0 comments on “Considering Selling Your Business and Wondering Where to Begin? The Anatomy of a Definitive Agreement”

Considering Selling Your Business and Wondering Where to Begin? The Anatomy of a Definitive Agreement

By Rajnish Puri |

Part four of a four-part series.

In this four-part series on the subject of selling your business, I have shared 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.

As discussed earlier in this series, in the context of a simultaneous sign and close transaction, buyer and seller do not have a legally binding agreement between them until the execution of a definitive agreement, a moment that also coincides with the closing.  It is therefore important to solve, beforehand, the mystery of a definitive document. What does it contain? What do the provisions mean?  How does everything fit together? Before answering these questions, it is helpful to note that a business can be purchased and sold adopting different structures for the transaction – the primary three being a sale of shares, a sale of assets and a merger of entities.  Hence, the respective names for the definitive documents – a Stock Purchase Agreement, an Asset Purchase Agreement and an Agreement and Plan of Merger.  The focus of this conversation is on the first two, they being more common than the third.  Although a given document may have several provisions depending on the terms and structure, broadly speaking, both types of agreements can be categorized into four principal segments as follows.

Specifying What is Being Sold and Purchased.  The initial segment of an agreement typically describes, with adequate specificity, the items being sold and purchased at closing – shares, in a Stock Purchase Agreement and, assets, in an Asset Purchase Agreement.  While the description of the shares that are the subject of transfer is relatively straightforward, reaching an agreement on the assets being sold (or retained) often requires more extensive drafting.  Unlike a share transfer where title to the entity’s assets and liabilities remains unchanged, the agreement for the sale and purchase of assets is not just limited to the notion of a transfer – it also requires the parties to address the concepts of which assets and liabilities are retained by the selling entity as well as identifying the liabilities being assumed by buyer.  The actual instruments of transferring title are generally included as exhibits to the agreement.

Purchase Price and Related Nuances.  A substantial segment of an agreement is devoted to describing the amount and timing of the purchase price being paid for the shares or assets, and the contingencies that may lead to adjustments, both upward or downward, in the price.  Other than the amount – something that parties generally establish “firmly” in a Letter of Intent, despite its non-binding nature – almost every element of this section warrants careful consideration by both seller and buyer.  Of the aggregate purchase price, what portion is to be delivered at closing or how much buyer or a jointly appointed escrow agent may holdback for potential post-closing obligations of seller, are subjects typically addressed here.  In certain transactions, particularly those dealing with seasonality in the target business or involving historical swings in revenue streams, it is in this segment where one finds provisions on purchase price adjustments linked to agreed-upon working capital targets and additional payments, or “earn-outs,” contingent upon the target business attaining certain milestones under buyer’s watch.

Statements About the Business.     Labeled as “Representations and Warranties of Seller,” with the exception of “as-is” transactions, this segment ends up being, by far, the most negotiated portion of an agreement.  The section includes several statements from Seller about various aspects of the business, some qualified with materiality, knowledge or both, and many without such qualifiers. (There also is a separate section covering the representations and warranties of a buyer, which is limited to certain fundamental matters and rarely draws intense scrutiny.)  In explaining the primary purpose behind this section, a friend once quipped that, whereas the section dealing with the purchase price provisions describes what a seller would receive at closing, by contrast, this section essentially lays the groundwork for what a seller would have to return to buyer should seller’s statements later turn out to be untrue, subject, of course, to other terms and conditions found in an agreement. In other words, the provisions of this segment are important with potential for serious implications.  It is principally for this reason that counsel for both parties spend significant time negotiating the provisions of this section, with seller’s counsel motivated by limiting the scope of seller’s representations to ultimately limit buyer’s recovery post-closing (as discussed below). Naturally, buyer’s motivation is quite the opposite and counsel’s strategy is dictated accordingly.  An ancillary document associated with this section is the disclosure schedule, which contains information required pursuant to seller’s statements about the business and exceptions to the representations.

