Category: Business
Clear ResultsMergers and Acquisitions
Breaking Down Rollover Equity: Why Buyers Love It and What Sellers Need to Know
For many business owners, the goal of selling their company is turning their years, and often decades, of hard work into liquidity. But in some cases, retaining a stake in the company could prove to be fruitful for both the buyer and the seller. That is where rollover equity comes into play. Below is a breakdown of the benefits and risks of rollover equity, and what sellers need to know. Rollover Equity Explained The concept of rollover equity is simple. Instead of paying a seller entirely in cash, a buyer acquires 100% of the target company while allowing founders and key shareholders to retain a stake in the new ownership structure. The seller still receives some immediate liquidity at closing, exchanging the remaining portion for equity in the post-transaction business. This is certainly not a new concept and has been common in private equity transactions for some time. However, it is becoming an increasingly important tool today as buyers and sellers work to bridge valuation gaps and align their incentives in today’s more cautious deal environment. The Benefits of Rollover Equity One of the most obvious benefits of this deal structure is that it reduces the amount of cash required to close a transaction. This is a significant benefit for buyers who are motivated to preserve capital whenever possible, particularly in today’s market when financing costs are elevated, and lenders are scrutinizing leverage more carefully. Buyers do not have to fully fund a transaction with cash, but they still obtain full control of the entire company. Additionally, when founders remain involved, there is an increased confidence that the management team and employees will remain motivated and stay onboard. Continued seller participation can also help to preserve relationships, maintain operational continuity, and retain institutional knowledge after the deal closes. These non-economic factors can be critical to the company’s future success. Rollover equity can also be a tool to bridge valuation disagreements between a buyer and seller. A frequent issue that arises is a seller’s belief their business deserves a higher valuation based on its growth potential vs. the buyer’s hesitation to fully underwrite those projections in cash. A rollover structure provides a bridge for both sides to move forward despite the disconnect on valuation. The seller gets to walk away with immediate liquidity while still retaining the opportunity to benefit from the upside if the company continues to grow. That second bite at the apple can prove to be extremely valuable for a seller if the company later sells at a higher valuation. They can see returns that far exceed anything they would have generated from an all-cash transaction up front. This makes rollover equity particularly attractive for sophisticated sellers who see the opportunity to continue participating in value creation alongside the buyer. The Risks of Rollover Equity While there are many upsides to rollover equity, it is not without risk. Most importantly, sellers must fully understand what they are receiving in exchange for the portion of the sale they are not receiving in cash. The rolled equity is typically a minority stake in a buyer-controlled entity. The seller will have minimal control over future decisions, including exit timing. Therefore, the rights associated with the rollover are incredibly important and should be carefully negotiated. Rollover equity can also include some restrictions for the seller. For example, there can be mandatory hold periods, drag-along provisions, or other limitations that can affect how and when the seller can monetize their investment. The capital structure of the post-closing entity also matters. If the new entity is highly leveraged, the seller may face a very different set of risks than they did as the original owner. As with any transaction structure, a rollover transaction comes with its own set of tax considerations as well. When structured properly, rollover equity can come with the added benefit of tax deferral in certain instances for sellers, but the rules here are complex and highly dependent on deal structure. It is essential to bring in legal and tax counsel early on to ensure everything is structured appropriately and aligns with the seller’s financial goals. Rollover equity can be a highly beneficial tool for both buyers and sellers, and it will no doubt continue to be increasingly used in today’s M&A environment. But there are many considerations, especially on the sell side, that must be addressed from the start. Working with effective legal counsel throughout the process can help to reduce the risk, increase the benefits, and set up sellers for even greater success in the future.
July 6, 2026
Business
Why the Friendly PC Model Remains Critical to Healthcare Private Equity Transactions with Medical and Dental Practices
Private equity (“PE”) activity in healthcare across the United States has caused continued focus by state legislatures and enforcement agencies on the doctrines of corporate practice of medicine and dentistry (“CPOM” or “CPOD”). Notwithstanding this attention, the often-referenced “Friendly PC” model remains the optimal corporate strategy to ensure post-closing compliance with CPOM and CPOD regulations in most jurisdictions. The following identifies some key considerations for the agreement's ancillary to the purchase of the non-clinical assets by the PE company’s management services organization (“MSO”), which are commonly used to ensure compliance with CPOM and CPOD. Friendly PC Model As a general matter, the term “Friendly PC” model in PE healthcare deals most often refers to a business arrangement where a physician or dentist-owned professional corporation (“PC”) sells all of its non-clinical assets to an entity owned by the MSO (controlled by the PE firm), which then takes responsibility for the PC’s non-clinical business operations. This model complies with fundamental CPOM and CPOD legal requirements, which are designed to restrict non-physicians from owning or controlling medical practices. Such a structure prevents the PE buyer from owning clinical assets or unduly controlling the clinical operations and decision-making of the providers employed by the PC. In the “Friendly PC” structure, the parties designate a single clinical professional to serve as the sole owner of the PC post-closing. This individual is referred to as the friendly physician or dentist (“Friendly Provider”), who is then expected to cooperate with the PE buyer in accomplishing its business goals. Such a transaction requires the drafting of a series of agreements to accomplish the necessary purposes of the arrangement. Although the nature and scope of such agreements may vary slightly based upon preference and applicable state law, below is a brief description of certain key agreements, and their most necessary elements, to ensure the PC’s compliance with CPOM and CPOD laws post-closing. Management Services Agreement The Management Services Agreement (“MSA”) is entered into between the PC and the MSO, which is owned by the PE buyer. Through this agreement, the MSO is responsible for providing and arranging for certain non-clinical administrative, business support, and back-office services on behalf of the PC. The MSA will clearly state that the MSO entity will not play any role in the care of patients and will specify the limitations of the actual services to be provided so as to ensure it will not fall within the applicable state’s definition of the practice of medicine or dentistry. It is also very important that the MSA define the independent contractor nature of this commercial relationship and seeks to avoid creating a de facto partnership between the MSO and the PC.1 Overly lengthy initial contract durations, requirements for minimum operational hours per period, the ability to negotiate payor and other agreements without the PC’s consent, and compensating the MSO through a percentage of the PC’s profits are all commonly mishandled deal points that could create an unintended partnership in the eyes of a regulatory agency.2 As such, legal counsel must carefully tailor these provisions to avoid such a problematic presumption. Equity Transfer Restriction Agreement This agreement establishes a highly restrictive framework which governs the ownership and transfer of the Friendly Provider’s interests in the PC, giving the MSO near-complete control over any change in ownership. As a baseline rule, no transfer of equity—whether voluntary, involuntary, or by operation of law—may occur without the MSO’s prior written consent, which may be granted or withheld in its sole discretion. The central mechanism is a set of transfer events (e.g., death, disability, termination of services, loss of licensure, legal disqualification, divorce, regulatory issues, or breach of agreements), upon which the Friendly Provider’s entire ownership interest is automatically and immediately transferred—without notice or further action—to an MSO–designated transferee. This transfer occurs by operation of contract, is effective upon the triggering event, regardless of administrative formalities and is typically priced at a nominal $1.00. In addition, the MSO typically holds a unilateral call option enabling it to trigger a forced transfer of all equity at any time by delivering notice, which itself constitutes a transfer event and results in the same automatic $1.00 transfer to its designated transferee. Following any such transfer, the Friendly Provider is automatically stripped of all ownership, governance roles, and economic rights in the PC. The agreement further reinforces this control structure through ongoing covenants that prohibit the Friendly Provider and the PC from taking a wide range of corporate, financial, and operational actions without MSO approval, ensuring that both ownership continuity and strategic direction remain fully aligned with the MSO’s interests. Provider Employment Agreement The provider employment agreement is often viewed as the most important by medical professionals who are divesting their interest in the PC. It includes terms and conditions regarding compensation and various restrictive covenants (i.e., non-competition, non-solicitation, confidentiality) that are critical to the clinician’s relationship with the PC. Legal counsel should ensure that the employment agreement also contains specific provisions or guarantees that the clinical professionals will maintain broad autonomy in all clinical decision-making and treatment of patients post-closing.3 Under no circumstances may the PC exercise any undue control over this aspect of their clinical professional employees’ job performance, and expressly stating as such within this agreement may help the arrangement survive future scrutiny.4 Clinical Liaison Agreement Lastly, the Clinical Liaison Agreement (“CLA”), typically entered into by the PE management entity and the Friendly Provider, is a frequently used means to outsource the development and implementation of the medico-administrative services of the PC. As a licensed professional in the state of operation, the Friendly Provider is the only party legally authorized to provide such services as the supervision of clinical staff, the development of clinical policies, and the leadership of patient-related programs and initiatives. The existence of such an arrangement is therefore imperative for the post-closing clinical management of the PC. As with the other agreements, the CLA should involve a reasonable term length and consideration for the Friendly Provider’s time and effort, and it should also protect the Friendly Provider’s necessary autonomy to perform their duties as outlined therein.5 Conclusion As scrutiny of “Friendly PC” transactions continues in light of consumer and legislative concerns over the affordability of health care services, the need for proper separation of clinical and non-clinical management post-closing is likely to be more important now than in years past. As such, PE buyers and their counsel must pay close attention to these frequently overlooked ancillary agreements to ensure the truly independent nature of their post-closing relationships. 1See Warren J. Apollon, D.M.D., P.C. v. OCA, Inc., 592 F. Supp. 2d 906; and OCA, Inc., et al . Kellyn Hodges, D.M.D., M.S., et al., 615 F. Supp. 2d 477. 2Id. 3The definitions of “Practice of Medicine” and “Practice of Dentistry” vary by state, however, guidance provided by the Pennsylvania Board of Medicine provides examples of the types of rights and privileges of licensed providers that must not be interfered with or influenced by unlicensed persons or entities. (See 63 P.S. § 422.1, et seq., 63 P.S. § 120, et seq.) 4Id. 5https://journalofethics.ama-assn.org/article/physician-engagement-private-equity-firms/2025-05
June 15, 2026
Business
Why Real Estate Issues Slow ETA Deals
Most buyers expect environmental issues to be the real estate risk. In many deals, the larger risk is operational disruption. Real Estate Is Involved in Most ETA Transactions Real estate shows up in the vast majority of lower middle market transactions in some form. According to the 2025 Small Business Credit Survey published by the Federal Reserve: approximately 59% of operating businesses with employees operate from leased facilities approximately 17% operate from owned facilities approximately 17% primarily operate from a residence or without a dedicated operating facility That means roughly 83% of entrepreneurship through acquisition transactions involve some form of real estate or occupancy issue. In many deals, the primary issue is not ownership of the property itself. It is whether occupancy, control rights, lease assignment provisions, lender requirements, zoning, or permits could interfere with the business continuing to operate after closing. Those risks often become the primary real estate issues affecting the transaction. Most Buyers Initially Focus on Environmental Risk Environmental exposure absolutely matters. Particularly in: manufacturing industrial logistics automotive fuel-related operations older commercial corridors Phase I and Phase II reports remain critical diligence tools. But many search funders, independent sponsors, and ETA buyers do not place enough weight on operational interruption risk. While the business may technically exist independent of the property, operationally, it often does not. Location Becomes Part of the Business Most of these businesses are highly dependent on their physical operating environment. Examples include: machine shops with specialized electrical infrastructure distributors dependent on loading access and trucking routes contractors relying on outdoor storage rights restaurants dependent on parking and liquor licensing healthcare operators dependent on permitted use manufacturers operating under grandfathered zoning protections The issue is not simply whether the business can move. The issue is: cost of relocation operational downtime customer disruption employee retention permitting risk lender reaction transition timing Many ETA buyers do not fully appreciate this until diligence deepens. Lease Problems Often Surface After LOI One issue that repeatedly appears in ETA deals is whether the business can continue occupying the property after closing under the existing lease arrangements. Many buyers initially assume that the lease will (and can) transfer automatically at the time of closing. That is often incorrect. Most commercial leases contain assignment restrictions, consent requirements, or change-of-control provisions that must be examined carefully during diligence. Buyers need to identify: anti-assignment clauses landlord consent requirements change-of-control provisions expired lease terms undocumented extensions side agreements reflected only in emails use restrictions relocation rights held by landlords personal guarantees tied to the seller While the business operated successfully under these arrangements for years, a transaction introduces scrutiny, diligence, lender review, and operational friction. Lenders Underwrite Real Estate Issues Aggressively Occupancy stability becomes especially important in financed transactions. Particularly: SBA-backed deals owner-occupied industrial acquisitions cash flow sensitive businesses location-dependent operations Lenders often focus heavily on: remaining lease term renewal rights assignability ownership structure related-party lease economics appraised value environmental exposure zoning compliance A business with strong EBITDA but only 18 months remaining on a lease can quickly become a financing issue. Especially if the landlord has leverage during the closing process. Owned Real Estate Creates a Separate Transaction (and Separate Issues) Buyers often assume owned real estate simplifies the acquisition. In reality, it frequently creates a separate parallel transaction with its own diligence process, timeline, costs, and risks. The buyer must now perform diligence on both the operating business and the real estate itself, including: title survey and boundary issues easements zoning environmental exposure permits deferred maintenance tax exposure utility access stormwater compliance shared access arrangements The ownership structure also becomes critical, with many ETA deals using separate entities for the business and real estate. For example: one LLC owns the operating business another entity owns the real estate the operating company leases the property from the real estate holding company That structure often creates cleaner liability separation, financing flexibility, estate planning opportunities, and long-term control over the property. The larger problems often appear when the business and property were never properly separated in the first place. Many older lower middle-market businesses operate under informal ownership structures where: the seller personally owns the property family members own portions of the real estate title ownership differs from operational control there is no formal lease occupancy economics were never documented properly related-party arrangements evolved informally over decades That creates a very different set of diligence and execution risks. Buyers now need to examine: who actually owns the property whether all owners are participating in the transaction whether any family members must consent whether the operating business has formal occupancy rights whether market rent materially changes EBITDA whether lender underwriting changes once rent is normalized whether personal use or mixed-use issues exist whether title, tax, or succession issues affect the property whether post-close disputes could arise around occupancy or control Real Estate Distorts EBITDA More Than Buyers Expect Normalized occupancy costs also frequently change the underwriting. This issue regularly shows up in entrepreneurship through acquisition transactions, causing the business to appear more profitable because the seller owns the building. The company may operate with: below-market rent no formal lease favorable related-party occupancy terms deferred maintenance underreported capital needs Once the buyer normalizes rent, maintenance, taxes, insurance, market occupancy economics, and other carrying costs, the cash flow can compress quickly. That affects: leverage availability DSCR calculations valuation purchase price expectations post-close cash needs This is particularly important in manufacturing, warehouse, automotive, and hospitality acquisitions. Zoning Problems May Remain Hidden Until Diligence It can be a misconception to assume: “The business already operates there, so zoning must be fine.” Not always. A lack of zoning compliance can significantly disrupt operations. Businesses sometimes operate under: grandfathered nonconforming uses historical variances undocumented expansions expired permits improper outdoor storage occupancy inconsistencies signage violations prior approvals tied to historical ownership A transaction can trigger: new permit review lender diligence insurance underwriting review municipal scrutiny updated inspections The business may have operated without issue for years, but that does not mean the use remains protected post-closing. Real Estate Risk Can Show Up Everywhere Real estate issues quickly spread into: financing operations integration employee retention transition planning insurance working capital timing of closing The issues then become larger than the property itself. Real estate issues are most prevalent in lower middle market acquisitions where: documentation evolved informally occupancy arrangements were relationship-driven operational processes were never built for institutional diligence In these ETA deals, the answer to the real estate question ultimately controls: “Can the business continue operating the same way immediately after closing?”
June 10, 2026
Mergers and Acquisitions
When the Deal Gets Personal: The Emotional Inflection Points of Selling a Business
Selling a business is largely viewed as a financial transaction shaped by valuation, structure, diligence, and closing. However, for founders and owners, selling a business is also an emotional journey that can be a highly stressful event. That stress can be compounded when a corporate attorney is brought in late in the process when many sellers have already experienced the early and most precarious stages of the deal. Many sellers work with an investment banker to take the company to market, vet buyers, and there may even be a letter of intent (LOI) on the table before an attorney is brought on board. While the seller feels they are making progress, from a legal and strategic standpoint, this early stage is where complexity and stress begin to escalate and legal counsel is critical. We have discussed the importance of bringing in legal counsel early in the process in multiple posts, and that cannot be emphasized enough. Below, we examine the most stressful components for sellers in any deal and how bringing in legal counsel early can help to ease the burden. Letter of Intent The LOI is one of the earliest inflection points in the deal process. Sellers often underestimate its significance because they see it as non-binding on economic terms. But this is a false sense of flexibility because exclusivity and time restrictions are binding. Once that LOI is signed, the seller is essentially off the market for a determined period and cannot engage in discussions with other interested buyers. This is where leverage begins to shift from the seller to the buyer. The buyer now has two things that are very valuable: time and access. On the other side, the seller is now increasingly invested, both financially and emotionally, in making the deal happen. It is now harder for the seller to walk away from the deal, even if circumstances change. Diligence The leverage shift becomes more pronounced when the deal enters the diligence stage. Buyers are highly disciplined as they approach this phase of the transaction, particularly when they are sophisticated financial sponsors. Diligence is not about buyers just confirming what they have been told, but rather testing assumptions, looking for weaknesses, and then recalibrating valuation based on their findings. It is common for buyers to reassess price or deal structure because of what is uncovered during diligence, and for sellers who entered the process with a clear expectation of value, that can be jarring. The business they have spent years or even decades building is now being evaluated through a different lens. Consistent Performance Another layer that multiplies the pressure on the seller is the expectation that the business continues to perform at the same level throughout the entire process. Entering negotiations to sell does not equate to a pause in operations. It is simply a process that runs parallel to day-to-day operations. Sellers must manage diligence requests, respond to buyer questions, and engage with all their advisors, all while effectively running the company. They cannot afford for performance to dip, even for reasons that have nothing to do with the transaction. That can lead to a reason for renegotiation, with buyers adjusting terms, implementing additional protections, or even revisiting the valuation entirely. This creates constant tension for the seller who is trying to execute the deal and simultaneously maintain the underlying business. Delayed Engagement of Legal Counsel When a seller brings in legal counsel later in the transaction, it can feel disruptive at first. This is because the job of an attorney is to identify and address risks, clarify what has already been agreed to, and ensure that the documents accurately reflect the intended deal. If they are not involved from the jump, they may have to revisit assumptions or unwind understandings that developed earlier in the process. This can feel like friction or a change in direction for sellers, and that can be avoided when counsel is engaged from the start. The issues become even greater when the buyer is a private equity (PE) firm. These repeat players operate with well-established playbooks and experienced deal teams. This is in stark contrast to a first-time seller who sees this as a once in a lifetime event. For a PE firm, this is just a routine transaction. The imbalance this creates can heighten the emotional stakes, particularly when discussing complex deal components. The Personal Dimension The personal dimension of the deal overlays everything. For a seller, their business represents years of work, relationships, and their identity. Their company is not just an asset they are selling; it is often their life’s work. Layer in concerns about their employees, customers, and their legacy, and the personal connection to the business complicates everything. Sellers often carry the weight of the transaction on their own, while they must continue to lead their company, One other very important reality for sellers is that the deal is not done until it is closed. It is easy to get excited and assume that signing an LOI or moving through the diligence process means the outcome is assured. But the truth is that transactions can, and do, change late in the process. Terms evolve, issues emerge, and sometimes, deals fall apart. It is critical to maintain perspective and discipline and attempt to put emotions to the side. The bottom line for sellers is that every transaction must be approached with preparation and support from the start to minimize the significant stress that comes with every stage. Bringing in skilled legal counsel very early in the process can alleviate that stress and help sellers to not only maximize value, but also bring clarity to the many complexities of a sale, resulting in a deal that truly reflects the seller’s goals.
June 1, 2026
Business
Post-Close Alignment in Lower Middle Market M&A: Where Deal Stress Begins to Fracture
Most sellers and buyers in lower-middle-market M&A, including search funds, entrepreneurship through acquisition (ETA), and independent-sponsor transactions, begin to suffer from deal fatigue and welcome the post-closing phase of a business acquisition or M&A transaction. No more due diligence, no more negotiations, no more redlines. However, in many cases, the post-close phase is fertile ground for additional disputes to emerge. Most post-closing friction in lower-middle-market M&A deals is not caused by something that was absent from the deal. To the contrary, it is actually related to the negotiated documents governing the relationship between seller and buyer in the post-close transition phase. Consulting agreements, employment agreements, and corporate governance documents in rollover equity transactions seek to govern the relationship, but the relationship is still new in this phase. The parties are experiencing, for the first time, what it is like to work together after the change in dynamics (seller-owner to exited owner; buyer with funding to operator managing debt service and performance expectations). In this example, the seller rolled equity in the transaction and was now an equity holder in the buyer's platform company. The post-closing issues did not stem from a missing provision, but from ambiguities that existed across multiple documents that were meant to align and work together: seller notes, management agreements, and governance documents were all in play and created more confusion than clarity. That pattern is more common than most buyers expect, particularly in search fund, entrepreneurship through acquisition (ETA), and independent sponsor deals where post-close roles and governance tend to be more fluid. The LOI to Close Gap in M&A Transactions Most of these issues are not created at closing. They are created in the window between LOI and signing. At LOI, the parties align on high-level economics and general expectations: The seller will stay involved The business will transition smoothly Equity will keep everyone aligned in the case of rolled equity, or amounts due pursuant to the seller note will incentivize cooperation But those concepts get translated into separate documents depending on the deal: Employment agreement Consulting agreement Operating agreement Purchase agreement Each document answers a different question. Very few processes force those answers to be reconciled into a single operating model. That is where the gap forms. By the time you reach closing, the documents are “complete” but not always aligned. Where Post-Closing Issues Show Up in Business Acquisitions Employment Terms in Post-Closing Transition Buyers often assume that key individuals, particularly a selling owner transitioning into an operating role, will continue “as expected.” The employment agreement is where that expectation either becomes a reality or breaks down. The most common issues include: Role definition is too broad or not tied to actual authority Termination provisions do not reflect how performance issues will be handled Compensation structures do not match the deal model Example: A seller stays on post-close in a senior operating role (e.g., general manager) under a two-year agreement while the buyer installs its own CEO or operating partner. The buyer expects to reshape reporting lines and decision-making authority over time. The agreement, however, includes strong severance protections and defines material changes to duties or authority as “good reason.” Six months in, the buyer begins shifting responsibilities to its operating partner. The seller asserts “good reason” and triggers severance or other protections, despite the buyer viewing the changes as part of the planned transition. Nothing is technically wrong in the document. It just does not reflect how the buyer intended to transition control of the business. Consulting Roles and Transition Services Agreements Consulting arrangements are often treated as secondary or low-risk. In practice, they can drive real execution outcomes. This is especially true in customer transition and institutional knowledge transfer. Where this tends to go wrong: Scope of services is loosely defined Time commitment is not specified Compensation is not tied to outputs Example: A seller agrees to a 12-month consulting arrangement to support transition. The agreement references “reasonable availability” but does not define hours, deliverables, or response expectations. Post-close, the buyer expects active involvement in customer introductions and onboarding. The seller views the role as limited advisory support that can be provided from a remote location and not on-site. The result is predictable. The buyer feels unsupported. The seller believes they are complying with the agreement. Again, nothing is broken in isolation. The expectations were never aligned. Rolled Equity and Post-Close Governance Rolled equity is typically framed as a tool to align the parties in furtherance of a more profitable enterprise. In practice, it can be alignment in concept only, not in execution. Where this tends to go wrong: Different expectations around liquidity timing Limited clarity on governance rights Misunderstanding of distribution mechanics Example: A seller rolls 20% of proceeds into the new structure. The buyer plans to reinvest cash flow into growth and limit near-term distributions. The seller expects periodic cash flow similar to how they operated pre-sale. The operating agreement permits discretion on distributions, but the practical application of that discretion was never aligned. This is not a legal defect. It is an operating mismatch that surfaces quickly once capital allocation decisions begin. Why Post-Closing Misalignment Occurs in M&A Deals During the deal process, these items are negotiated in parallel: Purchase agreement Employment agreements Consulting agreements Equity and governance documents Each document may be internally consistent, but the following question should be asked: Do these documents, taken together, reflect how this business will actually be operated on day one? More specifically: Do they clearly define what the seller is required to do, what authority they retain or lose, how they are compensated for that role, and what happens if those expectations change or break down? If the answer to those questions is unclear, the issue is already embedded in the deal. Practical Considerations Pre-Close in Lower Middle Market Transactions This is almost always easier to address before closing than after. In practice, a strong lower-middle-market post-close package tends to do six things: Define the role with objective deliverables. Move beyond titles. Specify outputs, metrics, and decision rights that tie to how the business will actually be operated. Clearly classify the relationship. State whether the seller is an employee, consultant, or board-level advisor. Blurred status tends to create both operational and legal ambiguity. Precisely frame “cause” and “good reason.” If the buyer retains flexibility to change duties, reporting lines, compensation, or authority, that flexibility should be clearly bounded. Well-defined “cause” and “good reason” concepts are what translate flexibility into enforceable expectations. Separate consulting economics from deal economics. Consulting fees should stand on their own unless the parties intentionally link them to purchase price or earnout mechanics. Unintended overlap often creates disputes about what is being paid for performance versus transition support. Build explicit consequences for disruption. If authority is stripped or termination occurs outside the expected framework, the documents should address the outcome. That can include tolling, acceleration, deemed achievement, or extension concepts tied to equity or earnouts. Preserve a practical enforcement path. Rights are only useful if they can be exercised. Escrow access, information rights, expert determination procedures, and specific performance provisions tend to make these arrangements function in practice. Closing Thought on Post-Closing Risk and Deal Execution These are not technical refinements. They determine whether the post-close relationship functions when conditions change. Most post-closing issues do not come from a single broken provision. They come from small inconsistencies across multiple documents that were never forced to align into a single operating framework. If you are under LOI or in diligence, this is typically the window to fix that alignment without disrupting the deal. After closing, you are no longer interpreting intent; you are operating within the structure you drafted. If you are working through this in a live deal, step back and ask: Do these documents, collectively, dictate how decisions get made, how the seller participates, and how economics actually flow? If not, then the risk is not theoretical. It is already built into the deal.
May 29, 2026
Business
Virginia Reshapes Franchising with Ban on Post-Term Non-Competes
Franchisors with Virginia locations should prepare to revise their franchise agreements and Virginia-specific disclosure materials. Beginning July 1, 2026, Virginia law will prohibit most post-termination non-compete provisions in covered franchise agreements and will require those agreements to be governed by Virginia law. For franchisees, the amendments create greater post-exit flexibility and reduce the ability of franchisors to rely on out-of-state governing-law clauses to avoid Virginia’s statutory protections. The practical message is straightforward: franchisors should review Virginia-facing templates, renewal and amendment practices, confidentiality and trade secret protections, and enforcement strategies well before making any new offer, sale, renewal, extension, or amendment for a Virginia location on or after the effective date. Implications for Virginia Franchisors and Franchisees These changes matter immediately for drafting and compliance. A franchisor that continues to use a standard national form for Virginia deals without modification risks including provisions that will no longer be permitted once the new law takes effect. Agreements entered into before July 1, 2026, are not automatically displaced, but renewals, extensions, and amendments on or after that date may trigger the new requirements, making it especially important to review not only new-deal documents but also legacy agreements that may soon come back into circulation. Public commentary following the legislation has also noted guidance issued on April 14, 2026, by the Virginia State Corporation Commission’s Division of Securities and Retail Franchising regarding updates to franchise disclosure materials and Virginia addenda, underscoring that compliance will require attention not just to contracts but also to disclosure practice. How Virginia’s New Franchise Non-Compete Law Affects Franchise Agreements The amendments to Virginia’s Retail Franchising Act, enacted through House Bill 69 and the companion Senate Bill 240, apply to franchises that require or contemplate a place of business in Virginia, a concept broad enough to reach more than traditional brick-and-mortar outlets and potentially many service concepts operating in the Commonwealth. Effective July 1, 2026, the law makes it unlawful to offer or enter into a covered franchise agreement that restricts the franchisee’s right to engage in the business of offering, selling, or distributing goods or services at retail after termination or expiration of the franchise agreement. Just as significantly, covered franchise agreements must now be governed by Virginia law, preventing franchisors from selecting another state’s law in an effort to sidestep Virginia’s franchisee protections. Virginia Franchise Non-Compete Exceptions The statute includes a narrow exception when a franchisee voluntarily sells the franchise at a mutually agreed price, whether to a third party or back to the franchisor. In that setting, the franchisor or the buyer may require the selling franchisee to agree to a non-compete that is binding for up to two years after the sale. Outside that sale context, however, post-term non-compete restrictions in covered Virginia franchise agreements are no longer permitted. The law is also expressly prospective: contracts entered into, extended, or modified on or before June 30, 2026, remain unaffected, but activity on or after July 1, 2026, may bring an agreement within the amended statute’s reach. The Business Impact of Virginia’s Franchise Non-Compete Ban and Compliance Steps for Franchisors Taken together, the amendments materially rebalance franchise relationships for Virginia locations in favor of franchisees by eliminating most post-termination non-competes and requiring Virginia law to govern covered agreements. That governing-law requirement may prove especially consequential, because it reduces the usefulness of contract provisions that previously might have directed disputes toward more franchisor-friendly legal standards. It also means that franchisors evaluating renewals, transfers, terminations, and system enforcement in Virginia will need to assess those decisions against Virginia’s franchise-specific statutory framework. For franchisors, the likely response will be to strengthen other forms of system protection that do not depend on a post-term non-compete. Confidentiality provisions, trade secret controls, non-solicitation language where appropriate, access limits on customer data, tighter operational safeguards, and clearer brand-transition requirements may all take on greater importance. The statute does not prevent a franchisor from pursuing monetary remedies when a franchisee breaches contractual obligations during the term, so careful drafting around in-term defaults, de-branding obligations, liquidated damages, and post-termination transition steps may become more important than ever. The new law may also influence how franchisors think about renewal rights in Virginia. If a former franchisee cannot be restricted from competing after expiration in most circumstances, franchisors may revisit whether renewal should remain automatic or broadly available, and whether Virginia-specific renewal provisions should be adjusted to reflect the changed competitive landscape. For franchisees, by contrast, the law creates additional bargaining leverage and a more realistic ability to continue in business after the franchise relationship ends, provided they do so without violating enforceable contractual duties that survive termination. More broadly, Virginia’s action may be an early indication of where franchise regulation is heading in other jurisdictions. Franchisors operating nationally may therefore want to treat these amendments not as an isolated state-law issue, but as a signal to review their broader contract architecture and protective covenants across the system. For now, however, the immediate takeaway is clear: any franchisor with Virginia-facing agreements or pending registration materials should act promptly to align its documents, disclosures, and operational protections with the Commonwealth’s new rules before July 1, 2026.
May 18, 2026
Mergers and Acquisitions
First Time Buyers: Avoiding Analysis Paralysis
For first time buyers, the diligence phase of an acquisition can be overwhelming. Every document review, identified risk, and unanswered question, can lead to hesitation, and hesitation can quickly turn into something known as “analysis paralysis.” This can be a dangerous place for a transaction as it leads to a loss of momentum or even loss of the deal entirely. It is important for first time buyers to understand that no deal is without risk. You cannot eliminate risk entirely, but you can understand it, quantify it, and allocate it appropriately. When first time buyers recognize this reality early in the process, they are far more likely to move through the diligence process with confidence and ultimately have a successful closing. Below we look at some of the ways first time buyers can help to avoid analysis paralysis and build in the kind of protections that will allow them to move forward with ease. Bring in Advisors Early One frequent error among first-time buyers is delaying the engagement of experienced advisors, especially legal counsel. Legal counsel should be involved before the Letter of Intent (LOI) is signed, as their early participation enables the deal team to identify key issues, recognize potential risks, and structure the transaction to align price with risk effectively. Early involvement of advisors ensures that, upon reaching the diligence stage, the team is prepared to execute a strategy that has been thoughtfully designed from the outset, rather than developing one mid-process. Shifting Risks To allocate certain risks from the purchaser to the seller, it is essential to include precise representations and warranties, along with unambiguous indemnification clauses. When concerns arise, such as outstanding liabilities or matters identified during due diligence, targeted indemnities can significantly strengthen the buyer's protection. These safeguards enable buyers to move forward with a transaction even when not every issue has been conclusively resolved. Financial Structuring The financial structure of a transaction is equally significant as the inclusion of contractual safeguards. Transactions may be designed to incorporate financial protections for the buyer, such as escrow arrangements, holdbacks, or promissory notes. Additionally, earnouts provide further protection, particularly in situations where future company performance remains uncertain. By linking a portion of the purchase price to post-closing results, buyers can mitigate the risk of overpayment while enabling sellers to realize their preferred valuation. Deal Momentum One of the most important considerations for first time buyers is maintaining deal momentum. Conditions can shift quickly as transactions progress from market conditions to financing terms to business performance. If the diligence process is stalled, it allows more time for these conditions to shift, often leading to increased risk or erosion in value. When sellers lose confidence in the transaction, they could begin to entertain a competitor’s bid. Shifting conditions could also lead to a need for price adjustments or renegotiation of other terms. This is exactly where advisors prove invaluable. They can help buyers to distinguish between those issues that need immediate attention and are true red flags, as opposed to those that can be addressed through deal structure. Advisors can instill the kind of confidence in first time buyers that allows deals to move forward, even if every variable is not perfectly resolved. For those buyers entering the M&A process for the first time, the key is not to avoid risk, but to manage it intelligently. With the right team and a disciplined approach to maintaining momentum, buyers can avoid analysis paralysis and position themselves for a successful closing.
May 4, 2026
Business
Maryland Franchise Reform Act Passes
The Maryland General Assembly has enacted, by overwhelming majorities, the Franchise Reform Act (Senate Bill 415 & House Bill 730), marking the first significant changes to the Maryland Franchise Registration & Disclosure Law (the “Maryland Franchise Law”) since its enactment in 1981. Governor Moore is expected to sign the legislation into law shortly, and it will become effective on October 1, 2026. The House sponsor and primary driver of the legislation, Delegate Marc Korman, introduced the bill resulting from numerous constituents who had raised concerns about the franchise registration process in Maryland, concerns shared by franchisors nationwide. However, while part of the law will encourage streamlining the Maryland franchise sales registration process, it also provides changes that will be helpful to Maryland franchisees and Maryland-based franchisors. Having focused my practice on franchise law in Maryland for more than 25 years, I was privileged to be asked by Delegate Korman to work closely with him and his staff on the drafting and revising of the legislation, which included conducting workgroup focus meetings with members of the Maryland State Bar Association (“MSBA”) to gather feedback, and testifying on behalf of the MSBA in favor of the legislation multiple times throughout 2025 and 2026. The Maryland Franchise Law protects people considering the purchase of a franchise from being misled or under-informed when deciding whether to buy. The law requires franchisors to prepare a prospectus (called a “Franchise Disclosure Document” or an “FDD”) detailing a wide variety of information and submit it to the Securities Commissioner, who is an officer with the Maryland Office of the Attorney General (the “OAG”), and obtain that agency’s approval to sell franchises in Maryland. That approval, called registration, must be renewed each year in which the franchisor continues to sell franchises to Maryland residents or for the operation of the franchised business in Maryland (collectively, “Maryland Franchises”). Until now, the law has solely addressed the franchise sales process, rather than the ongoing relationship between the franchisor and the franchisee. The Maryland Franchise Reform Act does the following: For the Benefit of Franchisors Generally Following the bill’s initial introduction and passage by the House of Delegates during the 2025 session, the Securities Commissioner established a pilot program intended to expedite franchise registration renewals. The approved law requires the Securities Commissioner to continue the pilot program and to report to the legislature in 2031 on the program’s results, as well providing data on other aspects of the registration process, and an analysis of how Maryland’s exemptions from registration for experienced franchisors compares with those of other states that require registration before sale of a franchise. For the Benefit of Maryland Franchisors The law limits private parties who can sue a franchisor for violation of the Maryland Franchise Law solely to Maryland franchisees. This will eliminate the ability of out-of-state franchisees to use the statute as a weapon in disputes with franchisors that are or were headquartered in Maryland, which has been a deterrent to franchising from Maryland as compared to nearby states. For the Benefit of Franchisees Consistent with the Maryland Franchise Law’s purpose, parts of the law will benefit franchisees. Specifically: For the first time, the Maryland Franchise Law addresses the imbalance of power between franchisees and franchisors within the ongoing relationship, by prohibiting a franchisor from restricting or inhibiting Maryland franchisees from associating with other franchisees within their brand for the franchisees’ common benefit “for any lawful purpose” — which could include collectively raising grievances with the franchisor for the franchisees’ mutual benefit. Maryland franchisees will have the right to sue in Maryland courts for injunctive relief and damage suffered, if the franchisor violates this prohibition. This provision is similar to “free association” laws passed in several other states, including California and Illinois. The time during which a franchisee may bring a private claim for violation of the law’s registration or disclosure provisions has changed in a manner that benefits certain franchisees. Franchisees will now have until the earlier of four years from buying the franchise rights or two years after the date the franchise opened to the public. The limitations period was three years from the date the franchise rights were purchased, regardless of when the franchised business opened. The advantage will be for retail franchises that often take two years or more from buying the franchise to open due to challenges in securing an acceptable site and constructing the franchise, since those owners then will have time after opening to determine the viability of their investment and whether the franchisor violated the Maryland Franchise Law in selling the franchise. For franchises that open within a short time of purchasing the rights, the judgment of the MSBA and the legislature was that two years from opening is sufficient for a franchisee to make that determination and commence a lawsuit.
April 30, 2026
Business
Strategic Equity Partners: Expertise vs. Governance Friction
In many platform acquisitions (particularly in search funds, entrepreneurship through acquisition (ETA) transactions, and independent sponsor deals), adding a “strategic equity partner” is framed as a clear positive. There are real benefits like additional capital, operating experience, lender credibility, and often a higher probability of closing. The issue is less about whether to add a partner and more about when and how that partner is introduced. When a strategic partner is brought in after the LOI is already signed, the timeline to negotiate the governance framework is compressed. The narrative and excitement at that stage remain focused on upside, while the governance implications of adding another decision-maker are pushed into later negotiations. The LOI-to-close window is compressed, and incentives shift toward getting the deal done. As a result, governance is frequently finalized under pressure rather than designed deliberately. The impact is rarely economic at the outset. It shows up in execution. As additional partner approvals and consent rights are layered in, decisions that were previously within the operator’s control now require alignment across multiple stakeholders. More stakeholders mean more approvals, and more approvals tend to slow the process. That friction is not always visible during the transaction itself. It becomes more apparent in the first 100 days post-close, when the business needs to move quickly, and the governance structure does not support the pace that was underwritten. This dynamic is more pronounced in roll-ups, including those executed through search funds, ETA platforms, and independent sponsor structures, where speed and repeatability drive returns. Even modest governance drag can change outcomes. A structure that is directionally sound but operationally constrained can often underperform a simpler structure that can execute consistently. There is a counterpoint: more deliberate governance can lead to better decisions. The tradeoff between decision quality and execution speed should be explicit rather than assumed. What “Strategic” Usually Signals Introducing a strategic partner at LOI often reflects a gap in the team rather than a pure enhancement. This is especially common in search fund and independent sponsor transactions, where the operator is building infrastructure in parallel with executing the acquisition. The framing is additive, but the underlying driver is frequently a need to solve for something that is not yet fully built into the platform. This dynamic also mirrors a broader structuring question: where strategic partners sit in the equity stack—at the holdco or portfolio level—can materially impact governance and decision flow, not just economics. In many cases, the platform relies on capabilities that are still developing. Integration experience is a common example. The roll-up model assumes that acquisitions can be absorbed efficiently, but that capability is often unproven at the platform stage. Industry-specific operating knowledge may also be limited, particularly where the operator is entering a new vertical or scaling beyond prior experience. Systems and reporting infrastructure tend to lag the ambition of the strategy, creating a mismatch between what is modeled and what can be executed. The natural response is to introduce a strategic partner to bridge that gap. Lender dynamics often reinforce the decision. In leveraged transactions, the team is underwritten alongside the asset. A strategic partner can strengthen that narrative by adding perceived institutional support and a track record that lenders recognize. In some cases, this improves terms or increases certainty of a close. The partner effectively becomes part of the credit story, not just the equity stack. Integration bandwidth is another driver. Roll-ups assume the ability to absorb add-ons quickly, often without a fully built-out operating platform. A partner is expected to support that integration planning and post-close execution, thereby reducing execution risk. There is also an element of risk sharing. Particularly in first platform deals or more aggressive investment theses, bringing in a partner spreads exposure and introduces another perspective if/when performance deviates from plan. None of this is inherently problematic. In many cases, it is a rational response to real constraints. The consistent consequence, however, is that the partner brings governance, and governance changes how the business operates. The key is to enter the deal with a clear understanding of how that governance will function in practice. The below demonstrates a typical board structure in traditional search fund models. You can explore the different models and board structure further here: https://tinyurl.com/2rh74bk2 Where Friction Shows Up As briefly mentioned above, the friction impact appears in decision-making. As additional consent rights are layered in, more parties must agree before action can be taken. The underwriting model may assume speed and autonomy that no longer exists once governance is expanded. Board composition is often where this dynamic becomes real, because it determines who actually has the ability to approve or block decisions. A balanced board on paper can function as a checkpoint in practice once quorum and voting thresholds are applied. If control is not clearly aligned with the operating model, the board shifts from oversight to gatekeeping. Decisions that would otherwise be routine begin to require formal coordination, special meetings, and sometimes even input from professional advisors representing various stakeholders. Protective provisions compound the effect. In practice, these are the provisions that designate certain actions as “reserved matters” requiring supermajority or unanimous consent at the board or investor level. Common examples include: incurring or refinancing debt, approving capital expenditures above a threshold, deviating from the approved budget or business plan, issuing additional equity, or entering into material contracts or acquisitions. Each of these approvals is reasonable on its own. When each step requires a supermajority or unanimous sign-off, the process shifts from operator-led execution to coordinated approvals across multiple stakeholders, which slows the cadence of decision-making. The issue is not the existence of these rights, but how frequently they are triggered in the normal course of operating the business. Budget approvals can create the same constraint. When budgets require approval and variance thresholds are tight, routine adjustments turn into approval processes, limiting management’s ability to respond in real time. Roll-ups rely on speed, and competitive processes — particularly in lower middle market ETA and independent sponsor deals — tend to reward buyers who can move quickly with certainty. If each add-on requires layered approvals, the platform becomes less competitive. Opportunities that fit the thesis may still be identified, but the ability to act on them is constrained by structure rather than strategy. This is why the friction becomes most visible in add-on acquisitions, where speed is often the deciding factor in winning the deal. Management decisions can also migrate from operator discretion to investor approval. Hiring, compensation, and incentive alignment become slower to execute. Over time, this affects the quality and responsiveness of the team, particularly in periods where rapid adjustment is required. Deadlock and Forced Outcomes As additional stakeholders are introduced, disagreements become more likely. In many structures, those disagreements ultimately point parties toward formal deadlock mechanisms. These can include buy-sell arrangements (often structured as “Russian roulette” or “Texas shootout”), put/call rights, forced sales or buyouts, or redemption rights. These mechanisms are designed to break impasses, but they can be outcome-determinative and, in some cases, harsh to one side. A forced buyout may require a sponsor or the company to purchase an equity stake at a defined price or formula, which can create meaningful cash flow strain at the exact moment the business needs capital to execute. Alternatively, a party may be compelled to sell at a time or valuation that does not align with the original thesis. The key point is not that these provisions should be avoided. It is that once disagreements arise, the path to resolution is often binary and financially significant. If those dynamics are not considered upfront, governance can shift from a tool for alignment to a mechanism that forces outcomes under pressure. Why It Matters More in Roll-Ups Single-asset acquisitions can tolerate some governance friction because the operating model is relatively stable. Decisions are fewer in number and less time-sensitive. In that context, additional oversight may be manageable. A roll-up operates differently. The model depends on pace, repetition, and the ability to act decisively across a sequence of opportunities. Each add-on introduces new variables, and the platform must be able to respond quickly to integrate, optimize, and move forward. When governance introduces multiple layers of approval and frequent investor involvement in operational decisions, the strategy becomes harder to execute in practice. Decisions can still be made, but not at the speed required to maintain momentum. At that point, governance directly affects outcomes and is difficult to unwind without renegotiating core terms. The graphic below shows a sample board composition after numerous acquisitions. Note the increasingly limited decision-making power of the operator. Decision Rights to Resolve Early If a strategic partner is introduced around LOI, whether it be in a search fund, ETA, or independent sponsor context, decision rights should be aligned with how the business will operate in practice. Board control at closing needs to be explicit and consistent with the intended operating model. Ambiguity at this stage tends to create friction later. It is also worth recognizing why these protections exist. Investors are seeking to protect capital and, in many cases, bring real experience that can improve outcomes. A well-constructed board can provide discipline, identify risks early, and prevent decisions that would otherwise impair value. The goal is not to remove oversight, but to calibrate it to support execution rather than impede it. Management authority should allow day-to-day decisions without repeated escalation. The distinction between strategic oversight and operational control needs to be clear in both concept and documentation. Add-on acquisition parameters should be defined in advance, so execution does not depend on real-time approvals. Debt capacity should align with the expected capital strategy rather than restrict it. Budget processes should allow for adjustment as conditions change, rather than lock the business into a static plan. Management should retain sufficient control to build and adapt the team required to execute. Deadlock provisions should be evaluated based on how quickly they can resolve disagreement, not simply how balanced they appear. These are execution variables that ultimately determine whether the strategy can be implemented as underwritten or whether governance constraints begin to reshape the outcome. Structuring to Preserve Speed These dynamics point to a few practical governance principles. First, align control with the operating model. If the thesis depends on speed, decision rights should enable timely action at the management level. Second, reserve approvals for truly fundamental matters, not routine operating decisions that occur frequently. Third, define thresholds that reflect how the business will actually run, including pre-approvals for expected activities like add-ons and incremental leverage. Fourth, make approval processes workable in real time, not just balanced on paper. This is where experienced counsel matters. In this context, “sophisticated governance” means more than drafting protections; it involves translating the investment thesis into a decision-rights framework that will function under time pressure. That includes calibrating reserved matters, setting practical thresholds, designing board composition and quorum rules, and stress-testing deadlock outcomes against realistic scenarios. The goal is to preserve investor protections while ensuring the company can execute without repeated escalation. Closing Thought Strategic partners can add value, particularly where they address real capability gaps or strengthen the financing narrative. In many cases, they improve the quality of the deal and increase the probability of closing. But they also introduce a second layer of governance that must align with how the business will operate after closing. If that alignment is not addressed before close, it tends to be addressed afterward, when decisions need to be made quickly and flexibility is limited. That is where execution risk increases and the original thesis begins to drift. Not because the strategy was flawed, but because the structure does not support it. If you are navigating this dynamic in a live deal, it is worth addressing decision rights early and in practical terms — before they become constraints in the first 100 days.
April 23, 2026
Business
The Great Ownership Transfer: Why Execution Breaks Search Fund & ETA Deals
Most commentary on the “Great Ownership Transfer” or the "Silver Tsunami" focuses on sellers. It is right there in the name. Aging owners. Lack of succession planning. Uncertainty around exit. That framing is incomplete. This is not just a supply story; it is a buyer capacity problem. Particularly for search fund entrepreneurs, independent sponsors, and others pursuing entrepreneurship through acquisition McKinsey estimates that ~6 million SMBs will face ownership transitions by 2035, representing up to $5 trillion in enterprise value. Yet roughly 92% of exits are likely to occur through closure, not sale. McKinsey Report: The Great Ownership Transfer. If you are acquiring businesses in the $500K–$25M range, your primary competition is often not another buyer. It is the business quietly shutting down. This Is Not a Deal Flow Problem - It Is a Buyer Execution Problem in Search Funds and ETA There is no shortage of businesses to buy in the lower middle market. The challenge for search funds, independent sponsors, and ETA buyers is execution. It is likely that for some of these businesses, the rational step is closure, but there will remain a significant number of profitable businesses in search of a buyer during this economic event. The problem exists in the shortage of buyers who can: Source effectively Underwrite accurately Finance reliably Transition successfully The gap between going under LOI for a “viable business” and closing is where most deals fail. That gap is also where the opportunities and risks live. The Buyer Capabilities Stack In practice, buyer success in this market comes down to the four capabilities identified above. Sourcing: The Best Deals Are Not in Market Because closure dominates exit paths, many viable businesses never run a formal sell process. They speak with a CPA, a broker, or a peer about selling, and when friction appears, the process stops. Running a sell process is not without its hurdles, which is why the rewards are greater for those who do it. If your sourcing strategy depends solely on brokered deals, you are competing in the most efficient (and crowded) segment of the market. If a buyer wants to improve their odds at wining, they need to: Build referral channels with accountants, attorneys, and advisors Focus on specific industries to accelerate underwriting Embrace cold outreach Engage sellers before a formal process exists The winning edge is not price. It is access to top tier deals that are found through hard work and diligence. Seller Readiness: Most Deals Fail Before Diligence Another recurring issue in lower middle-market transactions is not business quality, but transferability. Common issues that cause buyers to avoid deals include: Incomplete or inconsistent financials Owner-dependent relationships Undocumented processes Unclear working capital needs The better initial question is not: “Is this a good business?” It is: “Can this business be transferred and financed cleanly?” Buyers can use a simple readiness screen when examining prospective companies to purchase by examining for: 24 months of monthly financials and tax returns Customer concentration and contract review Identification of key personnel dependencies Basic operational systems (billing, quoting, payroll) Working capital dynamics post-close Deals that fail this screen rarely improve during diligence. I recently posted about broken LOIs and the reasons why buyers walk away: Broken Executed LOIs By Reason. Over 45% of the reasons for failure can be categorized within the items listed above. Financing: The Constraint Most Buyers Underestimate Financing is not a closing step. It is a very serious pre-LOI workstream. That may seem like an obvious statement, but many failed deals share a common pattern: The buyer underwrites one version of EBITDA, and the lender underwrites another. That gap kills deals. Particularly in SBA-driven transactions common in search funds and small business acquisitions: Equity requirements and guarantees are real constraints Underwriting timelines introduce friction Smaller deals are treated as bespoke, not standardized Disciplined buyers: Underwrite to debt service, not seller-adjusted earnings Normalize add-backs conservatively Identify working capital needs early Seriously consider the structure pre-LOI (seller notes, holdbacks, transition-linked payments) The deal is not real until the capital stack is real. Nothing happens without financing. Post-Close Execution: The First 100 Days Decide the Outcome The most underappreciated risk in these transactions is not closing. It is transition. I believe buyers should familiarize themselves with at least some turnaround management practices during the search process because buyers inherit: Informal systems Relationship-driven revenue Limited reporting infrastructure Outdated systems Without a clear transition plan, value can erode immediately. It is not simply a digital transformation play (digital advertising, industry specific project management Saas, etc.). Effective buyers plan for: Defined transition services from the seller Retention of key employees Structured customer handoffs Weekly cash and operations cadence post-close This is not operational detail. It is downside protection and risk mitigation. It is also some of the hardest work because it cannot be brute forced - it requires soft skills, attention to detail, and time-consuming review of information. What This Means for Investors Backing Buyers For family offices, independent sponsor investors, and capital partners backing search funds and ETA buyers, the underwriting focus needs to shift. Similar to what we discussed above, the question is not: “Is this a good business?” It is: “Can this buyer execute this transition?” Key diligence questions for investors to ask should include: Does the buyer have a repeatable sourcing strategy? Is there a defined readiness filter? Is financing aligned with lender reality? Is a post-close execution plan in place? Most deals in this segment fail due to execution gaps, not thesis failures. The Structural Inefficiency Creates Opportunity The inefficiency in this market is not hidden. It is structural: fragmented deal flow, inconsistent advisor quality, limited financing standardization, and minimal post-close support. These are not isolated issues - they are systemic frictions that sit between a viable business and a closed transaction. Prepared buyers can benefit from this inefficiency because it creates: Less competition in off-market deals Pricing inefficiencies The ability to win through structure and not just valuation But those advantages are only available to buyers who can execute. This is not a market where capital alone wins. It is a market where taking a business from “viable” to “financeable” to “transferable” is necessary and may require a longer pre-LOI/pre-close relationship with the seller. If pre-screening raises concerns around financial quality, customer concentration, or post-close execution, the question is not just whether the deal is attractive. It is whether those risks can be mitigated before committing to an LOI. Most deals don’t fail because the business is bad. They fail because the buyer underestimated what it would take to close and operate it. Spending time with the seller (sometimes weeks or even months) before fully committing can be one of the most effective ways to de-risk a transaction before signing an LOI and set up a smoother, more profitable transition. The Real Takeaway The Great Ownership Transfer is often framed as a wave of supply. The data suggests the real issue is execution. This is especially true for those pursuing entrepreneurship through acquisition, where execution risk concentrates in a single asset. The challenge is not finding viable businesses. It is getting them across the finish line after turning viable businesses into successful buyer transitions, not closures. For buyers, the edge is not just identifying a good business. It is building the capability to move a deal from: possible → financeable → transferable → stable The market does not reward intent. It rewards execution. Buyers who can deliver that consistently will capture disproportionate value.
