Do I need an attorney if I have a business broker?

Probably. Attorneys and brokers have different roles. While a business broker should be knowledgeable about various laws and regulations related to the sale of businesses, a broker should not give you legal advice.  In practice, a business broker may make recommendations or sometimes even negotiate and draft contracts.  However, professional brokers know their limits and should always recommend an attorney to protect their client’s best interests.

Unlike a broker, an attorney’s role is to provide legal advice and representation to the client in the transaction. The attorney will advise on how to structure the deal, favorably draft documents, and negotiate with other attorneys on legal matters in the deal. The attorney takes the responsibility to spot issues and advise on how to resolve them legally. A broker can identify legal issues as well based on their experience, but the attorney should resolve them.  For these reasons, it’s important to not only rely on your broker for legal matters. 

How do business brokers and business attorneys work together?

A business broker and an attorney should be in regular communication regarding the needs of their client during each phase of the deal. This will ensure that there no are no unexpected surprises.  

Both a broker and an attorney can represent and negotiate on behalf of their client, however, sometimes it might be more appropriate for one to take the lead on a particular issue. For instance, sometimes buyers and seller become agitated when lawyers start negotiating certain deal terms, and in these cases, the broker might be better suited to negotiate an issue.  Whatever the case, the broker and the attorney should always talk to ensure that each stage of the deal moves forward or put on pause (in the case of a major issue).

What does a business broker do that an attorney won’t?

The broker acts as the quarterback of the deal and will fill many roles. Theoretically, an attorney can represent a client in all aspects of a business transaction. However, just because an attorney can do something doesn’t mean that he or she should.

A business broker’s role is to value the company, prepare and list it for sale, and then oversee the transaction to its closing. Brokers act as the primary intermediary between the buyer and seller, whereas lawyers on each side of the deal will typically only communicate with the other lawyers. Brokers will communicate with all players in the transaction to make sure that information and documents get properly shared. 

Should my attorney also serve as my business broker?

There are attorneys that are also brokers. Sometimes, it is feasible that an attorney can provide dual services as both a broker and an attorney, especially in certain industry niches. However it’s often best to hire one person to perform just one role, either broker or attorney. This way, there is no confusion on what services are being provided. Likewise, this will ensure that the advice given is truly independent.

Options to extend the inspection period are also common. Buyers include these provisions when they expect to need more time to make a proper decision. These should be negotiated up front, but sometimes buyers ask for them once the purchase agreement is signed. A seller will usually require the buyer to pay for this extra time either by payment of a fee or requiring that a portion of the initial deposit be forfeited in exchange for the extension.

What should be in a due diligence provision?

The due diligence clause should give you broad rights to inspect the target business. The buyer needs to investigate the financial records, customer lists, vendor lists, insurance policies, equipment, contracts, real property, and tax returns of the business to name just a few. The clause should also state that the seller will cooperate with the buyer in providing information relative to all items.

One common concern is that sellers dislike potential buyers interviewing employees because this could affect operations. Buyers should try to negotiate the right to interview key employees in confidence to gain a better understanding of the business.

Other frequent restrictions in a due diligence provision include requirements of notice of inspections and the days and times when they can occur. Similarly, it’s very common to see provisions relating to indemnification for damages caused by a buyer’s investigation. 

Lastly, a due diligence provision should give the buyer the right to end the contract if they are unsatisfied with the results in the buyer’s sole discretion. The provision should also explain how notice is to be given so that disputes do not arise that notice was not given. 

A due diligence period should protect the rights of a buyer and seller. The parties should ensure that a business attorney reviews these terms and assists during the exchange of information during the sale. 

As Michigan business attorneys, we get asked to draft, review and negotiate lots of business agreements. The purchase agreement details several important, and material aspects of the transaction that should not be overlooked. 

Here we explore just a few of the common provisions that an asset sale agreement for a business will include in its terms. 

Payment Terms

Payment terms are perhaps the most crucial aspect of any purchase agreement. This section should contain all the details about how much the business is being bought for and on what terms: cash, financing, etc. It’s important that this section be clear for the parties. This section will cover the initial deposit, if any, and how much money is required to be brought to closing. 

