Author Archives BMK Law

By Keith E. Marlowe, Partner

A Company’s real property assets and leases are an inherent and financially critical factor in nearly all transactions involving the sale of the company (the “Target”); whether in the form of a sale of substantially all of the Target’s assets or a sale of the equity interests in the Target.  Often overlooked in the initial stages of a Target’s preparation for a transaction, it is important for the Target’s owners to focus on the following four issues:

• Will the business continue to be operated from the building(s) and real estate (the “Real Estate Assets”);
• Who owns the Real Estate Assets where the business is located (i.e., the Target, a party related to the Target or an independent third party):
• What, if any, environmental issues need to be addressed as federal and/or state law requirements may be applicable; and
• What are the tax consequences of the disposition of the Real Estate Assets and what, if any, planning opportunities may be available to defer the taxable gain, i.e. 1031 transactions.

The determination of whether the post-transaction operations of the Target will continue in the Real Estate Assets may impact whether or not the transaction is practical for the Target.  If the operations are not to be continued post-transaction in the Real Estate Assets, what is to be done with the Real Estate Assets?  Worse case scenarios if the operations are to be moved post-transaction, are that the owners of the Target end up owning vacant real estate or the owners end up having to remain obligated to third party landlords for rent that otherwise would have otherwise been funded by the Target.   If the operations are to be continued at the Real Estate Assets, it must be determined (i) what if any approvals and/or consents are required if the property is owned by a third-party landlord and (ii)  if the Real Estate Assets are owned by the Target, will the assets be part of the transaction or leased to the acquiror.  The terms of the on-going relationship needs to be addressed as part of the initial negotiation of the transaction’s terms.   If the assets are not part of the transaction and instead leased to the acquiror, will there be a fair market arms-length lease or a related-party arrangement.  One additional item to address is whether there will be a “commission/fee” paid on the portion of the consideration, if any, attributable to the real estate.

Regarding the issue of the ownership of the Real Estate Assets, the first item to address is who actually owns the Real Estate Assets. Generally, there are three alternatives: (i) the Real Estate Assets are owned by the Target; (ii) the Real Estate Assets are owned by a related party or (iii) the Real Estate Assets are owned by an independent third party.  In the case of item (ii), it must be determined if the ownership of the ownership of the Real Estate Assets is consistent with the ownership of the Target both as to the individual owners of the Real Estate Assets and the respective percentage interests; i.e.,  does owner A own 20% of the equity in the Target and either 15% or 25% in the owner of the Real Estate Assets.  If the latter scenario is the case, it needs to be determined whether all of the owners’ interests are aligned and if not, how are such non-alignments addressed in the entities’ respective organic documents.  In the case of item (iii), what if any approvals and/or consents need to be received from the third-party landlord.

Environmental issues need to be addressed as federal and state law requirements may be applicable.  First, is the transaction subject to any reporting requirements (federal or state); i.e. (as an example NJ has the “New Jersey Industrial Site Recovery Act (“ISRA”), which requires owners and/or operators of “industrial establishments” in New Jersey that cease operations or undergo a transfer of ownership or operational control to conduct an environmental review of and, if necessary, remediation of the industrial establishment prior to closing the transaction.  Second, is the Target subject to any on-going reporting requirements or does the Target have any permits that are necessary for the business and are the permits transferable/assignable.  Third, has the property previously been subject to a remediation or is it currently subject to on-going monitoring or reporting obligation(s).  If there are on-going monitoring or reporting obligations, it must be determined who will be responsible to meet such obligations post-closing.  Finally, the owners need to gather all prior environmental due diligence, reports, correspondences, etc. as part of the general due diligence process.

