I am going to take a bit of literary license here and write about something that has nothing to do with legal advice. I can't help myself. Last night I arrived home after a pretty stressful day at work. My cleaning lady, who has been cleaning my house for about three years now, left me a letter. Without going into a lot of detail, let me just say that this letter made my day. She wanted to let me know how I had, in a few small ways, influenced her life. She had recently experienced the death of her cousin who was about her age, and she has come away from that experience feeling strongly that we should reach out to others more, and let people know how we feel about them. So, she explained to me, she just wanted to let me know how I had touched her life. I had absolutely no idea and so, when I read this letter, well, I just had such a warm feeling. It completely changed my mood and made me think about how grateful I am for my life and the people I have in it.
Without getting any more sappy than I already have, I just wanted to relay this story to readers out there. I think it could serve as an important reminder to all of us that we need to let the people around us know how we feel about them, at least once in awhile. Now let me tie this back into some semblance of a business-related topic. Most of us spend a large part of our day at work with co-workers and employees. If you are a business owner you know that the strength of your staff is very importat to the success of your business. These employees are people in our lives too. And it is equally important that we let these people know how much they are valued and how they influence and shape our day to day lives. So give this some thought and maybe there is someone that you work with who could use a pat on the back today, a short note letting them know how great they are. It really doesn't take much more than a thought to make someone's day. And retaining motivated, caring employees who feel like valued team members makes good business sense.
Ok. I got that off my chest and now I feel better. Tomorrow, back to legal stuff.
Friday, August 31, 2007
Tuesday, August 28, 2007
Two Ways To Sell a Business
I was on the phone with a client tonight, trying to explain the difference between an asset sale and a share sale, and, now that I am a blawger, it occurred to me that this might make a good blawg article. It's been a long day, so I am not going to get into all of the pros and cons of these two very different transactions - we'll leave that for another article. I am just going to try to explain why they are different.
First, let's presume Mr. Green owns a lawncare company. Let's call it Green Lawncare Inc. (totally unimaginative, I know). Mr. Brown wants to purchase the business. The business likely has value to Mr. Brown because it has assets - maybe some equipment, a vehicle, some inventory and, usually an established name and customer list. Mr. Brown could start his own lawncare company, but there is value in purchasing an existing lawncare business, since he can get used equipment, presumably at a lower cost, and can assume all of the existing lawncare contracts that Mr. Green's business has. This means instant income as opposed to pounding the pavement for lawncare contracts.
Mr. Green can sell his business in one of two ways:
1. Asset Sale: Green Lawncare Inc. (a separate legally incorporated entity) can sell all or substantially all of its assets to Mr. Brown. Mr. Brown would pay the corporation for these assets. The agreement could stipulate which assets Mr. Brown would buy and which would stay in the company. For example, Mr. Brown may not wish to purchase the accounts receivable of the business. He could list the assets he did wish to purchase, such as the "goodwill" (customer lists, existing contracts, phone number) and the equipment necessary to carry on the business. Mr. Brown would not likely assume the liabilities of the business. On closing, Mr. Brown would pay the company for its assets. Mr. Brown would either buy those assets personally, or set up his own company (Brown Lawncare Inc?) to purchase the assets and operate the business through. Mr. Green could be paid by the Company (now flush with cash from the sale) through salary, management bonuses or dividends.
2. Share Sale: Mr. Green could sell all of his shares in Green Lawncare Inc. to Mr. Brown. Mr. Brown would then become the sole shareholder, director and officer of the company. Mr. Green would get the cash on closing, personally. Mr. Brown would continue to operate Green Lawncare Inc.
There are many issues involved with determining whether a transaction will be an asset sale or share sale and, often, the purchaser and vendor are at odds over which form the transaction should take. Considerations such as liability issues and taxation (as usual in the business law context!) should be addressed with both your lawyer and your accountant, before a final decision is made. Knowing the difference between the two types of transactions is the first step in making the right business decision.
First, let's presume Mr. Green owns a lawncare company. Let's call it Green Lawncare Inc. (totally unimaginative, I know). Mr. Brown wants to purchase the business. The business likely has value to Mr. Brown because it has assets - maybe some equipment, a vehicle, some inventory and, usually an established name and customer list. Mr. Brown could start his own lawncare company, but there is value in purchasing an existing lawncare business, since he can get used equipment, presumably at a lower cost, and can assume all of the existing lawncare contracts that Mr. Green's business has. This means instant income as opposed to pounding the pavement for lawncare contracts.