Due Diligence / Inspection

The due diligence period is critical for any buyer in purchasing a business. The inspection clause gives the buyer the right to evaluate the business to ensure that it is a good deal that they wish to pursue.

A due diligence period will usually be limited in time, and once it expires, certain aspects of the deal then “go hard” such as the money deposit becoming non-refundable or the deal itself may then be set to close, subject to any other terms in the agreement. 

Financing Contingency

If a loan is required for the business acquisition, then the buyer should have a financing contingency clause. This will permit him to seek financing on reasonable terms and walk away from the deal if he or she cannot obtain favorable financing. These contingencies are usually met when a buyer enters into a binding loan commitment prior to the end of the financing contingency period. 

Assignment of Contracts

Contracts often form an important part of the target business. To the extent feasible, the seller should assign all these contracts over to the buyer. These can be vendor contracts or customer contracts.

Sometimes, however, assignments are not automatically possible due to the terms of those underlying contracts. The buyer should review these contracts during due diligence to understand the associated risks. The buyer may have to approach the other parties to those contracts to negotiate assignments. 

Lease

Businesses with physical locations will often lease their premises. In such cases, the new owner will have to either assume the lease over from the seller or enter into a brand new lease with the landlord. There are advantages and disadvantages to each approach, depending on the circumstances.

The purchase agreement should identify the terms of how the lease is to be handled. The buyer will often want to make the deal contingent on a successful lease negotiation with the landlord   so they will not be at the landlord’s mercy after closing, which could jeopardize the entire business. 

No Assumption of Liabilities

Generally, in an asset sale, the buyer will not pick up corporate debts owed by the seller. Conversely, in a stock equity sale, the buyer will assume all the liabilities because the corporate entity will continue to exist. In any case, the purchase agreement should identify which liabilities are being included or excluded. 

Sometimes contracts and other assets which need to be included in the sale will have corresponding liabilities which may be owed or which will become due.  Depending on the particular circumstances, the buyer may want to insist that the seller take responsibility for those debts associated with its activities prior to closing and that the buyer be responsible only for new liabilities. 

Prorations

Business expenses like taxes and rent are often paid in advance. At closing, the seller will want reimbursement for the items on a pro rata basis. For example, if rent was paid one month in advance, but the buyer takes over the business mid-month, then the buyer should reimburse the seller for half of the month’s rent. 

Prepaids and Customer Deposits

Businesses often take deposits or prepayments from customers. The buyer will want to retain these funds if the goods or services are to be provided or performed after closing. In such cases, the purchase agreement should require the seller to forward these funds to the buyer. 

Similarly, the seller of the business will want to retain  pre-payments for goods or services which are to be provided or performed  prior to closing . Having a clause clearly outlining how prepayments are to be handled is important to avoid disputes after closing. 

Representations and Warranties of Seller and Buyer

Sellers and buyers of a business want assurances about the state of the business prior and up to the closing date. Buyers should ensure, at minimum, that the seller represents

• they have title to the assets
• the assets are free of liens (or liens are identified)
• the condition of the assets
• there are no claims or lawsuit against the business
• there are no breaches in any underlying contract
• taxes are paid
• the business complies with applicable law
• all the information conveyed as part of the transaction is true.

 The buyer usually only warrants that they have had the opportunity to evaluate the business and its associated risks independently, and that they were satisfied with the result of the due diligence. 

Indemnification

An indemnification provision allows the parties to divide risk between themselves in case issues arise in the business either before or after the sale. These provisions will contain language requiring the buyer and seller to indemnify (i.e. reimburse), hold harmless, and defend against those claims which arise out of their respective time operating the business. In a small business acquisition, these clauses will be kept relatively simple, and they will become more complex in larger transactions. Regardless of the size of the deal, they are always important to have in a purchase agreement.

Conclusion

These are just a few of the common provisions founds in an asset purchase agreement. Each deal is different. We recommend that a business attorney review your transaction carefully so that you have no surprises. 

