Buying a Business, Essential Qualities: Commitment

September 9, 2010

This blog is part of a series of blogs on buying a business. We are first exploring the qualities you need when deciding to whether or not you are should buy a business. I encourage you to go back and read the previous blogs.

This week we are discussing access to commitment.

Commitment. The one indispensable characteristic of a successful Buyer is commitment. By this I mean that although a Buyer will not succeed simply because they ARE committed to the business; it is certain that the business will fail if they are not.  Business commitment takes many forms. Business ownership can take a toll on the Buyer’s social and family life in addition to their financial situation. Accordingly, a Buyer, and to some extent their family and friends, must be willing to make some short term sacrifices to reap long term benefits. Among the commitments successful Buyers make is to be “life long learners.” There are many good business books and courses. Four books that we strongly recommend are: “Getting to Yes” by Roger Fisher and William Ury; “Guerilla Marketing” by Jay Conrad Levinson; “From Good to Great” by James Collins and “E-Myth Revisited” by Michael Gerber.

If you would like assistance in regards to the purchase/sale of a business, please contact me at http://www.kreamerlaw.com.

Buying a Business: Access to Expertise

July 21, 2010

This blog is part of a series of blogs on buying a business. We are first exploring the qualities you need when deciding to whether or not you are should buy a business. I encourage you to go back and read the previous blogs.

This week we are discussing access to expertise.

Access to Expertise. Most successful transactions require the Buyer to assemble (and pay the costs of) a “team” of players: bankers, accountants and lawyers all play critical roles in the transaction. Business brokers can also be an extremely valuable asset. Although many Buyers seek to hold down their acquisition costs by trying to fill some or all these functions themselves, in case after case, the legal fees to “fix” a transaction (if and when that is even possible) ALWAYS costs more than assembling/paying a team to do it right the first time. Depending on the size and complexity of the transaction Buyers should anticipate that acquisition costs/professional fees will be about 10% of the purchase price of the business. When selecting your professionals, you should carefully evaluate their experience and ability to get things done.

Bottom line: having a team of people helping you buy a business will help you prevent mistakes that will cost you time and money.

If you would like assistance in regards to the purchase/sale of a business, please contact me at http://www.kreamerlaw.com.

Buying a Business: Essential Qualities, Expansion of Products and Services

June 9, 2010

In the 30 +/- years of since I began practicing law, I have worked on hundreds of sales and purchases of businesses. This is the second chapter in a series of blogs wherein I will share my observations and experiences.  I encourage you to go back and read this blog series from the beginning “insert date”.

The second reason a strategic buyer will purchase a business is to provide expansion of products/services.

Expansion of products/services. Most business purchases by Buyers seeking to expand their product line/services are successful. These types of transactions are typified by Buyers with related industry experience. Examples of this type of acquisition could include:

An insurance agency who focuses on sales of life insurance buying an agency with expertise in property and casualty insurance.

A car dealership which buys another car dealership which represents a different manufacturer.

Sellers in these types of transactions are often motivated by personal reasons such as retirement, health issues, or unrelated indebtedness. It is not uncommon in these types of transactions for the Seller (or a key employee of Seller) to remain involved in the operation of the business after its acquisition. In the examples above the Seller might run a “division” of the Buyer’s business which engages in the Seller’s business. In these types of transactions, it is very important that as part of the transactions the Seller agrees that he/it will not compete with the Buyer for a period of time (normally 2-5 years) after the Seller is no longer involved with the business.

Next  I will be covering Entry into the Market.

Buying a Business: Essential Qualities

May 4, 2010

In the 30 +/- years of since I began practicing law, I have worked on hundreds of sales and purchases of businesses. This is the first in a series of blogs wherein I will share my observations and experiences.

There are several “qualities” which are common to Buyers in successful sales/purchases of businesses.  These qualities are:  industry knowledge, personal operational knowledge, capital, access to expertise, and commitment In the next few weeks I will be exploring these qualities with you.  Before you consider buying any business, you should ask yourself if you have these qualities:

This week we are examining industrial knowledge and Personal knowledge.

Industry knowledge. Industry knowledge includes knowing the “market” (both customers and competition), as well as “industry standard” revenue/costs/expense ratios for the business. This information can sometimes be obtained from associations which are comprised of similar businesses.

