Reopening the Business - Legal Steps Required

Introduction:

Reopening a business that has ceased operations or greatly reduced staff and resources due to a natural disaster or unforeseen catastrophic event, whether pandemic, flood, fire, hurricane, or personal tragedy requires preplanning every bit as detailed as when the business first opened its doors. In the rush to open the doors, many businesses blithely assume that the old methods and customers/vendors/competitors will reemerge intact and the old methods and safeguards will apply.

But as Thomas Wolfe wrote, “You can’t go home again.” Or, perhaps Heraclitus put it better: “One never steps into the same river twice.”

All things alter and those very alterations make attempts to recreate the past futile. When one reopens the business one does not set up the old business but is actually beginning a new business, often with much of the old goodwill and expertise, often with many of the same staff-but the experience of closing the doors requires an alteration of approach that is the subject of this article.

Determining the Damage:

The disruption to the business can have significant and, at times, permanent damage both legally and financially.

1. Money: Cash flow was undoubtedly disrupted and that often leads to accumulated debt that must be confronted. While many creditors may be willing to discount or allow time to pay off the debts, some may not, and it is ironic but often true that it is the “heartless” creditor who gets paid while the understanding ones must wait. And the creditors often have their own creditors pushing them, assuming that the reason the business ceased was widespread disaster.

There are other creditors who have particular rights that allow them to demand payment or threaten more severe consequences than filing suit. Employees have to be paid accrued wages and benefits. Tax authorities must be paid though at times a payment program can be worked out. Landlords can evict, secured creditors can seek to reclaim asse ts, and any creditor who has a guaranty or had a personal claim against the business owner need not delay seeking to enforce.

Credit ratings are often hurt by the close of business and need to put food on the table, and ready borrowing may not be available.

1. Employees and Contractors: Good employees may have determined that there are better opportunities out in the marketplace or have determined that they simply must move to a less expensive locale in order to rebuild their own wealth which was depleted by the closing. Contractors face the same pressures.

1. Contractual Breaches: Often closing operations resulted in breaches of ongoing contracts with vendors, landlords, and other third parties who may refuse to renew the contract or will want a premium for beginning business again-or may be out of business themselves.

1. Lost Clients and Customers: Being closed for weeks or months can force otherwise loyal customers to find alternative sources of goods and services and while many may return, not all will, and the competitors will do all they can to retain these new customers. To get them to return may require extraordinary efforts on the part of the business, including discounts, advertising, etc.

1. Depleted Reserves both Economic and Mental: This is a variation of the money theme, but also relates to state of mind. Not only has one utilized personal resource to pay for necessities for the period of time the business was closed, but it will be weeks, months or even years before sufficient net is generated to allow the income previously enjoyed. Further, the enthusiastic and optimistic state of mind that was the motivational force to take the chance and open the business is often in danger of being replaced by concern, worry and pessimism. One worked hard to build a business that may appear to suddenly evaporate, often for reasons beyond your own control. The stamina to take that risk again is often depleted. And this relates not only to the business owner, but the family who also took the risk and are suffering the results.

1. Changing Macro Economics: The world changes in a catastrophe, be it personal or the society as a whole. Locally, your local economy may be deeply altered, and it can take half a decade to recover from flood or hurricane. Even if the economy outside of your immediate area is strong, your local customers and clients may take years for their own recovery or may have less faith in you if your own business failed while theirs did not. For wider economic effects, such as pandemic, one can expect a sea change in attitude as people become less willing to spend and take risks in the newly discovered uncertain world.

Determining the Advantages:

1. Experience: “That which does not kill you, makes you stronger.” Nietzsche. You have already built at least one company and learned the myriad details and skills necessary to make it work, from employee interaction to use of websites, insurance, contracts, etc. You no longer are a novice and have a head start in commencing successful operations.

1. Contacts and Employees: The people that make your business work…vendors, suppliers, employees, contractors, consultants, CPAs and lawyers…are already known to you and while some may disappear after the hiatus, most are not only there to help but anxious to rebuild the old relationship.

