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Posts from the ‘Business Entities’ Category

Risky Business – Tips on how to Buy or Sell your Restaurant Business

Buying or selling a business, like any major financial transaction, is complicated and requires competent counsel. Careless mistakes can have very serious financial consequences for both parties. Take, for example, the recent sale, subsequent bankruptcy and pending lawsuit between the former and current owners of the storied Capitol Hill restaurant, Hawk n’ Dove.

Earlier this month, The Washington Business Journal reported on a law suit filed by William Sport, one of the former owners of a group that owned nine District of Columbia restaurants including The Chesapeake Room, Park Tavern, Boxcar Tavern, Hawk n’ Dove, Molly Malone’s, Pacifico, Senart’s Oyster and Chop House, and Willie’s Que and Brew. See the WBJ article here.

Sports and his partners agreed to sell the nine restaurants to Barracks Row Entertainment Group LLC in December 2012 for $19.3 million. According to his complaint, which was filed in federal district court in October of 2013, Sport is alleging that the Defendants falsely represented the ownership of the company making the purchase and fraudulently inducing Sports into a sales contract where he accepted a $4.63 million promissory note as partial payment. Sports also agreed to personally guarantee $5 million in bank debt carried by the restaurants, as well as to continue to personally guaranty the nine commercial restaurant leases. The named Defendants are Richard Cervera, Michael Hoi-Mingh Cheung, William J. Nimmo, and Halpern, Denny & Co., a private equity and venture capital firm. See the filed complaint here – Case 114-cv-01783-JEB.

As with most contentious litigation, it will be some time before this case is resolved. It nonetheless serves to highlight important issues that both sellers and buyers should keep in mind when entering into a sales contract. Below we’ve provided a general overview of the due diligence restaurateurs and entrepreneurs should undertake in any sales transaction. The list is by no means exhaustive and we highly recommend that each party consult with an experience business attorney when entering into any complex legal agreement.

Business for Sale – A Seller’s Prospective

1. Type of Sale – Asset sale or Stock Sale?

An owner can sell the company’s assets outright, or can sell stock in the corporation or membership interests/units if it is a limited liability company. Buyers will always want to structure the deal as an asset sale to protect itself against prior claims and liabilities of the business, as well as receiving a new tax basis in the assets, and higher depreciation and amortization deductions in the future. For the Seller, however, there are advantages to doing a stock sale. If the Seller’s company is a corporation, a stock sale usually results in a lower overall total tax bill than an asset sale. If necessary or the tax bill justifies it, the Seller may wish to consider adjusting the purchase price in order to persuade the buyer to accept a stock transaction rather than an asset sale.

2. Valuation – How to value equipment, inventory, and good will of your business

Whenever a sale of a business produces a capital or ordinary gain, the IRS will expect to receive its share and business owners need to take the potential tax bill into account when entering into a sales contract. In addition to the structure of the deal (asset v. stock sale), another factor the IRS will consider when evaluating the potential tax assessed for the sale of the business is the specific values assigned in the sale of the company’s assets. The gain or loss on the sale of different categories of business assets are taxed differently. Under the Internal Revenue Code, sellers and buyers must assign a specific value to each asset or groups of similar assets, and report a gain or a loss from the sale of each asset to the IRS. The sale of capital assets results in a capital gain or loss; the sale of real property or depreciable property used in the business and held longer than one year results in a gain or loss from a Section 1231 transaction; and the sale of inventory results in ordinary income or loss. It is important that a Seller value its assets accordingly to avoid higher tax classifications.

3. Tax Implications – Understanding capital gains tax and other tax consequences

The tax consequences of buying or selling a business can vary significantly depending on a number of factors, including the issues discussed above. Business owners should meet with legal and tax professionals beforehand to discuss tax strategies for making the company attractive to buyers, while minimizing their own tax liabilities.

