01.26.09

Buying or Selling Your Hospitality Business (Part 2)

Posted in Ownership of a Hospitality Business at 9:58 pm by Frank Petrosino

Representations and Warranties
No matter how much due diligence is done, most buyers still want sellers to give the buyers contractually binding representations and warranties about the past and current condition of the business.  The idea here is that if after a sale a buyer encounters an unpleasant surprise that relates to the seller’s action or inaction, the buyer wants to be able to go after the seller.  For example, if a seller of a resort hotel makes a representation that has remitted all collected trustee taxes to the appropriate taxing authorities and such representation turns out to be false, the seller will be liable to the buyer for any damages the buyer suffers as a result of the misrepresentation (even if the representation was innocent).

Conclusion
As on any road to achievement, the key to a successful and mutually rewarding sale of a business takes a combination of realistic self-confidence, bulldog determination, good timing, and a touch of audacity.  Planning and due diligence are essential to figuring out what is being purchased and reducing the risk of post-closing surprises.  If the process concludes well, the seller can move on to new adventures, and the buyer can make its new business shine.

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01.20.09

Buying or Selling Your Hospitality Business (Part 1)

Posted in Ownership of a Hospitality Business at 4:13 pm by Frank Petrosino

During the lifecycle of a business, its owners may get the opportunity to sell the business as a going concern.  Depending upon the type of business, the buyer may be a couple looking to get into the bed and breakfast market or a multinational resort owner looking to expand its market share.  Regardless of the size of the transaction and the types of players involved, however, there are common elements to every sale of a business. 

Finding Buyers and Sellers
The business of selling a business is no mystery.  Owners looking to sell a business can actively seek potential buyers by going through a business broker or marketing the business themselves.  In certain industries, such as the hospitality industry, a broker can really help bring buyers and sellers together and act as a liaison between the parties.  In industries with fewer players, sellers can market their businesses to potential buyers who may be direct competitors or who may be looking to vertically integrate.    

Circumstances will obviously dictate the tone of the search.  A financially distressed seller will have an air of desperation that a financially vibrant seller will not.  Be cognizant of relative bargaining positions, realistic about determining business value, and prepared for the likelihood that bargaining positions will affect the ultimate purchase price.   

Structuring the Deal – Asset Sale, Ownership Interest Sale, and Merger
There are three basic structures that can be used to effect the sale of a business: a sale of all the assets of the business; a sale of all the stock (or other ownership interest) of the entity (e.g., corporation, limited liability company) that owns the business; and a merger. 

Buyers who are not looking to assume all of the liabilities of a business will want to structure the purchase as an asset purchase.  In an asset deal, the buyer can generally pick which liabilities it wants to assume and which it does not.  For example, a hotel/restaurant business will carry current liabilities to its vendors, may owe long term debt to a bank, and may be a defendant in litigation.  A buyer is generally not going to want to take on the litigation liability or the long term debt (even if the bank would let the buyer take over the long term debt), and may or may not want to take on the current liabilities.  Of course, the buyer can also reject some of the assets (e.g., obsolete inventory).      

In an ownership purchase deal (called a “stock deal” in the corporate context), the buyer purchases the underling ownership interest of the entity that owns and operates the business.  Such an entity is usually a corporation or limited liability company.  In such a deal, the assets and liabilities of the business remain in the entity whose ownership is being purchased.  Contracts that the entity had with vendors and others will generally be unaffected.  The extent to which assets of the business remain unaffected, however, will need to be verified during the due diligence process (described below). 

In a merger, two entities will join together – one will survive and one will not survive.  The survivor becomes the owner of all of the assets and liabilities of the non-survivor.  Additionally, a merger of corporations may offer some tax advantages. 

The Due Diligence Process
The due diligence process allows buyers to determine what they are buying.  Of course, the financial condition of the seller’s business is of paramount concern.  Buyers also will want to investigate tax compliance, employee safety and benefit compliance, insurance coverage status, environmental and code compliance, intellectual property status, and litigation status.  For instance, when buying a restaurant, a buyer will want to know that the building where the restaurant is located is properly permitted and up to code, all servers serving alcohol are trained and certified, and all taxes have been paid. 

One key area in the due diligence process is determining whether the sale will violate any contracts the business has entered into.  If the buyer is looking to take over vehicle leases or key software licenses, the buyer must make sure that such contracts are transferable (even in a stock deal or a merger).  Transfer restrictions can be quite time consuming to deal with; give yourself plenty of time to work out such issues with third parties.

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01.15.09

The Fairytale of the Overtime Pay Requirements (Part 2)

Posted in Employment Issues at 3:38 pm by Frank Petrosino

Exceptions that May Be Relevant to the Recent Graduate
There are myriad exceptions to overtime requirements under both the FLSA and Vermont overtime laws.  The FLSA has white collar exceptions for salaried employees that many employers are familiar with. Since the recent graduate is being paid hourly, the white collar exceptions will not apply.  (It is possible, however, for chefs who are paid salary and meet certain other criteria under the white collar exemptions to be exempt from the FLSA’s overtime requirements.)      

One interesting Vermont exemption is specifically available for retail and service establishments.  Under this exemption, a restaurant is generally considered a service establishment as long as at least 75% of its goods and services are sold directly to consumers; any employee (including a chef, a cook, and a server) of a restaurant qualifying as a service establishment is exempt from Vermont’s overtime laws.  In practice, this Vermont exemption has very limited application because of the broad scope of the FLSA (which does not contain a similar exception).  For the fancy Vermont restaurant to have any chance of keeping the FLSA from applying to the recent graduate and having this Vermont exception apply, the fancy Vermont restaurant would have to fall below the $500,000 threshold, and the recent graduate could not during the scope of employment, take any deliveries, make any phone calls, drive, or process credit card payments.  Since the concept of interstate commerce is so broad, this might not even be enough. 

Enforcement and Penalties   
The recent graduate’s employment arrangement with the fancy Vermont restaurant creates a potentially significant liability for the fancy Vermont restaurant.  The recent graduate can easily file a complaint with either the Federal Department of Labor or the Vermont Department of Labor.  Such a complaint would trigger an investigation that would be less than pleasant.  Investigators must be allowed to enter a place of business in order to inspect all relevant records and question employees (expect all required postings to be checked at this time as well).

Penalties for overtime pay violations can include the payment of double the wages owed but not paid, payment of all expenses of enforcement, civil fines in the thousands of dollars, and even criminal fines and jail time.

Prevention is the Best Medicine
Though the fancy Vermont restaurant cannot change the past, it can implement procedures in order to avoid overtime issues in the future.  The first step is to learn about the FLSA and Vermont overtime laws (www.dol.gov (FLSA) and www.labor.vermont.gov (Vermont) are good places to start).  Second, all employment positions at the fancy Vermont restaurant should have written, detailed job descriptions that accurately set forth job requirements and functions.  Assuming they are accurate, job descriptions will help the fancy Vermont restaurant to figure out at the start of an employment relationship whether an exemption to overtime laws applies.Assuming no exception applies to the recent graduate, the fancy Vermont restaurant should immediately pay the recent graduate for any past wage deficiencies and commence paying the required wages (including overtime) going forward.  Doing this will hopefully give the recent graduate a happy ending and the fancy Vermont restaurant a less unhappy ending.    

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