Mr. Green can sell his business in one of two ways:
1. Asset Sale: Green Lawncare Inc. (a separate legally incorporated entity) can sell all or substantially all of its assets to Mr. Brown. Mr. Brown would pay the corporation for these assets. The agreement could stipulate which assets Mr. Brown would buy and which would stay in the company. For example, Mr. Brown may not wish to purchase the accounts receivable of the business. He could list the assets he did wish to purchase, such as the "goodwill" (customer lists, existing contracts, phone number) and the equipment necessary to carry on the business. Mr. Brown would not likely assume the liabilities of the business. On closing, Mr. Brown would pay the company for its assets. Mr. Brown would either buy those assets personally, or set up his own company (Brown Lawncare Inc?) to purchase the assets and operate the business through. Mr. Green could be paid by the Company (now flush with cash from the sale) through salary, management bonuses or dividends.
2. Share Sale: Mr. Green could sell all of his shares in Green Lawncare Inc. to Mr. Brown. Mr. Brown would then become the sole shareholder, director and officer of the company. Mr. Green would get the cash on closing, personally. Mr. Brown would continue to operate Green Lawncare Inc.
There are many issues involved with determining whether a transaction will be an asset sale or share sale and, often, the purchaser and vendor are at odds over which form the transaction should take. Considerations such as liability issues and taxation (as usual in the business law context!) should be addressed with both your lawyer and your accountant, before a final decision is made. Knowing the difference between the two types of transactions is the first step in making the right business decision.
Monday, August 27, 2007
Signing an Offer to Lease
If your business is in need of commercial space and you are going to have to lease that space, here are some quick thoughts to keep in mind. First, if you are working with a real estate agent, who is negotiating on your behalf, and that agent is experienced with commercial leasing, you are one step ahead of the game. Still, it would be prudent to run the Offer to Lease by your lawyer before submitting it to the Landlord. It is quite common for a lease agreement to run for three to five years. If you calculate the amount of rent you will pay over the life of that lease you may discover that it one of the biggest contracts you will ever sign. Leases are usually relatively large commitments, which means that you will want to make sure that you understand what you are signing and that you get the best possible deal.
The Offer to Lease may seem harmless - after all, it's not the actual Lease (which gets prepared after the main terms of the lease are agreed upon in the Offer) - but it is actually very important to get this document right. It will form the basis upon which the Lease is drafted and, if an important term is not in the Offer, you may be out of luck when it comes to the Lease. So, what sorts of things should you be thinking about when drafting the Offer? Here are some examples:
1. Who will the Tenant be? Will you be signing personally or through your corporation? If through the corporation, will the Landlord require a personal guarantee or indemnity?
2. Do you have any special signage requirements? Do you require any leasehold improvements to be done by the Landlord? If so, write it in the Offer and be specific.
3. Are you asking for a fixturing period - a month or two that is rent free, or base rent free, in order to get your business up and running?
4. What about stepped-up rent? If you are a new business, perhaps you can negotiate lower rent in the first year in return for slightly higher rent in the following years. This can assist in keeping your overhead low while you are first starting out.
5. If you anticipate the possibility of requiring additional space, you should consider requesting a right of first refusal over adjoining space so that when it comes available, you get the first chance to lease it, if you require it.
6. If there is a provision in the Offer that states that the Tenant agrees to sign the Landlord's standard form of Lease Agreement, make sure you add: "to be negotiated by the parties, acting reasonably." After all, why would anyone agree to sign a document that they have not even seen yet, without retaining the right to negotiate its terms!
7. You may want to negotiate a right to renew the lease for another one or two terms. The wording on this right to renew is important if it is going to be worth anything to you, so, again, a lawyer is recommended. If you have invested a lot of money into leasehold improvements or if the location of your business is a key component to its success, this provision makes good business sense.