April 3, 2026
Business
Planning for a Sale: Engineering the Best Possible Outcome
Most business owners approach a potential sale by asking a single question: What is my business worth? While valuation is important, it is rarely the most important question. A more productive starting point is: What do I want the sale of my business to accomplish for my family, my legacy, and the next phase of my life? A recent series by Family Business Magazine outlines a useful framework for thinking through that question. It moves the conversation beyond price and into a broader discussion of life planning, liquidity planning, and post-sale purpose. I highly suggest taking at those articles here: Part 1: How to exit a family business with purpose, profit and peace of mind - Family Business Magazine Part 2: Planning for the best possible outcome of a business sale - Family Business Magazine The below focuses primarily on maximizing enterprise value while preparing for a sale, but the articles linked above are a must read for owners planning an exit. Many of these themes closely mirror what we see in transactions involving search funds, independent sponsors, and family office investors acquiring privately held businesses, because many of those deals pull from the same group of sellers. Sellers Should Define "Enough" Before Negotiating One of the most common mistakes founders make is negotiating a transaction before defining what success actually looks like. Owners should enter negotiations with clarity on: The lifestyle they want after the sale How much liquidity is required to support that lifestyle Legacy or philanthropic goals Whether they want to remain involved in the business Without defining what "enough" means, sellers can end up optimizing for headline price rather than overall outcome. Some reject reasonable offers while others accept deals that ultimately do not support their long‑term financial goals. From a planning perspective, this is where tax modeling, estate planning, trust structuring, and charitable planning should occur before a letter of intent is signed. Once negotiations begin, many of these planning opportunities become more limited. Transaction Structure Matters as Much as Price A higher purchase price does not always produce a better result for the seller. Owners should carefully evaluate the structure of a proposed transaction, including: Cash at closing versus rollover equity Earn‑outs and performance contingencies Seller financing Employment agreements and non‑compete obligations Indemnification exposure and escrow provisions Capital tied up behind unrealistic performance benchmarks, potential clawbacks, and unintended tax consequences can quickly change how a seller views the attractiveness of a deal. A Practical Example: How Structure Shapes the Outcome Consider a common lower‑middle‑market transaction. A founder sells a services company for $12 million to a search fund backed by several investors. The deal structure may look something like this: $8 million paid in cash at closing (often financed through SBA or senior debt) $2 million rolled over by the seller as minority equity $1 million tied to performance‑based earn‑out targets $1 million held in escrow to cover indemnification exposure On paper, the headline purchase price is $12 million. In practice, the seller only receives $8 million at closing, with the rest dependent on future performance and negotiated protections. For some sellers, this structure can be extremely attractive. Rollover equity allows them to participate in future growth, particularly if the buyer plans to pursue add‑on acquisitions or scale the platform. For others, the priority may be liquidity and simplicity. The Emotional Transition Is Real Selling a business is not purely a financial event. For many founders, the business represents years of personal effort and identity. The business may represent: A founder's reputation in the community Their daily structure and purpose Their primary social and professional network This is why many successful transitions incorporate some form of gradual change rather than an immediate exit. Options may include: A phased transition period A recapitalization instead of a full sale Minority liquidity events Installing professional management before a transaction These approaches can allow owners to preserve value while also managing the emotional realities of stepping away from the enterprise they built. Post‑Sale Wealth Requires Structure For many founders, the sale of a business represents the single largest liquidity event of their lives. The transition from operating income to investment income requires a completely different mindset and governance framework. A successful sale often creates a new set of challenges. A significant liquidity event can introduce complexity that many founders have never previously faced. Common considerations include: Investment governance Asset protection Estate and gift tax exposure (although much of this should be planned prior to the sale date) Family alignment around wealth management Many families explore options such as establishing a family office, joining a multi-family office platform, or pursuing their own investments in different asset classes (real estate, private equity, traditional stocks and bonds, etc.). The legal and governance infrastructure supporting these structures is just as important as the purchase agreement that completes the sale. Why Sellers Need to Have This Conversation Now Several market trends are increasing the number of potential transactions in the lower middle market. We are seeing: Growing number of retiring business owners Continued growth of search funds Increased independent sponsor activity Expansion of family office direct investing Strong buyer demand in certain service sectors As a result, many business owners are receiving inbound acquisition interest earlier than expected. But inbound interest does not necessarily mean a business or its owner is ready for a transaction. The most successful exits tend to occur when three elements align: The owner is personally ready The business is operationally prepared Legal, contractual, and financial structures are organized When those pieces are in place, a transaction can achieve far more than simply generating liquidity. It can provide the foundation for the next chapter of the owner's personal and financial life. Seller Readiness Checklist For founders considering a potential exit, several questions can help determine whether the business and owner are ready for a transaction: Have you defined what financial outcome is "enough" for your post‑sale goals? Are your financial statements, contracts, and corporate records organized and diligence‑ready? Do you understand how different transaction structures affect liquidity and taxes? Have you discussed succession and estate planning with your advisors? Do you know whether you want to exit completely or remain involved post‑transaction? Is your management team capable of operating the business during and after a transition? Owners who address these questions early often enter negotiations from a position of clarity and strength. Final Thoughts Selling a business is one of the most consequential financial decisions an entrepreneur will make. The best outcomes rarely result from focusing on price alone. Instead, they come from thoughtful planning that integrates transaction strategy, tax considerations, estate planning, and personal goals. For owners considering an exit, taking the time to plan intentionally, before negotiations begin, can make the difference between a good outcome and a transformative one.
March 17, 2026
Business
Investor Equity Placement: Why HoldCo vs. OpCo Matters
When a searcher or independent sponsor brings in outside capital, the conversation often centers on valuation and percentage ownership. But an equally important question is structural: Should the investor hold equity in the operating company (OpCo) or in the parent holding company (HoldCo)? This decision carries meaningful legal, economic, governance, and strategic implications. It affects dilution, future capital raises, control dynamics, exit flexibility, and long-term alignment. The analysis also becomes more nuanced depending on the investor’s role and non-monetary contributions. Consider a common scenario: a sponsor raises $2 million to acquire a $10 million HVAC company, with plans to pursue add-on acquisitions over time. In a roll-up strategy like this, what if one investor brings domain expertise, sourcing capabilities, or operational leadership that materially influences growth? That strategic contribution may justify equity at the HoldCo level, where the investor participates in platform-wide upside and profits. By contrast, a passive investor whose involvement is limited to board oversight may be more appropriately placed at the OpCo level, particularly in a single-asset acquisition. Of course, this assumes the target will operate as a subsidiary rather than being merged into an existing operating entity — which is itself a separate structural decision. An investor in this scenario will usually see investment income flow solely from OpCo (instead of the entire portfolio of companies). The structure and placement of an investor's equity is rarely mechanical. It should reflect strategy, bargaining power, long-term vision, and investor expectations. The considerations below provide a framework for both searchers/sponsors and investors to consider when evaluating this decision. The Two Primary Structures Investor Holds Equity at the Portfolio Company Level (OpCo) Under this structure, the investor owns equity directly in the acquired operating business. OpCo is typically maintained as a standalone entity or as a clearly defined subsidiary beneath a holding structure. Key Implications The investor’s economics are tied solely to the business of OpCo Governance rights are limited to decisions within OpCo Exit proceeds flow from the sale or recapitalization of OpCo The investor has no direct rights to unrelated subsidiaries or future acquisitions Common Use Cases Single-asset traditional search fund deals One-off independent sponsor acquisitions Transactions without a broader platform thesis Situations where negotiation dynamics support a narrower investment scope Advantages Structural simplicity Clear alignment around a single asset Cleaner distribution waterfall Reduced complexity in governance documents Easier return modeling tied to one business Risks and Considerations Limited investor participation in future add-on acquisitions Potential need to restructure if platform ambitions later emerge Dilution of equity will occur at the operating level if additional capital is raised, although usually unlikely unless part of a larger restructuring Misalignment if investors expect exposure to future platform growth OpCo equity works best when the investment thesis is narrowly defined and neither party anticipates a broader multi-asset strategy. Many first-time searchers/sponsors and their investors will fall into this structure. Investor Holds Equity at the Parent Holding Company (HoldCo) In this structure, a parent entity owns one or more subsidiaries, and the investor holds equity at the parent level. Key Implications The investor participates in the economics of all subsidiaries beneath HoldCo Add-on acquisitions can be completed without issuing new OpCo equity Governance is centralized at the parent level Platform value creation accrues across the entire enterprise Common Use Cases Platform or roll-up strategies Independent sponsor models contemplating multiple acquisitions Long-term scaling plans involving additional capital raises Advantages Centralized governance and decision-making Easier implementation of sponsor promote structures Ability to allocate management incentive equity across subsidiaries Greater flexibility for future capital formation Risks and Considerations Increased complexity in operating agreements and shareholder documents Need for carefully drafted distribution waterfalls Cross-subsidiary economic exposure if not properly structured Greater sensitivity to dilution stemming from future equity financing More robust negotiation of protective provisions and investor rights HoldCo structures reward forward planning but require thoughtful drafting and clear alignment among stakeholders. Legal and Governance Considerations In practice, HoldCo structures centralize power and economics at the parent level, while OpCo structures localize rights and obligations within a single operating entity. Where the investor equity sits directly impacts: Voting rights and approval thresholds Board composition and observer rights Protective provisions Information and reporting rights Drag-along and tag-along mechanics Transfer restrictions and liquidity rights Put and call rights, if negotiated If the investor sits at HoldCo, governance documents must anticipate: Future equity issuances Add-on acquisitions and layered capital structures Sponsor promote mechanics Reallocation of advisor and/or employee incentive equity pools Distribution waterfalls across multiple subsidiaries Potential conflicts between legacy investors and new investors If the investor sits at OpCo, documentation tends to focus more narrowly on: Operating distributions Exit triggers tied to a single asset Seller rollover alignment These differences materially affect control and economics. They also influence negotiations with senior lenders, particularly where covenants intersect with equity commitments. Strategic Questions Before Deciding Before finalizing entity placement, sponsors and investors should consider: Is this a single-asset investment or the foundation of a broader platform? Are add-on acquisitions part of the near-term or long-term strategy? Will additional investors likely participate in future rounds? How centralized should governance be? What is the intended exit pathway (strategic sale, recapitalization, long-term hold)? How does the structure align with sponsor promote economics and incentive equity? Does the investor bring strategic value beyond capital? Common Structural Mistakes Frequent errors to keep in mind (and avoid): Defaulting to OpCo equity without evaluating long-term platform goals Granting HoldCo equity without clearly defining dilution mechanics Misaligning promote structures with entity placement Overlooking interaction between investor rights and senior debt covenants Ignoring tax, estate, or succession planning implications Treating entity placement as a documentation detail rather than a strategic decision These choices are difficult to unwind and can create friction during future capital raises, refinancings, or exits. Final Perspective Bringing on an investor is not merely a capital event. It is a structural decision that defines governance, economics, capital formation, and exit flexibility. Whether you are a search funder acquiring your first business, an independent sponsor building a scalable platform, or a family office co-investing alongside operators, the level at which equity is issued matters. The best structures anticipate the second deal before the first one closes. Structure intentionally. Plan forward. Align incentives early.
March 3, 2026
Tax
Treasury and IRS Issue Interim Guidance on Prohibited Foreign Entity Rules with New Safe Harbors Under Notice 2026‑15
On February 12, 2026, the Department of the Treasury and the Internal Revenue Service released Notice 2026-15, the first substantive regulatory action implementing the prohibited foreign entity ("PFE") provisions enacted by the One, Big, Beautiful Bill Act ("OBBBA") on July 4, 2025. The Notice provides interim guidance on restrictions to the Section 45Y clean electricity production credit, the Section 48E clean electricity investment credit, and the Section 45X advanced manufacturing production credit, with respect to sourcing from a PFE. It establishes temporary safe harbors and reliance rules for determining whether a facility, energy storage technology ("EST"), or eligible component includes "material assistance from a PFE," while previewing how Treasury and the IRS intend to approach related concepts, including effective control, in forthcoming proposed regulations. Unlike the domestic content bonus credit, which merely offered an incremental adder, these rules are binary: a facility that fails is ineligible for the tech-neutral ITC or PTC entirely with potentially devastating consequences for project capital stack. The Statutory Framework The OBBBA added new Sections 45Y(b)(1)(E), 48E(b)(6) and (c)(3), and 45X(c)(1)(C) to the Code, providing that the terms "qualified facility," "energy storage technology," and "eligible component" do not include items that incorporate material assistance from a PFE. The OBBBA simultaneously amended Section 7701 to add new paragraphs (a)(51) and (a)(52), defining a "prohibited foreign entity" and "material assistance from a prohibited foreign entity," respectively. Under Section 7701(a)(52), "material assistance from a PFE" is present when a facility's, EST's, or eligible component's material assistance cost ratio ("MACR") falls below the applicable threshold percentage. The threshold percentages phase in over time based on the calendar year during which construction of a qualified facility or EST begins (for Sections 45Y and 48E) or the calendar year during which an eligible component is sold (for Section 45X). For example, a qualified facility beginning construction in calendar year 2026 must achieve a Clean Electricity MACR of not less than 40% (for qualified facilities) or 55% (for ESTs), and a solar energy component sold during calendar year 2026 must achieve an Eligible Component MACR of not less than 50%. Calculating the MACR: A Two-Track System Notice 2026-15 establishes a detailed framework for calculating the MACR, distinguishing between two tracks: the "Clean Electricity MACR" (for qualified facilities and ESTs under Sections 45Y and 48E) and the "Eligible Component MACR" (for Section 45X eligible components). Clean Electricity MACR For qualified facilities and ESTs, the Clean Electricity MACR equals the taxpayer's total direct costs attributable to all manufactured products ("MPs") and manufactured product components ("MPCs") incorporated into the facility or EST, minus the total direct costs attributable to MPs and MPCs that were mined, produced, or manufactured by a PFE, divided by the total direct costs. The calculation requires a taxpayer to: (a) identify MP and MPC types; (b) track relevant characteristics of each MP and MPC; (c) determine direct costs; and (d) determine PFE direct costs. A separate Clean Electricity MACR must be calculated for each qualified facility or EST placed in service during a taxable year. Eligible Component MACR For Section 45X eligible components, the Eligible Component MACR substitutes "total direct material costs" for "total direct costs," focusing on the constituent elements, materials, or subcomponents ("Constituent Materials") incorporated into or consumed in the production of the eligible component. The relevant costs are those paid or incurred by the taxpayer for direct materials under Section 1.263A-1(e)(2)(i)(A), including freight-in and tariffs. Interim Safe Harbors: The Core of the Notice The most consequential aspect of Notice 2026-15 is its three-tiered interim safe harbor framework, which is intended to significantly simplify the compliance burden. Identification Safe Harbor The Identification Safe Harbor allows taxpayers to use the 2023–2025 domestic content safe harbor tables (from Notices 2023-38, 2024-41, and 2025-08) as the exclusive and exhaustive list of MPs and MPCs (or Constituent Materials) for purposes of identifying what must be tracked and costed. Components not appearing in the tables are disregarded entirely and do not factor into the MACR calculation. This is material compliance relief, it obviates the need for deeper upstream tracing that many in the industry feared and instead limits the inquiry to a discrete, published list of components. However, this pathway is available only for projects and components listed in the safe harbor tables. Facility types without specified tables, such as nuclear, fuel cells, or geothermal, cannot use this safe harbor. Likewise, facilities relying on the incremental production rule cannot use the Cost Percentage Safe Harbor. The Treasury has acknowledged these industries’ interest in obtaining updated tables, but guidance remains forthcoming. Cost Percentage Safe Harbor Building on the Identification Safe Harbor, the Cost Percentage Safe Harbor permits taxpayers to use the Assigned Cost Percentages from the safe harbor tables in lieu of tracking actual direct costs. The taxpayer sums the Assigned Cost Percentages for each listed MP and MPC (the "Total Percentage"), sums the Assigned Cost Percentages attributable to PFE-produced MPs and MPCs (the "Total PFE Percentage"), and calculates the MACR as: (Total Percentage – Total PFE Percentage) / Total Percentage. Structural steel and iron are excluded entirely from the MACR calculation, consistent with their treatment under the domestic content rules. Used property in facilities qualifying under the 80/20 rule is also disregarded; only the costs of new MPs and MPCs count toward the calculation. The Notice’s examples, particularly the PV facility illustration walking through both safe harbors, will be invaluable in standardizing the calculation methodology. Certification Safe Harbor The Certification Safe Harbor provides an alternative pathway allowing taxpayers to rely on supplier certifications to determine direct costs, PFE direct costs, and PFE status. Three certification forms are available, tracking the statutory framework in Section 7701(a)(52)(D)(iii)(II)(bb): (AA) an attestation that the property was not produced or manufactured by a PFE and the supplier has no knowledge of PFE involvement in the upstream chain; (BB) for Section 45X, a statement of total direct material costs not produced or manufactured by a PFE; or (CC) for Sections 45Y/48E, a statement of total direct costs attributable to non-PFE manufactured products. Importantly, pathways (BB) and (CC) do not facially require the supplier to possess knowledge of the entire upstream chain, as does pathway (AA). Certifications must include the supplier's employer identification number (or foreign equivalent), be signed under penalties of perjury, be retained for at least six years by both the supplier and the taxpayer, and be produced upon IRS request. A taxpayer may rely on a certification unless it "knows or has reason to know" the certification is inaccurate. The “reason to know” standard is the most significant area of ambiguity in the Notice and is driving intense market discussions. Early practice suggests a tiered diligence approach: baseline certifications with PFE-status checklists from established suppliers, supplemented for higher-risk Tier 2 suppliers and battery storage components by third party supply chain audits. Suppliers offering compliance packages, including legal memoranda and compliance presentations, are gaining a competitive edge. Tracking and Averaging Flexibility The Notice provides meaningful flexibility in how taxpayers track components to specific facilities or eligible components. Three tracking methods are available: Individual tracking. The default approach requiring each MP or MPC to be traced to the specific facility or EST into which it is incorporated. De minimis assignment-based tracking. Allows MPs or MPCs of the same type to be assigned across qualified facilities or ESTs placed in service during the same taxable year without individual tracing, provided the assigned components represent less than 10% of the Total Direct Costs of each facility. Average-cost tracking for small ESTs. For ESTs of the same type, each under 1 MW, placed in service during the same taxable year, taxpayers may use averaged costs and PFE Production Percentages over specified periods within the taxable year. Section 45X manufacturers may use a similar averaging system for Constituent Materials incorporated into eligible components during specified time periods. Binding Written Contract Election A notable feature of the statutory framework, addressed in the Notice, is the elective grandfather provision under Section 7701(a)(52)(D)(iv). Upon a taxpayer's election, MPs, eligible components, or Constituent Materials acquired or manufactured pursuant to a binding written contract entered into before June 16, 2025, and placed in service before January 1, 2030 (or January 1, 2028 for applicable wind facilities) in a facility where construction began before August 1, 2025, may be excluded from the MACR calculation entirely. For Constituent Materials, the item must be used in a product sold before January 1, 2030 (or January 1, 2027 for Section 45X). Treasury has been granted anti-abuse authority to prevent stockpiling of components during any period prior to the application of the PFE requirements. Qualified Interconnection Property The Notice addresses the separate treatment of qualified interconnection property under Section 48E with a nuanced approach. A taxpayer seeking to include interconnection property expenditures in its qualified investment must calculate a separate Clean Electricity MACR for the interconnection property, apart from the facility itself. Each project component: solar, storage, and interconnection, qualify independently; failure on one does not disqualify the others. However, the safe harbors are unavailable for interconnection property, requiring the direct cost method, with practitioners view as significantly more invasive and more susceptible to error. Effective Control and Anti-Abuse Provisions Notice 2026-15 previews forthcoming regulatory action on two important fronts. First, the Notice clarifies that effective control under the foreign-influenced entity provisions of Section 7701(a)(51)(D) is determined independently under each prong of the statute. Notably, any licensing agreement for intellectual property with respect to a qualified facility entered into or modified on or after July 4, 2025, constitutes effective control, even absent any of the other enumerated prohibited provisions, such as limits on IP usage. Second, Treasury and the IRS intend to propose regulations to prevent entities from evading, circumventing, or abusing the PFE restrictions, including through temporary lapses of restricted foreign ownership or control. Suppliers restructuring ownership of supply chains mid-stream to achieve compliance raise particularly difficult questions, as the rule lack specificity on the timing of qualification relative to procurement and delivery. Enhanced Penalty and Statute of Limitations Framework The OBBBA established a robust penalty regime supporting the PFE rules. New Section 6662(m) lowers the substantial understatement threshold to 1% (from 10%) for credit disallowances attributable to overstating the MACR. New Section 6501(o) extends the statute of limitations to six years for deficiencies attributable to MACR determination errors. New Section 6695B imposes a separate penalty on suppliers who provide certifications they know or should have known to be inaccurate, equal to the greater of 10% of the resulting underpayment or $5,000, though a reasonable cause defense is available. Reliance and What Comes Next Taxpayers may rely on the guidance in Sections 3 and 5.01 of the Notice for projects that begin construction after December 31, 2025, and continue through 60 days after publication of the forthcoming proposed regulations. The Section 4 safe harbors may be relied upon through 60 days after publication of the forthcoming safe harbor tables under Section 7701(a)(52)(D)(iii)(I), which must be issued by December 31, 2026. While Notice 2026-15 resolves several of the most pressing compliance questions confronting the clean energy tax credit market, particularly around supply-chain depth, cost allocation methodology, and certification standards, it expressly defers comprehensive guidance on the PFE definitional framework, constructive ownership mechanics, and long-term recapture rules to forthcoming proposed regulations. Stakeholders should use the comment period strategically and begin integrating the safe harbor frameworks into project and deal structures without delay. The early market consensus is that Notice 2026-15, while demanding increased diligence and documentation relative to the domestic content regime, provides workable and solvable rules. Storage remains the highest-risk area given the battery supply chain’s continued dependence on Chinese components. Stakeholders should engage counterparties and advisors early, integrate the safe harbor frameworks into deal structures without delay, and prepare for escalating MACR thresholds in future years.
March 3, 2026
Tax
Tariff Litigation & Section 122 Tariffs
On February 20, 2026 the U.S. Supreme Court issued a landmark decision in Learning Resources, Inc. v. Trump holding that the International Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs. The decision invalidates the reciprocal tariffs and trafficking/immigration tariffs imposed in 2025 under IEEPA and confirms that the power to impose tariffs lies with Congress. The Court did not prescribe a refund mechanism; that responsibility now falls to the U.S. Court of International Trade (CIT) and U.S. Customs and Border Protection (CBP). Within hours of the decision, the Administration imposed a new 10% tariff under Section 122 of the Trade Act of 1974 (now 15%), effective February 24, 2026, and limited to 150 days (absent congressional action). This creates two immediate opportunities: Refund claims for prior IEEPA tariffs (available to domestic and foreign companies) Advisory and planning work related to new Section 122 tariffs and potential replacement regimes (Section 232/301) What Changed: 1. IEEPA Tariffs Invalidated The Supreme Court ruled that IEEPA does not authorize tariff imposition. IEEPA tariffs imposed in 2025 are unlawful ab initio. Refunds are not automatic. Importers must act. 2. Section 122 Tariffs Now in Effect 15% tariff on most imports entered on or after February 24, 2026 Limited to 150 days (approx. expires July 24, 2026 unless extended) USMCA-qualified goods excluded “Goods on the water” exception for certain shipments loaded before Feb 24 and entered before Feb 28 This is a temporary bridge. Section 232 (tariff imposed for national security) and 301 (tariffs imposed on foreign products to counter unfair trade practices) actions may follow. Who May Have a Refund Claim: Those who: Imported goods between February 2025 and February 24, 2026 Paid additional IEEPA ad valorem duties Are the importer of record Have entries that are unliquidated or recently liquidated Did not yet file a protective Court of International Trade (CIT) action Refund claims are available to domestic and foreign companies – the controlling factor: who is the Importer of Record on the customs entry Important: Only IEEPA duties are refundable — not Section 232 or 301duties. Downstream buyers may have contract-based reimbursement claims. Areas Where Offit Kurman Can Assist You: 1. Tax Litigation / Customs Litigation Refund analysis and quantification Protest filings Protective CIT litigation Federal Circuit appeals Strategic coordination of administrative and judicial remedies 2. Transactional Tax Tariff deductibility analysis Accounting method considerations Timing of refund recognition Contingent asset treatment Structuring to mitigate future tariff exposure 3. Corporate & Business Structuring Restructuring importer-of-record status Creating new import entities Evaluating transfer pricing implications Risk allocation between affiliates Supply chain realignment 4. Commercial Contracts Review of tariff pass-through clauses Reimbursement rights for downstream buyers Force majeure and change-in-law provisions Supplier renegotiation strategy Indemnification enforcement 5. Commercial Litigation Claims between buyers and suppliers over tariff allocation Breach of contract actions Indemnity disputes Class or coordinated actions among distributors 6. Restructuring & Insolvency Tariff-driven liquidity pressure Claims valuation in bankruptcy Recovery of tariff refunds as estate assets Documents You Should Be Gathering: Entry summaries (CF 7501) Duty payment records Liquidation dates PSC filings Contracts allocating tariff responsibility ACE and ACH refund account status SKU lists affected by Section 122 Bottom Line: IEEPA refunds are potentially significant. Deadlines are running. Section 122 tariffs create immediate planning needs. If you import goods, manufacture overseas, distribute foreign products, or rely on cross-border supply chains, connect with Offit Kurman for consultation.
March 2, 2026
Mergers and Acquisitions
Preparing to Sell: The Most Common Deal-Killing Mistakes Business Owners Make, and How to Avoid Them
For many middle-market business owners, 2026 could present an ideal window to explore a sale. With financing markets improved and private equity (PE) sitting on significant amounts of dry powder, strategic buyers are in a prime position to pursue acquisitions that offer them growth and efficiency. Smart sellers will be prepared to take advantage of these improved conditions and strike while the iron is hot. But even in healthy deal environments, deals can fall apart, and most of these failures are preventable. As a corporate M&A attorney, what I typically see are the same avoidable issues that derail transactions. Below, we look at the most common mistakes business owners make before going to market and most importantly, how to avoid them. Sloppy or Unvetted Financials An easy way to erode buyer confidence is to present unreliable financials. Buyers expect clean financial statements, normalized EBITDA with clearly supportable add-backs, transparent revenue recognition policies, and thorough documentation. This requires significant preparation and engagement of advisors early in the process (at least 12 to 24 months before a contemplated sale). Taking the time to get your financials in order can help reduce friction, prevent re-trades, and ultimately protect your company’s valuation. Failure to Clean Up Your House Failure to clean your corporate house before going to market is a very common mistake owners make. Before engaging in any sale process, sellers should take a critical look at everything in the business, making sure it is all in order. This includes ensuring customer contracts are in writing, properly assignable, and free of any change of control termination rights that can present problems. Vendor agreements should also be scrutinized, making sure they clearly document pricing terms and are commercially sustainable. Do your debt structures contain restrictive covenants? And are your equity records and governing documents accurate and up to date? Is your intellectual property ownership properly documented? A deep dive into all of this and more is critical. Buyers do not like surprises in the diligence process. Further, having to “clean-up” the business in front of the buyer can cost credibility as well as deal value. Conducting a thorough pre-sale legal audit can help eliminate surprises as well as the costly delays (or worse). Limiting the Potential Universe of Buyers Assuming you already know your ideal buyer can be a major mistake. Many owners assume they will sell to a competitor or a PE firm, but the universe of buyers in 2026 is much larger. Limiting yourself to only certain types of buyers can materially depress value. Today’s buyers span strategic acquirers seeking bolt-on growth, family offices in search of long-term cash flow, international buyers looking to enter the US market, and more. To ensure you are maximizing your valuation and considering all options, there must be a broad, well-run process to vet buyers. This will increase competitive tension, which in turn, drives up the price and lays the groundwork for better deal terms. Overlooking Tax Structuring Tax structuring is not an afterthought. It must be a part of the strategy. After all, taxes drive transactions. How your transaction is structured matters. Whether it is an asset sale, stock sale, rollover equity arrangement, or partial liquidity event, it can materially impact net proceeds. Therefore, it is important to coordinate early with both legal and tax advisors who can dramatically change the “after-tax” outcome of your transaction. That is the number that truly matters. The Owner is the Business There are some red flags that buyers look for in an acquisition in relation to the owner and their role within the organization: Is the owner the primary salesperson? Are they the sole keeper of customer relationships? Are they the only decision maker? Without the owner, does the organization run into an operational bottleneck? If the answer is yes to these questions, then you do not have a truly transferable business. This creates a real issue for buyers, as they discount businesses that rely entirely on a founder. They want systems and processes in place, depth of management, and a company that can exist without its owner. Start working early to develop a solid management team, formalized processes, and institutionalized customer relationships to decrease risk and increase value. Failure to Incentivize Key Employees When key employees start to feel uncertain or that they are unprotected, it can negatively impact a transaction. Employees want some clarity, and buyers are looking for continuity. That means you must plan and communicate regularly and effectively. Retention plans, bonuses tied to the transaction, or equity offers are all incentives that can help preserve stability during and after the close. Failure to Plan Ahead Selling a business is a major financial event, but it is also a significant life transition. Most owners have spent years, if not decades, building their business, and it has become a part of their identity. So, it is surprising that they don’t often consider the role they will play (if any) with the company moving forward. Nor do they consider what’s next. What lies beyond the day after the sale? These might seem like afterthoughts, but they are not. They must be considered upfront so that expectations with the buyer are clearly communicated and there is no tension or dissatisfaction on either end. Waiting Too Long to Involve Advisors If you wait too long to involve your legal and financial advisors, you may have already lost your leverage. You cannot wait until you have received an unsolicited offer. Involving advisors early in the process is the key to success and to avoiding the mistakes we have discussed. Reach out to your advisors 12-24 months before considering a sale so that you can address any issues and ensure preparedness. By engaging experts early on, you are shortening diligence timelines and strengthening your negotiating position. And remember, valuation can be significantly eroded by avoidable preparation failures. Prepare your business, and yourself, for the outcome you want.
March 2, 2026
Tax
So, The IRS Has Selected Your Return for Audit
The Internal Revenue Service (“IRS”) audits 1% to 2% of small business income tax returns annually for one of two reasons: (1) something about the return (or information reported on the return) flagged the return for a closer review and the revenue agent reviewing the return decided an audit was appropriate; or (2) (bad) luck of the draw – the return was randomly selected for audit. The first reason – a red flag – is far more common than a random audit. The IRS publishes Audit Technique Guides for use by revenue officers. These guides can be found on the IRS’s website here and provide insight into what the IRS checks for and hopes to discover. Regardless of the reason or type (more on that below), the IRS never emails you and never calls without first sending you correspondence BY MAIL (not email). There are Four Types of Audits There are four types of audits, listed from least to most intrusive. Correspondence Audit The first (and most common) is a correspondence audit, which constitutes about three-quarters of all audits. With correspondence audits, you never meet with a revenue agent face-to-face because everything is done through the mail. In the simplest of audits, the IRS asks for information only regarding certain specific entries on your return. For example, if your return reported sales of stock and the return failed to indicate the basis, the IRS will write and request you to provide them with basis information (how much you paid for the stock you sold). Once you supply the requested information, the audit may be over (assuming the information provided matches the gain or loss reported on the return). Office Audit The second form of audit is an office audit, which takes place at their office, not yours. Office audits arise when a return is too complex for a correspondence audit but does not meet the threshold for a field audit. Often, office audits are over itemized deductions, rental incomes and losses, or Schedule C filers. During an office audit, the examiner will ask you questions in an attempt to find other areas to examine. Often, the examining agent will ask for more information, usually documents, and will give you a reasonable amount of time to gather and supply the requested information. Field Audit The third form of audit is a field audit. This audit takes place at your office, not theirs. During a field audit, the examiner will frequently ask for additional information and expect you to provide it reasonably quickly, after all, they are at your office where (in their mind) the records should reside. Line-By-Line Audit The fourth form of audit is a line-by-line audit, otherwise known as a Taxpayer Compliance Measurement Program (TCMP) audit. In this audit, the IRS reviews the returns of lucky taxpayers, line-by-line. The stated purpose of the audit is to build and refine the data points used to tweak the algorithms that determine whether a return should be selected for audit. Still, it is an audit, nonetheless. No matter the type of audit, the IRS’s starting position is to count all income and deny all deductions. For example, in our correspondence audit example, if you claimed a loss on the sale of stock, unless and until the IRS receives the requested supporting documentation, they will deny the loss, adjust your return accordingly, and send you a tax bill with interest and penalties. Office, field, and TCMP audits are the same way. The IRS wipes out your deductions and makes you build them back, providing reasonable substantiation for each type and amount of deduction. All audits begin the same way regardless of the type: the IRS sends you a letter, often by certified mail, advising you of the audit. The letter always has a response date. Do not ignore this date. If you ignore the date and do not respond, the IRS will either escalate the audit or issue a 30-day letter in which the IRS tells you what changes they propose and how much additional tax, interest, and penalties you will need to pay. If you ignore the 30-day letter, the IRS will issue a Statutory Notice of Deficiency (SNOD), and you will have ninety (90) days to file suit in the United States Tax Court to contest the IRS’s findings. When Do You Need a Tax Lawyer Certainly, for office and field audits. During office and field audits, the audit examiner will be asking you questions. Audits are unpleasant, and many people simply think that if they answer all the examiner’s questions the audit will be over quicker. WRONG. The examiner is asking questions because they are looking for additional areas to audit. Equally important, statements you make to the examiner fall under 18 USC § 1001, more commonly known as a “1001 violation.” 18 USC § 1001 criminalizes knowingly and willfully making materially false, fictitious, or fraudulent statements or representations made to a federal agent. This is the statute under which Martha Stewart was convicted. What she lied about was not a crime, but lying about it to a federal agent was (and still is) a crime under 18 USC § 1001. Whether an incorrect answer is merely the fault of a bad memory or may be considered lying to a federal agent is a question over which reasonable minds can and do differ. Just as I often told baseball teams I coached, never put the calling of a close pitch a ball or strike in the hands of an umpire; you shouldn’t leave the decision whether it was your bad memory or something worse to an IRS agent. A tax lawyer can help keep this from happening. When Should You Call a Tax Lawyer The minute you get the notice in the mail advising you that your return has been selected for audit. An experienced tax controversy lawyer can meet with the audit examiner on your behalf and provide information in a limited, organized manner, which will help limit the scope of the audit. The audit examiner will address questions to your attorney, not you. Tax lawyers’ answers are measured and designed to keep the audit as limited as possible. Even with a correspondence audit, your best solution may be to engage a tax lawyer to respond on your behalf or, at the very least, guide your response. Professional counsel can make a significant difference in the outcome, so leave the DIY to other areas.
February 9, 2026
Business
SBA Loan Performance in 2025: What the Data Says—and Why it Matters for Buyers and Investors
Recent SBA loan performance data offers an important reality check for buyers, lenders, and investors operating in the lower middle market. A 2025 analysis highlighted by Monitor Daily examines which industries are experiencing the lowest default rates across SBA-backed loans. These findings carry meaningful implications for search funders, independent sponsors, family offices, and anyone allocating capital to small businesses. This edition of Search Fund Operate takes a deeper look at what the data actually shows, why certain industries consistently outperform others from a credit-risk perspective, and how that information should inform acquisition strategy, diligence priorities, financing decisions, and legal structuring. For buyers using SBA leverage, this is forward-looking signal about operational durability and transition risk. What the SBA Loan Performance Data Reveals The SBA loan performance report identifies several industries with notably lower default rates in 2025. These sectors tend to share common structural characteristics: Predictable, recurring demand Essential or non-discretionary services Lower customer concentration risk Operational simplicity relative to revenue stability Limited exposure to volatile input costs Industries such as healthcare services, professional services, recurring service-based businesses, and essential retail continue to perform well compared to more cyclical or capital-intensive sectors. These businesses benefit from steady cash flow, contractual or repeat customer relationships, and pricing models that adjust more easily to inflation or labor pressure. By contrast, businesses tied to discretionary consumer spending, commodity-sensitive pricing, or seasonal revenue cycles show higher stress levels. Margin compression, labor shortages, and supply-chain disruptions continue to test these models—especially when layered with SBA leverage. This is unlikely to come as a surprise for anyone investing in this space. Why Default Rates Matter for Buyers (not Just Lenders) While SBA default data is often viewed through a lender’s lens, buyers should treat it as a proxy for operational resilience. Lower default rates typically correlate with: Stronger and more consistent debt service coverage More durable margins across economic cycles Better pricing power with customers Reduced reliance on a single owner, customer, or vendor For search fund entrepreneurs and first-time buyers, these factors materially affect day-to-day operating stress (and should translate to lower risk). The first 12–24 months post-close are often the most fragile period of ownership. A business that historically services SBA debt is more likely to support a new owner during the transition stage when they are still trying to absorb institutional knowledge from exiting leadership while simultaneously trying to establish their own credibility. From a legal perspective, default risk also ties directly into representations, indemnities, earn-outs, and seller financing terms. Businesses operating in higher-risk industries often require more robust contractual protections to balance uncertainty. Industry Selection Is a Risk Management Tool The data reinforces a point often overlooked in acquisition discussions: industry selection itself is a form of risk management. Buyers often focus on valuation multiples, seller notes, or headline EBITDA figures, but industry dynamics may matter more than price precision. A slightly more expensive business in a low-default, stable industry can be materially safer than a discounted deal in a volatile sector. For independent sponsors and family offices deploying patient capital, lower-default industries align well with: Moderate leverage strategies Longer hold periods Incremental operational improvements Leadership transition planning These industries tend to support governance frameworks, professionalization, and repeatable growth rather than aggressive financial engineering. SBA Financing Magnifies Both Strengths and Weaknesses SBA-backed transactions impose discipline both structurally and procedurally. While SBA loans remain attractive due to leverage and pricing, they magnify diligence failures when buyers underestimate operational weaknesses. Key diligence considerations include: Cashflow Quality: Are earnings repeatable, or dependent on one-time contracts, owner relationships, or favorable timing? Owner Reliance: Does the business function independently, or is the seller the operational bottleneck? Customer Concentration: Is revenue diversified or dependent on a small number of counterparties? Operational Controls: Are accounting systems, reporting cadence, and internal controls sufficient to support debt compliance? Legal Infrastructure: Are contracts assignable, enforceable, and properly documented for a post-close environment? Industries with lower default rates tend to score better across these dimensions—not by coincidence, but because their business models demand consistency and discipline. Legal Structuring Considerations in Lower-Default Industries From a legal standpoint, industry risk should influence deal structure. In more stable industries, buyers may have greater flexibility to: Negotiate cleaner transitions with shorter seller involvement Rely less on contingent consideration or earn-outs Use standardized employment and non-compete arrangements Implement governance documents that support scalability In higher-risk industries, buyers often need enhanced protections, including longer transition services agreements, expanded indemnities, escrow holdbacks, and tighter covenants tied to customer retention or financial performance. Understanding industry default trends helps buyers align legal risk allocation with operational reality. Implications for Investors and Family Offices For family offices allocating capital to search funds, independent sponsors, or direct acquisitions, SBA performance data offers an additional underwriting lens. It helps evaluate not just sponsor capability, but business durability. Investors increasingly expect sponsors to articulate why a target industry supports sustainable leverage, predictable operations, and long-term value creation. Default-rate data provides objective context for investment committee discussions and portfolio construction decisions. It also supports diversification across industries with varying risk profiles, rather than concentration in sectors vulnerable to economic or regulatory shifts. Final Thoughts The 2025 SBA loan performance analysis reinforces a simple but critical point: not all small businesses carry the same risk, even at similar price points. Industries with lower default rates tend to reward discipline, operational focus, and patience—traits that align closely with successful ETA and private capital strategies. For buyers, this is a reminder to look beyond the deal structure and focus on the durability of the underlying business. For investors, it reinforces the importance of industry selection as a cornerstone of long-term capital preservation and growth.
February 2, 2026
Business
Rethinking the Early Exit: How Gen X and Millennial Owners Are Selling Smarter in 2026
While much of the exit-planning conversation has centered on Baby Boomers approaching retirement, Millennial and Gen X founders are also a growing segment of today’s middle-market sellers. These generations collectively own a large portion of small and middle-market businesses, and they often do not hold on to their businesses as long as previous generations, prioritizing exits at a stage when they can still pivot to new ventures. This means that earlier-in-career exits are becoming increasingly common, and they present a distinct set of considerations for these younger generations, particularly for those looking to make a move in 2026. Market Conditions in 2026 Starting in 2025, we began to see a much more active merger & acquisition (M&A) market than we have the past few years, and that is expected to continue as we move through 2026. Strategic buyers remain active, private equity firms continue to deploy record levels of dry powder, and financing conditions (particularly in private credit) have improved. At the same time, buyers remain disciplined, and valuations favor businesses with predictable cash flow, strong management teams, and scalable operations, even where growth remains the primary story. For younger founders, this kind of dynamic can cut both ways. Many younger companies are still scaling, reinvesting, or professionalizing operations, which can limit valuation if pursued too early. Therefore, one of the most critical drivers of outcome this year is timing the market, while also allowing the business to mature operationally. The Impact of Boomer Sales on Timing and Valuation It is important for Gen X and Millennial business owners to note that right now, there are many Boomer-owned businesses that are coming to market. While this wave of Boomer business sales is fueling buyer interest, it does present another layer of complexity for younger sellers. Unlike legacy businesses with decades of operating history, companies owned by Gen X or Millennials may lack the same kinds of long-term financial track records. While buyers in 2026 are still willing to underwrite growth, they are going to expect clean financials, recurring revenue, and evidence that performance is durable, not founder dependent. This is why strategic exit planning, often beginning 12 to 24 months before a sale, can materially improve valuation by allowing time to normalize earnings, strengthen leadership, and reduce execution risk. Market cycles and competitive sale dynamics also matter, particularly as so many Boomers will be selling over the next few years. Choosing the Right Deal Structure for Long-Term Wealth Younger sellers typically have decades of professional life ahead of them, making deal structure equally as important as price. Partial liquidity events, rollover equity, earn-outs, and minority recapitalizations remain common in 2026, particularly in private equity transactions. Remember that the structure you choose will have significant tax, risk, and governance implications and should be addressed early with experienced legal and financial advisors. This will all impact your long-term wealth, so choosing wisely here is critical. Gen X and Millennials are certainly taking a different approach to business ownership and exit timing than earlier generations, opting for exits earlier in life that afford them flexibility and opportunity. While there can be incredible benefits to these early exits, in today’s competitive and disciplined M&A environment, younger owners must think beyond valuation alone, considering timing, structure, and how each decision will impact their long-term wealth. Ultimately, a successful exit for today’s younger business owners is not defined by the sale itself, but by how deliberately it positions them for sustained financial security, future ventures, and the next chapter of their professional lives.
January 30, 2026
Business
New York’s LLC Transparency Act Now in Effect
New York Governor Kathy Hochul signed the New York Limited Liability Company Transparency Act (“NY LLCTA”) into law in December 2023. Under the NY LLCTA, covered companies became subject to certain new reporting requirements that became effective January 1, 2026. But the NY LLCTA today is far narrower than the drafters originally intended. The NY LLCTA was originally designed as a state-level version of the federal Corporate Transparency Act (“CTA”). Both laws require certain companies to disclose to government agencies the identity of the individuals who own or control those companies. While the CTA requires federal filings, the NY LLCTA requires filings with the NY Department of State (“NY DOS”). The CTA is part of the Anti-Money Laundering Act of 2020, which became effective January 1, 2021, as a part of the National Defense Authorization Act. The CTA was enacted to combat money laundering, terrorism financing, human and drug trafficking, sanctions evasion, tax fraud, and other financial crimes. The CTA established beneficial owner information (“BOI”) reporting requirements for a wide range of legal entities nationwide. The NY LLCTA incorporates, by explicit reference, several provisions of the CTA. However, it applies only to limited liability companies formed in New York or qualified to do business in New York unless they fall within a range of specified exemptions (“Reporting LLCs”). The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) in December 2024 dramatically narrowed the CTA’s requirements, excluding all companies formed in the U.S. FinCEN confirmed these changes in its Interim Final Rule on March 26, 2025. In response to the Interim Final Rule, NY’s legislature amended the NY LLCTA in 2025 to de-link the NY LLCTA to some extent from the CTA by broadening the coverage of the NY LLCTA to encompass nearly all LLCs formed or registered to do business in New York, whether domestic or foreign, unless exempt (S8432/A8662). However, NY Governor Kathy Hochul vetoed this bill on December 19, 2025. As a result, LLCs formed in New York or LLCs formed elsewhere in the U.S. and registered to do business in New York are currently not required to file BOI reports with the NY DOS. Unless the New York legislature overrides the Governor’s veto, only LLCs formed outside the U.S. and registered to do business in New York State now fall within the definition of Reporting LLCs. Under the NY LLCTA, (foreign) Reporting LLCs formed before January 1, 2026, are required to file initial reports (“BOI reports”) by no later than December 31, 2026. Reporting LLCs formed or qualified in New York State in 2026 or later are required to file initial BOI reports within 30 days after formation or qualification. All Reporting LLCs must file annual reports with the NY DOS disclosing their beneficial owners. The reports must disclose certain identifying information about each individual who exercises substantial control over or owns 25% or more of a Reporting LLC. Even exempt LLCs must file initial and annual attestations of exemption. This information will be available to government enforcement agencies but will not be publicly disclosed. The NY DOS has posted on its website beneficial ownership disclosure FAQs and beneficial owner disclosure exemptions. Offit Kurman will continue to monitor for any updates to the status of the NY LLCTA and the BOI reporting obligations.
January 23, 2026
Business
Starting a Business Made Simple: A Practical Toolkit
Starting a business is exciting — but it can also feel overwhelming when you’re faced with critical decisions and don’t know where to begin. This toolkit is a practical, step-by-step guide designed specifically for new entrepreneurs. From choosing the right business structure and securing permits to drafting essential agreements, this toolkit gives you the clarity and confidence to build a strong foundation for success. Ready to turn your vision into reality? Decide on the Best Business Structure Figure out which business structure is the best fit. Common choices are sole proprietorship, partnership, limited liability company (LLC), and corporation. This may mean consulting with an attorney and with an accountant about the different options, but each business structure has its pros and cons. It’s essential to understand the pros and cons, then weigh them before deciding how to structure the business. Make Sure the Business Entity is Set Up Correctly Be aware of the requirements for forming corporate entities to ensure the business is properly set up. In some states, there may be publication requirements. For instance, in New York, a limited liability company must publish a notice within 120 days of the initial articles of organization becoming effective, as follows: “published once in each week for six successive weeks, in two newspapers of the county in which the office of the limited liability company is located, one newspaper to be printed weekly and one newspaper to be printed daily.” These requirements may be burdensome, but it’s important to follow them. In New York, a court may pause a case if the company is not properly formed and therefore cannot bring its claims against the defendant. Research the Licenses or Permits Needed for the Business Licensing and permitting can be tricky. Fortunately, many cities and states have set up portals or guides to help you determine whether your business requires a permit or a license to operate in the city or state. If you are operating a business in a niche area, however, it may take additional research to find concrete answers to whether your business needs a license or permit. Research the Tax Obligations for the Business There may be federal, state, and local taxes that apply to the business. The United States Small Business Administration is an excellent resource for starting that process, but conferring with an accountant and tax attorney may help to provide a more comprehensive understanding of those tax requirements. Be Thoughtful When Anyone Else Begins Working for the Business If that person is an employee, there are wage and hour laws, anti-discrimination laws, and other laws that apply. If you don’t want that person to be an employee, you should have an agreement in place that clarifies the relationship (and make sure you know any other legal requirements such as whether the person is an independent contractor). Particularly when a small business is just getting started and the first people working there are friends or family members, having written agreements with them seems too formal and unnecessary. In the early stages, everyone may have a clear understanding of how they fit into the business, and there isn’t room for disagreements. But as the business grows, those understandings may change, and conflicts may arise. When there’s a conflict like that, the business may be vulnerable without a written agreement clarifying the terms of the person’s involvement. Put Written Contracts in Place with Everyone You Do Business With Many businesses initially rely on phone calls or face-to-face conversations to get things done. That informal way of doing business may seem acceptable since the business is just beginning, but such discussions can lead to problems, misunderstandings, and leave the business without any legal remedies. Whenever there is a relationship between your business and others, it is essential to have an agreement in writing—even if it’s just an email or text message exchange. Conclusion By laying a solid foundation — choosing the right structure, meeting legal requirements, understanding obligations, and putting clear agreements in place — new entrepreneurs can avoid early pitfalls and focus on building a strong, sustainable business.