Post Closing Matters.   The last major segment of an agreement deals with matters relating to indemnification and restrictive covenants, although each appears in a separate dedicated section of its own.  The indemnification obligations are mutual between seller and buyer, but it is the seller’s that merit more attention.  The provisions deal with survival periods for the parties’ representations and warranties, scope of protections, limitations on liability and a description of procedures to be followed by the parties if problems were to arise.  With respect to the restrictive covenants, the document imposes on seller obligations to not compete in the target business industry and refrain from soliciting the employees or customers of the business being sold.  Finally, an agreement contains general provisions about methods of communication between parties, dispute resolution procedures, and the law governing the interpretation of the agreement, among other matters.

In Part One, Part Two and Part Three of this series, I shared thoughts on First Steps, Purpose of a Letter of Intent, and What Transpires after Signing the Letter of Intent, respectively.  Hope you found the discussion in this series helpful.  In my upcoming posts, I plan to share with the readers practical knowledge and trends on a variety of corporate finance topics applicable to early stage and established businesses. 

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.

 

0 comments on “Starting a New Business? Don’t Drop the Ball on Your Lease”

Starting a New Business? Don’t Drop the Ball on Your Lease

By Scott D. Page |

Leasing commercial office or retail space can be one of the most important and complex initial business decisions for startups. While the following are some of the most important issues for startups to consider, they also apply to any commercial tenant entering a new lease.

Length of the Lease – One area of the lease to focus on is the lease term. A short-term lease is almost always to your benefit, especially if your business isn’t particularly location-sensitive and finding comparable space won’t be a problem at the end of the lease term. Shorter leases give you more flexibility if the needs of your business change. On the other hand, a long-term lease ensures that the business will have an affordable space for a predictable period of time, especially if you have found a favorable location for a retail shop or other business where location is critical. Also, landlords are often willing to make more lease concessions (e.g., free rent or more money for tenant improvements) on longer-term leases.

A good solution for most tenants is to negotiate a shorter initial lease with one or more options to extend the term of the lease. If you ask for an option, expect the landlord to want a higher rent for the renewal period. A right of first refusal on other available space at the property can also give you important access to additional convenient space at agreed upon terms if your business quickly expands.

Understand What “Rent” Covers – Another primary issue to consider when leasing commercial space is how much rent you’ll pay and what costs are included in the base rent. When considering options, look carefully at whether the landlord will pay for utilities, maintenance, repairs, security, janitorial services, parking, taxes and insurance, or whether you will be paying for such amounts as “additional rent.” These costs can potentially be significant and increase dramatically over the term of the lease, especially if exclusive systems (e.g., HVAC for IT equipment) are required for your business. Paying higher rent that covers these costs will eliminate expensive surprises down the road.

Tenant Improvements – If significant improvements to the space are required, you may want to use most of your bargaining power to have the landlord provide them at no cost to you. If you’re willing to sign a longer-term lease, the landlord will be more willing to pay for the desired improvements. It is also important to understand the tenant’s obligations to remove any specialty improvements at the end of the lease term before those improvements are installed to avoid unexpected expenses or disputes in the future.

Subleases and Assignments – Make sure you have the right to sublease or assign your leased space. These provisions, along with options to renew or lease additional space, provide flexibility as your business needs change. If you rent more space than you currently need to allow for expansion, you can sublease some of the space until you’re ready to use it. On the other hand, if you need to move out before the lease is over, you’ll have the option of finding another tenant to take some or all of your space and pay the rent, without having to negotiate an early termination or break the lease.

Give Yourself Time – Allow for three to six months to identify a property, agree upon important lease terms and negotiate a lease. The less time you have to make a move, the more leverage the landlord has to dictate terms and avoid the tenant concessions discussed above.

Find a Broker (and an Attorney) – Leasing commercial property can be a complicated process and should never be undertaken without knowledgeable parties explaining each step of the way and working to get you the best deal possible. A commercial real estate broker familiar with your business and locations of interest can help you focus on available and best options for your business, now and for the future.

