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Business Acquisitions and Commercial Transactions
Business Acquisitions and Transactions
Mr. Padilla's commercial transactions and acquisitions practice area involves Business Acquisitions for immigration purpose (which includes advising clients regarding the sale and purchase of an operating business entity), Joint Venture Agreements among partners or a group of entities in order to pursue a business concept or objective, and Commercial Agreements, which includes advising clients regarding Consulting Agreements, Representative Agreements, Distribution Agreements, Licensing Agreements, Agency Agreements, Sales Agreements and other agreements used by small and medium sized businesses.
Mr. Padilla and his team of legal professionals strive to achieve the client's goals in all commercial transactions and in today's litigious and competitive business world, it is important to have clear agreements with partners, suppliers, and other contracting parties. We believe that the purpose of the commercial agreement is not necessarily protection, but rather, the agreement is meant to ensure that the parties do not misunderstand each other and that all of the parties clearly understand their duties, rights and obligations.
Mr. Padilla and his partners have worked on numerous local and transnational projects and transactions. The attorneys that work with Mr. Padilla understand the complications of having documents in several languages and parties who speak different languages. These are the challenges and we seek to obtain solutions for our clients. The commercial transactions that the firm handles include:
- Joint Ventures
- Acquisition and Sale of U.S. Businesses
- Organization of U.S. Enterprises
- Investments in U.S. Projects
- Franchise Arrangements
- Other Commercial Matters
A principal aspect of the Commercial Transactions handled by Mr. Padilla is the initial organization of a business in the United States, including structuring the business, preparing shareholder agreements, and other business operation matters. In many cases, foreign nationals seek to develop a project or company together with local parties who may offer specific expertise and, in such cases, a joint venture agreement may be appropriate. In connection with these types of transactions, Mr. Padilla has prepared a variety of contracts and agreements, including:
- Distribution Contracts
- Service Agreements
- Representative Agreements
- Shareholder Agreements
- License Agreements
- Joint Venture Agreements
Many clients requiring these services are foreign nationals who come to Miami and the South Florida area to establish a subsidiary or affiliate of their foreign companies, acquire a new business, such as a franchise or other established company, or simply organize a new business and, in many cases, immigrate.
Over his career, Mr. Padilla and his team have handled over 200 business organizations, acquisitions and commercial transactions on behalf of clients from various parts the world. For example, the commercial transactions that Mr. Padilla has worked on include the following:
- Acquisition of a U.S. printing company by foreign investor for $230,000 in connection with foreign investor's plans for the expansion of his foreign-based business.
- Acquisition of substantially all of the assets of a restaurant business in North Miami valued at approximately $750,000 by U.S. restaurant operations conglomerate.
- Acquisition of 52-room boutique hotel on Ocean Drive in Miami Beach for over $15,000,000 in connection with foreign hotel chain's plans to expand into the U.S. hotel market.
- Acquisition of glass and mirror distributor for $400,000 by foreign nationals in connection with their immigration plans.
Business Acquisitions
As stated above, Mr. Padilla has been involved in numerous business acquisitions during his practice, including the purchase of small and medium-sized businesses as well as government privatizations. We pride ourselves in being able to bring a unique perspective to these types of transactions because of our extensive litigation and commercial law experience.
Agreements are drafted and negotiated to ensure that if litigation ensues, the client is in the best possible position. Business Purchase Agreements provide for the purchase and sale of a going concern, generally without real estate. Agreements for the purchase of small businesses are usually drafted on standardized forms. However, these forms, like any form, must be reviewed and changed depending on the interests of the buyer and seller. These agreements should generally provide for a due diligence period during which the buyer will have the ability to perform their due diligence review of the business being purchased in order to determine whether it meets their intended use.
Business Purchase Agreements will usually provide for the purchase of the operating company's shares or of the operating company's assets. The decision as to how the transaction should be structured should be taken together with legal and financial advisers.
For larger and more complex businesses, a Letter of Intent will generally be used to commence the negotiations. Many persons believe that Letters of Intent are nonbinding simply because of the name. However, Letters of Intent are nonbinding only if the Letter of Intent specifically states that it is nonbinding. Moreover, a Letter of Intent is an indication of the present intent of the parties and has an implicit obligation of good faith under the law. This means that a Letter of Intent should not be signed unless the parties have a good faith intention of negotiating the purchase.
