As the economic recovery blossoms, the stage is set for a feeding frenzy on privately held companies. You've been working hard, and would love to sell. But, will you get the right price?
If you properly plan for the sale of your business, you can maximize value. Operating as "business and usual" can significantly affect in the negative the value someone is willing to pay. So, what you can you do? Here's some simple steps, that should be taken only in consultation with your lawyer and tax advisors.
First, cut expenses. A sophisticated buyer will look at your company's EBITDA -- earnings before interest, taxes, depreciation and amortization. Often times businesses are valued on a multiple of the EBITDA. Thus, your primary strategy is to maximize earnings. If the multiple is 7x, any reduction in expense is worth 7 times that reduction in a sale. That philosophy, however, is counterintuitive to a strategy to maximize after tax profits. For example, businesses typically lease vehicles or equipment to maximize the expense deductions. Thus, for example, consider a business that needs a $100,000 piece of equipment. It can rent it for $25,000 per year, or borrow the money, pay annual interest (of say 7%), and depreciate $20,000 per year. By borrowing the money to purchase the equipment, EBITDA increases by $18,000. At a 7x multiple, you're increased the value of the business by $126,000.
This is just one of the numerous planning opportunities that will maximize the value of your business in sale.
John R. Browning, Esq.
949.244.5053
johnrbrowning@gmail.com
Irvine, California
Tuesday, February 23, 2010
Monday, February 22, 2010
Do I need to incorporate?
"Do I need to incorporate" is a question often asked by small business owners, and often for differing reasons. Will I be able to write off more expenses? Will I be shielded from liability? Should I incorporate in Nevada? Should I form an LLC, a regular corporation, or "closely held" corporation. Should I make a subchapter "S" election?
These are all important questions. And the answers vary considerably depending on the business owners' operations and goals.
Business expenses are normally deductible regardless of the form of the business. A sole proprietor writes off business expenses on Schedule C on his or her personal tax return. A corporation writes off those same expenses on a separate tax return. Some accountants will tell you, however, that writing off business expenses on your personal tax return (Schedule C) will lead to more audits than writing them off through a separate business entity. But, regardless, forming a corporation will not allow you to deduct purely "personal" expenses.
From the standpoint of legal liability, incorporation can provide significant protection. If you don't incorporate, your personal assets are exposed to liability any time someone acts on behalf of your business. So, if you ask someone to go to Staples to buy something for your business, and they get in a car accident, you are personally liable to the injured party. Incorporation protects you from those types of liability. But, it will not protect you from your own actions. You can also shift to the corporation potential liabilities from leases or vendor contracts. Thus, if you sign a 3 year office lease under the corporation, you are not personally liable to the landlord if the business can't pay the bill, or needs to move. Just don't sign a personal guaranty!
Finally, once you decide to form a corporate entity, many more questions arise, including the corporate form, whether to file as a "closely held" business, where to incorporate, and whether to make an IRS Subchapter "S" election. Those questions will be answered in a future post.
John R. Browning, Esq.
Irvine, California
These are all important questions. And the answers vary considerably depending on the business owners' operations and goals.
Business expenses are normally deductible regardless of the form of the business. A sole proprietor writes off business expenses on Schedule C on his or her personal tax return. A corporation writes off those same expenses on a separate tax return. Some accountants will tell you, however, that writing off business expenses on your personal tax return (Schedule C) will lead to more audits than writing them off through a separate business entity. But, regardless, forming a corporation will not allow you to deduct purely "personal" expenses.
From the standpoint of legal liability, incorporation can provide significant protection. If you don't incorporate, your personal assets are exposed to liability any time someone acts on behalf of your business. So, if you ask someone to go to Staples to buy something for your business, and they get in a car accident, you are personally liable to the injured party. Incorporation protects you from those types of liability. But, it will not protect you from your own actions. You can also shift to the corporation potential liabilities from leases or vendor contracts. Thus, if you sign a 3 year office lease under the corporation, you are not personally liable to the landlord if the business can't pay the bill, or needs to move. Just don't sign a personal guaranty!
Finally, once you decide to form a corporate entity, many more questions arise, including the corporate form, whether to file as a "closely held" business, where to incorporate, and whether to make an IRS Subchapter "S" election. Those questions will be answered in a future post.
John R. Browning, Esq.