Startups typically have very little leverage with landlords, but a good broker and attorney can help negotiate the best terms possible. Lease forms are almost always provided by, and favor, the landlord. An attorney can help explain the critical provisions of the lease and identify terms where the landlord will more likely make concessions.

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 real estate issue.  If you wish to consult with the author of this post, please contact Scott Page by email at spage@clarktrev.com or telephonically by calling him at (213) 629-5700.

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Considering Selling Your Business and Wondering Where to Begin? What Transpires After Signing the Letter of Intent!

By Rajnish Puri |

Part three 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.

 After a willing seller of a business and an interested buyer have executed the Letter of Intent (LOI) (please see: part two of series here), the real work to complete the purchase and sale of the target business gets underway. Teams of advisors, for both sides, go to work simultaneously, on their way to accomplishing their respective goals tied to a common end-result.  In theory, transactions of this type can be signed first and closed at a later date after the completion or, in some cases, the waiver, of the requisite closing conditions.  Practically speaking, however, a significant number of transactions involving privately-owned businesses are completed adopting the simultaneous sign and close mechanism.  In other words, the parties sign the definitive agreement and close the transaction at the same time.  For purposes of this conversation, we assume a simultaneous sign and close scenario.  The time period between executing the LOI and closing a transaction involves the following primary activities, all taking place concurrently.                  

Preparing and Negotiating the Definitive Agreement.  With some of buyer’s investigation of the target business conducted prior to the LOI stage and the principal terms of the deal enumerated in the LOI, generally, soon after the signing of the LOI, buyer’s counsel commences preparation of the definitive asset purchase agreement or stock purchase agreement based on the agreed-upon structure of the transaction.  This is also the stage when representatives of buyer and seller are introduced to each other and establish the framework of communications, timing and expectations for completing the deal.  When working on preparing the initial draft, buyer’s counsel is in regular communication with its client and team of advisors to build the essential provisions of the definitive document.  Depending on the size and complexity of the transaction, this exercise usually takes a few weeks before buyer’s counsel presents the first draft of the definitive agreement to seller’s counsel. The negotiations begin soon thereafter, with seller’s counsel leading the effort on behalf of seller’s team.  Simultaneously, seller’s counsel actively engages seller personnel most familiar with the target business to begin preparing the disclosures and other schedules to the definitive agreement, a process that continues through the finalization of the transaction documents.  Although most of the attention is devoted to negotiating the definitive agreement, preparation of the ancillary documents also gets underway once both parties have reached a consensus on the primary structure of the former.

Due Diligence and Coordination with Third Parties.  Due diligence investigation of the target business is an exercise that rarely stops until the closing.  In fact, this aspect of the transaction only gains momentum with time, and justifiably so.  If not done during the pre-LOI phase, secure virtual data rooms are established at this stage where seller continues to add pertinent information about the business giving access to both buyer and seller teams of advisors.  While non-legal advisors pore over the analytics of the business data, counsel, specifically buyer’s, typically examines the information to formulate provisions in the definitive agreement.  Seller’s counsel utilizes the data room information and communications with seller principals to prepare the disclosure schedules and determine the third party approvals required as a condition to closing. As the parties are targeting a simultaneous sign and close, the task of communicating with third parties – most notably landlords (where real property leases are part of the business being sold) and parties to significant contracts in the business – becomes both critical and sensitive, requiring the parties to strike a delicate balance.  The transaction might not close – therefore, the need for obtaining contingent and confidential approvals from third parties.  The transaction needs to close  – therefore, the need for a timely approval.  Some of the other principal communications involve tracking down the selling shareholders (especially where the ownership is broadly held), arranging calls between buyer and key relationships of target business, and addressing human resource issues to ensure a smooth transition for employees (if applicable).