1. Outside Help: There may be assistance programs from the Federal, State and local government and most banks understand that outside events have to be considered in determining credit lines. You have a track record; you are not just a start up, that most risky of all business ventures. And such institutions as the Small Business Administration not only lend money but have advisors and consultants to assist. Friends and families might be available as well-but see the cautions below. There may be significant tax breaks available and losses that can be utilized over the coming years.

1. Competition Lessened: The same disaster that closed you down also closed down your competitors and they face the same challenges you do. Some will not want to take the risk again and may close their doors. And some closing their doors may have inventory, expertise or location that may allow you to prosper all the more.

1. Much of What is Needed is Already in Place: At the end of this article is reproduced our article on starting up your business, what is needed. If you were successful, most of that is already created. From bookkeeping systems, to form contracts, to procedures and manuals, you do not have to create them from scratch, and most can be utilized once again. Even such actions as selecting a good accountant or lawyer has already been achieved by you and you need not spend the time hunting for the persons and systems you need to make this work. Such additional items as insurance are normally still in place and need not be bought again…until the policy expires.

1. Valuable Assets Remain: Websites, logos, intellectual property, trade dress, customer lists, and the numerous intangible assets owned by the business are almost certainly intact and do not have to be recreated. This is also likely true of good will, that hard to define but very real attitude of the public, vendors, suppliers and employees who will often want to help your company survive the catastrophe.

The Choices:

1. Start Again or Close the Doors? Unless you are enthusiastic to the point of foolishness, you must make a very careful analysis of whether your current condition allows you to continue. Here, you need legal and tax input so you can determine what obligations can not be delayed or avoided and what personal liability you face if you shut the doors. You also must consult with family to determine how committed they are to you rebuilding the business and the economics involved. In short, you must know the upside and downside of both continuing in business and walking away.

A very wise entrepreneur who made and lost several fortunes once told the writer that the most difficult decision any businessperson ever makes is when to call it quits. It goes against the grain, he said to me, goes against everything that makes one start the business to begin with. But often it is the wisest decision to make. Closing the doors does not mean you are not ever going to be a business owner again. It means you are not going to try to keep this particular business going in light of the economics, risks and other opportunities that may be available.

The various criteria already listed above must be carefully considered. Remember, if you close the doors with debts outstanding, creditors can attempt to enforce their judgments both against the entity or (if you did not incorporate or create a limited liability company) against you as well. Intangibles, such as logos and intellectual property can be seized and if you transfer them to third parties before you close the doors those creditors can claim a transfer to defraud creditors and file suit against both you and the third party. Good legal and tax advice is vital in making this decision.

One thing that is dangerous is to simply start a new company with a new name in the same business, taking assets with you and leaving creditors in the lurch. While many creditors may simply walk away, others are likely to come after the new entity claiming that the closing of doors was a mere sham and that the debts should apply to the new entity.

Also, if you signed any personal guaranties for the existing company, you can expect creditors to come after you personally. It may be that you can arrange discounted payoffs or a protracted payment program-but in that case, you should consider keeping the old company going with that same payment program and not have to go to the time, trouble and expense of beginning again.

Of course, one can always leave the business entirely and start a different business in a different field or work as an employee or contractor for another. A “cooling off” period is what one client called it as he waited a year before beginning his next venture.

Nothing should be taken for granted. This can be a life changing decision and all possible avenues should be at least considered after access to such expert opinion as required.

Note that bankruptcy protection can also be considered and the articles on this site describing that process should be reviewed.

1. A New Approach or Recreation of the Old Business? A friend once commented to the writer that when his home burned down it gave him a golden opportunity to incorporate into the new home all the lessons he had learned while living in the old home. The same holds true for the business.

One has the opportunity to recraft and restructure the business in a manner that one did not have the opportunity or time to do before. A section of the business may be abandoned while another area of endeavor may be pursued. The weakness of a competitor in a particular market may be exploited by allocating to that market more resources that otherwise were committed to less profitable ventures. The possibilities are endless.

