DEC. LCT: Following gradual steps can ensure cool heads and sound judgment prevail.
Tony Beasley was not happy. A minority owner (25 percent) of New Pacific Limousine in Vancouver, British Columbia, he was being introduced to his two new “partners” by majority owner Mike Mazzone. It was 1994 and Mazzone was selling 10 percent of the company to two outside investors.
“I was getting along great with Mike,” says Beasley. “The company was doing well, but I realized that my vision of aggressive growth was not going to happen. I also knew that I did not want new partners.”
New Pacific was doing more than $300,000 in business with a six-car fleet. Beasley saw an opportunity to grow in the community. The cruise industry was booming and the film industry had recently discovered that Vancouver was an inexpensive venue.
Beasley was able to secure financing through his family. He then approached Mazzone and inquired about purchasing the entire company. It was a major step, but one that Beasley found necessary. “My vision for New Pacific Limousine was completely different from my partner’s,” he says. “He was content with running a good business and taking a good salary.
The service was excellent and the company had a first-rate reputation in the community. However, I wanted more.”
Mazzone wanted 150k for the business which included the vehicles and the valuable operating license. Beasley borrowed the $90,000 up-front money and paid Mazzone the remaining $60,000 over 20 months. New Pacific has more than doubled its fleet and quadrupled its sales since 1994.
The company has become fully computerized and the new owner has personally undertaken the sales role. Beasley’s vision of aggressive growth included penetrating the local travel and tourism industry. He was able to pay off his debt to Mazzone early. His ambitious plan was on track.
Beasley offers the following advice to those contemplating a buyout: “Be prepared to sacrifice. I reduced my salary to half of what my partner had been taking. I used that money to pay off the loan early. I also visited almost every client personally. The limousine business is a personal service business. Mike had given his clients great service. I let them know that I was committed to running a great company. It is very important to retain your current clients and get the word out on your new company.”
Buyouts occur and partnerships dissolve for three main reasons:
1. Disability — One partner is disabled and the other partner takes over. The minority owner can literally go from chauffeur to chief operating officer overnight.
2. Dispute — The partners disagree on the direction of the business or how the business is being run. A fundamental disagreement cannot be overcome and dissolution of the partnership occurs. Frequently, the “dispute” is simply that one partner is happy with the plateau the company has reached. He is unwilling to invest in new equipment, computerization, or increased spending in equipment or personnel. His only goal is to maintain the status quo and continue to extract as much income as possible from the business.
3. Death — One partner dies and the other partner or partners take over. Overnight, a spouse can inherit a limousine company, a business with which she previously had only casual involvement. It is critical in a partnership arrangement to be sure that both partners have consulted with their life insurance provider.
Be Smart and Take It Slow
Richard Mulcahey, an attorney in Philadelphia with Schubert, Bellwoar, Cahill, and Quinn, is an expert in transportation law and has negotiated numerous limousine company purchases.
Mulcahey believes after you have made the decision to buy out your partner, the first move is simple. “You need to slow down,” he says. “Many times the partner desiring the buyout is so anxious to close the deal that major mistakes occur. Both parties need independent professional advice and they need to understand that decisions being made now will have a major impact on the future of the business. If you intend to be in business for years to come, then why rush the initial purchase?”
Consider asking the seller to provide financing on the deal or to “hold some paper.” By paying the seller over a two-, three-, or five year period, the buyer is assured his questions will be answered and the seller will remain cooperative.
The seller will be motivated to help the new owner because he wants to receive his monthly payments in a timely manner. Ideally, the buyer would like to be able to pay the seller with current income.
A key question to ask prospective buyers is whether they are purchasing the stock or assets of a company. “When you purchase the stock of a company, you are basically buying everything,” says Mulcahey. “If you are doing this, you need a very strong stock agreement that will allow the buyer to go back to the seller and be indemnified for expenses or bills that were unknown at the time of the sale.”
Without a strong indemnification agreement, a buyer could make an unpleasant discovery after the purchase has been completed.
A Philadelphia area operator recently learned an expensive lesson after he purchased an existing limousine company. About two months after making a stock purchase deal, the new owner received a certified letter from a major Atlantic City casino. The casino demanded a $9,000 refund for a check they had mistakenly paid the company. The casino had sent payment to the Philadelphia limousine company that coincidentally had the same name as a company in New Jersey that should have originally received payment.
The $9,000 represented a huge chunk of the new owner’s working capital. If the new owner had simply purchased the assets of the company from the previous owner, he could have possibly avoided the debt.