The Federal Trade Commission governs the contents of the FDD. There are 23 required items in the FDD. A franchisor must supply the FDD 14 calendar days before the franchisee pays any fees or signs a franchise agreement.

A potential franchisee should read the FDD carefully before deciding to invest in a franchise. The FDD uncovers vital information about the franchise system and the franchisor. The FDD will also advise the franchisees of its obligations under the contract. 

The following list supplies a basic overview of the 23 items contained in the FDD. 

1. The Franchisor and its Parents, Predecessors, and Affiliates

This section provides a simple overview of the Franchisor and its business. Company-owned locations will also be found here. 

2. Franchisor’s Business Experience

Item 2 supplies more detail on who runs the franchisor and their business background.

3. Litigation

This is an important topic. This section will disclose litigation that the franchisor has been involved in regarding its franchisee relationship in the last fiscal year. While litigation can be common for large companies, it provides insight into potential trouble spots. 

4. Bankruptcy

Item 4 must show if the franchisor or the individuals in item 2 have filed for bankruptcy in the previous ten years.

5. Initial Fees

The Franchisor’s initial fees to become a franchise are listed in item 5.

6. Other Fees

The item discloses the other fees a franchisee must pay, such as royalty and marketing fees.

7. Estimated Initial Investment

This section will identify an estimate of how much the franchise can expect to incur to start the business (often with a low-high range). 

8. Restrictions on Sources of Products and Services

This item will list the products or services the franchise can be required to buy as part of the system.

9. Franchisee’s Obligations

Item 9 lists the franchisee’s legal obligations. Failure to follow these could mean a breach of the franchise agreement. 

10. Financing

Sometimes, a franchisor may give referrals for financing or even rarer, provide direct financing itself. Commissions or referral fees will be found here.

11. Franchisor’s Assistance, Advertising, Computer Systems, and Training

Franchisors may sell goods and/or services to their franchisees. These relationships and the revenue earned must be disclosed.

12. Franchise Territory

A potential franchisee should read this item carefully to see how safe their business will be from others in the system.Franchisors need not provide exclusive or protected territory.

13. Trademarks

Item 13 covers the franchise’s trademarks. Litigation over the marks, if any, will also be disclosed. This section will also discuss special limitations on the marks or if other entities are allowed to use them.

14. Patents, Copyrights, and Proprietary Information

Item 14 refers to the franchise’s patents, copyrights, and other proprietary information. 

15. Obligation to Participate in the Actual Operation of the Franchise Business

Item 15 states who can run the franchise unit. Some franchises allow managers to run the business, whereas others require an owner-operator.

16. Restrictions on What the Franchisee May Sell

This item identifies the vendors that franchise must use or other similar restrictions on the business. In some businesses, the franchisee must only buy from approved vendors. 

17. Renewal, Termination, Transfer, and Dispute Resolution

Item 17 covers what happens when the franchise is closed and other similar issues. It also covers how disputes are resolved.

18. Public Figures

Item 18 identifies a public figure’s role in the franchise. Think Shaq. These will include the person’s role in sales, management, and their investment in the franchise. 

19. Financial Performance Representations

Item 19 is important in evaluating a franchise. Franchisors are not required to provide financial information known as financial performance representations (FPRs). Some franchisors fear representations could be used in a lawsuit from a failed franchisee. However, if a franchisor wants to provide earnings, sales, and expenses data it will be found in item 19.

20. Outlets and Franchisee Information

Item 20 reviews the number of franchises opened, terminated, closed, and transferred in the past 3 years. Contact information is included. A potential franchise should understand why a location closed to help understand the strengths and weaknesses of the franchise.

21. Financial Statements

Item 21 will have three years of audited financial statements from the Franchisor. This item will assist in reviewing the franchisor’s financial condition. Startup franchisors are exempt from this rule and can provide an unaudited balance sheet in the first year of franchising.

22. Contracts

All required contracts, including the franchise agreement, will be provided in Item 22. Other contracts can include lease riders, non-compete agreements, and personal guarantees. Review these thoroughly. 