Personal operational  knowledge. Unlike “old dogs” it IS possible for Buyers to learn “new tricks”. HOWEVER, in most successful transactions the Buyer himself/herself has had PERSONAL experience in the operational side of a business similar to that which they are considering buying. Often one of the terms of a transaction is that the Seller agrees to “train” the Buyer. This approach can be successful if the business operation is not very complicated, or if the business has revenues of less than $250,000. Our experience is that in most (but not all) cases the teacher/pupil model does not translate well to Sellers and Buyers.

A hybrid between buying a business and starting one “from scratch” is the purchase of a franchise. At its core, a franchise is a tested business “model”. Their terms and conditions vary among industries and among companies within an industry, but most offer some level of industry/market knowledge and training of franchisees. Obtaining a franchise can reduce the “learning curve” but it is not a guaranty of success.

If you would like assistance in regards to the purchase/sale of a business, please contact me at http://www.kreamerlaw.com.

BE PREPARED TO CUT YOUR LEGAL FEES WHEN DOING ESTATE PLANNING

April 5, 2010

The client who comes prepared for meetings with their attorney save significant amounts on their legal fees. This is because the attorney can work much more efficiently to address your needs.

The nature of the preparation is dependent on the type of matter involved, but, at the very least, you should consider writing out a list of questions and/or issues to be discussed. This will help you “focus” the discussion, stay on track, and avoid forgetting something which needs attention.

If we were asked to assist you in the preparation of your estate planning documents (Will, Power of Attorney for Health Care, and Power of Attorney (Financial), we would urge you to consider the following:

  • Who will be Executor?
    • You can list more than one in succession
    • Often this is a spouse, family member or a bank
  • Who will handle funds of any beneficiaries who are minors-we ALWAYS RECOMMEND that this is a bank rather than an individual?
    • This avoids family disharmony in the event of disagreements
    • They are bonded, and in the (unforeseeable) event of a lawsuit have assets which can be reached
    • Professional management and record keeping
    • Names, addresses and social security numbers of all “owners”
  • Who will raise your children if your spouse does not survive you?
  • Who will make decisions for you on health care matters (including end of life issues) if you cannot make them for yourself, Often this is your spouse (as the primary holder) and then a family member (as successor)?
  • Who will make decisions for you on financial matters, if you cannot make them for yourself, Often this is your spouse (as the primary holder) and then a family member (as successor)?
  • How will your estate be distributed?
    • “Special” bequests (like a family memento) or a gift to non-family members.
    • A charitable bequest.
    • Most often, any remaining assets (after payment of debts, taxes and costs) are given to a surviving spouse (either outright or in trust for the spouse), but if spouse does not survive you, all to a trust in favor of your children (with income to be used for health, maintenance and education) until they reach certain ages (at which time the principal of the trust is distributed).

Although there are several “do your own will” software packages available, it turns out that estate planning is NOT “one size fits all”. Such software could produce documents which either (or both) do not reflect your wishes, or are not in compliance with the applicable statutes. Using a “canned” software package to prepare your estate planning documents means you are acting as your own lawyer; everyone knows the punch line to THAT story.

The adage “time is money” is particularly true when working with your attorney. By spending some of your time preparing for your meeting with your attorney, you could save a substantial amount of money.

BE PREPARED: CUT YOUR LEGAL FEES WHEN STARTING A BUSINESS

March 1, 2010

The client who comes prepared for meetings with their attorney save significant amounts on their legal fees. This is because the attorney can work much more efficiently to address your needs.

The nature of the preparation is dependent on the type of matter involved, but, at the very least, you should consider writing out a list of questions and/or issues to be discussed. This will help you “focus” the discussion, stay on track, and avoid forgetting something which needs attention.

