selling to your family can provide you a steady stream of income in the form of seller financing payments back to you on a promissory note. This is often important anyway, but if I am representing the spouse of a deceased entrepeneur, often this is even more important. Selling to the children, and owner-financing the sale, can provide to the seller a steady stream of income during the seller's golden years, while at the same time giving his or her children tax benefits and a leg up in this world.
If you have any questions, please call my office and set up an appointment at 704-735-0483.
Jumat, 08 Februari 2008
The Family Business, Part 2
When considering a succession plan for your family business, start with one of the most basic questions: who should succeed to your business in the event of your passing? A basic question, to be sure, but before you start planning your business plan wrap up, you need to determine whether it should descend to your family or not?
If you are like most entrepeneurs, you'll typically want your family to share in the successes of your business, but you may need to decide whether they should take on your business, or whether you should just pass to them the fruits of your business. When thinking about this, ask yourself these questions:
1. Does your family have the desire? First, ask yourself: does your family even want to continue your business? I've never done a formal survey, but anecdotally, I'd estimate that no more than half of the entrepeneurs I represent has families who even desire to take over the business. Often, the children have watched their parents sacrifice their private lives and time with family to build a successful business, and the children determine that they don't want to live their lives that way. I also suspect that for many of these children, who have enjoyed the financial fruits of their parents' labor, they subconsciously disconnect the labor necessary obtain those benefits. What do I mean? I've seen numerous children of successful entrepeneurs decide to work in lower-paying jobs--becoming teachers, social workers, and other idealistic professions. Some of these, I believe, decide to follow a calling such as this because in the back of their minds they know that they have their parents' financial resources to rely on.
If you're like most of my entrepeneur clients, your children have enjoyed the benefits of you owning the business: but do they want to own the business?
2. Does your family have the ability? Even if your family members do desire to take over the business, ask yourself this brutally honest question: do they have the ability to successfully continue (and even expand) the business you worked hard to create? Anecdotally, again, I've found that in more than half the cases, if a family member actually desires to continue the family business, that family member probably also has the ability. You've ingrained into him or her the work ethic necessary, and your family hopefully will share many of your same values that helped make your business a success. However, your family's ability is not a given. Just because you have a brilliant medical practice does not mean that your child can share that gift you have. Make an honest appraisal of your family members and your business. Does your business require mainly hard work and a certain ethic? If so, your child's desire to continue the business may see him through. Does it also contain certain talents or gifts that most people don't possess? Consider it more closely, then.
3. What do you do when there are multiple family members? I've been writing this article almost as if you only have one child, but the average family, of course, will have two or three children. This could bring multiple complications--all of which can be overcome with planning, but which need to be considered. I've seen all of the following issues:
--A brother and sister both want to run the family business, but don't get along.
--There are three brothers, two already in the family business, but one who is much younger and a minor.
--One child has always been in the business, and the other has never had anything to do with it, and the parent is trying to figure up how to divide his estate fairly between both of them.
None of the issues I have mentioned should keep you from making a succession plan with your family business. To the contrary, they are matters to be considered, and, with good planning from an attorney, an accountant, and perhaps even an investment advisor, they can all be taken into consideration when creating a successful plan regarding your business.
If you are like most entrepeneurs, you'll typically want your family to share in the successes of your business, but you may need to decide whether they should take on your business, or whether you should just pass to them the fruits of your business. When thinking about this, ask yourself these questions:
1. Does your family have the desire? First, ask yourself: does your family even want to continue your business? I've never done a formal survey, but anecdotally, I'd estimate that no more than half of the entrepeneurs I represent has families who even desire to take over the business. Often, the children have watched their parents sacrifice their private lives and time with family to build a successful business, and the children determine that they don't want to live their lives that way. I also suspect that for many of these children, who have enjoyed the financial fruits of their parents' labor, they subconsciously disconnect the labor necessary obtain those benefits. What do I mean? I've seen numerous children of successful entrepeneurs decide to work in lower-paying jobs--becoming teachers, social workers, and other idealistic professions. Some of these, I believe, decide to follow a calling such as this because in the back of their minds they know that they have their parents' financial resources to rely on.
If you're like most of my entrepeneur clients, your children have enjoyed the benefits of you owning the business: but do they want to own the business?
2. Does your family have the ability? Even if your family members do desire to take over the business, ask yourself this brutally honest question: do they have the ability to successfully continue (and even expand) the business you worked hard to create? Anecdotally, again, I've found that in more than half the cases, if a family member actually desires to continue the family business, that family member probably also has the ability. You've ingrained into him or her the work ethic necessary, and your family hopefully will share many of your same values that helped make your business a success. However, your family's ability is not a given. Just because you have a brilliant medical practice does not mean that your child can share that gift you have. Make an honest appraisal of your family members and your business. Does your business require mainly hard work and a certain ethic? If so, your child's desire to continue the business may see him through. Does it also contain certain talents or gifts that most people don't possess? Consider it more closely, then.