Buying the assets of a company is usually easier. If a buyer agrees to purchase the assets of a limousine company, he or she is agreeing to purchase the license, vehicles, and goodwill of the company.
For example, a new owner could set up her own company as Suzi Enterprises dba Executive Limousine. Her federal identification number is different. The vehicles are purchased by Suzi Enterprises. New debt will be applied under the correct corporation. The old company does not exist. The employees who stay on with the new company are working for a new entity “This is much easier,” says Mulcahey. “You do not have to worry about undisclosed debt or deals made by the seller. It’s very clean.”
Beasley says the rewards of buying out your partner are considerable. “I get a thrill out of owning this company and watching it grow,” he says. “I can make my own plans and know that with hard work and the support of my family and staff, anything is possible.”
What is an operating document and why must a business have one?
The single biggest mistake business partners make is failing to draft an operating agreement. Drafted by an attorney, this simple document must be agreed upon by allbusiness partners and determines how decisions are made in a business. The arrangement may be a shareholder’s agreement or a partnership agreement. This contract provides rules on how decisions, such as borrowing money or purchasing equipment, are executed. The operating agreement should be signed before your first run.
Richard Mulcahey, an attorney in Philadelphia with Schubert, Bellwoar, Cahill, and Quinn, describes a typical scenario. “Two friends put up $25,000 each and get the necessary license and insurance to operate an airport shuttle. They run a van on a regular shuttle route and the business begins to flourish. Partner A is thrilled. He drives regularly and takes a small, agreed upon salary.
“Partner B wants to grow the company, He goes to the local Lincoln dealer and buys a 1998 sedan, on credit, in the company’s name. Some of the bills start to go unpaid. The business, which began with so much promise, starts to lose money. Partner B is not receptive to tie pleas of Partner A. With no other recourse, an attorney is called in.”
With no operating agreement Partner B has committed Partner A to the sedan car loan. As an authorized signer on the corporate checking account, either partner can write a check for any legitimate business reason. He automatically obligates his partner to the new debt.
Mulcahey says that business partnership dispute cases are among the most expensive and time consuming. The unhappy partner has to go to court and find a judge to sign a temporary restraining order. As a rule, courts are very reluctant to intervene partnership disputes. This restraining order would prevent the partners from doing a variety of things until the courts heard the case. “You are asking the judge to quickly become an expert in the limousine business,” says Mulcahey. “Chances are the judge will take the parties aside and ask them to settle the dispute. However, with legal fees between $110 and $390 per hour, there are no winners.”
The other factor to consider is the very nature of the limousine business. Clients expect on time efficient service every day. It’s impossible to be preoccupied with legal proceedings and, at the same time, provide on-time efficient service. Whey business disputes hit the newspapers, the bottom line suffers. Limousine service is not a unique, one of-a-kind product. If a client reads that there is turmoil at his or her limousine service, he or she may simply find a new company.
An operating document for the situation described above could include the following:
“Be sure the operating agreement is in place before you go into business,” says Mulcahey. “Each partner’s attorney should review the document it should be filed away in an easily accessible place. Ideally, you hope it will not be necessary to refer to the document to run the business.”
From Employee to Owner: A Critical Check List
The “American Dream”, for many, means going from an employee to a business owner. Every worker has contemplated this challenge. Before making this move, a prospective business owner must consider the following:
1. Secure the services of a professional advisor. This advisor could be a lawyer, accountant, or experienced entrepreneur. Utilize the services of SCORE, a volunteer organization of retired executives. This organization is listed in the phone book or through the Small Business Administration.
2. Sign a confidentiality agreement. Show good faith by promising not to disclose any information about the current business or owner. The last thing a business owner needs is a curious employee who has no intention of purchasing his or her business.
3. Review the last three to five years of company financial records. The only income that you are interested in is verifiable, on-the-books income.
4. Have your accountant review the last three business tax returns.
5. Have your attorney check to see if there are any lawsuits pending.
6. Check to see if there are any Hens pending. That sweet limousine bus might have been used as collateral on a loan.
7. Be sure the assets of the company are titled properly. The 1997 Town Car that you assumed was part of the deal may be titled to the owner’s mother.
8. Check the status of the company’s public utility license. In states that this license is required, it can be one of the most valuable assets the company is selling. If a license suspension is in effect, this can be fatal to the new owner.
9. Contact the company’s current Insurance provider. A claim that may have been settled that calendar year could dramatically affect your next premium. Check with the insurance agent to prevent sticker shock down the line.
Perform “due diligence” on each of the above items. Ignoring any one of them could be fatal to the new business owner.
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