Commercial Real Estate Settlements

Is title clear?

An Ownership and Encumbrance report can be quickly and easily obtained prior to writing an offer to purchase a property. During the due diligence period, the buyer will be furnished with a full title report disclosing all encumbrances against the property. Be sure you have clear title and will be granted a General Warranty Deed is the best protection. This is one of the best ways to guard you from any ownership challenges.

Does the survey match the described property lines?

It happens more often than most would think, but a seller is not always aware of the exact property lines. They best way to ensure that the seller hasn’t built into a neighbor’s property lines or vice versa are for the seller to provide a recent property survey.

Is there insurable access to the property?

Many people believe that if there is a road to the property, access is not a concern. This is not always the case. There are many businesses that are located in rural areas with limited road access, so actual access to the property is much different than insurable access to the property. If there is not insurable access, you may encounter problems in the future if you attempt to develop, finance or sell the property.

Does the zoning code allow for your proposed use?

You should verify with the city or county that the zoning code permits your intended use of the property. You don’t want to spend time and money building a business only to be shut down by zoning. Re-zoning a property is something that can be done in some, but not all cases.

Are there any environmental concerns?

A “Phase I environmental assessment” should be obtained. Depending on the results of that report, a “Phase II environmental assessment may also be required.” Do not assume that because the property has never been used as a gas station, dry cleaning business or other type of business that there aren’t any environmental concerns with the property.

Are there code enforcement liens, expired permits, unsatisfied development or easement obligations, or unpaid municipal liens that may create potential legal liability for you, as the new owner?

This should be answered when clarifying title ownership, but it’s worth double checking. Some code enforcement liens may attach to all property owned by a person selling the property and this is not only limited to the property that is in violation of the code. This is referred to as "cross attaching." If the seller owns property with a cross attaching super priority code enforcement lien against one parcel and you purchase another parcel from the seller, the property may be subject to the lien. This is where having a General Warranty Deed will protect you against all liens or encumbrances against the property.

Are there any major issues with the building?

Before purchasing any property, obtain an inspection report to detail of any repairs to the structure such as the roof, electrical, plumbing, fire sprinklers, elevator, or HVAC are required. Due diligence documents should also be requested pertaining to the above mentioned systems and improvements. This will give you a glimpse at what the owner has taken care of, or neglected.

Are there tenants?

If so, carefully review each lease agreement to determine the landlord and tenant obligations, whether or not if the tenant has a right to purchase or relocate, or if the tenant has exclusivity. You should also determine if the tenant has paid a deposit or advance rents and obtain a tenant estoppel letter.

If there are tenants, is there a rent roll?

In commercial property sales it is important a log of tenants as well as their deposits and charged expenses is passed along with other operating data in order to ensure accuracy of accounting moving forward.

Is there a detailed record of operating expenses and other financial records pertaining to the property?

Once again, having these financial documents dating back prior to your ownership of the property will ensure accuracy in accounting and when making income projections. These financial records have an impact on the value of the property, so the seller should have them readily available upon request.

You could be a seasoned real estate investor,

but We have seen people over look at least one, if not more of the key questions above when they’re purchasing a property. This can be a costly mistake when dealing with the ramifications, such as having to move a business due to zoning or learning about expensive repairs after the purchase has gone through. We strongly recommend you retain an experienced real estate broker and real estate attorney to assist you through this process.

Business Transactions / Settlements

Closing a Business the Right Way

Shutting down a business involves more than just closing up shop and selling off inventory. Business owners have a legal responsibility to pay off creditors before any of the business assets can be distributed to owners. If the owners neglect to follow the correct procedures to dissolve the business, they can be held personally responsible for business debts for years into the future.

State Law Establishes Procedure

Every state has its own business code that allows people to form and operate different types of businesses within the state, such as corporations and limited liability companies. The laws for each type of business contain instructions for closing down the business and winding up its affairs. The only way that a business owner can ensure that his or her business obligations end on the day the doors close is to follow the state instructions for a particular type of business.

Owners Must Agree to Dissolve

State law often requires the owners of any type of business to agree to shut it down. Typically, the law requires a majority vote of the owners. Some states require a two-thirds majority or a unanimous decision for some types of businesses. The vote to dissolve should be properly recorded in the company’s records, and a person should be appointed to pay bills, liquidate assets, and close accounts.

