Incomplete Repairs: Smart Solutions to a Common Closing Issue

How do you handle incomplete repairs at closing?

After all the negotiating back and forth, you finally agree on the terms and conditions for closing. But as is pretty standard with closings, something unexpected happens and repairs that should have been completed by closing won’t be ready in time. This can be an emotional trigger for the buyer, who is already naturally nervous about embarking on such a large purchase. The seller will no longer be vested in the business and doesn’t want another last-minute headache to handle on his way out the door. How do you resolve this issue in a way that is mutually beneficial?

The buyer should obtain 2-3 estimates to do the work that is incomplete. An escrow agreement should be prepared, providing that two times the average estimated cost is held in escrow from the purchase proceeds. That amount can only be distributed to the seller when both the buyer and seller agree in writing that the repairs have been satisfactorily completed.

Another alternative is to provide the buyer a credit (reduction in purchase price) sufficient for the buyer to hire someone to complete the work. Some buyers prefer to control the work or do it themselves to save some money, “pocketing” the value of the difference between the contractor’s price and sweat equity. They may also want to be assured the repair will be quality work by hiring a trusted repair contractor. Whether the buyer chooses to complete the repairs himself or hire out the work, he is still entitled to the estimated costs for a professional service. Unlike the first alternative where extra money is held in escrow until the repairs are complete, a credit lets you walk away from closing with the entire proceeds you expected.

Both solutions work equally well. It is a matter of what is most comfortable or convenient for the buyer and seller. Although this situation is not ideal, neither is it unusual. The attorneys of both parties can determine which solution is best and set up the logistics for making it happen.

Have the entrepreneurial bug?

Have you been considering launching a new business? You probably are wondering if this is a good time to take the leap. Business ownership is a lifestyle choice. Are you needing to change your lifestyle to achieve your personal or professional goals? People start businesses at all phases of life. According to Global Entrepreneurship Monitor, new business were started or operated by:

  • 6% of all adults 18-24 years
  • 18% of all adults 25-54 years
  • 6% of all adults 55-64 years

More businesses are started by men, but the gap is decreasing. While only 80% of the U.S. entrepreneurs are women, they make up the majority of new entrepreneurs in the age 55-64 group. If you offer a service to startup businesses, you should focus on this target market. Common reasons women launch a business at this phase of life are second careers after raising a family and a desire to get out of the rat race in favor of more control over career, quality of life and a retirement income. The competing family and financial demands are less in their late 50’s and early 60’s. Confidence in entrepreneurial ability is greater for women at this age as well.

Your first step towards entrepreneurship should be to prepare a business plan. This will guide you as you launch the new business and help provide targets and benchmarks to measure progress. Consulting with a business attorney can help you identify steps you will need to take for regulatory compliance, potential risks and mitigation options, and alternatives for business structure. Armed with this information, you can create a realistic business plan with appropriate costs and timelines.

 

Basic differences between a Franchise and a License Agreement

Franchise

License

Elements A Franchise, at its very basic state, has these elements:

  •   Common   Brand
  •   Common   Operating System AND
  •   Payment   of either an initial fee or ongoing fees from Franchisee to Franchisor
A License agreement is usually missing one of the Franchise   elements. The most common form of  a   license agreement has the following elements:

  •   Common   Brand and/or
  •   Payment   of a fee to Licensor
Agreement Typical Agreements include:

  •   Training
  •   On-going   Mentoring
  •   Technical   Advice from Franchisee
License agreements do not get much ongoing support from licensor
Relationship Close Relationship between Franchisor/Franchisee Loose relationship with minimal communication
TM/Logo and Territory Franchisee has the rights to use the Trademark and/or logo of parent   company (Franchisor) and are typically given territorial rights Licensee is not given the right to use the parent company   Trademark or logo; they are expected to market their own brand and build   their own presence/identity in the marketplace.

Buyer beware! 3 steps the buyer must take before closing

Buying business assets requires notifying the appropriate government agencies of the upcoming sale. Failing to do so could have serious consequences that can delay opening the newly-acquired business or bring personal financial liability to the buyer. For most business transfers, there are three steps that the buyer must take before closing, and, like all things complicated, involve taxes. These steps are outlined below with excerpts directly from the relative state forms and instructions.

1. File the Bulk Sales Notice

A person who is the purchaser of all or any portion of another’s business assets, otherwise than in the ordinary course of business, must, at least ten days before taking possession of such assets, or paying for them, whichever comes first, mail a Notification of Sale, Transfer or Assignment in Bulk, form AU- 196.10, to the Department of Taxation and Finance by United States registered mail or United States certified mail – return receipt requested, with the sender’s receipt postmarked by an employee of the United States Postal Service. Failure to file a proper and timely Notification of Sale, Transfer, or Assignment in Bulk by the purchaser, or failure to withhold sufficient consideration when the purchaser has been timely notified by the Tax Commission, will result in personal liability of the purchaser for taxes due from the seller, limited to the purchase price or the fair market value of the business assets sold, whichever is higher.

