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PLUTUS ADVISERS GUIDE TO NJ BUSINESS FRANCHISES

By |2020-12-28T12:05:21-05:00December 28th, 2020|

PLUTUS ADVISERS GUIDE TO NJ BUSINESS FRANCHISES:

Someone once said to me that everyone has a little larceny in them.  And many franchisors have more than a little.  If you have some larceny in your heart and would like to stay out of prison, selling franchises is a pretty good way of doing it.  I’m not saying that there are not  many worthwhile franchises and  honest franchisors;  I’m just saying that it is an area rife with fraud and theft. 

Many franchise buyers are former corporate employees who are new to being in business for themselves.  They may have been in upper middle management, handed their “package,” and for the first time in their lives have some capital.  Their self image is generally  that of being more savvy and sophisticated in the ways of the business world than they really are. Dirty franchisors know this and many take advantage of it. These dishonest franchisors sell the prospective franchisee on the idea that they are buying an established business model and that this is far less risky than starting from scratch.  This is true, provided that the franchisor is legitimate.

Dishonest franchisors make money by selling equipment and products as opposed to receiving franchise fees from successful franchisees.  The upfront franchise fee that the franchisee pays should go to supporting the franchisee.  In poorly run or dishonest franchise operations, these funds are used to pay overhead and large salaries to the promoters of the franchise.  The franchise agreement that the prospective franchisee signs with the franchisor is, of course, drafted by the franchisor’s attorney; this document makes it almost impossible for the franchisee to have any legal recourse against the franchisor barring outright theft, and most of them are too smart for that. 

If you are thinking of purchasing a franchise, remember that anything the salesman tells you does not matter; what counts is what is in the written agreement.  This is called the Franchise Disclosure Document.   Second, retain a franchise attorney.  If this individual is independent, s/he should have had at least three to five years experience working in the franchise department of a large law firm.  Last, talk to and visit the operations of franchisees.  Did the franchisor do what he promised to do, are they profitable, how long have they been in business, how long did it take to become profitable, and would they recommend  this franchise to a close friend or relative?  Visit them personally at their place of business.

In the March/April 2009 edition of Mother Jones magazine, there is an excellent article about franchise fraud.  You may want to read it.  And remember, buyer beware!  Look carefully AND GET A GOOD FRANCHISE LAWYER.

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. 

PLUTUS ADVISERS ON NJ TAXES – BULK SALES

By |2020-12-12T20:54:49-05:00December 9th, 2020|

PLUTUS ADVISERS ON TAXES – BULK SALES OF GOODS IN NEW JERSEY

 In my last article on taxes, I did not address the issue of bulk sales.  Very few non-lawyers or non-accountants are familiar with this tax law, but as a business buyer or seller, you should be aware of it. 

Transfer of Business Assets

State bulk sales laws are designed to prevent the transfer of business assets in bulk outside the normal course of business without certain procedures being complied with.  The law is designed to prevent a dishonest business seller from transferring his tax liability to a buyer of the business, and it is also designed to aid the State’s tax collection process.  If, for example, a car dealer sells a car to a customer in the normal course of business, the bulk sales law would not apply.  If, however, he sells his entire inventory to another dealer, the bulk sales statute would apply i.e. he is selling his entire inventory in bulk.   

Bulk Sales Unit in NJ Division of Taxation

In New Jersey, if a business owner owes the State back taxes, a lien attaches to those assets.  If those assets are sold without compliance with the bulk sales statute, the buyer of those assets becomes liable for the taxes, i.e. the lien attaches to those assets, and transfers with those assets.  In New Jersey, in order to be in compliance with the Bulk Sales Statute, prior to closing, a form is filed with the New Jersey Division of Taxation, Bulk Sales Unit, along with an executed copy of the contract of purchase and sale. 

Funds Held in Escrow for Bulk Sales of Goods in New Jersey

After review of the documents, the bulk sales unit will issue a letter indicating that the bulk sales statute has been complied with; the letter will also stipulate that a certain amount of money should be withheld from the Seller at closing.  These funds are generally held in an attorneys escrow account, and will be held until the former owner of the business files all of his or her final tax returns, and pays any and all liabilities in full.  Subsequent to the seller of the business filing all tax returns and full payment, the funds held in escrow will be released to the seller. 

