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The Due Diligence Process in NJ

THE DUE DILIGENCE PROCESS

 In a previous blog, and on the website, I briefly discussed the due diligence process in NJ when buying a business, but more needs to be said. 

Buying a small business is a good, fast way to throw away a great deal of your own money, to say nothing of ruining your credit, if you do not know what you are doing.  With real estate, it is possible to overpay, but there really is no such thing as getting nothing for something. Even if you overpay somewhat, quality real estate in most markets goes up overtime.  A business does not rise in value simply because time passes. With the purchase of a small business, it is possible to simply buy the proverbial “pig in a poke”.  Most small business deals do not die in the contract negotiation stage, but in the due diligence stage when the buyer discovers that the seller is lying, or more politely stated, mistaken.

Dishonest people will do almost anything to make a business look better than it is.  They will put their own cash into the business’ account to create false revenue; they will fail to disclose a significant increase in competition; they will understate liabilities to vendors and tax authorities; they will fail to disclose impending eminent domain issues.  The list is endless. 

Unfortunately, many prospective business buyers due diligence focuses on the financial aspects of the business such as ascertaining if the assets and liabilities are correctly stated, and whether or not the profit or loss is accurate. This is extremely important, but it is not all there is to due diligence.   If you are not an accountant, you should hire one to perform the financial  aspect of due diligence. 

As regards the other aspects of the due diligence process, below is a check list of items that you can and should perform yourself:

  1. Do a thorough evaluation of the competitive environment. Visit competitors businesses if possible.
  2. Check with local political authorities to determine if there are any eminent domain issues.
  3. Try to speak to some existing customers, WITHOUT divulging confidentiality, to determine if they are satisfied with the products and/or services offered by the business.
  4. Meet with the landlord to determine if s/he is the type of individual that you want to enter into a long term lease agreement with.
  5. Do an evaluation of the long term prospects for the business’ products and services.

 

Remember, caveat emptor – buyer beware.  You cannot afford to make a mistake when buying a business. 

By |2021-01-26T20:41:53-05:00January 26th, 2021|

Buying or Selling the NJ Business

ON BUYING OR SELLING THE NJ BUSINESS:

 If you are buying or starting a business in N.J., there are some things that you should be aware of that may not be applicable in other states or other regions of the country.  And if you are selling a business, there are other issues that you need to acquaint yourself with.

  1.  First, New Jersey  landlords are notoriously greedy; most of them think that they are doing you a favor by renting to you, when you are of course paying them.  So if you are a buyer, always insist that the contract of purchase and sale be contingent upon getting a lease that is acceptable.  I had one deal die because the landlord wanted to raise the rent fifty percent per year for the buyer of the business.  It destroyed the profitability of the business and of course the deal.
  2. Second, the N.J. Department of Environmental Protection has a reputation for being one of the toughest in the country.  If you are buying or starting a business in N.J. where environmental issues could be an issue, be sure to retain an attorney who is expert in this area of the law IN NEW JERSEY.
  3. Third, even though you will have an outside accountant, you yourself should become familiar with the basics of N.J. tax law, especially as it relates to what types of returns your business needs to file, and the filing dates.  State tax forms that you should become familiar with are:  CBT – 100 or CBT – 100S, if you are a corporation, NJ 1065 if you are a partnership, NJ 927 and WR-30 if you have payroll, and ST 50 if sales taxes apply to your business.  There are many other taxes and forms that relate to specific types of businesses.
  4.  Fourth, if you are buying or selling the NJ business, be aware of the bulk sales law and the potential tax consequences.  I have addressed this issue in a previous blog.
  5. Fifth, if you are woman or a minority, the State of N.J. has a number of set aside programs whereby preferential treatment as regards contract letting is given to businesses that are more than 50% owned by a woman or minority.  You can obtain information about these programs by googling the topic.
  6. Sixth, you should visit the website www. nj.gov/njbusiness/starting.  It contains a wealth of information concerning topics that are of concern to the novice N.J. business owner.
By |2021-01-26T20:22:12-05:00January 26th, 2021|

Hiring an Accountant in NJ

Plutus Advisers CPAON HIRING AN ACCOUNTANT

Regardless of whether or not you decide to purchase or start a business, you are going to need to hire an outside accountant in NJ.  This individual is probably the single most important member of your team, and s/he will play an integral role in the ultimate success of failure of your business.  So what should you look for in your outside accountant.