January 22, 2026
M&A Nuggets
M&A Nugget: Qualified Small Business Stock Update
In 1993, Congress passed a tax law intended to incentivize entrepreneurs to invest in early-stage companies. This tax law, often referred to as QSBS (Qualified Small Business Stock) allows stockholders to exclude from tax a substantial portion of the gain on certain business sales structured as stock sales. Last year, the law was amended to expand tax savings. Here is how the QSBS tax exemption works: If a stockholder holds shares of stock issued initially and currently held in a C corporation, and The shares of stock have been owned for at least three years, and The corporation has assets of less than $50M or $75M (depending on the year the stock was acquired), and At least 80% in value of the corporation’s assets are used in the active conduct of a “qualified trade or business”, then When stock is sold in a business sale, between 50% and 100% of the gain can be excluded from tax. A “qualified trade or business” means any trade or business, except certain service businesses (usually involving the rendering of professional services), banking and insurance businesses, and certain real estate-related businesses. The most significant change in 2025’s QSBS amendment was to increase the amount of gain that can be excluded from tax. For stock issued before July 4, 2025, the maximum exclusion is $10M. For stock issued on or after July 4, 2025, the maximum exclusion increases to $15M. The tax savings can be substantial. For example, on the sale of a business in a stock transaction for $20M, if the original ownership was acquired before July 4, 2025, $10M can be excluded from federal tax (as long as the stock was held for at least five years), resulting in tax savings in excess of $2M. Planning Opportunity A stockholder that is not a corporation is eligible for the QSBS. This includes individuals and trusts and presents an extraordinary planning opportunity for an individual to create a trust to hold a portion of the company’s ownership. If the trust is structured as a separate taxpayer, the individual and the trust can each take advantage of the QSBS tax exemption. Many strict requirements must be satisfied to qualify for the QSBS, and anyone considering use of this tax law should engage a professional advisor who has experience with those requirements.
January 22, 2026
Mergers and Acquisitions
Preparing for a Sale in 2026: What Retiring Business Owners Need to Know
As we begin 2026, we find ourselves right in the middle of “Peak 65,” the period of time between 2024 and 2027 when approximately 4.1 million Americans will turn 65 each year. Also known as the “gray tsunami,” this powerful demographic shift has profound implications for closely held and family-owned businesses. For many of these business owners finding themselves at retirement age, 2026 will be a pivotal year, particularly for those who want to exit on their own terms through a sale. We previously examined this issue in 2025, but as the next round of business owners look at a potential sale in 2026, it’s time to revisit the issue and some of the specific considerations for sellers this year. Market Timing and Buyer Behavior In 2026, buyers are still disciplined. They will pay for quality, predictability, and growth, but they will penalize uncertainty. This means it is important to position the business as “recession-resilient,” showing recurring revenue, diversified customers, and stable margins. Sellers should also avoid sending a signal of urgency. Many buyers view a retirement-driven sale as a “must sell.” This can weaken the leverage on the seller’s side. In 2026, sellers should also anticipate longer diligence and tougher deal terms, especially if your house is not in order. Financial Readiness Having strong, clean financials is the single biggest value driver. 2026 buyers are going to heavily scrutinize everything from the last 24-36 months of financials to working capital trends to cash flow vs. EBITDA. This means it is important that your financials tell a clean story. Look carefully at issues such as owner compensation, what family is on the payroll, personal expenses, and one-time expenses. Remember that buyers will discount anything that is unclear or that you must overly explain. If it takes more than 30 seconds to explain an adjustment, you can likely expect pushback. Owner Dependence and Transition It is important to understand that buyers are not buying you. They want to buy a business that works without you. They will be looking for red flags such as too much control over key customer relationships or pricing, hiring or spending. If the owner is the only one who really “knows how things work,” it doesn’t instill confidence in the future of the business. Make sure you are delegating customer relationships, creating formal processes for pricing, approvals, and reporting, and identifying or elevating a second in charge or leadership team that can carry the torch moving forward. You should also document key processes and procedures so that there is a clear roadmap once you exit. Deal Terms In 2026, deal terms are going to be just as important as the headline price. Many sellers are focused just on the price, but they will regret the deal terms down the road. This year, buyers will be focused on terms such as earnouts tied to performance, seller notes, escrows and indemnity exposure, and post-closure employment or consulting obligations. Before you decide to sell, you must determine how long you are willing to stay involved, as well as what level of risk you’re willing to tolerate after the close. Are you looking for certainty or are you looking for upside? The more clarity you have on these issues going into negotiations, the less likely you are to make an emotional decision you will regret later. Family Dynamics One often overlooked issue that sellers do not consider is the dynamics of the family within the business. Emotional risk is viewed as financial risk, and this can be tricky when a family business comes up for sale. Do you intend for any children or relatives to stay on with the business? Is everyone aligned on value and timing? And what kind of family perks are embedded in the business? All of these are vital questions to answer well ahead of a sale. 2026 buyers will move away from uncertainty around family involvement or adjust the price accordingly. Looking Ahead For retiring business owners, selling a company is one of the most consequential transactions of their lives. In the context of the gray tsunami and an increasingly active middle-market M&A environment, 2026 is filled with opportunities as well as risks. With thoughtful preparation, it is possible not only to maximize value, but also to protect the legacy built over decades and transition into the next chapter on favorable terms.
January 6, 2026
Business
USPS Postmark Changes Could Impact Tax Filing Deadlines
A couple of years ago, I wrote a blog about the importance of sending any correspondence to the Internal Revenue Service via Registered or Certified Mail or by an approved overnight courier, rather than relying solely on the regular USPS First-Class postmark to determine timely mailing. I like to know the IRS receives what I send. On more than a few occasions, the IRS loses mail, and the only evidence of receipt is the return receipt or proof of delivery. Recently, the USPS announced an upcoming change to its postmark date system, effective December 24, 2025. This change makes it even more critical that taxpayers and their representatives use Registered or Certified mail, or an approved overnight courier, when filing a federal tax return. Here is why this change matters. “Postmarks are generally applied by the Postal Service via automation on machines in originating processing facilities but may also be applied manually by Postal Service personnel at those facilities, or by a Postal Service employee at a retail unit when a customer presents a mailpiece at a retail counter and requests a postmark.” FR Doc. 2025-20740. Under the USPS’s current system, the postmark reflects the date the mail is given to the USPS, i.e., handed to a USPS employee at a USPS counter or placed in an official USPS mailbox. Under IRC § 7502, a return is considered timely filed if it is postmarked on or before the due date of the return. For example, in 2025, the filing deadline for an individual taxpayer who did not request an automatic extension was April 15, 2025. Under the USPS’s current system, if the taxpayer mailed the return on April 15, 2025 by depositing the return, with sufficient postage, in an official USPS mailbox prior to the last mail pickup posted on the USPS mailbox, the return would have been postmarked April 15, 2025. It would be considered timely filed even if the return was not received by the IRS until days or weeks later. However, under the soon to be implemented USPS change, a machine-applied postmark indicates the date of the "first automated processing operation" at a processing facility, which may be later than the date the mail was dropped off, which could happen anytime but particularly during periods of high volume, i.e., April 15 (March 15 for calendar year tax year corporate and partnership taxpayers). With this change, even if the return were deposited into a USPS official mailbox, the return may not be postmarked with the official USPS postmark until after the filing deadline when the return was processed in a processing facility. Still, because most postmarks are applied at processing facilities, the postmark does not represent either the place or date on which the USPS first accepted possession of the mailed return. This means the return would not be considered timely filed, and failure to file penalties and interest would be assessed by the IRS. With this USPS change, an ounce of prevention is worth more than a pound of cure. Mail returns, Register or Certified mail, and get a hand-cancelled receipt, or use an approved overnight courier with an approved level of service. And just in case you were wondering, the postmark on the office postage machine is never sufficient. The views expressed herein are solely those of the author, are not intended as, and do not constitute legal or tax advice.
December 18, 2025
Real Estate
Business Legal Maintenance: What to Review Before January
As the year comes to a close and businesses prepare to wrap up 2025, there’s one critical task that should not be overlooked — a comprehensive legal check-up. Just as we schedule annual physicals to safeguard our personal health, your business deserves the same level of care. Whether this year was highly productive or presented challenges, it’s essential to keep your finger on the pulse of your operations and potential liabilities. If your business didn’t meet expectations, a thorough check-up is even more critical—sometimes the insights we least want to hear are the ones that help us move forward. Below are several key legal areas to review as you head into the new year. Assessing these items will help you determine whether it’s time to consult your business attorney. Business Structure and Governing Documents Whether your business is an LLC, a partnership, or a corporation, its structure is controlled by state law. Operating agreements, partnership agreements, and bylaws are the foundational documents every business should have in place. Take a look, do you have one? If not, it is certainly time to discuss this with an attorney. If you do, read through the pages to review key terms. Make sure you understand them and that they continue to be accurate. The terms that are most likely to change are as follows: Are all current members/owners listed on the schedule of owners or in the document? Has the purpose of the company shifted/changed since it was originally formed? Are the capital accounts property reflected? (you should consult your attorney or accountant on this one) If you have two or more members/owners, do you have a Buy-Sell Agreement. You should. Are the roles and responsibilities of the members/owners clearly defined? Trademarks and Patent Work If you want to secure your business name and reputation, you will likely want to file for trademarks at some point. The same holds true if this has been a growth year or a rebranding year. For those of you who are working in any field where you routinely develop something, you may want to seek the assistance of a patent attorney. Patent attorneys help protect your inventions, source codes, and processes from competitors. Licensing and Regulations When are your licenses up for renewal? Have any laws or regulations changed in how you get those renewals? Take a quick look and create a system to make sure you never miss a deadline for registrations, which can throw a huge wrench in your business effectiveness. Website Does your website need updating? How does it hold up to privacy laws? Several states have privacy laws regarding what information you can collect, or at least how you can collect it. A well-written privacy policy can alleviate many of these concerns. Legal Forms and Contracts Do you routinely use standard forms or contracts to conduct your business? You should review them to ensure these documents address all your needs and legal updates. The best way to avoid a lawsuit is to have a robust documentation system. Employee Agreements, Handbooks, and Non-competes Review your company’s source documents, i.e., handbooks, employee contracts, and non-competes, to ensure they still address your needs. Note: If you do not have these documents, contact an attorney. Review your employee files to ensure they are complete. Does each employee have a signed receipt for the employee handbook? Does each employee for whom it is applicable have a signed non-compete and/or non-solicitation agreement? Do you have I-9’s and other required documentation for each employee? Legal and Pseudo-Legal Matters Insurance: Do you have it? Do you have all the correct coverages? You should also review your lease(s) and/or mortgages to make sure your insurance coverages match the requirements of those documents. This yearly business legal checkup is not exhaustive. These are some easily identifiable legal issues that typically require review and updates from year to year. There are numerous other legal topics that should be discussed with your business attorney regularly to ensure your business is well-protected. Cheers to a profitable, productive, and healthy 2026.
December 16, 2025
Business
The American Franchise Act Could Secure the Future of Franchising in the U.S.
A bill pending before the U.S. House of Representatives, if signed into law, would finally establish clarity on how and when employer responsibility is shared by franchisors and franchisees under the National Labor Relations Act and the Fair Labor Standards Act. The “joint employer” issue, which has cast a cloud over franchising’s continued viability in the U.S. since the Obama Administration, can finally be resolved in the long-term if this 119th Congress passes the bill. The current President has publicly committed to signing it into law if it comes to his desk. The American Franchise Act, H.R. 5267, states, “a franchisor may be considered a joint employer of the employee of a franchisee only if the franchisor possesses and exercises substantial direct and immediate control over one or more essential terms or conditions of the employees of the franchisee.” It sets forth, in some detail, the essential terms and conditions of employment, the level of control that the franchisor must exert over the term or condition (such as wage rates), and examples of assistance or guidance provided by a franchisor concerning an employment term or condition that do not constitute control. The bill’s original 14 cosponsors were seven Republicans, including U.S. Rep. Kevin Hein of Oklahoma, a former McDonald’s franchisee, and seven Democrats, including U.S. Rep. Hillary Scholten of Michigan, who said the bill will help the franchise model, which she called an “economic powerhouse” for entrepreneurs. “This bill will bring the clarity small business owners need to continue creating jobs and building up our communities,” Scholten said in a statement. “The franchising model is unique. It requires a tailored approach that properly recognizes the relationship between franchisors and franchisees.” Representative Scholten noted the uncertainty with shifting regulations “is costly to our entrepreneurs,” and the AFA “provides a clear path forward so they can focus on running their businesses.” The uncertainty to which Rep. Scholten refers is that, under a broader standard for finding a franchisor to be the “joint employer” of the franchisee’s employees, many or most franchisors would be at risk of sharing liability with franchisees on matters such as labor and wage-and-hour law violations. They might also have a legal obligation to negotiate with unions. The most recent uncertainty on the issue occurred in 2023 and 2024, when the National Labor Relations Board (“NLRB”) promulgated a regulation defining joint employment in a broad fashion nearly identical to the rule issued during the Obama Administration. The International Franchise Association, the U.S. Chamber of Commerce, and other groups challenged the rule’s legal validity in court. A U.S. District Court judge struck down the rule in March 2024, and the NLRB did not appeal the ruling. In addition, both houses of the last (118th) Congress approved a bill to reverse the NLRB’s regulation, utilizing the Congressional Review Act, including the U.S. Senate which then had a Democratic majority. However, President Joe Biden vetoed the bill in May 2024. An important effect of the uncertainty caused by expansive joint employer definitions has been to discourage franchisors from providing their franchisees with valuable tools and guidance for recruiting and managing their workforce, thereby eroding the value of the franchise for the franchisees themselves. In addition, the possibility of future administrations enacting a broad joint employer definition has a chilling effect on the continued success of the franchise model as a growth vehicle. In the absence of legislation, which is more difficult to overturn than regulations, the reticence of a quality brand to franchise will deprive potential franchise buyers of opportunities to develop successful locations of famous brands in their communities. The American Franchise Act now has 48 co-sponsors in the House of Representatives, including 12 Democratic representatives. This 119th Congress is the best chance to enact this type of legislation. To learn how to support it by telling your positive franchising story, please go to Joint Employer - International Franchise Association.
December 3, 2025
Business
Middle-Market M&A at the Close of 2025: What Business Owners Should Expect in 2026
As 2025 ends, the merger and acquisition (M&A) market, especially in the $5–$100M deal range, is closing out the year on firmer footing than it began. After two years defined by higher borrowing costs, valuation gaps, and cautious buyers, the middle market spent 2025 recalibrating. Today, we’re seeing disciplined but real momentum. There is better alignment between buyers and sellers, renewed lender appetite, and a more predictable rate environment that is finally allowing exit windows to open. Heading into 2026, small and mid-sized business owners should feel cautiously optimistic. Deals are getting done, but strong fundamentals matter more than ever. Below is a year-end look at the data, the trends, and the opportunities for middle-market deals. Deal Volume For transactions involving PE firms, deal volume appears to be on the rise in late 2025. According to a report from EY, while deal value was down for PE deals in October, deal volume in this area was up, indicating a move to more mid-market and smaller transactions for PE firms as opposed to mega deals. In terms of the overall picture for the M&A market, Deloitte’s 2026 M&A Trends Survey signals that while total deal value rose 56% in Q3, total deal volume only jumped 1.6%. They say this could “present an opportunity for increased value realization, especially with midmarket and smaller deals.” Valuation Gaps EY’s Private Equity Pulse from Q3 of this year also points to a narrowing valuation gap between buyers and sellers. In their most recent global general partner (GP) survey, two-thirds of respondents cite a narrowing valuation gap that is allowing “buyers and sellers to find common ground and move forward with confidence.” So, what is driving this gap to close? More stable interest rates and improved credit access are two of the most significant factors, along with sellers adjusting their expectations and buyers who are willing to use structure (earnouts, seller notes, rollover equity) to bridge any gaps. Sellers entering the market prepared with reliable financials, clear forecasts, and realistic expectations are the ones securing the strongest multiples. Financing Conditions EY’s Private Equity Pulse from Q3 also indicates significantly improving financing conditions. They say direct lenders are staying highly active and offering competitive pricing and flexible structures, while the broadly syndicated loan market has reopened for larger buyouts. Their report cites PitchBook LCD data showing that in the U.S., syndicated loan activity reached a record $404 billion in Q3, reflecting renewed confidence from both borrowers and lenders and signaling stronger overall credit availability heading into 2026. The 25 basis point rate cuts by the Fed in September and October have been a much-needed bright spot in 2025, freeing up access to capital, and we could see one more before the end of the year. Deloitte’s 2026 M&A Trends Survey says that if that next rate cut materializes, it would be a “welcome tailwind for deal activity.” Strategic Buyers While private equity remains active, strategic buyers were the surprise strength of 2025. Solomon Partners M&A Outlook and Trends from October indicates that strategic M&A remains steady, with strategic deal volume up 21% in Q3 2025 vs 2024. They highlight elevated cash reserves and tariff-driven cost pressures as two factors that are encouraging consolidation. Strategics are also less rate-sensitive than financial buyers, giving them more room to compete on valuation. What Small & Mid-Market Sellers Should Expect in 2026 A Healthier, but Highly Selective, Universe of Buyers Expect a strong pipeline of buyers in 2026, but not necessarily for every business. Buyers are increasingly becoming more selective, prioritizing factors such as strong margins and stable cash flow, as well as recurring or contractual revenue. AI-enabled operations or meaningful data visibility, clean financials with audit-ready records, and a clear, demonstrable growth runway will continue to drive premium valuations. Businesses that lack these characteristics should anticipate more intensive diligence and a greater reliance on structured deal terms. Diligence Will Be Even Tighter Buyers will continue to push for deeper and more comprehensive diligence in 2026, making quality of earnings reports a baseline expectation and expanding operational reviews to cover technology infrastructure, cybersecurity, and AI adoption. They will scrutinize things such as inventory practices, working-capital trends, and customer concentration more closely, while also increasing their focus on data-privacy and overall regulatory compliance. Well-Prepared Sellers Will Have the Advantage Owners considering an exit in 2026 should begin preparing now. The most successful sellers in 2025 entered the process with 12–24 months of clean, normalized financials, a strong management team ready to support the transition, and early engagement with their legal, tax, and accounting advisors before going to market. This level of preparation consistently results in shorter diligence timelines and more secure, defensible purchase prices. While the market is improving, buyers remain disciplined, and seller-friendly terms are not guaranteed. Overall, the outlook for 2026 is cautious optimism with real opportunity. If 2025 was defined by recalibration, 2026 is poised to be a year of execution, particularly in the lower and middle markets. For business owners considering a sale, 2026 may present the best environment we have seen since 2021, but only for those who are preparing today to seize the opportunity of tomorrow.
December 2, 2025
Business
Before You Exit: Navigating Succession Planning and Growth in Privately Held Companies
The Third Annual Private Business Owner Survey by Brown Brothers Harriman (BBH) is out, and it provides a revealing and timely look into the mindset, priorities, and risks facing today’s private business owners. We're all aware of it by now - the largest cohort of founders and business owners are reaching retirement age. The survey from BBH and findings in the report shed light on the intersection of personal planning and corporate continuity. For business owners, investors, advisors, and those preparing to take the reins, this report offers not just data, but direction. Succession and sustainable growth are clearly interconnected based on the information collected. The BBH report also underscores the importance of understanding the broader exit landscape. In addition to estate planning, it should be considered how search funds, independent sponsors, and family office buyers fit in. As deal volume rises and ownership transitions accelerate, sellers must weigh the nature of their successors just as carefully as the valuation terms. Succession: More Talked About, Still Under-Planned Although 62% of business owners express a desire to pass their business to the next generation, only 23% have taken concrete steps to implement a formal succession plan with key executives. An alarming 30% have no succession plan at all, despite the majority having been in business for decades. The balance (~46%) have some form of succession plan in progress. Key barriers to succession planning were reported to include: Emotional reluctance to step away (28%) Uncertainty over the right successor (41%) Complex family dynamics (46%) The business owner's perception of the successor's preparedness is also likely an issue, where the overwhelming majority reported that the successor is not yet fully prepared. Business owners hope that informal conversations will serve as a roadmap, but the reality is far less forgiving. Without clear documentation and defined leadership roles, businesses face confusion, instability, and risk of value erosion during a transition. Succession isn’t a one-time event - it’s a process requiring candid conversations, objective planning, and consistent follow-through. This is where search funds and independent sponsors can play a unique role. These buyers, often backed by seasoned investors or family offices, are well-positioned to acquire and operate businesses where no natural successor exists. Their appeal lies in their hands-on involvement, long-term view, and ability to step into the role of owner-operator while respecting the legacy of the founder. This also ties into the critical question of estate planning. The BBH report found that of the 70% of business owners with an estate plan, 76% will be using a trust. Growing and Sustaining: A Top Priority with Diverging Paths A strong growth mindset persists among private business owners. 78% of respondents prefer reinvestment and long-term growth over extracting profits or maintaining full ownership. However, this growth focus can lead to diverging opinions within ownership groups, especially when generational views or risk tolerances differ. The survey revealed that while 59% of owners believe their leadership teams are very well aligned on business strategy, 32% admitted to only moderate alignment. That misalignment can be costly—it often leads to stalled initiatives, delayed decision-making, and increased friction over strategic direction. To support growth, owners are considering various funding strategies: 69% plan to use traditional bank financing 30% are open to family office partnerships 20% are exploring private equity as a source of growth capital Still, the most commonly cited barrier to external capital is loss of control. Many owners fear that selling equity or bringing in new stakeholders may compromise their values, culture, or influence. However, those who thoughtfully structure outside capital arrangements may find they unlock opportunities that far exceed the costs. It’s worth noting that the search fund (ETA) and independent sponsor space is seeing a sharp uptick in activity, with many of these buyers receiving funding from family offices and specialty investors. Many of these groups offer capital and continuity without the pressures of a traditional private equity exit cycle. Some family offices are combining direct investment strategies with multi-generational wealth management, leading them to become increasingly active in small and mid-market acquisitions. The Legacy Lens: Transcending the Exit Succession is not simply about exiting the business or passing on shares. It’s about defining and preserving a legacy that goes beyond spreadsheets and valuations. Owners in the BBH survey expressed deep commitments to continuity. They desire to see family harmony, company culture, employee loyalty, and community impact. These “soft” values often matter just as much as legal or tax considerations. To preserve legacy and sustain the business beyond the current generation, owners must: Foster regular dialogue with heirs and management teams Evaluate successor readiness across leadership roles Introduce outside advisors who offer perspective and neutrality Reassess governance frameworks to support long-term strategy Document as much as possible Moreover, it’s vital to build structures that allow next-generation leaders to grow into their roles while being mentored by the outgoing generation. Done well, this approach creates both continuity and momentum. Preparing the Business, Not Just the Owner: Legal Review Succession planning is as much about preparing the business as it is about preparing the people. Even the most well-intentioned plan will falter if the company’s infrastructure, processes, or governance can’t support new leadership. Important readiness steps include: Reviewing key contracts for assignability or change-of-control clauses Establishing clear reporting systems and operational playbooks Addressing concentration risks (customer, supplier, key employee) Implementing equity compensation or retention plans for critical staff Transition planning should include a full enterprise audit of both legal and operational functions of the business to ensure the next owner or leader inherits a stable foundation. This level of diligence is especially critical in independent sponsor or search fund transactions. Buyers in these transactions often inherit businesses with informal structures or legacy systems that require immediate modernization. Business owners planning an exit should prepare for this scrutiny and invest in proactive documentation and governance to avoid valuation discounts or deal delays. This will also help the business command a higher valuation. Final Thoughts Whether your long-term vision includes a family transition, a management buyout, or a strategic sale to a search funder or family office, the path forward must be deliberate. Integrating succession with growth planning is key to protecting enterprise value and maintaining continuity. Planning early provides more flexibility, more stakeholder buy-in, and ultimately, a smoother transfer of both ownership and leadership. The BBH survey reveals a growing awareness of these issues, but this awareness must also be followed by action. Fortunately, a wide range of advisors, tools, and capital partners are now supporting business owners through these pivotal moments. Read the full BBH report here: BBH Thid Annual Business Owner Survey
November 14, 2025
Mergers and Acquisitions
Bridging the Gap: The Art of Communicating with First Time Sellers
It is estimated that 75 million baby boomers could retire by 2030. Many of these boomers have built successful businesses over decades, and they are now ready to sell as they move into the next phase of their lives. This is leading to a rise in M&A activity involving first-time sellers who are financially sophisticated and emotionally invested in their business, but they have not experienced the pace, process, or complexity of an acquisition. When this kind of first-time seller is involved, there can be some tension if buyers bring in large law firms who utilize their standard “big deal” approach. This specific client needs more clarity, connection, and practical guidance as opposed to layers of process. The Process Can Overwhelm the Person When a large law firm comes in on the buyer’s side, they bring an undeniable level of horsepower to transactions. But the same approach taken for billion-dollar deals isn’t necessarily a fit for the sale of a closely held business, and it can lead first-time sellers to feel sidelined and overwhelmed by complex jargon, unexpected costs, or rigid workflows. It can also lead the seller’s counsel, who they have likely worked with for years, to feel out of step with the tempo and expectations of the larger firm. The result is often an erosion in goodwill between the buyer and seller before the deal closes. The Advantage of the Middle-Market and the Art of Adapting This significant disconnect has created an opportunity for middle-market firms that understand both sides of the table. Middle-market firms offer sophisticated, deal-tested counsel who still prioritize communication and trust. They are better able to breakdown the jargon of big firms into advice business owners can understand and act on, helping these first-time sellers to feel informed and empowered, rather than frustrated and intimidated. But bridging this kind of a gap isn’t just about legal skill. It also requires a level of emotional intelligence and the ability to recognize when a seller needs context or reassurance. It also requires an understanding that every negotiation does not necessitate a 100-page response. There is an art to adapting the process to the client’s needs and experience level without compromising the quality of the transaction. The Importance of Nuance There is no one size fits all approach to transactions. They are all different, and they all require a nuanced approach. If a first-generation business owner is selling their life’s work to a PE firm, there is a very different set of concerns involved than if a serial entrepreneur is on their fifth exit. It is critical that counsel knows how to balance structure with flexibility and sophistication with accessibility, meeting clients where they are as opposed to forcing the client into a transactional template. Applying this kind of nuance to transactions can lead to a smoother process and a collaborative closing. There is significant value in the firms that can operate in the middle. They bring the kind of insight and technical strength expected from big firms, but they also have the responsiveness and reliability expected from small firms. As the market becomes further shaped by generational transitions and first-time sellers parting with their closely held businesses, the balance that middle-market firms bring to the table is more than just a competitive advantage. It is what gets this kind of deal done.
November 4, 2025
Business
The SMB Market Is Moving: Record SBA Lending, Strong Deal Flow, and What It Means for Buyers
According to the latest BizBuySell report, Q3 2025 saw 2,599 small business sale transactions. This is an 8% year-over-year increase and 11% growth over Q2. Data also shows a steady wave of buyers are seeking the right opportunity to operate and grow established businesses. In parallel, the Small Business Administration (SBA) was on pace to close $4.8 billion in loan approvals before the federal shutdown temporarily paused operations. This is the highest volume of capital deployed to small businesses in a single fiscal year. That includes over 84,400 7(a) and 504 loans, amounting to 1,600 loans a week. The appetite is clear. What’s Fueling the Market? Despite macroeconomic pressures (inflation, tariff-driven supply costs, etc.), many buyers remain focused on long-term fundamentals. The median sale price for a business this quarter was $320,044, down slightly from last year. This is likely a lower sale price than many Searchfunders/Independent Sponsors are targeting, but the data also shows a shorter time on market (149 days), evidencing strong buyer demand. Essential services were the leading category of sales. I work with buyers, investors, and operators on a daily basis. Here is what I am noticing: These Are Small Businesses — Not Just Small Corporations Many of these deals involve main street and lower middle market businesses, where the seller is not just the owner — they’re often the primary operator, manager, and customer relationship lead. This model can work well, but it’s important for buyers to go in with eyes wide open. These are not absentee owner businesses. These are owner-operator businesses, and unless the buyer has a plan to step into the day-to-day, or grow and install leadership, the absence of middle management may lead to significant demands on the business owner's time. Diligence Is Critical — Especially for Deals at or below $1 Million Buyers and advisors need to scrutinize: Owner reliance — Will customer or vendor relationships walk out the door post-close? Documentation gaps — Are there written contracts? Employment terms? Assignable leases? Many of these businesses fail to properly maintain documentation. Employee risk — What’s the true culture, compensation model, and turnover rate? System maturity — Is there any standardization, or will you be rebuilding ops from scratch? The Desire to Own Must Match the Business Type Entrepreneurship through acquisition (ETA) is a powerful path. But not every business fits every buyer. I always advise clients to ask: “Do I want to run this business, or do I just want to own it?” In the start-up world this is called "founder-market fit." The same concept applies here. Some deals are perfect for someone who wants to buy a job and eventually grow it. Others might require an immediate team build or capital outlay to systematize operations. It’s critical to understand the type of role you’re buying into, the basics of the industry, and what that means when operating solo or with lean support. Deals Are Happening — But You Need the Right Team This market shows real momentum. That being said, deals still require precision. That means: Structuring with SBA or seller financing Negotiating reps, indemnities, and transition terms Performing adequate due diligence Aligning tax, legal, and operational diligence Preparing to serve as both the owner and the operator (or installing trusted leadership) I work closely with searchers, independent sponsors, and advisors both during the acquisition and long after the closing. From real estate and contracts to employee issues and outside general counsel support, you need the support to manage the risk and build the value. It is exciting to see the growing volume of deals and buyer interest. But remember not to lose sight of the need to find the right acquisition target and to protect your downside.
October 23, 2025
Business
Due Diligence: It's Not Just a Checklist
Selling a business is never just about numbers on a page, it’s about preparation, people, and navigating the unexpected. Mike Mercurio presents a compelling series of conversations with client and former Fireline owner Anna Gavin, as she shares the real story behind her company’s sale. From the private moment she first decided to sell, to the surprise challenges of disclosure schedules, and the essential role of trusted advisors, Anna offers a rare, inside look at what the process truly feels like. Whether you’re years away from a sale or already planning one, her journey provides invaluable lessons on timing, team, and trust. In Part 5 of our Selling Your Business series, client and former Fireline owner Anna Gavin reflects with her M&A attorney, Mike Mercurio, what it really felt like to go through due diligence and how even with a well-run, clean business, it was more intense than expected. Initially confident and prepared to tackle a long checklist, she quickly realized that diligence wasn’t just about ticking boxes it was a full-blown deep dive into every corner of the business. From finances and leases to operations and infrastructure, nothing was off limits. She compares it to an IRS audit but ten times. If you're heading into diligence, this is a must-watch for understanding what could be ahead.
October 16, 2025
Business
The Unsung Heroes of a Successful Exit: Your Advisors
Selling a business is never just about numbers on a page, it’s about preparation, people, and navigating the unexpected. Mike Mercurio presents a compelling series of conversations with client and former Fireline owner Anna Gavin, as she shares the real story behind her company’s sale. From the private moment she first decided to sell, to the surprise challenges of disclosure schedules, and the essential role of trusted advisors, Anna offers a rare, inside look at what the process truly feels like. Whether you’re years away from a sale or already planning one, her journey provides invaluable lessons on timing, team, and trust. In Part 4 of our Selling Your Business series, M&A attorney Mike Mercurio along with client and former Fireline owner, Anna Gavin touch on the critical role that advisors, including financial advisors and Offit Kurman as legal advisors, play throughout the deal process, especially in those intense final weeks leading up to closing. From reviewing contracts and translating legalese into plain English, to offering a safe space for honest questions, Anna reflects on how her legal team became both a guide and sounding board. If you’re thinking about selling, this is a reminder that having experts in your corner isn’t a luxury, it’s a necessity.
October 9, 2025
Business
Due Diligence in M&A Transactions: Why First-Time Buyers Should Avoid Analysis Paralysis
For many first-time buyers, the initial instinct in M&A transactions is to scrutinize every financial detail, prolonging the diligence process until they have an answer to every single question. This is certainly understandable, particularly for first-time buyers; however, this approach can often do more harm than good. The reason many deals fall apart is because they lose momentum, conditions shift over time, or sellers simply lose patience and walk away. All of these are considerable risks when the diligence process extends too long. Over-Diligence While thorough diligence is essential in any M&A transaction, when there is too much focus on financial minutiae, it can result in decision making paralysis. For first-time buyers, this can be difficult as they struggle to quantify risk and get caught in over-diligence, or a cycle of analysis and re-analysis. What can end up happening is analysis paralysis, meaning the fear of the unknown stops a deal from progressing. When buyers engage in over-diligence, it can lead to deal fatigue, where one or more parties lose interest or confidence as the process drags on for too long. When the diligence process stretches out, market conditions can also shift during the delay, or there could be internal changes such as an executive departing or a new business challenge arising. Timing is Essential In any transaction, momentum is key, and timing is everything. During the diligence process in M&A transactions, there are three ways in which timing can make a critical difference. First, timing is essential to the overall process. By keeping diligence tight, you can better ensure that the entire process will be compact and efficient. Then, there is timing of the market. When external factors such as regulatory shifts or new competitors pop up, they can start to impact deal value when a deal lingers. And finally, there is the internal timing of the target company itself. Over time, internal challenges could arise with leadership or operations that can lead to unnecessary hurdles. So, when diligence drags on too long, buyers run a significant risk of paying the same price for a business that could be fundamentally different, or even losing the deal all together. Buyers should also consider the period of exclusivity to complete diligence outlined in the LOI. That period of exclusivity can run out, and buyers could be forced to request extensions if they spend too much time focusing on incremental details. At a minimum, this can erode confidence, and at the worst, the seller could walk. Built In Protections It important for first-time buyers to understand one constant in M&A transactions: there is risk in every deal. But equally as important to understand is that you do not need to chase every risk. That is why there are built-in protections in transactions to help buyers move forward even when every minute detail is not fully uncovered during the diligence process. Buyers should work closely with legal counsel and advisors to structure agreements that include contractual provisions such as representations, warranties, indemnifications, and insurance solutions to protect parties from anything that was not uncovered. These kinds of tools are designed to balance the interests of buyers and sellers, and they allow buyers to focus their diligence efforts on those issues that affect valuation or viability of the deal, rather than wasting valuable time attempting to eliminate all risks. At the end of the day, diligence is designed to manage risk, not to eliminate it entirely. When you resist the tendency to over analyze financials, and stay focused instead, you can better maintain the necessary momentum and avoid paralysis. This leads to deals that close with confidence and are set up for long-term success.
October 6, 2025
Business
The Part of the Deal No One Warns You About: Disclosure Schedules
Selling a business is never just about numbers on a page, it’s about preparation, people, and navigating the unexpected. Mike Mercurio presents a compelling series of conversations with client and former Fireline owner Anna Gavin, as she shares the real story behind her company’s sale. From the private moment she first decided to sell, to the surprise challenges of disclosure schedules, and the essential role of trusted advisors, Anna offers a rare, inside look at what the process truly feels like. Whether you’re years away from a sale or already planning one, her journey provides invaluable lessons on timing, team, and trust. In Part 3 of our Selling Your Business series, client and former Fireline owner, Anna Gavin chats with her M&A attorney Mike Mercurio about a step that often catches sellers completely off guard — disclosure schedules. After what feels like the heavy lifting of diligence, you're suddenly asked to translate everything into a legal document that modifies your reps and warranties. It’s tedious, detailed, and critical to the final outcome. Anna shares her first-hand surprise at how complex this stage was and why having the right legal support made all the difference.
October 2, 2025
Mergers and Acquisitions
What Really Happens When You Decide to Sell Your Business?
Selling a business is never just about numbers on a page, it’s about preparation, people, and navigating the unexpected. Mike Mercurio presents a compelling series of conversations with client and former Fireline owner Anna Gavin, as she shares the real story behind her company’s sale. From the private moment she first decided to sell, to the surprise challenges of disclosure schedules, and the essential role of trusted advisors, Anna offers a rare, inside look at what the process truly feels like. Whether you’re years away from a sale or already planning one, her journey provides invaluable lessons on timing, team, and trust. In Part 1 of our Selling Your Business series, client and former Fireline owner Anna Gavin shares her personal and professional journey that followed her pivotal decision to sell her business. From quietly sitting with the decision for a year to finally voicing it to her spouse, she walks M&A attorney Mike Mercurio, who served as her counsel and deal attorney, through the early steps she took to get informed and prepared. By attending panels, listening to expert advice, and beginning the groundwork a year in advance, her story highlights the importance of planning and just how early that planning really needs to begin.
September 18, 2025
Business
Strategy and Deal Making: Understanding the Nuances of the Buy Side Approach
When it comes to today’s deal market, no two buyers approach acquisitions in the same way. For companies exploring a sale, or for boards weighing offers, understanding the distinct perspectives and motivations of private equity (PE) firms vs. strategic buyers is a key component in the decision-making process. Most data shows that strategic buyers are involved in a larger percentage of acquistions in the U.S. than PE firms, with some estimating they make up about 70% of transactions. While both categories of buyers are interested in achieving growth and value creation, their objectives, timelines, and deal-making strategies differ in ways that can shape everything from valuation to the post-closing integration process. What Drives Different Types of Buyers At the heart of every acquisition lies one simple question: What is driving the buyer? Understanding the why is essential as it determines factors such as how the deal will be structured, how risks will be allocated, and what life will look like post-closing. For most M&A transactions, buyers generally fall into three categories: Private Equity (Financial Sponsors) – These investment firms are highly focused on financial returns, have shorter investment horizons, and a defined exit strategy. They are looking to acquire a company with a goal to exit for a profit. Strategic Buyers (Operating Companies) – This category is made up of public companies, large private corporations, or industry leaders who concentrate more on finding synergies, long-term competitive positioning, and importantly, the integration of the target into their existing organization. Hybrid and Alternative Buyers – This group may include family offices, sovereign wealth funds, and consortiums, which may offer a blend of financial discipline and strategic motivations. Private Equity’s Playbook Private equity buyers typically operate within defined fund cycles, translating into a clear investment horizon, which is often five to seven years. Their acquisition strategy centers on unlocking value, whether that is through operational improvements, growth initiatives, or bolt-on acquisitions. There are several key hallmarks of the private equity approach, including discipline surrounding valuation. PE firms are very focused on returns, which can make them much more price sensitive than other buyers. They also utilize leveraged financing as a core component of their capital structure. This can magnify returns, but it also includes an additional risk factor. PE buyers also enter the transaction with the end in mind. They are concentrated on the exit event, whether that is a sale down the road, IPO, or recapitalization. For sellers, partnering with private equity can mean access to growth capital and operational expertise that can be invaluable, but it likely will not provide the kind of long-term “home” that a strategic acquirer would. The PE buyer is looking to exit as soon as the time is right. The Strategic Buyer’s Perspective As opposed to their PE counterparts, strategic buyers, pursue acquisitions to achieve synergies and create competitive advantages. They are motivated by expanding their market share, entering new regions, or acquiring complementary technologies. Strategic buyers often have longer investment horizons and could be willing to invest more heavily on the front end, knowing that they are looking to achieve returns over a longer time frame. This means that they might pay more of a premium when they can justify it through cost savings, revenue growth, or vertical integration over time. These buyers are going to be looking to integrate the target into their existing operations, which can impact culture, systems, as well as management continuity. Sellers may see strategic buyers as a more stable option as they are “in it for the long run.” The Rise of Hybrid Buyers There is an increasingly important category for sellers to consider, and that is the hybrid buyer. This category can include family offices, sovereign wealth funds, or corporate-backed investment arms which blend the return-driven discipline of a PE buyer with the more patient objectives of a strategic buyer. For certain sellers, for example founder-owned businesses, this option can be an attractive middle ground that presents a “best of both worlds” scenario. On the sell side, understanding the nuances of the buy side is essential to making the right decision. The “best” buyer isn’t always the one that comes in with the highest offer, and it is important to consider things such as long-term vision, cultural alignment, deal certainty, and growth support as well. There are some distinct differences between buyers, and to best negotiate terms and maximize value and long-term success, sellers must appreciate these differences and prepare accordingly.
September 10, 2025
Business
Non-Compliance with CMMC Could Put Your DoD Contracts at Risk
This past month, the Department of Defense sent the final rule for the new Cybersecurity Maturity Model Certification (CMMC) program under the Federal Acquisition Regulation to the Office of Information and Regulatory Affairs for review. This action precedes the inclusion of the new rule in Department of Defense contracts beginning this autumn. So, it is time to get into compliance for all who have been delaying the inevitable. Below is a quick review of these requirements. Background CMMC is designed to bolster the cybersecurity posture of the DoD’s supply chain by validating that DoD contractors and subcontractors possess the necessary cybersecurity practices and processes to safeguard Federal Contract Information (FCI) and various kinds of Controlled Unclassified Information (CUI). CMMC introduces a tiered, certification-based approach, ranging from Level 1 (basic cybersecurity practices for FCI) to Level 2 (advanced practices for most CUI), and Level 3 (expert practices for sensitive CUI). Why is This Important? Contractors and subcontractors must attain the appropriate CMMC level aligned with the security requirements of their contracts to bid and work on DoD projects. In addition to the cybersecurity and reputational risks of non-compliance, if contractors and subcontractors fib or cut corners, they could face False Claims Act (FCA) liability, including draconian damage and penalty assessments. One disgruntled employee who decides to bring an FCA complaint can cost a company significant pain. Contracts Covered by CMMC The CMMC requirement applies to DoD acquisitions that involve the handling of FCI and CUI. Major Contract Programs: Contracts for the procurement of defense systems, weapons, military equipment, and related services that require access to CUI or FCI will be directly impacted. This includes a broad spectrum of procurement categories across the DoD, from large-scale hardware contracts to software development and services. Subcontractors and Supply Chain: Importantly, the rule also extends to subcontractors at all tiers. This flow-down creates a ripple effect throughout the defense supply chain. Contracts Not Subject to CMMC While the rule is broad, it does not universally apply to all federal contracts. FAR Part 12 Commercial Item Contracts: Some commercial item contracts purchased under FAR Part 12 may be excluded unless the scope involves sensitive information or national security concerns. Contracts with No Access to CUI or FCI: Contracts that do not involve access to or handling of CUI/FCI will not be subject to CMMC requirements. Other Exceptions: The FAR Council has provisions for exemptions for technical or administrative reasons, but these are limited and require justification. What is FCI If you are a contractor or subcontractor that handles controlled information such as CUI, you likely have some sophistication regarding cybersecurity. But those with FCI may not be aware that they have protectible information, and most medium and larger-sized DoD contracts will have FCI. FCI refers to information that is not intended for public release but is provided by the federal government to a contractor or subcontractor for the purpose of fulfilling a federal contract. It includes data that is critical to the performance of government contracts. Examples include technical data (e.g., details about a supplier’s hardware specifications), contract schedules and milestones (e.g., timelines for delivering military equipment), and financial or administrative information shared with contractors. Typical Contracts:Smaller contracts Basic supply chain activities FCI Requires Level 1: Basic Cyber Hygiene Key Requirements: Implementation of basic controls, including access only by authorized users, maintaining identification and authentication, and physical protection of information systems. Practices include routine login credentials, portable device protections, and basic awareness training. Annual self-assessment and annual affirmation of compliance with CMMC requirements. What is CUI It’s not classified information, but it is information that requires safeguarding pursuant to various laws, regulations, and government policy. Examples include information about physical security, system vulnerability, or operational issues. CUI Requires Level 2 (Intermediate) or Level 3 (Expert) Processes Level 2: Intermediate Cyber HygienePractices: 110 practices, aligned with NIST SP 800-171 security requirements. Focus: Establishing more disciplined cybersecurity processes and practices suitable for organizations handling CUI. Third-party assessments are required for certification at this level. Level 3: Expert Cyber HygienePractices: Over 130 security controls, closely aligned with NIST SP 800-171, plus some additional practices. Focus: A mature, enterprise-wide cybersecurity program. This will apply only to a limited number of contractors with larger, more sensitive defense contracts that require higher levels of CUI protection. Third-party assessment is required.
August 27, 2025
Business
Business Tax Law Provisions of the OBBBA
The business tax provisions of the One Big Beautiful Bill Act (OBBBA), as signed by the president on July 4, reflect sweeping changes aimed at incentivizing small businesses, domestic investment, and manufacturing. Outlined below are key provisions of the bill that may impact your business. Extension and Enhancement of Immediate Expensing 100% Immediate Expensing for Qualified Property OBBA permanently reinstates 100% bonus depreciation for eligible business property acquired after January 19, 2025. Immediate Deduction for Domestic Research and Experimental Expenditures Immediate expensing of domestic research and experimental expenditures is now permanent, with an election to amortize certain expenditures. Permanent Small Business Deduction (Section 199A) Section 199A Deduction Made Permanent The 20% deduction for qualified business income (QBI) for pass-through entities is made permanent. The deduction remains at 20%, with expanded phase-in thresholds and an inflation-adjusted minimum deduction for taxpayers with at least $1,000 of qualifying income from active trades or businesses. Increased Expensing for Depreciable Business Assets Section 179 Expensing Limits Raised The maximum amount a taxpayer may expense under Section 179 is increased to $2.5 million, with a phase-out threshold of $4 million, both indexed for inflation. Modification of Business Interest Deduction Business Interest Expense Deduction Expanded The calculation of adjusted taxable income (ATI) for business interest deduction purposes is permanently based on EBITDA, increasing the amount of deductible business interest. Special Depreciation Allowance for Production Property Immediate Deduction for Qualified Production Property Businesses may elect a 100% bonus depreciation deduction for qualified production property placed in service after enactment and before January 1, 2031. Renewal and Enhancement of Opportunity Zones Second Round of Opportunity Zones (OZs) A new round of Opportunity Zones is created, with at least 33% of OZs designated as rural. Enhanced benefits for rural Qualified Opportunity Funds (RQOFs) are included, with a 30% step-up in basis after five years. Expanded Low-Income Housing and New Markets Tax Credits Low-Income Housing Tax Credit (LIHTC) Reforms The state housing credit ceiling is temporarily restored and increased for 2026–2029. Permanent Extension of New Markets Tax Credit (NMTC) The NMTC is made permanent, with a five-year carryover of unused limitation. Permanent Excess Business Loss Limitation Excess Business Loss (EBL) Rules Made Permanent The limitation on excess business losses for noncorporate taxpayers is permanent, with carryforwards treated as net operating losses (NOLs). Estate and Gift Tax Exemption Increased and Made Permanent The estate and lifetime gift tax exemption is permanently set at $15 million for single filers ($30 million for married couples), indexed for inflation. State and Local Tax (SALT) Deduction Changes The SALT deduction cap is temporarily increased for 2025 to $40,000 ($20,000 for married filing separately), with a permanent increase to $40,400 starting in 2026, subject to income limitations and phase-outs. For taxable years beginning after December 31, 2029, the limitation reverts to $10,000. Section 707(a)(2) Partnership Changes Allocations and distributions from partnerships that are, in substance, payments for property or services are now treated as such, rather than as allocations and distributions from a partnership to a partner. This codifies the disguised sale rules without reliance on regulations and applies to services performed and property transferred after enactment. The following “Quick at a Glance” table distills each major OBBBA business‑tax change into a concise, one‑line summary of its scope, benefits, and effective dates. SUMMARY TABLE: Major OBBBA Business Tax Provisions (as Amended) Provision Key Change/Benefit 100% Bonus Depreciation Permanent for eligible property. Section 179 Expensing $2.5M limit, $4M phase-out, indexed. Section 199A Deduction Permanent at 20%, broader phase-in, inflation-adjusted minimum. Business Interest Deduction Permanent EBITDA basis. Opportunity Zones New round, rural focus, enhanced rural benefits. LIHTC/NMTC Increased/extended, NMTC permanent, rural/Indian prioritization. Excess Business Loss Limit Permanent, NOL carryforward. Estate & Gift Tax Exemption $15M/$30M, indexed. SALT Deduction Cap increased to $40,000/$40,400, reverts to $10,000 after 2029. Section 707(a)(2) Disguised sale rules codified, applies to property/services after enactment.
July 8, 2025
Business
Maryland’s Sales Tax on IT Services: Key Insights and Compliance Tips
As part of its 2025 Budget Reconciliation and Financing Act, Maryland is introducing a 3% sales and use tax on a broad range of information technology (IT) services, effective July 1, 2025.[1] This “tech tax” is designed to modernize the state’s tax base and capture revenue from the rapidly expanding digital economy. The new law will impact service providers and purchasers across sectors, requiring careful attention to compliance and timely updates to accounting and billing systems. Scope of the New Tax The tax applies to IT and data services classified under specific North American Industry Classification System (NAICS) codes: 518 (data processing, hosting, and related services), 519 (web search portals, libraries, archives, and other information services), 5415 (computer systems design and related services), and 5132 (software publishing services). Covered services include cloud storage, web and server hosting, SaaS offerings, IT consulting, custom software development, and more.[2] Notably, the law eliminates the prior exemption for custom software and related services, meaning that even fully customized solutions, regardless of delivery method, are now taxable.[3] The tax rate is set at 3%, unless the service qualifies as a digital product or tangible personal property, in which case the standard 6% rate applies. Clarifications from Maryland Technical Bulletin No. 56 Maryland Technical Bulletin No. 56, published June 10, 2025, provides essential clarifications on the new sales and use tax for IT services. The Bulletin explicitly states that taxability is determined by the nature of the service provided, not the primary NAICS code reported by the business for federal or state income tax purposes. Each service must be evaluated individually against the NAICS activity descriptions for data or IT services and software publishing as defined by Maryland law.[4] For example, even if a business’s primary NAICS code is not one of the specified codes, any services it provides that fall under NAICS sectors 518, 519, 5415, or 5132 are subject to the 3% tax. Similarly, the NAICS code listed in a procurement contract is not determinative; taxability is based on the actual service provided.[5] The Bulletin also clarifies that the tax applies to internal services provided by one affiliated company to another, even if provided at cost, unless a specific exemption applies. Regarding timing, the Bulletin explains that for subscription-based services, each payment after July 1, 2025, is considered a separate sale and is taxable. However, installment or credit sales where the contract was executed before July 1, 2025, are generally not taxable, even if payments are made or services are delivered after that date.[6] Change orders expanding the scope of services after July 1, 2025, are considered new sales and are taxable.[7] Compliance and Exemptions Businesses must register for a Sales and Use Tax (SUT) license and prepare to collect and remit the new tax. The law provides exemptions for certain research and development contracts, such as those involving the University of Maryland’s Discovery District and its quantum computing partners.[8] Additionally, for services used simultaneously in multiple jurisdictions, buyers can provide a Multiple Points of Use (MPU) certificate, shifting the tax remittance responsibility to the buyer, who must apportion the tax based on Maryland usage.[9] Impact and Next Steps Maryland’s new tax on IT services marks a significant shift in the state’s approach to taxing the digital economy. It is expected to increase costs for both providers and purchasers of IT services, particularly in the technology, finance, and government contracting sectors. Businesses should review their service offerings, update compliance protocols, and use guidance from the Comptroller’s Office to ensure smooth implementation. Key Takeaways Effective Date: July 1, 2025 Tax Rate: 3% on qualifying IT and data services Covered Services: NAICS 518, 519, 5415, and 5132 Clarifications: Taxability determined by service, not business NAICS code; applies to internal and affiliate transactions; timing rules clarified for subscriptions, installments, and change orders. Compliance: Register for SUT license, review service offerings, and prepare to collect/remit tax. Exemptions: Research contracts with University of Maryland Discovery District; MPU certificates for multi-jurisdictional use. By proactively addressing these changes, businesses can minimize disruption and ensure compliance with Maryland’s new sales tax on information technology services. [1] “Budget Reconciliation and Financing Act of 2025” (“BRFA”), H.B. 325, 2025 Leg. Sess. (Md. 2025). [2] Comptroller of Maryland, Sales and Use Tax on Data or Information Technology Services and Software Publishing Services: Questions and Answers, Tax Bulletin No. 56 (June 10, 2025) (the “Maryland Technical Bulletin No. 56”). [3] See Maryland Technical Bulletin No. 56 para I. A. 7. [4] See Maryland Technical Bulletin No. 56 [5] See Maryland Technical Bulletin No. 56 Q&A I. A. 2. [6] See Maryland Technical Bulletin No. 56 Q&A II. C. 13. and 14. [7] See Maryland Technical Bulletin No. 56 Q&A II. C. 16. [8] See Maryland Technical Bulletin No. 56 Q&A III. B. 27. [9] See Maryland Technical Bulletin No. 56 Q&A III. C.