2. Register for your own new sales tax number (Certificate of Authority to Collect Sales Tax).

The purchaser, if his business will be required to collect any sales or compensating use tax, or will sell tangible personal property for resale, must apply for the Certificate of Authority at least twenty days prior to commencing or opening such place of business, or before purchasing or paying for business assets, whichever comes first, file a Certificate of Registration, form TP-153, with the Tax Department. Form TP-153 may be obtained from the Taxpayer Assistance Bureau, Department of Taxation and Finance, State Campus, Albany, New York 12227.

3. Remit sales tax to the state for the taxable portion of the sale (tangible personal property). 

If a portion of the purchase price is for sued machinery or equipment, sales and use tax may be owed for this portion of the sale. (For manufacturers, there may be an exemption available with a ST-121 form for machinery and equipment used to make a tangible product.) In most cases, the rate will be the sales tax rate applicable in the county where the buyer is located. This is reported with an ST-131 form for casual sales. The form and tax must be filed within 20 days.

Understanding your requirements and taking the appropriate steps will increases the likelihood that your business transfer closes smoothly and allows you the opportunity to get on with your new business venture.

Short Sales: they aren’t really that short!

A short sale is not always “short” in terms of how quickly they are processed. Many think that as an alternative to being foreclosed on, selling their home as a short sale is the quick and easy fix to a less than ideal situation. In reality, a short sale can take anywhere from three months to over a year, depending on the lender, the market and potential buyers.

So what is a short sale? A short sale occurs when the homeowner owes more on the mortgage than what the property is worth in the real estate market. The name “short sale” refers to the shortfall in the amount the lienholder receives on their loan.

Once a buyer presents an offer that the seller has accepted, a contingency for short sale approval is added to the contract of sale. In order to move forward with the real estate closing, the bank (or lienholder) has to agree to accept the amount offered by the buyer to satisfy the mortgage on the home.

Among the several factors that speed up or slow down a short sale transaction, the short sale approval from the bank is one of the main reasons the transaction can take months longer than a typical real estate transaction. The approval time depends on the bank, and what their short sale approval procedure involves. After the bank’s approval, the real work begins, and things like loan processing, appraisals, title work, etc. are ordered and prepared. This work is never done prior to short sale approval to ensure that an approval is obtained prior to the expenditure of time and resources in preparing the real estate transaction.

When facing a decision between foreclosure and a short sale, discuss the issues underlying these choices with your attorney. Your decision will be affected by your circumstances, along with the bank, the market, and potential lenders and should be considered on an individual basis.

How to dissolve your DBA with New York State Department of State

At some point during the life cycle of owning your business, you may find that you no longer have use for the trade name (assumed name, DBA, or ‘doing business as’) that you registered with the New York Department of State (NYDOS), Division of Corporations. It may be that you are quitting the business or selling it, or that you decide to operate under a different name. Either way, you are going to need to get rid of the current trade name. This is known as ‘discontinuing an assumed name’ – the term that the NYDOS uses for a DBA. Another term for this process is ‘dissolving a DBA.’

Dissolving your DBA can be a very quick and easy process. In order to file the dissolution paperwork, you will need:

  1. The “Fillable Certificate of Dissolution Form” from the NYSDOS.  The appropriate form can be found at: http://www.dos.ny.gov/forms/corporations/1625-f-l.pdf ;
  2. $25 Filing Fee paid by check made payable to the New York State Department of State (or  if you are faxing the form, the fee will be submitted via credit card on the Credit Card Authorization Form found at: http://www.dos.ny.gov/forms/corporations/1515-f-l.pdf ); and
  3. Information on the date of filing of both the initial corporation as well as the DBA (Certificate of Assumed Name).

If you are dissolving the DBA for a business transaction and require a filing receipt of the dissolution, I recommend that you elect to pay the additional expedited fee of $25.00 as the NYSDOS is usually backed up 3-6 weeks in its processing of un-expedited filings.

Fill out the Certificate of Dissolution Form and provide a check for the filing fee and mail to: New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231.

If you are faxing your dissolution, you will also need to complete the Credit Card Authorization Form and submit both via fax to the NYSDOS at (518)474-1418.

You must make sure to keep the information in the form consistent with NYDOS records, as the NYSDOS will reject the Certificate if you make any errors. You can check the online business entity search to ascertain some of the details of the official record of the Corporation at http://www.dos.ny.gov/corps/bus_entity_search.html .

Here is an example of the completed Certificate of Discontinuance of Assumed Name and Credit Card Authorization forms as a reference.

Buying a restaurant in New York

If you are looking to purchase a restaurant in New York, you have two options: (1) buy the sellers’ ownership shares; or (2) buy the seller’s assets. Like any choice, there are advantages and disadvantages to either option, but generally, an asset purchase is more beneficial to the buyer. It boils down to liability: when you purchase a business’s assets, you assume specific liabilities of the seller, but when you purchase the stock of the business, you risk assuming all liabilities of the company, whether known or unknown.

