e) The existence of a new and modern securities legislation (including regulations on mutual funds). See our article "Panama's New Securities Law in a Nutshell", published at http://www.legalinfo-panama.com, November 2000, and also at Patton Moreno & Asvat's website http://www.pmalawyers.com.
20. Obviously, following the diversification criteria for the pools established by the rating agencies.
21. "Tranching" and establishing levels of subordination among the different tranches is a way of enhancing the structure for the protection of investors. In this case, the subordinated tranche bears the default risk on the underlying financial asset, and only if the subordinated tranche and other forms of credit support are insufficient to bear the loss does the (investment grade) tranche carry any risk.
The trouble-shooter's checklist
Non-tax issues of buying or selling a business
By Donna J. Cunningham, Palatine
This checklist is meant to list those non-tax factors that most often lead to trouble, disagreement, or failure of the business. It is not a complete list, even of such troublesome issues, but is meant to be the starting point for an approach dealing first with the issues which are most known to cause difficulty--for the client or the attorney--or both. This approach may be helpful to the attorney who represents a client who seeks an analysis or evaluation as a first step, or to the client with limited resources who knowingly chooses to do something less than full due diligence.
One more prefatory remark: most purchases and sales of businesses today involve "small" businesses--those who employ fewer than 100 employees, or earn less than $10 million dollars per year in gross income. Most of them are closely-held or family-owned businesses, which have a quite different set of problems from those faced by publicly-traded corporations. This checklist is prepared with those businesses in mind.
Pre-sale & purchase
As lawyers, we sometimes believe that our job is to consider only those issues deemed to be "legal" ones, and that we should not consider the businesses issues involved. But in this, I believe we err. The finest legal maneuvering will not repair a bad business decision, and I have no doubt that if the client loses the business, then the lawyer will lose the client. On the other hand, if the business succeeds, the lawyer may well have a client for life. So, our checklist includes some "business" type issues:
The business
* What kind of business is this? Is the industry or service growing or declining?
* Is near-future technology likely to change the character, profitability, or salability of the business?
* What are other, similar businesses in the industry or service doing?
* What are the most common problems of this kind of business?
* Is this particular business growing or declining?
* How and what is Seller's competitor doing?
* What is Seller's competitor doing differently? The same?
* Does the business create or include environmental problems?
* Does the land on which the business is located have environmental problems?
The seller
* Why does Seller want to sell?
* Have there been any major changes recently involving Seller's business?
* What risks are involved in this kind of business? In this particular business?
* Does Seller want a stock sale or an asset sale? Will an asset sale avoid the assumption of liability?
* If Seller remains liable for parts of the transaction or for past obligations of the business, will he have the assets to stand behind it? Buyer wants Seller's indemnification.
* Is Seller retiring? Starting a new business? Changing industries?
* What are Seller's cash flow needs from the sale of the business?
* Does Seller need to coordinate Estate Planning? Retirement Planning?
* Can the sale be restructured to accomplish those goals, and net more after-tax dollars?
* Does Seller want/need security for the non-cash portion of the sale? Will Buyer's cash or financing needs conflict with Seller's security needs? Who takes priority? (The Bank always wins.) Discuss this with seller, and confirm in writing; and
* If Seller is a closely-held or family-owned business, do all of the participants want to sell? Are all of them selling? Willingly? Beware family squabbles.
The buyer
* What is Buyer's goal in purchasing the business? Does he want to own it? Manage it? Resell? Dismantle and sell the pieces?
* Does Buyer know the business, or will he need training? If so, will Seller provide it?
* Will Buyer have to be a licensed professional to operate this business?
* Does Buyer plan to expand the business?
* Will Buyer need additional capital?
* If Buyer is a corporation, does Seller want a personal guarantee? Is Buyer willing to provide it? If Seller is a corporation, does Buyer want a personal guarantee? Is Seller willing to provide it?
* If Buyer purchases the business, will it be salable when Buyer wants to sell?
The professionals
* Has your client agreed regarding the scope of your duties? Have you confirmed that in writing?
* Will your client perform some of the legwork and investigation? Have you confirmed that in writing?
* What other professionals will be involved? A Certified Public Accountant? An appraiser? Is a business broker involved? Who will do the business valuation, if one is to be done?
* Who will evaluate tax considerations?
* Which comes first: the contract or the due diligence? Seller wants the contract; Buyer wants due diligence. If contract first, Buyer wants it subject to due diligence; Seller wants to limit Buyer's remedies if he doesn't like what he finds.
Checking it out
The books
* What is the cash flow? Has it been consistent?
* What is the relationship with major suppliers? What is the status of contracts with major suppliers? Will that change if the business is sold?