3. What do you do when there are multiple family members? I've been writing this article almost as if you only have one child, but the average family, of course, will have two or three children. This could bring multiple complications--all of which can be overcome with planning, but which need to be considered. I've seen all of the following issues:
--A brother and sister both want to run the family business, but don't get along.
--There are three brothers, two already in the family business, but one who is much younger and a minor.
--One child has always been in the business, and the other has never had anything to do with it, and the parent is trying to figure up how to divide his estate fairly between both of them.
None of the issues I have mentioned should keep you from making a succession plan with your family business. To the contrary, they are matters to be considered, and, with good planning from an attorney, an accountant, and perhaps even an investment advisor, they can all be taken into consideration when creating a successful plan regarding your business.
Minggu, 13 Januari 2008
Passing on the Family Business
Passing along a family business may seem like a pretty simple process. The entrepeneur builds a successful business, makes a solid living, then passes it along to his or her children. Easy, right? Unfortunately, those entrepeneurs fortunate enough to have created a successful business have found, when the time actually comes for them to pass the torch, that things aren't so easy. If you own a successful business, here are some issues that may come your way. In future blogs, I'll go through these different issues and describe how they can be overcome. But for now, give them some thought well before the time comes for you to pass down your business.
1. Do your children want the business? The first, and most basic question to ask yourself is, do your children really want the business? Do they have a desire to carry on the family business; do they have the same passion (and ability) to do what you are doing; and are they currently involved in your business? Or, have your children enjoyed the benefits of your business (e.g., annual gifts of cash, a company job at an inflated rate, a higher standard of living than their career would otherwise allow), but don't seem to have an interest in doing what you did to provide those benefits?
If your children are already adults (and you're considering retiring), chances are you probably already know this answer. But knowing the answer, and making future plans for yourself and your family, are two different things. If your family is not interested in joining, working at, or perpetuating your successful family business, then it's time to start thinking about your own future. You may want to consider selling the business while you are still healthy, and while the business has goodwill. Because if you have no one to succeed you, and you hold on to your business until you die, your business' value will wither quickly while your children try to orchestrate a quick liquidation.
If, on the other hand, your children are interested in taking over and continuing your business, you need to consider how best to accomplish such a handover. The way you accomplish this may have profound consequences, affecting your own standard of living during retirement; the net worth of your children; and estate taxes that may be suffered by your estate after you die.
2. Give or sell the business? Assuming one or more of your children do want to own the business, how should you convey it to them? Should it be a gift? Or should you sell it to them? While many people, at first blush, might be aghast at the idea of making their children pay them money, the decision on how to handle this shouldn't be made without the collective advice of tax and legal professionals.
3. Should you keep any control? When you convey the business to your children, should you walk away? Or should you retain the right to make business decisions even after you no longer own it? The decision you make should depend on the particular circumstances of the family members who will be taking over your business.
4. If you sell the business, should you take cash or owner finance? A cash payout will provide you hard, liquid assets that will allow you to live out your retirement goals. Owner financing, however, also has its own benefits--both for you, and the family members buying from you.
If you live in North Carolina, and have questions about a family business, feel free to contact my office to set up an appointment:
wldeaton@bellsouth.net
704-735-0483.
1. Do your children want the business? The first, and most basic question to ask yourself is, do your children really want the business? Do they have a desire to carry on the family business; do they have the same passion (and ability) to do what you are doing; and are they currently involved in your business? Or, have your children enjoyed the benefits of your business (e.g., annual gifts of cash, a company job at an inflated rate, a higher standard of living than their career would otherwise allow), but don't seem to have an interest in doing what you did to provide those benefits?
If your children are already adults (and you're considering retiring), chances are you probably already know this answer. But knowing the answer, and making future plans for yourself and your family, are two different things. If your family is not interested in joining, working at, or perpetuating your successful family business, then it's time to start thinking about your own future. You may want to consider selling the business while you are still healthy, and while the business has goodwill. Because if you have no one to succeed you, and you hold on to your business until you die, your business' value will wither quickly while your children try to orchestrate a quick liquidation.
If, on the other hand, your children are interested in taking over and continuing your business, you need to consider how best to accomplish such a handover. The way you accomplish this may have profound consequences, affecting your own standard of living during retirement; the net worth of your children; and estate taxes that may be suffered by your estate after you die.
2. Give or sell the business? Assuming one or more of your children do want to own the business, how should you convey it to them? Should it be a gift? Or should you sell it to them? While many people, at first blush, might be aghast at the idea of making their children pay them money, the decision on how to handle this shouldn't be made without the collective advice of tax and legal professionals.