In either case, a thorough search and due diligence review of the business can mitigate the risk. Guaranties and indemnification provisions can help provide protection. There are circumstances where a stock sale may be advantageous. These include where licenses are owned by a corporation or LLC, such as a liquor license. The process to approve a change in corporate ownership may be faster and less costly than an entire new application. It can also help pre-empt an interruption in operations, keeping the business open and in business during the ownership transition.

You will also want to determine if the seller can assign the lease to you (permission for a lease assignment would be found in one of the clauses in the existing lease agreement). Before you agree to an assignment, make sure that the remaining term on the lease, the rent amount, the security deposit, the personal guaranty, etc. are all acceptable. In the case where the lease cannot be assigned, the landlord will have to agree to terminate the current lease and enter a new lease with you.

The purchase agreement (bulk asset agreement or stock purchase agreement depending on how you are acquiring the business) should contain all the critical information pertaining to the sale. These terms include the purchase price, how much will be held in escrow, a list of the assets being purchased, personal representations and indemnifications, the amount paid at closing, the date of closing, and any contingencies for closing (such as a liquor license or lease assignment approval for the buyer). Along with the purchase agreement, there should also be a Bill of Sale and corporate resolution that authorizes the seller to sell the business.

As the buyer, you are responsible for any NYS sales tax that the seller may owe. You must file a bulk sale notice (at least 10 days before closing) and have the seller personally represent that there are no taxes owed. You should also have the seller personally indemnify the buyer for any unpaid taxes or other liabilities that were incurred before the closing date. The closing date should occur after the buyer receives the tax release letter from the NYS Department of Taxation. This letter states that no taxes are owed. If holding off the closing isn’t an option, a large portion of the purchase price should be held in escrow until you receive the release letter. Failure to follow this procedure makes the buyer responsible for outstanding sales tax and will result in a lien on the assets.

If you need to close in less than ten days, you can use an escrow agreement where the title transfers but funds are held by the attorney until the sales tax issues are confirmed. This is unusual, but your attorney can creatively help you accomplish your business goals and needs with work-around solutions that still protect your interests.

When should you consult an attorney in a commercial transaction?

The best time to consult an attorney when you are considering a commercial deal is before you sign a contract or purchase offer. It is important to understand that brokers make a commission on the transaction and generally only get paid if it closes. There is an inherent conflict created by this situation, as their desire to close (and get paid) may impair their desire to get the best deal possible – something that can take time to negotiate.

It is also important to understand that commercial real estate or business sale transactions raise complex issues. These transactions require consulting with a variety of professionals to get all of the information you will need to receive the best deal for your situation. A broker’s role in the process is to bring the parties together – to be a matchmaker. Your financial advisors will advise on tax and accounting issues. Your accountant should be consulted to review the financial records and give an opinion on the allocation of the sales price (how much of the total price is allocated to things such as equipment, inventory, good will, or a consulting contract).

The role of the attorney is to advise on the legal issues. Among other things, your attorney can identify necessary preconditions, pitfalls, potential liabilities, ways to mitigate your risks, appropriate contingencies to address important issues (e.g. liquor license approval) and the appropriate due diligence that should be done before you proceed. The attorney will identify liens, taxes and other title defects and provide appropriate remedies to satisfy all parties’ needs. Your attorney can assist with necessary permits, inspections and licenses that may be required by government agencies (for example, building code, health department, business permits, liquor licenses, etc.). Your attorney can help you decide on the best structure and form an entity such as a partnership, LLC or corporation for your transaction. The earlier you bring the issues to the attorney, the more opportunity for timely advice on important issues.

Each of these professionals fills a role necessary in ensuring the transaction meets both parties’ needs. In order for them to do their job well, they should be provided information early in the process. It can be difficult and costly to change a provision once a contract is signed. It is best to get advice before the documents are executed and become binding. Your negotiation position is greatest before the documents are signed and may be greatly reduced after you are legally bound to certain terms of the deal.

Property Sales with Underground Oil and Gas Tanks

When the sale of property involves an underground fuel tank, the buyer should consider having the tank tested to avoid unknowingly taking on an environmental hazard that may require costly remediation. Many lenders or insurers will not enter the transaction unless a passing test result is provided. Such underground tank tests are not generally part of an engineering inspection or home inspection and must be performed by a specialist. These may often be done by a local fuel company.

Failure to test at the time of purchase may transfer the cost when the buyer sells the property. Typical remediation costs may be $3000-$10,000, so liability could be significant.

Tests typically include a pressure test or a soil test. The least expensive test is generally a pressure test of the underground tank, although there are risks with pressure tests, as they may cause the tank to rupture. A cautious seller may not permit such testing procedure.  A soil test is more costly, but generally the more desirable procedure. The cost may be as much as $3,000. If a leak is found, it must be reported to the DEC or DEP.

The issue of underground tank testing is included at the time of contract, setting forth an appropriate contingency and who will pay for the test, and even the negotiated remedy if the tank fails the test.

A typical remediation is to abandon the tank, fill it in and install an above-ground tank. The seller may also consider agreeing to a price concession in lieu of testing or remediation.

An experienced attorney can guide a buyer or seller though this and other real estate issues, mitigating the client’s risk and maximizing the economic benefit of the transaction.