Issues to be addressed in business purchase agreements include the following:
- Due Diligence Period
- Owner Financing
- Noncompetition by the Owner
- Terms of the Premises Lease
- Conditions to Closing
Summary of a Small Business Acquisition for Foreign Nationals
Introduction
Under the U.S. immigration laws, if a foreign national acquires a U.S. business, he or she may obtain a nonimmigrant visa to live and work in the U.S., and, in some cases, obtain permanent residency to live permanently in the U.S. In this article, I will provide the steps that a foreign national should take in order to acquire a business for purposes of obtaining a U.S. visa.
The process of acquiring a U.S. can be broken down into 7 steps, which are (1) organizing a U.S. business entity, (2) searching for a business to acquire, (3) negotiating the terms of the acquisition, (4) due diligence review, (5) negotiating the lease agreement, (6) closing the acquisition, and (7) taking over operations of the business. Each of these steps will be briefly discussed below.
Organizing a U.S. Business Entity
In order to prepare for the acquisition of a business, the foreign national should first organize a U.S. business entity, such as a corporation or a limited liability company. Generally, the acquisition will involve the purchase of the assets of the business as opposed to a purchase of the stock of the existing business entity, so the organization of a new business entity owned by the foreign national is fundamental.[1]
One of the first issues to address is to decide in what jurisdiction should the new business entity be organized. Generally, an operating company is best organized in the jurisdiction where the business operates and/or has employees. However, if confidentiality is a factor, then we normally suggest that a holding company be organized in the State of Delaware and that company then owns the capital stock of the operating company in the local jurisdiction.
The type of business entity is also an issue to be considered - should it be a limited liability company or a corporation or some other type of business entity? The answer is driven largely by tax considerations, but generally we suggest a limited liability company to avoid “double taxation.” Specifically, with a corporation, the company pays taxes on its net income and, when the company distributes cash to its shareholders, the shareholders again pay taxes on the amount that they receive. In essence, the same income is taxed twice.[2] With limited liability companies, however, the net income of the company is paid by the shareholders or members of the company. There is no tax upon distribution. Yet, there may be issues with the taxation of “phantom” income, which is income that is not distributed but taxed to the owners of the company. Finally, in some cases, it may be preferrable for the foreign national to organize a corporation or to elect for the limited liability company to be treated as a corporation in order for the foreign national not to be taxed in the U.S.
The foreign national should also consider the organization of a holding company in another jurisdiction that does not have an inheritance tax, such as for example in the British Virgin Islands, Panama or Saint Kitts & Nevis, among others. These countries do not have an inheritance tax, so if the foreign national owns the capital stock of an offshore company, which in turn owns the shares of the U.S. company, generally, the estate of the foreign national will not be subject to inheritance tax in the U.S. This is important because the inheritance tax on a “nondomiciliary foreign national” is approximately 40% of the value of the estate upon the death of the foreign national.
Obviously, the foregoing should be discussed with a specialist that is experienced in international taxation, but this is the typical structure that we normally recommend. It is not the only structure, but a very common structure used by foreign national clients.
Searching for a Business to Acquire
When searching for a business to acquire, we generally advise clients to look for a business where they have experience or where they can offer some expertise. For example, if the foreign national knows the logistics market, then the right business to purchase would be a company that is in the logistics business. The investor should also ask himself/herself questions such as (1) What skills do I have that would translate best to owning a business? (2) Do I feel comfortable selling? (3) In what sector is my work experience? (4) What licensing is required for the business? These questions will help the investor narrow the search.
Next, the astute business shopper will always establish the financial parameters of the purchase, e.g., how much is the monetary commitment that I am willing to make, and how much will I need as income from the business? In this respect, the investor needs to understand that a business that can be acquired for $100,000 or $150,000 will generally provide much less revenue or income to the owner than a business that has a purchase price of $300,000 to $400,000. Yet, in some businesses, if the owner is willing to dedicate time in managing or working the business, there could be sufficient income for the owner.
The investor also needs to consider the impact to his or her lifestyle that the business will mean. For example, if the business is very far from where the investor will live, then the hours to be dedicated in commuting to the business may be considerable. Another factor to consider is whether the investor will have a passive or active role in the management of the business. Usually, businesses that do not require owner management are generally more expensive than businesses where the owner must dedicate himself or herself to the business.
Finally, once the investor has narrowed down the search to a handful of businesses, the investor should be prepared to ask the right questions to the seller or the seller’s representative. At this stage, these questions should be generalized in order to get a feeling for the business. In many cases, sellers will ask the prospective buyer to sign a nondisclosure agreement (or “NDA”) in order to maintain the company’s information confidential.