* What is the relationship with major customers? What is the status of contracts with major customers? Will that change if the business is sold?
* Does any supplier or customer represent 25 percent or more of supplies or sales? Will Buyer need to diversify to avoid over-dependence on one supplier or customer?
* What is the net income from the business? Has it been consistent?
* Are there any other factors which might change the net income?
* Has Seller been paid a salary, or has everything gone back into the business?
* Will the business support Buyer's salary?
* Will the business support necessary employees, suppliers, payables, etc.
The corporate books
* Is the corporation in good standing in the state of its organization?
* Is it licensed to do business in every state in which it does business?
* Are the corporate books up to date?
* If a Sub-S election has been made, is it valid? Will the sale invalidate the election?
The staff
* Is Seller the only manager, or the key manager? How will Buyer provide for continuity?
* Are there key employees of the business, upon whom success depends, even in part? If so, will they go when the business is sold?
* Does the business have a history of problems with the Immigration and Naturalization Service? Even if not, might there be an INS problem? Is required documentation in place?
* Do the employees know the business is for sale? Will they stay on? Does Buyer want them to stay on?
* What benefits and obligations come with employees? Seniority, accrued vacations, retirement plans? Should Seller fire and Buyer rehire to avoid?
Assets and liabilities
* Is liability insurance in place? Is it adequate? Is it assignable? (Does Buyer want it?)
* Does Seller have outstanding loans? Mortgages?
* Are there "due on sale" clauses?
* What other contracts might be affected by the sale of the business?
* Which contracts are assignable? (If Buyer steps into Seller's shoes, he also acquires Seller's defenses, but if he merely agrees to pay, he does not.)
* Who owns or holds the licenses to any patents, trademarks, servicemarks, copyrights, licenses, or websites associated with the business? Are they transferable? Are they included in the purchase?
* What lawsuits are threatened or pending against Seller?
* What is the claims history? For injury? For faulty products or services?
* What percentage of inventory has been returned? Is inventory repairable? What was cause of damage?
* What liens are outstanding against Seller? Seller's assets? What liens or assessments are outstanding against the building, the real estate, the business complex, the landlord, and so on?
Equipment and inventory
* Will Buyer purchase equipment? All or some?
* What is condition of equipment? Obsolete? Aging? In need of repair or updating?
* Has equipment been paid for? Liens outstanding? Liens released?
* Will Seller accept lien on equipment as security? Will this be adequate?
* Is inventory salable? Obsolete? Aging? Damaged?
* How long has it been in stock? What inventory method has been used?
* Can it sold quickly to provide cash flow? Is Buyer relying on a quick sale?
Leases and real estate
* What are terms of lease as to rental, duration? Does Buyer want? Is it assignable? On same terms?
* If assignment is prohibited, will landlord negotiate? Write a new lease?
* Even if Buyer assumes lease and Landlord agrees, will Landlord negotiate any other/additional terms?
* If the lease is not assignable and Seller is a corporation, Buyer may be able to avoid the prohibition by purchasing all of Seller's corporate stock. (But is it worth it?)
* If new lease, how will this affect Buyer's cash flow, profitability?
* Is this a "dream" lease? Is rental substantially under market rate? If so, profits are overstated.
* Are there any covenants running with the land?
* Are there any special zoning restrictions? Cooperative associations? Business or trade associations?
* Does the business presently comply with all such applicable laws and rules?
* Has an environmental audit been performed? How many? How long ago? What level? What were the results?
* Is parking provided? Who maintains and repairs parking lots, driveways, sidewalks?
* Are streets dedicated?
* Are there any special assessments? Are any likely?
The contract(s)
* How might the transaction be structured? Is one contract sufficient, or would two or more better serve the parties' needs? Should the obligations be separated or lumped together (i.e., sale of business, and lease of premises, with option to buy; or, purchase and sale agreement, plus consulting agreement and/or covenant not to compete)?
* Seller wants security for the non-cash portion of the debt--meaningful, adequate security, not on aging inventory or obsolete equipment.
* Buyer also wants security for Seller's remaining obligations. Cash? Insurance? Personal guaranty?
* If Buyer is paying in installments and also purchasing new equipment, there will be multiple liens. Who gets first? (The Bank Always Wins.) Who gets second? Will Seller have to subordinate his lien to the bank's? Does he understand the risks of doing so? Discuss this with seller, and confirm in writing.
* Buyer wants a non-compete, even if Seller plans to retire. Prohibit competition within geographical area? Structure based on current clients?
* Will Seller provide training? Under what terms, and for how long?
* Buyer wants an escrow for unknown claims, breaches by Seller. How much? For how long? For what purposes?
