Dallinger Business Consulting

Case Studies

Business Sale Transaction Planning

ARE YOU A BROKER, OWNER OR BUYER FRUSTRATED OR DISCOURAGED IN THE SALE OF A BUSINESS?

THE PACKAGE DEAL

The family owners of a privately held, 30 year old California manufacturer of packaged foods, decided to sell the business and related real estate to one of their competitors.

As a condition of the sale the family was concerned about the future welfare of some of the long time employees of the business and wanted protection for those individuals as well as a promise that the business would not be relocated after sale. Further, of course, the family wanted top dollar for the business and the real estate and were willing to carry back only a limited amount of financing.

The purchaser was arranging for an SBA loan to purchase the business which tied up all of his major assets leaving nothing substantial as security for the seller carried financing.

Further, the SBA was insisting on strict limits on the seller carried financing. This requirement translated into the need for cash through escrow from the purchaser that he simply did not have available to spend without reselling the real estate after his purchase of the business and, subsequently, relocating the business to property he already owned hundreds of miles away and consolidating operations with his existing competitive business.

Given all of these competing needs and desires as well as financial complexities and limitations, Mr. Dallinger recommended and was able to persuade the parties to agree to a scenario in which

The key employees shared in a somewhat increased acquisition price by means of bonuses in accordance with a formula based on their longevity, thus assuaging the sellers’ desires to protect their employees and alleviating their expressed need to see that the business not relocate post-sale, and thus permitting the buyer to take advantage of economies of scale by selling the real estate to raise cash and relocating the business to his existing facility soon after close of escrow,
The daughter of the original operating officer (his successor in that position and a long time key employee) received a separate substantial post-sale consulting contract and personal consideration over time for the sale and subsequent non-disclosure of proprietary formulas in lieu of a portion of the purchase price, thus lowering the purchase price and alleviating the need for a larger seller carried note in order to satisfy the SBA’s lending requirements, and
The real estate sale and the business sale were separated so that the seller carried financing applied primarily to the real estate and the real estate was purchased by the owner of the purchasing corporate entity individually, thus altering the debt ratios and financial structure as viewed by the SBA based on valuation and consideration for the sale of the business itself.

Many years of hands on experience in structuring the sales of business assets as well as entity sales enabled Mr. Dallinger to ascertain, understand and appreciate the parties’ competing needs and to envision a practical method whereby each could be satisfied on an acceptable, practical compromise basis.

Only the skills and knowledge flowing from such lengthy direct experience could have resulted in the successful critical and creative balancing of so many variables and parties in such complex, multi-layered circumstances.

THE WASHED UP WINDOW WASHING DEAL

Asked to assist a business broker who was having trouble closing a transaction in which the broker was a dual agent representing both sides to the deal, Mr. Dallinger met with the broker and learned the following critical facts:

The transaction involved a commercial window washing firm with customers across the country
Buyer and seller had agreed to a price and terms, escrow was opened and deposits made
Buyer had completed due diligence and had been satisfied with the details of the transaction
The parties had agreed to buyer’s early possession of the business prior to close of escrow subject to release from escrow of a significant percentage of the purchase price to the seller
After early possession and release of funds, the buyer began to have misgivings about the numbers and wanted to back away from the deal
The seller, upon hearing of the buyer’s remorse, took back possession of the business but kept the released funds
The escrow was about to fail completely and litigation was on the horizon.

The broker wanted to know how to communicate with the parties in a last ditch effort to bring them back together and to close the escrow.

Based on the transaction documents and the broker’s listing agreement, it appeared that both parties might be in breach of the purchase agreement and, further, that the seller might be in breach of the listing. The agreements gave the broker an independent right to demand mediation of the dispute between the buyer and seller as well as the potential commission dispute between the broker and the seller.

Given these circumstances, and with the need to protect the broker from an assertion that, as a dual agent, fiduciary duties to one side or the other might have been breached, Mr. Dallinger helped the broker craft communications in writing and verbally to both sides demanding prompt mediation and designed to inform them of what their duties and risks were and why closing the escrow was a much better and less risky alternative than not doing so.

Based on Mr. Dallinger’s analysis and explanations, the broker was, in turn, able to explain persuasively to the parties what their respective self-interests were. The transaction closed successfully without even the need for a formal mediation and the broker received his full commission.

By virtue of Mr. Dallinger’s experience, insight, analytic and communication abilities, the transaction was saved in a matter of days after many months of hard work and frustration by the broker.

Management Conflicts

ARE YOU AN OWNER OR MANAGER OF A BUSINESS FRUSTRATED BY MANAGEMENT CONFLICTS OR A DEADLOCKED BOARD?