3. Should you keep any control? When you convey the business to your children, should you walk away? Or should you retain the right to make business decisions even after you no longer own it? The decision you make should depend on the particular circumstances of the family members who will be taking over your business.
4. If you sell the business, should you take cash or owner finance? A cash payout will provide you hard, liquid assets that will allow you to live out your retirement goals. Owner financing, however, also has its own benefits--both for you, and the family members buying from you.
If you live in North Carolina, and have questions about a family business, feel free to contact my office to set up an appointment:
wldeaton@bellsouth.net
704-735-0483.
Sabtu, 03 November 2007
Limited Liability Companies
In a spring post (http://thebusinesslawblog.blogspot.com/2007/04/limited-liability-companies-new-case.html) I wrote about a new case further strengthening the protection offered to limited liability companies. During that time, I was litigating a case in which a home purchaser had paid a large amount of money down to a home builder llc to build a home, only to have it fold. She sued not only the limited liability company, but also the three individual members, one of whom I represented. My client, the only financial strong member of the three, was of course an attractive target for the plaintiff. However, my client was also the least culpable. He'd never met the plaintiff, and actually was nothing more than the cliche' "silent partner"--somebody who put up his money and creditworthiness to allow the two primary members to get loans to build homes.
I'd felt comfortable going in to the case that the law seemed to be in our favor, and during its pendency, two new cases came down from the Court of Appeals further buttressing our arguments. I scheduled a motion for summary judgment (which, for those not in the legal field, is basically a motion to dismiss the Plaintiff's complaint) for mid-November. I wrote a letter to the Plaintiff's attorney giving them one more chance to dismiss their case against my client voluntarily. Normally, in such a case the Plaintiff's attorney, even if they think their case is week, will at least try to fight. However, the Plaintiff had her own risks--we'd filed a counterclaim for attorney's fees, and one North Carolina case had ruled that when a plaintiff improperly named an LLC's member in a lawsuit, the plaintiff may be liable for attorney's fees. The attorney, who was diligent for his client, nonetheless decided the right thing was to dismiss his case against my client. Therefore, though I never got a judge's ruling to reinforce my belief about LLCs, I believe the Plaintiff's dismissal bears out my theory.
I'd felt comfortable going in to the case that the law seemed to be in our favor, and during its pendency, two new cases came down from the Court of Appeals further buttressing our arguments. I scheduled a motion for summary judgment (which, for those not in the legal field, is basically a motion to dismiss the Plaintiff's complaint) for mid-November. I wrote a letter to the Plaintiff's attorney giving them one more chance to dismiss their case against my client voluntarily. Normally, in such a case the Plaintiff's attorney, even if they think their case is week, will at least try to fight. However, the Plaintiff had her own risks--we'd filed a counterclaim for attorney's fees, and one North Carolina case had ruled that when a plaintiff improperly named an LLC's member in a lawsuit, the plaintiff may be liable for attorney's fees. The attorney, who was diligent for his client, nonetheless decided the right thing was to dismiss his case against my client. Therefore, though I never got a judge's ruling to reinforce my belief about LLCs, I believe the Plaintiff's dismissal bears out my theory.
Sabtu, 20 Oktober 2007
Real Estate Contracts -- Conclusion
A while back on this blog I wrote about real estate contracts (http://thebusinesslawblog.blogspot.com/2006_12_01_archive.html), and described a lawsuit which I was defending on behalf of a client. We tried the case out last week and, after successfully getting the judge to exclude most of the Plaintiff's evidence, we ended up settling the case for a nominal value (about one percent of what the Plaintiff was asking).
Now that the case is over, I can look back and give some advice to prospective buyers and sellers who find themselves in a contract dispute.
1. To the Buyer: it's rarely worth it to sue over a lost sale. In North Carolina, you've got two remedies of a seller breaches his contract to sell: either get a court order forcing him to sell the proprety to you, or ask for damages.
As for specific performance (the court order), this is great if the Court will do it, but it is what is called an equitable remedy, and the Court, in its discretion,
may not order the seller to convey the property to you. Also, to get this remedy, you have to take certain quick legal steps to tie up the property (called a Lis Pendens) before the seller sells it to someone else. In my case, the Plaintiff attempted to do this, but my clients sold the property too quickly. Therefore, that just left a remedy of damages.
As for damages, they are figured by subtracting the price you would have paid for the property (the contract price) from the actual market price. In other words, you have to argue that you were buying the property for less than what it was really worth. If, however, the seller immediately resells the property (and actually this is often the reason why the seller refuses to sell it to the original buyer), then a buyer will be able to show damages in the amount of the difference between what the property sold for and what the buyer had contracted to buy it for.
