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Considering Selling Your Business and Wondering Where to Begin? The Role of a Letter of Intent

By Rajnish Puri |

Part two of a four-part series.

In this four-part series on the subject of selling your business, I plan to share with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.

Once a seller has completed the initial steps in deciding to sell its business (please see last week’s article) and also has identified the most suitable buyer, generally speaking, the first formal expression of interest between the two parties to carry out the sale and purchase transaction is memorialized in a Letter of Intent.  Traditionally, the buyer prepares and submits the signed letter to seller who, after consultation with its team of experts, elects to either accept the proposal as presented or provide modifications for buyer’s consideration.  In certain situations, prior to executing the Letter of Intent, the parties may enter into a confidentiality agreement to facilitate exchange of information about seller’s business for buyer’s preliminary evaluation.  As is implicit in its title, the Letter of Intent is a medium through which a willing seller and a willing buyer communicate to each other their respective “intent,” and not a definitive promise, to enter into a transaction under certain terms and conditions.  Nonetheless, with the exception of certain provisions (discussed below), the commitment, though primarily non-binding at this stage, is sophisticated enough to convey that each party is serious about pursuing the deal.  Letters of Intent may vary in style, length and the extent of details included, but often address the following primary matters.

Establishing the Principal Framework.  Depending on the nature and size of the target business, its history and ownership structure, parties make an early decision to agree on the structure of the proposed transaction, with the primary choices being an asset or a stock purchase transaction.  When uncertain, parties defer the decision on the structure pending further evaluation of the business by buyer.  The purchase price buyer is willing to pay to seller is the next key component of a Letter of Intent, as are the associated conditions, such as expectations about the level of debt to be assumed by buyer and adjustments to the purchase price based on the working capital available at closing. The timing of payment of the purchase price – what portion is to be paid at closing and how much is subject to a holdback or linked to the post-closing performance of the business – is another aspect the parties tend to describe at this stage.  Finally, if buyer has engaged in prior, even if limited, due diligence about the business, buyer sets forth the conditions it expects to be completed prior to closing the proposed transaction.

Non-Binding v. Binding.  Because buyer has plenty to investigate about the target business before legally committing itself to go through with the proposed transaction, with the exception of select provisions, a Letter of Intent is predominantly non-binding.  A binding commitment between the parties is expressed in a definitive agreement, typically entered into between the parties following buyer’s due diligence investigation.  From buyer’s perspective, some of the prerequisite investigations imposing demands on its time are understanding the financial statements, contracts and ongoing obligations of the business, evaluating third party relationships, and understanding employee matters and related aspects – all of which could impact buyer’s decision on the structure and financing of the transaction or, in some cases, whether or not it is even prepared to move forward.  The provisions that are typically binding in a Letter of Intent are the obligations of the parties to bear their respective expenses, ensuring confidentiality of information shared by seller (although it could be addressed through an independent non-disclosure agreement), granting buyer and its team of advisors extended access to information about the target business, and buyer having exclusive rights to evaluate the business for a limited period of time.

Due Diligence and Confidentiality.  Unless previously addressed in the context of a non-disclosure agreement executed between the parties, a Letter of Intent, when signed, permits buyer and its designated team of advisors (attorneys, accountants, and members of buyer’s management) to begin their due diligence investigation of the target business.  To ensure that the information seller shares about the business remains protected and is limited to use by buyer solely to evaluate if buyer should acquire the business, a confidentiality provision is an important element. Occasionally, the confidentiality provision also includes names of select individuals from seller’s team who are the only ones authorized to receive and respond to buyer’s inquiries to ensure a coordinated and efficient due diligence process.

Exclusivity and Termination.  The last thing a potential buyer wants to do is to engage in the investigation of seller and the target business, incur costs and fees, and make the related time commitments – only to later learn there are other potential buyers invited to the party, triggering the need for an exclusivity provision seeking seller’s assurance that buyer is the only party engaged in negotiations.  What frequently gets negotiated is the duration of the exclusivity period, which, depending on the size of proposed transaction, varies between 30 to 90 days.  Naturally, seller prefers the shorter end of the spectrum to allow itself other options should the buyer have a change of heart, and buyer likes to maximize the duration.  And, finally, there is seller’s need for certainty about the process, which is addressed through listing the conditions – satisfied or failed – that trigger the termination of the Letter of Intent, again with a select surviving the termination.

In Part One of this series, I shared thoughts on First Steps.  In Part Three of this series, I plan to focus on What to Expect between Signing a Letter of Intent and Closing.  Stay tuned for another conversation on ClarkTalk!!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering the sale or purchase of a business.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at rpuri@clarktrev.com or telephonically by calling the author at (213) 341-1322.

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Do I Need a Will, a Trust or Both?

By Tiffany A. Halimi |

To some, Trusts are believed to be used exclusively by the ultra-wealthy.  Should your baby be a Trust fund baby?  Is there a minimum level of wealth a person should have in order to benefit from a Trust?

Given today’s legal climate, a living Trust is a great tool for any individual whose total assets exceed One Hundred Fifty Thousand Dollars ($150,000) or whose real property assets exceed Fifty Thousand Dollars ($50,000).  Once an individual’s estate exceeds either or both of those minimum thresholds, then that estate must go through the probate court system before it can reach the heirs, unless the deceased individual (“decedent”) executed a Trust, or took some other action, prior to the decedent’s demise.