  1. A C.P.A.  P.A. stands for Certified Public Accountant; in order to acquire this credential, an individual must have a four year college degree, 30 college credits beyond the degree, one year of experience working for  a C.P.A., and must pass a rigorous multi-subject examination.  While the credential does not guarantee of competency, it is still a very good indicator when hiring an accountant in NJ.
  1. Employment experience: The outside C.P.A. that you hire should have three to five years experience working for a quality accounting firm.  Professional competency in anything is acquired not so much through schooling, as important as it is, but through high quality professional experience. Having worked for a minimum of three to five years for a quality firm indicates that an individual has probably acquired the requisite professional skills that you need.
  1. Tax background: Your outside accountants role in the tax area is to prepare returns that minimize your tax liability within the parameters of the tax law. It is not to understate income or overstate deductions so that you do not have to pay taxes.  If you are deemed to have committed tax fraud by the Internal Revenue Service, you might find yourself getting several years free room and board, courtesy of the Federal Bureau of Prisons. Unfortunately, there are too many business people today who seem to think that running your own business is a license to defraud the government. Hiring an accountant in NJ will help prevent that mistake.   

You should also keep in mind that there is no such thing as accountant/client privilege such as is the case between attorneys and clients. While accountants have a professional responsibility to keep confidential their clients business, there is no legal obligation to do so, and that is what matters. ONLY GIVE YOUR ACCOUNTANT THE INFORMATION THAT S/HE NEEDS TO DO WHAT YOU ARE PAYING HIM OR HER TO DO. Never anything more. The Internal Revenue Service pays rewards to individuals who “snitch” on tax cheats, and there have been instances where accountants have done so. Your accountant can also be forced to testify in Court against you. A word to the wise is sufficient. 

 

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 
By |2021-01-19T18:11:56-05:00January 19th, 2021|

What Are the Financing Options for My NJ Business?

WHAT ARE THE FINANCING OPTIONS FOR MY NJ BUSINESS?

In Hamlet, Act I, Polonius says “neither a borrower or lender be.”  Obviously, Shakespeare did not like debt.  The U.S. tax code and Federal bankruptcy law, however, do like debt since all of the interest on a business loan is fully deductible, and most debts can be discharged in bankruptcy court.  So the question arises, should I finance my business purchase or startup with debt capital, equity capital, or some combination thereof?   Here are the basic answers to  this question.


Debt Financing Options

If you borrow money to purchase or start a business, it is virtually certain that you are going to have to personally guarantee the loan.  If the business fails, barring filing bankruptcy, you are going to have to repay the loan.  The advantages of debt financing are that the interest is fully deductible, and as the loan is repaid, you build equity in the business. When the entity is eventually sold, the entire proceeds of the sale are yours. Additionally, you have total control over the day to day operation of the enterprise. 

Equity Financing Options

Equity financing consists of your own funds that are used to begin the business, as well as monies belonging to outside investors who expect a return on their investment,  as well as eventual repayment of the investment.  There is, however, no legal obligation on the part of the promoter to pay the investors anything if the business does not succeed.  Regardless of whether you decide to purchase a business or start one, if you choose to go the equity financing route, you are almost certainly going to have to relinquish  a majority percentage of the equity to the investors, especially if you are investing little or no capital of your own. 

Know Your Responsibility

It is extremely important if you decide to go the equity route that the legal documents clearly state that the investors investment is equity and not debt. Never accept equity capital on the proverbial “handshake” since if the business fails, the investors will often claim that they loaned you the money and that they want repayment. You just know what the options are in financing your NJ business. If you organize your business as a limited liability company, the operating agreement is the controlling document, and if you are a corporation, then the articles of incorporation control.  Finally, if you are an employee working for a promoter who asks you to accept a below market salary in return for equity, never agree to this without the arrangement being in writing since dishonest businesspersons will often deny that they agreed to this years down the road if the business is successful and is sold. 

