For over a decade On the Skware Toy Soldiers and its owners, Boo & Woo, the Skware brothers, have enjoyed the shopping traffic brought to their retail store that’s located in the same shopping center as Athletics Authoritiez, a popular sporting goods retailer. However, over the last couple of years the Skware brothers have seen their overall numbers of shoppers go down and, with slowing traffic, their gross sales revenue has dropped by over 15% – straight off the bottom line. Now, blaming E-Commerce woes, the news media (supported by local scuttlebutt) is suggesting that Authoritiez is on the ropes and may close its store. Can Boo & Woo do anything to save On the Skware? Continue Reading E-Commerce Disruption – Tenant’s Tizzy
Beginning as a part-time college job walking friends’ dogs, Cary Barker’s full time business now employs over 30 college students to walk neighborhood dogs and to deliver them for daily activities to and from his Barkingham Palace Doggie Day Care Center, LLC. Although not yet ready to seek investors and begin franchising, Cary wants to grow Barkingham Palace, protect its blind spots, get alternative perspectives from other’s experiences and expand his network of friends. Cary’s friend Bayh Lawz suggests that Cary should select a board of directors. Should he? Continue Reading Selecting an Advisory Board – Do’s & Don’ts
Spurred by the frenzy of mid-century modern furniture of the 1950s and 1960s returning in popularity, a growing number of collectors are investing in and holding vintage furniture. Capitalizing on that craze, N. Stile Sune’s start-up Mothbalz Antiques cannot grow fast enough to meet demand. To buy more old warehouses and re-fit them into climate controlled spaces, N. Stile must raise over $2 million and is willing to give his investors an equity interest. Can N. Stile use crowdfunding or must he go the old fashioned route of a private placement memorandum (PPM)?
Due to Sune’s $2 million in capital needs (and more) crowdfunding is not a viable option.
The JOBS Act 2012 (Jumpstart Our Business Startups) was designed to encourage funding of U.S. small businesses and to ease various U.S. securities regulations affecting business investment. Enticingly entitled the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” Title III of the JOBS Act had visions of giving small individual investors access to early-stage investment and the enhanced ability to raise money beyond “friends and family,” through social media and from unknown investors like other sites such as Kickstarter.
When compared to other forms of private placements, crowdfunding is not a feasible option for our friend N. Stile Sune and Mothbalz Antiques. As explained in Forbes, here are ten reasons why:
- Issuers are capped to raising $1 million in any 12-month period.
- Shares issued are subject to a one-year restricted period.
- Crowdfunding is capped over a 12-month period at amounts depending upon net worth / income.
- Crowdfunding must be done through a registered broker-dealer or registered “funding portal.”
- The disclosure document (PPM) must be filed with the SEC prior to first sale and N. Stile Sune would have to file audited financial statements.
- Unlike JOBS Act changes affecting accredited investors, crowdfunding does not allow advertising except in narrow exceptions.
- Annual reports and possibly more frequent reports must be filed with the SEC.
- Legal prospectus liability applies to disclosures.
- Extensive due diligence is required, including background checks on management and large stockholders.
Tilting the Scales in Your Favor
Beware. Crowdfunding is far from a start-up fund raising panacea. You can still be sued for fraud for an actual or perceived misrepresentation or omission. One of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest. Disclose as much information as possible about your business, ensuring that if things begin to fall apart and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense – through the traditional Private Placement Memorandum – or PPM for short.
Growth in the DFW metroplex is booming, and the City of Flourish is one of the driving forces. Unfortunately, the City has had a difficult time keeping up its infrastructure with the growing population. Recently the City selected a bid from Slab Mixer Co., a concrete pipe manufacturer, for culverts for a project widening some of the City’s streets. After the City and Slab signed their contract, a group of Flourish citizens, concerned with how the City’s spending might affect their taxes, requested a copy of the contract under the Texas Public Information Act (TPIA). When the City notified Slab of the request, Slab asserted that some of the terms in the contract needed to be redacted because they would give Slab’s competitors an advantage in future contracts. Does Slab have the right to do that?
Background on the Texas Public Information Act
The Texas Public Information Act provides the public with the right to access information the government collects, subject to approximately 60 exceptions. Tex. Gov’t Code §§ 552.221, 552.101-.154. One exception is “information that, if released, would give advantage to a competitor or bidder.” Id. at § 552.104(a). Historically, the Texas Attorney General’s Office, which is charged with interpreting the Act and maintaining its uniformity, has taken the position that this exception only protects the governmental body, and not a private party. In other words, the AG believed the Act only allowed a governmental body to protect information that would place it at a disadvantage with other governmental bodies inside and outside of the State of Texas.
Do Private Parties Have a Right to Protect Their Bid Information?