The tax consequences of the sale or disposition of the Real Estate Assets needs to be addressed as part of the overall tax analysis of the Transaction as planning opportunities may be available, i.e. 1031 transactions.  If a 1031 like kind transaction is considered, the parties need to reach out to their advisors immediately as the Internal Revenue Service rules are very specific and “unforgiving.”  Although beyond the scope of this article, the issues to be addressed would include:

• are the parties willing to part with the receipt of cash from the transaction in return for the current tax savings and having to reinvest the proceeds in other real property for a period of time;
• does the structure of the current ownership of the Real Estate Assets need to be adjusted and will there be tax consequences to such restructuring;
• the owner of the Real Property Assets needs to engage a “qualified intermediary” to take hold all of the consideration attributable to the real estate;
• potential replacement property or properties need to be identified
• individually addressing items on the settlement statement to minimize the amount of the consideration that may be subject to tax; and

the timing to identify any potential replacement property and the actual closing of the acquisition of the replacement property.

By Stuart M. Brown, Partner and Co-Chair, Commercial Transactions

Envision working diligently in your business one day when the telephone rings. On the other end is a pleasant-sounding individual who compliments you on your business success, with an alarming amount of granular knowledge about you and your Company, and quickly expresses interest in acquiring your business.  Immediately, the bubble over your head reads “that new fill-in-the-blank sports car or yacht or vacation home is finally mine!” Not so fast!

Before embarking on a journey that may or may not be worthwhile, consider your options: (i) pursue it on your own, (ii) decline the offer, or (iii) defer the conversation until you speak with your trusted advisors in order to make an informed decision. As the saying goes, you begin the process of selling your business on the day you decide to start your business. You will be best served by addressing the offer with a well thought out plan, i.e., are you emotionally and financially ready to consider selling your Company? If not, don’t waste time. If you are, consider the next step – who will help you evaluate the offer and how do you proceed?

Surrounding yourself with the right professionals to form a deal team who will serve your interests well by minimizing wasted time and maximizing value is essential.  Your deal team should consist of your M&A attorney, an accountant with deal experience and an intermediary. You ask, I received an unsolicited offer so why would I need an intermediary? To answer a question with a question, do you know the market value of your Company?  Do you know if the proposed terms are reasonable given the current economic climate? Can you successfully negotiate the business terms of the transaction while running your Company (in effect, two full time jobs)?

To properly evaluate an unsolicited offer, you should find out what the “market” is willing to offer to you for your Company. To do so, it would be most efficient and expedient to engage an intermediary to provide the data. The intermediary can be engaged as a consultant or in the traditional sense as an exclusive transaction advisor. Bottom line: while you know your business and possibly some potential suitors, the only way to make an informed decision is after a thorough and careful review of the industry data.

The M&A markets are competitive and tricky. An unsolicited offer provides certain advantages to the suitor such as a non-competitive landscape and a potentially unsophisticated seller. In this case, “seller beware” is appropriate. While it is clearly an ego-boosting experience to receive an unsolicited offer, the sale of your Company may be the single most important business transaction of your life.  Approach it with care and a healthy amount of skepticism.

That said, unsolicited offers are not necessarily bad offers; however, they can present traps for the unindoctrinated and those who believe that they can sell their business entirely on their own. After all, how hard can it be? Turns out, it’s pretty hard! Here’s the takeaway — work with experienced advisors who know the M&A landscape as well as you know your business. Good luck!

by Norman D. Kallen, Partner, Brown Moskowitz & Kallen, P.C.

The COVID-19 pandemic brought to light a critical issue for which all small business owners should always have contingency plans: what should a sole business owner do to maintain business continuity in the event the owner becomes ill or otherwise disabled?

Sole proprietors, sole members of LLCs, sole shareholders of a corporation, self-employed individuals and independent contractors often are the only persons in their businesses authorized to conduct certain aspects of business activities on behalf of their entity or themselves. For example, these individuals may have sole authority to handle banking activities (sign checks, etc.), review and approve payment of payroll and accounts payable, review and approve invoices, and oversee policy related to accounts receivable. What if a sole member of an LLC is also the only officer of the company? Who steps into his or her shoes in the event of illness or other disability? Is there a mechanism for temporarily authorizing a trusted advisor, friend or family member to act on the owner’s behalf to handle any or all of the above-described activities?

