Due Diligence

July 30, 2011

So you’re one of the lucky ones. You business has survived the worst of the recession, but now you want out. The last couple years, well, sure you made a profit, but just barely, and darn! it was hard!

The good news is you have a potential buyer, who seemed ready and willing to sign on the dotted line, that is, until his lawyer put that to a screeching halt with worried cries of “due diligence!”

What is due diligence? In a nutshell, due diligence is making sure the i’s are dotted and the t’s are crossed. Due diligence research will bring up outstanding issues that would prevent a clean sale from one’s hands to the other.

For instance, if you own a piece of equipment, but secured the loan to pay for the equipment with that piece of equipment, then the bank will have security in the equipment. Said simply, if you got a forklift with a secured loan from the bank, the bank would take the forklift back if you stopped making payments.  A potential buyer will want to know that the equipment is not paid for, and would also want to know if there are additional entitities who hold security interests.  Depending upon what is owned and what is owed, the asking price for otherwise apparently similar businesses might vary widely.

Due diligence might also bring up problems with ownership of the company—imagine a man trying to sell a business, or even his half of the business out from under his wife because he plans on divorcing her in the near future. Perhaps the couple is in the middle of divorce already. Even if he was trying to sell only his half of the business, would the buyer want to take on that can of worms unknowingly? Eh, probably not.

So due diligence protects a buyer, and also may favor a buyer in the event the sale goes through. For example, if the buyer wants the company but discovers a flaw in the business, the buyer may ask for a reduction in price. In our unhappy couple scenario, perhaps the wife decides, yeah, she’s OK with her husband selling his half, but she’s not letting her half go. In that case, the buyer might ask for a reduction to reflect that he is purchasing only a half business, and an extra reduction to reflect a lower value to him due to having to be in business with the wife.

Due diligence research also will examine tax returns, employee handbooks, agreements, assets, work processes, valuations and P&L statements. If your books are not in order, then the buyer may refuse the sale, or may ask for further reduction in sales price.

The lesson here is, get your business in order before you put it up for sale. Just like you would repair your house and make it attractive for buyers prior to putting it on the market, so should you with your business. Your lawyer and accountant can help with that.

Leave a Comment » | Buying and Selling a Business, Employment Issues | Tagged: , , | Permalink
Posted by debmcnichol

Pay Your Lawyer!

July 27, 2011

I have a few acquaintances that call me every few months, and when they do, their questions boil down to two unuttered concerns, the first being, they don’t want to pay a lawyer (usually me) for legal services.  Now, these same people have no theoretical or actual problem paying rent, paying for a car lease, a trip to the doctor, a taxi, or tax preparation.  They’ll pay for glasses for their children, and groceries and clothing.  They’ll pay for movies and dinner out, the latest versions of Wii and Xbox and Nintendo DS.  They’ll buy an overabundance of birthday presents for their kids to be loaded through the back doors of their homes while simultaneously leaving through the front door with last year’s toys destined for Goodwill.

Why do these people not want to pay for an attorney?  Does any person pay for an attorney in a way other than reluctantly?  Well, yes, some people do.

And corporations do.  Large corporations may have a hundred attorneys on staff, and still manage to farm out work to specialist law firms that charge $1000 per hour of work.  Complain about big business, the economy, and lawyers all you want, but no one has ever said, “That bank went bankrupt because it paid its lawyers too much.”  Successful corporations know that lawyers provide services that range from necessary evils such as compliance and damage containment to business builders such as acquisitions, franchising, and exportation.

So many people, however, have an aversion to visiting a law office, which might be explained for any number of reasons, not the least of which is that attorneys are expensive. (Let’s put aside the fact that there are bad attorneys out there.  I recognize and agree that there are many.) While theoretically, at least, we can see the benefit of having an attorney negotiate for us a favorable business deal, we dread the idea of paying the lawyer for her expertise in assuring that we got the best deal.  Same thing for settling an accident or criminal charges.