Creditors Must Be Paid First

Dissolving businesses must pay off their creditors first, to the extent possible, before distributing any excess assets to owners. The law also requires the business to set aside enough money to pay unresolved debts that may come due after it has closed its doors. Most states allow a business to publish a notice in a local paper, requesting anyone who has a claim against the company to come forward by a specific date. In some states, proper notification can prevent creditors from suing the company after a certain number of years have passed. In other states, following the notification procedures limits claims to any excess assets that were distributed to owners.

Cancel State Registration

Independent business entities that had to file formation paperwork with a state business registration office to begin operations, such as corporations and LLCs, must also file paperwork to dissolve. The paperwork is typically called articles of dissolution or a certificate of dissolution. Filing dissolution paperwork makes the exact date that the business closed down part of the public record.

Cancel State Licenses

Any state or local business licenses or permits need to be canceled. If your business uses an assumed business name, contact the registration office to cancel it. File any required final reports and returns with the state and federal governments, including annual reports and tax returns.

A Business Lawyer Can Help

The law surrounding dissolving a business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.

How to Purchase a Small Business Wisely

Talk to a Local Buying or Selling a Business Attorney

People planning to buy a small business have several methods to choose from. You can simply buy the business’ assets, for example, and transform them into your own business. You can also purchase shares of the target company or merge your company with the other company. You can even buy a franchise.

Asset Purchase Avoids Debts

If you buy another company’s assets, you must be careful to properly value the assets you are buying, especially intangible assets such as consumer goodwill. You need to transfer title to any titled assets such as bank accounts, real estate, and automobiles, into your company’s name. Although you generally don’t assume any of the debts of the company whose assets you are purchasing, some exceptions exist. If you buy real estate with a mortgage, for example, you will take the property subject to the mortgage. This means that the bank still owns a portion of your new real estate. In an asset purchase, the target company will be taxed on the sales proceeds.

Stock Purchase Includes Debts

You may buy all of a target company’s stock or only a majority interest. If you own a company that buys the shares, the target company will become your company’s subsidiary. You can then use your shareholder voting power to name directors and officers, giving you effective control of the company’s operations. The acquired company will still hold all of that company’s assets in its own name. A target company may be more willing to authorize a share purchase than an asset purchase. This is because it will not be taxed on sales proceeds, and because target company shareholders can pay lower tax rates on any profits they earn from the sale.

A Merger Combines Two Companies

In a typical merger one company, designated as the “surviving company,” issues new shares and uses them to buy the shares of the target company. It then takes title to the target company’s assets and dissolves the target company. In this way, the target company’s shareholders become shareholders in the surviving company. In many cases, the surviving company is renamed. One advantage of a merger is that target company shareholders are left with an ownership stake in the new company.

Buying a Franchise Does Not Require a Takeover

Purchasing a franchise means that you buys the right to use the trademarks and other intellectual property owned by a company that has an established business reputation. By purchasing a Starbucks franchise, for example, you are buying the right to use Starbucks’ name, logos, and coffee formulas. However, you will have to accept restrictions on your business operations. You may be forbidden to sell any products except franchise products. You may be forbidden to advertise independently. You must pay the franchisor a one-time franchise fee plus ongoing royalties based on a percentage of your sales.

A Business Lawyer Can Help

The law surrounding purchase of a small business is complicated. Plus, the facts of each case are unique. For more detailed, specific information, please contact a business lawyer.

Preparing to Sell Your Business

Talk to a Local Buying or Selling a Business Attorney

Selling your privately owned business is not a task to tackle on your own. It can be difficult to set the right sales price, find a buyer, and structure a deal that gets you out of the business without lingering responsibility for any past actions. Even if your business is small in size, help from experts, such as lawyers, accountants, and brokers, can protect your interests.

Prepare for Sale

A potential buyer expects to review all aspects of your business operations before making a deal. This process is called due diligence. It is a legal requirement that protects the buyer in case the buyer has to sue in court concerning some aspect of the deal. If you are not prepared to show some information that the buyer wants to see, your reluctance might scare the buyer away. It is particularly important to have the company’s books in order.