Yes. In 2015 the Texas Supreme Court in The Boeing Company et al. v. Paxton held that “a private party may assert the exception to protect its competitively sensitive information.” The Court found that the plain language of the exception was not limited to a governmental body’s right to protect that information. It also noted that the governmental body had the right to defer to the private party to assert its competitive interests were at stake and request that the competitively sensitive information be withheld. Thus, Boeing had standing to assert the exception, but would have to show that the information requested, “if released, would give advantage to a competitor or bidder.”
What about Citizens’ Right to Know How Much Their Government is Spending?
Some have claimed the Texas Supreme Court’s decision in Boeing has given governmental bodies a carte blanche loophole to avoid turning over any information about their contracts. According to these critics, the Court’s decision allows the governmental bodies to assert that disclosing that information would give an advantage to the successful bidder’s competitors in the future.
While it’s a superficially appealing position from a taxpayer’s perspective, it ignores another argument that the governmental bodies assert to protect disclosure of this information. As mentioned above, the governmental bodies have asserted the exception protects disclosure of sensitive information that the body believes will give other governmental bodies an advantage.
For example, the Boeing case points out that the Attorney General ruled the exception protected disclosure of information concerning the Texas Governor’s marketing meetings with businesses in other states because the State is competing with other states to recruit those businesses to relocate. The release of that information would give other states the advantage to approach those businesses with competing or better incentives.
Companion bills (HB 792 and SB 407) have been filed in the Texas House and Senate to address the Texas Supreme Court’s decision in Boeing. If enacted, the legislation would make clear that the exception only allows a governmental body to protect information that it believes would harm its competitive interests. It would also apply an “exception to the exception” that would require governmental bodies to disclose that competitive information after the body awards the contract. HB 792 was recently referred to committee. SB 407 was referred to committee, where it was discussed but not voted upon yet.
Tilting the Scales in Your Favor
That depends on how your business has been affected by the competitive bidding process. If you have won bids in the past, and your proposals contain proprietary information that gives you a competitive advantage, you should ask the governmental body to redact that information if anyone requests it under the TPIA. On the other hand, if your business has consistently lost out in the bidding process, you may want to press the Legislature to pass HB 792 and SB 407 this session so that you can see your competitor’s proposals and try to figure out how you can match, or beat, them in the future.
This is the last installment of a series discussing potential pitfalls relating to selling your business. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer; Selling Your Business: Why Accurate Financials are Important; and Selling Your Business: 5 Critical Deal Points. Today we’re going to discuss why it’s important to have a business plan.
It’s the end of the year and you have made that decision: you want to sell your business next year and retire. Congratulations! Previous installments in this series discussed the importance of deal points, accurate financials and having any legal issues resolved to avoid any pitfalls when you sell your business. But to get to the point of making a deal with a buyer, you first have to have a marketable business. A business plan is the essential tool you need to help market your company.
Business Plans are Road Maps for Buyers
The question on every prospective buyer’s mind is “What makes your business so special that it’s worth $_____________?” A business plan helps buyers understand your assets and why someone would want to buy your business. For example, a business plan can summarize historical and projected financial data, market share, marketing strategies and analyze your competition. Your business plan should also summarize what key intellectual property your business owns, as well as any proprietary licensing that is in place. This information attracts prospective buyers to dig deeper – especially if the business plan is packaged well because it conveys a sense that you run a disciplined business.
Putting it All Together to Tilt the Scales in Your Favor
We’ve talked about a lot of important issues in this series. If you are looking to sell your business remembering these key points will help your sales process get off to a good start:
- Prepare or update your business plan to market your company to prospective buyers.
- Have your accountant audit your financials.
- Make sure a prospective buyer signs a confidentiality and non-competition agreement before you allow them to conduct any non-public due diligence.
- Qualify your buyer. Why waste time allowing a buyer who can’t meet your payment terms or get financing from a lending institution?
- Use a lawyer to prepare, review and advise you on all letters of intent or sales agreements.
- When negotiating back and forth with a prospective buyer, make sure all of the terms are documented in writing!
Hope you have enjoyed this series. Merry Christmas and Happy New Year! See you in 2017.
This is the fifth installment of a series discussing potential pitfalls affecting the intended sale by JR and Sue Ellen Pawlenty of their business Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer and Selling Your Business: Why Accurate Financials are Important. This month we discuss the Top 5 Critical Deal Points and Recommendations.
Get to the Offer Stage Quickly by Term Sheet or Letter of Intent. Before signing any written understanding, JR and Sue Ellen should consult a trusted representative to assist them in preparing a well drafted non-binding Letter of Intent, which is critical to setting goals and expectations for a clearly understood, viable offer that represents a good probability of closing.
- Payment Terms – Price and Timing. Unless you are paid in cash in full at closing, there’s more than setting price. Expect to negotiate both time and money – deferred and/or contingent payments such as earn-outs, seller notes and stock all depend upon whether your buyer is strategic or financial. Taking a modest down-payment with a note secured only by your company assets and giving the buyer control over your company’s operations, for example, is a recipe for probable disappointment, if not certain disaster.