4. Solvency of Buyer – Do you know who your buyer is?

In the sales transaction for Hawk n’ Dove, the buyer of the restaurants could not afford the full asking price of $19.3 million dollars so the seller accepted a $4.63 million promissory note as partial payment for the balance. Unfortunately, within a year, the Buyer filed for Chapter 11 bankruptcy which halted payments to the Seller on the note. The Seller also alleges that he did not know the true owners of the corporate entity that bought his restaurants. The circumstances of this case are a cautionary tale and reminder to any Seller that he or she must do sufficient due diligence when selecting a suitable buyer. At a minimum, the Seller should review the Buyer’s financial statements, Buyer’s credit history, the Buyer’s resume and business plan, and if possible, seek references or third party input with individuals or businesses who have dealt with the Buyer in the past.

5. Financing Issues – Seller/Owner Financing has advantages and risks

It is not uncommon for a portion of the purchase price to be paid over time, in the form of a promissory note. In essence, the Seller is financing part of the sales price for the Buyer. There are certain tax advantages to deferring payment but there are also substantial risks that the Buyer may default, file bankruptcy or otherwise fail to meet its obligations under the note. Therefore, it is important for the Seller to negotiate personal guarantees from the Buyers, file security interests on the business assets to be sold, or draft strong default provisions to prepare for worst-case scenarios.

These are just a few issues the Seller must consider when selling its business, and we highly recommend that each party consult with experienced legal and tax professionals when entering into a sales agreement. In a later post, we will discuss issues Buyers must consider when purchasing a business.

Doyle, Barlow & Mazard has experiences representing buyers and sellers in the sale of a business. For more information, contact

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Rosemarie Salguero, Esq.
rsalguero@dbmlawgroup.com
(202) 589-1836

Arlington Treasurer Frank O’Leary to Publicize Tax Delinquent Restaurants in Media; Lobbying for Power to Shut Restaurants Down

Arlington County Treasurer Frank O’Leary announced today that he intends to acquire the power to seize and shut down restaurants that have large meals tax debts.  Arlington County imposes a 4 percent food and beverage (“meals”) tax on restaurants in addition to Virginia state’s sales tax.  O’Leary asserts that restaurants owe more than $900,000 in unpaid meals taxes to the county.

O’Leary’s first step in targeting delinquent restaurants will be to send a letter to owners warning them that their tax delinquencies will be publicized in the media and on the county’s web site if they do not pay their tax bill or enter into a repayment plan.  Simultaneously, O’Leary is meeting with the county’s state delegates to gain support for a bill to be introduced to the Virginia General Assembly that will grant him the authority to close down severely delinquent restaurants.

Click here to read the complete interview with O’Leary.

Local Chefs selected for the Department of State’s Diplomatic Culinary Partnership

On Friday, September 7, 2012, the U.S. Chief of Chief of Protocol, Capricia Penavic Marshall, launched the Diplomatic Culinary Partnership, a joint initiative between the U.S. Department of State and the James Beard Foundation.   This newly-created American Chef Corp will consist of chefs from across the country who will serve as resources to the Department in preparing meals for foreign leaders, and will participate in public diplomacy programs that engage foreign audiences abroad as well as those visiting the United States.

Below is a list of local participating chefs:

Anthony Lombardo, 1789; Art Smith, Art and Soul; B. Smith, B. Smith’s; Chris Jakubiec, Plume; David Guas, Bayou Bakery; Enzo Fargione, Elisir;  Eric Ziebold, CityZen; Guillermo Pernot, Cuba Libre;  Hoss Fuentes, The Palm;  Jaime Leeds, Hank’s Oyster Bar; Jeffrey Buben, Vidalia;  Jose Andres, Zaytinya; Kaz Okochi, Kaz Sushi Bistro;  Mike Isabella, Graffiato; Richard Sandoval, Zengo; Ris Lacoste, RIS; Robert Kinkead, Kinkead’s; Robert Weland, Cork; Robert Wiedmaier, Marcel’s, Rock Harper, DCCK;  Scott Drewno, The Source;  Todd Gray, Equinox;  Vikram Sunderam, Rasika;  Wes Morton, Art and Soul;  Bryan Voltaggio, Volt;  Duff Goldman, Charm City Cakes;  Bill Yosses, State Department;  Jason Larkin, State Department; Cris Comerford, White House;  Sam Kass, White House;  Walter Scheib, former White House chef;  Roland Mesnier, former White House pastry chef;  Frank Ruta, Palena;  Maziar Farivar, Peacok Café;  Spike Mendelsohn, Good Stuff Eatery;  Victor Albisu, Taco Bamba;  and Barton Seaver. 