949.244.5053
johnrbrowning@gmail.com
Irvine, California
Monday, February 15, 2010
Traps to avoid when shutting down (or leaving) a business
I had a potential client come to me who had owned, with a partner, a franchised retail store. As the "franchisee", they were required to purchase products they sold from the "franchisor". They were each required to guarantee these purchases. These types of "personal guarantees" are very common in franchise relationships, and in many ongoing relationships between a business and its vendors.
A fews years after the business was started, the potential client had decided she no longer wanted to be part of the business, and her partner bought her out. The business was making money and its bills were paid. She trusted her business partner, knew that he would pay her, and didn't see a need to pay a lawyer to document the transaction.
Unfortunately, with the downturn in the economy, the business could no longer pay its bills, and had amassed a significant sum of money owed for product purchases to the franchisor. Her ex partner closed the business, and filed for bankruptcy.
And why was this potential client here seeking legal advice? She had just been served a lawsuit filed by the franchisor seeking over $100,000 from her personally. Yes, her personally. Why, she asked? She hadn't been involved in the business in years. She wasn't an owner when the products that hadn't been paid for were purchased. She could prove when she left the business, and that she wasn't involved.
Her problem was the personal guarantee she signed long ago. The guarantee stated that she was personally legally liable for the payment of any products by the business. The guarantee didn't state that she had to be an owner to be legally liable. In fact, it provided that she could notify the franchisor of any termination in her relationship with the franchised business, and that would end her personal liability. But, she didn't imagine that she would continue to be personally liable after she sold her interest in the business. Because she didn't hire a lawyer to document the sale of her business interest, no one took a "fresh look" at the existing documentation to determine what steps were needed to fully protect her. That process -- a sort of legal due diligence -- is critical, and can lead to very unfortunate circumstances.
So, be careful any time you buy or sell a business, or close down a company, or separate from a business partner. There can be unintended consequences that are easily dealt with at the time, and substantial if ignored. In these trying economic times, one can't be too careful.
John R. Browning, Esq.
949.833.8838
jbrowning@rrjlaw.com
Russakow, Ryan & Johnson, a PLC
Irvine, California
A fews years after the business was started, the potential client had decided she no longer wanted to be part of the business, and her partner bought her out. The business was making money and its bills were paid. She trusted her business partner, knew that he would pay her, and didn't see a need to pay a lawyer to document the transaction.
Unfortunately, with the downturn in the economy, the business could no longer pay its bills, and had amassed a significant sum of money owed for product purchases to the franchisor. Her ex partner closed the business, and filed for bankruptcy.
And why was this potential client here seeking legal advice? She had just been served a lawsuit filed by the franchisor seeking over $100,000 from her personally. Yes, her personally. Why, she asked? She hadn't been involved in the business in years. She wasn't an owner when the products that hadn't been paid for were purchased. She could prove when she left the business, and that she wasn't involved.
Her problem was the personal guarantee she signed long ago. The guarantee stated that she was personally legally liable for the payment of any products by the business. The guarantee didn't state that she had to be an owner to be legally liable. In fact, it provided that she could notify the franchisor of any termination in her relationship with the franchised business, and that would end her personal liability. But, she didn't imagine that she would continue to be personally liable after she sold her interest in the business. Because she didn't hire a lawyer to document the sale of her business interest, no one took a "fresh look" at the existing documentation to determine what steps were needed to fully protect her. That process -- a sort of legal due diligence -- is critical, and can lead to very unfortunate circumstances.
So, be careful any time you buy or sell a business, or close down a company, or separate from a business partner. There can be unintended consequences that are easily dealt with at the time, and substantial if ignored. In these trying economic times, one can't be too careful.
John R. Browning, Esq.
949.833.8838
jbrowning@rrjlaw.com
Russakow, Ryan & Johnson, a PLC
Irvine, California
Tuesday, February 9, 2010
Losing your child support?? New law allows increase in spousal support.
Are you expecting a decrease in child support from your ex as your child turns 18 this year? Well, hope may be on the way. The legislature has enacted a law that expires at the end of 2010 that allows you to go back to court and ask for an increase in spousal support if your child turns 18 (and thus the child support stops). Historically, the code and case law has drawn a clear distinction between spousal support and child support. This new California Family code section blurs that distinction significantly. Specifically, the emancipation of a child for whom support is paid is a change in circumstances which enables the supported spouse to seek a modification of spousal support.