- Reps and Warranties. These are essential statements of fact made by the buyer and seller to each other about various aspects of the transaction, typically including finances, customers, taxes, contracts, ownership, legal issues, intellectual property and more. While both pledge their statements to be true, difficulty of proof and ability to collect realistically impact any agreed upon remedy. Making sure that the statements (promises) you make are clear and accurate is critical.
- Indemnification. If a representation or warranty of either you or the buyer is incorrect, the transaction documents address who is responsible and how damages are determined; attorney’s fees are frequently assessed against the loser. Careful attention to contract language addressing both the promises made and the scope of liability imposed for misstatements is crucial.
- Transition. Expect the buyer to require your continuing participation to transition the sale. Delaying negotiation of your role and compensation risks an undesirable commitment of time at an almost certainly reduced compensation.
- Employees. What assurances does the buyer require about key employees? What is the buyer’s plan for both key and support employees post-closing? Will the buyer retain them with the same compensation and benefits? Be careful when you tell your team. Wait for a solid plan and a solid buyer so you can answer– what does this mean to them?
Tilting the Scales in Your Favor
Beyond the deal points there are some lessons learned that are worth knowing, particularly if this is your first “rodeo”:
- Your first “buyer” likely won’t.
- Run your business as if you were going to own it forever – it improves your negotiation position.
- Due diligence is a two-way street. Check out your buyer’s ability to perform.
- Run a litigation check on your prospective buyer.
Gunner Gunter employs dealership manager Sayles and computer technician H. Packard (“Pack”) at Falconaire’s Fine Ford and pays these “white collar” employees $40,000 per year. In busy sales months, each averages 50-60 hours a week without paid overtime. Do the new FLSA regulations affect Gunner?
Yes. Effective December 1st, Sayles and Pack must either be paid for their overtime hours or to avoid this mandate, their minimum annual salary must be $47,892 (up from the current $23,600 minimum per year) assuming they are Fair Labor Standards Act “white collar” employees (i.e., executive, administrative or professional) under the exemption, and not otherwise entitled to overtime pay.
The Labor Department estimates the new rules affect some 5 million exempt workers, predominantly in Texas, California, Florida, Illinois, New York and Pennsylvania, which have the largest number of newly eligible workers – 200,000 or more in each state. Of those numbers, hardest hit are lower-wage businesses and service industries like hospitality and retail, which identify the new rules as “Career Killers.” Rather than increasing salaries, many business may elect to reclassify professionals as hourly workers and reduce hours, adjust or remove existing benefits and flexibility (including loss of their more prestigious titles) or cut base salaries. “Comp time” (working overtime for future days off) is not an option for these newly eligible overtime workers. Even with labor reductions, the projected additional administrative costs to businesses to track hours of more employees and updating payroll systems are estimated to cost $745 million.
Employers who fail to comply after December 1st risk Department of Labor (DOL) investigation. More daunting, perhaps, is the threat of private litigation, including class action litigation – a risk with substantial downside potential.
Tilting the Scales in your Favor
Evaluate your current employees and salary levels to assess your company’s possible DOL exposure. If you elect to reclassify employees from “overtime exempt” to “overtime eligible”, develop comprehensive plans to (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes. Congress may attempt to redirect these changes with legislation, but it’s more likely that the results of the November election will dictate whether that momentum is sustained. Consider using a Checklist.
For more insight on cutting edge employment issues, including federal changes to overtime exemptions, visit the Texas Employer Handbook blog, written by Gray Reed employment partner Michael Kelsheimer.
This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.
Avoid Losing the Sale
Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business. Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.
Potentially Avoiding Litigation
When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense. One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.
Boosting Your Business’s Market Value
Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth. You should also consider having the business appraised.
Other Important Records
If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing. Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.
If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.
You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.
Tilting the Scales in Your Favor
Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.
Among the growing number of business owners looking to sell their business, JR and Sue Ellen Pawlenty are in the market to sell their company Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls and So You Might Sell Your Business Someday: Do You Need a Broker? For multiple reasons, such as family, health, age or interest, you have decided to sell your business. Now what do you do?
4 Tips – No Matter the Buyer
- Get your House in Order – all of your records, especially financial records should be reviewed by a competent accountant and be consistent with GAAP accounting methods.
- Assemble your Asset Financial Information for Buyer Due Diligence – contracts with buyers, employee policies and contracts, and overall business structure for legal and tax implications.
- Business Valuation – get an early idea from a competent valuation adviser and ask your expert for ideas to improve valuation, including identifying and perhaps courting your current competition. Careful: it may not be worth what you think, know what you need to retire.