The best way to provide for these types of circumstances is to plan in advance and prepare an agreement appointing a designated individual to undertake “running the business.” A power of attorney or a simple signatory authority document from a bank may be too broad or too narrow to meet the owner’s requirements. Moreover, if the business is operated in the form of an LLC or corporation, the only documentation that your bank may have for you to enter into is the authorization of an additional signatory on checks and loan matters. To that end, you may not wish to grant an employee, trusted advisor, friend or family member that authority immediately. Without some sort of agreement in place with either an employee, trusted advisor, friend or family member, you are placed at a disadvantage from a management perspective.

An owner should make a list of tasks that are essential to preserving the business in his or her absence. Next, the owner should very closely consider who he or she trusts to operate the financial aspects of the business. After these issues are clarified, the owner and the “stand-in” need to come to an agreement in writing regarding the duties, rights, liabilities, indemnification and the commencement or effective date for these duties and a date of termination of the agreement.

The agreement should explicitly set forth:

• The current duties of the business owner that would need to be continued in the event that the owner is unable to carry out those obligations;
• The full and proper legal name of the “stand-in”;
• The “trigger” circumstances under which the agreement will take effect;
• The exact list of undertakings of the “stand-in” which to a large extent would mirror 1. above;
• The grant of authority to the “stand-in” to execute the tasks set forth in the agreement such that a third party, including a bank, would be able to rely on the document as proper authorization for the “stand-in” to act;
• Allocation of risks – liabilities and indemnification; and
• Circumstances under which the business owner terminates the authority of the “stand-in”

Standard terms and conditions would also be included. It is important to have the document notarized, because it will, no doubt, be presented to banks or other institutions that require this formality.

The COVID-19 public health crisis was a wake-up call for all sole business owners and individual business entrepreneurs. The critical point is to consider and plan for illness and disability in any circumstance to ensure the continuity of your business in your absence.

If you would like more guidance, please contact Norman D. Kallen at Brown Moskowitz & Kallen, P.C. at (973) 376-0909, ext. 1114 or via email, nkallen@bmk-law.com

Succession planning is about actively listening to the needs and wants of business owners, discussing realistic goals based on experience and crafting a practical and achievable plan. Brown Moskowitz & Kallen recently advised River Edge, New Jersey-based leading landscape and hardscape company, Let It Grow, Inc. in the development of a succession plan that would sustain the legacy of its founder Paul T. Imbarrato.

Established in 1986, the Company is renowned for its expertise in the planning, execution and delivery of world-class design/build and landscape projects throughout the Northeast. With Mr. Imbarrato at the helm, Let It Grow has evolved into a leading regional firm serving prominent organizations such as Prudential, Unilever, Rutgers University, NJIT, and Westfield Garden State Plaza, among many others.

The succession plan was a collaborative effort developed over the course of several conversations involving Mr. Imbarrato, the Company’s incumbent accountant, an investment banker, a family office consultant, a benefits and insurance consultant and BMK. Ultimately, Mr. Imbarrato shared equity in Let It Grow with certain team members pursuant to a vesting schedule designed to motivate the recipients and ensure continuity of management. The succession plan also enables Let It Grow to remain independent while creating an incentive for the continuing recruitment of key industry talent. While Mr. Imbarrato is not ready to retire, his objective, in part, was to create a pathway for eventual retirement that does not require acquisition by private equity. Rather, Mr. Imbarrato wanted to ensure the Company’s sustainability for many years ahead.

“I was seeking a way to continue my firm’s legacy while enrolling my existing highly valued team in ownership of the Company,” said Mr. Imbarrato. “I take great pride in having built Let It Grow to the success it is today. I am now confident that success will continue in the hands of my employee owners even after I am no longer engaged in the day-to-day activities of the Company. BMK was instrumental in helping me transform my vision into a comprehensive and practical plan. ”

“The Let It Grow succession plan is a key example of how BMK listens to client needs and devises innovative solutions that align with their professional and personal desires,” said Stuart M. Brown, Partner and Co-Chair of the Commercial Transactions practice at BMK. “We knew Paul Imbarrato did not wish to sell his Company as his means of exiting the business he painstakingly created over several decades. He has great faith in his dedicated and talented employees. While no one can predict the future, Paul takes comfort knowing that he implemented a succession plan providing for continuity of management upon his retirement and establishing a means for the Company to continue to grow and thrive..”

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