So, what should you do? Contact an attorney immediately, and appeal to the court for an increase in your spousal support due to changed circumstances. My firm has lawyers specialization in family law on staff. Contact someone soon to take advantage of this new California family law statute.
949.833.8838
jbrowning@rrjlaw.com
Russakow, Ryan & Johnson, a PLC
Irvine, California
Monday, February 8, 2010
Must employers tolerate medical marijuana use?
Marijuana has been legal for medicinal purposes in California since 1996. But only since Obama changed Federal policy and stopped raids and prosecutions for state sanctioned medical marijuana use has the popularity of this once illegal drug flourished. But what are your rights as an employer? If you fire an employee for testing positive for marijuana, are you going to get sued? Must an employer provide "accommodation" for employees using marijuana pursuant to a doctor's prescription?
Fortunately, the California Supreme Court has held that the Compassionate Use Act of 1996 does not give medical marijuana users protection under the Fair Employment and Housing Act. Employers can rely on this precedent to require employees submit to drug test, and are not required to provide accommodations to those who use medical marijuana.
John R. Browning, Esq.
Irvine, California
Fortunately, the California Supreme Court has held that the Compassionate Use Act of 1996 does not give medical marijuana users protection under the Fair Employment and Housing Act. Employers can rely on this precedent to require employees submit to drug test, and are not required to provide accommodations to those who use medical marijuana.
John R. Browning, Esq.
949.244.5053
johnrbrowning@gmail.com
Irvine, California
Friday, February 5, 2010
When is a Judgment Lien not enough?? Be careful of the foreclosure sale...
Have a judgment against someone? Be careful of a new California case law that left a judgment creditor empty handed after the debtor's home was foreclosed on and there was extra money after the mortgage was paid off. If you're smart, there's something you can do.
So, you've got a judgment against someone who owns a home, recorded your judgment with the county recorder, and think that's good enough -- eventually, the "judgment debtor" will try to refinance or sell the home, and you'll get paid. Right? WRONG!!!! If that's all you've done, you may never recover. A recent California appellate decision held that you may get nothing if the judgment debtor's home is sold in a non-judicial foreclosure sale, even if it is sold for more than the mortgage being foreclosed upon! With foreclosures on the rise, be careful!
So, imagine this -- you have a $100,000 judgment against a home owner. The home has a $500,000 mortgage. You timely file your judgment lien (called an "Abstract of Judgment) with the county recorder's office. The home owner / judgment debtor fails to pay the mortgage, and the mortgage holder initiates a foreclosure sale. This does not have to go through the Court system. Rather, the mortgage holder hires a "trustee" to sell the property. The trustee simply records a "notice of default", sends the notice to the homeowner (your judgment debtor), waits three months, records a "notice of sale", and 20 days later sells the property. Most significantly, the trustee has no obligation to inform you, the lienholder, of the sale!
Back to the example -- the home is sold to the highest bidder at public auction. Let's say it is sold for $600,000. In the crazy California real estate market, you never know what will happen at the sale. So, the trustee pays the mortgage holder $500,000, and that leaves an extra $100,000. Remember, this new California appellate decision states that the trustee has no legal obligation to notify the other lienholders of the foreclosure sale, and has no legal obligation to pay off the "junior" liens (your judgment). So, what does the trustee do with the money? He pays it to your judgment debtor! (Who immediately proceeds to take a nice vacation, maybe to Las Vegas).
So, what can you do? Well, if you get lucky, you can try to get money from the judgment debtor -- after all, he now has a $100,000 in his bank (well, maybe less after the Vegas trip). But, is there a better way? Well, fortunately there is -- in addition to recording an "Abstract of Judgment" with the county recorder, you can record a request that the mortgage holder send you notice of the judgment debtor's property is going to be foreclosed upon. When you find out about the sale, you formally request the trustee to pay you out of the excess proceeds, and the trustee is obligated to do so. But be wary -- this case came out in January 2010, and it is not typical that a judgment creditor would record, in addition to the Abstract of Judgment, a request for notice from the trustee. If you have a judgment lien, talk to lawyer soon to make sure you are protected.
John R. Browning, Esq.