July 1, 2025
Business
AI Reps & Warranties: Emerging Issues in Deals and Commercial Contracts
Artificial intelligence quickly became embedded into business operations, software platforms, internal workflows, and consumer-facing applications. This means the legal risks associated with its development and growth are moving from the abstract to the real world. AI is not only changing how businesses operate, but also how leaders and legal practitioners must structure and negotiate contracts. Legal teams, in-house counsel, and M&A deal professionals can no longer consider this a niche issue and should consider it a negotiated deal point involving risk allocation, liability exposure, and asset valuation. While there is significant attention paid to the disruptive operational power of AI, its implications on representations and warranties in commercial agreements and corporate transactions deserve just as much attention within the legal community. Some tailored legal frameworks are already emerging to address the novel concerns around data privacy, intellectual property, indemnity, and operational continuity. These issues are especially critical in the context of software acquisitions, SaaS contracts, and any M&A deal involving AI-derived intellectual property or business processes. AI-Specific Representations in Deals The National Venture Capital Association (NVCA) model forms were updated at the end of 2024 to incorporate AI-specific representations and warranties. These terms are increasingly reflected in market practice: Targets must affirm that AI tools were used in compliance with applicable licenses, regulations, and data use agreements. Targets must represent that they did not input any personal, confidential, or protected information into AI tools, unless those tools guarantee that such data is not used for training or product enhancement. Targets must represent that data was deidentified or anonymized prior to use in training models to avoid running afoul of applicable data protection standards. Targets must disclose any generative AI platforms used to develop proprietary IP and warrant that such use does not jeopardize any ownership rights being acquired. The above issues are only the tip of the iceberg. Transactions and agreements involving complex AI products must include increasingly technical reps concerning: Model training logs and documentation Fine-tuning methods and retention of model weights Mechanisms used in retrieval-augmented generation (RAG) Use of synthetic or auto-generated content in commercial workflows Model validation performance thresholds, including floating point operation limits and accuracy ranges As the technology matures, the legal community is catching up by embedding operational guardrails directly into transactional documentation. Practical Contractual Risk Areas in AI Licensing Commercial licensing agreements involving AI must now be viewed through a much more detailed legal lens. Counsel should be prepared to negotiate contract terms specifically addressing: Non-infringement guarantees concerning both source code and training data, especially where data scraping or aggregation may have occurred Explicit ownership claims over AI outputs, derivatives, and model weights Training data auditability, including the legal basis for data collection, classification, and labeling Compliance with global privacy and cybersecurity laws, including GDPR, CPRA, and HIPAA when applicable Robust indemnification obligations for breaches of data usage restrictions, IP violations, or algorithmic harms Tech E&O and cyber liability insurance provisions, ensuring recourse exists if generative tools malfunction, hallucinate, or produce defamatory content In many cases, the liability profile of AI is uncertain and difficult to quantify. Because many models operate as "black boxes," licensees are often left without a clear explanation of how certain outputs were generated or what datasets were used in training. This makes traditional warranties about performance or fitness for a particular purpose difficult to enforce. As a result, buyers and licensees are demanding broader representations, heightened disclosure obligations, and post-closing audit rights to mitigate these unknowns (while sellers are seeking to disclaim warranties and narrow representations). M&A and AI Due Diligence AI risk has quickly become a key diligence category in M&A deals, especially in transactions involving software, e-commerce, analytics, or consumer engagement platforms. Buyers are now expected to conduct diligence not just on IP rights and customer contracts, but also on how AI has been implemented and governed. Pre-Acquisition Diligence Key diligence areas include: Training data sourcing: Was the data obtained lawfully and under enforceable terms? Privacy risk: Was any personally identifiable information (PII) used in training or prompting without consent? Third-party code and APIs: Does the AI product depend on third-party components that might limit assignability or trigger license fees? Model update and retraining rights: Who controls the model lifecycle, including patches and performance tuning? Export control risks: Could the AI model be subject to ITAR, EAR, or other national security controls due to its capabilities? Post-Closing Continuity Buyers should also require: Complete AI architecture diagrams and component inventories Documentation of ethical safeguards and bias mitigation processes Retention policies around input prompts and AI-generated output logs Model deployment playbooks and downtime risk disclosures Transition services agreements, software escrow, and founder retention may also be needed to ensure business continuity and proper knowledge transfer where AI is a critical but complex asset. IP, Privacy, and Employment Triggers This isn't only an issue for "tech transactions." As AI expands across business functions, its legal implications multiply. Core issues include: Intellectual property ownership, particularly whether AI-generated outputs are protectable under U.S. copyright law or must be secured as trade secrets Privacy and cybersecurity risks stemming from unstructured data ingestion and prompt leakage, especially when sensitive information is processed or used Employment law exposure, including discriminatory hiring algorithms or opaque automated decision-making processes that may violate EEOC or state-level labor rules Recent case law and regulatory action suggest that companies using AI for decision-making will be held to explainability and fairness standards, even if they do not fully control or understand the model. Additionally, companies leveraging AI in consumer products or safety-critical environments must consider product liability exposure under traditional tort theories, especially if AI contributes to physical or economic harm. Think about the auto-driving taxi that must decide whether to hit the pedestrian or crash the car. AI and IP Security Agreements As more companies develop proprietary AI tools, models, and datasets, lenders and investors are increasingly taking security interests in these intangible assets. This requires a rethinking of traditional IP Security Agreements. When collateral includes AI-generated or AI-driven intellectual property, legal teams should evaluate: Whether model weights, training datasets, or prompt libraries are clearly documented and listed as pledged assets Whether the borrower can demonstrate ownership and provenance of the training data and model code If the model is fine-tuned from a third-party foundation model, whether the underlying license permits encumbrance or assignment If retrieval-augmented generation (RAG) is used, whether the underlying corpuses and connectors are part of the security package The existence of source code escrow to ensure access in the event of default or bankruptcy Any restrictions in open source or SaaS agreements that may limit foreclosure or reassignment rights Moreover, the lender’s enforcement rights may be limited if the AI model or data is co-owned, cloud-hosted, or reliant on third-party APIs. Security interests must be carefully drafted to reflect operational dependencies, and perfection of those interests may require filings beyond the USPTO, including notice to cloud vendors or consent from licensors. IP Security Agreements for AI assets must go beyond standard boilerplate and should be tailored to the unique hybrid nature of AI systems combining software, services, and data streams. In many cases, a supplemental AI-specific collateral schedule may be appropriate. Takeaways for Legal and Deal Teams AI is no longer a novel technology element to be glossed over in standard reps and warranties. It is a high-stakes business driver that intersects with every major legal category: IP, privacy, cybersecurity, employment, antitrust, and contract liability. Actionable takeaways include: Draft AI-specific reps and warranties that cover data sourcing, training protocols, model rights, and use case restrictions Build diligence frameworks that include discussions with technical teams and review of logs, policies, and product roadmaps Negotiate indemnification mechanisms that allocate financial risk from misuse, error, or regulatory exposure Ensure insurance provisions cover AI incidents, from hallucinated content to data leakage Establish post-closing governance and monitoring structures, particularly in acquisitions involving live AI models or mission-critical algorithms Review and update IP Security Agreements to specifically address AI collateral and embedded third-party dependencies Ultimately, the central legal question becomes: When AI makes a mistake, who pays? Whether drafting a commercial SaaS agreement or executing a strategic acquisition, every deal team must be ready to answer that. As legal and technological standards continue to evolve, ongoing adaptation will be essential.
June 19, 2025
Business
Pennsylvania Limits Non-Compete Agreements for Health Care Practitioners
In July 2024, Pennsylvania Governor Josh Shapiro signed House Bill (HB) 1633, the Fair Contracting for Health Care Practitioners Act (the "Act"), into law. In summary, the Act: (1) limits the enforceability of non-competes against certain health care practitioners; and (2) imposes a notice obligation on employers of those practitioners. The Act became effective on January 1, 2025. The purpose of this article is to revisit this important legislative development in its first year of existence, given its potential to significantly impact the health care landscape. Here is a breakdown of the Act changes, including who it covers, its application in case law, and its potential impact on physician and other clinical professional employment contracts across the Commonwealth. Limits on Non-Competes The Act renders unenforceable non-compete covenants with a duration longer than one year for certain health care practitioners, subject to the following caveats: The Act only applies to “health care practitioners,” which the Act defines to include “medical doctors,” “doctors of osteopathy,” “certified registered nurse anesthetists,” “certified registered nurse practitioners,” and “physician assistants,” as those terms are defined in other Pennsylvania statutes. The Act only applies to “non-compete covenants,” defined as agreements between an employer and a health care practitioner that “has the effect of impeding the ability of the health care practitioner to continue treating patients or accepting patients.” Notably, the Act does not apply to other post-employment restrictive covenants, such as confidentiality provisions and employee non-solicitation clauses. The Act does not prohibit employers from enforcing non-competes with a duration of one year or less, provided that the employer did not terminate the health care practitioner’s employment without cause. This means that employers cannot enforce a non-compete against health care practitioners who are terminated without cause, regardless of the duration of the covenant. The Act is silent as to whether Pennsylvania courts may reform overbroad non-competes. Presumably, that decision is still within the discretion of the court. The Act does not apply to non-competes entered into in connection with the sale of a business or grant of equity, provided the health care practitioner was a party to the transaction. The Act becomes effective on January 1, 2025. Importantly, it does not apply retroactively. That means that non-compete agreements entered into with health care practitioners prior to the effective date will remain enforceable, subject to existing requirements under Pennsylvania law. Notification Requirement The Act also imposes a patient notice requirement on employers of health care practitioners. Within 90 days of a health care practitioner’s termination of employment, employers must notify the separated practitioner’s patients: (1) of the practitioner’s departure; (2) if the patient chooses to receive care from the departed health care practitioner or another health care practitioner, how the patient may transfer their health records to that provider; and (3) that the patient may be reassigned to another practitioner in the employ of the employer if the patient wants to continue treatment with the employer. Importantly, this notification obligation applies regardless of whether the separated practitioner is subject to a non-compete. In addition, an employer is required to provide these notifications within 90 days of the health care practitioner’s departure. However, the notification requirement applies only where the health care practitioner had an ongoing outpatient relationship with the patient for two or more years. Existing Case Law & Precedents Pre-Act Foundation: WellSpan Health v. Bayliss (2005) Under Pennsylvania common law, courts evaluating physician non-competes traditionally balance public interest—particularly patient access to care. In WellSpan Health v. Bayliss, the Commonwealth Court emphasized that ensuring patients can continue treatment is paramount when deciding whether to enforce restrictive covenants law. While predating the Act, this ruling sets the tone: Pennsylvania courts lean toward protecting continuity of care when non-competes might limit it. Post-Act Litigation: Thakkar v. AHN (2025) Shortly after the Act took effect, gastroenterologist Dr. Thakkar challenged Allegheny Health Network (AHN) in the Allegheny County Court of Common Pleas. After AHN declined to renew his contract, Dr. Thakkar stated that the existing non-compete prevented him from practicing in the same region, which disrupted patient care. Although the trial court sided with AHN, Thakkar has appealed to the Pennsylvania Superior Court. His argument underscores the Act’s protections: non-competes imposed post‑January 1, 2025, should be void if the practitioner is dismissed. Open Issues Under the Act The Act does not define many terms and is such a hodgepodge of concepts and requirements that it could be a health care employer's nightmare. Some unanswered questions include: Are reasonable non-compete covenants enforceable where the health care practitioner receives a tiny “ownership interest”? Are non-compete covenants effective for more than one year enforceable where an employment agreement is not renewed? Will a patient non-solicitation provision be included within the scope of the Act? Is the patient notice requirement triggered regardless of the reason for the end of the employment relationship? Does the death or retirement of a health care practitioner trigger a potential notice requirement? Is the patient notice requirement necessary where the health care practitioner is employed for only 23 months (i.e. two years)? How is patient notice accomplished? Is a website posting sufficient? Is there any penalty for noncompliance? The Act reflects a trend in states across the U.S. focused on promoting physician mobility and improving patient access to care, while raising important compliance considerations for hospitals, health systems, medical practices, and their legal teams. For physicians and other clinical professional employers, the Act presents both compliance challenges and the need for directional shifts. Employment contracts will need to be revised, and retention strategies will need to pivot from focusing on legal restrictions to emphasizing purposeful engagement, such as competitive compensation, workplace culture, or career growth opportunities.
June 18, 2025
Business
Effectively Representing Entrepreneurs: Bridging the Gap Between Business and Law
Entrepreneurs represent a unique type of client for attorneys. They thrive on uncertainty, they move fast, and they see opportunities where many others see red flags. They often have a much higher risk tolerance, and they are visionaries who challenge the status quo, not only in the markets they disrupt, but also in the regulatory or legal frameworks that often cannot keep pace with innovation. For attorneys representing entrepreneurs, there can be a clear challenge as they struggle to bridge the gap between the law and the entrepreneur’s fast-moving world. Therefore, it is critical to remember that when working with entrepreneurs, the law is not the only seat at the table. Their legal counsel is just one of many voices in the room involved in making strategic decisions. Law, finance, insurance, product development, and growth marketing must all come together to make sound decisions and to create a path forward. Attorneys must understand this broader context and be able to operate within it. When advising entrepreneurs, it's not enough to say no or shut down ideas due to high risk levels. It is better to determine their tolerance for risk and develop a structure to make it work. Entrepreneurs don’t want a gatekeeper. They want legal counsel who can help them navigate the complexities of their world. Innovation Often Outpaces Regulation We have all seen that innovation frequently moves faster than the law. Just look at the incredible developments in AI over the past few years and the regulatory efforts that have significantly lagged the innovation in this space. We now see a patchwork of regulations across this country and on an international level. This highlights the point that an entrepreneur doesn’t always have the luxury of waiting for full regulatory clarity. They need legal counsel who can advise them on the current regulatory environment and help them anticipate and prepare for what the future might hold. Manage Risk, Don’t Eliminate It Entrepreneurial lawyering does not mean ignoring risk. It means identifying and managing risk, as well as helping the client embrace it in a calculated way. The idea isn’t to stifle innovation or kill ideas, but instead to make the big ideas viable within some parameters. There must be a mindset of managing risk smartly as opposed to avoiding risk at all costs. When attorneys can help entrepreneurs to see the legal implications of their decisions without shutting them down, they create the kind of trust that defines a successful attorney-client relationship. The Importance of Understanding Business Entrepreneurs want legal counsel who speaks their language and understands the many moving parts that make up their world. To have a seat at the entrepreneur’s table, it is essential to fully understand how legal decisions will impact their business objectives. This requires attorneys to evolve beyond just providing traditional legal advice and to move from the singular role of legal advisor to the multifaceted role of business advisor, risk strategist, and trusted partner throughout the entrepreneurial journey. There will always be a gap that exists between business and the law, as legal frameworks and regulations serve as roadblocks to the next big ideas coming out of startups. But great attorneys build bridges, not walls. They don’t ignore the law, but instead help entrepreneurs to navigate it with clarity, creativity, and awareness.
June 2, 2025
Business
Avoiding Common Contract Pitfalls: Legal Landmines in Agreements
Contracts are the backbone of every business relationship. Whether buying a business or entering into a new commercial agreement, many small to mid-sized businesses do not fully negotiate critical clauses within the document. Failing to fully negotiate certain language, relying on informal agreements, or failing to update commercial contracts with appropriate amendments as the relationship evolves can become a significant liability to a company. Informal arrangements may feel efficient in the short term but can create significant issues if a dispute arises. In this edition of Search Fund Operate, we break down the most commonly negotiated (and litigated) provisions in contracts. The below is an overview of how acquirers, operators, and business owners can proactively protect themselves from exposure. The Risk of Informal Agreements Many business relationships begin with trust — a handshake deal, an email exchange, or a PDF template someone downloaded online years ago. But when disputes arise, courts look for formal agreements. Informal or undocumented agreements often lack enforceable provisions around risk allocation, dispute resolution, and payment mechanics. Even worse, they often fail to outline each party’s actual responsibilities, deadlines, or remedies. Tip: If a dispute reaches litigation, and there is no signed agreement or only partial documentation, courts may rely on the parties' prior conduct or applicable statutory rules that might not reflect the parties’ original intentions. Inconsistencies can lead to conflicting testimony and unpredictable results. Without formal terms, operators risk operational confusion and disruptions, customer dissatisfaction, and expensive court battles. This risk grows exponentially when the business is being sold or scaled, as buyers expect to inherit clear, enforceable rights and obligations. Liability and Indemnification Indemnification Clauses Indemnity provisions shift the burden of financial responsibility for specific claims. These are some of the most heavily negotiated clauses. Poorly drafted clauses can: Leave you liable for the other party’s negligence or misconduct. Fail to include third-party claims (e.g., customer injuries from vendor products). Omit procedural requirements for notice and defense, leaving you without control of litigation that affects your reputation. Tip: Ensure that the indemnification clause is protective of your interests. Push for mutual indemnification, defense, and settlement rights, not just reimbursement. Also consider whether to limit indemnification to direct damages or extend it to consequential losses. Environmental Indemnity In certain industries — such as manufacturing, logistics, or commercial real estate — environmental risk requires special attention. Contracts should: Clearly allocate responsibility for environmental conditions, both known and unknown. Include representations about compliance with environmental laws and past environmental issues. Address remediation costs and third-party claims. Tip: Require the disclosing party to provide environmental reports and clarify who bears responsibility for pre-existing contamination. Liability Carve-Outs Clauses that attempt to shift risk should specify whether they cover negligence, gross negligence, or willful misconduct. The broader the language, the greater the protection. Sophisticated parties often negotiate carve-outs for fraud or breaches of confidentiality. Limitation of Liability: Know Your Exposure Exclusion of Damages Most contracts attempt to exclude certain categories of damages: Consequential damages (e.g., lost profits or reputational harm) Incidental damages (e.g., additional shipping or handling costs) Punitive damages (rare, but potentially significant in litigation) However, these clauses must be: Clearly drafted and conspicuously presented in the agreement Consistent with governing law and not prohibited by statute Tied to specific breaches or defined categories of claims Tip: Courts may strike down limitation clauses if they are hidden in boilerplate language or conflict with public policy (e.g., consumer harm or gross negligence). Careful drafting is necessary to ensure these clauses are enforceable. Caps on Damages Liability caps are common. These are often limited to: The total fees paid under the agreement over a certain period A multiple of the monthly or annual contract value These types of damages caps should be: Commercially reasonable Include carve outs for egregious conduct (e.g., fraud, IP infringement) Reviewed for enforceability in high-risk jurisdictions (such as California or New York) Tip: Combine caps on damages with tailored indemnification clauses and insurance requirements offer the most balanced protection. Right to Recover Damages Parties should not assume that silence on damages means full recovery. Contracts should affirmatively state: Whether consequential or incidental damages are recoverable Whether lost profits are compensable Whether the right to injunctive relief is preserved for breaches such as misuse of IP, confidential information, or violation of non-competes (if included and within a jurisdiction where enforceable) Tip: Courts can be reluctant to award damages not clearly contemplated in the contract language. Assignability and Change of Control An often overlooked provision is whether contracts can be assigned to another party — a crucial issue during a business sale or restructuring. If assignment is restricted, it may require: Written consent from the counterparty Disclosure of assignee's financial information Attorney fees associated with any legal review prior to consenting to the assignment Some contracts even treat a change of ownership or control as a default or termination trigger. Tip: Failing to secure assignability can delay or derail an acquisition, especially if key customer contracts are involved. Operators should inventory and review top agreements well before a contemplated sale. Payment Terms and Dispute Mechanics Clear Payment Language Contracts should specify: Invoice frequency and delivery method Payment deadlines, accepted payment methods Grace periods, late fees, and interest charges Whether payments are conditional on acceptance, delivery, or milestones Right to stop future delivery of services or products in the event of non-payment Vague or missing language around payment terms is a common source of cash flow disruption. Courts often apply standard practices or industry norms — which may not reflect your business model. Tip: Use net terms that clearly reflect the payment terms. Add provisions for disputed invoices and partial payments. Condition of Delivered Goods or Services Ensure the contract addresses: Acceptance criteria and inspection periods What constitutes a material defect Remedies for nonconforming or damaged goods Whether services must meet a defined performance standard Tip: If materials are delivered late or defective, and the contract is silent, the buyer may have limited options to reject or recover costs. Dispute Resolution Well-structured dispute resolution clauses can minimize litigation costs and clarify where and how conflicts are resolved. These clauses should address: Venue and jurisdiction Governing law (state of choice) Mediation or arbitration requirements before litigation Scope of issues subject to arbitration Tip: Choose arbitration only when you can afford and control it — not all arbitration is cheaper or faster than court. Choice of Law and Venue Failing to specify a governing law can create confusion and increase cost. Choose a state with predictable case law and commercial friendliness Clarify venue for both lawsuits and arbitration (county and state) Tip: Courts generally uphold these clauses, but ambiguity can invite satellite litigation over which rules apply. Recovery of Attorneys’ Fees By default, parties generally pay their own legal fees unless the contract provides otherwise. A prevailing party clause can: Deter frivolous lawsuits Improve recovery leverage for the aggrieved party Help offset enforcement costs in breach scenarios Tip: Ensure the clause clearly defines "prevailing party" and whether partial victories count. Other Heavily Litigated Provisions Force Majeure Since COVID-19, courts have closely scrutinized force majeure clauses. These should be specific and include: Pandemics, epidemics, and public health emergencies Cybersecurity incidents and data breaches Labor strikes, natural disasters, and government actions Tip: Clarify notice requirements and what obligations are suspended or excused. Termination Rights Contracts should clearly state: Whether either party may terminate for convenience Grounds for termination for cause (e.g., material breach, insolvency) Required notice periods Obligations upon termination (e.g., final payments, transition support) Tip: Courts often look to see if the termination provisions were exercised in good faith and consistent with the contract’s intent. Integration Clause A merger or integration clause ensures that only the written agreement governs the relationship. This is a critical protection against claims of oral promises or email side agreements that contradict the final document. Conclusion Contracts are not just formalities — they are critical risk allocation tools. Whether you are acquiring a business, managing a commercial relationship, or selling to customers, business owners should ensure that agreements are thorough, clear, and enforceable. This will reduce litigation risk and protect your enterprise value. For buyers and operators, reviewing all critical contracts pre- and post-close is an essential part of your diligence and compliance process. Don’t assume the existing agreements are sufficient — many are not. Where possible, standardize contract templates, build clear negotiation guardrails, and involve legal counsel to spot ambiguous or dangerous provisions before they become problems.
May 14, 2025
Business
Unexpected Tax Penalties in Talent Contracts: Could Your Motion Picture, Recording, or Sports Contract be Subject to IRC Section 409A?
Could your motion picture agreement, recording agreement, or sports contract be a non-qualified deferred compensation arrangement? You may think it unlikely, but a non-qualified deferred compensation arrangement refers to any agreement under which an employee or independent contractor—i.e., a “service provider”—may receive a payment in a taxable year later than the year in which the service provider had a legal right to the payment. There are specific rules governing non-qualified deferred compensation arrangements: Code Section 409A of the Internal Revenue Code of 1986, as amended. Failure to comply with the detailed requirements of Code Section 409A can trigger the immediate taxation of deferred income and impose an additional 20% penalty tax on that income. Any contract providing for the provision of services that provides that some payments may be made after the year that the contract was entered into may be a non-qualified deferred compensation arrangement. This is because the Internal Revenue Service takes the position that a service provider first has a legal right to payment when the contract is entered into, and this applies even if the contract requires the service provider to provide services and the services have not yet been provided. Entertainment Industry Examples: How Code Section 409A May Apply Motion picture contracts frequently provide top talent with a percentage of the box office as compensation for services. In recording contracts, a new artist is generally given an advance to deliver a master recording to a record company. The record company owns the master recording, but the agreement provides the artist receives a “royalty” equal to a certain percentage of sales that will be offset against the advance that the artist received. Since the artist does not have a property right in the master recording, the “royalties” are compensation and will be subject to Code Section 409A, unless an exception applies. Sports contracts often provide for deferred compensation in a colloquial sense. Since the payment to be received by the athlete is not a payment under a qualified retirement plan governed by ERISA, the deferred compensation will be subject to Code Section 409A unless an exception applies. One exception to Code Section 409A is the short-term deferral exception. A payment qualifies as a short-term deferral if the payment must be made by March 15 (for a calendar year service recipient) of the year following the year in which the payment becomes vested or is no longer “subject to a substantial risk of forfeiture.” In this case, this is a short-term deferral and Code Section 409A does not apply. Permissible Payment Events Under Code Section 409A If a payment constitutes non-qualified deferred compensation, then there are only certain events on which the payment can be made: An objectively determinable time or schedule set forth in the agreement (e.g., on January 1 of a certain year or the athlete’s 50th birthday) Death or disability Separation from service (with a very specific definition) Change of control (also a very special definition) Unforeseen emergency Once the payment terms are set forth in an agreement, the terms cannot change, except in very limited circumstances. The payment can never be accelerated by more than 30 days, and there are very strict rules regarding further deferral of the payment. One of those rules is that if a payment is deferred, it must be deferred by more than 5 years from the original payment date. Consequences of Violating Section 409A If Code Section 409A applies and is violated, the penalties are generally imposed on the service provider. These penalties include acceleration of recognition of income for all payments to be made under the agreement in the year in which the violation occurs. Additionally, the service provider is required to pay a 20% penalty tax, as well as ordinary income tax on these accelerated payments. Code Section 409A is complex and often overlooked in entertainment and sports agreements. But if your contract includes future payments tied to services performed now, it is worth asking whether these rules apply. Careful planning can help avoid unexpected taxes and penalties.
May 5, 2025
Business
How Buy-Sell Agreements Can Help Prevent a Messy Business Divorce
Just like any kind of relationship, not all business partnerships are built to stand the test of time. They can sour just as easily as a romantic partnership or friendship as vision and long-term goals diverge, financial stress comes into play, or personal issues enter the business relationship. When these kinds of factors arise, it can often result in a “business divorce.” A business divorce has the potential to be just as messy, emotionally charged, and costly as a marital divorce, particularly when there is no established plan in place to outline how the two parties will separate. This is why buy-sell agreements can be critical, helping to ensure a smooth and fair process in the case of a business divorce. It is always best to agree on buyout terms in advance while everyone is getting along and not leave it to the expense and risk of legal proceedings before an arbitrator or judge who does not understand your business. What is a Business Divorce? A business divorce occurs when two or more parties decide to end a business partnership, and it is estimated that anywhere from 50-70% of business partnerships will fail. There can be numerous contributing factors that lead to the dissolution of the partnership. As stated earlier, there are typically differing visions for the company’s future, the strategies used to achieve long-term goals, financial disagreements, or even personal issues that begin to impact the partnership. However, there can also be actions taken by a partner that reflect negatively on the company or even an illness or death that would require the partnership to dissolve. No matter the root cause of the divorce, there are several avenues that can be taken when the partners make the decision to split. This could be one partner buying out the other, fully dissolving the business, or some kind of restructuring that occurs. It is at this stage of deciding which path to take where emotions can start to come into play, and lawsuits and other disputes can arise if there is not an agreed-upon method to end the partnership. This is where buy-sell agreements can be a game changer. Why Buy-Sell Agreements are Critical Think of a buy-sell agreement as a prenuptial agreement for business owners. When a married couple has a prenup in place, it provides a roadmap for how to divide the assets if they divorce. Buy-sell agreements provide the same kind of roadmap for a partnership, outlining a course of action should one partner want or need to leave. As with a prenup, these are typically negotiated when the partnership is established; however, it is never too late to negotiate this in a partnership if one does not already exist. These agreements allow for a smoother process and minimize conflict, as they provide an established business valuation methodology as well as liquidity and exit plans, including the terms of the payout to the departing partner, which could be over several years so as not to impair the business cash flow. They can also prevent a spouse or heirs from attempting to assume a partnership role in the case of a partner’s death or disabling illness, and they can help stabilize the business during what can be a chaotic time. When considering structures for a buy-sell agreement, there are several options. These can include one or more owners buying out a departing owner’s stake, the actual business buying the departing partner’s stake, or some of combination of the two. In the case of death, the buy-sell can provide for the purchase of life insurance on the deceased partner. The structure of a buy-sell agreement is specific to the individual business and partnership and must be agreed upon by all parties involved. At the end of the day, a buy-sell agreement can save a great deal of heartache and expense if you find yourself in the middle of a business divorce. A little bit of additional planning on the front end could be the key to an amicable split that allows for the continuity of the business and avoids a legal mess.
April 18, 2025
Business
Succession Planning for Business Owners: Preparing for the Expected—and the Unexpected
Acquiring a business is an exciting and rewarding achievement, but it’s only the beginning of the journey. Many new business owners focus on growth, operations, and profitability, but one critical factor often gets overlooked: succession planning. What happens if you’re suddenly unable to lead? Have you prepared your business to survive and thrive beyond your direct involvement? According to industry insights, over two-thirds of small business owners plan to retire within the next decade, yet nearly two-thirds of family-owned businesses lack a documented succession plan. Without a solid contingency strategy, a business can face severe disruptions, loss of value, or even risk closure. Succession planning is not just about retirement—it’s about ensuring the business can withstand unexpected challenges, leadership transitions, and shifts in ownership dynamics. It must also take into account your financial legacy, meaning your estate plan is a critical piece of this process. Two Critical Aspects of Succession Planning Succession planning can be broken down into two key areas: management succession and ownership succession through estate planning. While management succession ensures the business continues to operate efficiently after leadership changes, ownership succession focuses on transitioning equity and control in a way that preserves family wealth and business continuity. Succession Planning for Management Purposes For search fund entrepreneurs and independent sponsors, acquiring a business often means stepping into an operation that has relied heavily on the prior owner’s relationships and institutional knowledge. If a crisis arises—whether due to illness, a sudden exit, or unforeseen personal events—having a structured plan ensures the company’s continuity and stability. A business should be able to function independently of its owner to maintain investment value, operational efficiency, and strategic direction. Investors such as family offices and other patient capital providers are increasingly focused on long-term business sustainability. They recognize that a company’s ability to transition leadership smoothly directly impacts its valuation, resilience, and growth potential. Businesses with strong management succession plans are inherently more attractive to investors, lenders, and strategic partners. Key Steps in Management Succession Planning Identifying Future Leadership – Develop a leadership pipeline and invest in training potential successors. Creating Governance Frameworks – Establish clear decision-making protocols, performance benchmarks, and board roles. Documenting Operational Processes – Maintain SOPs, financial reporting procedures, and relationship management protocols. Legal & Financial Structuring – Draft contingency plans, transition agreements, and updated leadership contracts. Employee & Stakeholder Communication – Foster transparency to maintain trust and engagement during transitions. Disney - A Succession Planning Failure: A well-known cautionary tale is Disney’s prolonged succession struggle. It offers a public case study in the risks of delayed or unclear leadership planning. Harvard Law’s analysis explores how missteps in succession planning can result in strategic confusion and shareholder concern. Succession Planning for Ownership & Estate Purposes While leadership succession supports operational continuity, ownership succession via estate planning ensures that equity transfers are executed in a tax-efficient, structured, and family-aligned way. Many business owners delay these conversations until it's too late, leading to conflict and financial inefficiencies. A recent article from J.P. Morgan Private Bank highlights the value of family meetings as tools for creating transparency, aligning generational goals, and easing the emotional weight of wealth transfer decisions. Clear communication and proactive planning are essential to avoiding misunderstandings and ensuring continuity. Key Considerations for Ownership & Estate Succession Planning Recapitalization & Equity Transfers – Gradually shift ownership to heirs, employees, or outside investors. Trust & Estate Structures – Use trusts, GRATs, or similar tools to reduce tax burden and streamline asset transition. Buy-Sell Agreements – Protect against disruption in the event of death, incapacity, or ownership disputes. Liquidity Planning – Ensure cash availability to meet estate taxes and avoid forced asset sales. Open Family Conversations – Define expectations, roles, and stewardship principles across generations. Estate Planning Beyond Business Ownership Estate planning must extend beyond business assets. All holdings—real estate, private equity, marketable securities, and personal property—should be included. A comprehensive plan reduces the risk of asset disputes, tax inefficiencies, and missed philanthropic goals. Key Components of a Comprehensive Estate Plan Multi-Generational Wealth Strategy – Articulate long-term objectives for family stewardship and legacy. Liquidity for Tax Obligations – Prepare for estate taxes without disturbing business operations. Asset Protection – Use legal mechanisms to guard against litigation and liability. Charitable Planning – Incorporate giving strategies that reflect family values and optimize tax outcomes. Building Your Estate Planning Team: Successful estate planning requires the coordinated efforts of legal, tax, and financial professionals. Business owners often work with corporate, tax, and estate attorneys. In addition to legal, family offices are increasingly emerging as a central resource for coordinating these efforts across generations. For example, Cresset Capital offers a holistic family office model that integrates investment, planning, and advisory services. The Role of Recapitalization in Succession Planning Recapitalization is a versatile strategy that supports both management transitions and estate planning. It allows business owners to restructure equity, generate liquidity, and introduce new ownership stakeholders while maintaining stability. Preserve Business Value – Transition ownership strategically to avoid disruption. Generate Liquidity – Create financial flexibility without an outright sale. Support Long-Term Sustainability – Bring in aligned investors who support the next generation of leadership. Final Thoughts: Don’t Leave the Future to Chance Whether you’re planning an exit, acquiring your first business, or simply organizing your affairs, succession planning is not optional. It’s a fundamental aspect of preserving the value you’ve built and ensuring your enterprise—and legacy—endures. A business without a succession plan is a business with an expiration date. Start now. Incorporate recapitalization, leadership development, and comprehensive estate planning into your long-term strategy.
March 21, 2025
Business
Financing in the Independent Sponsor and Search Fund World: SBA vs. Conventional Lending
Financing is one of the most critical components of a successful search fund or independent sponsor acquisition, influencing not just deal structure and capital requirements but also long-term financial health and growth potential. Entrepreneurs and investors evaluating a business purchase must carefully weigh two primary financing options: Small Business Administration (SBA) loans and conventional bank loans. While both have their merits, the choice between SBA and conventional lending impacts everything from cash flow management and debt servicing to operational flexibility and future capital raises. Selecting the right option requires a clear understanding of short-term liquidity needs, financial reporting obligations, investor expectations, and the intended growth trajectory of the acquired company. SBA Loans: Flexible but Costly in Equity Terms The SBA 7(a) loan program is a widely used financing tool, particularly for first-time entrepreneurs and acquisitions of lower middle-market businesses. The program is designed to make small business ownership more accessible by offering low down payments, extended repayment terms, and fewer financial covenants compared to conventional loans. Key Advantages of SBA Loans: Lower Equity Requirements – SBA loans typically require only 10% equity, making them an attractive option for buyers with limited personal capital. In contrast, conventional loans often require 20-50% equity, significantly raising the cash burden. Longer Repayment Terms – The standard 10-year amortization schedule allows borrowers to maintain lower monthly payments, easing cash flow constraints. Limited Financial Covenants – Unlike conventional lenders, SBA-backed loans do not impose strict financial performance benchmarks, providing greater flexibility in early-stage business operations. Easier Qualification Process – Many first-time buyers may find it easier to secure an SBA loan compared to conventional financing due to the government-backed guarantee, reducing lender risk. Challenges of SBA Loans Despite their accessibility, SBA loans come with notable downsides, particularly for search funders and independent sponsors looking for long-term capital efficiency and equity retention: Personal Guarantee Requirements – SBA loans require personal liability from the borrower, meaning that if the business fails, personal assets may be at risk. Restrictions on Seller Notes & Subordinated Debt – The SBA often limits the use of seller financing and additional subordinate debt, making capital structuring more rigid. Prepayment Penalties & Financing Limitations – Borrowers looking to refinance into more favorable debt structures down the road may face prepayment penalties, increasing overall financing costs. Growth Limitations – The lack of institutional-style covenants can prevent businesses from building the structured financial discipline needed for future capital raises or attracting private equity investment. For sponsors and search fund entrepreneurs planning recapitalization, secondary financing rounds, or eventual exit strategies, the limitations associated with SBA loans should be carefully considered. Conventional Bank Lending: More Rigid, but (Maybe) a Stronger Long-Term Fit For experienced operators or businesses with strong existing cash flow, conventional loans can be a more sustainable long-term financing solution. These loans provide greater flexibility in structuring deals, but they also come with stricter requirements. Key Advantages of Conventional Loans: Higher Loan Amounts – Unlike SBA loans, which cap at $5 million, conventional banks can finance larger acquisitions, making them more suitable for companies with $5M+ in EBITDA. Stronger Banking Relationships – Working with a commercial bank can create opportunities for long-term financial partnerships, including credit facilities, treasury services, and strategic capital allocation. More Favorable Equity Retention Terms – Conventional lenders often allow higher levels of seller financing and preferred equity arrangements, giving the buyer greater control over the capital stack. Stricter Covenants: More Financial Controls and Reporting Unlike SBA loans, conventional financing requires detailed financial oversight, which, while adding complexity, can ultimately benefit long-term financial planning and investor confidence: Debt Service Coverage Ratios (DSCR) – Lenders typically mandate a minimum DSCR threshold, ensuring the business maintains healthy cash flow relative to debt obligations. Regular Financial Reporting – Borrowers must provide quarterly and annual financial statements, reinforcing financial discipline and operational transparency. Leverage & Liquidity Limits – Many conventional loans include leverage constraints, preventing businesses from taking on excessive debt that could jeopardize financial stability. While these restrictions may seem burdensome, they prepare companies for future institutional investment and create stronger exit opportunities by making businesses more attractive to private equity firms and strategic acquirers. Choosing the Right Financing for Sponsors and Search Funds The decision between SBA and conventional financing depends largely on the business model, investor profile, and long-term capital strategy of the acquirer. SBA Loans Are Best For: First-time search funders acquiring sub-$5 million EBITDA businesses Deals where seller financing is limited or unavailable Entrepreneurs seeking maximum leverage with minimal equity investment Buyers prioritizing cash flow flexibility over institutional financing constraints Conventional Loans Are Best For: Larger acquisitions requiring more flexible financing structures Search funders looking to build long-term banking relationships Companies planning to secure future private capital or institutional investment Acquisitions where financial discipline and structured reporting will be critical for growth and scalability Final Thoughts: Aligning Capital with Growth Strategy For independent sponsors and search fund entrepreneurs, financing is about more than just getting the deal done—it’s about positioning the business for long-term success. SBA loans can provide immediate access to capital, but conventional financing ensures long-term scalability and financial discipline. Navigating the complexities of acquisition financing requires strategic planning and expert guidance. Working with an experienced attorney and financial advisor can help independent sponsors and search funders structure deals properly, negotiate loan agreements, and ensure compliance with lender requirements, ultimately protecting long-term equity value.
February 28, 2025
Business
Congress Extends Telehealth Waivers
On December 20, 2024, as part of its stopgap government funding legislation (the “Continuing Resolution”), Congress issued an important extension of telehealth waivers and flexibilities currently in place for the next two years through December 31, 2026. The Continuing Resolution also includes the following measures relevant to the telehealth market segment: Patients’ homes will continue to serve as eligible Originating Sites for all telehealth services. All Medicare-enrolled providers will continue to be eligible providers for the purpose of providing telehealth services. There will continue to be no geographic limitations on where the patient or the eligible provider is physically located within the United States during a telehealth service. Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs) will continue to serve as eligible Distant Sites for non-behavioral health telehealth services. Providers may continue to use audio-only technology to provide reimbursable telehealth services. Hospice providers may continue to use audio-visual telehealth technologies to conduct face-to-face encounters to recertify hospice care eligibility. Additionally, the Continuing Resolution further delays the requirement that Medicare beneficiaries have an in-person visit with their behavioral health provider within six months of their initial telehealth appointment. This CR is indicative of the continued evolution of telehealth services, the trajectory of which accelerated dramatically during the COVID-19 Public Health Emergency. It has become clear that legislators believe telehealth services to be an integral aspect of the U.S. healthcare delivery system. The challenge in the future will be figuring out which industry segments (i.e., behavioral health, rural health access, remote monitoring) will benefit the most from making these rules permanent.
February 20, 2025
Business
Search Funds Are Changing the Small Business M&A Landscape
In recent years, search funds have seen increased usage in small business acquisitions, offering a structured yet flexible approach to acquiring and growing companies. The "origin story" is often credited as arising out of Stanford Business School in the 1980s, and has gained traction among entrepreneurs, investors, and family offices since then. It provides a new path to ownership and long-term value creation. So, why are search funds transforming the small business M&A landscape? The answer starts first with the structure of these search funds, how they differ from traditional private equity, and the legal and financial considerations investors and entrepreneurs need to understand. They share many similarities with independent sponsor deals but also have a number of stark differences. What Is a Search Fund? A search fund is a structured investment vehicle designed to help an entrepreneur find, acquire, and operate a small business. It typically follows a two-stage process: Search Phase Investors provide initial capital to support a qualified entrepreneur as they search for a business to acquire. The timeline for this search can typically take 12–24 months and is often dictated by the terms of the investment documents. This initial capital is used to cover due diligence expenses, professional fees, and provide some form of compensation to the searcher (although this last point can turn off some investors). Searchers typically target businesses that fit a particular investment thesis, such as those with strong recurring revenue, low customer concentration, and proven stability. The process requires extensive outreach, negotiation, and due diligence, making it both intensive and time-consuming. Acquisition & Operation Phase Once a suitable business is identified during the search phase, the entrepreneur leads the acquisition, often bringing in additional investor capital and financing for the purchase. SBA loans are often utilized as a financing option unless it is an asset-heavy target, in which case a traditional lender may be willing to finance the deal. Post-acquisition, the entrepreneur operates and scales the business, creating value for investors over a 5- to 10-year horizon. This differs from independent sponsor deals where the independent sponsor may prefer a "hands-off" approach rather than taking on the "operating partner" role. The target size for these acquisitions is typically small businesses with $1M–$5M in EBITDA, focusing on stable, profitable companies where an operational leader can add significant value. Some might be willing to acquire a business with less stable footing if there are clear deficiencies that can be quickly remedied. An example of these remedies can include digital transformation, improved sales or operational processes, faster accounts receivable cycles, or vendor/supplier issues that can be addressed with fresh capital. Why Are Search Funds Growing in Popularity? Aging Business Owners & Succession Gaps Many Baby Boomer-owned businesses are coming up for sale, but they lack internal succession plans. We've all heard about the upcoming "transfer of wealth." This is largely what is being discussed. There are huge amounts of capital locked up in small business ownership. Search funds provide a structured solution, offering business owners an exit while ensuring continuity under capable leadership. Alternative to Private Equity & Traditional M&A Private equity (PE) firms often seek larger, high-growth businesses or require substantial restructuring post-acquisition. Search funds focus on stable, cash-flow-positive businesses, often without excessive debt financing. These search funds also offer emerging managers a platform to showcase their skills and set up future (larger) deals. Strong Investor Interest in Small Business Buyouts Many family offices, high-net-worth individuals, and independent investors are attracted to the long-term, hands-on nature of search fund investments, and the chance to mentor emerging entrepreneurs. Unlike traditional PE, investors partner directly with an operator, aligning interests toward sustainable growth rather than quick flips. Proven Success & Institutional Recognition Studies show that successful search funds yield attractive returns. Stanford’s research indicates an average IRR of 30–35% for successful search fund investments. Business schools and institutional investors are increasingly supporting search funds as a legitimate investment class, with many schools creating "entrepreneurship through acquisition" workshops or curriculums. Key Legal & Financial Considerations While search funds present compelling opportunities, structuring the deal properly is critical to long-term success. Here are key legal and financial considerations investors and entrepreneurs should keep in mind: Legal Considerations: Fund Formation & Investor Agreements: Search fund structures vary—some use traditional LP/GP models, while others form LLCs with pro-rata investor rights. Well-drafted legal agreements define profit splits, investor rights, and operational control. Due Diligence & M&A Structuring: Business acquisitions involve legal, tax, and regulatory complexities. Asset vs. stock purchases have different tax implications and liability considerations. Governance & Founder-Investor Alignment: Search funds operate with investor oversight, often with board seats or advisory committees. Proper corporate governance structures protect both investors and the entrepreneur. Financial Considerations: Equity vs. Debt Financing: Search funds typically rely on equity-heavy funding rather than high levels of debt. However, some deals incorporate SBA 7(a) loans or seller financing to optimize capital efficiency. Profitability & Valuation Metrics: Investors focus on stable EBITDA margins, typically in the 15–25% range. Many search-acquired companies operate in low-tech, recession-resistant industries (e.g., B2B services, healthcare, niche manufacturing). Exit Strategies: Search fund exits typically occur via private equity acquisition, strategic buyer sale, or investor buyout. Holding periods range from 5–10 years, aligning with long-term wealth creation. Should You Invest in or Launch a Search Fund? For investors, search funds offer a compelling alternative to traditional private equity, allowing for: Higher potential returns in undercapitalized small business sectors. More direct involvement and operational influence in acquired businesses. Alignment with long-term value creation, rather than short-term financial engineering. For entrepreneurs, search funds provide: A structured pathway to business ownership with investor-backed support. Access to capital and advisory networks without needing personal funds upfront. A leadership role with strong financial upside. Final Thoughts: The Search Fund Model Is Likely to Continue Trending Upwards As small business ownership transitions accelerate, search funds will continue to play a growing role in the M&A ecosystem. For investors, they provide an opportunity to back talented entrepreneurs in acquiring and scaling high-quality businesses. For "searchers" or buyers, search funds offer a viable and structured alternative to a startup.
February 19, 2025
Business
Startup Success Starts with Governance Documents and Clear Ownership Rules
If you are launching a new business without proper governance documents, you’re risking financial loss and business owner disputes. Every business owner needs properly drafted governance documents. This cannot be overstated. It’s exciting to launch a new business, but failing to properly document the business relationship between owners is a major pitfall. It is not uncommon for attorneys to have witnessed this firsthand, numerous times, and it almost always results in financial loss or dispute. An episode on Acquiring Minds podcast provides a powerful example of the troubles you can face without these governance documents (jump to the 51-minute mark to hear why). Learn how to safeguard your venture from the outset. Assuming a business is structured as an LLC, an operating agreement sets the governance foundation and prevents many avoidable disputes. Key Provisions to Consider Equity Vesting Schedule: For startups and emerging companies, it’s critical to protect the company from premature departures. Implementing a vesting schedule keeps everyone incentivized for the long haul, ensuring commitment and stability. Dispute Resolution: Conflict is inevitable. Whether it’s a disagreement over strategy or management style, a clear dispute resolution mechanism (such as mediation or arbitration) can help resolve disputes without causing a full breakdown of the business. In the Acquiring Minds podcast example, a "shotgun clause" would have been helpful. This is a buyout mechanism that also doubles as a form of dispute resolution. These tools work together to protect the business during critical decision-making moments. Equity Buyout Terms: Define how ownership interests can be bought or sold to ensure fairness while protecting the business from being forced into unwelcome arrangements. Important terms include shotgun clauses, puts, and call options. Decision-Making Processes: Specify how major business decisions will be made. This includes setting voting thresholds and identifying areas that require unanimous consent. It’s also important to establish early on whether someone will hold a majority stake in the company. Even a 1–2% difference in ownership can make a significant impact. Exit Strategies: Plan for the future by outlining provisions for dissolution, sale, or succession. For instance, drag-along rights protect majority shareholders in a sale, while tag-along rights safeguard minority interests. These provisions ensure smooth transitions and clarity for all parties. Don’t Rely on A Handshake A handshake may start a partnership, but only a well-drafted operating agreement can protect it. Having robust governance documents isn’t just a best-practice, it’s essential for protecting your venture and ensuring long-term success. Don’t overlook the importance of partnering with experienced legal professionals to get it right.
January 29, 2025
Business
Why Are the Fees to Sell a Business So High? It’s a Matter of Expectations
“How much will it cost to sell my business?” It seems like a reasonable enough question—and a business owner is wise to plan ahead and think about the financial impact of merger, acquisition, or other business transactions early on. However, focusing on what you’ll pay to sell a business is a classic example of “missing the forest for the trees.” Or, to put it another way, missing the sale for the fees. I get it. Legal costs are never pretty. Most business owners are fortunate enough to only pay attorney’s fees periodically, on an as-needed basis, for relatively small projects. We’re talking about document review, collections, intellectual property development, and so forth. If you’re really unlucky, you may need to bring on a lawyer for litigation. The associated bills aren’t pleasant, but they won’t bankrupt you (and if they do, you hired the wrong attorney). When you have the opportunity to consummate the sale of your company, on the other hand, you can expect to receive the largest legal bill of your lifetime. Depending on the size of the deal, your attorney may charge you upwards of six figures. In any other situation, the price would seem exorbitant—outrageously so. But a business transaction isn’t like other situations. It’s an extraordinary event with exponentially higher stakes than an owner is used to. No business milestone compares. Yes, you’ll receive the largest legal bill of your lifetime—because you’re earning the biggest payday of your lifetime. It’s a matter of scale and complexity. You will not get a good second “bite of the apple.” For sellers, some level of legal “sticker shock” is understandable. Few people on Earth can normalize earning several million dollars, or several hundred million, at once. The problem arises when a business owner handcuffs their advisors due to fee constraints. The handcuffs could have unintended implications for a seller. I recently represented a client who had grown accustomed to relying on legal assistance from a family friend. He was used to essentially paying his lawyer a couple of bucks and a case of beer. When it came time to sell his business, the client realized he needed a different caliber of attorney—but failed to adjust his expectations accordingly. When he learned he owed approximately $300,000 in legal fees, I watched the color drain from his face. Keep in mind my client’s business sold for $75 million. Our fees amounted to less than 1% of the total sale price. That’s in line with (admittedly loose) industry standards—if not below. My client knew how many hours were invested in the matter—and he had the budget in mind before the deal commenced. He knew a substantial bill was coming. But it wasn’t tangible for him until the end. The moral of the story? Don’t wait until after you’ve sold your business to think about the costs of selling your business. Develop a financial plan—and speak to your advisors to understand the moving parts and inputs to a transaction. Be prepared to spend substantial fees paying your attorney, investment banker, accountant, M&A advisor(s), and any other professionals involved in your team. After all, the sale of your business likely will be the largest financial transaction of your lifetime. Then, move all that to the back of your mind and prepare yourself for the biggest question ahead: what you’ll do with all that money after you close?
October 17, 2024
Business
What Message Are We Sending When We Say, “We Are Busy?”