In my case, however, the buyer, in addition, attempted to sue for lost profits. My clients sold the property for only $15,000 more than the original price with the Plaintiff. But the Plaintiff claimed he thought it was "feasible" that he could have subdivided it and made $700,000 profit from the sales. The judge felt that testimony was speculative, and would not allow it into evidence.
2. Sellers, don't communicate in writing with the buyer. The Plaintiff/Buyer in my case based his hopes, in large part, on the fact that he'd carried on a string of email conversations with my client long after the closing time had passed. He argued that these conversations (in which closing dates were set and re-set) showed that my clients had waived the closing deadline. I was able to get this evidence excluded (without which the Plaintiff didn't have much of a case), but on appeal (or if the Plaintiff had dismissed his case and re-filed again), I don't know if that ruling would have stood. In any event, had my client not communicated in writing with the Plaintiff, this case probably would never have been filed.
3. Get an attorney to draw the contract. Self-serving, I know. But had I drawn the contract for my clients, I would have put in numerous provisions that probably would have kept this case from ever getting started, such as:
a. A time is of the essence provision.
b. A provision that any extensions of time must require additional earnest money.
c. A larger earnest money deposit.
4. Speaking of earnest money... One final piece of advice: if you're selling a serious piece of property, make sure you have a serious buyer by requiring a serious earnest money deposit. I'm convinced that the Plaintiff/Buyer was someone who was financially unsound and was attempting to "flip" the property with almost no money down. My clients only requested a $1,000 earnest money deposit--on a purchase of $389,000! The company that ultimately bought their property put down $25,000 earnest money, and bought the property in less than 14 days. Had my clients forced the Plaintiff/Buyer to come up with serious money (at least $10,000), he probably would not have been able to, and would have simply walked away, looking for another easy mark.
Now that the case is over, I can look back and give some advice to prospective buyers and sellers who find themselves in a contract dispute.
1. To the Buyer: it's rarely worth it to sue over a lost sale. In North Carolina, you've got two remedies of a seller breaches his contract to sell: either get a court order forcing him to sell the proprety to you, or ask for damages.
As for specific performance (the court order), this is great if the Court will do it, but it is what is called an equitable remedy, and the Court, in its discretion,
may not order the seller to convey the property to you. Also, to get this remedy, you have to take certain quick legal steps to tie up the property (called a Lis Pendens) before the seller sells it to someone else. In my case, the Plaintiff attempted to do this, but my clients sold the property too quickly. Therefore, that just left a remedy of damages.
As for damages, they are figured by subtracting the price you would have paid for the property (the contract price) from the actual market price. In other words, you have to argue that you were buying the property for less than what it was really worth. If, however, the seller immediately resells the property (and actually this is often the reason why the seller refuses to sell it to the original buyer), then a buyer will be able to show damages in the amount of the difference between what the property sold for and what the buyer had contracted to buy it for.
In my case, however, the buyer, in addition, attempted to sue for lost profits. My clients sold the property for only $15,000 more than the original price with the Plaintiff. But the Plaintiff claimed he thought it was "feasible" that he could have subdivided it and made $700,000 profit from the sales. The judge felt that testimony was speculative, and would not allow it into evidence.
2. Sellers, don't communicate in writing with the buyer. The Plaintiff/Buyer in my case based his hopes, in large part, on the fact that he'd carried on a string of email conversations with my client long after the closing time had passed. He argued that these conversations (in which closing dates were set and re-set) showed that my clients had waived the closing deadline. I was able to get this evidence excluded (without which the Plaintiff didn't have much of a case), but on appeal (or if the Plaintiff had dismissed his case and re-filed again), I don't know if that ruling would have stood. In any event, had my client not communicated in writing with the Plaintiff, this case probably would never have been filed.
3. Get an attorney to draw the contract. Self-serving, I know. But had I drawn the contract for my clients, I would have put in numerous provisions that probably would have kept this case from ever getting started, such as:
a. A time is of the essence provision.
b. A provision that any extensions of time must require additional earnest money.
c. A larger earnest money deposit.
4. Speaking of earnest money... One final piece of advice: if you're selling a serious piece of property, make sure you have a serious buyer by requiring a serious earnest money deposit. I'm convinced that the Plaintiff/Buyer was someone who was financially unsound and was attempting to "flip" the property with almost no money down. My clients only requested a $1,000 earnest money deposit--on a purchase of $389,000! The company that ultimately bought their property put down $25,000 earnest money, and bought the property in less than 14 days. Had my clients forced the Plaintiff/Buyer to come up with serious money (at least $10,000), he probably would not have been able to, and would have simply walked away, looking for another easy mark.
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