Expert Valuation

Setting a sales price for your private business is harder than it seems. Private businesses lack an established market for ownership interests, so it is often impossible to know what your business is really worth until you get the first offer. Business valuation experts use economic models that take into account revenue, current earnings, future earnings, and current assets to help establish what your business should be worth. Ultimately, your business is worth only what someone is willing to pay. But a business valuation expert can help you set an initial asking price.

Sell Just the Assets

There are two ways to sell a business – through an asset purchase or an ownership purchase. In an asset purchase, the buyer purchases all or some of your business assets. You remain responsible for the shell of the business entity and any future liabilities. The buyer gets to pick certain parts of the business. In an ownership purchase, the buyer steps into your shoes, purchasing all of your ownership interest in the company and assuming all responsibilities.

Put Agreements in Writing

The terms of the sale of your business should be placed in a written sales agreement. A written agreement helps you avoid misunderstandings about what is included in the sale and about the information you provided on the status of the business. It can also prevent the buyer from backing out of the deal at the last minute.

A Business Lawyer Can Help

The law surrounding sale of a business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.

Most-Asked Questions about Small Business

Do I have what it takes to own/manage a small business?

You will be your own most important asset, so an objective appraisal of your strengths and weaknesses is essential. To determine if you have what it takes, you need to answer some questions about yourself: Am I a self-starter? How well do I get along with a variety of personalities? How good am I at making decisions? Do I have the physical and emotional stamina to run a business? How well do I plan and organize? Am I willing to travel? Are my attitudes and drive strong enough to maintain motivation? How will the business affect my family?

What business should I choose?

Usually, the best business for you is the one in which you are most skilled and interested. For example, it you are trained as a children's librarian, you may want to consider storytelling. As you review your options, it is advisable to consult local experts and business persons about opportunities in your area. Matching your background with the local market characteristics will increase your chance of success.

What is a business plan and why do I need one?

A business plan precisely defines your business, identifies your goals, and serves as your firm's resume. Its basic components include a market study, marketing/promotional strategy, current balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package. Additionally, it can tell your sales personnel, suppliers and others about your operations and goals.

Why do I need to define my business in detail?

It may seem silly to ask yourself, "What business am I really in?" Many business owners have gone broke because they never answered that question. One watch store owner realized that most of his time was spent repairing watches while most of his money was spent selling them. He finally decided he was in the repair business and discontinued the sales operations. His profits improved dramatically. Clearly defining your business or your purpose will give a true sense of direction as your venture develops.

What legal aspects do I need to consider?

Licenses, permits, zoning laws and other regulations vary from business to business and from state to state. You will need to consider requirements of the Americans with Disabilities Act in order to accommodate needs of your customers and your employees. Many local resources must be contacted including the state, local government(s), the chamber of commerce and your local Small Business Administration (SBA) office. You will need to consult your attorney and/or business counselor for advice specific to your enterprise and area. You also must decide about your form of organization (corporation, partnership or sole proprietorship).

What do I need to succeed in a business? There are four basic needs for success in small business:

a . sound management practices
b . industry experience
c . technical support
d . planning ability.

Few people start a business with all of these bases covered. Honestly assess your own experience and skills; then look for partners or key employees to compensate for y our deficiencies.

Would a partner(s) make it easier to be successful?

A business partner does not guarantee success. If you require additional management skills or start-up capital, engaging a partner may be your best decision. Personality and character, as well as ability to give technical or financial assistance, determine the ultimate success of a partnership. A successful partnership usually occurs when partners complement each other so that one's weakness is another's strength. If you decide a partner is a good idea, make certain each of you has a clear, written understanding of your responsibilities and your rights.

How can I hire qualified employees?

Choose your employees carefully. Decide beforehand what you want them to do. Be specific. You may need flexible employees who can shift from task to task as required. Interview and screen applicants with care. Remember, good questions lead to good answers. The more you learn about each applicant's experience and skills, the better prepared you are to make your decision.

How do I set wage levels?

Wage levels are calculated using position importance and skill requirements as criteria. Consult your trade association and accountant to learn the most current practices, cost ratios and profit margins in your business field. While there is a Minimum wage set by federal law and by some states for most jobs, the actual wage paid is entirely between you and your prospective employee.

