Buying A Business

Buying a Business

Every entrepreneur dreams of owning a successful business. However, many people do not want to take the risk of starting a business from the ground up. As an alternative, you can buy an existing business.

People buy businesses for a variety of reasons. It is easier and faster than starting a company from scratch. The assets, suppliers, and consumer base already exist. Also, banks and other lenders are more likely to offer you a loan for an existing business.

However, there are still many complications that can arise. This article examines the major legal issues that can occur if you decide to buy a business.

The Deal

The most basic aspect of buying a business is that you are making an agreement to take ownership of a business. This might sound like a no-brainer, but the buyer should understand what exactly he or she is purchasing and should include every detail in a written contract.

Before signing an agreement, you must carefully verify the seller’s information. Lawyers call this “due diligence.” Look at the company’s financial and legal records. Do their financial statements match the reality? What is their projected outlook for future growth? Are they in debt? What kind of contracts do they have with suppliers? Are there any copyrights or patents? If you’re buying a bar or convenience store, do they have a liquor license?

Don’t be afraid to ask these questions. If the seller is less than forthcoming with the answers, ask yourself why they want to sell the company in the first place. Hiring an accountant and an attorney to double-check the numbers and the paperwork will save money in the long run. If you prefer to keep your findings secret, a confidentiality agreement will keep lips sealed.

There are two common mistakes buyers make when closing a deal. First, the Internet makes it easy to assess a company without ever visiting the business. If the company is online only, that’s understandable. However, if the company has a brick and mortar building, you should definitely make a physical inspection. Checking for building code violations is helpful, but making a physical inspection allows you to interact with customers and employees in person. If you plan to take over, meeting the people who will make you money is crucial.

The second mistake is that some buyers will fall in love with the business and ignore all the risks. Buyers sometimes ignore risks even if they have carefully run the numbers and found that the business isn’t as profitable as it first appeared. If you find yourself ignoring all the potential downsides, look for a second or third opinion. The law protects against fraud and misrepresentation, but it does not offer protection from bad business decisions.

Insurance

One way to assess risk is to examine the type of business insurance the seller currently has. Checking insurance allows you to become familiar with the company’s insurance policies and allows you to assess what types of legal risks might occur. A manufacturer typically carries product liability insurance. Professional firms, such as real estate brokers, attorneys, dentists and doctors use malpractice insurance. Delivery services will have automobile insurance.

In the rare case that the business doesn’t have any form of insurance, check if they are breaking any laws. For example, many states require professional firms to purchase malpractice insurance, unless they hang a sign outside their office stating they don’t have insurance (one more reason to make a physical inspection). Likewise, starting in 2015, employers with 50 or more employees are required to offer health care insurance to their employees.

Terminating Employees

If you buy the business, there are two crucial employment questions: can you terminate an employee and can you retain an employee? Look through employment contracts, if any, to check the terms of employment. Even if a business changes ownership, the employee can still retain her job through a contract. Otherwise, the new employer is free to terminate employment at-will.

Employees who feel they were mistreated by new management will sometimes start their own business – near their former workplace. Therefore, buyers should also check employment contracts for non-compete clauses. Non-compete clauses prevent former employees from directly competing with your newly acquired business. You should also consider negotiating a non-compete clause into the contract with the seller.

Keeping Employees

Although at-will employment typically favors the employer, business acquisition is one situation where the employer is at a disadvantage. This is important to understand in instances where you are purchasing a business partly for its staff.

If the buyer wishes to preserve staff, the buyer should treat the employees well before the deal is made. Although good will alone won’t keep employees from walking out the door, it does set the stage for employment contracts. Employment contracts can prevent employers from firing employees; they can also bind employees to the company. However, convincing an employee to stay with a company, despite the change in ownership, will often result in terms which will favor the employee.

Alternatives to Buying a Business

Even if you are determined to purchase an existing business, you should take a step back and consider the alternatives. The reality is that not every business will be worth buying. Moreover, not everyone is prepared to run a business alone.

Here are three ways that you can run a business without completely committing to buying it outright:

  1. If the costs and stress of buying a business is overwhelming to you, consider buying the business with a person you trust. Although you won’t have full control in a partnership, you won’t have to go into business alone.
  2. Consider leasing the business with an option to buy. You can “test drive” the business for a period of time and then you can purchase the whole thing if you find the experience worthwhile. Finding a seller who is willing to lease with the option of buying will not be easy, but this is a common business tactic.
  3. Consider purchasing a franchise. This can be a realistic option if you would like to have promotional support from a parent company.