There is a tendency to be conservative in times of stress and challenge: to merely try to recreate what worked before, to stabilize not innovate. That may make sense. But there are also opportunities in disasters and the businesspeople with sufficient resources of both capital and energy can seize an opportunity that did not exist in less difficult times.

Keep in mind that Bank of America (called Bank of Italy) only dominated the California market due to the 1906 earthquake and fire disaster in San Francisco. Giannini, its owner, saw the fire coming and buried his safes where they lay in the ruins of his building and fled the fire. He returned two days later, recovered his safes, set up a table, and immediately began loaning the money out to the victims of the earthquake and fire. At that time, his business was zero, all of his assets but that cash destroyed by the same fire and earthquake, but he recognized that these people borrowing were the same hard-working businesspeople that, four days before, were excellent customers. He was convinced they would be again and concentrated on expanding his clientele at a time when other bankers were hoarding their wealth, afraid for the economic future of San Francisco.

A disaster is horrible. A disaster can be an opportunity to reinvent the business in ways impossible to consider before.

1. Outside Capital and Owners? It is tempting when confronting economic stress to seek outside capital via borrowing or even bringing in new owners. All the issues one confronts when setting up a new business with too much debt or other owners will arise and the wise owner hesitates long and hard before using ownership or excessive debt to obtain capital. If a new owner is brought in, his/her role, a buy and sell agreement if he/she wants to leave, etc. must all be negotiated and reduced to writing.

That said, times of economic stress can lead to closure of competitors and some of those competitors might be very good employees or owners and that avenue should be carefully explored if that opportunity arises.

1. Staged reentry? It often makes sense to slowly reenter a market, especially when a large-scale disaster has occurred. If pandemic or fire or flood has shut down an entire market, keeping the expenses and commitments low as one builds up the business can make good sense. One does risk losing out to possible competitors and losing good employees, but few people, recovering from a disaster, are going to buy more than essentials for at least a quarter or two.

1. When to Open Up? So, here is the problem: the first one back in business is going to get a lot of customers interested in the service or product and, indeed may beat out the competition who is slow to open the doors again. That said, the preplanning and budgeting is vital. To simply open up without checking debt, available employees, ability to finance inventory or service providers, etc. is to take a tremendous chance.

The solution is simple: plan before you open and plan right now. Move fast but move carefully with a full understanding of the challenges faced. Do not wait for the crisis to pass but plan during the crisis and the moment it has passed, implement your plan.

When to open? As soon as humanly possible after planning and budgeting is completed.

Part of that budgeting may involve seeking governmental relief and those agencies are notoriously slow to act. If your odds of collecting are very good, this may be one of the times that loaning your own money to the business to open up quickly…and paying yourself back when the money comes in…may make sense. But be careful. Some agencies do not allow repayment of loans to owners prior to repayment to the agencies.

State of Mind of Business Owners:

One starts a business for very personal reasons. One wants to control one’s own destiny, to take a chance on making it, to be proud of a business created from scratch or expanded from its initial state. Challenges are inherent in business and surmounting challenges is a key part of the goals of any good businessperson.

Few people who have owned their own business have an easy time adjusting to being an employee again and even fewer fail to begin again after a setback, especially if it was caused by outside forces.

If you still enjoy the challenge and excitement of owning a business, then realize that just as when you first opened the doors, you have to plan, to budget and to be prepared for things not going smoothly.

And what are those plans? Think of this as starting from scratch. With the following differences:

1. You already know how to run the business, have the contacts and personnel and customers.
2. You are facing a market in turmoil though it may soon recover.
3. Your competitors are also in disarray and some may disappear.
4. You have encountered remarkable costs and interrupted cash flow: but you also have a head start in getting going again based on your own expertise.

Following this article, we have attached the article on what a business needs to begin operations. Some do not apply to you, but go through the list carefully since, in a way, you are “starting again.”

Conclusion:

One only fails when one gives up and stops trying. To be an entrepreneur is to take body blows and keep going. Life is by nature uncertain and the good businessperson is the one who understands that, stays flexible, and enjoys the challenge.