Have you been busy lately? I’ve been busy. We’ve all been busy. Everyone, it seems, is really busy—super busy, incredibly busy—so, so busy. It’s become something of a greeting, in fact: “How are you?” “I’m all right—really busy.” “How’s work?” “Oh, you know, work’s been busy.” “How’s your family?” “Well, with school, and the kids, and the dog… things are busy!” Frequently, we’re not just busy but “swamped” or “crushed” by our daily activities and obligations. It’s almost as if we take pride in how out of control it all seems or how overwhelmed we feel. And yes, busyness is a feeling. So, why do we frequently tell others we’ve been “busy” or “swamped?” If I had to guess, I think we use these terms as a means of communicating success. No one wants to say they have no work or no clients—or no life, for that matter. Busyness also (conveniently) obfuscates the choice to prioritize one thing over another. Consider how often “I’ve been busy” follows “I’m sorry.” But just as “sorry” loses meaning with repetition, “busy” can’t insulate us from the consequences of our decisions. Nor can it affect how our words are received by others. If you’re not careful, a client may hear “I’m busy” as “I don’t have time for you” or “I can’t give you my best effort.” I’ll give an example. A few weeks ago, I approached a landscaping business. I knew the current season—late spring, early summer—would be a busy time for the company, but I figured they would be prepared for it and happy to take my business. The company was too busy to take my work. So, I went with a competitor. I wonder how the owner of the first business will feel when January comes around, and the business is not so busy. Missed opportunities are one of the many risks the always-busy face. I recently heard about a company that lost a multi-million dollar award because the would-be customer thought the organization lacked the time and capacity to handle the work. Employees had transmitted the company’s busy status to the prospect—a couple of offhand remarks was all it took. Of course, if you run a business, there will be times—many times—when your company is unable to meet a certain deadline or deliver results within a given timeframe. In these circumstances, the wise move is not to turn clients or customers away or stunt the conversation with a blanket “I’m busy” but to manage expectations. Take a moment to think past your current feelings of stress and consider the other party’s needs: Can the project wait a week? Would the client be willing to pay rush fees? Use that busy period as an opportunity to negotiate, consider your boundaries, learn, grow, and establish better lines of trust and communication. You should never promise what you can’t deliver, but that doesn’t mean you always have to say “no.” The old saying holds true: make hay when the sun is shining. When there is business, work harder and work longer. There is no guarantee a customer or client will come back if you turn them away now. Every relationship is important, and work arrives when it arrives—not always when it’s convenient. And remember: words have meaning. The next time someone asks how things are going, try something besides “I’ve been busy.” How about “business is good?” It is the truth, after all. Originally posted 6/13/2019, no content changes
October 10, 2024
Business
What M&A Buyers Lose by Keeping Their Closing Checklists to Themselves
I recently represented a group of business owners in the sale of their company. As with any merger or acquisition, the transaction demanded tremendous patience, effort, and commitment from all people involved. For my clients, however, the deal was far more onerous than it needed to be — because the buyer’s attorney chose not to work from a closing checklist. A closing checklist can be thought of as a shared roadmap for an M&A transaction. It lays out all the steps that must be taken to bring the deal to fruition, specifying the roles and responsibilities of the buyer, the seller, and any other participants. Checklists cover everything from sophisticated legal and financial considerations (e.g. intellectual property searches, lien releases, third-party consents) to minute particulars such as signatures and wiring instructions. Whatever its level of detail, any checklist is better than none. Deals without closing checklists sometimes waffle as parties experience distrust, restlessness, and confusion over priorities. While this transaction fortunately did go through, my clients faced significant friction and frustration. At times, a collapse appeared likely. Instead of providing a closing checklist, the buyer essentially assigned us several dozen to-dos, which was just a rundown of tasks we needed to complete in order to satisfy their pre-closing requirements. It was a one-sided, opaque way of doing business. It left us feeling as though we were operating in a vacuum and never working fast enough. This kind of approach not only strains the lines of communication between a buyer and seller, but also tends to dissolve any kind of meaningful negotiations. When you’re rushing through line items without the larger context of the deal in mind, you give up your leverage. A closing checklist is essential because it situates parties within the same universe and keeps their attention oriented on a shared goal. It’s a common point of reference for discussions and perspective — a constant reminder that all that labor and stress is in service of a mutually beneficial transaction. If you don’t have a closing checklist, you become blind to the other side’s objectives as well as your own. What is particularly baffling about the decision to keep the seller in the dark is that it creates more work for the buyer. Closing checklists are generated in almost every transaction. They flow naturally from the buyer’s documentation and due diligence. There’s no additional effort or risk to making them generally available to the other party. By refusing to share their checklist, the buyer chooses instead to dole out the information in a piecemeal manner, potentially causing errors and slowing down the deal. It’s the difference between telling a seller what you aim to accomplish and telling them what to do. It’s turning what should be a partnership into a managerial relationship. And ultimately, it’s unproductive. Few owners can put up with being bossed around—especially when they’re in the middle of exiting their business. Originally posted 09/26/2019 - no content changes.
October 3, 2024
Business
The Entrepreneur’s Lab Video Series: Definitive Sales Agreement
Definitive sales agreement – the sales agreement is the key document for the seller in a transaction. It encompasses the hard work of the parties from LOI through diligence. Definitive agreements typically are drafted by the buyer’s counsel and will be a large document with many moving parts. A few of the key parts are as follows: The business terms: A seller needs to make certain the key terms in the LOI are accurately and fully reflected in the agreement. Typically, the first portion of a definitive agreement speaks to the price, the payment terms, and the related items. Representations, warranties and covenants: The largest part of the agreement will be the various reps and warranties required of the seller. These reps are statements of truth about the business and will need to be carefully reviewed with legal counsel to make certain no modifications are necessary. Conditions to closing: A seller needs to be keen on any conditions in the agreement that need to be satisfied prior to closing. Such conditions could include buyer’s financing or the obtainment of certain customer consents. Indemnifications: Remember the buyer will want to pass the risk of any issues arising prior to closing back to the seller. A seller needs to fully understand the risk of indemnification and make efforts to cap and/or limit future exposure. Disclosure schedules: These schedules supplement the agreement, especially the reps and warranties. In many respects, disclosure schedules culminate and complement the diligence process. As a seller, disclosure and completeness is your friend. Make certain that your sell-side schedules are accurate. Originally posted 2/16/18. No content changes.
September 26, 2024
Business
Not Sure if Your Company Is Ready to Sell? Consider the PAEI Model
For most business owners, the chance to sell your enterprise is a once-in-a-lifetime opportunity. But if you take that offer too early or at the wrong stage of business development, the sale could result in a number of undesired outcomes: a low valuation, difficulty finding a buyer, management disputes, contract issues, and other legal problems. Selling a business is like preparing a meal. It’s crucial for a business owner to be able to recognize if their business is either under or overcooked before taking it to market. Unfortunately, it’s not as simple as using a meat thermometer. Instead, owners rely on systems such as the PAEI Model, which Dr. Ichak Adizes developed in the 1970s to track business growth and stability. To this day, business owners use the model to understand their organizations’ lifecycles through the lens of management dynamics. How the PAEI Model Works “PAEI” stands for four different yet common management personae that affect a business’s short-term and long-term performance. Producers are managers who are task-oriented and focused on tangible results. They demonstrate big-picture thinking with little regard to interpersonal or individual concerns. Administrators are managers driven by procedure and planning, with a strong focus on routine and structure in order to maintain success. Entrepreneurs are managers driven by dreams and future achievement. They’re concerned less with day-to-day operations and more with a broad, long-lasting vision of the business. Integrators are managers who work well with others. These individuals are adept at both considering and balancing the concerns of other managers and employees. Each of these roles is important to business development, but each has its own time. The PAEI model lays out an arc of business growth, starting with “Courtship” (when an owner “flirts” with the business idea), which leads to “Infancy,” “Go-Go,” “Adolescence,” “Prime,” and ultimately stability. Which Stage Is the Ideal Moment to Sell? Every stage can spin off into a negative conclusion. For instance, Infancy can result in “Infant Mortality” when there’s nothing left but a Producer. Adolescence, meanwhile, can result in “Divorce” (the owner and the company split), which may lead to “Premature Aging” (the company peaks early without an entrepreneurial vision) and an “Unfulfilled Entrepreneur.” To avoid the potential pitfalls during every stage of a business’ lifecycle, each one of the four management styles must be present. But not everyone comes to the foreground in every stage. Instead, a single management style or combination of styles takes dominance at certain points along the way. For example, in Courtship, the very beginning stages of a new business, the Entrepreneurial management style is required for crafting the initial big ideas and long-term goals that will sway investors and fund the enterprise into Infancy. Once the money rolls in and the business reaches Infancy, it’s important for a Producer to recognize how to responsibly use the startup funds to survive on a daily basis. After some inevitable growing pains, a business reaches Adolescence with the help of an Administrator, whose management style shifts the focus away from sales and revenue generation—and toward cost-cutting, boosting profits, and keeping the company lean. At this stage, an organizational structure is key in order to reach the Prime period of a lifecycle. When the business is in its Prime—when profits are up, operations are running smoothly, and customer satisfaction is at an all-time high—that’s when it’s time to sell. Yes, believe it or not, the best time to sell your business is usually right before it reaches the Stable stage. While further growth can seem all but guaranteed at the Prime stage, according to the PAEI model, most companies begin to falter and precipitously lose value once they’ve become Stable. This is the period in which the Entrepreneurial management style begins to fade, and the Administrative and Integrator styles achieve dominance. In other words, the initial visionary is replaced by people who excel at bureaucracy and longevity. In the realm of mergers and acquisitions, the Integrator is frequently the buyer. As a seller, it’s up to you to ensure the business has reached its Prime and that all the elements are in place for continued success—and to get out right before the business peaks and starts to lose value. While the PAEI Model is not a guaranteed method of success, I believe it can provide rare insight into the business lifecycle. It presents a valuable framework for the roles and traits it takes to reach success and ultimately earn the highest possible sale price for your company.
September 19, 2024
Business
Letters of Intent (LOI) – Buyer’s Exclusivity
I’ve reviewed many LOIs over the years – some we’ve prepared and others the client prepared. I’ve found that too many people view LOIs as form documents containing commercial terms. Yes, LOIs are vital documents establishing the commercial terms of a transaction. However, LOIs should not be considered “throwaway” forms in the M&A process. I think the lax attitudes relate to the non-binding nature of most terms in the LOI. Yet, there should be specific binding terms in every LOI. For a buyer, one important binding term is the exclusivity provision. Most recently, I needed to enforce this provision due to a seller’s breach. My client invested much of their time and money evaluating a transaction and documenting the same (legal, accounting, and banker time). The exclusivity provision protects a buyer from a seller “two-timing” them by not committing fully to the contemplated transaction and not negotiating in good faith. In my instance, the seller committed to another transaction during my client’s exclusivity period, leaving my client with much frustration and wasted costs. Buyers rightly demand a fair time frame to evaluate and work with a seller to consummate a transaction. Buyers invest substantial front-end costs in this regard. Fairtrade is for the seller to commit to an exclusivity period (30, 60, 90 days) to allow the parties to finalize a transaction in good faith. My client had an exclusivity period with “teeth” that allowed him to recoup these costs – and the seller did reimburse. But buyers beware. Without an adequate exclusivity provision, among other protective provisions, much time and money can be lost when a seller changes course.
September 12, 2024
Business
I’m a Potential M&A Buyer; Should I Focus on Buying Stocks (Equities) or Buying Assets?
When an M&A buyer is looking into a target company, they’re faced with the decision whether to buy stocks (the equities) or acquire assets. But what’s the difference? A stock purchase involves the purchase of the selling company’s stock only. Simply put: the buyer acquires all of the outstanding stock of the target company directly from the target company’s stockholders, including the assets, rights, and liabilities. The buyer then steps in the shoes of the selling stockholders (switches places). Stock purchases are generally straightforward transactions. Both parties sign a Stock Purchase Agreement (a sales agreement used to transfer and assign ownership in a corporation) and any other related documents that outline the terms of the deal, and the sellers then transfer their stock to the buyer. It seems simple enough, right? For the most part. There are risks, such as unknown or undisclosed liabilities of the target company. Again, when you purchase the stock, you become the stockholder; thus, nothing at the company level changes (save perhaps change of control issues). Operations remain intact as do all risks and liabilities. In addition, stock sales generally have favorable tax treatment for sellers. But what if you don’t want to buy everything and/or you want to limit your risk exposure? You might then be more interested in an asset purchase. An asset purchase is an agreement between a buyer and seller to acquire a company’s assets. This means: the buyer only acquires the assets, rights, and liabilities it identifies and agrees to acquire and assume. Assets can be both tangible, such as offices and equipment, and intangible, such an intellectual property and corporate name. Asset purchases are a good option if you’re looking for more flexibility and don’t want to pay for unwanted assets. Further to that point, it means less risk of assuming unknown or undisclosed liabilities. Asset purchase transactions are generally more favorable to a buyer and at times less favorable to a seller. Some buyers may be deterred by asset acquisitions because they’re more complex than stock purchases. The buyer has to spend time identifying the assets it wishes to acquire/assume. By doing so, the buyer may potentially overlook an important asset required to run the business it’s acquiring. Asset purchases have more formalities and documents since they require a separate transfer for each of the identified assets and liabilities of the target company. They may also require more third-party consent since the contracts assumed by the buyer are likely to contain anti-assignment clauses (which prevents either party the ability to assign tasks to a third party without the agreement of the non-assigning party). Whether you’re considering a stock purchase or an asset purchase, it’s always best to discuss it with an M&A attorney first. Selecting the form of the transaction is a key consideration when targeting the purchase of a business. There are many variables to consider as to why a transaction is set as a stock purchase versus an asset purchase. Originally posted on 9/9/2020, no content changes.
August 29, 2024
Business
From the Field to the M&A Negotiating Table, Every Successful Team Shares The Same Dynamics
They say there’s no “I” in “team.” Tellingly, for the parties in merger or acquisition, it’s also impossible to spell “team” without an “M” or an “A.” But I’d like to introduce you to a different set of letters. Even though you can’t find them in the word itself, every team should contain three “Cs”: cohesion, collaboration, and culture. Over the course of my career as a business attorney and advisor, I’ve seen many transactions succeed—and witnessed many more fall apart. Every deal that’s gone through could not have happened if not for a cohesive, collaborative, culturally connected team. Speaking as a sports fan, I could say the same about a squad like the Ravens, the Bulls, or the Bruins. Whether we’re talking about a sports team or a corporate team, the Three Cs are paramount for optimal results: Cohesion is the team’s capacity to stick together, through the good times and the difficult moments. It’s the fundamental element every group needs to take on risk and uncertainty, survive failure, and doggedly pursue its goal. Without cohesion, there is no team. Collaboration is how the team works together as a unit, maximizing each team member’s strengths to become something more than the sum of their individual abilities. Collaboration ensures the team is operating at its full capacity. It’s how team members keep each other accountable, engaged, and in the game—be it a real game or a metaphorical one. Culture is everything the team cares about and stands for—the values, principles, beliefs, assumptions, and personalities that make the team unique. A team’s culture determines how and why the team does what it does. Culture eclipses everything else; it’s how Joe Namath led the Jets to triumph over the Colts, the so-called “greatest football team in history,” in Super Bowl III. The Three Cs are essential ingredients of all successful teams, but they aren’t the only qualities that matter. Many teams with extraordinary M&A records have been together for a long time—sometimes years. Time not only imparts experience, but builds team confidence and predictability. Diversity matters as well. An M&A advisory team should be comprised of individuals from different disciplines, such as leadership, accounting, law, and investments. Many successful sellers and buyers build teams from their networks: they tap their closest colleagues and associates for support; hire attorneys, bankers, and other M&A consultants; and then bring in trusted advisors from their organizations’ boards of directors, executive suits, and finance departments. Finally, even the smartest, most experienced and diverse teams need to watch out for dysfunction. Everyone on the team should share a single goal: deal consummation. Internal dysfunction can impact everything from timing to cost structures. With that in mind, effective M&A teams work on resolving conflicts early, build open lines of communication, and save their competitive energy for the playing field—or negotiating table. Originally posted on 1/25/2019, no content changes.
August 22, 2024
Business
For Attorneys and Clients, the Internet Is the Great Equalizer
Not long ago, hiring an attorney was a lot like visiting a doctor. If you needed legal help, you would drive to your local law office. The building’s windows or signage would be emblazoned with two words: “Law Office,” often lacking identifying names or law firm branding. You would check in with a receptionist, pour yourself a cup of coffee, and wait in the lobby for the next available appointment. When the attorney was ready to see you, he—and it was almost always a he—would call you into his office, you would explain your situation, and the attorney would either offer advice, schedule a follow-up, or refer you to a colleague with specialized knowledge. As quaint as that may sound, it still reflects reality in some small towns. Moreover, the image of the local law office—a community’s elemental, all-purpose legal resource—continues to shape lawyers’ practices everywhere. Many modern-day firms cling to the notion that clients are a given and that presence alone will generate business. They think of themselves as essential services first and brands second. But where healthcare industry regulations effectively preclude any marketing effort on the part of a doctor’s office, the legal industry is relatively unhindered. And the technological developments brought by the 21st century—namely, the rise of the internet and social media—give attorneys and firms unprecedented opportunities to compete for clients’ business. The internet and social media have democratized the field both for people seeking legal assistance and those providing it. To borrow from an old adage, God may have made lawyers, but Google made them equal. Today, someone looking for a mergers and acquisitions attorney, for example, can simply type “m&a attorney” into their search bar and immediately browse listings of practices and firms in their area, along with guides on choosing the best lawyer for the job. One doesn’t need to rely on connections or blind faith to access a qualified legal advisor. It is, therefore, essential for lawyers to proactively market their firms and differentiate themselves online. If you don’t use the internet and social media to attract clients’ and prospects’ attention, a competitor will. At the same time, attorneys must contend with self-service, on-demand legal providers, such as LegalZoom, who ostensibly offer greater convenience at a lower cost. Fortunately, it’s possible for any attorney and any firm to stand out, establish credibility, and build trust with clients and prospects. All it takes is commitment, strategic planning, and a few hours per week. First, you need to develop marketing content related to your practice and interests. Content serves multiple purposes, from education to branding to lead generation and networking. Indeed, it’s at the core of nearly every marketing strategy. Blog posts, articles, videos, podcasts, and infographics are all great ways to drive traffic, cultivate an audience, and start conversations. For attorneys and firms, the type of content matters less than its consistency and authenticity. Next, find ways to distribute that content and amplify its reach online. This is where social media comes into play. LinkedIn, Twitter, Facebook, and other social networks provide means to connect with a target market, share information and links, and forge relationships with influencers—i.e., people well-positioned to broadcast your message to larger audiences. (Keep in mind that social media is one channel of many; email newsletters, for instance, remain as effective a form of content distribution as ever.) In addition to content creation and distribution, firms and attorneys can employ a number of digital marketing tactics to outrank their competitors. Through search engine optimization (SEO), you can boost your website and content’s visibility for visitors searching for specific keywords. Online advertising and paid search (e.g., via Google AdWords) also make a difference—and a small investment can go a long way. To succeed, these initiatives must complement and flow from a group’s overall business strategy. At my firm, for instance, our content development and distribution platform is part of a larger, ongoing effort to create relationships with and provide value to business owners. The internet and social media don’t replace in-person meetings and handshakes, but technology does empower us to more fully and consistently connect with the right clients. It’s the difference between passively assuming the role of generalized “law office” and actively leading with the singular skills, knowledge, and perspective you and your team bring. And digital marketing is critical for attracting not only clients and prospects but recent law school graduates and lateral hires as well. Attorneys pay attention to your firm’s marketing efforts, and if those efforts don’t support their practices and goals, they’ll look for positions elsewhere. In an era of choice, the onus is on us to guide people toward the best decisions for themselves, their families, and their organizations. In that respect, at least, the legal business hasn’t changed. Originally posted 4/5/2020, no content changes
August 8, 2024
Labor and Employment
Federal Court Denies ATS Tree Services' Bid to Delay FTC Rule Implementation
On July 23, 2024, U.S. District Judge Kelley Brisbon Hodge, serving the Eastern District of Pennsylvania, rejected ATS Tree Services LLC’s request to delay the Federal Trade Commission’s (FTC) final rule, set to take effect on September 4, 2024. ATS also sought a preliminary injunction against the rule. Still, Judge Hodge also denied this request, concluding that ATS had not shown that the rule would cause irreparable harm or that it could establish a likelihood of success on the merits. This decision followed shortly after U.S. District Judge Ada Brown of the Northern District of Texas issued a preliminary injunction blocking the FTC from enforcing the rule against Ryan, LLC, a tax preparation company, and certain intervenors. Judge Hodge’s denial of ATS's motion was based on a determination that ATS had failed to prove it would suffer irreparable harm because of the rule. The court found that ATS’s claims of irreparable harm—such as nonrecoverable compliance costs and the potential loss of contractual benefits— were based upon either a choice or a “speculative risk,” which did not rise to the level of irreparable and immediate harm required for an injunction. The court cited Third Circuit precedent, stating that nonrecoverable compliance costs, such as monetary losses or business expenses, do not constitute irreparable and immediate harm required for an injunction. Additionally, the court held that ATS offered no binding precedent to support its argument that the loss of contractual rights is an irreparable harm, reiterating that such determinations must be on a case-by-case basis. Even if ATS could establish irreparable harm, the court found that it had not demonstrated a likelihood of success on the merits. Judge Hodge’s opinion included a detailed analysis of the FTC’s authority to issue substantive rules regarding unfair methods of competition. The court confirmed that the FTC has such authority, noting that Section 6 of the FTC Act does not limit the FTC to procedural rules alone. The use of the term "prevent" in Section 5 of the Act supports the FTC's ability to make rules to prevent harm before it occurs rather than merely remedying it. The court also referenced prior circuit court decisions and Congressional actions, such as the Magnuson-Moss Act, which affirmed the FTC’s rulemaking authority. The court also addressed ATS’s other challenges to the rule. It upheld the FTC’s authority to broadly regulate non-compete clauses as unfair methods of competition, rejected claims that regulation of non-competes is solely a state matter, and found that the Major Questions Doctrine does not apply to the rule. Additionally, the court dismissed ATS’s nondelegation challenge, affirming that Congress had provided a clear guiding principle for the FTC’s rulemaking authority under the FTC Act. Given these findings, the court did not need to evaluate the balance of equities or public interest considerations. This ruling is significant for several reasons. It contrasts with the earlier decision in Ryan LLC v. Federal Trade Commission, where Judge Brown granted a preliminary injunction, suggesting the plaintiffs would likely succeed on the merits. The Texas court has indicated it will decide on the enforceability of the FTC rule by August 30, 2024. While Judge Hodge’s decision represents a victory for the FTC, it may be temporary. The Texas court’s preliminary injunction in Ryan LLC hinted at potential future invalidation of the rule based on arguments that the FTC lacked statutory authority or that the rule was arbitrary and capricious under the Administrative Procedure Act (APA). If the Texas court rules against the FTC, it might vacate the rule entirely or issue a permanent injunction, though the specifics are yet to be determined. In the meantime, businesses should continue to assess and document their use of non-competes and explore alternative protections like non-disclosure agreements, invention protection, non-solicits, training repayment programs, garden leaves, and non-competes related to business sales. The FTC’s guidance suggests that if properly structured, these alternatives should comply with the new rule. Additionally, state legislation and actions by other federal agencies, like the National Labor Relations Board (NLRB), may further influence the legal landscape regarding non-competes.
August 7, 2024
Business
Five Phases of a Deal from a Sell-Side Perspective
M&A can be complex. For most sellers, it is a one-time event and likely their most significant financial transaction in life. Given the complexity and the stakes, many sellers can be confused as to what is essential and where to focus. I understand. To help, I created the below infographic as a cheat sheet for sellers to organize the various advisors involved, the different phases of their transaction, and what the seller should be focused on. Most importantly, sellers need to keep their eyes on their business during the sale transaction. As obvious as it sounds, a seller has not sold his/her business until the deal closes (and the money hits their account!). Deals can be exhausting, and deal fatigue can set in. Plus, buyers can lure sellers into a sense of combination that is not yet legally transacted. Don’t make this mistake. If the deal does not close (for whatever reason), the seller needs to be able to move forward with the business. Don’t lose sight of your prize. Further, sellers should weigh the transaction details through two lenses. First, the seller needs to understand the purchase price and how the price will be paid. Second, the seller needs to understand trailing liabilities. This is a big item as most sellers do not need to worry about personal liability for their business during the operational phase. However, most buyers make a seller guarantee all aspects of their business in a transaction. Again, M&A can be complex. Make certain to hire good advisors to provide practical advice. ANATOMY OF THE DEAL 5 Phases of a Deal from a SELL-SIDE PERSPECTIVE: The Players and Their Involvement Pre- Transaction Planning Phase Rule: Find and eliminate skeletons; create multiple options Phase I: Letter of Intent Phase Rule: Know what you want and get it in writing as the LOI may be your high water mark Phase II: Due Diligence Phase Rule: Disclosure is your friend Phase III: Contracts Phase Rule: Confirm Business terms and Phase IV: Closing Phase Rule: Time is your enemy Phase V: Post Closing Phase Rule: Remember to dot the I’s and cross the t’s to meet all conditions Post-Transaction Planning Phase Rule: Enjoy your new status in life; make sure you’ve considered life without the business Sell Side M&A: Three Rules of Thumb for the Transaction Rule #1: You haven’t sold your business until you’ve sold your business Rule #2: Get your money upfront (as soon and as much as possible) Rule #3: Reduce and eliminate your trailing liabilities Originally posted 3/26/2021, no content changes
August 1, 2024
Business
Figure These Two Things Out Before You Sell Your Business
Your business is in good shape and you’re feeling ready to sell. You have your key value drivers in place: skilled employees, strong sales numbers, a pattern of consistent growth. You’ve assembled an advisory team, conducted a thorough sweep of your organizational records, and eliminated the proverbial skeletons in your closet. You’ve also performed the deep, difficult work of preparing yourself emotionally and psychologically for the journey ahead. Time to hit the gas—right? Perhaps, not quite yet. Yes, all of the above are fundamental success factors and important steps to take before engaging in a merger, acquisition, or another type of business transaction. But they’re only the basics. Polishing every surface and tightening every screw won’t make a difference if the business isn’t built on a rock-solid foundation. To adequately prepare for M&A, business owners need to proactively strategize and fortify their organizations for potential curveballs. As a seller, you need to think ten steps ahead of a buyer. You need to know what they want before they want it. It pays to err on the side of paranoia. Here are two critical questions every seller must answer before stepping into the market: 1. Is the Business Structured Correctly? One factor sellers frequently ignore is business entity structure. The way your business is structured today may not be the ideal structure during an M&A transaction. Say your company is operating as an S corporation. You have detailed records of your finances and meetings, a strong leadership team in place, and—best of all—lower taxes than you’d have if the company was structured differently. You may think this shows prudent business management—and in most cases, it would. In M&A, however, S corps at times fare poorly. That’s because certain buyers like to acquire LLC interests—not S corporation stock. The same vehicle that may shield you from high tax payments may create obstacles for a buyer during a sale. In an environment less robust than the current market, it even could cause a potential buyer to pass on the deal. Thus, as an S corporation owner, you may need to do an “F-reorganization,” a tax-free structuring technique that changes your business so that you’re selling LLC interests. A corporate restructure may improve your chances of closing the eventual sale. If you do have to restructure, you’ll need to do so in the pre-transaction phase. 2. Are Employees in It for The Long Run? Your people are the lifeblood of your business. Without them, your organization wouldn’t be worth what it is, nor would it be well-equipped for continued success in the future. Most sellers realize this, and yet a fair number neglect to lock down their key employees until well into the transaction. These business owners compartmentalize the deal and their day-to-day business operations separately. What they don’t realize is one domain frequently spills over into the other. A rocky M&A negotiation damages employee morale, and vice versa. By the time a transaction is nearly consummated, an ill-prepared business may have missed projections or dropped in value due to unexpected employee departures. Always stay focused on your employee engagement and retention rates—before and during the transaction. Figure out how you’ll incent your people to cooperate and continue performing at their best while the deal is pending, and to stay with the new ownership after you’ve closed. Put plans into place early, well in advance of courting a buyer. The longer you wait, the less effective your efforts will be. For sellers, employee retention and business structure are two vital pre-transaction considerations. But they’re only a couple of many. If you’re thinking about selling your business, you need to prepare for anything and everything that could go wrong. Familiarize yourself with Murphy’s law, and start strategizing as soon as possible. Forethought and planning today can save you serious time, money, and frustration tomorrow. Originally posted 12/20/2019, no content changes
July 18, 2024
Business
Supreme Court Overturns Chevron Deference in Landmark Loper Bright Decision
On June 28, 2024, the Supreme Court issued its decision in Loper Bright v. Raimondo and Relentless v. Department of Commerce. As expected, following oral argument, the Court overruled the Chevron deference doctrine in a 6–3 decision written by Chief Justice John Roberts. The doctrine stems from a 1984 Supreme Court case, Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc, 467 U.S. 837 (1984), establishing a two-step analysis for judicial review of statutory interpretation. Under Chevron, if a court concluded that a statute was silent or ambiguous, it had to defer to an agency’s permissible construction of the statute. Now, under Loper Bright, courts must “exercise their independent judgment” and “may not defer to an agency interpretation of the law simply because a statute is ambiguous.” Supreme Court Review: Chevron Doctrine's Applicability to Cases Post-Loper Bright In Loper Bright, two sets of fishing companies challenged a rule issued by the National Marine Fisheries Service requiring vessels operating in the Atlantic herring market to pay for a government-certified observer during their fishing trips. Applying Chevron, the district court in each case rejected the companies’ challenge to the observer rule and granted summary judgment to the government. Panels of the U.S. Courts of Appeals for the D.C. Circuit and First Circuit affirmed these decisions. The U.S. Supreme Court granted certiorari in both cases on the limited question of whether Chevron should be overruled or clarified. Supreme Court's Interpretation of APA in Loper Bright The Loper Bright decision is premised on what the majority believes is a plain text reading of the Administrative Procedure Act (APA), which governs judicial challenges to agency actions. The Court specifically determined that the APA, which was not considered in Chevron, reflects the traditional understanding of the judiciary's role. This role requires courts to independently interpret the meaning of laws. The Court dismissed the notion of a “presumption” of agency expertise, explaining that resolving unclear laws falls within the court’s jurisdiction, not the agencies. Put another way, while courts may use an agency’s interpretation to help “inform their inquiry,” they cannot dictate how courts interpret the law. The Loper Bright Court also rejected the idea that Chevron promotes consistency, highlighting inconsistencies in its application. Furthermore, it concluded that adherence to Chevron is not mandated by stare decisis. Chevron had proven “unworkable” because determining whether a statute is ambiguous is an indeterminate exercise. Consequently, the Court vacated and remanded the lower court’s decisions. Supreme Court Opinion: Chief Justice Roberts and the Majority Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett joined. Justices Thomas and Gorsuch each filed concurring opinions. Justice Kagan filed a dissenting opinion, in which Justices Sotomayor and Jackson joined.
July 12, 2024
Business
Don’t Use an M&A Attorney for an Investment Banker’s Job
Most people will never experience a merger, acquisition, or other business transaction firsthand. Of those business owners who do sell their companies, few will go through the process more than once. Therefore, M&A professionals exist. When you’re embarking on the most complex and challenging business deal of your lifetime, it pays to have a few people in your corner who know what they’re doing. One of the biggest mistakes a seller can make is neglecting to build a team of experienced M&A advisors. Yet sellers frequently go to market without sufficient support. Occasionally, they attempt to handle the entire transaction themselves. This is tantamount to representing yourself in court— you’re almost always guaranteeing a victory for the other side. Similarly, when you spend less than you need to access qualified help, you can expect to get the result you pay for. Hiring an investment banker is one necessary cost sellers too often overlook. Perhaps the seller sees a banker as an unnecessary middleman, thinks their deal is too small to warrant involving one, or doesn’t understand the value the individual brings to the deal. Other times, a business owner will use an investment banker during the early stages of the transaction and dismiss them once a buyer is found. To be clear, one of the investment banker’s primary roles during a business transaction is to connect the seller to an interested buyer. Most business owners can’t simply wake up one day and find someone willing to purchase their company, which is why it’s important to work with a professional with a network and the ability to pitch the business. But your banker is much more than a matchmaker. Think of them as the overall quarterback of the deal. Like a QB, they lead the team and call the plays, always focusing on the end zone. Much of the work gets done in the huddle, so to speak. Normally, an investment banker starts by putting together a memorandum to market the business, coming up with a market strategy by analyzing the business—what it’s worth, what contracts it has in place, its revenue, and so forth. It’s the banker who understands the business better than anyone; they know the company inside and out and can see things more objectively than the owner can. Once a letter of intent has been signed—i.e. the ball has been thrown—the banker acts as a buffer between the selling principal(s) and the buyer’s people. At this point, they’ve passed the bulk of the work off to an attorney, but they remain active in the sense that they’re running interference. When lawyers are emphatically arguing for our clients’ interests, bankers are the ones keeping both parties calm, on track, and optimistic. They relay what are often heated messages (to put it mildly) in a composed and productive manner. Deals that lack this important cushion tend to flounder or implode as the parties argue and lose sight of their shared goals. I’ve worked with several sellers who didn’t realize the extent to which their bankers helped—even saved—the transaction. I’ve also had clients who linked up with buyers on their own, chose not to bring on investment bankers, and exposed themselves to intense periods of stress as a result. These clients had no one who could run interference. Worse, they created serious risks for themselves and their organizations. After signing an LOI, for instance, a buyer and seller may set an agreed-upon amount of net working capital (or operating capital) left in the business. If negotiations drag on and the seller needs more money to continue running the company in the interim, who gets to decide what kind of adjustment is fair? Who can determine how much cash the business really needs to keep in the bank? Attorneys can’t—we’re not financial people. And unlike bankers, who get paid at the end of the deal, we bill hourly. For these reasons, it’s not in your best interest to heavily involve your legal representative in any tasks better suited for your financial partner. Take it from someone who’s been there numerous times: you need an attorney and an investment banker. You wouldn’t hit the field with only a QB or only a center. Both jobs are essential, and their roles are certainly not interchangeable. Originally posted 10/3/2019, no content changes.
July 11, 2024
Labor and Employment
Texas Court Blocks FTC Non-Compete Rule: What It Means for Businesses
On July 3, 2024, a federal district court in Texas took a significant step, temporarily blocking the Federal Trade Commission's (FTC) proposed rule banning non-competes. U.S. District Judge Ada Brown for the Northern District of Texas granted the motion for preliminary injunction filed by plaintiffs Ryan LLC and plaintiff-intervenors U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, effectively putting the FTC’s rule on hold for the named plaintiffs. Although the stay is temporary pending the court’s final decision on the merits of the case and applies only to the movants, it signals that a permanent and nationwide injunction is likely. Background on the FTC's Non-Compete Rule As a quick refresher, in April 2024, the FTC narrowly passed a rule along party lines intended to ban future non-compete agreements and nullify most existing ones. The FTC asserted its authority to enact this rule under Section 6(g) of the FTC Act, claiming it grants the power to establish substantive rules against unfair competition. Set to take effect on September 4, 2024, the rule would prohibit all new employment-related non-competes and invalidate nearly all existing ones. Ryan LLC and others immediately challenged the rule in court on various grounds. Judge Ada Brown's Ruling on the FTC Rule Judge Ada Brown, a former President Trump appointee, ruled in favor of the plaintiffs, determining that they successfully demonstrated all the necessary criteria for a preliminary injunction: (i) a strong likelihood of winning the case; (ii) a significant risk of irreparable harm if the injunction wasn't granted; and (iii) a favorable balance of the potential harms and benefits to both parties. Judge Brown’s opinion focused on two key points: The Scope of the FTC’s Authority: The court’s determination that the FTC lacked statutory authority to enact the rule is significant, particularly considering its alignment with the "major questions" doctrine. Historically, the FTC has disclaimed such power, but Congress has not expressly granted it. The court's reasoning aligns with the recent trend of limiting agencies' authority, echoing concerns in the "major questions" doctrine. Whether the Rule is Arbitrary and Capricious: Judge Brown ruled that the rule was arbitrary and capricious under the Administrative Procedure Act (APA) due to its overbroad nature and lack of supporting evidence. The opinion noted that no state has enacted a ban as broad as the one proposed by the FTC, and the FTC failed to justify its sweeping approach or consider less disruptive alternatives. Additionally, the court agreed that the rule would cause irreparable harm to the plaintiffs' businesses and that the balance of equities favored maintaining the status quo. Current Status and Potential Developments of the FTC Rule While the injunction only applies to Ryan LLC and the U.S. Chamber of Commerce (and not its members), no entities will be subject to enforcement before the rule's intended effective date of September 4, 2024. Additionally, Judge Brown indicated that she intends to issue a final ruling by August 30, 2024, which could invalidate or permanently enjoin the rule. In the interim, the parties will further brief the merits issues and the narrow scope of the court’s order, including whether the injunction should be expanded nationwide. A separate challenge brought by ATS Tree Services LLC is pending in Pennsylvania, with a hearing scheduled for July 10, 2024, potentially resulting in a nationwide injunction 1. This underscores the potential nationwide impact of the ongoing legal proceedings. Impact on FTC's Rulemaking Authority This ruling is a significant setback to the FTC's agenda to expand its rulemaking authority and regulate labor markets. It reflects a broader trend of constraining administrative agencies following the Supreme Court's recent decision (issued June 28, 2024) in Loper Bright Enterprises. In Loper Bright, the court overruled Chevron’s deference. It concluded that courts must interpret statutes de novo, and agency interpretations are not entitled to deference. The court found that even where a statute is “ambiguous,” there is a single “best reading” of the statute that courts, not agencies, are responsible for determining. Previously, courts often deferred to agencies under the Chevron doctrine if their interpretation of an ambiguous law was reasonable. However, Loper mandates that courts independently assess whether an agency acted within its authority, regardless of statutory ambiguity. This means the Ryan court's final decision will heavily depend on its own interpretation of the FTC's statutory power. Given this new precedent, it is plausible to expect the FTC's rule may be overturned, at least in part. The business community, which has strongly opposed the rule, likely sees this as a positive sign. However, state-level efforts to limit non-competes continue, and the National Labor Relations Board (NLRB) has taken the view that the proffer, maintenance, and enforcement of non-competes generally violate the National Labor Relations Act 2. Proactive Review of Non-Competes: Alternative Strategies Businesses are advised to proactively review their use of non-competes across their organization and explore alternative strategies to safeguard their interests. These alternatives include: Non-Disclosure Agreements (NDAs) Intellectual Property Protection Non-solicitation agreements Training Reimbursement Programs Garden Leave Clauses Non-Competes Linked to Business Sales The FTC has indicated that, when properly structured, these alternatives should not violate its proposed rule. _____________________________________________ 1 ATS Tree Services, LLC v. FTC, No. 2:24-cv-1743 (E.D. Pa. 2024). 2 On June 13, 2024, an administrative law judge for the NLRB held that certain non-compete and non-solicit covenants violated an employee’s labor rights under the NLRA. See J.O. Mory, Inc., 25-CA-309577, 25-CA-336995, JD-36-24 (2024).
July 10, 2024
Business
Beyond Finances: If You Don’t Consider a Business’ Practices, You’re Missing Half the Story
It seems like a win-win: Anya is buying Barry's masonry business and both parties are happy with the transaction. The negotiations went smoothly. The sale price feels fair. Anya is getting a successful company with a clean bill of health. Nothing out of the ordinary appeared during diligence into Barry's accounts, vendor contracts, equipment, and so forth. Plus, Anya analyzed the business and found ways to make it even more profitable. Meanwhile, Barry is getting a really nice retirement package. He was able to leave the business earlier than he expected and with a sizable chunk of cash. There's just one problem: Anya and Barry have a culture clash and neither party knows it...yet. Anya has spent her career in the hands-off world of corporate finance, while Barry has worked hands-on in construction. The white-collar buyer and the blue-collar seller have fundamentally different attitudes, beliefs, and organizational practices and norms — none of which were discussed during the transaction. What Anya doesn’t yet realize is that masons are extremely hard to come by. Much of the industry’s labor force, including Barry’s, is undocumented. Anya now owns a business that generates money but is not in compliance with immigration and employment laws. To say the least, the company is rougher around the edges than she expected it to be. What Barry doesn’t realize is that Anya isn’t like most business owners in the masonry space. She isn’t comfortable with what he perceives as run-of-the-mill labor and employment risk. And once she finds out about it, he could face post-closing liability. She’s going to make her problems his problems. This kind of situation happens more frequently than one might expect. Many people don’t realize there’s more to business analysis beyond cash flow and financial spreadsheets. Buyers and sellers fail to appreciate the differences and nuances between their points of view and they run into trouble as a result. Issues don’t get communicated because one or more parties assume those issues aren’t important enough to bring up. They don’t understand how apparently minor differences shape significantly divergent practices. In mergers and acquisitions (M&A), no one can afford to assume anything. Everything is worth bringing up. This is why proper due diligence is essential. Buyers need to prepare to thoroughly investigate every single aspect of the target business from finances and contracts to worker status, organizational culture, and leadership philosophy. Buyers and sellers also need to consider working with teams of M&A professionals as early on as possible. An attorney or another close advisor can clue you in to potential issues, red flags, culture clashes, and areas of uncertainty that may seem otherwise inconsequential or invisible. Remember: a business transaction is an unusually challenging and stressful event. Without help, it’s normal for first-time sellers and buyers to overlook serious problems. There are countless legal, financial, organizational, and personal matters to manage — and it can all become overwhelming if you manage it alone. Don’t wait until you meet your Barry or Anya to discuss your exit strategy with an M&A advisor. Originally posted 8/15/2019, no content changes.
July 3, 2024
Business
Compensation of Target Management Teams in Private Equity M&A
The typical private equity-sponsored buy-out includes the seller’s investment in the future growth of the target company’s valuation, a bargain for the participant’s active participation in the target company and buy-in for success. The customary approach for private equity buyers is to convey equity participation through equity-based incentive plans. There is a lot of appeal for both buyers and sellers to entertain deal structures with an equity-based compensation component to satisfy cash flow requirements, participant commitment and the creation of a common goal in the success of the target company. Both parties should be aware of the complexities associated with equity compensation which can present some disadvantages that are not discovered until after closing. Common forms of modern equity compensation include stock, stock options or warrants, profit participation and stock appreciation rights (and the limited liability company equivalents thereof). Each type of equity compensation has its own unique advantages to buyers and participants as well as potential negative consequences for both. Many of these structures are chosen over other structures for their total cost considerations and legal features that meet the operative requirements of the buyer. Both buyers and target management should factor these cost considerations and legal features in their offer and acceptance of this compensation. At a high level, here are a few of the considerations applicable to most all equity-based compensation schemes: With few exceptions, all equity-based compensation schemes have restrictions and conditions imposed on their receipt, retention, exercise and disposition. These limitations serve to align compensation with the long-term company performance requirements with the ability to mitigate against short-term behaviors. The most common restriction is a restriction on a participant’s resale of the equity-based compensation, making the opportunity unique only to the participant. A follow-on close-second restriction is the issuer’s right to ‘claw back’ or repurchase the equity compensation at the same or lesser value than its original valuation, a mechanism that aligns equity ownership with a participant’s active engagement. The common ‘management rights’ conveyed to institutional investors are commonly omitted in private equity-backed equity-compensation plans, including transactions for roll-over equity, to limit participant involvement and visibility of management discussions and information utilized by the company. Statutory rights are the minimum threshold and commonly the norm. Economic participation can come in the form of quarterly payments, annual payments, one-time payouts upon sale and the allocation of profit and loss. For private-equity sponsored plans, economic participation can have a minimum valuation threshold that the target must achieve and with exception to allocations, they are most-commonly limited until the target company’s liquidity event, which can be years later. Liquidity events include IPOs, sales and sometimes recapitalizations. Tax implications of equity-based incentives can vary between the types of equity-compensation conveyed. Synthetic forms of equity-compensation are typically taxed as income whereas traditional forms of equity ownership have capital gains treatment upon disposition. These tax consequences can occur at the time of conveyance, at vesting or disposition. For tax purposes, company and participant interests are not always aligned. Private equity buyers intend to provide value with the implementation of equity compensation plans. Each type of equity compensation has its own features, making it advantageous in some circumstances and not so in others. Firms frequently roll out an enterprise equity compensation plan that utilizes the same type of equity compensation plan throughout their portfolio to allow for a familiar and efficient form of management. Plans can vary greatly between different firms and participants can find distinctive and meaningful differences between plans although much of these distinctions remain unknown to would-be participants and are not discernable during the due diligence phase of a transaction.
July 3, 2024
Business
M&A Market Opportunity: Is Now The Right Time To Sell Your Business?
Is now the right time to sell your business? Just as every business is unique, so is every sale. Some companies are well-positioned now; others need a longer runway. Still, others may find that market conditions in several years will yield even greater benefits, provided owners are ready to bear the potential downturn ahead. To find out where your business sits and determine the timing of your exit strategy, take a look at this infographic. When you’re ready to take the next step, Offit Kurman’s M&A attorneys are ready to make the deal happen. For more information and infographics about the current M&A market, click here. Market IS Highly Receptive; Business IS NOT Optimized Get a valuation Check your assumptions Be realistic about longevity Consider demand-to-risk ratio Protect valuable employees and assets now Discuss exit options with attorney Market IS NOT Receptive; Business IS NOT Optimized Button up any risks and uncertainties now Build a board, or join an advisory group Cultivate your network Secure talent and valuable assets Develop long-term exit plan Market IS Highly Receptive; Business IS Optimized Commit to the process Create competitive environment Assemble selling team Assess and take care of legal, financial skeletons Maximize value Hit the market Market IS NOT Receptive; Business IS Optimized Analyze market and alternative options with attorney Get to know potential, eventual buyers Create conveyable value Stay on top of market conditions Be patient
June 27, 2024
Business
A Look at the U.S. Private Equity Middle-Market
There is some good news to report in the Private Equity (PE) world. PitchBook has released its US PE Middle Market Report, showing continued YoY growth for middle-market dealmaking in Q1 of this year. PitchBook cites recovery of deal multiples, an improvement in borrowing costs and a focus on selling the best assets as key features in publicized transactions. Here are some of the key findings from the report: Deal Values Are Up, Deal Count is Flat: PE middle-market dealmaking hit an all-time high in 2021 of $502.5 billion. It is no surprise that number was down last year by 36.8%, but PitchBook data shows a stabilization trend in recent quarters that started with the burst of activity we saw in Q4 2023 and continued into Q1 of this year. The Q1 numbers are not as strong as Q4, but they are ahead of Q1 2023 in terms of deal value. Deal count, however, remains flat. A Lack of Sellers: The report notes that a lack of PE sellers is impacting recovery in the volume of M&A transactions. PE sellers are focusing on bringing only their most attractive assets to the table and holding off on the rest. PitchBook notes that in order for dry powder to be deployed more quickly, the volume of sellers in the market needs to increase, especially in the middle-market. Decline in Buyouts: Overall, Pitchbook notes that buyouts were hit hard in 2023, but middle-market buyouts fared better, with only an 18.9% decline in deal value and a 4.0% increase in deal count. For Q1 2024, PitchBook notes that in Q1, buyouts across the board were relatively unchanged in value and slightly higher in volume YoY. Borrowing Costs Coming Down: PE borrowers are seeing some positive movement in terms of lending, with PitchBook pointing out competition between private credit lenders and bank-led syndicates as driving a decrease in borrowing costs. Their data shows that overall spreads were down by 54 basis points in Q1. Firming Trend on Multiples: Data also shows a “firming trend” for the middle market in terms of multiples. The report states, “The median EV/revenue multiple on middle-market PE deals for the TTM ending Q1 2024 rose to 2.2x, up from 2.0x as of Q4 2024. The median EV/EBITDA multiple recorded an even stronger bounce to 12.7x from 11.0x for the TTM ending Q1 2024 and Q4 2023, respectively.” These are just some of the key findings from this report, but they give us an overall idea of the health of the middle-market today. It will be interesting to see if an increase in sellers increases the deployment of dry powder. The report’s authors think this is the key to a rally in activity, so it is certainly something everyone will be watching closely.
June 26, 2024
Business
New Legislation to Override Judicial Precedents and Simplify Corporate Governance in M&A
Changes to the Delaware General Corporation Law (“DGCL”) were recently introduced to the Delaware General Assembly in response to several Delaware Chancery Court rulings affecting stockholder agreements, merger agreements and corporate governance requirements applicable to merger transactions. Introduced last month, SB313 imposes a legislative override over recent decisions to implement changes that allow for greater freedom of contract for stockholder and merger agreements and the elimination of technical, seemingly non-material governance requirements applicable to merger transactions. A new DGCL § 122(18) would permit corporations to convey the rights to consent and approval of corporate action to persons through stockholder agreements unless such conveyance is specifically prohibited by the corporation’s certificate of incorporation. This amendment nullifies the recent decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. where the Court found a stockholder agreement requiring the majority stockholder’s approval for certain corporate actions “an impermissible internal governance restriction” in violation of DGCL § 141. Addressing the Court’s finding of a violation of DGCL § 251(b) when the board approved a draft version of the merger agreement in Sjunde Ap-Fonden v. Activision Blizzard, Inc., a new DGCL § 147, would eliminate the requirement for board approval of the ‘final form’ of agreement if, at the time of approval, all of the material terms are determinable through information and materials presented to or known by the board, and second, a new DGCL § 268(b) would clarify that disclosure schedules and the like are not required to be a part of the merger agreement for board approval pursuant to DGCL § 251(b). Doubling up on the results of Activision, in response to the Court’s finding of a violation of DGCL § 251(c) where the corporation had included a brief summary of the merger agreement in the proxy statement sent with a separate notice to the stockholders that did not include a brief summary of the merger agreement, a proposed DGCL § 232(g) would allow a corporation to satisfy the stockholder notice requirement for a merger agreement when such agreements and brief summaries are “enclosed with the stockholder notice or annexed or appended to the notice.” A third byproduct of the Activision decision, a proposed DGCL § 268(a) allows a board to approve and file a certificate of incorporation of the surviving corporation of a merger following the effectiveness of the merger if the surviving entity will be wholly-owned and controlled by the buyer and all of the shares of capital stock of the constituent corporation issued and outstanding immediately before the effective time of the merger are converted into or exchanged for cash, property, rights or securities (other than stock of the surviving corporation). In Crispo v. Musk, the Court denied a stockholder plaintiff’s claim for lack of standing where the plaintiff sued for ‘lost stockholder premium’ damages despite a provision in the merger agreement that specified that the buyer would be liable for ‘lost stockholder premium’ in the event buyer breached the merger agreement. A newly proposed DGCL § 261(a)(1) would specifically allow parties to a merger agreement to include provisions requiring the payment of penalties and ‘lost stockholder premiums’ in the event the merger is not consummated and allow parties to enforce these payment provisions. New DGCL § 261(a)(2) confirms that the stockholders of a constituent party to a merger agreement may irrevocably appoint one or more persons to serve as a representative of all stockholders and delegate to such person the exclusive authority to enforce the rights of all stockholders under such agreement, after consummation of the transaction as an agent of the stockholders of the constituent corporation whose shares are canceled and converted in the merger into the right to receive cash or other property, and to enter into a binding settlement on behalf of all shareholders, a principal of corporate law. Seemingly, this amendment codified stockholder representative authority articulated by the Court in Aveta Inc. v. Cavallieri, where the Court found that the stockholders were bound to the results of a post-closing adjustment and subsequent arbitration decision when the stockholders appointed a stockholder representative to represent the stockholders and the representative utilized facts ascertainable outside the merger agreement to derive post-closing adjustments on behalf of all stockholders using a calculation method clearly and expressly set forth in the merger agreement and subsequently pursued the final determination through the use of a neutral arbitrator. This Act requires the affirmative vote of two-thirds of the members elected to each house of the General Assembly. If passed, these changes will become effective on August 1, 2024, and retroactively applied except for any civil action completed or pending on or before such date.