Continuity of Business Operations.  While all the activity surrounding the sale and purchase is ongoing, someone from seller’s team must continue to mind the store.  Readers may recall from an earlier discussion in this series that, but for a select few provisions, LOIs are mostly non-binding in nature.  As a result, there is no legally binding agreement between a buyer and seller to do the deal unless the parties execute a definitive agreement. Accordingly, the parties could spend an enormous amount of time and resources negotiating the transaction and yet end up walking away from the deal.  (Note: Discussing the consequences of walking away is outside the scope of this conversation.) Some of the reasons for terminating negotiations could be outside the control of the parties, such as a sudden shift in market conditions, failure to obtain adequate financing or the inability to overcome regulatory hurdles.  Many of the circumstances, however, can be managed, and ensuring that the target business remains strong or consistent with its past performance is a priority.  A typical transaction cycle may last three to six months from start to finish, which could be an eternity from seller’s vantage point given the distractions caused by the negotiation process.  Despite all precautionary measures, the word somehow gets out that the target business is in play leading to conversations among employees and others concerning their future, which, in turn, could impact performance.  Buyer bids for the target business based on certain assumptions that include attaining baseline financial metrics. If those assumptions fail to reach the expected levels or new conditions suggest their imminent decline, buyer might renegotiate the price or decide to take a pass.  Naturally, not a desirable outcome by either party and certainly not for seller who may watch its goal of selling the business drifting away – at least for some time.  Hence, the point person appointed by seller at the early stages of the process should ensure the preservation and consistent performance of the business.

Closing and Transition. Somewhere along the line in the negotiation process, and typically after the two sides believe they have a well developed draft of the definitive agreement (even if not final), a closing date is penciled in.  Even though it is a date that is only tentative at this point, in my experience, both seller and buyer take it very seriously and both teams work diligently toward meeting the target date.  It is not uncommon, especially in document-intensive transactions, for parties to stage a pre-closing, a day or two prior to the actual closing date, to ensure everyone is on the same page and that all pre-closing conditions have been, or will be by the closing date, completed.  Finally, following months of laboring through the process of conducting due diligence, negotiating deal documents, communications among seller, buyer and the employee contingent that remains with the target business, among other activities, the closing date arrives and the purchase and sale of the business is completed.  Interestingly, in contrast to the flurry of activity taking place leading up to the closing date, the actual closing process is relatively short and less intense (other than the typical anxiety associated with accomplishing a significant task).  The parties exchange signed pages of the transaction documents, buyer remits the purchase price and, occasionally, there is a press release or a limited announcement often conducted jointly by the parties.  At that moment, buyer officially takes over the ownership and operations of the target business and, sometimes by express agreement and occasionally without one, certain designated personnel from seller management assist buyer with the transition to ensure the transfer goes through with minimal interruption.

In Part One and Part Two of this series, I shared thoughts on First Steps and the Purpose of a Letter of Intent, respectively.  In Part Four of this series, I plan to give to our readers an overview of the primary components of a definitive agreement.  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.

1 comment on “Considering Selling Your Business and Wondering Where to Begin? The Role of a Letter of Intent”

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.

0 comments on “AIR Lease Forms – Good for the Goose or Good for the Gander? A View From the Tenant’s Perspective”

AIR Lease Forms – Good for the Goose or Good for the Gander? A View From the Tenant’s Perspective

By James S. Arico

Despite what a landlord may tell a prospective tenant, there is nothing “standard” about any lease form.  This is true even for pre-printed leases labeled as “standard,” like the AIR Commercial Real Estate Association lease forms (collectively, the “AIR Form”) for both net (where tenant pays a base rent amount plus its share of taxes, maintenance and insurance) and gross (where tenant pays a base rent amount plus its share of increased taxes, maintenance and insurance over a base year amount) lease transactions.  Traditionally, the AIR lease forms have been landlord orientated and designed to protect the commercial real estate brokerage community.  While the AIR lease forms have become more tenant-friendly in recent years, tenants should take care in reviewing an AIR Form prepared by either landlord or landlord’s broker.  Preferably, tenant should seek the assistance of commercial real estate counsel to review and negotiate the AIR provisions, since the form itself is generally favorable to landlord.