As for uncertainty, one client put it well: “People think they are safer in a big company or as an employee. Nonsense. All that means is that someone else’s decisions will have a direct effect on your life rather than your own. How is that safer?”

ARTICLE ON WHAT IS NEEDED TO BEGIN A BUSINESS SAFELY:

BUSINESS STARTUPS WHILE PROTECTING YOUR ASSETS

Introduction:

There is little as exciting and dynamic as starting one’s own business. It is, “taking your own fate into your own hands,” one of our clients commented three months before he began what would be a successful construction business. Eight years later, as he pondered how to survive the greatest downturn in construction in sixty years, he ruefully lamented that, “fate is not always kind and never fair.”

Most startup businesses fail. In some industries, such as restaurants, the failure rate is above seventy percent on average. In others, standard retail outlets, the failure rate remains above fifty percent over three years. The safest businesses to start up are those with the least contact with end users, such as wholesale, material men for construction, as well as the service industries such as accounting, day care, etc.

But it is the chance to succeed that draws people to the attempt. There are certainly no guaranties of success…but the success has no limits, either, and if one wishes to go beyond the relative security but finite limits of a salaried position, commencement of a business one owns is the best route. Or, as one businessman told the author, “All business is risk, including the one you work for as an employee. If you are going to take the risk, you might as well grab the possible gain.”

But, to begin a business without taking intelligent steps to protect oneself from possible failure is to make your first big mistake in starting a business. Simple as that.

It is vital when commencing a new business to take those basic steps that can allow protection of personal assets if things go wrong. Optimism and hard work are the sinews of beginning a new business and without such conviction, no new business can succeed. But such optimism should not blind oneself to the simple fact that many new businesses fail and the wise pilot, when taking off, knows how to land with minimal damage.

The tools necessary to protect personal assets are readily available and considering their usefulness, not that expensive. Likewise, the skills necessary to limit the economic loss to business assets are not hard to master if one takes the time and energy to learn them. Sadly, too many neophytes to the business world do not and face personal economic catastrophe if their businesses fail… economic catastrophe that could have been possibly avoided if the initial enthusiasm for the creation of the business did not result in them ignoring careful planning for all eventualities.

This article shall briefly outline some of the basic protections available to limit the downside of starting a business. Anyone considering such a venture should consult with accountants and attorneys to obtain detailed implementation of those tools that seem appropriate.

The Challenge:

Most new business owners are putting the bulk of their energy and assets into the start up. Most have thought about beginning a new business for years and the excitement of the new business can be intoxicating and intimidating. One concentrates on the thousands of details critical for success, such as selection of location, design of logos and trademarks, design of web site, hiring of employees, plans for marketing, competitors, etc. etc. Often one does not prepare for failure or take time to carefully separate personal assets from company assets.

Which is a mistake. One can always decide to add personal assets into an entity but getting them out again can be far more dangerous, (and tax expensive) as discussed below.

The overall goal of the entrepreneur should be to put in the assets and commitments necessary to make the business succeed but retain in personal control and protection as many assets as possible and only parcel them into the company if critically needed. Personal obligations should be carefully segregated from business obligations and that separation must be a continuing concern as outside vendors and creditors as well as banks ask for personal guaranties, more commitment of monies, and even pledging of personal assets.

The Tools:

1. LIMITED LIABILITY ENTITIES

While tax advantages may apply to certain limited liability entities, a primary advantage is that they provide what the name implies: limited liability for the owners. A corporation or a limited liability company incurs its own debts and obligations and is a “person” like any other member of the state. It can sue, be sued, pay debts, not pay debts and file bankruptcy. It allows one to participate in the creation of a business but retain outside of the risk of the business those personal assets not invested or transferred to the entity. If the business fails or goes bankrupt, those personal assets of the owners are protected from the creditors.