Peter Clarke

Peter Clarke, JD, is the content manager for LegalMatch.com in South San Francisco.  He can be reached at peter.clarke@legalmatch.com.

 

 

 

 

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Choosing a Name for Your New Business: Trademark Law Issues

One of the first choices a new business must make is what name to give the business. Businesses think first and foremost about the marketing and branding considerations going into the name. Is it a memorable name? Does it help to create positive images in consumers’ minds about the product or service? All of these concerns will help businesses create a universe of names from which to choose.

In addition to the business issues involved in choosing a name, businesses should also consider trademark law. First, a new business should consult with legal counsel to make sure that the names it is thinking of using is not already taken by another business. If another business is already using the name, that business could assert a claim against the new business for trademark or service mark infringement.

Second, under trademark law, some names are easier to protect than others. For instance, famous marks like Exxon and Apple (for computers) are entitled to strong protection. By contrast, generic words such as “milk” and “car” are completely in unprotectable when used with the products they describe. No one is permitted to gain exclusive rights to use these common words.

The strongest types of marks are either made-up words having no meaning in English or have a meaning, but not in connection with the product with which it is used. Made-up marks include Exxon and Kodak, which are referred to as “fanciful” marks. English words unconnected with their product are “arbitrary” marks, and include Apple for electronics and Camel for cigarettes. Fanciful and arbitrary marks are entitled to the strongest protection under the law, and are therefore preferable, other things being equal.

The next strongest marks are called “suggestive,” because the mark is suggestive of a characteristic of a product without directly describing the product. It takes a leap of imagination to connect with them the product or service. For instance, the word mark “poison” when used with perfume suggests danger, intrigue, and excitement without directly describing perfume.

The weakest marks are called “descriptive,” because they describe a product or a characteristic of it. For instance, words like “best,” “giant,” or ” gold medal” are descriptive. Descriptive marks are unprotectable unless they acquire what is called “secondary meaning.” A business can obtain secondary meaning of a mark via repeated significant advertising that links the mark to the business as the source of the product. All three of the descriptive marks above have acquired secondary meaning, namely Best for mayonnaise, Giant for groceries in the DC area, and Gold Medal for flour. The companies using these marks have heavily advertised them with their products and thus can protect them. For other products, however, these words are merely descriptive and are unprotectable.

Finally, as stated above, generic words such as milk and car are completely unprotectable. Interestingly, the generic words “aspirin” and “gasoline” used to be trademarks. Because the companies that created them failed to protect them, and people used them as generic words, they are now unprotectable in connection with the products to which they refer.

Our firm has helped numerous businesses to create corporations and limited liability companies. We help our clients in choosing a name by checking for possible prior use. We also counsel them on what name is most protectable from a trademark law perspective. Choosing a good name from a trademark law perspective will help a business start on the right foot.

StevenSWu3

Attorney Stephen Wu is a partner in the law firm of Cooke Kobrick & Wu LLP in downtown
Los Altos.  He can be reached at (650) 917-8045 or at swu@ckwlaw.com.

 

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Are Unified Communications Right for Your Business?

Unified communications (UC) solutions refer to a combination of voice, data and business applications that enable employees to access and utilize communications without regard to location or type of device. The biggest benefit for small- to medium-size companies is the cost savings that comes from consolidating equipment and services and centralizing network management for data, video and voice.  In this way, you can integrate real-time communication services with non-real time communication services.

In addition to cost savings, UC solutions increase employee productivity in several ways. For instance, employees with smart phones, as well as those working at remote, distributed locations, are able to access complete business telephony capabilities using a common interface regardless of the device they use. Making mobile devices extensions of the enterprise network helps enhance employee responsiveness to customers. Also, higher quality voice, video, and web conferencing enhances the overall conferencing experience for employees as well as customers. The wide range of products available in the network communications space provides a unified user interface and user experience across multiple devices and media types.

UC solutions can also help your company increase innovation across the enterprise by integrating collaboration into applications and business processes. This can lead to shorter sales and customer service cycles, reduced time-to-market and the ability to adapt more quickly to market changes.  Integrated communication methods help to accelerate business processes and help your business more efficient, with faster time to revenue.