June 20, 2024
Business
Managing Contract Liability in Ransomware Disruptions: A Case Study in the Logistics Sector
Recent litigation in the State of Washington highlights the need to address the evolving landscape of cyber liability and ransomware attacks. The lawsuit filed by POC USA, LLC ("POC") against Expeditors International of Washington, Inc. ("Expeditors") stems from a failure to fulfill third-party logistics services during a ransomware attack. The rising prevalence of ransomware is a concern that all businesses should address in their agreements. Because this litigation pertains directly to shipping fulfillment centers, we want to address how industry stakeholders can proactively address these cyber liability and ransomware issues in their service agreements. For context, POC manufactures and distributes protective gear for gravity sports such as skiing and mountain biking. Expeditors, on the other hand, is a third-party logistics ("3PL") provider. Expeditor contracted with POC and agreed to handle POC's shipping and distribution of protective gear. Expeditors suffered a ransomware attack that disrupted their ability to provide 3PL services for 90 days. Consequently, POC filed suit seeking the recovery of damages stemming from lost revenue resulting from the ransomware attack. POC’s complaint includes a claim for: Breach of Contract Breach of Implied Covenant of Good Faith and Fair Dealing Washington Consumer Protection Act Violations Unjust Enrichment Negligence and Gross Negligence In response, Expeditors filed a motion to dismiss, seeking a court order dismissing POC’s claims. On April 11, 2024, the court issued an opinion and order, dismissing the claims of negligence, gross negligence, and bailment. However, POC’s claims for breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, and Washington Consumer Protection Act violations were not dismissed remain subject to litigation. This pending litigation highlights the need to analyze and update commercial agreements to address current events that may cause service disruptions, such as ransomware. Failing to properly address these disruptions in your commercial agreements could leave your organization vulnerable to significant and unexpected claims. In today’s business environment, it is essential for almost every company to proactively review and update their agreements to address cyber liability and ransomware concerns effectively. The only exception would be a business run entirely on offline systems, a rarity today. Below are some of the relevant clauses to examine: Limitation of Liability: While many agreements limit liability to only the consideration paid under the agreement, the exact text of that clause matters. The language of that limitation of liability clause may not limit certain claims asserted for loss of services stemming from a ransomware attack. Based on the business operations, it may be prudent to ensure that your distribution services agreement does not limit liability solely to damages stemming from property damage (thereby allowing unlimited liability for claims other than property damage). At a minimum, the language should be updated to expressly limit liability for damages resulting from a loss of services due to uncontrollable events. This issue should also be addressed in your force majeure clause, as discussed in the following paragraph. By addressing this in the force majeure clause, cyber-attack liability can be effectively limited. This approach is preferred because, as illustrated in the case of POC v. Expeditors, where the amount paid under the agreement in prior years was $2.5-3 million, each company should endeavor to avoid any damages stemming from the malicious acts of a third party. Force Majeure: The force majeure clause is another critical clause that must be updated to address these issues. Relying on a contract’s limitation or disclaimer of liability clause is insufficient. The force majeure clause should expressly identify a force majeure event to include a loss of access or inability to perform services due to cyber-attacks, ransomware attacks, or other malicious third-party attacks on your cyber infrastructure, including hardware, on-premises, and cloud-based systems of any kind. Warranties and Representations: One of the factual averments set forth in the POC vs. Expeditors litigation focused on Expeditor’s representation that it used “up-to-date tools” that enabled Expeditors to move cargo “securely.” Arguably, Expeditors’ reference to “security” may mean physical security. Still, the lack of clarity opened Expeditors up to litigation based on this representation, including cyber security. A better approach to representations regarding cyber security should include a “commercially reasonable” qualifier. Companies should also audit their marketing material to ensure no marketing copy is overcommitting your organization to provide best-in-class cyber security, especially when that is not the case. Catch-All Disclaimers: Additional language expressly disclaiming the ability to perform services in the event of a cyber-security or ransomware attack is a widely accepted and prudent way to avoid claims from your customers. These clauses may be heavily negotiated but should be a baseline starting point for every 3PL service provider, providing a sense of industry-standard security. Cyber Insurance: Cyber liability insurance is another consideration to examine outside of the contract terms. Many service agreements now require that all parties maintain a cyber liability insurance policy; however, these policies are becoming increasingly expensive. The cost of insurance premiums also depends on the security measures your business puts in place, so engaging a cyber security professional is also a prudent method to mitigate cyber liability exposure and reduce insurance premiums. The above list is not exhaustive, and every organization will have scenarios that require bespoke contract language to address (and mitigate) potential customer claims. Engaging competent legal counsel capable of crafting the appropriate language within your agreements is crucial to ensuring comprehensive protection.
May 16, 2024
Business
Shipment Success: The Importance of Pre-Contract Qualification in Fulfillment Centers
Shipping fulfillment centers play a pivotal role in the third-party logistics ecosystem. These businesses are uniquely positioned as both a warehouse to store products sold on e-commerce sites and a service provider responsible for packing and shipping such products once ordered. This dual role creates unique liabilities and responsibilities for each of these two functions. Appropriate customer and vendor screening is important to complete these functions. Warehouse Liability and Issues When a shipping fulfillment center receives customer products for storage and subsequent shipment, it is critical to understand what the products are, together with the creditworthiness of the fulfillment center’s customer. Product considerations may include: What products require a temperature-controlled environment? Do the products contain regulated materials that require special handling and storage? What is the packaging of these products when delivered to the fulfillment center warehouse? Additionally, assessing the customer’s creditworthiness upfront helps address accounts receivable issues and prevents scenarios where aging customer inventory occupies valuable rack space due to non-payment or bankruptcy. Each of these considerations is tied to some aspect of liability and whether the fulfillment center must take special steps to mitigate any such liability. This may include incorporating special charges for mitigation efforts into the service agreement with the customer. Packing and Shipping Concerns Similarly, the fulfillment center’s packing and shipping side must understand the customer’s desired packaging requests and shipping procedures. For example: Does the shipped product contain unique characteristics requiring special packaging materials? Are special freight charges likely to apply? Is the fulfillment center provided with the shipping materials, or is this item being sourced from a third party? Each of these factors will affect the workflow of the fulfillment center team. Pre-Contract Qualification of Customers With the above issues in mind, the fulfillment center must assess whether the customer is a good fit for their business or otherwise contract around any concerns or issues. This decision-making process (and subsequent contract negotiation) will help mitigate issues such as damage to other customer products, unforeseen expenses incurred to the fulfillment center’s detriment, delayed shipping issues, or rack space occupied by defunct customers. Implementing a comprehensive customer screening process will help drive better customer interactions and warehouse efficiency while ensuring that you engage with reliable and legitimate parties. Here is a structured approach that your warehouse can implement to evaluate potential customers: 1. Authorization to Do Business; Background Checks Documentation Check: Require potential customers to provide official business registration documents from the appropriate governmental body in their state (or, when dealing with international companies, their country of origin). This verifies their legal existence and is an easy way to confirm whether this customer sells legitimate products accepted by the market. Be cautious of any company unable to provide such documentation, as they may be either undercapitalized or operating as “fly-by-night” entities selling defective or non-compliant products until the market rejects them. Such companies are prone to leaving fulfillment centers with unpaid invoices and obsolete inventory occupying valuable fulfillment center rack space. Verification with Authorities: Cross-check the provided documents with relevant authorities or utilize online government databases specifically designed for business verification. Background Check: If the account is a significant size, consider a background check to ensure the company has a history of legitimate business operations and payment history. This can include checking for any legal issues or past bankruptcies. References: In addition to conducting background checks, consider requesting financial references from banks and other companies that have done business with the potential customer. This provides valuable insights into their financial integrity and payment track record. This is also an important step when negotiating contract terms because the fulfillment center can assert a security interest in the products being stored. Therefore, it is crucial to identify existing lienholders and assess whether they are considering legal action against the customer. 2. Proper Licensing Licensing Verification: Ask for copies of relevant licenses if the products use special materials that require specialized care. This same consideration should be given when hiring vendors to handle specialized products. This step is crucial for ensuring compliance with industry regulations and standards, as well as your applicable insurance policies. Compliance Checks: Conduct or request audits on compliance with industry-specific regulations and standards. This might include environmental, safety, and other operational standards relevant to the logistics sector. Implementing the Process Once you develop a screening and qualification process for customers, implementing that process into your daily workflows is essential. The best way to implement such screening is by creating a digital or paper-based checklist to be reviewed when accepting new customer inquiries. The process should also be continuous. Customers can change over time, so annual or bi-annual compliance and background checks can help proactively identify payment issues before they begin. Establish a structured procedure for periodic customer re-evaluation to ensure ongoing compliance with your standards. Lastly, be sure to maintain detailed records of all checks and verifications carried out. These records serve as vital documentation for audits, compliance checks, and resolving any potential disputes with the customer or third parties. Conclusion Implementing these measures will significantly reduce the risk associated with onboarding new customers. Warehouse space is critical for fulfillment center operations, and one of the quickest ways to endanger profits is to have this space occupied by delinquent customer accounts. Remember, the depth of the screening should be proportional to the potential risk and impact the customer might have on the fulfillment center’s business operations. For assistance implementing a customer screening process or addressing specific concerns in contracts, feel free to reach out to Mark Wendaur or Faith Miros.
April 2, 2024
Business
Is a Trust Better Protection Than a Prenup?
Business owners and families of wealth should know that a properly structured trust can be a very effective alternative to a pre-nuptial agreement. The Legal Intelligencer By Joe Armstrong Preparing for your child’s wedding should be a joyful experience, so it should come as no surprise when a family business owner avoids bringing up a prenuptial agreement. Business owners and families of wealth should know that a properly structured trust can be a very effective alternative to a prenuptial agreement. When one or more generations of a family have worked hard in business to accumulate substantial wealth, they will frequently ask their children to enter into prenuptial agreements to protect the family business and other assets in the event of a future divorce. For a first marriage of relatively young persons, the concept of a prenuptial agreement is frequently considered offensive and a topic to be avoided. Even the discussion between parent and child can be stressful and considered by the child to be undue pressure ahead of what they believe will be the happiest day of their lives. When met with these circumstances, counsel can help alleviate the family strife by suggesting the use of trusts to protect assets in the event of a divorce at least as effectively as an actual prenuptial agreement signed by those about to be married. This article discusses some of the many ways that a trust can be a very effective alternative to a prenuptial agreement. Each state has its own laws and customs regarding the division of property between divorcing spouses. These state laws can vary significantly (e.g., equitable distribution v. community property states), but they all will look at the extent to which a spouse owns or controls an asset and the right to receive income from that asset. It is the ownership or control of an asset by a spouse that will bring the asset within reach of a divorce court. This core concept of ownership or control is what allows a trust to be such an effective alternative to a prenuptial agreement. As a general proposition, if a divorcing spouse does not own or control a particular asset or the right to income from that asset, a divorce court will not attempt to award that asset to the other spouse. Just because a trust is established for someone’s benefit does not mean that the beneficiary automatically has ownership or control of the assets in the trust, or even the right to income generated by those assets. The key is structuring the trust in a way that does not give the spouse ownership or control over the assets in the trust while still giving the trustee broad discretion in how to utilize the assets for the benefit of the spouse. Revocable Living Trusts One of the most commonly used trusts is a revocable living trust or “RLT.” As suggested by its name, an RLT is fully revocable by the settlor and is typically used in conjunction with a simple will that leaves the assets of the testator to the RLT. Since an RLT does not provide savings on death taxes that can be achieved with a more complicated irrevocable trust, those without exposure to the federal estate tax often prefer an RLT as a cost-effective method to minimize the burden of the probate process and provide asset protection to the heirs. An RLT does not complete a transfer of assets during the lifetime of the settlor since by nature an RLT may be revoked at any time. An RLT can work well for the generation owning the family business or otherwise having substantial wealth with the intent to hold on to their assets until death. Irrevocable Trusts An RLT immediately becomes an irrevocable trust upon the death of the settlor since the trust can no longer be revoked. An irrevocable trust upon formation transfers assets of the settlor to the trust during the lifetime of the settlor (an inter vivos transfer). The use of an irrevocable trust allows for more complex tax planning to minimize the burden of estate, gift and generation skipping taxes on the beneficiaries and future generations. For those fortunate enough to have wealth beyond the amount of the lifetime federal estate and gift tax exemption ($13.61 million for an individual and $27.22 million for a married couple in 2024), an irrevocable trust with tax planning provisions will be the preferred form of trust to use in lieu of a prenuptial agreement. So How Does It Work? Whether using an RLT or one of the many varieties of irrevocable trusts, it all comes down to making sure the language of the trust document cannot be fairly construed to give the spouse, as beneficiary, ownership or control of the assets in the trust. The following are some of the key points to address when drafting a trust to have the same impact as a prenuptial agreement but without the angst that goes along with putting one in place. A Trustee You Can Trust Selecting a trustee that you can readily trust (for lack of a better word) to act in the best interest of the spouse as the beneficiary is critical. The more independent the trustee is from influence by the beneficiary, the better for protecting the assets from a divorcing spouse. A corporate trust company will be viewed as highly independent while a sibling of the beneficiary spouse may be considered more susceptible to influence by the beneficiary. Identifying the trustee is often the most challenging task for the family. When in doubt, select a corporate fiduciary with a long history of serving as a trustee for multiple generations of families of substantial wealth. No Absolute Right to Income or Principal Distributions Clients are often tempted to provide terms in their trust that will give their child as a beneficiary the right to withdraw some or all of the principal in the trust at certain ages or other milestones. Providing beneficiaries with the absolute right to income from the trust or the ability to withdraw principle from the trust can significantly weaken the asset protection characteristics of the trust and its effectiveness as a substitute for a prenuptial agreement. Giving withdrawal rights or the absolute right to income to beneficiaries of a trust indirectly gives them a degree of ownership or control over the assets of the trust that springs into existence when the stated age or milestone is reached. In a divorce court setting, one can expect a special master or judge to consider a spouse to own or control some or all of the assets in the trust. Once ownership or control is established, one must assume that the divorce court will look to find a way to include the value of the assets in the trust as being subject to some form of distribution to the other spouse in the divorce. In the end, a carefully crafted trust can be even better than a prenuptial agreement when seeking to protect assets in the event of a divorce. Reprinted with permission from the February 15, 2024, edition of The Legal Intelligencer © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.
March 7, 2024
Business
The Corporate Transparency Act and FinCEN Reporting
As you may already know, the Corporate Transparency Act (“CTA”) goes into effect on January 1, 2024. Under the CTA, many privately held companies will be required to file beneficial ownership information (“BOI”) reports online with the Financial Crimes Enforcement Network of the U.S. Treasury (FinCEN). For more information, see an overview linked below. We will continue to monitor updates to this process in the new year.
December 27, 2023
Business
Newly Enacted Requirements for Disclosure of Beneficial Ownership of US Business Entities
Originally posted on 02/21/2021, content updated 11/08/23. Congress has passed legislation over the veto of former President Trump to require the disclosure of the direct or indirect beneficial ownership of US business entities at the time of formation. This legislation was included as part of the annual National Defense Appropriations Act, which took effect on January 1, 2021. Under this Act, upon the issuance by the Department of Treasury of regulations providing more detail on the specific requirements of the Act, all corporations, limited liability companies and other types of business entities will be required to disclose the details of their direct and indirect beneficial owners at the time the business is formed unless the business falls within a group of exempt industries. These exempt industries include banking, insurance, and other financial institutions, where the disclosure of beneficial ownership of such businesses is generally already required. In addition, within 2 years of the issuance of the regulations, the same disclosure requirements will apply to all existing non-exempt industry business entities, except those which are publicly traded or have more than 20 full-time employees, have annual revenues of more than $5 million, and have an operating presence at a physical office within the United States. The Treasury regulations must be published within one year of the effective date of the Act or by January 1, 2022, but are expected to be published sooner. The Act requires such reporting companies to submit the disclosure information to the Department of Treasury, which is required to create a beneficial ownership registry within its Financial Crimes Enforcement Network (FinCEN). The purpose of the registry is to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists and criminals.” The information will not be made available to the public in general but will be available to US federal law enforcement agencies and, with the consent of the reporting company, financial institutions in order to meet their customer due diligence requirements. The Act defines a beneficial owner as an individual who owns a 25% equity interest in or exercises “substantial control” over the reporting company. The definition of substantial control is not stated in the Act, and there are many other questions regarding the scope of the disclosure requirements, including how to measure a 25% equity stake in a tiered group of entities or in an entity which has shifting percentage interests of its members. Presumably, these and other issues arising under the Act will be clarified in the regulations. The information that must be reported to the registry includes the following with respect to any beneficial owner, as well as any “applicant” for the entity (which includes incorporators and other formation agents): (i) full legal name, (ii) date of birth, (iii) residential or business street address, and (iv) a unique identifying number from an acceptable identification document, including a driver’s license, US passport, or other US state-issued identification document. Further, any changes to the beneficial ownership of a business entity or any change to any of the foregoing information must be reported to the registry within one year of the change. The Act imposes penalties on companies that fail to report the required information or submit a report containing false or fraudulent beneficial ownership information of $500 per day up to a maximum of $10,000 and imprisonment of up to 2 years. The Act represents a sea change in the US requirements for beneficial ownership disclosure of business entities. Similar or even more restrictive ownership disclosure requirements have been in place for several years in Europe and other developed nations throughout the world. We will be monitoring the issuance of the Treasury regulations and other developments in this area. Please feel free to contact us with any questions. Final regulations under the Corporate Transparency Act were issued on September 30, 2022, which provide for the implementation of the Act commencing January 1, 2024. See separate blog post – “FinCEN Issues Final Rule for Beneficial Ownership Reporting under the Corporate Transparency Act.”
November 8, 2023
Business
The Current M&A Market: Three Questions & Three Pieces of Advice
In an Uncertain M&A Market, Is Now the Time to Sell Your Business? 3 Questions and 3 Pieces of Advice In the lower middle market, the mergers and acquisitions market is still hot (despite the larger economic challenges). This is largely due to a combination of issues, including “Covid hang-over” concerns, challenges with hiring and retaining employees, baby-boomers getting older and the large amounts of cash that still needs to be deployed. As a result, many business owners have a once-in-a-lifetime opportunity to retire wealthy. To take advantage of that opportunity, however, owners need to act fast. The market won’t stay hot forever. And with a potential further economic downturn ahead, the next window to maximize sales value may be five or 10 years out. As I have been telling my clients, now is the time to choose a path: get ready to sell your business as soon as possible, or prepare to keep running it until the next M&A window develops. To determine which path is right for you, consider the following questions: Do you feel emotionally ready to sell? The sale of a business is likely the most sophisticated and largest transaction a seller will encounter in the course of their career. There’s a reason most only go through with it once. Even with years of preparation, no owner can fully predict the myriad of issues and uncertainties in M&A until a buyer commences diligence. You need to be ready for ups and downs, back and forth negotiations, false starts and sudden surprises. Do you know what your business is really worth – and how much M&A may cost? Get a valuation – perhaps more than one. Owners are too close to their businesses to assess their worth objectively. Once you truly understand the value of your company, be prepared to set aside more than you think you’ll need to sell your business. Even if you achieve ideal terms, you will need to be ready to cover any trailing liabilities post-closing. How long will you have the energy to continue running your business? The older you get, the more critical the decision to sell your business becomes. Owners need to be realistic about their abilities and limitations, particularly if things were to go sour: e.g., contacts disappear, key employees leave, or industry disruption makes the business irrelevant. Even if a potential deal doesn’t seem perfect, an owner selling now would have a longer runway to retirement. Otherwise, the owner would need to spend the next few years working harder than ever to carve out better numbers. Whichever path you choose – selling now or waiting – there are three steps you can take to set yourself up for M&A success: Commit to your plan. Do not let others set the terms of your business’s outcome for you. Use the market to your advantage. If you’re thinking of selling now, don’t sign the first letter of intent that comes your way. If you’re waiting it out, don’t concede to a mediocre offer in a couple years; instead, turn into an opportunity to create competition over your business. Focus on creating conveyable value. This one is simple: maximize your earnings, minimize your risks and secure your greatest assets – be they contracts, intellectual property, real estate or skilled employees. Build the team. Whether selling now or later, consider hiring an M&A advisor – they tend to pay for themselves. At the very least, discuss your exit plan with your financial planner, CPA and attorney. Look within your organization for people you can trust to go to bat for the business during negotiations with a buyer: executives, board members and finance personnel are good candidates. Make no mistake: M&A is a challenging and costly prospect no matter what the market looks like. But by developing the right strategy, setting the right expectations, and finding the right allies early on, any business owner can begin their exit with confidence. © 2017 - 2023 Michael N. Mercurio. All Rights Reserved. Originally posted 9/23/2020, content updated 11/2/2023.
November 2, 2023
Business
The Entrepreneur’s Lab Video Series: Due Diligence
Due Diligence, exchanging information and documents during a sales transaction can be a tricky proposition. During our business life, we do all we can do to keep our information and data private. With the transaction, a seller will be asked to tell and show all. Due Diligence is typically conducted in three buckets: financial, legal and operational. As a seller moves beyond the letter of intent, the diligence process intensifies. There will be a natural tension between buyer and seller as to what to disclose and when. Sellers naturally want to keep their data, customers, employees, and other items close to the vest. Buyers want to know about contracts, customers, and employees ASAP. So, what should a seller do? Here are a few tips. Make certain to have a strong confidentiality agreement that contains non-solicitation provisions from the buyer. Understand that disclosure is the friend of the seller. Few businesses have zero nicks. Disclose the good, the bad, and the ugly to any buyers. Note that diligence is a process that continues to closing; manage the process with the buyer so that risk is mitigated. For example, hold back introductions of clients and employees to the buyer until such time that the deal is on firm ground. Last, and most importantly, get organized. Nothing is worse than a shoebox full of papers. Being disorganized during diligence will cost the seller valuable time and money. Originally posted 1/26/2018, no content changes.
October 24, 2023
Business
Choice of US Entity for Foreign Companies
Originally posted on 02/12/2019, content updated on 10/09/2023 Foreign companies (“FC”) wishing to establish a U.S. entity to expand their business activities in the U.S. will need to consider whether to form a corporation (Inc.) or a limited liability company (LLC). Likewise, an FC which wants to invest in an Inc. or an LLC will need to be familiar with certain tax and non-tax aspects of an Inc. and an LLC. Professional services, such as architecture and engineering, may require a special professional services entity (which will not be addressed in this article). An Inc. and an LLC are similar in that they both offer limited liability to their owners (shareholders of an Inc. or members of an LLC). In general (with some exceptions), an FC is not liable for the obligations of an Inc. or LLC. Following are some of the main differences between both entities: Taxation: An Inc. is subject to U.S. federal, state and local corporate income tax. An LLC is not subject to federal or state income tax (but may be subject to local tax, such as the New York City unincorporated business tax). Profits of an LLC are allocated or “passed-through” to its owners, who are subject to U.S. income tax on those profits, whether or not distributed, and who will need to file U.S. income tax returns for their share of the LLC’s profits. An FC which owns an LLC will need to obtain a U.S. federal taxpayer identification number and will need to appoint a person whom the IRS can contact for any tax matters of the LLC (so-called “partnership representative”). That person does not need to be a U.S. citizen or resident. Professional investors, such as venture capitalists, often do not want to invest in LLCs because of their flow-through tax treatment. In order to avoid pass-through tax treatment to the FC, an LLC can file an election with the IRS to be taxed as a corporation. Alternatively, the FC could establish a so-called “blocker” corporation which will own or invest in the LLC. Dividends from an Inc. to the FC are generally subject to a U.S. withholding tax or a reduced income tax treaty rate, if applicable. After-tax profits of an LLC are generally subject to a U.S. “branch profits” tax (or a reduced income tax treaty rate, if applicable) when distributed or deemed distributed to the FC. In contrast, net profits distributed to an owner in the U.S. are not taxed again. Management: An Inc. is managed by directors and officers. The directors are responsible for overall management of the Inc. Although they make certain management decisions, such as approving a major contract, they generally do not sign contracts on behalf of the Inc. Directors are elected and removed by the shareholders. The officers are responsible for day-to-day management and sign contracts and other documents on behalf of the Inc. The officers include a President/CEO, Secretary and a Treasurer. They are elected and removed by the directors. The directors and officers must be individuals. They do not need to be U.S. citizens or residents. All director and officer functions can be combined in one person. An LLC is managed by one or more managers or by the owners of the LLC. A manager can be either an individual or a corporate entity and does not need to be a U.S. citizen or resident. Formation costs: Although the costs of formation of an Inc. and an LLC are comparable, an LLC which will register in New York will need to publish its formation in two newspapers in New York. Publication costs can make the formation or registration of an LLC in New York more expensive than that of an Inc. Corporate Organizational Documents. Both an Inc. and an LLC are formed by filing a formation document with the secretary of state of the state in which the entity will be formed. An Inc. will also need to have several additional organizational documents, including a statement of "incorporator" for the election of the first director(s), a written consent of the first director(s) electing the first officer(s), bylaws, issuance of the first shares to the FC and a shareholders’ agreement if more than one shareholder. An LLC will only need an operating agreement between the LLC and its owner(s) providing for, among other things, the management of the company and the allocation and distribution of profits and losses. Sharing of Profits and Losses. Shareholders of an Inc. share in the profits in proportion to their ownership percentages. Owners of an LLC share in the profits and losses as agreed to between the owners in the operating agreement. If an FC invests in a joint venture company and wishes to allocate profits and losses to the joint venture partners in a ratio which is different from the ownership percentages, the FC should consider forming the JV entity as an LLC. All in all, generally, unless there is a need for pass-through tax treatment, management by a corporate entity, or a flexible joint venture entity, an FC will probably prefer to establish or invest in an Inc. instead of an LLC.
October 9, 2023
Business
U.S. Inbound M&A and Investment Transactions May Be Subject to CFIUS Review
Originally posted on 03/26/2020, content updated on 10/06/2023 Foreign companies and investors who are acquiring or investing in a U.S. company should consider whether their U.S. inbound transaction will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). On February 13, 2020, regulations (31 CFR §§800, 802) (the “Final Regulations”) issued by the U.S. Department of the Treasury went into effect, which expanded and clarified CFIUS’ jurisdiction over certain foreign investments in U.S. companies or real estate. CFIUS is an interagency committee chaired by the Secretary of the Treasury that is authorized to review certain transactions involving foreign investment into the U.S. to determine the effect of such transactions on national security. If a transaction could pose a risk to U.S. national security, the U.S. President may suspend or prohibit the transaction, or impose conditions on it. Before August 2018, CFIUS’s jurisdiction was limited to transactions in which a foreign investor acquired control of a U.S. business (which involves certain blocking rights). CFIUS’s jurisdiction was expanded in August 2018, when President Trump signed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) into law. The Final Regulations implement FIRRMA. FIRRMA covers not only certain controlling/majority investments but also certain non-controlling/minority investments and certain investments in real estate located near sensitive government sites (including airports, harbors, and military sites). This article will focus on non-controlling investments in U.S. companies. A non-controlling investment is subject to CFIUS’ jurisdiction if it (i) is an investment in a U.S. business involved in certain critical technologies, critical infrastructure, or sensitive personal data of U.S. nationals (referred to as “TID” businesses), and (ii) grants the foreign investor any of the following: (a) access to any material non-public technical information of the U.S. company, (b) membership or observer rights on the board of directors or equivalent governing body of the U.S. company or the right to nominate an individual to a position on the board of directors or equivalent governing body, (c) any involvement, other than through voting of shares, in substantive decision-making of the US company. Critical technologies are defined as items on certain U.S. export regulations (such as the U.S. Munitions List and the Commerce Control List) and other regulatory regimes and include certain emerging and foundational technologies controlled under the Export Control Reform Act of 2018 (“ECRA”). The Bureau of Industry and Security (BIS) is working on proposed rules to define “emerging and foundational technologies” that will be subject to future export controls. BIS is considering technologies such as (a) artificial intelligence and machine learning technology; (b) logistics technology; (c) robotics; and (d) advanced surveillance technologies, such as faceprint and voiceprint technologies. Critical infrastructure is generally defined as systems and assets, whether physical or virtual, so vital to the U.S. that the incapacity or destruction of such systems or assets would have a debilitating impact on national security. Critical infrastructure includes certain IP networks, telecommunications services, interstate oil pipelines, crude oil storage facilities, rail lines, public water systems, and electric power generation, storage, or transmission facilities. A list of types of critical infrastructure can be found in Appendix A to Part 800 of the Final Rules. Sensitive personal data include the following categories: financial, consumer report data, geolocational, health data, non-public electronic communications (including emails and chats), Federal ID card data, U.S. government personnel security clearance data, and genetic testing data. The categories are covered under FIRRMA only if the U.S. business: (a) targets or tailors its products or services to sensitive U.S. Government personnel or contractors, (b) maintains or collects such data on greater than one million individuals, or (c) has a demonstrated business objective to maintain or collect such data on greater than one million individuals and such data is an integrated part of the U.S. business’s primary products or services. Genetic testing data from databases maintained by the U.S. government and routinely provided to private parties for research are exempted, so as not to capture U.S. businesses using common datasets for research purposes. Examples of transactions that were blocked by CFIUS involved a dating app for LGBT individuals (Grinder LLC) and an online patient forum (PatientsLikeMe). Under the Final Regulations, non-controlling investments by certain investors from Canada, the UK and Australia are exempted. Furthermore, investments in TID businesses by U.S. investment funds with foreign limited partners will not be subject to CFIUS review if (i) the fund is managed exclusively by a U.S. general partner (or equivalent), (ii) the firm's advisory board on which the foreign limited partner sits does not have the ability to control in any way the investment decisions of the investment fund, (iii) the foreign limited partner does not have the ability to control the fund, including through investment decisions, ability to approve or disapprove decisions made by the managing partner, or unilaterally determine the compensation of the general partner, and (iv) the limited partner does not have access to material, nonpublic technical information. Filings with CFIUS are voluntary, except for the following investments which require a prior filing with CFIUS: (i) investments in critical technology businesses operated within one of twenty-seven specific industries, as defined by the North American Industry Classification System (NAICS) codes, listed in Appendix B to Part 800 of the Final Rules, as well as (iii) investments by foreign persons in which a foreign government (other than Canada, the UK, or Australia) owns a substantial stake. Filings related to investments in critical technology businesses were made mandatory in October 2018 when FIRMA instituted a “Pilot Program”. CFIUS stated, however, that it expects to replace the Pilot Program system based on NAICS codes with a system based on export control licensing requirements. Even if a prior filing with CFIUS is not required, the parties should consider filing on a voluntary basis in order to avoid a possible rejection or modification of the transaction after closing. Filings with CFIUS may require a filing fee not to exceed $300,000. Voluntary and mandatory CFIUS filings can be done by a short declaration or longer notice. Mandatory declarations must be filed 45 days before the close of a transaction. CFIUS has 30 days to render a decision on a mandatory declaration but may at that time require a full notice, which may delay the transaction substantially. CFIUS has 130 days to decide on a notice. Failure to submit a mandatory filing may result in a penalty of up to the greater of $250,000 or the value of the transaction. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
October 6, 2023
Business
New Mandatory CFIUS Filing Rule for Critical Technologies
Originally posted on 10/12/2020, content updated on 10/04/2023 On September 15, 2020, the U.S. Treasury Department issued a rule changing the requirements for mandatory filings with CFIUS for a national security review of certain investments by foreign investors in U.S. businesses with critical technologies. As of October 15, 2020, CFIUS no longer reviews whether the critical technology of the U.S. company is used in one of 27 specified industries identified by their North American Industry Classification System ("NAICS") codes (the NAICS test). Instead, critical technology requires a CFIUS filing if the export of the technology from the U.S. to the foreign investor requires a license from the U.S. government (export control test). In a previous article, the CFIUS filing requirements were addressed in general, including the NAICS test (learn more here »). Whether a CFIUS filing is required is an important issue that needs to be addressed when a foreign company invests in a U.S. technology company. Failure to submit a mandatory filing may result in civil penalties up to the greater of $250,000 or the value of the transaction. The NAICS test continues to apply to transactions for which the signing or the closing occurred on or after February 15, 2020, and before October 15, 2020. The determination of whether the target U.S. company is engaged in "critical technologies" activities is assessed as of the date of signing a binding written agreement for the transaction. This means that if a technology is declared "critical" by the government after signing the agreement, it is not subject to the mandatory filing requirement. The universe of "critical technologies" will likely expand as the government continues to identify "emerging" and "foundational" technologies under the Export Control Reform Act of 2018 (ECRA). A U.S. license or authorization may be required under one of the four major U.S. export control regimes: (i) the U.S. Department of State's International Traffic in Arms Regulations (the "ITAR"); (ii) the U.S. Department of Commerce's Export Administration Regulations (the "EAR"); (iii) the Department of Energy's regulations governing assistance to certain foreign atomic-energy activities; and (iv) the Nuclear Regulatory Commission's regulations governing the export and import of certain nuclear equipment and material. Of the export control regimes, the EAR is the one that will be most likely relevant for investments in technology companies. The EAR controls the export and reexport of most commercial items (commodities, software, and technology) and are administered by the Bureau of Industry and Security (BIS), which is part of the U.S. Commerce Department. Only a small percentage of all U.S. export transactions require licenses from the U.S. government, including so-called dual-use items (both civil and military). To determine whether an item is subject to the EAR, one should refer to the EAR's Commerce Control List (CCL) to see if it has an Export Control Classification Number (ECCN). If the item falls under the jurisdiction of the U.S. Department of Commerce and is not listed on the CCL, it most likely will not require an export license. Depending on the destination, end-user, or end use of the item, however, even such an item may require an export license. If the export control laws provide for any license exceptions, a CFIUS filing will still be mandatory unless any of the EAR license exceptions for technology and software (unrestricted) (TSU), encryption (ENC), and strategic trade authorization (STA) apply. Certain license exceptions may contain procedural requirements. For example, the ENC license exception requires submission of a classification request to the Bureau of Industry and Security 30 days before export. If a license exception imposes certain procedural requirements before export, those procedural requirements will have to be met in order for the CFIUS filing to be non-mandatory. Since export licenses are much more likely to be required for exports to countries subject to stricter U.S. export controls, such as China and Russia, investors from those countries will become subject to heightened CFIUS review. Under the new export control test, not only will it need to be reviewed whether the (hypothetical) export of the technology from the U.S. to the foreign investor would require a license from the U.S. government, but also to the home countries of those who hold a 25 percent direct or indirect interest in the foreign investor.
October 4, 2023
Business
Many US and Foreign Companies in the US Will Need to Disclose Ownership
Originally posted on 02/03/2021, content updated on 10/02/2023 On January 1, 2021, the Corporate Transparency Act of 2019 (the “CTA”) became law. The CTA is part of the Anti-Money Laundering Act (“AMLA”) and is intended to fight money laundering and terrorism through the anonymous use of shell companies. Under the CTA, many US and foreign companies registered in the US will need to disclose their beneficial ownership to the Financial Crimes Enforcement Network of the US Treasury (“FinCEN”). Unlike in some foreign countries, including in Europe, states in the US generally do not require disclosure of entity ownership. In Delaware, for example, only the name of the entity and the registered agent information is included in the certificate of incorporation, and the beneficial owners do not need to be disclosed in the Delaware annual report filings. Who will need to disclose ownership information? Beneficial ownership will need to be disclosed by a "reporting company." The CTA broadly defines “reporting company.” It does not only include "a corporation, limited liability company, or other similar entity" in the US but also similar entities formed abroad and registered to do business in the US. The CTA excludes, among others, taxable entities that (i) employ more than 20 full-time employees in the US; (ii) annually report more than $5 million in gross receipts or sales to the Internal Revenue Service (IRS); and (iii) have an operating presence at a physical office within the US. Public companies and non-profits are also excluded. Many small to mid-size privately held companies will be affected by the disclosure requirements of the CTA. What will need to be disclosed? A reporting company must report the name, date of birth, current address (business or residential) and unique identifying number from an acceptable document (such as a state driver’s license, other U.S. state-issued identification, U.S. or foreign passport) for each “beneficial owner.” Under the CTA, a "beneficial owner" is any natural person who, directly or indirectly, owns at least 25% of the equity interests in a reporting company or exercises "substantial control" over the reporting company. The CTA does not define the term “substantial control.” Certain individuals are expressly excluded from the definition of "beneficial owner," including: individuals acting as agents, nominees, intermediaries, or custodians on behalf of another; individuals who control an entity solely because of their employment; and individuals whose only interest in a reporting company is through a right of inheritance. When will disclosure need to be made? Disclosure will need to be made after final regulations under the CTA will have become effective. It is expected that regulations will be issued before January 1, 2022. Companies which already exist as of the effective date of the CTA’s implementing regulations will be required to report beneficial ownership information within two years; companies created after the effective date of the regulations will be required to report that information upon formation. Reporting companies must update their disclosures within one year of any change in ownership or control. Who will have access to the information? Beneficial ownership information will need to be submitted to FinCEN, which is only permitted to use that information for limited national security and anti-money laundering purposes. The beneficial ownership information submitted to FinCEN will be stored and maintained solely with FinCEN and will not be made publicly available nor will such ownership information be made generally available to the states. FinCEN may use the information to confirm beneficial information provided to financial institutions to facilitate the compliance of such financial institutions with anti-money laundering laws, provided that the consent of the reporting company is obtained. Are there penalties for non-disclosure? Any person who willfully fails to report complete beneficial ownership information to FinCEN or who willfully provides false or fraudulent information in any such report is subject to a civil penalty up to a maximum of $10,000 and possibly imprisonment. Negligent omissions or mistakes in beneficial ownership reports do not trigger penalties. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
October 2, 2023
Business
Healthy Businesses Lead to Successful Sales: Business Ownership Maintenance is Key
What does getting your car its annual safety inspection and selling a business have in common? More than seems obvious. Many states require annual safety inspections for vehicles. Maryland is one of the states that does NOT have this annual safety inspection. In Maryland, your vehicle does not need to be safety inspected until you seek to transfer the title. Thus, in practice, there are many cars in Maryland on the road for years that have not been safety inspected. Hence, numerous vehicles are driving around that may have “issues” that the owners are not aware of. My personal experience has shown that when you transfer a vehicle in Maryland and have the car inspected, you are suddenly faced with numerous vehicle “defects” that must be fixed to pass inspection and transfer title. Fast forward to selling a business. In my experience, I have not come across a single business that was without “defects” in the sale process. Like the running car, these businesses are operating and making money. However, when the business goes to sell, the buyer and its advisors will conduct a thorough inspection. Too often, many defects rise to the surface, requiring remedy before the sale can proceed. In this series of articles, I will be discussing the best ways to start, grow, and maintain a healthy business by reflecting on top issues when selling a business and what can be done to set up a business for a successful sale. This series will include annual “inspections” by the owner in the areas of legal, operation and financial to better prepare the business for sale. Frequently defect areas often include tax planning, employment and key employees, intellectual property, ownership issues/operating agreements, cap tables, and corporate governance issues.
September 21, 2023
Business
M&A Nugget: Dissenters’ Rights
In Maryland, and other states, a stockholder who does not believe that the purchase price to be paid by an acquirer is fair value has the right to object to the sale and receive payment for the fair value of the stock. The basic procedure for a stockholder to invoke that right is to object to the proposed transaction in writing, not vote in favor of the transaction and make a demand for payment of the stock. The target may then notify the stockholder of the price the target is willing to pay for the stock. If that price is not satisfactory to the owner, or the target does not notify the owner, then the owner may ask a court to obtain an appraisal to determine the fair value of the stock. If the court accepts the appraisal or, not accepting the appraisal, determines the fair value of the stock itself, the amount determined shall be entered as a judgment against the target. Although the use of these dissent and appraisal rights is rare, both parties to a sale transaction need to be aware of them, especially if the acquirer intends to purchase 100% of the target’s stock.
September 11, 2023
Business
M & A Nuggets: The “KEIP”
The Key Employee Incentive Plan (“KEIP”), has become common as a way to incentivize key employees. The KEIP usually allows key employees to participate in an exit transaction through the grant of a percentage of the net proceeds from the sale of the business. Many transactions are structured with potential post-closing payments through earnouts or other mechanisms. Acquirers do not want or accept responsibility for KEIPs and, therefore, require that the seller maintain responsibility for the KEIP post-closing. During the negotiation process, a significant amount of time is devoted to the KEIP. Instead of leaving it to the acquirer to react to and dictate how the KEIP will be handled, owners of target companies should have a plan developed. The plan will have as its objective achieving the same end result that the acquirer will eventually insist on. Here are the two most common ways KEIPs are dealt with: Termination of the KEIP, with the only surviving provision being the payment of amounts that may be owed to the key employees in the future reducing the seller’s share of net proceeds, and The transfer of any future responsibility under the KEIP to the selling owners. When first developing a KEIP, it is important that the agreements that will memorialize the KEIP allow flexibility to achieve one of the results described above. By proactively dealing with the KEIP and having a plan in place, a target can lessen an acquirer’s concern about the KEIP and save both sides time and resources.
September 7, 2023
Business
M&A Nugget: Licenses – Odds and Ends
When acquiring a business, it is important to understand the licenses needed to operate that business. Some licenses, such as professional and contractor’s licenses, are obvious. There are many business activities that do not shout out as requiring a license, but for which the license is integral to operate the business. Here are a few examples: Locksmithing License Well Drillers License Salvage Yard Permit Bottled Water License Fire Sprinkler Contractors License Taxidermy License Licenses are either required to be held in the company’s name, a designated individual’s name, or both. There may be different levels for a particular license, such as master, associate or apprentice. Usually, even with a license in the company’s name, an individual who has gone through training and licensing, must be listed. For the purchaser entering into a new business, it can take weeks or even months to obtain the necessary licenses. It is therefore often crucial that the licensed individual agrees to allow the purchaser to continue to use the license and to provide services to the purchaser post-closing. The bottom line is that the purchaser and seller must plan for the purchaser to be able to operate with the requisite licenses on the closing date.
August 30, 2023
Business
M&A Nugget: Related Party Transactions
It is important that the purchaser investigate related party transactions when conducting due diligence. A related party transaction is a transaction or a contract between the target and another company controlled by, or related to, the owners of the target. An example of a related party transaction that is often encountered is a real estate lease between the owner of the target and the target. Another example is a key supplier agreement between the target and a relative of the target’s owner. Related party transactions must be examined to determine whether they are priced at fair market value. Often these arrangements are priced at higher than fair market value to benefit the related party. Another factor to consider is whether the related party will continue doing business with the purchaser post-closing, especially if the related party is a key supplier of goods or even a sole source provider. I have encountered situations where the key supplier was the target owner’s relative, and while more than happy to do business with the target on generous terms, would not commit to continuing those terms with the purchaser. So, as part of the purchaser’s due diligence, related party arrangements must be asked about and investigated.
August 28, 2023
Business
M&A Nugget: Cyber Insurance – The Tail
As data breaches have become larger (think Equifax, Target, and Yahoo) and more frequent, buyers and sellers should pay more attention to cyber insurance. Cyber insurance provides coverage for risks that arise out of the use of devices that maintain data, including computers and mobile phones. The insurance has existed for years, and generally covers losses incurred by the insured and claims of third parties seeking to be compensated for a data breach. One issue that arises with cyber insurance is that it is usually issued on a “claims-made” basis, which means that, for a loss to be covered, the claim must occur while the insurance policy was in place or within a specified period after the policy lapses. The problem with this is that cyber incidents may not be uncovered until well after the coverage period lapses. This is where tail insurance comes in. The inclusion of a tail provision extends the time during which a claim can be reported and therefore covered. Another way for a buyer to close the gap in coverage that exists with claims-made policies is to purchase cyber insurance with a retroactive coverage date, that will cover cyber incidents that occur before closing. The bottom line here is that with the increase in cyber security breaches, the buyer and seller need to ensure seamless coverage for incidents that occur before closing.
August 24, 2023
Business
Expanding Your Business To The U.S.: Should You Form A U.S. Legal Entity?
Originally posted on 01/23/2020, content updated on 08/11/2023 In my practice as a corporate lawyer in New York, I represent many European and other foreign companies and entrepreneurs who are doing business in the U.S. If you are a foreign company and want to expand your business to the U.S., or an advisor to such a company, you will need to consider several important legal issues. Some of those issues include questions like should I form a separate legal entity in the U.S.? If so, what should the legal form of the U.S. entity be? Where in the U.S. should the legal entity be incorporated? Do I need to appoint U.S. managers to run the U.S. entity? What types of taxes will I need to deal with? How can I protect my intellectual property? What do I need to consider when hiring employees or consultants in the U.S.? Do I need general terms and conditions which are different from the ones I use for my foreign company? What can I do to minimize the risk of litigation in the U.S.? What issues should I consider when entering into a joint venture or buying a company in the U.S.? In this article, I will address the question of whether you should form a U.S. entity. As a foreign company, you are not required to form a separate legal entity in the U.S. in order to sell products or provide services in the U.S. There are, however, several disadvantages to doing business in the U.S. as a foreign company. If you conduct business in the U.S. as a foreign company, your foreign company will become liable for contractual obligations with U.S. customers or clients. Your company could get sued in the U.S., especially if your contract with the U.S. customer or client includes a clause for dispute resolution in a court in the U.S. Your foreign company could become subject to income and sales taxes in the US. In addition, you may be required to register your foreign company with the Secretary of State of a state depending on the level of business you are conducting in that state. The Secretary of State is the government agency of a state with which companies that are incorporated in that state or are doing business in that state on a regular basis need to register. Although not much company information needs to be disclosed (unlike in some other countries), your foreign company may need to provide a good standing certificate from the country in which it is incorporated and a notarized translation of its corporate organizational documents (which can be expensive and time-consuming). Setting up a separate U.S. legal entity could reduce your foreign company’s exposure to lawsuits in the U.S. and income and sales tax liabilities. The U.S. entity could be owned by your foreign company so that it is a 100% subsidiary of your foreign company. Your foreign parent company (“FC”) is generally not liable for the obligations of the U.S. subsidiary (“USC”). Under certain circumstances, however, a creditor of USC may try to “pierce the corporate veil” and hold FC liable for the obligations of USC. The creditor will need to prove that: (i) FC completely dominated and controlled USC disregarding its separate identity, and (ii) an injustice or other wrong to the plaintiff-creditor will likely result if the corporate veil is not pierced. Courts look at many factors, none of which alone is sufficient to pierce the corporate veil, including, but not limited to: (i) USC’s corporate formalities are disregarded by FC, (ii) USC is inadequately capitalized, (iii) USC shares offices, employees, bank accounts, and telephone numbers with FC, (iv) the FC uses USC’ property as its own; (v) the agreements and other arrangements (such as sharing administrative services, employees, or insurance coverage) between FC and USC are not arm’s-length transactions; or (vi) USC makes undocumented “loans” to the FC or extends credit to the FC on other than market terms. FC could also be held liable in the U.S. for product liability if it is a manufacturer or distributor of a product which caused personal injury to a consumer in the U.S. If USC is a corporation, USC instead of FC will become subject to income and sales taxes in the US. FC generally will only become subject to U.S. income tax if USC distributes any profits to FC, subject to any reductions under any US income tax treaty with the country in which FC is incorporated. If, however, USC is a limited liability company (LLC), and does not elect to be taxed as a corporation, FC will become subject to U.S. income tax on USC’s net income. Doing business in the U.S. as a USC also offers an advantage from a marketing perspective. Having a U.S. presence in the form of a legal entity shows commitment to the US market and accessibility. US customers (whether businesses or consumers) usually prefer to deal with a vendor in the U.S. instead of an overseas company. Finally, forming a USC may make it easier for FC to obtain insurance in the US. For an FC without a USC, it is often difficult and expensive to obtain insurance for FC’s activities in the U.S. If you are a foreign business owner or entrepreneur and want to expand your business to the U.S., you should consider forming a U.S. legal entity. If you have any questions or would like to discuss any of these issues, please contact me at 212-545-1900 or mbloemsma@offitkurman.com.
August 11, 2023
Business
Over 50 Years of Law Practice Tips
Originally posted on 08/12/2020, content updated on 07/27/2023 Having been fortunate to serve clients on every continent other than Antarctica in transactions of every size and in every kind of business and having been privileged to have mentored many newer lawyers, over 50 years of experience as an international and domestic business lawyer has taught me many things. I have compiled a list of many of the lessons I have passed on to others over 50 years, and this article sets out the latest iteration of my tips for others to consider. If something does not make sense, it usually does not make sense for a reason. Finding that reason is not always easy. Ask questions and continue to ask questions, just like peeling back the layers of an onion. Make statements in the form of a question. Focus your thinking by diagraming the deal or what happened or was supposed to have happened. Understand the underlying economics of a particular matter. Learn financial statements and how each statement impacts the other statements. Do your own income tax return at least once to understand the schematic of the Internal Revenue Code. Research the income tax regulations on a specific matter at least once in your career. Framing a question properly will often suggest the answer or options. Ask if anyone in the firm has a file or precedent for your legal issue. Whatever you say in writing, whether in an email, fax, letter, or otherwise, can and will be used against you and will be distorted. Re-read calmly whatever you write before sending it and ask yourself if you really want to say whatever you wrote. Ask how it would look if whatever you write appears on the front page of your favorite newspaper. It may be best to use bcc’s and not cc’ s to clients on letters or emails to opposing lawyers, or better yet, forward what you send to avoid a bcc recipient from replying to people who do not know who was bcc’d and to preclude a waiver of the attorney-client privilege. No typo’s or typos — clients and adversaries will find them! Use spellcheck. Proofread all documents even after using spellcheck. Spellcheck is not a substitute for proofreading. Know the differences between:effect-affect principal-principle your- you’ re its-it’s lose-loose No split infinitives. Avoid the passive voice. The ultimate reader of your email, fax or document is a judge or arbitrator. Listen to the client or other side and ask questions. Hear and process what is said, and what is not said. Ask questions! It’s best if all questions have a purpose. Silence your cell phone and other devices before a meeting starts; preferably, put the device away and help cause everyone in the meeting to focus on the agenda. Have an agenda for each meeting and stick to it. Start meetings on time. Those who miss the start will learn not to do that again, especially if you bar them from attending the meeting if they are late. Do not multitask during a meeting or call. If you do, you cannot be listening, and you are being rude to the person you are talking to. Better to end the call or meeting or not have it. There is no such thing as ” boilerplate.” Pay attention to the so-called “boilerplate” provisions in contracts that generally appear in a “General” or “Miscellaneous” final section of a contract. The other side often (1) may consider those clauses to be “boilerplate” and in drafting or reading them often pay less attention to them and (2) may be tired or bored by the time they get to read those provisions if the other side reads a draft starting with page 1 straight through to its conclusion. The agreement you are using as a model is the end product of negotiation in another deal. Do not copy someone else’s mistakes. Start with the basics of legal principles and definitions, including looking at Black Law’s Dictionary or other sources of definitions because those precedents may give you words and concepts that will aid in your drafting or mark-up. Check to see if there is a statute on whatever the issue is, including statutes providing for statutory construction, definitions of terms, rules of construction for contracts, and other statutes that may use or define a particular term that can offer some guidance. Is there a Federal issue lurking somewhere, including any Constitutional question? Is there a public policy matter underlying the legal rule in issue, and are your facts distinguishable so that the public policy underlying the legal rule may or may not be violated depending on the result? Excluding Constitutional, criminal and tort cases, most reported court decisions usually result from (1) a client not seeking or getting good legal advice before the particular matter eventuated into a litigation, (2) a lawyer not giving particularly good legal advice either in the underlying matter or in the litigation itself, (3) the client did not use a lawyer and made a mistake, or (4) there was a serious miscommunication in the underlying matter. If a trial or intermediate appellate courts made no errors, the quantity of reported judicial decisions would be reduced materially. An appeal, therefore, and planning for that appeal, may be an appropriate part of litigation strategy because error at the trial court or intermediate appellate court level is very possible, either on a procedural or substantive matter. It may not make sense to rely solely on online research and not consult books. Check findlaw.com or cornell.edu for free legal research links before using Westlaw or Lexis. Consider not using the word “should” in communications with clients if its use could be deemed to create a standard of conduct for the client or for our firm. Have multiple original copies of a power of attorney signed and where appropriate, acknowledged, because you never know who will want to keep an original. Have only one original copy of a promissory note signed. Ask the client to obtain the original signed promissory note when it is paid off. Do not allow what you do to fall to or be viewed as the lowest common denominator. Shortcuts often result in mistakes or less than comprehensive documents. Document client instructions in confirmatory emails and do that in a nurturing and not accusatory way. Price and cost are two different things. Negotiating and bargaining are two different things. Generally, it takes 3 hours of preparation time for every 1 hour of a meeting or negotiation. Try to be elegant in whatever you do, for yourself, and for appearances with others. There are excuses, but there is no such thing as a good excuse. We recruit for skills. We hire for attitude. We promote for both. Under-promise and over-deliver. The best interests of our entire firm are paramount to the self-interest of any one person or group of persons in our firm. Understand the client’s goal and think as if you were the client and your money or business is involved, bringing to that thought process all your skills and experience as a trusted legal advisor. Document everything. Undocumented anything often results in ambiguity. Strategy and tactics are two different things. What is your unique selling proposition? As a glassblower-artist for 31 of those 47 years, sometimes the old tried and true ways are just as good or better than the new ways. No matter what you know, there is always more to learn, whether from others or from your own mistakes. The remaining number of years in your life may not include as many years as your current age may suggest. Hope is not a strategy. All business is personal. I welcome comments from others and am always happy to discuss the story behind each of these tips.