The Offer to Lease may seem harmless - after all, it's not the actual Lease (which gets prepared after the main terms of the lease are agreed upon in the Offer) - but it is actually very important to get this document right. It will form the basis upon which the Lease is drafted and, if an important term is not in the Offer, you may be out of luck when it comes to the Lease. So, what sorts of things should you be thinking about when drafting the Offer? Here are some examples:
1. Who will the Tenant be? Will you be signing personally or through your corporation? If through the corporation, will the Landlord require a personal guarantee or indemnity?
2. Do you have any special signage requirements? Do you require any leasehold improvements to be done by the Landlord? If so, write it in the Offer and be specific.
3. Are you asking for a fixturing period - a month or two that is rent free, or base rent free, in order to get your business up and running?
4. What about stepped-up rent? If you are a new business, perhaps you can negotiate lower rent in the first year in return for slightly higher rent in the following years. This can assist in keeping your overhead low while you are first starting out.
5. If you anticipate the possibility of requiring additional space, you should consider requesting a right of first refusal over adjoining space so that when it comes available, you get the first chance to lease it, if you require it.
6. If there is a provision in the Offer that states that the Tenant agrees to sign the Landlord's standard form of Lease Agreement, make sure you add: "to be negotiated by the parties, acting reasonably." After all, why would anyone agree to sign a document that they have not even seen yet, without retaining the right to negotiate its terms!
7. You may want to negotiate a right to renew the lease for another one or two terms. The wording on this right to renew is important if it is going to be worth anything to you, so, again, a lawyer is recommended. If you have invested a lot of money into leasehold improvements or if the location of your business is a key component to its success, this provision makes good business sense.
Tuesday, August 21, 2007
When Should You Incorporate? And Who Should You Ask?
There is no easy answer to this question. It depends. It's interesting to me that often, new businesses get conflicting advice from their accountant and their lawyer. There's nothing wrong with this, it's just that each professional is looking at the question from a different angle. An accountant is going to look at the tax implications of incorporation and, often, incorporating won't do a start-up business any good tax-wise. In fact, it may not make any sense at all from a tax perspective to incorporate a business that hasn't even started yet and may have some losses up front due to start up costs and low initial income. Lawyers, however, tend to look at the issue of limited liability. Incorporating creates a separate legal entitity, so, from a liability standpoint, it can be very useful in terms of keeping your personal assets separate from your business liabilities. Often a client has to listen to two very conflicting views and then make a decision, based upon what may be more important to that specific client.
Here's some really good advice - try to get your lawyer and accountant in the same room at the same time and then you can all have the discussion together, not only about incorporating, but about all of the other questions you may have regarding your new or existing business. I don't know why we don't do this more often. It is value-added for the client who doesn't have to go back and forth between his or her two advisors to try to figure out what direction to take. Plus, you get the benefit of actual live communication with your most trusted advisors working together and brainstorming ideas. Everyone is in the loop and connected. That's how you "get business done".
Here's some really good advice - try to get your lawyer and accountant in the same room at the same time and then you can all have the discussion together, not only about incorporating, but about all of the other questions you may have regarding your new or existing business. I don't know why we don't do this more often. It is value-added for the client who doesn't have to go back and forth between his or her two advisors to try to figure out what direction to take. Plus, you get the benefit of actual live communication with your most trusted advisors working together and brainstorming ideas. Everyone is in the loop and connected. That's how you "get business done".
Sunday, August 19, 2007
Just Getting Started?
Are you thinking about starting a business and trying to find out how to get started? Speak to your trusted advisors and mentors if you are lucky enough to have them. If you don't, think about getting one or two. Every new business should have a competent accountant and lawyer to provide advice about start-up. How will your current financial situation be impacted by this new business? Is the new venture risky financially? Will there be large start-up losses? Does the business pose the risk of law suits? These are questions that your lawyer and accountant will want to address before you get started. If you are looking for a good lawyer or accountant, the best way to find one is through word of mouth. Go to two or three other business people who you respect and ask them who they deal with and if they would recommend their advisors. Or go to a seminar where a lawyer or accountant is speaking to get a sense of how they communicate and what their personality may be like. Establishing a relationship with your professional advisors will take time so think of your initial consultation with the professional as the beginning of a long-term relationship. It may take a couple of appointments before you find the right fit. But finding the right fit will be important in the long-term success of your business.
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