If we were asked to assist you in the formation of your business, we would urge you to consider the following:

  1. The business name
  2. Principal address of the business
  3. Names, addresses and social security numbers of all “owners”
  4. How much (as a percentage of the total equity) each owner will own
  5. What each owner will contribute to the business in return for their ownership
  6. Names, addresses, and titles of officers
  7. If the business will be leasing space, a copy of the lease
  8. If the business will have employees how many and when the first payroll will be paid (you are considered an employee of a corporation of which you are an owner; you are NOT an employee of a limited liability company in which you are an owner)

We strongly recommend, but do not require, that you prepare a business plan. The biggest value a written business plan is that it will cause you to think through the business on a practical logistical level. A “completed” business plan should include:

  1. A marketing plan
  2. A projection of revenue and expense, and
  3. An analysis of the Strengths, Weaknesses, Opportunities and Threats (a S.W.O.T. analysis) which you may confront in your business.

Although there are several business plan software packages available, we HIGHLY recommend you work with a nearby Small Business Development Center (“SBDC”), which is a governmental entity charged with assisting entrepreneurs.

The adage “time is money” is particularly true when working with your attorney. By spending some of your time preparing for your meeting with your attorney, you could save a substantial amount of money.

Durable Power of Attorney for Health Care

February 1, 2010

You’ve been become ill or been injured. You’re unconscious, or, you are simply in so much pain that you can’t speak; or you are no longer “competent”. A medical decision needs to be made. NOW.

Who is going to make that decision, since you either can’t make the decision, or, you can’t communicate what you want done?

The best, and easiest, solution is for you to designate (in a notarized writing) someone to make a “health care decision[1]” for you (if you cannot make one for yourself) BEFORE the crisis occurs. This document is commonly called a Durable Power of Attorney for Health Care[2] (or a Health Care/Medical Directive).

The decision maker specified your Durable Power of Attorney for Health Care has decision making powers are as broad or as narrow as you specify. Generally, the decision maker will be authorized to determine whether “life sustaining procedures[3]” should be employed and when it’s time to let you go. HOWEVER, the decision maker cannot withhold any treatment which is necessary for your comfort or freedom from pain.

The decision maker is required to follow your wishes on these matters. Accordingly, selection of the individual for this responsibility is of critical importance. You need to choose someone who knows your wishes and is strong enough to carry them out. Although any mentally competent person of legal age (including a close friend) can serve in this role, often the decision maker is your spouse, or a family member. You should consider choosing one (or more) alternate decision maker(s) who can fill this need in the event that a previously listed individual cannot, or will not, serve.

A Durable Power of Attorney for Health Care is different from a “Living Will[4]” in several very important respects:

Living Will Durable Power of Attorney for Health Care
Who is the Designee? Attending physician[5] Any competent person of legal age whom you trust to make this decision[6]
When does it take operative effect? Only when you are in a terminal condition and you  cannot make treatment decisions[7] Only when your attending physician determines that you are unable to make health care decisions on your own behalf[8]
What does it authorize? Only withholding or withdrawing life sustaining procedures[9] Consent, refusal of consent or withdrawal of any care, treatment, service or procedure (including, but not limited to, life sustaining procedures) to maintain, diagnose or treat your physical or mental condition[10]

If you are unconscious and in a “terminal condition[11]” but you have NOT prepared a Durable Power of Attorney for Health Care, decisions relative to the withdrawal of life sustaining procedures may made (in conjunction with your attending physician) by (in order):

  • A legally appointed Guardian (with court approval for the withdrawal);
  • Your spouse;
  • A majority vote by those of your children who are of “legal” age;
  • Your parents;
  • An adult sibling[12]

Again, if these are not the individuals you would prefer to make these decisions, or if they are not in the decision making order which you would prefer, it is necessary for you to designate an individual to act on your behalf in a Durable Power of Attorney.

Preparing or reviewing a Durable Power of Attorney for Health Care is not complicated, but it may be a tremendous benefit to your family in a time of tremendous stress. A Durable Power of Attorney for Health Care, allows you to control who will make decisions for you, and can save you, and your loved ones, from the heartache suffered by ALL of the parties in the Terri Schiavo situation.


[1] Iowa Code (2009) §144B.1(3) and (4).

[2] Iowa Code (2009) §144B

[3] Iowa Code (2009) §144A.2(8)

[4] Iowa Code (2009) §144A.3

[5] Iowa Code (2009) §144A.3(5)

[6] Iowa Code (2009) §144B.3(2)

[7] Iowa Code (2009) §144A.3

[8] Iowa Code (2009) §144B.6(1). This is inability” may be due to illness, injury or mental incompetence

[9] Iowa Code (2009) §144A.3

[10]

[11] Iowa Code (2009) §144A.2(13)

[12] Iowa Code (2009) §144A.7(1) Note: these provisions are limited to only take effect if you are in a “terminal condition”, and only relate to withdrawal of life sustaining procedures.