According to technology research company, Gartner, most enterprises take a longer-term approach to UC. They start by defining strategy and direction, then determine the most effective way to deliver this while controlling costs and leveraging existing investments. In the coming year there will be much progress on what business processes are being communications-enabled and where the potential remains untapped.   It is truly an exciting and up-and-coming space to investigate for  your business.

Adrianne Wong, Owner TeamLogic IT

Adrienne Wong

Adrienne is co-owner of TeamLogic IT in Mountain View. She can be reached at (650) 204-3153 or by email at awong@teamlogicit.com.

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Can an Employer Ask for Your Facebook Profile?

We have all seen stories about how social media accounts are treasure troves of information.  In past years, legal experts have discussed the issue of whether employers should view social media information of prospective employees. Some employers are tempted by the amount of information available on these services to vet employees and obtain a much more candid view of what makes job applicants tick.

Some employers are taking the next step and asking job applicants to provide user name and password login information to see the most private information on applicants’ social media accounts.  Others want the applicant to log in at an interview so that they can “shoulder surf” and review what the information looks like.

I recently heard a story on National Public Radio about Robert Collins, who was reapplying for his old job as a corrections officer with the Maryland Department of Public Safety and Correctional Services.  The Department wanted his password to see his Facebook information, and he felt uncomfortable by the request.  This story and others like it are generating a significant amount of outrage in the media.  Even Facebook disapproves of the practice and is threatening to sue employers who demand Facebook passwords.

Recently, California Senator Leland Yee introduced legislation (SB 1349) that would prohibit employers from asking for social media user names or account information, or any content from social media accounts.  The bill also covers postsecondary educational institutions.

Setting aside the California legislation and bills in other states, here is the message for employers:  asking job applicants for social media login information is risky.  Doing so threatens to cause the user to violate social media services’ terms of service and may trigger a suit from the social network, at least in the case of Facebook.  Job applicants or employees may use such practices as the basis for a breach of privacy suit.  Moreover, if an employer reviews social media information in an inconsistent way, the employer may be opening itself up to claims of discrimination.  Asking for login information just doesn’t seem worth it.

StevenSWu3 Attorney Stephen Wu is a partner in the law firm of Cooke Kobrick & Wu LLP in downtown Los Altos.  He can be reached at (650) 917-8045 or via email at swu@ckwlaw.com.

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The Cost of System Downtime

If your computer systems stopped working at this very moment, how long would it take before
your business operations came to a screeching halt? From the loss of email and Internet
applications to a potential interruption in communications (i.e. phone, instant messaging and
teleconferencing), a breakdown in computer systems can be extremely counterproductive and
costly to your business.

The day-to-day responsibility of these systems may lie with your IT team or service provider, but
the ultimate accountability rests with a business’ management team. By minimizing downtime,
the organization can employ its people and resources more efficiently; which is especially crucial
in competitive markets and industries.

How much does an hour of downtime cost your company? Start with a calculation of the
combined hourly wage (Don’t forget to include the benefit packages) of all the organization’s
employees. This price may vary by hour of the day (shift staffing), so adding that step can be
helpful. Then you can determine the hourly rate for other business expenses, by dividing those
fixed and variable costs by the hours in your operating day.

When you consolidate these hourly rates into a single operations cost, it illustrates the business
expense incurred by shutting down for the day but still paying all your employees. But the
opportunity cost (lost revenue) is actually much larger than this number, and needs to be
included to give you the REAL cost of downtime. When your business is unable to operate, the
ability to generate revenue is greatly diminished, whether you rely on foot traffic or phones and
Web sales.

Whether a company experiences significant problems with its current systems or is just looking
to avoid future issues, understanding downtime costs is essential. When implementing the latest
technology or a new service, this figure helps a business understand the savings (or losses)
associated with the project. Knowing those costs allows the organization to prioritize emergency
response needs and evaluate future plans. It becomes truly critical when discussing response
needs and service level agreements with providers who will support your critical systems.

Adrianne Wong, Owner TeamLogic IT

Adrianne Wong, Owner TeamLogic IT

For more information, contact Adrienne at mountainviewca@TeamLogicIT.com or visit her website at www.TeamLogicIT.com/mountainviewca.

 

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