July 27, 2023
Business
Top Ten Things Every Property Manager Should Know
Here are ten things I believe every property manager should know. These ten things will help you make your job easier and ensure that you are in compliance with the applicable laws. Keep Complete and Accurate Records. I cannot stress the importance of this enough. Keeping complete and accurate records is not only good business practices but it is necessary for evidentiary purposes. Property managers and staff should document conversations and other interactions they may have with tenants, complete incident reports, when necessary, keep track of invoices and work tickets or maintenance requests. Doing these things can help you defend and defeat potential claims that may arise throughout the course of litigation and at trial. This one goes hand in hand with keeping complete and accurate records. It is important that management and staff have regularly scheduled meetings to keep everyone apprised of what is going on in the apartment community and address any outstanding issues. This is important to ensure that everyone is on the same page. Keeping complete and accurate records aids in ensuring that everyone is on the same page, and nothing is overlooked or missing. Be familiar with the terms of the lease. It is important to familiarize yourself with the terms of the lease. Although North Carolina General Statutes (NCGS) Chapter 42, the Residential Rental Agreements Act, governs residential agreements such as leases, some of the provisions in it are default provisions that are only applicable in the absence of an express lease provision. For example, NCGS §42-3 outlines the notice requirements for issuing a notice for nonpayment of rent; however, leases may contain forfeiture clauses that waive this notice requirement. So, if there is ever a question about notice or whether something is permissible, the first thing you should look at is the lease. Does the lease waive notice? Is this conduct prohibited by the lease? Nail down the facts. Generally, cases in which a complaint in summary ejectment are filed are fact specific. Did the tenant tender rent according to the terms of the lease? Did the tenant engage in activity which is prohibited by the lease? What evidence do you have to support what is being alleged in the complaint? Cases like these, specifically summary ejectment actions, turn on the occurrence of specific events. It is important that you are aware of everything that happened and any communication with the tenant (another reason why keeping complete and accurate record is important). For example, was some time of agreement entered given the tenant additional time to pay, are there any pending maintenance requests, did the tenant make any formal complaints, etc. You want to ensure that in the event you go to court, there are no surprises. Be organized. I recommend having a system in place to eliminate any confusion about who should be doing what and what course of action should be taken if certain events occur. Having a clear plan in place, outlining the steps management should take when looking to file a complaint, in summary, ejectment makes the process a lot smoother. You should always have a signed copy of each tenant’s lease on file and a current ledger so you and your attorney can easily determine what type of notice should be issued, if any, and the amount of past due rent owed. These two things should always be readily accessible. Always Follow Up and Follow Through. You should always follow any phone conversation or conversation you have in person with a tenant with an email summarizing what you discussed and what action will be taken if any is necessary. Always ensure that tenants execute all the necessary documents, such as signing the lease, completing a move-out receipt, and signing a release if applicable. Pay Attention to Detail. Because summary ejectment actions are fact specific, it is important that you pay close attention to the details. Please ensure that any notice you issued complies with the terms outlined in your lease, list the correct address, and names all leaseholders. For example, does your lease require that all notices be signed? Does it require that all notices are sent via email, US mail, or some other carrier? Does the lease require that any notices to be sent to address other than the address of the leased premises? For summary ejectment actions, sometimes, the devil can be in the details. If in doubt, ask questions and seek advice. There may come a time when a tenant asks you a question or a situation arise where you don’t have the answer or don’t know what you should do. That’s ok! If you are unsure, tell the tenant that you will have to get back to them and reach out to someone in a supervisory role or to an attorney to get some guidance. Be consistent. Be consistent in enforcing the rules and regulations. This will make your job a lot easier and help curb any discrimination claims and fair housing issues. Are you prepared to offer what you offered one tenant to every tenant who asks? Stay informed. Things are constantly changing; legislation is being passed, new case law is being introduced. It is important that you stay informed of any changes and how they can affect the processes if you have in place.
June 29, 2023
Business
Foreign-Owned U.S. Entities Have Until June 30, 2023 To File Form BE-12 With The Bureau of Economic Analysis
This year, the Bureau of Economic Analysis (“BEA”) of the U.S. Department of Commerce is conducting a mandatory five-year survey on foreign investments in the United States for fiscal years ending in 2022. The survey covers financial and operating data of U.S. affiliates of foreign multinational enterprises. The survey is used to produce statistics on the scale and effects of foreign-owned business activities in the United States. Reporting on BEA’s direct investment surveys is mandatory under the International Investment and Trade in Services Survey Act (P.L. 94–472, 90 Stat. 2059, 22 U.S.C. 3101–3108, as amended). The act protects the confidentiality of the data that companies report. BEA is prohibited from granting another agency access to the data for tax, investigative, or regulatory purposes. A BE-12 report is required for each U.S. affiliate, i.e., for each U.S. business enterprise (including real estate held for non-personal use) in which a foreign person or entity owned or controlled, directly or indirectly, 10 % or more of the voting securities or equivalent interest of a U.S. business enterprise, at the end of the business enterprise's fiscal year that ended in the calendar year 2022. Certain private funds may be exempt from filing. Which BE-12 report to file depends on the size of the U.S. entity. See the chart on the BEA website. U.S. entities that were at least 10% owned by a non-U.S. entity in 2022 and whose total assets, sales, or gross operating revenues or net income did not exceed $60 million in 2022 must file BE-12C. Larger foreign-owned U.S. entities may need to file BE-12A or BE-12B. The forms are available online on the BEA website. Companies that did not file a hard copy of the BE-12 by May 31, 2023, can still file an electronic copy online via the BEA website by June 30, 2023. Failure to provide the required information may result in fines ranging from $5,580 to $55,808 and possible criminal penalties, including imprisonment. If you have any questions or need assistance with filing BE-12, please contact me at 212-545-1900 or mbloemsma@offitkurman.com. DISCLAIMER: The information contained in this blog alert is intended for informational purposes only; and should not be relied upon or construed as legal advice.
June 20, 2023
Business
Paycheck Protection Program (PPP) Loan Forgiveness Primer
This blog post may contain information that was accurate at the time of publication but could become outdated over time. We strive to provide relevant and timely content, but circumstances, facts, and data can change. Users are encouraged to verify the current status of any information presented and seek updated guidance where necessary. Originally posted on 6/9/2020, no content changes. You applied for and obtained a Paycheck Protection Program loan. Now it is time to ask for the loan to be forgiven. Listen and watch here for a 30 minute presentation from the Offit Kurman CV-19 Business Response Team on the what, when and how to that apply to the loan forgiveness process, along with keen insights into that process. This presentation was recorded on June 5, 2020. For any updates to the loan forgiveness rules since then, please contact us.
June 9, 2023
Business
UPDATE: Did Your Business Need a PPP Loan? Borrowers May Return Funds by May 14 Without Fear of Civil or Criminal Enforcement
This blog post may contain information that was accurate at the time of publication but could become outdated over time. We strive to provide relevant and timely content, but circumstances, facts, and data can change. Users are encouraged to verify the current status of any information presented and seek updated guidance where necessary. Originally posted on 5/6/2020, no content changes. UPDATE: On May 6 the SBA extended the safe harbor deadline to return PPP funds from May 7 to May 14 in FAQ #43. FAQ #43 also noted this is an automatic extension of the safe harbor and that borrowers do not need to apply for the extension. The safe harbor applies to any borrower who applied for a PPP loan prior to April 24, 2020 and repays it in full by May 14, 2020. As the SBA has provided little guidance on what it means to “need” a PPP loan, the SBA has promised to provide additional guidance on this issue prior to May 14, 2020. *All May 7th deadlines have been extended to May 14th In response to adverse publicity, a number of high-profile entities, including listed companies, that had received loans in recent weeks under the Paycheck Protection Program (PPP), announced that they were returning the money. The decision by these entities was prompted in part by the SBA’s publication on April 23, 2020 of FAQ 31, emphasizing that loan applicants should think carefully before certifying, as required, that the loan was really necessary to support ongoing operations considering the uncertainty of economic conditions. The stakes were raised even further on April 28, 2020, when Treasury Secretary Steven Mnuchin announced that all companies receiving more than $2 million of PPP money, and other loans as appropriate, would be audited and could face criminal prosecution if their certification of “need” was false and they did not return the money by May 14th*. Predictably this sudden scrutiny of “need” by businesses that received loans has created uncertainty and anxiety among business owners who had applied in good faith, had been able to check all the qualification boxes on the application, and felt fortunate to have received the quick infusion of capital. However, the same business owners who a few weeks ago asked their attorneys and accountants for help in applying, are now asking these same advisors, with trepidation, should they keep the money? The problem of course is that the CARES Act legislation, and supporting regulations, were hastily drafted and did not provide clarity, especially with respect to “need”. Facing a hard May 14th* deadline, what should a business owner do now if he has any concerns regarding entitlement to the loan? Certainly, this requires a case-by-case analysis, beginning with making certain that the proceeds of the loan will be put to use as Congress intended: putting workers back on the payroll promptly, i.e., within the first eight weeks of receiving the loan. If a business is in an industry that cannot function during the lockdown, e.g., hospitality, the need for PPP money is difficult to justify. Second, businesses that have access to other sources of capital through, the public securities markets, private equity or hedge funds, should take a closer look at their “need”. On a more subjective basis, any company that would consider the scrutiny of a federal audit to be bad optics, e.g., a defense contractor, should carefully consider the consequences of not being able to support the need for the money. These special circumstances aside, what should the owners of a business that received a significant PPP loan be thinking about, and doing, in the next few days before the May 14th* deadline? If a borrower decides to retain the PPP Funds, affirmative steps must be taken now, if they have not been taken already, to document in writing the need for the loan. Put differently, in the event of audit by the SBA, the borrower must demonstrate that it had a good faith belief that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” While the Treasury and SBA have provided very little guidance on the interpretation of this borrower certification, documentation to establish a good faith belief should examine all issues the borrower faces as to economic uncertainty and necessity of the funds. Projections of revenue and cash flow under various scenarios should be made, with the margin of solvency resulting from each scenario closely analyzed. Further, the borrower should focus on issues specific to its business and also in the industry/region in which the borrower operates. Specifically, the borrower should review and document, among other items: Financial stability - budgets and projections, including payroll shortfall projections; Liquidity - cash on hand and alternative sources of funds; Geographic Location – will the area and region in which the borrower operates open first or last; Risks – is the borrower a favored “mom and pop” business; Employee Availability – cost to train, find and replace staff; Materiality of the Loan Amount – will the business be able to operate without the loan and for how long; Sensitivity to Public Scrutiny – what is the impact of an audit on prospective business opportunities; and Projected Uses of the Funds – when and how. Although the absence of clarity in the PPP legislation and rules makes good faith compliance challenging and uncertain for all, business owners should address these issues with a team of advisors including their attorneys and accountants.
May 8, 2023
Business
Why is M&A Due Diligence Important?
The success of a Merger and Acquisition (M&A) deal depends heavily on the due diligence process. Due diligence refers to the investigation and analysis of a company's financial and legal information to identify potential risks and opportunities associated with an M&A transaction. M&A due diligence is critical for several reasons. First, it helps the acquiring company to identify potential risks associated with the acquisition, such as legal or financial liabilities, compliance issues, or hidden costs. This information is vital in negotiating the terms of the deal and determining the fair value of the target company. Second, due diligence can help identify potential synergies and opportunities for growth that the acquisition may bring. By analyzing the target company's financial and operational data, the acquirer can identify areas where cost savings can be made, revenue can be increased, or efficiencies can be gained. Lastly, due diligence can help the acquirer to develop an integration plan and manage the transition process more effectively. By understanding the target company's operations and culture, the acquirer can plan and execute a seamless integration that minimizes disruption and maximizes value. Key Steps in M&A Due Diligence The due diligence process can be complex and time-consuming, involving a range of activities, such as financial analysis, legal review, and operational assessments. Below are some of the key steps involved in M&A due diligence: Identify Key Areas for Investigation: The first step in the due diligence process is to identify the key areas of investigation. This may include financial statements, tax records, legal documents, customer contracts, employee agreements, and operational data. Conduct Financial Analysis: The financial analysis involves a detailed review of the target company's financial statements, including income statements, balance sheets, and cash flow statements. This analysis helps identify potential financial risks and opportunities associated with the acquisition. Review Legal Documents: The legal review involves a thorough analysis of the target company's legal documents, such as contracts, agreements, leases, and intellectual property rights. This review helps identify any legal risks or liabilities associated with the acquisition. Assess Operational Data: The operational assessment involves a review of the target company's operations, including production processes, supply chain management, and customer service. This assessment helps identify potential synergies and opportunities for operational improvement. Identify Risks and Opportunities: Based on the findings of the due diligence process, the acquirer can identify potential risks and opportunities associated with the acquisition. This information is used to negotiate the terms of the deal and develop an integration plan. Develop an Integration Plan: The integration plan outlines the steps required to integrate the target company into the acquirer's operations successfully. This plan should address key areas such as organizational structure, culture, systems integration, and communication.
May 4, 2023
Business
NJBPU Issues Proposal for Permanent Community Solar Program
After two successful pilot years of its nascent community solar program, the New Jersey Board of Public Utilities has released a straw proposal and proposed regulations for a permanent community solar program. As the final program will likely match many of the aspects of the straw proposal, below are some preliminary details on what project developers, investors, financiers, and others can expect: Projects will be required to be placed on rooftops, carports, and canopies over impervious surfaces, contaminated sites and landfills, and man-made bodies of water that have little-to-no established floral and fauna. Rather than the competitive application process used during the pilots, applications will be accepted on a first-come, first-served basis until the annual capacity is reached, provided that if the entire capacity is subscribed within the first ten days of the registration period, a tiebreaker will be used. Program capacity will be set at 225 MW for EY24 and EY 25 and at least 150 in EY26 and beyond. Applications will be subject to enhanced project maturity requirements, as only 44% of projects in pilot year 1 reached commercial operation by the expiration date of their conditional approval, and limited extensions of registration expiration dates will be provided. All projects will be required to serve a minimum of 51% low- and moderate-income subscribers. Consolidated billing will be implemented for pilot and future projects through a working group, and utilities will be authorized to charge a fee in connection with the consolidated billing. Co-location of community solar projects will not be allowed with other solar projects by related entities if the total capacity would exceed 5MW. However, the Board will allow co-location of unrelated projects as well as community solar and net-metered projects and will entertain petitions in other co-location circumstances. Incentive values will be maintained at $90/MWh for all community solar projects. Additional consumer protection measures will be implemented, including a minimum 10 percent guaranteed bill credit, prohibition on termination fees with appropriate notice, and certain marketing disclosures. Automatic enrollment will be an option for a municipality that owns and operates a community solar project, but only once consolidated billing is implemented. Geographic distances will not be considered as long as the subscribers are in the same utility territory as the community solar project. Dual-use solar projects on farmland will not be allowed to participate in the community solar program. The straw proposal contains many questions for stakeholders and will go through a variety of stakeholder discussions. The NJBPU will be holding an initial stakeholder meeting on April 24, 2023, and comments on the straw proposal are due by May 15, 2023. Interested parties can review the notice for information on the stakeholder meetings (including registration) as well as the complete proposed regulations. Consult with counsel regarding the impact of the proposal on future projects, as well as existing projects that have not reached commercial operation.
April 3, 2023
Business
In Delaware – Is Your Business “Essential” or Not? A Deep Dive With Our Guidance
This blog post may contain information that was accurate at the time of publication but could become outdated over time. We strive to provide relevant and timely content, but circumstances, facts, and data can change. Users are encouraged to verify the current status of any information presented and seek updated guidance where necessary. Originally posted on 3/30/2020, no content changes Practice Group: Business Law & Transactions In response to the Coronavirus pandemic, most of us know that governments have ordered certain businesses to close. Delaware Governor John C. Carney declared a State of Emergency starting on March 13, 2020 and has since updated it multiple times, most recently on March 22. On March 22, the Governor ordered Non-Essential Businesses to close at 8:00 a.m. on Tuesday, March 24. The March 22 Order also requires that employers operating “Essential Businesses” maximize telecommuting. Moreover, the Order is a “stay at home” order that requires everyone to stay home, except essential personnel. The Order also puts in place a travel ban except for certain circumstances. The purpose of the Order is to control and direct within the State of Delaware the operation of certain businesses, organizations, and enterprises necessary to maintain life, health, property, or public peace during the State of Emergency. Above all else, we as a firm want everyone to remain healthy and make it through this emergency unscathed. This article provides a general overview. As always, please contact us for specific guidance for your business as the March 22 Order creates a few murky areas for the unwary business. For example, while the Order allows individuals to leave their house to perform “Essential Activities,” which seems to allow for work in the office, the section on “Essential Travel” does not seem to authorize leaving the house to go to the office. Another example is that the Order appears to require employers to exclude workers over 60 years old from the worksite. However, this provision may run afoul of the Americans with Disabilities Act. Another issue presented is what to do about situations in which employees cannot be kept six feet apart, as will happen in many situations. We are here to help. THE MARCH 22 ORDER. In essence, the March 22 Order states that all physical locations of Non-Essential Businesses within the State of Delaware are closed until after May 15, 2020, or after the public health threat of COVID-19 has been eliminated, except that Non-Essential Businesses may continue to offer goods and services over the internet. Here is a link to the 18-page March 22 Order relating to Essential and Non-Essential Businesses. https://governor.delaware.gov/wp-content/uploads/sites/24/2020/03/Fourth-Modification-to-State-of-Emergency-03222020.pdf WHO CAN WORK? Essential Businesses are certain businesses that employ or utilize the following workers: (a) healthcare and public health; (b) law enforcement, public safety and first responders; (c) food and agriculture; (d) certain energy-related industries (electricity, petroleum, natural and propane gas); (e) water and wastewater; (f) transportation and logistics; (g) public works; (h) certain communications and information technology businesses; (i) certain community-based government operations and essential function; (j) manufacturing; (k) hazardous materials; (l) financial services and insurance; (m) chemical; (n) defense industrial base; (o) construction; (p) necessary products retailers; (q) necessary retail and service establishments; and (r) open air recreational facilities. Non-Essential Businesses are certain businesses that employ or utilize the following workers: (a) hospitality and recreational facilities; (b) concert halls and venues; (c) theaters and performing arts venues; (d) sporting event facilities and venues; (e) golf courses and shooting ranges; (f) realtors; (g) business support services, including customer service call centers and telemarketing operations; (h) shopping malls; and (i) retail stores. It is important to note that the above list of Essential Business and Non-Essential Businesses contains many exceptions and clarifications. The list found at the link above also contains the relevant 4-digit North American Industry Classification System (NAICS) code. All businesses should have a NAICS code or codes on their unemployment insurance forms or on their most recent tax return to aid in determining whether a business is Essential or Non-Essential. If you are unsure as to whether your business is Essential or Non-Essential, you can email covid19faq@delaware.gov or call 302-577-8477 between the hours of 9:00 am and 4:00 pm with any additional questions. Again, Offit Kurman is also here to help you navigate your business through these troubled waters. CAN YOU APPEAL YOUR BUSINESS CLASSIFICATION AS NON-ESSENTIAL? Yes, but there is not a guarantee that a petition will be successful. A petition must be requested in writing via electronic mail to covid19faq@delaware.gov for consideration. We understand that you can expect to receive a decision within one week of your submission. If you have questions or need assistance with the preparation of your petition, please contact us at the phone number or e-mail address listed below. ENFORCEMENT. The March 22 Order has the force and effect of law. Any failure to comply with the provisions contained in a Declaration of a State of Emergency or any modification to a Declaration of the State of Emergency constitutes a criminal offense. State and local law enforcement agencies are authorized to enforce the provisions of any Declaration of a State of Emergency. OTHER RESOURCES. Delawareans with questions about COVID-19 or their exposure risk can call the Division of Public Health’s Coronavirus Call Center at 1-866-408-1899, or 711 for people who are hearing impaired, from 8:30 a.m. to 8:00 p.m. Monday through Friday, and 10 a.m. to 4 p.m. Saturday and Sunday, or email DPHCall@delaware.gov For more information go to https://dhss.delaware.gov/dhss/dph/epi/2019novelcoronavirus.html The Delaware Department of Health & Social Services website offers a response to COVID-19, including information on testing, community resources and what you can do to avoid spreading COVID-19. For more information go to https://coronavirus.delaware.gov/ FURTHER GUIDANCE AND CLARIFICATION. As noted above, Governor Carney has modified the Declaration of a State of Emergency on six occasions and we anticipate that such modifications will continue, seemingly on a daily basis. For example, on March 24, the Governor issued an order, effective March 25 at 8:00 a.m. that delayed elections, evictions, foreclosures, termination of utility service, and termination of insurance coverage. Here is a link to the March 24 order as to these issues. https://media1.dsba.org/public/pdfs/GOVR%20Sixth-Modification-to-State-of-Emergency-03242020.pdf Please contact us if you have any questions regarding the Declaration of a State of Emergency generally, the classification, or appeal of a classification, as an Essential or Non-Essential Business, insurance coverage questions, employment law questions, or the most recent order concerning delayed elections, evictions, foreclosures, termination of utility service, and termination of insurance coverage. Stay tuned for more. Charles “Max” McCauley III contributed to this Article.
March 31, 2023
Business
Cannabis Manufacturing Complicated by New Jersey Industrial Site Recovery Act (ISRA) and Potential Environmental Liability
New Jersey’s Industrial Site Recovery Act (ISRA) may impose significant environmental liabilities on unsuspecting Class 2 Cannabis Manufacturers, including liability for historical contamination. ISRA requires investigation and remediation of all historical contamination, whether or not caused by the manufacturer, each time certain business goes through a change of ownership or control or ceases operations including as a result of a lease termination, subject to specific exceptions and limitations. Cannabis businesses that may be subject to ISRA will want to take additional precautions through due diligence, contracting, and perhaps even obtaining environmental insurance, to limit potential liability. However, ISRA does not apply to all businesses or transactions, and will not apply to all Class 2 Cannabis Manufacturers. In fact, the provisions of ISRA only apply if the following the place of business must have a North American Industry Classification System (NAICS) code listed in N.J.A.C. 7:26 B – Appendix C of the regulations implementing ISRA. A Class 2 Cannabis Manufacturer may fall under a few different NAICS codes, including: 311812 – Commercial Bakeries: This industry comprises establishments primarily engaged in manufacturing fresh and frozen bread and bread-type rolls and other fresh bakery (except cookies and crackers) products.” 311991 – Perishable Food Manufacturing: This industry comprises establishments primarily engaged in manufacturing perishable prepared foods, such as salads, sandwiches, prepared meals, fresh pizza, fresh pasta, and peeled or cut vegetables. 325411–Medicinal and Botanical Manufacturing: This industry comprises manufacturing uncompounded medicinal chemicals and their derivatives (i.e., generally for use by pharmaceutical preparation manufacturers) and/or Grading, grinding, and milling uncompounded botanicals 424590– Other Farm Product Raw Material Merchant Wholesalers: This industry comprises establishments primarily engaged in the merchant wholesale distribution of farm products (except grain and field beans, livestock, raw milk, live poultry, and fresh fruits and vegetables). It is possible that a business will have multiple operations at a single location, and then the dominant use must be determined for purposes of ISRA. The only ISRA-subject code noted above is 325411 (Medicinal and Botanical Manufacturing), but other ISRA-subject codes not listed above could apply in certain situations. Class 2 Cannabis Manufacturers with medicinal and botanical manufacturing as the dominant use may need to comply with the requirements of ISRA each time a change of ownership or operations, or a cessation of operations, including a lease termination, occurs. These businesses should protect themselves by conducting due diligence on historical contamination, carefully allocating environmental risks and liabilities in leases and other real estate contracts, and perhaps even obtaining pollution legal liability or other environmental insurance. Competent local environmental attorneys can assist with the evaluation of whether ISRA applies, and, if it does, advise on risk mitigation.
March 9, 2023
Business
Crisis Management – Lessons from the Law, Aviation and Real Life
Originally posted on 03/04/2020, content updated on 03/04/2023 Crises are often self-inflicted, such as the Boeing 737 Max crisis in which Boeing’s executives apparently ignored the very people inside Boeing who knew of the Max’s problems – the pilots. “After the crash, Boeing issued a bulletin disclosing that this line of planes, known as the 737 Max 8, was equipped with a new type of software as part of the plane’s automated functions. Some pilots were furious that they were not told about the new software when the plane was unveiled.”[1] “Boeing Pilot Complained of ‘Egregious’ Issue With 737 Max in 2016” was a headline in the New York Times.[2] Too often a crisis in the cockpit is so urgent that time does not allow for taking out the paper or electronic flight manual to help analyze and solve the problem. Student pilots are taught the “4 C’s” -- when faced with difficulty, “Climb, Communicate, Confess and Comply with instructions.”[3] In addition to learning what’s in the flight manual for the aircraft being flown, the 4 C’s are part of every pilot’s proficiency check ride. “A pilot goes through four stages of proficiency when learning a new airplane, a new set of skills, or working in a new environment. Those stages are Cautious, Compliant (or Current), Confident and Complacent. The last of these can kill you.”[4] Boeing as an institution seems to have gotten “complacent” when it came to Max’s safety because, it appears, those in the C-suite knew better than the pilots in the trenches. Once a self-inflicted crisis due to whatever cause, such as complacency, escalates, the 4 C’s come into play – Climb to safety, Communicate the problem, Confess what you did and what the problem is, and Comply with instructions from the higher authority of air traffic control. Boeing did what the Iranians did in the crash of a Ukrainian Boeing 737-800 (not a Max). The Iranians denied there was a problem and blamed someone else. Boeing blamed pilot error and the Iranians blamed mechanical failure. The two Boeing Max crashes occurred when foreign pilots were in control of new Boeing Max jets maintained and operated by foreign airlines. The Iranians did what some say they do best – invoke the big lie. The Iranians had no access to the black box or to cockpit information; there was no distress call; and in lying the Iranians were effectively faulting Ukraine’s pilots, mechanics, and pilot training even though Ukraine has one of the best safety records in terms of aircraft maintenance and pilot training. Only days later did the Iranians admit their military “unintentionally” shot down the Ukrainian airliner.[5] Even when “confessing,” the Iranians continued to lie – the missile was fired intentionally at an ascending aircraft, not at a descending incoming anything, and the Iranian’s Russian missile homed in on the airliner’s transponder which is what those missiles are supposed to do to hit their targets. The “unintentional” word was intended to excuse the incompetence and stupidity of the Iranian missile defense personnel. Bill Clinton in the Monica Lewinsky affair invoked only part of the 4 C’s -- he Climbed by telling America he had to get back to work as President of the United States, and he certainly Communicated that position. He also did the big lie when he denied he had had “sex with that woman.” In telling America, “It depends on what the meaning of ‘is’ is,”[6] President Clinton made every American parent of a daughter cringe. Boeing, Iran and President Clinton created these crises, and all mismanaged them. While it would seem axiomatic that a self-inflicted crisis can be managed more easily than an unexpected crisis, that unfortunately appears not to be the case. In unexpected crises, these rules of aviation also apply. The obituary of one of America’s foremost crisis management experts, Harold Burson, said: “Mr. Burson advised corporate C.E.O.s to get bad news out quickly and fully, making it a one-day story rather than letting it drag out. He urged them to be candid, and refused to take clients who could not be. He held staff seminars to promote Burson-Marsteller’s ‘vision and values.’ He was less interested in hiring reporters with contacts than he was in finding good writers who could capture the essence of a client. As business and financial news reporting improved in the 1970s and ’80s, he sought writers adept at detailed analysis, not the old puffery about chief executives and companies.”[7] [Emphasis added] Boeing, Iran and President Clinton could have used and heeded this advice which looks similar to the 4 C’s As a lawyer for over 50 years, I have had the privilege of having clients trust my judgment when a crisis occurs. Sometimes those have been “bet-the-company” crises. Boeing’s Max crisis was potentially a “bet-the-company” crisis. The Iranian shoot-down of a passenger plane and killing all 176 aboard was nothing more than a seeming “public relations” crisis to the Iranian regime.[8] And the Clinton crisis was a “Bet-the-Presidency” crisis that turned on a 50-50 Senate vote. “Over the years, I learned that the traditional advice of a lawyer to avoid public comment during a legal crisis had become outdated, especially with the impact of the Internet at the turn of the twenty-first century. . . . It was no longer viable for a lawyer to tell a client, ‘We’ll win it in the courtroom—we won’t litigate this in the media.’ There were too many ways for the judge and the jury to be influenced by public opinion, consciously or unconsciously; too many ways for prosecutors and regulators to be persuaded by adverse media coverage to launch an investigation or to bring a case, as broadcast news, once a day, became 24/7 cable, and then within just a few years, the Internet led to websites and then some blogs and then the blogosphere and then Google, Twitter, YouTube, WiFi, and social networks. Everything that follows ineffective crisis management – developing a simple message, rapid response to correct misinformation that could hurt a client’s reputation, share values or outcome in the courtroom – and, in the long-term, repairing the damage begins with the need to get the facts, all the facts, good and bad – not just those that attorneys are ready to tell a non-attorney crisis manager or public relations, consultant. And that means getting access to all the facts, first with the protection of attorney-client privilege.”[9] While the author of that advice was one of President Clinton’s advisers in the Paula Jones and Monica Lewinsky matters, his words of today, which may be ironic given what happened some 25 years ago, are valuable: “The first rule of Crisis Management is to get all the facts.”[10] Some law firms have created crisis management practices, sometimes within their government investigations practices. One firm “advocates a multifront approach to crisis management. Whether the situation stems from internal problems or external events, we enable our clients to maintain focus on their business objectives while managing a crisis to its best outcome.”[11] In aviation terms, this law firm is telling clients to continue to fly the airplane – continue to run their businesses, which is the “Climb” mandate of the 4 C’s, and the lawyers will gather the facts and engage other professionals such as public relations or crisis management firms, under the umbrella of the attorney-client privilege, and then advise the client on potential courses of action. An Above-the-Law article explains the critical importance of learning the facts: A hospital manager’s lost laptop with protected patient information on it meant the focus had to be not first on what the potential damage for a HIPAA violation could be, but first on making sure the “fact” the laptop was lost was accurate. “[T]he only ‘wise’ decision I made that day was to turn over the reins of our response to my colleague who suggested we first ask the manager to retrace her steps over the previous day. And as luck would have it, her laptop turned up in a rarely used conference room a few minutes later. Safe and sound, and most importantly, no violation of HIPAA or our patients’ information.”[12] There is no substitute for learning the facts as quickly and as accurately as possible. Another aviation crisis management lesson taught to all student pilots and repeated at all phases of pilot training is to “Aviate, Navigate, Communicate.”[13] The “Aviate and Navigate” part of this mandate is the “Climb” part of the 4 C’s. The “Communicate” element is shorthand for the “Communicate, Confess and Comply with instructions” part of the 4 C’s. The client must always Aviate and Climb – run the business. The Confess part is usually where things get dicey in terms of whether the client will come clean with the lawyers. Boeing apparently did not. The global media were the lawyers in the case of the Iranian shoot-down of the Ukrainian aircraft. And we do not know whether President Clinton Confessed to his advisers at the time all of the facts regarding Paula Jones, Monica Lewinsky and other women accusers. I chose the aviation analogy to crisis management for business because as a licensed pilot for more than 40 years and having owned my own single engine aircraft for more than 38 years, I have had my share of difficult situations just as every plot does. Having a landing light blow out on approach to an unfamiliar non-tower controlled airport after a multi-hour night cross country to work on an acquisition in Maine; having a very large Seagull dive towards my windscreen and hit my right wing over the New Jersey Turnpike at 500 feet on approach to my home airport; and getting lost when encountering an unexpected snow squall in Western Pennsylvania, many occurring in my aircraft’s pre-GPS days, were all manageable because of my recurrent pilot training to prepare for those potential crises. While the possible crises in aviation are seemingly endless, especially the more complicated the aircraft, training and more training proves the adage that “practice makes perfect.” There are some crises that cannot be practiced in an aircraft and need to be practiced in a simulator, especially when flying more complicated aircraft. An airplane is a machine with parts, systems, passengers and crew that can malfunction. What we do as student pilots and then as pilots is train for contingencies. Training for a crisis in business is not as easy as training for a crisis in aviation because training for crises is usually not part of a business’s agenda. Contingency planning can be urged by insurers, and some companies’ management will have risk managers who do engage in contingency planning. Unenlightened management will often view costly contingency planning as an expense without a quantifiable immediate benefit. How often do we roll our eyes at fire drills in high rise office buildings? This is contingency planning and practice, or recurrent training, no different from what we do as pilots. “If you see fire or smoke, follow the four ACES of high rise building fire safety: 1. ACTIVATE the fire alarm immediately by pulling the nearest Fire Alarm Box . . . . If you cannot pull the Fire Alarm, call 911. 2. COMMUNICATE with the Fire Warden Team and other colleagues on your floor. 3. EVACUATE by using the stairs . . . . DO NOT USE THE ELEVATORS. Members of the Fire Warden team will lead the evacuation down two or more floors for re-entry (or if there is the need to evacuate the building completely . . .). 4. SELF-ESCAPE Stay calm, don’t panic. Stay low in smoke conditions, and close doors to confine fire and smoke. Feel doors before opening them; if they’re hot, don’t open!”[14] Isn’t this really a tenant’s variant on “Climb, Communicate, Confess and Comply with instructions?” “I have written before about the necessity of contingency plans, but what if there is simply no time to pull out the book and turn to page 63? You are in a state of emergency, your stomach is in a knot, and the CEO is asking you some very difficult questions. Grab the canoe. Take a breath and do your best.”[15] The canoe is the business or the aviate and navigate/fly the plane part of dealing with an aviation crisis. “First, you must ‘grab the canoe’ and get back to floating; only then can you assess what else might be wrong (missing possessions, food, wet socks, etc.). Things are going to go screwy during your tenure as an attorney — they just will. You cannot possibly plan for everything, but you can remember the mantra of ‘grab the canoe.’ The canoe is a metaphor for the stasis that usually surrounds your job. You are first and foremost representing an entity. . . . The entity is what keeps you and the other employees afloat. During a crisis, all of the happenings within the entity are to be worried about after first taking care to right your primary client, the business. Some things that occur in an emergency, or a quickly moving negotiation, can be left behind, such as obsolete contractual language. Other issues are absolutely necessary in a publicly-traded company — reporting requirements, for instance. And in the time it takes to read this column, some of these issues can overturn your company’s sense of balance, and leave you drifting.”[16] “Of course we are not saving lives, or curing dread disease. We practice law. The key is in the word “practice.” As you practice, answers become ingrained, and your expertise begins to grow. After years of “practice,” you enable yourself to right tipped canoes, and assist stressed CEOs quickly, efficiently, and appropriately. But in the recesses of your mind, you must always be aware of the possibilities for crisis. Remember that in the moment you will rely on what you know and keep the primary focus on staying afloat. You can allow yourself to let the what-ifs creep in once you are past the crisis and are happily ensconced at the third seat at the bar, with a martini safely in hand.”[17] Crises can be big or small. And they can sometimes involve saving lives. It is not often we as lawyers are called upon to help clients deal with “Bet-the-Company” or life-and-death crises. Our “practice” for these crisis events usually comes on the job and our performance often turns on the judgment we have developed from experience, from observing more experienced lawyers, from reading as much as we can about as much as possible, and most of all from thinking and analyzing what we read, see and hear and all the what-if’s that never cease in our daily law practices. In my law practice, I have had a few “Bet-the-Company” crises to help clients through. Fortunately, all turned out fine. One involved consumer product tampering and the other involved a brother-in-law’s attempt to misappropriate my client’s business. The Product Tampering Crisis: The CEO of my branded consumer product client called in a panic, telling me a supermarket executive notified the client and FBI that one of its stores had received a call from someone claiming to have put poison in a container of the client's product. The client asked whether he should issue a product recall. I have used this example in interviewing job applicants. I ascertained the facts by speaking with the client’s CEO, COO and plant manager and by liaising with the FBI. I learned that wiretaps had been placed on the supermarket's telephone lines and that the FBI agent’s experience was more often than not these were hoaxes. My advice to the client was to wait, not rush to issue a product recall, and instead to withdraw the product just from the stores in the local area, to test the withdrawn product, and to replace the product with new product produced at a different plant. That was done and testing proved negative. We waited. This was in the days before computer real-time inventory could tell us how much product had been purchased at each location. If no poisoned product was out there and the client issued a recall, the company and its brand would have been severely and possibly irreparably damaged. If a poisoned container was already out there in commerce to an unsuspecting consumer, the company would be severely damaged, and a recall would necessarily follow. The FBI agent and I thought the odds of a just-purchased container being consumed and harming or killing someone were fairly low. The supermarket received a second call from the same caller a few hours later. The FBI wiretap led to an arrest that day of a disgruntled teenage supermarket employee who confessed to the hoax. A public product recall was avoided, and no one was hurt. The Brother-In-Law Crisis: A prospective client was referred to me to discuss estate planning and his desire to leave his hotel business to his adult child who had joined the business and opened an on-premises restaurant. The client believed this hotel was “his,” as the client ran this hotel and his brother-in-law ran two other hotels that all four in-laws owned. I needed to know what the client owned, not what the client told me he owned. After reading the relevant documents, I learned that the client did not own or control the business he thought he did, and he would not be able to leave the business to his heir. The client owned 26% of a limited partnership that owned the business, and he was one of two general partners, the other being his brother-in-law, a very controlling and domineering person. The brother-in-law conditioned his okay for the client’s adult child to open the restaurant on the restaurant providing, at its expense, free breakfasts to the hotel’s guests. The client's then-lawyer and then-accountant were among the dozen or so family and friends limited partners. The partnership's term was contractually scheduled to expire some years earlier, but the brother-in-law, attorney and accountant had advised the client to extend the partnership's term because if the business was sold, they would all have to pay taxes. It was not a coincidence that each limited partner's original investment was yielding an annual 700% cash return, all while the assets of the business had appreciated significantly. Because the client was the nicest person I had ever met and was the kind of man one would choose as your father if that was a matter of choice, the client was not confrontational and did not want to sue despite what I thought were good claims against some of the actors here. I devised a non-litigation strategy that included the partnership not distributing cash to its partners so the partnership could use its cash for acquisitions and other business matters. That resulted in the partners having taxable income without cash being distributed to them. The client offered to buy out the limited partners who rejected the offer, commenced arbitration, and sued for an injunction to compel cash distributions. Although the client would not sue, he would defend himself quite vigorously. The injunction was denied. The case proceeded to pre-arbitration mediation. Relying on their own "expertise," the former lawyer and former accountant chose not to obtain an appraisal and agreed on behalf of the limited partners to a buy-out at a particular partnership valuation. I arranged for a bank client to make a loan to the partnership in an amount greater than the buy-out value of the limited partners’ 48%. The bank's appraised value of the business turned out to be about 50% greater than the buy-out value. After some intra-family transactions, this crisis was resolved with my client owning 100% of his business and having the ability to leave his very valuable asset to his heir. The client said that the decision to make me his attorney was the most significant business decision of his life. It is critical to ascertain the facts in any crisis situation, both for the lawyer and the client, and the lawyer must be able to communicate those facts clearly to the client and ultimately to others involved in the crisis. “’We are advocates,’ Mr. Burson told The New York Times in 1984. ‘We are being paid to tell our clients’ side of the story. We are in the business of changing and molding attitudes, and we aren’t successful unless we move the needle, get people to do something. But we are also a client’s conscience, and we have to do what is in the public interest.”[18] While we are advocates to the world outside the client, we need to be truth-tellers to and questioners of the client. “When cyanide-laced capsules of Tylenol, the pain medication, killed seven people in the Chicago area in 1982, its manufacturer, Johnson & Johnson, made the best of a bad situation. After consulting Mr. Burson, the company’s chief, James E. Burke, announced a recall, ordered new tamper-resistant caplets and packaging seals, and mounted a campaign that acknowledged the facts, stressed safety measures and eventually restored his company’s credibility. ‘Basically, I served to help him think through problems and reinforce his own instincts,’ Mr. Burson said of Mr. Burke. It was not modesty. P.R. people have always tried to keep their hands invisible, allowing clients to take credit and blame, and the Tylenol case is often cited as a textbook model of corporate responsibility in a crisis. No one was ever prosecuted for the tampering, or for an isolated 1986 recurrence.”[19] (Coincidentally, I advised a pharmaceutical packaging company client at that time that repackaged Tylenol in tamper-evident packaging following that crisis.) Sometimes, identifying and articulating the facts suggests a solution. In my examples, each business needed to continue to be operated while these crisis situations played out and resolved. “Climb, Communicate, Confess and Comply with instructions” is the client’s job in a crisis. Our role as lawyers is to focus the client on running the business and ascertaining the facts as rapidly and as accurately as possible, evaluate options with the client, and then together arrive at the solution that makes the most sense for the client and the client’s constituencies. "Never let a good crisis go to waste" has been attributed to Winston Churchill[20] and to others.[21] No matter the outcome of a crisis, there is always a lesson to be learned. [1] https://www.washingtonpost.com/business/economy/new-software-in-boeing-737-max-planes-under-scrutinty-after-second-crash/2019/03/13/06716fda-45c7-11e9-90f0-0ccfeec87a61_story.html[2] https://www.nytimes.com/2019/10/18/business/boeing-flight-simulator-text-message.html [3] https://airfactsjournal.com/2018/09/the-other-4-cs-of-aviation/ [4] https://airfactsjournal.com/2018/09/the-other-4-cs-of-aviation/ [5] https://www.nbcnews.com/news/world/iranian-military-says-it-unintentionally-shot-down-ukrainian-plane-n1113996 [6] https://en.wikipedia.org/wiki/Impeachment_of_Bill_Clinton [7] Harold Burson, a Giant in Public Relations, Dies at 98 https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [8] https://en.wikipedia.org/wiki/Ukraine_International_Airlines_Flight_752 [9] Lanny J. Davis, Why Lawyers Are Best At Crisis Management http://www.lannyjdavis.com/why-lawyers-are-best-at-crisis-management/ [10] http://www.lannyjdavis.com/why-lawyers-are-best-at-crisis-management/ [11] https://www.steptoe.com/en/services/practices/criminal-defense-investigations/crisis-management.html [12] https://abovethelaw.com/2017/05/counseling-through-an-in-house-crisis/ [13] For much more on this topic, see https://idea.library.drexel.edu › idea:6094 › datastream › OBJ › download). [14] https://finance.columbia.edu/content/building-evacuation-procedures [15] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/ [16] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/?rf=1 [17] https://abovethelaw.com/2013/07/grabbing-the-canoe-or-reflections-on-crisis-management/?rf=1 [18] https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [19] https://www.nytimes.com/2020/01/10/business/media/harold-burson-dead.html [20] https://realbusiness.co.uk/as-said-by-winston-churchill-never-waste-a-good-crisis/ [21] http://freakonomics.com/2009/08/13/quotes-uncovered-who-said-no-crisis-should-go-to-waste/
March 4, 2023
Business
FTC Seeks to Ban Non-compete Clauses: What This Really Means for Your Business
Today we will cover how the FTC seeks to ban non-compete clauses and what this means for your business. On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule banning employers from imposing non-competes on their workers. The rule is undoubtedly politically motivated as it was issued in response to President Biden’s Executive Order that encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC believes a non-compete is a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. By stopping this practice, the FTC erroneously estimates wages would increase by nearly $300 billion per year, and it would expand career opportunities for 30 million Americans. Scope of Proposed Rule to Ban Non-compete Clauses The FTC’s proposed rule would prohibit employers from using non-compete clauses – i.e., any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, within a specific geographic area and period of time after the conclusion of the worker’s employment with the employer. It would make it illegal for an employer to: enter into or attempt to enter into a non-compete with a worker; maintain a non-compete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a non-compete. The proposed rule would apply to “workers,” broadly defined by the FTC to include employees, individuals classified as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer. The rule also includes a “functional test” for determining what constitutes a “de facto” non-compete clause that has the same effect as an express non-compete clause – the same test employed by courts in states that already have express prohibitions on non-compete clauses. Effective Date of Proposed Rule Importantly, this is a proposed rule that is not in effect. The proposed rule is in a comment period until March 20, 2023. We do not believe it will go into effect, if at all, until after a lengthy court battle ending with a ruling from the United State Supreme Court. Then, even if the proposed ban becomes law, employers will have 180 days to revise their agreements to conform with the law. Moreover, there are a variety of tools, such as reasonably tailored non-disclosure agreements and confidentiality provisions, employers can use to accomplish their goals without violating the proposed ban. The proposed rule is the first step in a long process that will take years to complete. We expect the FTC will receive thousands or hundreds of thousands of comments to consider. Based on the comments, the rule will be revised. It could take the FTC until late 2023 or even the end of 2024 to issue a final rule. After the final rule is set forth, it will be subject to a legal challenge (or challenges); this will undoubtedly delay the effective date into 2025 or later, assuming the final rule survives any legal hurdles it faces. During this challenging period, a presidential election will occur, and the political winds will likely change, potentially further reversing the course of the FTC. Criticism of the Proposed Rule The U.S. Chamber of Commerce has opined that the FTC lacks the authority to issue the rule and ignores the benefits of non-competes. A senior vice president for the U.S. Chamber of Commerce has stated: “Attempting to ban non-compete clauses in all employment circumstances overturns well-established state laws which had long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.” An FTC Commissioner issued a dissenting statement when the proposed ban was announced. The dissenting statement outlined potential legal challenges noting the FTC lacks the legal authority to issue the ban, and the rule is barred by a recent United Supreme Court decision. Even if the FTC has authority, it is an impermissible delegation of that authority. The proposed rule must overcome extensive case law upholding the use of non-compete clauses that are determined to be reasonable unless they are unreasonable as to time or geographic scope. Even if the FTC has authority, it is an impermissible delegation of that authority. Exemptions to Proposed Rule to Ban Non-compete Clauses The proposed rule would exempt non-compete agreements that a person entered in connection with the sale of a business, but only if that person owned 25% or more of that business. The FTC is also seeking comments as to whether: non-compete clauses between employers and senior executives should be subject to a different standard; the rule should apply uniformly to all workers; and the rule should impose a categorical ban on non-compete clauses. Alternatives to Non-compete Clauses Employers are not without options. The FTC’s proposed rule’s definition of a non-compete clause does not include other types of covenants. Accordingly, employers should begin analyzing their confidentiality clauses, non-solicitation, and non-disclosure provisions. Carefully drafted provisions can ensure that employers are able to protect confidential information and customer relationships, as well as the poaching of current employees by former employees. Employers should also use this as an opportunity to strengthen trade secret protection plans. Employers should also use this as an opportunity to strengthen trade secret protection plans. What Should I Do as an Employer? There is no need to panic. The proposed rule will not go into law in its final form, if at all. However, now is the time to implement proper planning techniques into agreements with employees. As noted previously, with proper legal counsel, non-compete, non-solicitation (vertically and horizontally), confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers, most of which are not within the scope of the current version of the proposed rule. With proper legal counsel, non-compete, non-solicitation, confidentiality, non-disclosure, and other restrictive covenants can be used to accomplish the goals of employers. Conclusion Thank you for reading our blog on how the FTC seeks to ban non-compete clauses and what this means for your business. Please contact us immediately so that we can assist you in your planning and contract drafting process to properly implement such restrictions to protect your business. Charles McCauley can be reached at cmccauley@offitkurman.com or 484-531-1712, and Sarah Goodman can be reached at sarah.goodman@offitkurman.com or 267-338-1319.
February 24, 2023
Business
Does Litigation Risk Loss of Potential Insurance for Environmental Harm? New Jersey Court Weighs In
Businesses risk losing potential insurance coverage for investigation and remediation of environmental contamination if they pursue claims against third parties without carefully considering and preserving available coverage. In fact, in recent ligation in New Jersey with implications nationwide, two insurance companies tried to avoid providing coverage for environmental expenses incurred by the owner of the contaminated property by arguing that the property owner’s claims were barred by New Jersey’s “entire controversy” doctrine as a result of prior litigation between the property owner and its former tenant and the tenant’s insurance company. See Industrial Corner Corp. v. Public Serv. Mut. Ins. Co., Docket No. 20-06677 (D.N.J. February 8, 2023). New Jersey’s “entire controversy” doctrine is a unique formulation of the more typical doctrine of “res judicata,” which generally bars claims that could have and should have been brought in prior litigation. However, based on the specific facts at issue, the New Jersey federal district court allowed the property owner to continue to pursue insurance coverage from the insurers despite the prior litigation. That is, the property owner has owned the New Jersey property at issue since 1971. From 1971 through 2008, the property owner leased the property to a tenant conducting manufacturing. The tenant discharged perchloroethylene (“PCE”), a solvent used to clean metal and dry-clean fabric, through its operations and thereby contaminated the property. After learning of the contamination, the property owner sued the tenant and the tenant’s insurance company in separate litigation for damages under the terms of the lease and the applicable insurance policies. The property owner successfully obtained compensation from these parties but was unable to recover all of its costs. As a result, following the conclusion of this litigation, the property owner sought coverage from its own insurance providers. As noted above, the providers responded by arguing that the property owner’s claims were barred by New Jersey’s “entire controversy” doctrine. In evaluating the applicability of the “entire controversy” doctrine, the court determined that two of the three elements of the doctrine weighed in favor of dismissing the property owner’s claims. However, the third and final element was not satisfied. In particular, the court determined that the “entire controversy” doctrine did not apply because the claims by the property owner and its insurance providers did not arise from the same transaction or occurrence as the prior litigation against the former tenant and the tenant’s insurer. The court weighed several factors and determined that, even though all of the claims arise from the PCE contamination, the claims differ in certain key regards. The court also found it dispositive that the property owner could not have brought all of the claims in the same action because they were not yet ripe, i.e., because its insurance providers had not yet refused to provide coverage. While this decision is helpful to insureds, it is easy to formulate a set of facts where the property owner’s insurers could have escaped liability based on the “entire controversy” doctrine or otherwise. As such, this decision provides a necessary warning to parties, whether located in New Jersey or beyond: carefully evaluate all potential recovery options, including private parties and insurance providers, before instituting litigation and take precautions to preserve and maintain all recovery options.