Will You Be Personally Liable For Your Actions of Your Employees?

December 2, 2009

Are you personally liable for damages arising from the actions (whether negligent or intentional) of your employees? If one of your employees, during normal business hours, causes a serious accident while driving a company vehicle, are you (personally) liable for the damages/injuries? Are you personally liable for your business’ accounts payable to vendors, or loans from creditors?

The answers may depend, on your company’s books and records.

In virtually every state, the law provides that if the owners of the company do not follow general business protocols creditors (including people who file lawsuits) can “pierce the veil” and attribute personal liability to the owners of the company.

Your best defense to a lawsuit seeking to “pierce the veil” is to maintain good company records. This includes, but is not limited to:

  • The existence of a company Minute Book. This is the repository of the company’s records. It normally will contain not only minutes of meetings[1], but also stock[2] or membership unit ledgers[3].
  • The existence of Bylaws[4] or an Operating Agreement[5]. These documents normally address issues of business governance (including, but not limited to: who votes, the issues on which votes are taken, and how votes are counted), as well as tax issues. These documents may address relationships among the owners (buy/sell; rights of first refusal, transfers on death), but these issues are often addressed in separate documents.
  • The issuance of Stock or Unit certificates. These are tangible evidence of business ownership. Most commonly the number of shares/units is less important than the percentage of ownership of the total outstanding shares/units. Not all shares or units need be exactly alike. For instance: there could be non-voting owners who share in the economic returns, but have no “voice” in the management of the company (“silent partners”); or certain owners may have a right to a preferential return (either as to income or as to liquidation, or both).
  • Minutes of shareholder/member and director/manager meetings. Anything “material” (i.e. important and/or significant) should be documented in minutes. Determination of what is “material” will vary from business to business. Elections of directors/managers should be documented (particularly if there is a change of directors/managers). Meetings need not be held in person, or face to face. Telephonic, and/or e-meetings are becoming increasingly common. Resolutions affirming, authorizing, or directing, an action can be adopted without a meeting is the resolutions are contained in a signed document.
  • Filing of all applicable tax forms on a timely basis.
  • Absence of co-mingling of funds of the business and the owners; absence of payments of the owner’s personal expenses with company funds.

In short: if those who own and manage the business ignore business formalities, the law will ignore the separate existence of the business entity.


[1] Shareholder and director meeting minutes in the case of a corporation; member and manager meetings in the case of a limited liability company.

[2] For a corporation

[3] For a limited liability company

[4] For a corporation

[5] For a limited liability company

Buy/Sell and the future of your business

November 4, 2009

What happens if you (or a co-owner of your business) die, become disabled, decide to retire, or have a HUGE disagreement on a business decision? A properly structured buy/sell agreement could provide the answers.

Buy/sell agreements can either be structured as an agreement by and among co-owners (a “Cross-purchase”), as an agreement between an owner and the business itself (a “Redemption”), or as a combination of the two (if the other owner or the company does not buy the other will, sometimes called a “Wait and See”). The best type of buy/sell agreement of any particular business often depends on the classification of the business for tax purposes , the form of funding of the agreement as well as the nature of the business itself.

The way a buy/sell agreement operates is that when a “triggering event” occurs, one of the parties to the agreement (or the company itself), either:

• must buy the selling owner’s interest or

• may buy the selling owner’s interest .

“Triggering Events” can include, but are not limited to: the death, disability or retirement of one or more of the business owners.

A business disagreement could also be a triggering event, as could one (or more) owners seeking to “buy out” the other owner(s). Buy/sell agreements which take effect in these situations have the result of resolving business decisions via the purchase/sale of the interest of one (or more) of the parties.