What other financial responsibilities do I have for employees?

You must withhold federal and state income taxes from all wages and salaries, contribute to unemployment and workers compensation systems, and match Social Security contributions. You may also wish to inquire about key employee life or disability insurance. Because laws on these matters vary from state to state, you should consult local information sources.

What kind of security measures must I take?

Crimes ranging from armed robbery to embezzlement can destroy even the best businesses. You should install a good physical security system. Just as important, you must establish policies and safeguards to ensure awareness and honesty among your personnel. Because computer systems can be used to defraud as well as keep records, you should check into a computer security program. Consider taking seminars on how to spot and deter shoplifting and how to handle cash and merchandise; it is time and money well spent. Finally, careful screening when hiring can be your best ally against crime. Also consider developing a plan for coping with disaster as part of your security measures. It is impossible to predict when fire, flood, earthquake, tornado, explosion or other disaster will strike. Being prepared--with a spare set of essential, regularly updated business records kept off premises--can spell the difference between when or if you will reopen for business after the emergency is controlled.

Should I hire family members to work for me?

Frequently, family members of the owner "help out in the business." For some small business owners it is a rewarding experience; for others it can cause irreparable damage. Carefully consider their loyalty and respect for you as the owner. A question of paramount importance that you must be able to answer: Can you keep your family and business decisions separate?

Do I need a computer?

It today's world the answer is probably yes. Computers are useful in word processing, data processing, accounting and data gathering. Computers are not cure-alls, however, and considerable care should be given to:
a . deciding if you need one,
b . selecting the best system (or personal computer) for your business,
c. selecting the most relevant software for your needs, and
d. ensuring that you can easily operate the system.

What about telecommunications?

All small businesses share some common functions: sales, purchasing, financing, operations and administration. Depending on your individual business, telecommunications can support your objectives in any or all of these areas. The telephone (the terminal) and the local and long distance carriers and Internet provider make up the basic components of a telecommunications system. These are effective tools that can easily adapt to changes in seasonality and growth. How you use telecommunications can affect how efficiently and profitably your company grows in the future. Telecommunications equipment can be costly and service providers prices differ significantly.

How much money do I need to get started?

Once you, have taken care of your building and equipment needs you also must have enough money on hand to cover operating expenses (fixed and variable costs) for at least one year. These expenses include your salary, as the owner, and money to repay your loans. One of the leading causes of business failure is insufficient start-up capital. Consequently, you should work closely with your accountant to estimate your cash flow needs. Writing a business plan will provide you with accurate information on your needs for capital.

What are the alternatives in financing a business?

Committing your own funds is often the first financing step. It is certainly the best indicator of how serious you are about your business. Risking your own money gives confidence to others who may invest in your business. You may want to consider family members or a partner for additional financing. Banks are an obvious source of funds. Other loan sources include commercial finance companies, venture capital firms, local development companies and life insurance companies. Trade credit, selling stock and equipment leasing offer alternatives to borrowing. Leasing, for example, can be an advantage because it ties up less of your cash.

What do I have to do to get a loan?

Initially, the lender will ask three questions:

How will you use the loan proceeds?

How much do you need to borrow?

How will you repay the loan?

When you apply for a loan, you will be asked to provide projected financial statements along with a cohesive, clear business plan which supplies the name of the firm, location, production facilities, legal structure, marketing and sales goals, financial analyses and operating plan. A clear description of your experience and management capabilities, as well as the expertise of other key personnel, will also be needed.

What kind of profits can I expect?

Not an easy question, and you need to consider income and expenses before you even start to think about profits. However, there are standards of comparison called "industry norms and ratios" which can help you estimate your profits. Return on investment (ROI), for example, estimates the amount of profit gained on a given number of dollars invested in the business. These ratios are broken down by standard industrial classification (SIC) code for assets and size, so you can look up your type of business to see what the industry averages are. These figures are published by several groups, and can be found at your local library. Help is also available through the SBA, through SBA's business information centers and the trade associations that serve your industry.

What should I know about accounting and bookkeeping?