February 22, 2023
Business
Ninth Circuit Court of Appeals Submits Second Certified Question to California Supreme Court On COVID-19 Related Insurance Coverage
On February 7, 2023, the Ninth U.S. Circuit Court of Appeals (“9th Circuit”) sent a certified question to the California Supreme Court on an issue in a pending case relating to insurance coverage for COVID-19-related business shutdowns. This is the second time within the past 45 days that the 9th Circuit has done so, having submitted a different question to the California Supreme Court in another COVID-19 coverage case on December 28, 2022. The certified question sent on February 7, 2023, relating to a pending dispute between French Laundry Partners and its insurer, The Hartford, asks, “[i]s the virus exclusion in French Laundry’s insurance policy unenforceable because enforcing it would render illusory a limited virus coverage provision allowing for the possibility of coverage for business losses and extra expenses allegedly caused by the presence and impacts of COVID-19 at an insured’s properties, including the loss of business due to a civil authority closure order?” The certified question sent on December 28, 2022, relating to a pending dispute between concert organizer Another Planet Entertainment and its insurer Vigilant Insurance Co., asks “[c]an the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?” The topics of the two certified questions are not the main points here. Instead, it is the uncertainty that remains as COVID-19-related insurance cases make their way through Courts – in California and elsewhere – that is paramount. Indeed, in its February 7, 2023, submission to the California Supreme Court, the 9th Circuit stressed: Courts at both the state and federal levels are grappling with the application of California insurance contract interpretation law to coverage for losses from business shutdowns due to government closure orders in response to COVID-19. While both state and federal courts have published opinions providing some guidance, there remains much uncertainty as to how California law applies in many scenarios. The prevalence of and uncertainty surrounding COVID-19 insurance litigation is underscored by our certification to the Supreme Court of California on December 28, 2022, in another case asking whether the actual or potential presence of the COVID-19 virus can constitute ‘direct physical loss or damage to property’ for the purposes of coverage under an insurance policy. The stakes are high in COVID-19 coverage cases, which center on an insured’s loss of business due to government closure orders. After more than two years of litigation across the nation, uncertainty remains. The 9th Circuit’s sending of two certified questions to the California Supreme Court in the past 45 days is a manifestation of this and an effort to, in the words of the 9th Circuit, “gain some efficiencies through concurrent consideration of our certification in [the French Laundry] case.” Time will tell what the California Supreme Court decides to do in these two instances and whether more certified questions will come from Federal Courts to State Supreme Courts as courts seek clarity and consistency in handling COVID-19-related insurance coverage cases. If you are still grappling with claims associated with losses due to government closure orders in response to COVID-19 or other comprehensive general liability or property insurance coverage issues, please feel free to contact us for a consultation.
February 14, 2023
Business
How Long Did You Say I Need to Keep My Tax Records?
I get this question a lot, and not just from non-lawyers. The answer, as with any question you ask a lawyer, is it depends. Several different statutes of limitation apply regarding how much time the IRS has within which to audit your return. The basic period is three years from the due date of the return or the date of its filing, whichever is later. So, if you only recently filed your 2015 return, the three-year clock starts to run on the date your 2015 return was filed. Had you filed your 2015 return early, say on March 1, 2016, the three-year clock started to run on April 15, 2016 (the due date of your 2015 return (for individuals), March 15, 2016 (for businesses)). This means when your 2015 return is selected for audit, you need to be able to produce records that are now seven years old to substantiate any deductions taken. Records get lost and destroyed. Houses and businesses suffer casualty damage, people move, and dogs eat things. The IRS has heard it all and frankly doesn’t care. If the IRS thinks you have understated your income or overstated your basis by more than twenty-five percent (25%), then the Service has six years (computed from the dates like the three-year statute discussed in the preceding paragraph) to audit your return. If the IRS thinks the omission was fraudulent, they have forever. Likewise, if you never file your return, then the statute never starts to run. If you have foreign accounts or have signature authority over foreign accounts and are required to file a FBAR and Form 8938, the IRS deems those tax years open until those forms are filed! So, if you had a foreign account that you should have but forgot to disclose on your 2010 return, the IRS can still go back and audit that return in 2022 because the filing was never completed because all the required forms were not filed, so the return was never filed to start the clock running. The hits just keep on coming. Recently the Tax Court upheld a Notice of Deficiency (NOD) against a taxpayer based on a net operating loss she incurred in 1999 and had been carrying forward every year. Under IRC 172, an individual taxpayer can carry a NOL forward indefinitely until the NOL is completely used. In this case, that’s what the taxpayer did. The taxpayer had a large loss (initially more than $5,000,000.00) from a failed franchise. She first claimed the loss on her 1999 return, which the IRS promptly audited and found no deficiency, i.e., the NOL was proper and fully substantiated. The taxpayer (a CPA) dutifully carried forward and claimed the adjusted NOL each year (she used up a little bit each year), including 2014 and 2015. The Service then challenges the 2014 and 2015 returns and denies the NOL. Yes, this is the same NOL on the previously audited 1999 and 2000 returns that the IRS said passed muster. So, the CPA goes to Tax Court. This is where is really gets good. In Tax Court, the taxpayer introduced the 1999 and 2000 returns to which the Court held-get this-the taxpayer’s “proof to be insufficient to substantiate a taxpayer's entitlement to a loss carryforward.” Amos v. Commissioner, TC Memo. 2022-109. The Court noted, “The prior tax returns show only that [the taxpayers] claimed NOL carryforward deductions. They do not provide evidence that [the taxpayers] are entitled to them.” Amos v. Commissioner. So, even when the IRS audits your return and agrees with your return, if the return is for the first year you are claiming a NOL that will likely be carried forward for years to come, you better hang onto those records that document and establish the NOL. Currently, many of us rely on online banking, online tax payments (property and state income (in states that have a state income tax)), online brokerage activity, and a whole host of other things. Each year, as you prepare your taxes, you should print out and retain copies of any online reports you rely on in determining your federal and state income tax liability. Many service providers purge information after a few years, so it may not necessarily be available should you need it in response to an audit. Retain copies (a personal scanner works great) to scan documents regarding basis information and expense deductions. Setting aside the soundbites coming from both sides of the aisle, the practical reality of increased funding for the Internal Revenue Service is audits will increase. As you may know, a return can be “selected” for audit in one of three ways: (1) the computer flags the return because certain figures or ratios of figures trip its algorithms; (2) the return is randomly selected for audit (nothing triggered the audit, it was just the taxpayer’s unlucky day); and (3) an examiner flags the return (more common in the estate and gift tax area, and other specialized returns, less so, but still possible, for individual returns). Several years ago, the IRS openly announced audits were decreasing because the Service lacked personnel. That will soon change, and with that change comes the need for heightened vigilance by taxpayers regarding record keeping and record retention so that if your return is selected for audit, you have the records to come out of the audit relatively unscathed. Because an audit starts with the IRS denying all deductions you took on the returns, to claim the deductions, you must prove to the revenue officer’s satisfaction that you have kept proper records substantiating the deduction. If you can’t prove it, you can’t take it. This means starting from ground zero, and therein lies the problem with old records. So, depending on your tax situation, you may want to hang onto those records a little longer. Scott Tippett is a principal with Offit Kurman’s Business Law Transactions group. Offit/Kurman PA counsels clients on business and matters, including representing clients before the Internal Revenue Service, Office of Appeals, and United States Tax Court, as well as state and local tax authorities. We counsel clients regarding personal and business tax planning matters and issues and assist with the formation and structuring of entities to maximize tax savings and tax credits. The views expressed herein are solely those of the author, and are not intended as, and do not constitute, legal or tax advice.
January 9, 2023
Business
FinCEN Issues Final Rule for Beneficial Ownership Reporting under Corporate Transparency Act
On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) within the U.S. Department of Treasury issued final regulations under the Corporate Transparency Act (CTA) that will require most small domestic and foreign business entities which are registered to do business in the United States to disclose the identity of their beneficial owners. The rule will take effect on January 1, 2024. These regulations, which finalized proposed regulations issued under the CTA in December 2021, resulted from years of debate in Congress over the best measures to develop a database of beneficial owners of business entities in order to combat terrorism, money laundering and other financial crimes. With the adoption of these regulations, the United States joins many other developed countries throughout the world in providing a means for the federal government, as well as state and local law enforcement agencies, to ascertain the identity of individuals who possess ultimate control over so-called “shell companies” that heretofore were not required to disclose their owners and therefore be better equipped to combat illicit activities conducted through such entities. The regulations require all “reporting companies,” as discussed below, to report identifying information concerning itself and any individual who either (i) exercises “substantial control,” as discussed below, over the reporting company or (ii) owns or controls at least 25% of the ownership interests of the reporting company. In addition, all reporting companies formed after January 1, 2024, must disclose the identity of the individual or individuals who directly filed the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States, and the individual who is primarily responsible for directing or controlling the filing of the relevant document by another (including attorneys, corporate service companies, etc.)(each such individual referred to as a “company applicant”). Reporting Company A reporting company is any entity (i) that is formed under the laws of any state or Indian tribe in the United States or any entity that is formed under the laws of any foreign jurisdiction that has qualified (registered) to do business in any jurisdiction in the United States, and which is formed or qualified by the filing of a document with the secretary of state or equivalent filing office in the jurisdiction of formation or qualification, and (ii) is not one of 23 specified categories of exempt entities that are already subject to beneficial ownership reporting requirements to FinCEN. Accordingly, all corporations, limited liability companies, limited partnerships and business trusts, among other entities, fall within the definition of a reporting company, while general partnerships, sole proprietorships and other trusts do not. Exempt entities include, among others, (i) most regulated financial institutions, including banks, credit unions, insurance companies, and broker-dealers, (ii) companies required to file reports under the Securities and Exchange Act of 1934, (iii) tax-exempt entities, (iv) subsidiaries of exempt entities, and (v) “large operating companies”. This latter category of an exempted entity consists of any entity that has a physical presence in the United States, employs more than 20 full-time equivalent employees and has annual gross receipts in excess of $5 million. Beneficial Owners The regulations require each reporting company to report to FinCEN certain information with respect to each individual that qualifies as a direct or indirect beneficial owner of such reporting company, as described below. The determination of who constitutes a beneficial owner derives from either of two independent tests, a substantial control test or an ownership test. The regulations define “substantial control” over the entity to mean any of the following: (i) service as a senior officer; (ii) possessing authority to remove or appoint any senior officer or majority of the board of directors or equivalent body; (iii) having the ability to direct, determine or have substantial influence over important decisions to be made by the reporting company; or (iv) having some other form of substantial control over the reporting company. Substantial control can be exercised in a number of ways, including through a position held with the reporting company, through a position held with the parent or other controlling entity of the reporting company, through contractual or other arrangements, through nominee relationships, or through other financial relationships with the reporting company. The ownership test requires that the individual own, directly or indirectly, at least 25% of the ownership interests of the reporting company. Such ownership may be obtained through direct or indirect ownership of equity interests in the company, through a profits interest, or through convertible instruments such as options, warrants or convertible debt instruments, as well as through trusts or other contractual arrangements. In calculating the percentage of ownership, the regulations require that the number of ownership interests owned by such individual be compared to the total outstanding ownership interests of the company and that any convertible, or exercisable interests in securities owned by the individual be considered to be fully converted or exercised on a per share basis. The regulations make it clear that there can be more than one beneficial owner of each reporting company. Information to be Reported and Filing Deadline Each reporting company formed on or after January 1, 2024, must file an initial report with FinCEN within 30 days of receipt of official notice of formation or qualification from the applicable jurisdiction of formation or qualification. Each reporting company in existence or qualified prior to January 1, 2024, must file an initial report no later than January 1, 2025. The initial report must contain the following information: Legal name of the entity and any d/b/a names Full business address Jurisdiction of formation or qualification for foreign entities Tax Identification Number Beneficial Owner information, including for each individual:Full legal name of the individual Residence address of the individual Unique identifying number for the individual as provided by a governmental agency, such as a driver’s license number, passport number or other identification card number, in each case together with an image of the document where such number exists. In addition, reporting companies must file an updated report with FinCEN containing revised information within 30 days of (i) any changes to the information or (ii) the company becoming aware or having reason to know of any incorrect information previously reported. For entities formed on or after January 1, 2024, the initial report must also include information for each company applicant similar to that required of beneficial owners, although a business address may be reported in place of a residence address for such individuals. While a reporting company must file a report to show any corrected information for any company applicant named in the initial report, it is not required to report updated information with respect to company applicants. When a reporting company files an initial report, it may apply for a FinCEN identifying number that it may use for filing any updating reports. In the future, FinCEN will be releasing FAQs that detail questions and answers regarding specific situations as they arise and the forms for the initial and updated reports. In addition, FinCEN will be subsequently releasing separate sets of regulations dealing with what parties will have access to the database of beneficial ownership information and revisions to the existing Customer Due Diligence regulations for financial institutions to better harmonize the existing requirements with those under the final Beneficial Ownership Reporting regulations. Offit Kurman has a team of attorneys who are familiar with the CTA and the final regulations. We will continue to monitor the roll-out of the additional regulations and other FinCEN guidance and will be happy to answer any questions that you may have in this regard.
November 3, 2022
Business
Executive Playbook: The Challenges of Hiring and Recruiting
On this month’s episode of the Executive Playbook, Mike Cammarata and Russell Berger discuss the practical challenges of making strategic hires and recruiting. Mike and Russell focus on the different leading indicators that should prompt business owners to move forward with a hire and then, once that decision is made, where to recruit and how best to interview. Listen in to learn more.
October 27, 2022
Business
Forwarding Email to Hotel Front Desk for Printing Waived Privilege!
Normally I write about recent and interesting tax cases in this blog, but every now and then, I come across a case so important I just have to share it here. Fourth Dimension Software v. Der Touristik Deutschland GMBh is such a case with an important cautionary tale. Fourth Dimension Software (“FDS”) is embroiled in a dispute with Der Touristik Deutschland GMBh (“DTD”) regarding DTD’s alleged overuse of a software license for software developed by FDS and licensed to DTD. Prior to the litigation, in preparation for a meeting with DTD in Berlin to discuss the licensing agreement, FDS’s former outside counsel emailed the president of DTD regarding certain issues for the meeting. As people sometimes do, FDS’s president wanted a hard copy of the email for his notes. Having no printer, FDS’s president forwarded the email to info.berlin@hilton.com with a note in the subject line “Please print one copy. I’m waiting at the front desk. Thanks.” How DTD got its hands on a copy of the email was not discussed. What was discussed was the waiver of the attorney-client privilege as a result of FDS’s president forwarding the email to the front desk of the Hilton in Berlin for printing. When the email came to light, FDS sought to exclude it as an attorney-client communication protected by the attorney-client privilege. As a reminder, the attorney-client privilege applies to any communication in which legal advice is sought or communicated, not just communications in the context of litigation. Because the parties were in federal court because they were from different states, and not because the case concerned a question of federal law, California law, not federal law, applied. Under California law, if a client discloses an attorney-client communication to unnecessary third parties, the client manifests an intent to waive the privilege. DTD successfully argued that was exactly what happened here. FDS pointed out that under California law, the privilege is not lost solely because the communication is by electronic means (e-mail) or because persons involved in the delivery, facilitation, or storage of electronic communications may have access to the content of the email. The Court dryly noted, “That statute does help FDS here.” The Court went on to point out the hotel desk clerk was an unnecessary third party to whom FDS’s president knowingly disclosed the communication. Though not mentioned in the court’s order, under the court’s analysis, merely forwarding the email to an unnecessary third party would have resulted in a waiver of the privilege as well. Other states’ laws may not be the same as California, but remember that forum selection clause in that contract you signed that said would only be brought in California? But why risk it? Think twice before forwarding that email to or from your lawyer. Like FDS, you may end up waiving the privilege.
October 14, 2022
Business
Executive Playbook: Maryland Saves Program
On this month’s episode of the Executive Playbook, Mike Cammarata and Russell Berger discuss the new Maryland Saves program. Under this program, almost all employers in Maryland are required to either offer a retirement plan of their own or to provide their employees with access to the Maryland Saves program. While this program should not cost employers any out-of-pocket funds, it is an opportunity for employers to ensure that they are taking strategic steps to not only comply with the law but to provide meaningful benefits to employees. Listen in to learn more about the financial and legal opportunities Maryland Saves presents for business owners.
September 29, 2022
Business
Executive Playbook: Alternative Solutions for Recruiting and Retention
Recruiting and retention continues to be a challenge for employers. While employers could always pay employees more, that is not a particularly attractive solution and, in many cases, is not a solution at all. In this episode of the Executive Playbook, Mike and Russell discuss strategies that employers can implement to attract new employees and retain existing employees.
July 28, 2022
Business
Executive Playbook: Business Owners & the Changing Economy
In this episode, Russell Berger and Mike Cammarata discuss the impact of changing economic conditions on business owners. While the news is filled with stories about inflation and a slowing economy, Mike and Russell talk about the practical challenges this creates for businesses and actions that businesses can take to prepare for economic uncertainty.
June 29, 2022
Business
Executive Playbook: Planning for Your Exit
In this episode, Russell Berger and Mike Cammarata discuss strategies for preparing and planning for an exit from your company.
June 1, 2022
Business
How to Avoid Derailing Your Sell Side M&A Transaction
There are many items and considerations that can derail your sell side M&A transaction. Active litigation, titling issues to assets and employee/benefit matters all could lead to the quick demise of your sale. Most times, these items are found when due diligence commences in earnest by your buyer. However, the single most item that will tank your deal (or have buyers pass before a deal commences) relates to sloppy financial books and records. A seller’s financial data is generally the first substantive intersection with a buyer. Even before a letter of intent is submitted, a buyer will want to see some financial records of the potential target. If the seller’s records are disorganized and not in accordance with proper standards, most buyers will move on. For all business owners having good financial statements is vital to operating a successful business; for sellers in the market, hoping clean records is a must-have. The inability to show the buyer financial value and clean operations is the foremost deal killer for a seller. Sellers wanting to sell their business should have their books and records scrubbed before going into the marketplace to make certain their finances are clean, normal and what would be expected by a buyer. Failure to do so may prevent a seller from landing that large payday.
May 13, 2022
Business
Tax Considerations when Selling your Business
Most business owners pay their fair share of taxes while running their company. When it comes time to sell the business, most owners are seeking tax strategies to minimize taxes paid on their gain. We know that tax considerations are a major driver of any commercial transaction, especially M&A transactions. So, what should a seller keep in mind when considering a sale? First, before going into the market and soliciting letters of intent (LOI), sellers should update their estate plan and engage in pre-transaction tax planning. Ideally, this planning should be finalized a year in advance of a sale. The closer to the sale, the less tax planning opportunities available. Estate planning strategies including gifting and otherwise transferring interests to reduce wealth received directly by the seller. Pre-tax planning may include reorganizing the structure of the business or changing tax elections. Once the seller receives an LOI, the proposed structure of the transaction becomes paramount for the seller’s tax planning. For example, structuring the transaction as an equity purchase likely could result in long-term capital gains treatment for the seller. An asset sale structure could lead to a mixed result of ordinary income as well as capital gains for the seller, depending on how the purchase price is allocated. Most times, a change in structure that benefits one party is a negative for the other party. Thus, the seller must have competent legal counsel versed in M&A and taxation issues. Further, how a purchase price is paid to the seller may have implications on timing as well as the treatment of the income. Monies paid overtime may lead to tax on the income being deferred to later years. Monies paid in forms such as for employment or consulting services or in consideration of a restrictive covenant likewise could have particular tax implications. In summary, selling a business is most times the largest financial transaction for an entrepreneur. Making certain to understand the tax treatment and implications at the earliest is paramount. After all, for any entrepreneur, the bottom-line net amount is what ultimately counts, not the top-line valuation.
April 20, 2022
Business
Before You Sell – Have an Accurate, Realistic Understanding of What You Actually Own
This statement seems obvious, right? From experience, I can tell you that while obvious, some sellers find out during the diligence and sale process that they do not own what they thought they owned. Take intellectual property and software rights as an example. Ownership of the software and the underlying source code can be complicated especially if the software went through a number of iterations. It can be fatal to a transaction to find out a key piece of software is not owned by the seller, or the seller has not secured the proper underlying licenses granting it the authority to do what it is doing. A best practice for all business owners is to regularly inventory their assets and confirm the ownership sourcing. Hard assets are easy to source, but finding titles and releasing liens during a transaction can add unnecessary stress. Soft assets can be tricky. A businesses’ name, logo and tag lines can be issues if the business never took the proper steps to register and confirm there were no conflicts. There is nothing worse than determining a business’ name has a conflict with another business and having to then rebrand the business and take a new course. In sum, the time to determine asset ownership and the status of any clean-up is well before being asked by a buyer to provide confirmation of ownership during the sale process.
February 9, 2022
Business
How to Know if You’re Ready to Sell Your Business
As a business owner, how does one now know the time is right to sell? The easy answer is that the time is right when the owner decides to sell. However, that answer is too simplistic and does not serve the owner well. There are two primary factors to evaluate the timing to sell a business – external considerations and internal considerations. External considerations frequently are not well vetted by many owners. External factors include the market conditions, such as the general receptivity to the owner’s business type (e.g., is the market hungry to acquire PT practices). Other external factors that impact market conditions include the tax framework and access to capital. As mentioned, too many owners decide they want to sell without fully understanding the external considerations as to the optimal time to sell their business. The reason this happens relates back to the internal considerations. The owner determines they want (or need) to sell. It could be circumstantially driven (a family illness or death). It could be a mindset such as an owner being fed up with the pandemic. Regardless, the internal pressures/decisions often outweigh what is going happening in the rest of the world. An owner can manage their mindset by getting themselves fully informed about the true state of their business and how it presently fits into the marketplace. In addition to speaking with the company attorney and CPA, the owner can get the insight of 2 other advisors and services. First, the owner may want to speak with an investment banker. The investment banker can provide the owner with market intelligence about the receptibility of the market to the owner’s business, as well as give the owner insight into how to position the business best for the sale. Further, the owner should speak with a financial advisor. Because a significant component of any sale relates to financial considerations, having an excellent financial advisor help the owner understand their financial picture is key. The financial advisor should do two things. First, this advisor should work with the investment banker/CPA to get a true market value for the business to include the likely composition of sale funds (all cash, cash plus deferred monies, etc.). Second, the financial advisor should work with the owner on their personal financial situation. Having an understanding of what the business is likely worth in the market coupled with the financial needs of the owner allows the owner to go into the selling state fully informed and ready to powerfully evaluate any offers. I find that too many owners decide to sell without having their financial house in order and thus have no ability to vet offers to know that the offers are fair and workable. Lastly, an owner may know they are ready to sell when their mindset is clear. When they have purpose beyond the business. I have experienced a number of owners that have sold their business only to become lost and disaffected. An owner that wants to sell needs to deliberately develop their “life” after their business is sold.
January 20, 2022
Business
Five Phases of a Deal from a Sell-Side Perspective: Due Diligence
You’ve signed your letter of intent (LOI). So what’s next? Now it’s time to roll up your sleeves as the real work on your sale begins. Due diligence commences. Prior to signing the LOI, you likely provided your buyer some limited financial diligence, enough that the buyer could determine to move forward and on what proposed terms. With the LOI execution, the buyer will now seek to learn much more about your business. Diligence will generally fall into three categories –financial, legal and operational. As a seller, the buyer will send you a very long and detailed diligence request list. Many times, this request list feels very overwhelming and beyond the scope of your business. This is intentional by the buyer. The buyer is casting a very large net in an effort to uncover and learn about your business in every aspect. Your approach to due diligence likely will require a new mindset. Diligence is opposite the natural inclination of entrepreneurs. Diligence requires disclosure of all things in your business –the good items and the not-so-good items. However, in all events, disclosure and diligence is the seller’s friend. Fully opening up your business in a complete and honest fashion allows the buyer to fully understand the mechanics of your business. The seller should not withhold or color any responses in an attempt to mitigate or spin matters. Rather, disclose what is requested and allow the buyer to ask its questions and make it own conclusions. No seller wants to be in a position where a buyer would revise its intentions had it known about an item (think fraud in the worst case). At times, a buyer will modify terms of the transaction (price, payment, etc.) based upon the diligence findings. While this is not usually positive for the seller (terms usually don’t get better), it is the opportunity for the parties to have open dialogue based on the same business knowledge. And remember, as a seller, diligence is a continuing process up until closing. It is not good enough to disclose and forget. Business is ever moving, and as items change in your business, the seller has the duty to update diligence to the buyer. Anatomy of the Deal 5 Phases of a Deal from a SELL-SIDE PERSPECTIVE: The Players and Their Involvement Pre- Transaction Planning Phase Rule: Find and eliminate skeletons; create multiple options Phase I: Letter of Intent Phase Rule: Know what you want and get it in writing as the LOI may be your high water mark Phase II: Due Diligence Phase Rule: Disclosure is your friend Phase III: Contracts Phase Rule: Confirm Business terms and Phase IV: Closing Phase Rule: Time is your enemy Phase V: Post Closing Phase Rule: Remember to dot the I’s and cross the t’s to meet all conditions Post-Transaction Planning Phase Rule: Enjoy your new status in life; make sure you’ve considered life without the business Sell Side M&A: Three Rules of Thumb for the Transaction Rule #1: You haven’t sold your business until you’ve sold your business Rule #2: Get your money upfront (as soon and as much as possible) Rule #3: Reduce and eliminate your trailing liabilities
December 22, 2021
Business
Treasury Department Issues Proposed Regulations on Disclosure of Beneficial Ownership for Most Business Entities
On December 8, 2021, the Department of Treasury issued a release containing a set of proposed regulations that would implement the reporting requirements for disclosure of Beneficial Ownership Information (BOI) of most US and foreign entities doing business in the US under the Corporate Transparency Act (CTA) adopted by Congress in January 2021. The comment period for these regulations extends until February 22, 2021. Commencing with the effective date of the final rule, the reporting regime would commence for all newly formed entities. All existing entities would be subject to the reporting requirements commencing one year after the effective date of the regulations. It is estimated that these reporting requirements would apply to approximately 4 million newly formed entities each year and 25 million existing entities in the first year of its effectiveness. The proposed regulations require all “reporting companies”, as discussed below, to report to the Financial Crimes Enforcement Network (FinCEN) identifying information concerning any individual who either (i) exercises substantial control over the entity or (ii) owns or controls at least 25% of the ownership interests of the entity. The proposed regulations provide a range of activities that would constitute “substantial control” including (x) service as a senior officer of the entity, (y) authority over the appointment or removal of a senior officer or dominant member of a board of directors or similar body, or (z) direction, determination, or decision of, or substantial influence over, important matters for the entity. The proposed regulations also indicate that substantial control can be exercised through a number of ways by title, contract, arrangement, understanding, relationship, or otherwise, whether directly or through intermediate entities. Similarly, “ownership interests” can be evidenced in a variety of ways including equity, capital or profits interest, convertible instruments, options, through trusts, or otherwise, and either directly or indirectly through intermediate entities. Reporting companies are defined to include all domestic corporations, limited liability companies and other entities that are formed by the filing of a document with the secretary or similar agency of a state or Indian Tribe, or foreign entities that qualify to do business by the filing of a document with a state or Indian Tribe. Therefore, the regulation clarifies that limited partnerships, statutory trusts, and most other business entities would be subject to the regime. As listed in the CTA, there are 23 exempted categories of entities that are not subject to the regulations, primarily because most of these are already subject to FinCEN regulations or other governmental requirements regarding disclosure of beneficial ownership. The broadest category of exempt entities is so-called “large operating companies” which are defined as companies operating in the US that have more than 20 full-time equivalent employees and have reported over $5 million in gross operating receipts on a federal tax return. In addition to the BOI disclosure, the proposed regulations would require the disclosure of information concerning the individual or individuals who directed or controlled the formation of a reporting company. The BOI that must be reported for each beneficial owner by a reporting company includes (i) the individual’s full legal name, (ii) date of birth, (iii) current residential or business address, and (4) unique identifying number, which would include a passport number, driver’s license, or similar number issued by a governmental agency, together with a copy of the document that contains such identifying number. Once an individual’s information was included in a report, FinCEN would issue its own identifying number to be used for any subsequent reports filed with respect to such individual. Identifying information concerning the reporting company would also be mandated under the proposed regulations. Under the CTA, as implemented by the proposed regulations, the disclosure of BOI for each beneficial owner must be reported not only within 14 days of the formation of the entity, or for existing entities, within one year of the effective date of the regulations, but also upon any change in the information reported. The proposed regulations state that the updated BOI must be reported within 30 days of the change. The release indicates that FinCEN has to develop a new IT system, to be called the Beneficial Ownership Disclosure System (BOSS) in order to collect and provide access to the BOI, which may ultimately affect the effective date of the final regulations. The intent behind the CTA and the proposed regulations is to promote financial transparency and compliance and to assist the US government and law enforcement agencies in combatting money laundering, terrorist financing, drug and arms trafficking, and other illegal acts conducted through so-called “shell companies”. These proposed regulations are part of a larger effort by the Biden administration to combat business corruption, and two other rule-making initiatives were announced in the issuing release, including a strengthening of FinCEN’s Customer Due Diligence rules adopted in 2016 and the implementation of protocols regarding access to and the disclosure of information collected by FinCEN under the CTA. We will be monitoring further developments in the adoption of regulations regarding the reporting of BOI for business entities. Please feel free to contact me with any questions.
December 20, 2021
Business
Trends in the M&A Market Heading into 2022
M&A in 2021 is roaring to a close. Most will agree that the 2021 M&A market was exceptional, regardless of geography, industry, sector, etc. Many deals were successfully closed, and a number of transactions are still pushing towards the finish line. What has driven this robust market? I think 3 factors have played a large role. First, the continuing Covid cloud has pushed many sellers into the marketplace that considered sale transactions sooner than they may have otherwise. Covid impacted everyone and for many business owners, the uncertainty around Covid made some owners conclude they want out – or at least to take some risk off the table. Second, though rates, etc., are slowly creeping up, access to money and significant funds on balance sheets have translated to many buyers in the market. The match of multiple buyers with many sellers has driven values up. Deals are bigger than they might have been. Third, tax considerations and the potential for taxes to increase has caused significant pressure to get the deal concluded in 2021. So what does 2022 look like? In my opinion, 2022 will continue where 2021 left off. Covid issues are still with us and the uncertainties of Covid shutdowns and restrictions matched with vaccine mandates are proving too much for some business owners. This will continue to cause many sellers to look for a deal. Further, there are still funds to be had and money to be invested. The M&A boom in this regard has not flattened and I do not believe it will go into 2022. And taxes? Who knows. Earlier in 2021, it appeared certain there would be tax changes that would make business taxes higher. But now there is much speculation, given recent political events, that any tax law changes may not be as significant or perhaps there will not be any tax changes next year given it is an election year with much at stake. So, in conclusion, if you are considering a business sale but did not get moving in 2021, I think 2022 will continue to be a receptive marketplace for buyers and sellers to make good deals!
December 8, 2021
Business
Skeletons in the Closet: The 5 Biggest Undiscovered Issues that Can Halt the Sale of a Business
You have an interested buyer and they have submitted an exciting letter of intent for the purchase of your business. What could possibly derail the sale? Well . . . the golden rule for a seller is that the business is not “sold” until the closing and the monies hit the account. Before receiving your monies and having the business sold, be aware of a number of issues that could cause problems. By the way, with proper advanced planning these issues can be alleviated/mitigated prior to going to the market. Proper documentation of owner relations. Nothing ices a sale transaction like equity owners not on the same page. Ownership disagreements on the terms of a sale will quickly sour any potential buyer. However, with a proper stockholders’ agreement or operating agreement, the sale of equity can be controlled and “dragged” along into a transaction. Locking up key employees. Too often key employees are not properly locked up. All buyers will compel sellers to lock up their key persons, making such requirement a condition to closing. Going to a key employee on the eve of a sale is a very bad place to be if you are the seller. Poor financials. One of the first intersections a buyer will have with your business is the review of your financial data. Too many sellers have a mess for their financials. A buyer cannot evaluate the value of your business if it cannot review financial statements that are prepared to standard. Wrong corporate form. Many buyers have corporate structures that are not friendly to investors to maximize gains. The form a seller operates their business during normal times (an S corporation for example) may not be the corporate form desired by an acquirer. Uncertain ownership of key assets. Too many sellers rely upon the assumption that they own the assets of their business. This rings especially true with technology and intellectual property. The time to learn that you do not own the source code to your software is not in the middle of your sale transaction. These are a few of the most common pitfalls that many sellers experience during the sales process. Many times a seller is not aware of these items until a buyer brings it up in diligence as part of a larger conversation regarding the path to closing. All M&A transactions spin on leverage. Sellers should be careful to give over leverage to a buyer by falling into one of the traps.
October 13, 2021
Business
Employer Restraints on Employee Competition Under Attack
In many employment relationships, particularly those involving employees with management roles, customer contacts or specialized knowledge, employers have sought to restrain the employee from competing with the employer’s business after terminating employment. These so-called “Covenants Not to Compete” have always been subject to court-imposed restraints in order to be enforceable – the covenant may not last for an unreasonable length of time following termination of employment, and the geographic scope of the covenant must be reasonably related to the potential harm to the employer’s business. In recent years, however, an increasing number of states have enacted statutory limitations and, in some cases, bans on Covenants Not to Compete on employees. In 2019, Maryland enacted a law that prohibits the enforcement of Covenants Not to Compete against workers earning less than $15 per hour, or $31,200 annually. This year, Virginia enacted a similar ban on enforcement of such covenants for workers earning less than the average weekly wage of workers in Virginia, $1,204 per week, or $62,608 annually. Similar laws exist in other states, including Colorado, Idaho, Illinois, New Hampshire, Oregon, Rhode Island, and Washington. Significantly, in 2021, the District of Columbia enacted a very broad law that will take effect this fall that will render unenforceable Covenants Not to Compete in all employment agreements entered into by private employers operating in the District of Columbia (with limited exceptions for certain categories including religious or nonprofit organizations and casual babysitters). The law will, therefore, effectively ban employers from requiring employees to enter into agreements that “prohibit the employee from being simultaneously or subsequently employed by another person, performing work or providing services for pay for another person, or operating the employee's own business.” The effect of this law, therefore, is broader than that of the typical Covenant Not to Compete in that it also would render unenforceable so-called “anti-moonlighting” prohibitions that are often contained in employment agreements or employment handbooks. The law is prospective in effect, so existing Covenants Not to Compete are not impacted. Further, the law specifically carves out Covenants Not to Compete executed in the context of the sale of a business. The law also affirms that other restraints against employees from “disclosing the employer's confidential, proprietary, or sensitive information, client list, customer list, or a trade secret” are not included within the scope of the law. Employers should consult with legal counsel knowledgeable in the laws of the local jurisdiction where they operate before entering into employment agreements that contain Covenants Not to Compete in order to ensure that such agreements are enforceable.
July 14, 2021
Business
Five Phases of a Deal from a Sell-Side Perspective: Letter of Intent
Congratulations, you’ve received a letter of intent (LOI) to sell your business. What is your next step? Do you sign it because the valuation seems fair and the letter states the terms are not binding? Or do you ask your advisors, especially your legal counsel, to fully review? If you picked option two, you are a very smart seller. The letter of intent is frequently the “highwater mark” for seller deal terms. If the seller does not negotiate material commercial points and legal points, the ability to do so later in the transaction becomes compromised. Yes, the LOI is typically non-binding on the parties. However, it is an expression of goodwill and credibility. As the transaction process gets deeper, it is hard to negotiate material changes to the terms unless the seller is committed to walking away. If closing (and money) is within reach, many sellers will roll over on key items due to deal fatigue, lack of understanding, or buyer pressure. For a seller, leverage is paramount to negotiate the best transaction terms possible. The seller has the most leverage at the LOI stage. In addition, it is always better for a seller to know that a deal will fail on day 1 than day 45 when much time, energy and costs have been incurred. Make certain to have your attorney review all letters of intent before signature! Anatomy of the Deal 5 Phases of a Deal from a SELL-SIDE PERSPECTIVE: The Players and Their Involvement Pre- Transaction Planning Phase Rule: Find and eliminate skeletons; create multiple options Phase I: Letter of Intent Phase Rule: Know what you want and get it in writing as the LOI may be your high water mark Phase II: Due Diligence Phase Rule: Disclosure is your friend Phase III: Contracts Phase Rule: Confirm Business terms and Phase IV: Closing Phase Rule: Time is your enemy Phase V: Post Closing Phase Rule: Remember to dot the I’s and cross the t’s to meet all conditions Post-Transaction Planning Phase Rule: Enjoy your new status in life; make sure you’ve considered life without the business Sell Side M&A: Three Rules of Thumb for the Transaction Rule #1: You haven’t sold your business until you’ve sold your business Rule #2: Get your money upfront (as soon and as much as possible) Rule #3: Reduce and eliminate your trailing liabilities
June 16, 2021
Business
The Fab Five’s $2 Billion Crypto-Fraud Flop
On May 28, 2021, the U.S. Securities and Exchange Commission (“SEC”) commenced an enforcement action against five U.S. individuals who, between January 2017 and January 2018 participated in BitConnect’s fraudulent scheme, which collectively raised an eye-popping $2 billion from investors throughout the world. The complaint alleges that: (i) the Fab Five promoted investments into a “lending program” to U.S. retail investors, promising significant return on investment; (ii) the sale of these investments into BitConnect’s lending program was an illegal, unregistered securities offering, sold without a valid exemption from the SEC’s securities registration requirement; and (iii) that the crew were part of a network of promoters selling these investments. BitConnect represented to its investors that the company could “deploy investor funds to trade in and profit from the volatility of Bitcoin,” promising monthly returns of up to 40%, or over 566% a year. In return for his promotion efforts, each defendant received compensation based on a percentage of investor funds received by BitConnect. The BitConnect complaint is one of a long list of SEC enforcement actions asserting that the sale of products promising returns, whether from trading in cash or cryptocurrency, are sales of securities. Others include Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust and In the Matter of Erik T. Voorhees. It is also a reminder that promoters cannot profit from the sale of securities—even unregistered securities—without being a registered broker-dealer, or affiliating with a licensed broker. Indeed, the complaint explains that receipt of transaction-based compensation, which often occurs “in the form of a percentage of the funds raised for investments,” is an important hallmark of a broker-dealer. (In a somewhat analogous anti-touting law, the SEC has obtained cease and desist orders against celebrities such as Floyd Mayweather, Jr., DJ Khaled and Steven Seagal for promoting securities sold via initial coin offerings or ICOs without publicly disclosing the compensation paid for these promotions.) The global reach of the BitConnect fraud also highlights how the SEC often cooperates with its overseas companion-agencies. Indeed the press release made specific mention of the assistance it received from the Cayman Islands Monetary Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, the Ontario Securities Commission, the Romanian Financial Supervisory Authority, and the Thailand Securities and Exchange Commission. Ultimately, the BitConnect enforcement action serves as a reminder that the SEC is actively investigating the offer and sale of digital asset securities and fraudulent conduct surrounding these assets, even offerings as far back as the 2017 ICO Boom. Click here to learn more about the FinTech team at Offit Kurman.
June 16, 2021
Business
The Terrifying New York Definition of a Franchise
As Published in the New York Business Law Journal Licensing is big business. Brand owners may license selected product lines, create brand extensions, enter new markets or simply enhance their brands through licensing. But few brand owners know that the New York Franchise Sales Act (“NYFSA”), by its terms, regulates licensors who provide no marketing assistance and impose no requirements other than quality control. The definition of a “franchise” under the NYFSA is extremely broad.[1] It covers far more business arrangements than anyone would reasonably consider to be a franchise. This anomaly puts New York franchise law in “left field” as the late Rupert Barkoff noted in his excellent article published in the New York Law Journal on May 1, 2012.[2] This is an understatement. The NYFSA, which has not been revised since it went into effect in 1981, is not even in the same ballpark as similar legislation in other jurisdictions. Barkoff called this anomalous New York definition of a franchise “terrifying.” In order to sell franchises anywhere in the U.S., a franchisor must prepare a detailed franchise disclosure document that includes audited financial statements. A franchisor located in New York, or a franchisor that intends to sell franchises to buyers in New York, must register the offering with the state Attorney General’s Office before the franchisor may lawfully sell franchises from or in the state. The franchisor must then make the required disclosures to each prospective franchisee and wait 10 business days (or 14 calendar days in the other dozen or so states that regulate franchise sales) before entering into the agreement or accepting any payment. Failure to comply with the NYFSA can result in enforcement action by the New York State Attorney General’s Office and private actions by franchisees for rescission, damages, injunctive or declaratory relief, attorneys’ fees, and costs. Willful violation of the NYFSA can lead to punitive damages and criminal liability. Not only can a simple trademark license agreement be a franchise in New York. A marketing consulting agreement can also be a franchise. So can a distribution arrangement where the distributor must pay an initial fee to the supplier to gain the right to distribute in a specific market or territory. To put this another way, outside of the business arrangement that we all know as a franchise is a large “gray” area in which the arrangement is at risk of being a franchise under New York law. In short, the NYFSA is a trap for the unwary. Most people would not think of consulting with a franchise lawyer before entering into a trademark license agreement or a marketing agreement. Yet failure to comply with the NYFSA can give ammunition to an aggrieved licensee in a dispute with its licensor or result in prosecution of the licensor by the New York State Attorney General’s office. The broad definition of a franchise cries out for change in the law. A Two-Prong Definition Impedes Business in New York The definition of a franchise under most franchise sales laws contains three elements: a fee, a trademark and a marketing plan prescribed in substantial part by the franchisor. The franchise sales laws of Maryland and Virginia are typical examples.[3] These definitions, unlike the New York definition, are also similar to the definition of a franchise under the Federal Trade Commission’s trade regulation rule on franchising (the “FTC Rule”), which also contains three elements.[4] The New York definition of a franchise has just two elements.[5] One element is either a trademark or a marketing plan prescribed in substantial part by the franchisor. The second element is a fee. Each of the franchise sales laws, of course, has various exemptions and exclusions from the definition of a franchise.[6] Both prongs of the NYFSA’s definition of a franchise raise issues. Starting with the first prong, what does it mean to grant “the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor” without a trademark? A marketing consultant may provide a marketing plan to a client to enable that client to launch a business. Certainly, the client will pay a fee. Is this a franchise? When does such an arrangement constitute a “grant” of the “right” to engage in a business? The statute is not at all clear on what type of arrangement this prong of the definition is intended to cover. The second prong is easier to understand but is extremely broad. The plain language of the statute covers many license and distribution arrangements that would not be considered franchises in other states. Any trademark license granting someone a right to engage in a business in consideration for a royalty would fall within the definition of a franchise under the NYFSA. So would a distribution arrangement with no grant of trademark rights in which the distributor pays a one-time fee to the supplier to purchase the distribution rights. These are not the types of business arrangements that anyone unfamiliar with New York law would expect to be franchises. For licensors who receive proper legal advice, this broad definition is an impediment to doing business in the state of New York or with a person located in New York. The proper advice in many of these cases is that the broad scope of the New York law creates risk and imposes a degree of uncertainty. This advice would discourage some from locating their business in the state. Why would a licensor choose to be subject to the extensive franchise registration and disclosure requirements in New York when the company can avoid these requirements by locating in or licensing into any other state? Why would a consultant based in New York or working with a New York client provide a marketing plan to enable the client to launch a business? For Traditional Franchisors, New York’s Broad Definition of a Franchise is a Non-Issue Companies that offer traditional franchises have no issue with the broad definition of a franchise under the NYFSA. Franchisors know that they must prepare franchise disclosure documents in accordance with the FTC Rule and, when necessary, also in accordance with the requirements of the NYFSA and the franchise laws of other states. Franchisors register their franchise offerings in New York as they do in other states and they make the required disclosures to prospective franchisees. The broad definition of a franchise under the NYFSA also does not adversely affect franchisees or prospective franchisees in traditional franchise arrangements. They receive the required disclosures from their franchisors regardless of the law’s overly broad definition of a franchise. The “terrifying” aspects of the New York definition apply only to those who would not be considered franchisors under the FTC Rule or the franchise sales laws of any other state. Narrowing New York’s broad definition of a “franchise” to conform to the definition in other states would have no effect on franchisors or franchisees as those terms are commonly understood. Does the Broad Definition Serve a Useful Purpose? In practice, relatively few litigants raise the issue of noncompliance with the NYFSA against trademark licensors or marketing consultants. The Attorney General’s Office seldom prosecutes business arrangements that are not commonly understood to be franchises. The reason may be that these business arrangements do not require the protections that the NYFSA affords to prospective franchisees. Maybe we should view trademark licensors and certain marketing consultants in New York as we do drivers who speed on a highway. Drivers often speed. Only a small number are prosecuted. But speeding is dangerous. A simple trademark license agreement or marketing consulting agreement is not. The sparse enforcement of the NYFSA does not change the fact that the threat is always there. An enforcer can arbitrarily decide at any time to enforce it. Why should a licensor or consultant have to run this risk? The fact that the Attorney General’s Office does not apply the law to arrangements that are not commonly understood to be franchises also indicates that the Attorney General’s Office may not view the broad definition as a necessity. Cutting back the definition so that it conforms to the laws of other states would not significantly change the enforcement activity at the Attorney General’s Office. Nor would it change the way private litigants behave. A revised NYFSA could eliminate the registration and disclosure requirement for businesses that lie in the “gray” area of the New York definition today while retaining the Attorney General’s broad anti-fraud jurisdiction for these businesses. If necessary, the state might even consider enacting a “business opportunity” law, as roughly half of the states have done, which would regulate some business arrangements in the “gray” area but have far less onerous registration and disclosure requirements than a franchise law. The broad definition of a franchise has been a part of the NYFSA since it became effective in 1981. New York was the last state to enact a franchise sales law, and that law has never been amended. One commentator noted in 2012 that the NYFSA “was crafted to attack a vast criminal invasion of the franchise arena which transpired in the 1960s and 70s (including significant organized crime involvement) and to safeguard New York’s reputation as the financial capital of the world.”[7] In other words, the NYFSA was written expansively in order to give the Attorney General broad latitude to prosecute bad actors who might run off with initial franchise investments of would-be franchise buyers. The same author noted in 2020 that on its 40th anniversary, the NYFSA “achieved its intended purpose – the eradication of massive fraud and criminality that had permeated the then-nascent franchise arena.”[8] Even if there was a need for a franchise law with such broad application in 1981, there is no such need today. Undoubtedly, the FTC Rule, which went into effect in 1979, also played an important role in cleaning up an industry that was riddled with fraud, as did the franchise laws of other states, which were all enacted in the 1970s before the FTC Rule became effective. Time for Change Most business owners want to comply with applicable laws. If by chance or good fortune a business owner based in New York or planning to do business in New York happens to consult with a franchise lawyer before entering into a trademark license agreement or a market consulting agreement, that business owner might be advised either to seek a discretionary exemption or to locate the business outside the state of New York and to consider not entering into the contract with anyone who is located in New York. This sounds extreme because it is. Franchising is a respected way of doing business. Franchising is also an important part of the U.S. economy.[9] With some careful revising, the NYFSA can make franchising a far more important part of the New York economy than it is today. The broad definition of a franchise under the NYFSA today is the single most important reason to change this law. It is high time for New York State to change its definition of a “franchise” to conform more closely with the franchise sales laws of other states. [1] N.Y. General Business Law (GBL) Article 33, Section 681.3 defines a franchise as follows: "Franchise" means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which: (a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, and the franchisee is required to pay, directly or indirectly, a franchise fee, or (b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchisee fee. [2] “New York Franchise Act: Out in Left Field,” by Rupert M. Barkoff, NYLJ 5/1/2012. [3] Section 14-201(e)(1) of the Maryland Business Regulation Code provides as follows: “Franchise” means an expressed or implied, oral or written agreement in which: (i) a purchaser is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; (ii) the operation of the business under the marketing plan or system is associated substantially with the trademark, service mark, trade name, logotype, advertising, or other commercial symbol that designates the franchisor or its affiliate; and (iii) the purchaser must pay, directly or indirectly, a franchise fee. Section 13.1-559(A) of the Code of Virginia (the Retail Franchising Act) defines a “franchise” as follows: "Franchise" means a written contract or agreement between two or more persons, by which: 1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services at retail under a marketing plan or system prescribed in substantial part by a franchisor; 2. The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and 3. The franchisee is required to pay, directly or indirectly, a franchise fee of $500 or more. [4] 16 CFR Section 436.1(h) provides as follows: Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark; (2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate. [5] Note 1 supra. [6] See Exemptions and Exclusions Under Federal and State Franchise Registration and Disclosure Laws, Leslie D. Curran and Beata Krakus, Editors (ABA Forum on Franchising, 2017). [7] “In Defense of the New York Franchise Act,” by David Kaufmann, NYLJ June 26, 2012. [8] “New York Franchise Act Turns 40 – A Look Back,” by David Kaufmann, NYLJ June 25, 2020. [9] See, e.g., https://www.franchise.org/franchise-information/franchise-business-outlook/franchise-business-economic-outlook-2020
April 6, 2021
Business
Avoiding an Adverse Tax Impact on Death of an S Corporation Shareholder
As Published on American Bar Association – ABA Tax Section I. Introduction One of the main reasons to consider a partnership for owning a business rather than an S Corporation is the adverse impact upon death if the business is held by an S Corporation. Now there are solutions to this problem for S Corporation shareholders that tax advisers need to add to their toolbox. These solutions convert the tax status of the business from an S Corporation to a partnership for federal tax purposes, in a federal income tax-neutral manner. This can be accomplished through liquidation in the case of a deceased shareholder or reorganization prior to death of a shareholder. A. Upon the Death of an S Corporation Owner Specifically, upon the death of an S Corporation owner, the heirs are denied the benefits of receiving a step-up in bases in underlying corporate assets to fair market value. In a partnership, the heirs receive a full income tax-free step-up in basis for all of the underling partnership assets and the benefits of obtaining the income tax shelter from new large depreciation deductions. However, in an S Corporation when the owner dies, the shareholder heirs only receive a step-up of basis in the corporate stock equal to the fair market value of the company at the date of death. The underlying S Corporation assets retain the same pre-death tax bases even though the decedent estates in both cases have the same federal estate tax implications and costs. Therefore, the S Corporation heirs should consider promptly liquidating the corporation to also achieve an income-tax neutral stepped-up basis for the company’s assets. This same technique can also be considered if a surviving shareholder buys out the estate of a deceased shareholder. If you have questions about this or any other legal matter, please feel free to contact Herb Fineburg at 267.338.1376 or Charles McCauley, III at 484.531.1712. Read the full article below.
April 1, 2021