See our article on Limited Liability Entities for a more complete discussion of these useful structures. Unlike sole

proprietorships or general partnerships, these structures are a critical protection to the owners of a business if created correctly and adhered to in terms of the mechanics of their operations. The creation and administration of these entities is simple and not remarkably expensive, requiring less than a day a year of the owner’s time and attorney fees for creation and accountant fees for maintenance. Given that an attorney and accountant are necessary advisors for any startup, the extra expense is minimal compared to the benefit.

Put simply, the entity is the “person” who engages in business, who is at risk when executing contracts, borrowing money, signing leases, etc. If the business fails, the entity may file bankruptcy and close its doors, but the individual owners, provided they have adhered to corporate or LLC formalities, are not individually liable.

The creditors often recognize the limited liability inherent in such structures and ask for the owners to personally guaranty the obligations of the entity. If that is done, personal liability can attach, but quite often creditors fail to do that, or the guaranties can be limited in scope. Further many creditors, especially trade creditors, fail to ask for guaranties-a mistake on their part.

Some types of liability can almost always pierce through the limited nature of the entity and apply to owners. These liabilities are often tax obligations due, especially those connected with payroll taxes. Claims based on intentional wrongdoing also “pierce the corporate veil” such as fraud or assault. However, most private liabilities, absent a guaranty, do not.

A wise entrepreneur will thus minimize his or her cash assets being invested into the entity to safeguard them, only putting in money from time to time if needed and usually in the form of a promissory note so that the money can be paid back with minimum tax. Note that the obligation to an insider shareholder or officer is normally considered subsidiary to obligations to third parties in the event of insolvency.

2. ADEQUATE LIABILITY INSURANCE

Third party liability insurance and, at times, directors and officers’ errors and omissions insurance is not prohibitively expensive and provides coverage for those claims predicated on torts or other types of non-contractual wrongdoing. The insurance should be owned by the entity and is deductible as a business expense. Certain policies can cover other types of liability, such as selected types of contractual liability, and these options should be explored with a reputable insurance broker. Anyone selling a product should carefully inquire as to products liability insurance and malpractice insurance is often required in certain professions.

3. CONTRACT REVIEW PACKAGE.

Such basic tools of business as invoices, purchase orders, employment contracts, leases, etc. should not only be drafted or reviewed by experienced counsel but should be made into a standard library of forms which the business utilizes in all of its transactions on a regular basis. Such clauses as arbitration of conflicts; providing that the winning party gets attorney’s fees; choice of law; definition of performance and warranty, are all vital to any business and failure to adequately create excellent agreements is to await a dispute which will quickly escalate into unneeded expense and turmoil. See our articles on Contracts, and The Acid Test Clause. Various forms can be found online and some of them are adequate. However, before you decide to create your own or use a website to create your forms, read our article Form Contracts Do Not Go To Trial.

How vital is this library? Consider the following: the average contract dispute will last two years and cost you close to one hundred thousand dollars in fees and costs. Arbitration clauses can limit that to a six-month event with the winning side receiving back the fees incurred. And in our system of law, it only takes one side to force a lawsuit upon all others. It is not unusual for three year’s profits to be wiped out by a single lawsuit, whether the lawsuit is meritorious or not. The right agreements can limit that danger.

4. GOOD TAX ADVICE AND SETTING UP THE BOOKS

Not only is it vital to make sure you are aware of all taxes that may be due, from payroll to local business tax, but it is equally vital to have your books set up correctly and efficiently so that a CPA can efficiently determine the best method to prepare your tax returns. Tax authorities have no concern as to whether you go out of business or not, assuming they can impose personal liability, so to create the correct set of books and establish a good relationship with a good CPA and/or bookkeeper is vital. Failure to pay certain taxes, such as payroll taxes, can result in imprisonment. One of our nicest clients ended up for a weekend in jail before bail could be arranged since he had commingled funds between his operating account and his payroll tax account.

5. EMPLOYMENT LAW BRIEFING AND FORMS

While smaller companies are not held to many of the requirements imposed on larger companies, California law still imposes a wealth of requirements on the employer and the cost of ignoring them…or confusing independent contractors with employees…can be substantial. Even the cost of an audit by the EED can be in the many thousands of dollars. Getting some legal advice and creating the right contracts and procedures in this vital area before hiring the first employee makes good sense. Again, this is one of the areas that the limited liability entity may not give full protection, especially if payroll taxes are not paid or under withheld or if claims of discrimination are made.