Nevertheless, in preliminary meetings with sellers, the prospective buyer will generally not have access to detailed financial information, such as tax returns and bank accounts, until the prospective buyer has signed a purchase contract. Yet, the prospective buyer should ask the following general questions to the seller in order to help narrow the search, such as (1) Why are you selling? (2) How has the business been coping with the down economy? (3) What part of the business drives the largest part of revenues? (4) Who are you customers? Do any of them make up more than 10 percent of revenues? (5) What keeps you up at night about the business? (6) How much vacation do you take each year? (7) How much salary do you take home? (8) What's kept you from expanding the business? (9) Would you be willing to stay on as a consultant to the business?
Negotiating the Terms of the Acquisition
If the investor has identified a specific business and is ready to move forward, then it is time to start negotiating the terms of the acquisition. Generally, the seller will have established certain price parameters for the transaction and what assets are being sold, but there are many other terms that need to be pinned down, such as, for example, what inventory is included in the purchase, are any liabilities included, will the seller offer financing, how long will the inspection period be, will the seller be willing to sign a noncompete agreement, will the seller stay on during a transition period, and how will the negotiation of the underlying lease take place. These are major issues that could cause a transaction to fall apart, so it is advisable to determine the answer to these questions early in the process.
We generally advise purchasers to enter into a letter of intent (“LOI”) in order to narrow the terms of the purchase. An LOI can be prepared quickly, and it will help the parties understand if they are far apart or whether the transaction can proceed. It should be noted, however, that LOIs are legal documents that need to be drafted carefully. While many believe that an LOI is “nonbinding,” if the language of the LOI contains promises or commitments of either party, it could result in being binding in those respects. Therefore, the buyer should engage legal counsel to draft the LOI.
Once the parties have signed an LOI, the purchase contract can be developed and signed. The purchase agreement is the document that will contain time periods for the transaction and the closing of the purchase , representations of the parties, conditions for consummating the purchase, and requirements of the parties, as well as agreements of the parties that may survive the closing of the transaction, such as indemnification, noncompetition and confidentiality.
Due Diligence Review
The due diligence review of the business to be purchased is the heart of the transaction, which is a major reason why the due diligence period should be long enough to perform all of the inspections and financial reviews that are needed. Usually, the purchase contract will provide for a 15- or 20-day period within which the buyer and its representatives can review the assets and the books and records of the business in order to make a determination whether or not to buy the business. If the buyer is not satisfied with the due diligence review for one reason or another and notifies the seller prior to the expiration of the due diligence period, most purchase contracts provide that any deposits provided by the buyer will be returned to the buyer without any deduction.
Inspections that should be performed in the due diligence period include, among others, (1) an inspection of the premises and equipment, (2) a review of the legal documentation of the company, including contracts and commitments with third parties, employment matters, (3) a review of governmental fines or assessments and code violations, (4) a search of judgments or liens against the business or assets of the businesses, and (5) a financial review of the books and records of the company. In some cases, an environmental assessment may be appropriate, especially where there is risk of contamination of the soil due to operations of the company. It should be noted that the U.S. environmental laws may hold the purchaser of a business liable for contamination if the purchaser has not performed an environmental assessment of the premises being acquired or leased.[3]
Another aspect of the business that needs to be reviewed is whether or not the business has properly paid sales taxes in its operations. Under Florida law, the buyer of the assets of a business can be held liable for any unpaid sales taxes, interest, or penalties owed by the seller.[4] Therefore, part of the due diligence review should encompass a review of the sales tax liability of the seller. This can usually be resolved by having an accountant review the sales of the business and sales taxes paid, but it is also a good practice to obtain a Certificate of Compliance from the Florida Department of Revenue. In some cases, the buyer should hold money in escrow to ensure that there is enough money to pay past sales tax liability of the seller.
As part of our legal work, we normally prepare a Due Diligence Memorandum for the investor that identifies issues with respect to the business and the assets, such as corporate organization, tax returns, litigation, liens and judgments, the premises lease, employment matters, the condition of the assets, contracts with suppliers and customers, the tradename (if any), financing, and the inspections.
If the due diligence review reveals information about the assets or the business which indicates that the business is overvalued or that the purchase price is too high, the parties may negotiate an adjustment to the purchase price to take into account these discrepancies. This usually occurs when the income is not as was represented, or when the inventory of a business is less or more than what the seller had initially indicated, or if the equipment of the business (such as in the case of medical equipment) is either damaged or obsolete.
Negotiating the Lease Agreement
Another major aspect that needs to be negotiated by the buyer is the underlying lease agreement for the business. In some cases, the new buyer can simply step into the current lease, but usually, the landlord of the premises will seek to negotiate a new lease agreement with the buyer or will request the parties to enter into an assignment agreement whereby the new buyer accepts all of the clauses of the current lease. In such cases, the negotiation of a new lease or the assignment should be a contingency that is resolved during the due diligence period or it should be a condition precedent to the buyer’s obligation to purchase the business.