* Buyer wants a Bulk Sales Affidavit and filing in each state in which Seller does business, even though it is no longer required in many states. Why? For known creditors, for the State department governing unemployment insurance compensation matters, for business done in other states, and for all other unknown creditors.
* Seller should pay all outstanding creditors before closing. or a sufficient amount to pay such claims should be withheld in escrow from the proceeds of the sale, until payment can be made and verified.
* Review and investigate all "pre-paid expenses" proposed by Seller. Are they of value? Does Buyer want them, or would he prefer to make his own arrangements?
Post-sale and purchase
* Follow up on all outstanding documents. File liens and security interests, record deeds, store original promissory notes.
* Obtain signed copies of all documents, and file.
* Send appropriate copies to tax professionals.
* Congratulate your client on his or her sale/purchase of the business!
What's new in corporate filings and business entity laws
By William A. Price, Wheaton
The following news is an extract from the first quarter update to my treatise Limited Liability Organizations (http://www.stpub.com/pubs/llo.htm), which provides detailed url's for the state business entity registration sites from which these notes were gleaned, and a variety of other information on business trust, federal tax, state tax, and drafting issues relevant to the many variants of limited liability business entities.
Alaska:
* New corporations, securities, premium finance company and credit union regulations have been adopted. The corporation regulations increased the expedited services filing fee to $150, defined distinguishable names requirements to apply to multiple forms of business entity, and made provision for electronic signatures.
Expedited service is now available as a limited service and must first be approved by the Corporations Supervisor on a case-by-case basis.
Arizona:
* A Corporations Division omnibus bill has been passed containing restoration of statutory agent provisions to law, permitting administrative dissolution of a domestic LLC or withdrawal of the certificate of authority for a foreign LLC, and clarifying the status of a Corporation Sole as a nonprofit; and
* Partnership name availability can now be checked online.
Arkansas:
* 2001 Franchise Tax reports are available; and
* Business entities can now file required forms and pay fees and taxes online.
California:
Legislation passed in 2001:
Corporations:
* SB 324
(Chapter 50): This measure provides that in mergers in which a domestic disappearing stock corporation is merging into a surviving stock corporation which is either a domestic corporation or a foreign corporation qualified to do business in California, the Secretary of State shall file the merger without a certificate of satisfaction and notify the Franchise Tax Board of the merger. Amends Corporations Code Section 1107.5.
Partnerships/LLC:
* AB 1596
(Chapter 595): This measure extends until January 1, 2007, the sunset date allowing architectural firms to register as limited liability partnerships or foreign limited liability partnerships.
* SB 263
(Chapter 425): This measure requires the Secretary of State's office to include with instructional materials provided in conjunction with limited liability partnership and limited liability company registration forms a notice that filing the registration will obligate the limited liability partnership or limited liability company to pay an annual tax for that calendar year to the Franchise Tax Board. The notice would have to be updated annually to specify the dollar amount of the tax.
* AB 898
(Chapter 391): This measure sets a permanent annual fee schedule for limited liability companies, based on total annual income, as follows:
* If the total income is at least $250,000 but less than $500,000, the annual fee would be $900.
* If the total income is at least $500,000 but less than $1,000,000, the annual fee would be $2,500.
* If the total income is at least $1,000,000 but less than $$5,000,000, the annual fee would be $6,000.
* If the total income is $5,000,000 or more, the annual fee would be $11,000.
Inquiries regarding AB 898 or the annual fee schedule for limited liability companies should be directed to the Franchise Tax Board.
Special Filings:
* AB 25
(Chapter 893): This measure expands the rights and privileges available to persons who are registered with the Secretary of State as domestic partners. The only change that affects the Secretary of State's office is to extend the eligibility to form a domestic partnership to opposite-sex couples in which at least one of the partners is 62 years of age or older and eligible for Social Security old-age benefits. Previously, eligibility for domestic partnership registration for opposite-sex couples required that both partners be at least 62 years of age and eligible for Social Security old-age benefits.
* SB 916
(Chapter 178): This measure would create an exemption from the definition of a "discount buying organization" businesses that meet a specific set of requirements. The requirement that affects the Secretary of State's office is that a business seeking this exemption must file proof with the Secretary of State that the business has established a $50,000 escrow account for the purpose of providing refunds to its members.
* SB 1194
(Chapter 304): This measure makes changes to the law regulating immigration consultants. The provision that affects the Secretary of State's office is the repeal of the portions of Business and Professions Code section 22443.1 that previously allowed an immigration consultant to file with the Secretary of State a deposit in lieu of filing a bond. The portions of the statute requiring an immigration consultant to file a bond with the Secretary of State are still in effect.