So if you are thinking about buying a business on a “handshake”, remember that if the seller is not in compliance with the State tax law, you will become liable for his or her back taxes. If you do not pay, the State can seize the assets that you paid the seller for.

Remember,  God invented lawyers and accountants for a reason,

 

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. 

RETAINING A LAWYER

By |2020-12-03T13:33:15-05:00December 1st, 2020|

One of Shakespeare’s characters in Henry VI, states “First thing we do, let’s kill all the lawyers”.  This line has been misinterpreted, and it is actually praise to the legal profession. But that’s for English lit class.  If you are buying or selling a business, you are going to need an attorney to represent your interests.  Thus you should be aware of what legal tasks need to be performed if you are a buyer; there is usually somewhat less legal work entailed if you are the seller, and this article has been written from the buyer’s perspective. 

As a buyer, you need your attorney to review the contract of purchase and sale that is usually prepared by the seller’s attorney. Generally speaking, there will be a number of issues that will have to be negotiated between your attorney and the seller’s attorney.  These include leases, non-compete agreements,  lien searches, your term of employment, if any, transfer of security deposits, State licenses that may need to be transferred, and how accounts receivables and accounts payables will be dealt with.  This article is too brief to deal with all of these issues, but two of the most important ones are the non-compete agreement,  and the employment agreement.

The non-compete agreement legally obligates the seller to not engage in his or her current   occupation for a certain period of time within a certain geographic area.     The non-compete agreement  must be reasonable in scope with respect to both time and geography.  The buyer must also pay the seller for the non-compete, and prior to closing, an allocation must be made concerning how much of the purchase price is to be allocated to the non-compete.  The valuation of non competes is beyond the scope of this article.

As regards the employment agreement, you the buyer will probably require that the seller work for you for a certain period of time;  this period of time may be from several weeks to several years, depending upon the business and the buyer’s prior industry experience.  A great deal of what the buyer is paying for is the seller’s expertise and business connections.    During the seller’s term of employment, he or she is entitled to reasonable compensation for services rendered;  reasonable compensation generally means what an outside non-owner employee would be paid to provide the same, or similar services,  as will be required of the seller,  or former owner. 

Be sure to give careful thought and consideration to the selection of an attorney when purchasing a business; at the minimum, s/he should have small business transaction experience, and have some knowledge of your industry. We have found that legal fees will generally be $3,000 – $5,000, but Plutus Advisers LLC is in the New York area, and this will vary greatly by region of the country.

 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 areas should be sought. 

VALUATION TECHNIQUES FOR YOUR NEW JERSEY BUSINESS

By |2020-12-09T20:13:39-05:00August 26th, 2020|

Valuation Techniques for Your New Jersey Business

If you are thinking of selling your business, the value that you place on it is extremely important.  First, the price that you advertise it at is going to determine the response rate:  the higher the price the lower the response rate, and the longer it will take to sell.  But more importantly, the price that you actually receive for your business is going to impact the quality of your retirement and the value of your estate.  Buyers today are extremely sophisticated, and it is highly unlikely that an unsophisticated person will purchase the business at a price that is substantially above fair market value.  

Accounting for Financial Institution Financing

Additionally, if there is a financial institution financing a portion of the transaction, it will invariably require that an outside valuation firm perform a valuation;  valuation firms are extremely knowledgeable,  and they  apply a variety of quantitative techniques developed on Wall Street and in academia to your financial data to arrive at a conclusion of value.  The financial institution will accept the valuation firm’s conclusion of value, and you will not be able to negotiate a different amount.  There is nothing that helps to kill a deal faster than a buyer and seller agreeing upon a price, and the valuation coming in at a lower number. 

Valuation Techniques

While there is no “going rate” for a business, one needs to apply valuation techniques for your New Jersey business to arrive at a value.  Generally speaking, the income method is the preferred valuation technique, and the two standard valuation methodologies within the income method  are discounted cash flow and capitalization of earnings.   Plutus Advisers, LLC is expert at valuing small and mid-sized businesses and Brad Palmer, Managing Member.  has testified numerous times in N.J. State Superior Court as regards valuation related matters.  If you would like a cost free consultation, please contact us at (908) 364-6920.

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