Issues that would need to be addressed in negotiating a new lease or an assignment of lease include whether or not the new buyer will provide a personal guaranty. Generally, we advise clients to stay away from personal guaranties primarily because the future is very difficult to predict. Nevertheless, in some cases, the landlord of the premises will place a personal guaranty as a condition to the assignment of the lease. In such cases, we try to negotiate something reasonable for the clients, such as having a “rolling guaranty” that is limited in amount to one year of rent, or perhaps a guaranty that goes away after a period of time of full compliance under the lease. These and other options can be explored with the landlord.
Other aspects of negotiating a new lease or an assignment of lease involve analyzing the condition of the HVAC, plumbing, and electrical and other installations. In this respect, the new buyer should ensure that he or she will not have the obligation to change the HVAC or other components soon after taking over the operations of the business.
Closing of the Transaction
At the closing of the purchase of the business, the parties will sign documentation, such as affidavits, bills of transfer of the assets, promissory notes, and assignment agreements regarding contracts, intellectual property and other aspects of the business. It is also important to identify and calculate the prorations for things like the electricity bill, the water bill, municipal taxes and other matters. These prorations will be calculated and set forth in a final settlement statement that will identify the debits and credits for each of the parties.
In addition, for businesses that have significant inventory, the parties will generally close the operations of the business on the day prior to the closing in order to obtain a precise count of the inventory, which may affect the purchase price. Such adjustments will be reflected in the settlement statement.
In some cases, there are items that need to remain pending, such as security deposits, accounts receivables and/or accounts payables and for some reason or another, resolution of these items must wait until after the closing. Therefore, it may be appropriate for the parties to agree to place a certain amount of money in escrow to address these unresolved contingencies.
Taking Over Operations
Once the closing takes place, the new owner must now take over operations of the business. One of the first things that needs to be done is to determine whether or not the current employees will continue with the business or whether other employees will be hired. In either case, it should be made clear to all employees that the business is under new management and that their employment with the new company commences when the new owner takes over the operations. Forms that all employees should sign include an Employment Application, Form W-4, and Form I-9.
In many cases, it’s helpful that the previous owner or managers stay on with the new company in order to show the new owner the intricacies of the operations and to assist in a smooth transition so that the business can continue without much interruption.
Working with a Buyer’s Representative
As demonstrated above, buying a business for the foreign national who intends to use that business as his or her vehicle in obtaining a U.S. Visa or Green Card may be one of the largest and most complex financial transactions that the individual has ever undertaken. What we as lawyers do is work with the client as a “Buyer’s Representative” so that the legal risks and issues in the transaction are covered during the entire process, from searching for the business to closing the purchase transaction. This is quite different than hiring a broker to find a business or searching internet websites that offer business for sale. The difference is that we, as lawyers, have a fiduciary obligation to our client and work exclusively for the client in obtaining the client’s objectives and the best deal for them. This is not always the case when working with brokers, many of whom have been hired by the seller of the business. Therefore, in many transactions, clients hire us as the “Buyer’s Agent” in searching for business, culling the multitude of businesses that they are offered, and documenting the transaction, and in closing the transaction successfully.
[1] While sometimes the acquisition may involve purchasing the capital stock of the entity that owns the business, it is generally advisable to avoid this acquisition method due to liability issues. Nevertheless, in some cases, a foreign national may decide to purchase only 50% or 51% of a business, in which case the risks are somewhat reduced.
[2] While U.S. citizens and U.S. resident shareholders can elect “subchapter S” status, thereby treating the corporation as a pass-through entity, under U.S. tax law, an S corporation generally cannot have a “nonresident alien as a shareholder.” Internal Revenue Code §1361(b)(1)(C). A nonresident alien is neither a U.S. citizen nor a resident alien. Id. § 7701(b)(1)(B). A person qualifies as a “resident alien” if the person is “a lawful permanent resident of the United States,” fulfills the “substantial presence test,” or fulfills the “first-year election” requirements. Id. § 7701(b)(1)(A).
[3] Both federal and state laws impose potentially significant liabilities on owners and operators (meaning “tenants”) of properties with environmental contamination. See, Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.A. §§ 9601 et seq. (known as “CERCLA”).
[4] Under Florida Statutes, §213.758, a transferee of more than 50% of the assets of a business (including real property) is liable for unpaid sales taxes owed by the transferor arising from the operation of that business.