23. Receipts

Item 23 is simply a receipt page to acknowledge when the FDD was received.

As you perform due diligence of a franchise, make sure that you review the FDD carefully. An attorney can help you wade through the documents and assist you in understanding your investment. 

In this article we discuss CAM charges and how landlords and tenants look at them in the commercial lease context. We also discuss common points of contention and negotiation. 

What Is Common Area Maintenance (CAM)?

Common area maintenance charges relate to the costs of upkeeping portions of the property that all tenants enjoy. 

Essentially, tenants pay CAM to compensate the landlord for maintenance and operation of the non-exclusive areas of the premises.

What does CAM include?

The lease language defines CAM. There are two main types of costs in running a building: direct and indirect 

Usually, CAM will incorporate the direct “common area” expenses related to the building. These direct costs include:

• Parking lot maintenance
• Restrooms
• Lobby maintenance
• Vending areas
• Landscaping
• Outdoor lighting

Indirect costs can include such as administrative, accounting, and legal fees. 

Other costs might include capital improvements, such as repairs to the foundation, walls or roof, plumbing, HVAC, and electrical systems. Because costs can be expensive to address, it’s important that landlord and tenants understand how they are defined to avoid disputes.

How are CAM charges calculated?

CAM expenses are usually calculated on a pro-rata basis using the tenant’s square footage of the leased premises. The larger the space, the bigger the tenant’s share will be.

Is the tenant’s share compared against the property’s total leasable area or simply currently occupied space? A tenant must know how the lease defines this pro-rata share.

Landlords often estimate CAM charges and the tenant pays this estimate each month as additional rent. At year-end, the landlord will review the actual expenses incurred. If the CAM estimates were higher than the actuals, the tenant will get a refund or credit to rent. If the estimate was lower than actual, the tenant will need to pay the difference. 

CAM charges are often included as part of the first year’s rent. In following lease year, the landlord may increase the CAM charge if the CAM expenses fluctuate upwards. 

Are CAM Charges Negotiable?

CAM charges can be negotiated. 

The tenant should look to cap annual expense increases. It may also seek to amortize capital expenses if they are included in CAM.

For example, the cost of a lobby renovation could mean a steep increase for the tenant if charged in one lease year.The tenant could instead seek to spread this cost over the remaining years of the lease to reduce the burden on its cash flow. 

Tenants should always make sure they have the right to audit the landlord’s books to ensure that expenses are recorded properly and to receive itemization of expenses at least annually.

A landlord will often charge a percentage management/administrative fee on top of the baseline CAM charges. For the landlord, this fee compensates them for their time in handling maintenance. From the tenant’s perspective, the landlord is renting space and should not tack on extra charges. The landlord and tenant will need to negotiate the proper fee, if any, that is appropriate for the space. 

Conclusion

CAM charges are important for any commercial lease negotiation. Tenants and Landlords should not overlook these important terms. Whether you are a tenant or landlord, a lawyer should assist you in understanding and negotiating the lease to protect your interests.

1. Form your Michigan Non-Profit

The first step is to legally create your non-profit corporation in the State of Michigan. To do this, you will need to file Articles of Incorporation with the State of Michigan Department of Licensing and Regulatory Affairs (LARA). There are standard Articles of Incorporation available from the State of Michigan, but these alone will not be sufficient for your purposes if you intend to obtain 501(c)(3) tax exempt status from the IRS.

There are few critical sections in your Articles that you need to identify and develop. Most importantly, you are required to define the purposes of your organization that are exclusive for exempt purposes, such as charitable, religious, educational, and/or scientific purposes. Also, you will need to add required language stating that, in the event of the dissolution of the non-profit the remaining assets will be used for exempt purposes.

2. File for 501(c)(3) Status with the IRS

Once your entity has been legally formed you need to seek tax-exempt status with the IRS. This is done by filing either a Form 1023 or the shorter Form 1023-EZ, both of which may be downloaded from the IRS website.