Redline Gastrolounge Debuts New Menu

Redline Gastrolounge, located in the former Indebleu space near the Verizon Center, recently unveiled its new seasonal menu featuring classic American cuisine with a French twist.

Redline executive chef Fabrice Reymond has created a visually and palate pleasing menu which includes Marinated Boneless Short-Rib Skewers, Ceviche, Gator Three Ways, and Watermelon Salad.

   

Photo Credit: Jack Conroy

Legislative Update: JOBS Bill Clears Congress

On Tuesday, March 27th, the Jumpstart Our Business Startups Act or JOBS Act was passed again by the United States House of Representatives and is now awaiting signature by the President.   The bill aims to make it easier for small businesses to access investment capital by relaxing Securities and Exchange Commission (“SEC”) regulations such as removing the SEC restrictions that prevent “crowdfunding” so entrepreneurs can raise equity capital from a large pool of small investors who may or may  not be considered “accredited” by the SEC.   The bill allows companies to pool up to $1 million from investors without registering with the SEC, or up to $2 million if the company provides investors with audited financial statements.  Individual contributions are limited to $10,000 or 10 percent of the investor’s annual income, whichever is less.   The bill also includes a provision making it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million.  While the bill has been controversial, the House approved the measure 380-41, and President Obama is expected to sign it.   After the president signs the bill into law, it will not take effect until new investment rules are written by the Securities and Exchange Commission, a process that could push into next year.

Limiting Liability in a Personal Guaranty

Most commercial landlords and lenders require personal guarantees from their tenants and borrowers.  Small business owners often believe they have no other option than to agree to the terms of the personal guaranty agreement provided to them by the landlord or lender.  However, in these troubled economic times, landlords and lenders have fewer attractive prospective tenants and borrowers, giving tenants and borrowers more leverage to negotiate favorable terms.

It is important to understand that even if a lease or loan is made in the name of the corporate entity, the limited liability protection afforded by these entities is eliminated once a personal guaranty is signed.  In other words, even if an entity goes bankrupt, landlords and lenders can pursue the owner’s personal assets if she signed a personal guaranty.  Most standard landlord-friendly personal guarantees have provisions that protect the landlord even if the tenant files for Chapter 7 (personal) bankruptcy.  Therefore, a small business owner tenant can be stuck paying a high price tag for a bad business venture for years to come.

So how can a business owner manage the risk or minimize potential personal liability?

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Overhaul of D.C. Code Title 29 (Business Organizations) to take effect on January 1, 2012.

District of Columbia Official Code Title 29 (Business Organizations) Enactment Act of 2010  reforms and revises the business entity laws of the District of Columbia and replaces Title 29 of the D.C. Code.  The new Title 29 takes effect for all existing entities on January 1, 2012 as long as appropriate funding is made available to the District’s Department of Consumer & Regulatory Affairs (DCRA) to implement the changes in the Act.

Chinatown

The Friendship Arc, constructed in 1986, measures 48-foot-high, 75-foot-wide gateway and is the nation’s largest Chinese archway.  Chinatown is the center of the culinary vibrant Penn Quarter.

Columbia Heights

Home to such historic sites as the Tivoli Theater and Meridian Hill Park, Columbia Heights is a culturally rich neighborhood with many new innovative bars, restaurants and preforming arts venues.

Capitol Hill

Aside from being the largest historic residential neighborhood in the District, Capit0l Hill boasts some of the city’s best restaurants and bars to talk politics and catch sight of a Senator.