Even worse than the fees, though, might be the connection between the attorney and a bad event in a person’s life.  I’m convinced that the source of most anti-attorney feelings is the idea that a person who feels victimized should not have to pay for anything.  The person, after all, is already suffering, and the attorney is simply getting him to where he originally was.  Or more often, the lawyer is supposed to “make those b$#%^s pay,” yes?

When things go wrong in a marriage, for example, it is easy to resent having to pay a lawyer to get through the painful process as intact as possible. In the US, with the exception of faulty real estate closings, the attorneys most likely to be sued for malpractice are over “bad events” like divorce and crime.

When an ex-husband has had to give up the good car, the house, the bank account, child support, and alimony, he might find it difficult to see that his pension, the stocks, the vacation home, his prize boat, and his way of life remain with him—due largely to a
hard-working attorney who might have had to work around sticky issues of abuse, abandonment, or infidelity.  The problem with that mindset, though, is that the lawyer did not cause the divorce.  The lawyer did not cause the accident.  The lawyer did not convince the client that having two wives unaware of each other was a good idea.  The lawyer did not breach the contract. The lawyer did not force the client to drink and drive, rob a convenience store, or beat his no-good brother-in-law with a shoe. The lawyer, though, is there to help her client get through it.

So pay her already!

Contrary to popular belief, I am not that fun at parties and iftars. My acquaintances do not love me for my bubbly personality, but (I do hope) I provide them something of value when they call me.

It took me a while to figure out my phone acquaintances’ second concern, but this is it in a nutshell: they want to feel safe. Talking an issue out, or at least being able to tease out what issues exist in a tangled and convoluted set of facts helps to make people feel
a bit more in control of a situation that might otherwise seem out of hand.  For that, I am grateful and happy to help.

That said, the number of new people to receive my personal number these days is exactly zero.

Leave a Comment » | business building, small business | Tagged: , , | Permalink
Posted by debmcnichol

The End of NASA?

July 10, 2011

This week saw the end to the American  Space Shuttle program.  The final shuttle  ceremoniously took off on July 8, 2011, with a few seconds glitch.  The shuttle successfully docked at the  International Space Station two days later.   Its cargo included tools needed to maintain and sustain the space  station in a future devoid of the American shuttle.  For the foreseeable future, the United States  will be paying the Russians to shuttle American astronauts to and from the space station, while NASA directs its resources elsewhere.

This deal with Russia was struck at  the direction of the Obama Administration.  According to Space.com, the total cost of the Russian taxi service is $753  million.  That buys, adjusted for  inflation, twelve round trip tickets to the International Space Station in 2014  and 2015.  Compared to NASA’s average  cost of a space shuttle trip of $450 million, and $1.7 billion to build a space
shuttle, this appears to be a bargain (NASA FAQ).  Only time will tell, however, if this  consumer relationship will work out.

Is NASA doomed, and does Russia have  a monopoly on space for now?  Not  according to Charles Bolden, NASA Administrator.  Bolden told CNN’s Candy Crowley that that even if Congress cuts NASA spending, the Obama Administration’s goals for the NASA program will continue.  Plans include putting a man on an asteroid by  2025 and a man on Mars sometime in the 2030’s.

In the nearer term, NASA plans to  continue, or restart, to work on orbital spacecraft as early as next year, with
cargo being hauled into space in early 2012.  Additionally, NASA will be asking for contractor proposals within a few
years for a commercial crew vehicle.

Private industry contractors  actually play a large role in NASA scientific development.  Thousands of companies, large and small, work for NASA and are paid with American taxpayer dollars. These companies are depended upon in large part to take NASA into the future.  We’ll see.

As for the United States being dependent upon the Russian taxi service and losing the space race, the hype seems to be much worse than the reality.  NASA, while obviously needing its hair cut (as does every other program in this country),is too large and too important a program to scrap, or to pare down so much as to make it irrelevant.  Its budget is $100 billion from 2011-2015, which seems relatively small somehow (yikes!), but…  When the economy improves, so will funding for the behemoth.

Leave a Comment » | General | Tagged: , , , , | Permalink
Posted by debmcnichol

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