- Plan – identify specific shareholder objectives and a transition plan. If your primary plan is a family transition plan, WAIT, there’s much more!
9 Specific Tips for Succession Planning of a Family Business
Family businesses account for a staggering 50 percent of the gross domestic product of the U.S., and it is not just in small storefronts or website businesses: 35 percent of Fortune 500 companies are private or public companies that are controlled by families. Key issues for succession planning include:
- Generational Transition – only a third of all family businesses successfully make the transition to the second generation.
- Alignment of Family Interests – alignment becomes more problematic as members retire and turn over the reins to the new generation and expect retirement income from the company.
- Balancing Financial Returns – buyout agreements are challenging when retiring family members look to the balance sheet value rather than an earnings capitalization model.
- Interfamily disputes. Family member interests may not be aligned, becoming even more difficult upon a family owner’s divorce or death and the surviving spouse holds stock (and voting rights) but is not actively contributing to the business.
- Estate and Inheritance Issues. Taxes and probate upon a family owner’s death can complicate business continuation.
- Identify and Groom the Successor. Identify a competent successor then develop them to assume the headship of the business by on-the-job training, working under mentors and advisors, and delegating before the actual passing on of the baton.
- Document the Succession Plan. A concrete, straight forward and not open to interpretation at a succession plan should be written: identifying the successors both in ownership and management; roles of both active and non-active family members in the business; and the support system for the successor from family members as well as the company.
- Create a Plan for the Transition. Establish how the business will be handed over – will the successor purchase the company, or will it be gifted? And when? If sold, what purchasing options will the older generation offer the successor? Minimizing taxes to all is critical.
- Communicate. The Plan must be timely communicated to the family and those active within the business, as well as non-active members, preferably by the current ownership. Every family member and employee must fully understand how the succession will work, and what their part is within it all.
Tilting the Scales in Your Favor
You can’t sell your business like you sell your car. It’s more like selling your house, but even more challenging than just timing the market, de-cluttering the inside and slapping a coat of paint on the outside. Beyond just the physical assets and the economic climate, you are dealing with people – employees, customers and vendors. Even more complicated is the addition of continuing family ownership, management and control to the mix. It takes time, planning, decision making and then decisive communications to all concerned for success. Success won’t happen overnight; failure almost certainly will happen if you don’t.
This is the second installment of a series discussing potential pitfalls of which closely held business owners should be wary when they are trying to sell their business. Here’s a link to our first installment.
After a lifetime of pouring time and energy into growing and expanding, Pawlenty Energy, JR and Sue Ellen Pawlenty are ready to sell their business and retire. Having never sold anything of this magnitude, JR and Sue Ellen have no idea where to start to try to sell their company. Even more challenging is that, until the money exchanges, they must continue to run their business. Marketing to sell their company will be a hassle that could negatively affect their operations, their personnel and their reputation both with their customers and with their vendors. Their friend Nancy Noitall recommended that they hire a business broker to assist them in handling the sale. Is this a good idea?
Benefits of a Business Broker
Business brokers can provide a valuable resource to sellers. For example, a business broker can mass market a company when the seller does not already have a prospective buyer lined up. The broker also serves as the seller’s spokesperson, allowing the seller to concentrate on running the business instead of dealing with the daily distractions that arise from trying to get a deal done. This includes screening prospective buyers to ensure they can afford the sales price. A broker can also come up with a market value for the business based on the sales prices of similar businesses.
Risks of Using a Broker
Sellers face some risks using business brokers. Because a business broker is the seller’s spokesperson, the seller would likely be liable if the broker misrepresented the business to a buyer. Business brokers also typically use form agreements for each transaction. If there are unique aspects of the transaction, or the business, that are a material part of the sale, form agreements may not address those issues and create the potential for litigation between the buyer and seller down the road.
Should I Involve Other Professionals?
Yes. If you have an accountant, he or she can help you get your financial statements in order before you advertise your business for sale. If your accountant did not previously do so, he or she may be able to audit your financial statements, which will improve your business’s value. If you hire a broker, your broker can deal directly with your accountant on any questions from potential buyers about the company’s financials.
You should also involve an attorney who can review and advise you about the broker agreement. Your attorney can also review and revise the broker’s form sales contracts to try to protect you from certain risks if the sale fails.
What Should I Look For in a Broker?
If you want to hire a broker, you should look for someone who has a proven track record selling similar businesses, or who has experience in your industry. The broker should be willing to work with your financial and legal advisers. Most importantly, you want a broker who puts your interests ahead of his or her fee.
Tilting the Scales in Your Favor
Whether you use a broker to help you sell your business depends on your personal circumstances. If you choose to use a broker, conduct a thorough background check, including references, of all potential candidates before hiring one. You also need to make sure you have a clear understanding of how the broker is compensated under the broker agreement – which you should have an attorney review with you.