A “right of first refusal” is a buy/sell agreement whose triggering event is the receipt by one party of a bonna fide offer to sell their interest in the business to a non-owner. The recipient of the offer is then required to give the other owner(s), or the company, the right to buy the interest on the same terms being offered by the non-owner before completing the sale. A potential pitfall to entering into a “right of first refusal” is that it may of itself discourage the making of offers because:

• If the Non-owner becomes the purchaser of the interest, the Non-owner will be dissatisfied with the transaction because they paid more than the “insiders” think the interest is worth; or

• If the Non-owner’s proposal is “taken” by the insiders, the Non-owner will be dissatisfied because they didn’t get the benefit of their bargain; they simply made a “deal” for someone else.

One of the most important aspects of a buy/sell agreement is the method of arriving at a price. Most often, the price is determined by a formula. There is no one “right” formula. Common formulas include (but are not limited to) a proportionate share of:

• An appraised value of the business,

• The book value of the business,

• The book value of the business with an adjustment for appreciated assets,

• A multiple of book value,

• A multiple of earnings, or

• A capitalization of earnings.

Terms of payment of the purchase price are also a topic for consideration. Payments can be set up in installments or paid in a lump sum. Often in the case of a buy/sell agreement which is triggered by death or disability, the payment terms are designed to coincide with the terms of insurance policies purchased to “fund” these payments.

A properly drafted buy/sell agreement can address difficult situations before they jeopardize the future of the business.

Will Your Life Insurance Mess Up Your Estate Plan?

October 1, 2009

Your life insurance may mess up your estate plan.

Life insurance is a key element of most estate plans, but an improper, or ill-considered beneficiary designation, can ruin the best of plans.

Upon your “passing”, life insurance proceeds, are paid pursuant to the exact terms of the policy, that is to say, the insurance company provides the proceeds to whoever you designate as the beneficiary of the policy.

If a spouse is named as the beneficiary, and the spouse survives, the life insurance proceeds will be part of your taxable estate BUT the proceeds will qualify for the marital deduction. Therefore no estate tax will be generated by life insurance proceeds paid to a surviving spouse.

Upon ANY change in your marital status, whether as the result of a divorce, or a marriage, you should contact your insurance agent to make sure your beneficiary designation is still accurate. An “ambiguity” (and a very awkward familial situation) can arise if “my spouse” is designated as the beneficiary and your “surviving” spouse is not the same person who was your “spouse” at the time you bought the policy.

If your spouse does not survive you, or, if you name a child (or children are) as the beneficiary (beneficiaries) on your life insurance policy, there could be significant problems.

In many cases, a properly drafted Will contains provisions for the establishment of a trust for the benefit and protection of beneficiaries, and to prevent the beneficiary from squandering the funds at a young age.

HOWEVER, if your children are individually named (example: Sam and Becky in equal shares) or collectively named (example: “My Children in equal shares”) as the “contingent” or “secondary” beneficiary or beneficiaries (they receive the proceeds if there is no surviving spouse), they will receive the insurance proceeds[1] when they reach “legal” age[2] - REGARDLESS OF ANY TRUST CREATED BY YOUR WILL.

Another problem can occur if there are children who are born AFTER the beneficiary designation. If your beneficiary designation is “My Children: Sam and Becky” as the contingent beneficiaries, what does that mean for Jeff, your son, who is born three years after you bought the policy, but there has been no change of the beneficiary designation?

Avoiding these pitfalls is really quite simple:

First, you need a properly drafted and fully executed will which reflects your intentions; including, but not limited to, any trust to be created to protect your family members.

Second, check with your insurance agent to make certain that the beneficiary designation will be in harmony with your estate planning objectives. This may require you to change your contingent beneficiary designations to: “the Family Trust created by my Will”; or “my Estate” rather than “my children” or naming the children themselves.

Finally, review your Will and beneficiary designations on your life insurance every few years. If you have not reviewed your Will and/or the beneficiary designation on your life insurance in a few years, you should do now.

An improper, ambiguous, or out of date beneficiary designation could cause your life insurance to mess up your estate plan instead of meeting your objectives.


[1] The Proceeds will be held in a conservatorship, until the beneficiary reach the “legal” age. The conservator is a court appointed and supervised individual or bank who invests the proceeds, and makes payments, for the benefit of the “ward”.

[2] “Legal” age (the age when an individual is no longer a “minor”) varies from state to state. In Iowa this is age 18.


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