With respect to changes to the AIR Form made by landlord, any revisions using the copywrited AIR Form or AIR software are easily recognizable.  Form language landlord wishes to delete will appear as strike throughs and additions or revisions will either appear in the AIR Form in conspicuous type (i.e. different from the form type font) or will be addressed in a separate lease addendum.

The following are some examples of lease items that you, the prospective tenant, should be aware of that are in both the net and gross AIR lease forms:

Condition of the Premises.  In paragraph 2.2 of the AIR Form, landlord warrants that, among other things, the existing plumbing, electrical, and heating, ventilation and air conditioning (“HVAC”) systems are in good working order and the structural condition of the building in which the premises is located is free of material defects.  While this landlord warranty is a benefit for tenant, the warranty period is only thirty (30) days, with the sole exception being the HVAC system, which carries a six (6) month warranty.  Any problems incurred with these items following the expiration of the warranty period are tenant’s responsibility to fix at tenant’s sole cost.  Since a prospective tenant needs to “live” in its new premises for some to determine which building systems may be defective, tenant should request that, at a minimum, landlord’s warranty for all building systems and the building structure be extended to six (6) months.

Security Deposit.  The security deposit section of the AIR Form (paragraph 5) provides that if the base rent increases during the term of the lease, landlord has the right to increase the amount of tenant’s security deposit to maintain the same proportion as the initial security deposit bears to the initial base rent amount.  To avoid surprises, tenant should seek to strike this provision of the lease.

Tenant Improvements and Surrender of Possession.  Paragraph 7.3 of the AIR Form provides for tenant’s right to make alterations/improvements to the premises.  Tenant should keep in mind that, except for movable items of personal property used in tenant’s business (called trade fixtures), landlord has the right to keep or require removal of any other alterations or improvements tenant makes to the premises at the end of the lease term.  Since some alterations may be as expensive to remove as to install, tenant should request that all tenant improvements (other than trade fixtures) remain with the premises or, alternatively, that landlord make the “remove or remain” decision on all tenant improvements prior to installation.

Partial Damage that is an Insured Loss.  Under paragraph 9.2 of the AIR Form, if damage to the premises occurs that is insured and the cost to repair is $10,000 or less, landlord has the option to give tenant the insurance proceeds and have tenant undertake the repairs.  Two immediate issues arise with this concept.  First, tenant is usually not in the construction business and undertaking repair responsibilities, even if of minor nature, is a distraction to the ability of tenant to conduct its business.  Second, tenant may be responsible for any gap between the insurance proceeds received by landlord and the actual cost of the damage repair.  Tenant should carefully review its responsibilities in the event of damage or destruction and make sure that the provisions are “even handed.”

Accessibility ADA.  The last numbered paragraph of the AIR Form (Paragraph 50 on the net form and Paragraph 49 on the gross form) identifies three important things.  First, whether the premises has been inspected by a Certified Access Specialist (a “CASp”); second, that landlord makes no guarantees that the premises is ADA compliant; and third, that any ADA modifications required by tenant’s use will be the sole responsibility of tenant.  Tenant should consider the following:  First, if the premises have not been inspected by a CASp, tenant may want to retain its own CASp to inspect the premises; and second, tenant should negotiate a fair resolution of the allocation of costs related to any required ADA modifications.  For example, tenant should be responsible for only those non-structural modifications related to the unique nature of tenant’s use of the premises (as opposed to any other use of a tenant in the building, or a general office/warehouse use) and landlord should be responsible for all other modifications.

NOTE: THE ABOVE LEASE ITEMS ARE ONLY EXAMPLES OF POTENTIAL PITFALLS A TENANT MAY ENCOUNTER.  For this reason I reiterate the suggestion to seek the assistance of a commercial real estate counsel.

Good luck!