 

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 
By |2021-01-19T18:26:12-05:00January 19th, 2021|

Your Guide to Buying or Starting a Business in New Jersey

ON BUYING OR STARTING A NJ BUSINESS:

If you are buying or starting a business in New Jersey, there are some things that you should be aware of that may not be applicable in other states or other regions of the country. And if you are selling a business, there are other issues that you need to acquaint yourself with.

  1. First, New Jersey landlords are notoriously greedy; most of them think that they are doing you a favor by renting to you, when you are of course paying them. So if you are a buyer, always insist that the contract of purchase and sale be contingent upon getting a lease that is acceptable. I had one deal die because the landlord wanted to raise the rent fifty percent per year for the buyer of the business. It destroyed the profitability of the business and of course the deal.
  2. Second, the N.J. Department of Environmental Protection has a reputation for being one of the toughest in the country.  If you are buying or starting a business in N.J. where environmental issues could be an issue, be sure to retain an attorney who is expert in this area of the law IN NEW JERSEY.
  3. Third, even though you will have an outside accountant, you yourself should become familiar with the basics of N.J. tax law, especially as it relates to what types of returns your business needs to file, and the filing dates.  State tax forms that you should become familiar with are: CBT – 100 or CBT – 100S, if you are a corporation, NJ 1065 if you are a partnership, NJ 927 and WR-30 if you have payroll, and ST 50 if sales taxes apply to your business.  There are many other taxes and forms that relate to specific types of businesses.
  4. Fourth, if you are buying a business in N.J., be aware of the bulk sales law and the potential tax consequences.  I have addressed this issue in a previous blog.
  5. Fifth, if you are woman or a minority, the State of N.J. has a number of set aside programs whereby preferential treatment as regards contract letting is given to businesses that are more than 50% owned by a woman or minority.  You can obtain information about these programs by googling the topic.
  6. Sixth, you should visit the website www. nj.gov/njbusiness/starting.  It contains a wealth of information concerning topics that are of concern to the novice N.J. business owner.
By |2021-01-10T14:02:17-05:00January 10th, 2021|

HOW TO HIRE AN ACCOUNTANT IN NEW JERSEY

ON HIRING AN ACCOUNTANT

Regardless of whether or not you decide to purchase or start a business, you are going to need to know how to hire an outside accountant. This individual is probably the single most important member of your team, and s/he will play an integral role in the ultimate success of failure of your business.  So what should you look for in your outside accountant.

  1. A C.P.A. stands for Certified Public Accountant; in order to acquire this credential, an individual must have a four year college degree, 30 college credits beyond the degree, one year of experience working for a C.P.A., and must pass a rigorous multi-subject examination. While the credential does not guarantee of competency, it is still a very good indicator when looking to hire an accountant in New Jersey.
  1. Employment experience: The outside C.P.A. that you hire should have three to five years experience working for a quality accounting firm. Professional competency in anything is acquired not so much through schooling, as important as it is, but through high quality professional experience. Having worked for a minimum of three to five years for a quality firm indicates that an individual has probably acquired the requisite professional skills that you need.
  1. Tax background: Your outside accountants role in the tax area is to prepare returns that minimize your tax liability within the parameters of the tax law. It is not to understate income or overstate deductions so that you do not have to pay taxes. If you are deemed to have committed tax fraud by the Internal Revenue Service, you might find yourself getting several years free room and board, courtesy of the Federal Bureau of Prisons. Unfortunately, there are too many business people today who seem to think that running your own business is a license to defraud the government.   

You should also keep in mind that there is no such thing as accountant/client privilege such as is the case between attorneys and clients. While accountants have a professional responsibility to keep confidential their clients business, there is no legal obligation to do so, and that is what matters. ONLY GIVE YOUR ACCOUNTANT THE INFORMATION THAT S/HE NEEDS TO DO WHAT YOU ARE PAYING HIM OR HER TO DO. Never anything more. The Internal Revenue Service pays rewards to individuals who “snitch” on tax cheats, and there have been instances where accountants have done so. Your accountant can also be forced to testify in Court against you. A word to the wise is sufficient. 

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 

By |2021-01-10T13:21:33-05:00January 10th, 2021|
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