Form 1023 EZ is shorter form used where a non-profit does not anticipate having more than $50,000 in gross receipts in a given year or $250,000 in assets. The turnaround time for these forms is relatively quick and can be great cost saver for smaller organizations. However, there are drawbacks to using the EZ form. First, you do not technically receive a formal determination letter regarding your tax-exempt status like you would if you completed a normal Form 1023, which can be a drawback for donors, especially larger ones. Second, it’s not yet clear what the IRS wants an organization to do if it ever exceeds the gross receipt or assets thresholds noted above in the future.

The regular Form 1023 is lengthy and intensive. The form requires a great amount of attention, as it contains many technical questions. Two of the most important sections of the form are the narrative description of your activities located in Part IV and the required financial data in Part IX. The narrative section is crucial because it is your opportunity to explain your organization’s mission and programs in detail. Similarly, the financial section will identify to the IRS how your operations will be financed, which is important in determining whether you are eligible to be what is known as “publicly supported” charity or a “private foundation”, which has certain ramifications on how you run your non-profit. If you do not understand a question on the form, a good place to look is on the IRS Form 1023 instructions. However, for more complicated questions, you may need an attorney to help you.

3. Register your organization with the Michigan Attorney General.

Charitable non-profits are required to register with the Michigan Attorney General Charitable Trust Section. This is an often-overlooked requirement that many organizations fail to meet. Any organization holding property for charitable purposes is required to register under the Supervision of Trustees for Charitable Purposes Act. Typically, an organization will register once they have obtained 501(c)(3) status. Also, those organizations that solicit or receive contributions in Michigan are required to register under the Solicitations Act, but certain exceptions apply. Many organizations fail to meet these requirements, and failure to register could lead to lead to fines and penalties. If you did not register, contact our office for help as we have assisted many clients who have found themselves in this situation.

Setting up a non-profit in Michigan can be complicated, but the process is manageable if you follow these basic steps. For assistance with any non-profit issues that you may be having, please feel free to contact Nicholas S. Kovach at Shifman & Carlson.

Identify the best franchise system for you

There are thousands of franchise systems around today. The choice can be daunting. Some are better than others. The type of franchise you choose should be a decision that plays on your strengths.

Spend time reviewing the various industries and trends. Keep in mind that just because something is “hot” today does not mean that it will be tomorrow. If you have experience in a particular industry this is usually a good place to start your search. Also, be sensitive to the local nature of the market; what works in Texas may not work in Michigan.

You may want to consider using a franchise coach to help you understand the skills needed to succeed and identify potential best fits. However, make sure you understand how these coaches are identified and that your interests and theirs are aligned.

Decide between buying a new franchise or an existing franchise

As a franchisee, you can typically purchase a new unit or buy an existing location from a current franchisee. There are advantages and disadvantages in either scenario.

The advantage of buying a new unit is that you have greater control over how and where your business will operate. You get to choose, with the consent of the franchisor, the exact location of your business. Similarly, you get to make all the business decisions like hiring staff, finding the right suppliers, and hiring contractors. A disadvantage of buying a new franchise is that you take on a greater risk that the business may not be profitable. Unlike buying an existing franchise, you will not have any actual sales data to evaluate prior to opening. You cannot piggyback off the success of a prior franchise owner.

The advantage of purchasing a franchise from an existing franchisee is that you can more accurately predict the profitability of the business. The seller’s books will have lots of data that you can use to evaluate the franchise. Also, the person selling the franchise can stay on for a limited time to show you the ropes of the business. One downside to buying an existing franchise is that there may be legacy and goodwill issues, such as disgruntled staff or poor customer perception of the business.

Review the Franchise Disclosure Document

The Franchise Disclosure Document is one of the most important franchise documents that you will read. The Disclosure Document covers a breadth of information such as franchise fees, territory location, non-compete agreements, and termination rights and obligations, just to name a few. The Disclosure Document will also have the form franchise agreement.