6. LEARN THE LICENSE REQUIREMENTS AND ADHERE TO THEM

Many businesses require some type of license indicating expertise (realtor, professional corporations, appraisers, etc.) and most jurisdictions require one to obtain a business license (and pay local taxes) to engage in business. Some businesses cannot be run out of certain locations or would be in violation of zoning requirements. Violation of license or zoning requirements can be liability imposed personally and time should be spent in mastering those requirements.

7. CARE OF INTELLECTUAL PROPERTY

Quite often the most valuable asset a business has is its name, confidential information, logo and software. And many of these assets cannot be protected if registration is delayed. One of the most upsetting events for a business is to discover that years of hard work in establishing a name is eliminated by a hardnosed competitor who saw an opening in the protection of intellectual property. Take the steps to learn how to protect it and take those steps. See our article on Registration of Copyrights.

8. BACKGROUND CHECK ON KEY EMPLOYEES

As discussed in our article on Embezzlement in Your Business or Assets, embezzlement is widespread and seldom prosecuted. Recent studies indicate that over half the businesses suffer this type of action at least once in their lifetimes. A background check…and actually calling the references…can make a tremendous difference. The author knows of at least five businesses that were prospering until destroyed by an inventive employee-embezzler. A background check normally costs less than six hundred dollars and can save your business. The prospective employee should consent to the background check. If the prospective employee does not, do not hire him or her.

9. THE GROUP OF ADVISORS-MENTORS AND PROFESSIONALS

The ideal situation for you is to find someone who ran your type of business and either informally or formally find out the pitfalls and concepts that are to be considered in making the business work. Most businesspeople are delighted to speak of their experience, often with wonderful “war stories” so long as you are not a competitor and one may be shocked at how much one can learn over a dinner table with a retired person in the field.

This dovetails into the second important group to gather, the attorneys, accountants, bookkeepers and tax advisors. These people are as necessary to a business as employees and will often have contacts in the field (including potential mentors) that are invaluable.

Consultants can also be retained, though that can be an expensive process, and if a consultant is hired, be sure to get a clearly written contract limiting the potential expense.

One thing is certain. One will eventually learn the pitfalls…but it is better to learn them from good advice than by experience.

10. THE DROP DEADLINE

Before you begin, decide when you will know when you have failed.

That may sound strange, but the most usual way people lose personal assets when beginning a business is to keep pouring personal assets into a losing cause and guarantying the debts of a failing business. And after years of straining to make the business work, few can easily pull the plug and walk away-rather, they sign another guaranty or put in another ten thousand dollars, hoping things will turn around.

Enthusiasm and optimism are critical for business success. But those are two attributes that may get in the way of knowing when to give up and treat the failure of the business as a “learning event” that allows one to try again in a different forum.

How does one know when to stop? Each person must make their own decision, but one client we know, who made millions but failed in business two or three times to do it, had a formula which is intriguing. Before he started his second business, he created what he called “The Iron Nest Egg” which was a list of assets he would never touch to save the business. He advised us that it was the money he would need to begin yet another business. When his second business prospered, he put aside enough cash to increase his Iron Nest Egg by tens of thousands of dollars, knowing that he might need it if things changed.

They did. And when he was faced with the choice of invading his Iron Nest Egg to keep his second business afloat…or use it to start his third business, he told this author over the telephone that at least he had that choice and most of his competitors did not.

(It was during the downturn in the early nineties.)

And when his third business prospered to the point where he sold it for enough to retire, he named his home in the country not after his third business-but called it The Iron Nest Egg. His neighbors often wondered what it was all about.

Conclusion:

Despite all the warnings above, there remains nothing as thrilling as taking the chance, putting your economics on the line, and seeing if you can succeed in this freest of world markets. The risk is there-though can be minimized as described above-but so is the chance for great success.

Go for it.