Intestate-SuccessionThe use of a Trust can (a) facilitate the avoidance of probate and (b) direct to whom and how assets will be distributed.

A.     Avoid Probate

A funded Trust allows a decedent’s estate to pass directly to the decedent’s designated beneficiaries, without having to go through probate.  Avoiding probate is beneficial to the beneficiaries for several reasons.

1.) Trust administration can expedite the time it takes to administer an estate.

First, the probate courts in Los Angeles County are severely backed up, and a probate administration often takes a year or more to complete.  The decedent’s estate cannot be paid out until the probate administration is complete.  Currently, a petition to open a new probate in Los Angeles Superior Court will not be heard for at least 4-6 weeks.  A Trust, on the other hand, can often be administered without court supervision, thereby expediting the total process.  Additionally, the Trustee will have immediate ability to manage the assets that are held by the Trust, and will not have to wait 4-6 weeks for a Court to grant such authority.

2.)  Trust administration keeps the decedent’s information confidential from the public.

Second, a probate becomes public record, making otherwise private information relating to a decedent’s assets publicly accessible.  A Trust administration without court supervision is private.

3.)  Trust administration does not give an attorney a percentage of the decedent’s estate.

Third, an attorney is statutorily entitled to take attorneys’ fees as a percentage of the estate, regardless of how much time the attorney puts into the matter.  See Probate Code Section 10810.  With a Trust administration, an attorney can offer guidance to the Trustee and only bill for the attorney’s time, rather than take a percentage of the estate.

Thus, in order to avoid administration through the probate courts, an estate that is comprised of total assets valued more than $150,000 or real estate valued more than $50,000 should be administered pursuant to a Trust declaration

B.     Decide Who Receives Your Assets

In addition to avoiding probate, there is another important reason to consider a Trust or a Will.  A Trust or a Will allows a person to determine to whom they would like their assets to pass and when.  For more information on the distributive benefits of a Will or a Trust, please see If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com

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Traps for the Unwary Lurk in New Paid Sick Leave Law

By Leonard Brazil

We’ve entered a new year and employers are scrambling to ensure they are in compliance with another layer of employment laws.  But first make sure you’ve already properly implemented the paid sick leave law that effectively kicked in on July 1 of last year and has already been amended once!

You are probably aware of the paid sick leave law so I won’t summarize it.  (You can review a summary here).  Instead, I want to focus on some of the traps for the unwary–nuances in the law which leave employers vulnerable to unknowing violations.

Employee Handbook’s Inclusion of Introductory Period.  Check whether your employee handbook includes a policy that a new hire’s first 30, 60 or 90 days is an “Introductory Period.”  Some of those policies state new hires must complete their Introductory Period before they begin to accrue sick leave or paid time off (PTO).  Such a delay in the accrual of sick leave or PTO would violate the paid sick leave law.  New hires are to commence accrual (or sick leave front loaded) immediately when hired if the employee has already worked in California for at least 30 days for the same employer within a year of commencement of employment.

Inconsistency With Family & Medical Leave Act.  Another trap for employers arises if they are covered by the federal Family & Medical Leave Act/California Family Rights Act (collectively “FMLA”).  Under the FMLA, the minimum increment of leave you may require an employee to take cannot exceed 1 hour.  However, the paid sick leave law states the minimum increment an employer may impose for the use of sick leave cannot exceed 2 hours.  The FMLA and paid sick leave law have different minimum increments of leave an employer can require.  A problem may arise because some FMLA policies state employees are required to use available sick leave while on FMLA for their own serious medical condition.  If employees take leave of 1 hour under the FMLA for their own serious medical condition and the employer applies available sick leave to the FMLA absence of 1 hour, the employer will have violated the sick leave law which does not allow sick leave in increments of less than 2 hours.

Determining Minimum Front Load Requirement.  The poorly drafted sick leave law also exposes employers to another surprise violation.  The law states an employer may “front load” sick leave at the beginning of the year instead of having it accrue through the year so long as the leave is not less than 24 hours or 3 days.  The California Division of Labor Standards Enforcement (DLSE) interprets the “24 hours or 3 days” differently than you may have thought.  The DLSE states that if a part-time employee works, for example, 4 hours a day, the minimum amount of leave which must be front loaded is not the amount of time they worked in 3 days (12 hours) as one would think—it would be 24 hours (See August 8, 2015 DLSE Opinion Letter).  I hope the DLSE’s interpretation will be rejected by the courts because it seems absurd to give employees more sick leave pay for their absence than would have been received if they actually worked those days!  Likewise, the DLSE states an employee working a regular shift in excess of 8 hours would be entitled to receive sick leave based on the total hours worked in 3 days.  For example, employees with a regular 10-hour shift would be front loaded 30 hours, not 24 hours.

Plaintiff employment lawyers will automatically look at an employer’s sick leave policy with the hope of snaring unsuspecting employers who think they are safe because they prepared a sick leave policy to comply with the new law—but have they?

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other employment issue.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Debbie Petito dpetito@clarktrev.com or Leonard Brazil lbrazil@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.