Irvine, California
So, you've got a judgment against someone who owns a home, recorded your judgment with the county recorder, and think that's good enough -- eventually, the "judgment debtor" will try to refinance or sell the home, and you'll get paid. Right? WRONG!!!! If that's all you've done, you may never recover. A recent California appellate decision held that you may get nothing if the judgment debtor's home is sold in a non-judicial foreclosure sale, even if it is sold for more than the mortgage being foreclosed upon! With foreclosures on the rise, be careful!
So, imagine this -- you have a $100,000 judgment against a home owner. The home has a $500,000 mortgage. You timely file your judgment lien (called an "Abstract of Judgment) with the county recorder's office. The home owner / judgment debtor fails to pay the mortgage, and the mortgage holder initiates a foreclosure sale. This does not have to go through the Court system. Rather, the mortgage holder hires a "trustee" to sell the property. The trustee simply records a "notice of default", sends the notice to the homeowner (your judgment debtor), waits three months, records a "notice of sale", and 20 days later sells the property. Most significantly, the trustee has no obligation to inform you, the lienholder, of the sale!
Back to the example -- the home is sold to the highest bidder at public auction. Let's say it is sold for $600,000. In the crazy California real estate market, you never know what will happen at the sale. So, the trustee pays the mortgage holder $500,000, and that leaves an extra $100,000. Remember, this new California appellate decision states that the trustee has no legal obligation to notify the other lienholders of the foreclosure sale, and has no legal obligation to pay off the "junior" liens (your judgment). So, what does the trustee do with the money? He pays it to your judgment debtor! (Who immediately proceeds to take a nice vacation, maybe to Las Vegas).
So, what can you do? Well, if you get lucky, you can try to get money from the judgment debtor -- after all, he now has a $100,000 in his bank (well, maybe less after the Vegas trip). But, is there a better way? Well, fortunately there is -- in addition to recording an "Abstract of Judgment" with the county recorder, you can record a request that the mortgage holder send you notice of the judgment debtor's property is going to be foreclosed upon. When you find out about the sale, you formally request the trustee to pay you out of the excess proceeds, and the trustee is obligated to do so. But be wary -- this case came out in January 2010, and it is not typical that a judgment creditor would record, in addition to the Abstract of Judgment, a request for notice from the trustee. If you have a judgment lien, talk to lawyer soon to make sure you are protected.
John R. Browning, Esq.
949.244.5053
johnrbrowning@gmail.com
Irvine, California
Thursday, February 4, 2010
The dangers of online wills and trusts
If you own a business, you have assets that would pass to your spouse and/or children upon your death. At minimum, your ownership interest in your business would be included in your estate. Clients often inquire as to whether an online will or trust preparation form is "good enough" to address their estate planning needs. Unfortunately, with today's complicated tax structure, using an online service may save money in the short term, but cost big dollars later on. Let me explain.
You may know that the estate tax, otherwise known as the "death tax", was repealed effective calendar year 2010. So, if you die in 2010, as the law stands today (and until congress likely imposes a new estate tax retroactively), you could pass any amount or money, or value of property, to your heirs without paying estate tax. As a business owner, your ownership interest in your business would be an asset of your estate, and the value of that ownership interest would be included in the value of your estate. Your heirs would receive a step up in basis if estate taxes were paid, but would not if congress does not reenact the estate tax. When your heirs sell the business, they would pay income tax on the difference. But what to do if the estate tax is reenacted and applied retroactively? There are many nuances and traps given the unsure nature of what will happen next with the estate tax (which will come back in 2011) this year. Without careful drafting of a will and trust to address your particular situation, you could fall trap to congress and over pay, now or later.
John R. Browning, Esq.
Irvine, California
You may know that the estate tax, otherwise known as the "death tax", was repealed effective calendar year 2010. So, if you die in 2010, as the law stands today (and until congress likely imposes a new estate tax retroactively), you could pass any amount or money, or value of property, to your heirs without paying estate tax. As a business owner, your ownership interest in your business would be an asset of your estate, and the value of that ownership interest would be included in the value of your estate. Your heirs would receive a step up in basis if estate taxes were paid, but would not if congress does not reenact the estate tax. When your heirs sell the business, they would pay income tax on the difference. But what to do if the estate tax is reenacted and applied retroactively? There are many nuances and traps given the unsure nature of what will happen next with the estate tax (which will come back in 2011) this year. Without careful drafting of a will and trust to address your particular situation, you could fall trap to congress and over pay, now or later.
John R. Browning, Esq.
949.244.5053
johnrbrowning@gmail.com
Irvine, California
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