State and federal law mandate that the Franchisor provide the Disclosure Document to you prior to signing the franchise agreement. In Michigan, the Disclosure Document must be provided 10 business days before signing of the agreement or payment. It is critical that you review the Disclosure Document and franchise agreement so you understand how the business works and the risks involved. Franchise documents are heavy reads and you should consider seeking appropriate professional help to understand your rights and obligations. For more information about Michigan-specific Franchise rules, the Michigan Attorney general has an excellent resource for prospective franchisees.

Hire the right franchise professionals

Make sure you have the right professionals in place before you invest in a franchise system. We recommend that you have someone familiar with business valuations (typically an accountant or CPA) and a franchise attorney.

An accountant or CPA will help you assess any projections the franchisor may have provided to you. They will also assist you in looking at the books of an existing franchise to evaluate any issues.

A franchise attorney is critical for your success. Many franchisees jump into a purchase without understanding the risks. Only later do they find out that a particular franchise agreement provision, such as a non-compete clause, will have severely negative consequences. Your attorney helps structure your business to reduce liability, and in certain cases, negotiate changes to the franchise agreement where feasible.

Interview existing and former franchise owners

Interviewing existing franchise owners is one of the most useful tools for any prospective franchisee. Interviewing these operators will give you a look under the hood about how well or poorly a franchise runs. What type of support does the franchisor provide in practice? How have disputes been resolved? If there was one thing you could change about how the franchise is run, what would it be? Go beyond just simple questions.

We also recommend contacting former franchise owners. Whether they left the business on good or bad terms, try to figure out if their reasons for exiting are a cause for concern. You can use their experience as an opportunity for success in your own situation.

Determine how you will finance your franchise purchase.

Purchasing a franchise is no small financial undertaking. To own a franchise, you need to pay a substantial sum for the initial franchise (if starting new) or transfer fee (if you are purchasing an existing location). Additionally, you need tens of thousands of dollars in the first months as your business starts. While many franchise owners want to buy a franchise with no money down, the reality is that you need to explore all options.

If you are looking to finance with a loan, make sure to work with a lender who is familiar with SBA loans and franchise acquisitions. The Small Business Administration can often provide a great opportunity for financing your franchise acquisition. The SBA maintains a directory of approved franchises to assist lenders in providing potential franchisees with SBA loans.

1. Limited Liability Means You Are Personally Protected

“Limited liability” is a legal concept that means the owners and managers of an LLC are not personally responsible for the liabilities (debts, obligations, lawsuits, etc.) of the LLC. If your LLC goes under because of a big lawsuit, that means that the LLC might cease to be, but you won’t have to file bankruptcy. The LLC limits the liability of the owners and managers. This limited liability concept is borrowed from traditional corporations, but for LLCs is done in a much simpler way that most people can use for their own small businesses. Which is why we recommend it for almost all of our small business clients.

2. They are Really Easy to Set Up

LLCs are dead simple to set up in Michigan. All you need is a name, internet access, and $50. Fill out a really quick form online with the Michigan Department of Licensing and Regulatory Affairs, and you have yourself an LLC.

3. They Make Taxes Pretty Easy

Taxation with LLCs is much easier than it is with corporations. Most LLCs are taxed by the IRS as pass-through entities, which means that the IRS pretends that the LLC doesn’t even exist. Instead, you just need to disclose your profits and losses in your 1040 and (most likely) pay quarterly estimated taxes.

4. LLCs Are Very Flexible to Run

Management of LLCs is also really easy to set up. Most LLCs are single-member LLCs, meaning they have only one owner. In that case, you run the shop and don’t need much else. If you have multiple owners, you can set it up so that all of the owners run the LLC, some of the owners run it, or instead hire a separate non-owning manager who runs things. If you are going to have multiple owners, we do recommend having a document called an operating agreement that sets down on paper who is responsible for what. That way, responsibilities are clear and defined.

5. LLCs Have Flexible Ownership

With an LLC, it is a snap to add owners. You can start with multiple owners right off the bat. If you decide you want to add owners later on, you just need a vote of the existing members of the LLC or an assignment of membership interest. Further still, you can easily divvy up or reassign how profits are to be shared. The amount of profits each member is entitled to can be different from their ownership amount. It’s all up to how you want to structure it.