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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Data Breaches and Legal Risks

You’ve probably heard in the news more and more stories all the time about information security breaches.  The latest high-profile breach of the retailer Target may have compromised information of 110 million consumers.  Neiman Marcus also reported a recent security breach.  With all of these breaches of major retailers in the news, you might wonder as a consumer whether your own accounts were affected.  Certainly, it is wise to watch your own credit card statements for signs of unauthorized transactions and to report any fraudulent purchases.

In addition, however, small and medium-sized businesses face their own data breach risk.  Hackers are not just targeting large businesses.  They also target small businesses, such as restaurants and other merchants.  Why?  Hackers see small businesses as easy targets.  Larger businesses are more sophisticated about their security practices and harder to attack.  Smaller businesses don’t have the security resources of larger businesses.

If a small business has a data breach, the breach may ruin the reputation of the business and scare away customers.  People are less likely to shop at a merchant that can’t protect customer information.  Ultimately, small businesses face many risks from data breaches.

One of those risks is legal liability.  Companies in California by law must notify consumers if they fall victim to a data breach affecting personal information of customers such as Social Security numbers, driver’s license numbers, and payment card information.  Failing to make the notification or delaying the notification may cause governmental investigations or customer lawsuits.  State and some federal laws also require companies to protect sensitive information in the first place.  Based on past history, I have to imaging that Target will spend over $100 million in responding to its recent breach, defending itself and paying settlements in the class action lawsuits filed against it.  Data breaches cost big dollars.

Securing your business’s sensitive information will reduce your legal and business risks.  How can you do that?  You should assess your information security risks, develop policies and procedures to secure sensitive information, and train your workers on data security.  Part of your preparation will include investigating on which information security laws will apply to your business and what kinds of security safeguards are required.  The time to look into upgrading your information security practices is now.  Preparing today can help prevent data breaches and liabilities tomorrow.

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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Managing Pregnant Employees

Managing Pregnant Employees

Employers often have a difficult time understanding how to manage pregnant employees. Although employers are concerned about the temporary loss of an employee, they are unable to replace the mother without a potential lawsuit. At the same time, employers fear that pregnant employees who become injured on the job may blame their employers.

Pregnancy is a difficult issue for businesses to approach correctly. Understanding the basics of pregnancy discrimination law will greatly help an employer avoid lawsuits.

Federal Law 

Like most laws, pregnancy discrimination is divided between the state and federal levels. For instance, the Pregnancy Discrimination Act (PDA) makes it illegal for employers with 15 or more employees to discriminate on the basis of pregnancy or pregnancy-related disabilities. Employers cannot terminate or punish a woman for being pregnant or for having pregnancy-related issues.

If a future mother is late to work because she spent the morning vomiting, the employer cannot punish her. However, the law only protects disabilities related to pregnancy. If that same employee was constantly late for work prior to pregnancy, pregnancy would not be a defense.

Federal law can also protect the mother’s right to leave for childbirth and her right to care for the new born child. The Family and Medical Leave Act (FMLA) gives eligible employees up to 12 weeks of unpaid medical leave. “Eligible” refers to employees working for government employers or private employers with over 50 employees. The employee must have worked at least 12 months prior to leave and at least 1,250 hours over the course of those months. In return, the mother has the right to return to her original job or an equivalent one.

When a mother can breastfeed an infant at work is a relatively new and untested area of law. The Patient Protection and Affordable Care Act (ObamaCare) gives mothers the right to breastfeed at work. If an employee requests it, the employer must give the mother a private place to feed her infant. The “private place” cannot be a bathroom, but it can be any other room in the building provided that co-workers, customers, and other people don’t accidently wander in.

California Law

Although the Constitution prohibits states from contradicting federal law, states can offer greater protection than federal law. California provides pregnant employees with a few extra days of leave. More importantly, California gives pregnant workers the right to ask for an accommodation. An accommodation is a reasonable request by an employee which does not pose an undue burden to the employer. If the employer fails to provide that request, the employer is discriminating against the employee.