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 your real estate needs.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Jim Arico by email at jarico@clarktrev.com or telephonically by calling the author at (213) 629-5700.

1 comment on “Considering Selling Your Business and Wondering Where to Begin? Here are Some First Steps!”

Considering Selling Your Business and Wondering Where to Begin? Here are Some First Steps!

By Rajnish Puri

Part one 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.

You have labored hard to build a profitable business and are now contemplating an exit.  So, where to begin? In today’s economy, where mergers and acquisitions of large businesses frequently dominate the front pages of major newspapers, what goes largely unnoticed, and, therefore, little discussed, is the corresponding activity in the world of small- to medium-sized, privately-owned businesses and the tough decisions that confront their owners.  Whether it is identifying the right buyer, determining the correct value of the enterprise, selecting the most tax efficient structure, or optimizing the timing – these are only some of the many complex decisions you must make. If you are one of those potential sellers, here are initial steps in the planning.

Identify Your Goal.  Sellers are motivated by different reasons to sell their businesses.  What is yours?  Is it retirement, tying up with a strategic partner for further growth, a new-found opportunity, or something else? The answer to this question sets the stage for the remainder of the process.  If retiring, the primary goal often becomes maximizing the value of the business being sold; a strategic alliance would focus one’s attention on seeking the right partners; and a new interest might influence the timing of the deal if capital is required to fund the new venture. Your ultimate goal may also affect what you intend to leave behind –financial security for the family, a legacy for those who helped grow your business or both.  It’s important for your advisors to understand what your goal(s) are early in the process to effectively implement tax planning tools for the benefit of the sellers and others impacted by the transaction.

Build a Team.  Just like you are undoubtedly the architect of your business, the art of selling businesses, too, has its specialists.  Similarly, as you trusted your talent to grow your business, trust the experts to help you with the sale process.  The four key advisors on your team should be – a tax advisor capable of addressing both income tax and estate planning needs, an attorney experienced in mergers and acquisitions, a valuation professional with experience in similar-sized businesses, and a point person within the business to ensure normal operations of the business during the sale negotiations and to be the liaison between seller and buyer.

Get Your House in Order.  Has curiosity ever tempted you to walk into an open-house in your neighborhood (even if you were not in the market to purchase real property)?  And, if so, did you notice the curb appeal, the landscaping, the fresh paint or the artwork on the walls, the kitchen with utensils neatly tucked away in the cabinets, or the clean bathrooms?  Doesn’t the appearance make the property more attractive, which also justifies, and, in some markets, even drives up, the price?  Or, at least, lays the groundwork for a buyer to be prepared to pay a good price?  Optics play a role.  Selling a business isn’t much different in terms of preparing it well to ensure the seller can demand a fair price. In the context of selling a business, getting your house in order means addressing multiple fronts, prior to putting up the “for sale” sign.  Some of the simple, but often overlooked, tasks are: ensuring the accuracy of corporate records; evaluating and managing the risks stemming from pending litigation, expiring contracts, aging receivables, and cyber security; knowing your financial statements; examining the application of regulatory framework; and confirming the condition of the operating assets.  Careful planning in managing these areas plays a role in attracting good value for the business and a faster closing schedule.

Timing the Deal.  Finding the perfect timing to complete a transaction is by far one of the most unpredictable elements of deal making, though there is no single factor that is controlling.  There may exist a willing seller, but is there an interested buyer? Does the economy favor a strong valuation for the seller’s business and also allow buyer to tap into credit markets for financing?  Are there tax issues, prevailing or looming, affecting the timing of a closing? Does the seller wish to reward key employees upon closing and, if so, are the desired plans in place?  And, so on and so forth.  All of the stars need to be aligned for a transaction to succeed.  Your preparation must weigh all the elements prior to beginning the sale process to ensure the best outcome.

In the next part of this series, I plan to focus on Letters of Intent – often the first formal step that commences the negotiations between a seller and buyer.  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.