The importance of keeping adequate records cannot be stressed too much. Without financial records, you cannot determine how well your business is doing or where it is going. At a minimum, records are needed to substantiate:

a. Your tax returns under federal and state laws, including income tax and Social Security laws;
b. Your request for credit from vendors or a loan from a bank; and
c. Your claims about the business, should you wish to sell it.

But most important, you need them to run your business successfully and to increase your profits.

How do I set up the right record-keeping system for my business?

The type of records and how many you need depend on your particular operation. A business consultant, an accountant and the SBA's resources can provide you with many options. When deciding what is and is not necessary, keep in mind the following questions:

a. How will this record be used?
b. How important is this information likely to be?
c. Is the information available elsewhere in an equally accessible form?

What financial statements will I need?

You should prepare and understand three basic financial statements:

a. the balance sheet, which is a record of assets, liabilities and capital at a specific point in time;
b. the income (profit and loss) statement, which is a summary of your earnings, expenses and net profit (or loss) over a given period of time; and
c. the cash flow projection, which shows the actual inflows and actual outflows of cash into and out of your business.

What does marketing involve?

Marketing is your most important operational concern. There are four basic aspects of marketing, often called the four P's:

a . product: a description of the item or service you sell.
b . price: the amount you charge for your product or service.
c. promotion: the ways you inform your market as to who, what and where you are.
d . place: the distribution channels you use to offer the product to the customer.

As you can see, marketing encompasses much more than just advertising or selling. For example, a major part of marketing involves researching your customers: What do they want? What can they afford? What do they think? Your understanding and application of the answers to such questions play a major role in the success or failure of your business.

What is my market potential?

The principles of determining market share and market potential are the same for all geographic areas. First, determine a customer profile (who) and the geographic size of the market (how many). This is the general market potential. Knowing the number and strength of your competitors (and then estimating the share of business you will take from them) will give you the market potential specific to your enterprise.

What about advertising/promotion?

Your business growth will be influenced by how well you plan and execute an advertising program. Because it is one of the main creators of your business's image, it must be well planned and well budgeted. Contact local advertising agencies or a local SBA office to assist you in devising an effective advertising/ promotional strategy.

How do I set price levels?

The price of a service or item is based on three basic production costs: direct materials, labor and overhead (the share of facilities, utilities, taxes, insurance, security and other general operating costs of the business attributable to the product or service - for example, if one product accounts for 10 percent of your business, 10 percent of your overhead is assigned to it). After these costs are determined (the break-even cost) you factor in the profit desired. Because pricing can be a complicated process and you must remain competitive as well as profitable, you may wish to seek help from an expert.

Are some locations better than others?

Time and effort devoted to selecting where to locate your business can mean the difference between success and failure. The kind of business you are in, the potential market, availability of employees, the number of competitive establishments and customer accessibility all determine where you should put your business. Location is critical to small retailers where traffic flow spells the difference between success and failure. Home-based businesses initially operate out of the founder's home and, as they grow, the issue of location becomes vital to their continued success.

Is it better to lease or buy the store (plant) and equipment?

This is a good question and needs to be considered carefully. Leasing does not tie up your cash; a disadvantage is that the item then has no resale or salvage value since you do not own it. Careful weighing of alternatives and a cost analysis will help you make the best decision.

Can I operate a business from my home?

Yes. In fact, experts estimate that as many as 20 percent of new small businesses are operated out of the owner's home. Local SBA offices and state chambers of commerce can provide pertinent information on how to manage a home-based business.

How do I find out about suppliers/manufacturers/ distributors?

Most suppliers want new accounts. A prime source for finding suppliers is the Thomas Register of Manufacturers, which lists manufacturers by categories and geographic area. Most libraries have a directory of manufacturers listed by state. If you know the product-line manufacturers, a letter or phone call to the companies will get you the local distributor-wholesaler. In some lines, trade shows are good sources of getting suppliers and looking over competing products.

Where can I go for help?

The first stop should be a good library, usually a university or major city, where you can find information on the business, locality, and all sorts of other necessary data. Check government documents and maps where often real treasures can be found. The second stop should be with a small-business consultant/attorney who can force you to answer hard questions and give you guidance. The third stop should be the U.S. Small Business Administration, which has offices in nearly every major city, and SBA's web page,; these are excellent sources of pertinent information.

Raja Bhandari Law Offices

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