Pregnancy accommodations should be tied to the mother’s health and comfort. Some accommodations are very simple. For example, a woman who typically stands at work may request a chair for a few months. Complying with this simple request can prevent a major lawsuit if something goes wrong during the pregnancy. Keep in mind that the employee should make the decision whether she requires an early leave or whether she can continue working with an accommodation.

Peter Clarke

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

 

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Why Have a Privacy Policy?

Privacy has been a hot legal issue for years, and the temperature is moving even higher.  Companies with websites and mobile applications are now targets for privacy compliance investigations.  Governmental enforcement actions and class action suits have become ever more common.  One common trigger is a data privacy or security breach.  Surprisingly, in 2013, another common trigger is the lack of a privacy policy.  Yes, there are some companies that create online services or Internet applications collecting personal information from consumers in 2013 and yet have no privacy policies.

California’s Online Privacy Protection Act (OPPA) of 2003 requires commercial websites or online services that obtain personally identifiable information about California consumers to post their privacy policies.  “Personally identifiable information” includes a first and last name, address, email address, telephone number, social security number, or any other identifier that permits physical or online contacting of a specific individual.  Accordingly, the definition of “personally identifiable information” is quite broad, and beyond the scope of the security breach notification laws in California and other states.  Violations of the law can occur even if the website operator or online service provider did not knowingly or willfully fail to comply.

OPPA not only says that operators of online services must have privacy policies, it also says that these privacy policies must cover certain topics.  A privacy policy must identify the categories of information collected by the operator, the categories of others with whom the operator may share the information, any means for the consumer to review and request changes to the information, the process to notify consumers of changes to the policy, and the effective date of the policy.

None of these requirements is new.   They are standard fare for privacy policies.  For instance, Federal Trade Commission has long published information about these topics in its guide to fair information practice principles.

In sum, online services that collect personally identifiable information from California consumers and have no privacy policy are violating OPPA and are risking lawsuits and governmental enforcement actions.  Even if a service has a privacy policy, if it is inaccurate, the service may be violating laws against unfair and deceptive trade practices.  Areas of greater risk include companies that collect certain kinds of information, such as geolocation information, without notifying the user first.  Also, companies that share information with third parties, but do not warn the user, are at risk.  The bottom line is that online services should review their privacy practices, write a privacy policy if they don’t already have one, update their privacy policies to match changes in law and their circumstances, and make sure their policies match their information practices.

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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Email Reminders for Corporate and LLC Statements of Information

One of the things our firm does for our clients is help them maintain their company documentation on an ongoing basis. One of the recurring tasks is to file Statements of Information with the Secretary of State after the first statement filed in connection with organization of the entity. Domestic stock corporations must file them annually. Limited liability companies must file them every other year.

Before a corporation or LLC must file a Statement of Information, the Secretary of State sends it a renewal notice. Under existing law, the Secretary sends the renewal notice to the mailing address of record. Last year, however, new legislation, AB 657, gives corporations and LLCs the option to receive renewal notices by electronic mail.

AB 657 says that corporations choosing to receive renewal notices and any other notifications from the Secretary by email instead of US mail must provide a valid email address for the corporation or its designee to receive those notices. After such an election, the Secretary will send renewal notices to the last email address of record with the Secretary.

AB 657 affords the same option to limited liability companies. Likewise, it also permits email renewal notices for foreign corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, consumer cooperative corporations, and state credit unions. Renewal notices to these entities are also sent to the last email address of record.

Designating an email address may provide a convenience for some clients. Nonetheless, receiving renewals by email entails risk, since clients may frequently change domain names, email addresses, and personnel designated to receive emails. Accordingly, clients wishing to designate an email address may want to designate a role-based email alias for receiving renewal notices, rather than an individual’s email address.

Stephen S. Wu, JD

Stephen S. Wu

 

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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