THE HIGH TECH MESS

A small, closely held high tech company developing very specialized software consisted of three equal shareholders and a Board of Directors of five including the three owners, the accountant and the lawyer.

The President of the company, a founder and the creative force in the company, became divorced after many years of marriage and began a new relationship with an employee of the company. Their relationship became quite serious and, eventually, they were married.

In the same time frame, one of the other founders of the company, a Vice-President, began a relationship with another employee. That relationship too became quite serious and they too ultimately married.

The third founder, and also a Vice-President, was in a stable marriage and never experienced any extra-curricular relationships. He found himself in the unenviable position of trying to keep peace between and work with his partners when the following events occurred over 15 years into the existence of the company:

The Vice-President’s girlfriend blatantly accused the President’s girlfriend of having had sexual relationships with one or more of the other male employees of the company during working hours at the offices of the company, thus impugning the President’s girlfriend’s reputation quite seriously and infuriating both the President and his girlfriend.

The President’s girlfriend strongly denied the accusations and became distressed in the extreme.

As a result, after years of friendship and a successful working relationship, the President and the Vice-President became bitterly divided and virtually unable to be in the same room, let alone work together effectively as officers and directors of the company. Decision-making became impossible.

The company was on the verge of foundering in its industry in which it had long been the leader. The entire equity and revenue flow which had been built up in the company over years of creative and hard work was at risk.

At that point in time, Mr. Dallinger, engaged in “round robin” discussions with all of the parties involved . resulting in the two founders developing a renewed successful relationship.

The company went on to greater success and, ultimately, was acquired by a larger diversified entity engaging in the same industry at a very reasonable price and on very favorable terms substantially negotiated by Mr. Dallinger which permitted the parties to move on with their business and personal lives.

The President and the remaining Vice-President continue to work together suceessfully to this day.

The ability of Mr. Dallinger to foster and reinvigorate communication between the parties was a product of his expertise in ascertaining individuals’ needs, fears, desires and limitations and in facilitating group communications under extremely stressful and exigent circumstances.

Years later, the founders of the company freely acknowledged that Mr. Dallinger had saved their careers in the industry, their company and their valuable investments in it.

THE NON-PROFIT WITH FOUNDERITIS

A non-profit entity was originally incorporated in New York to serve hospitalized and out-patient individuals suffering from severe mental illnesses by means of a novel, proprietary methodology employing professional actors, writers and directors as well as medical staff to engage with the patients in creating original plays and music written and performed by the patients themselves.

Specialized, creative drama workshops including psychological interventions when necessary by medical staff always present were a salient feature of the methodology which was created and initiated by the two founders of the non-profit organization, both successful in the entertainment industry in their own right.

The methodology, when properly employed, resulted in the ability of severely mentally ill individuals to express their thoughts and feelings, some for the first time in their lives, in the guise of fictional characters which they had created.

After years of successful operation in the New York City area, the organization began to experience “political” and “creative” differences on its Board of Directors which consisted of highly recognizable and wealthy individuals used to having precisely their own way. The organization was on the verge of breaking apart which would have resulted in a tragic loss to the patients of this wonderful methodology which had helped literally thousands of patients in their struggle with the isolation and pain of mental illness.

Initially as a charitable donation of his services , Mr. Dallinger successfully negotiated an agreement to sever the operations of the organization such that the founders were able to move the organization to Los Angeles where they had themselves relocated. The methodology remained the proprietary property of the founders licensed to the remaining New York organization as well as the new Los Angeles organization.

Once re-incorporated and relocated in Los Angeles, the organization experienced intense growing and operating pains as well as the usual fundraising challenges faced by virtually all non-profit entities, especially arts organizations.

The founders, though skilled in their artistic modalities and their creative endeavors, where uninitiated in the ways of business and, especially, shared decision-making. As a result, Board Members would come and go. Executive Directors would also come and go. Relationships with sponsoring medical facilities were often strained and fraught with impending peril to the organization.

Creative employees and medical staff were also often dissatisfied with the administration of the organization.

Ultimately a group of young doctors, artists and administrative staff members collaborated to propose a transition plan pursuant to which the now aging founders would, over time, relinquish control of the organization to the next generation. The founders were experiencing classic “approach avoidance” reactions to the plan and to its actual implementation.

At that point in time, Mr. Dallinger, at the request of the founders and other Board Members, agreed to become temporary Chairman of the Board in order to facilitate and to oversee the process of transition.

As a result of Mr. Dallinger’s effective assistance in encouraging and fostering candid communication at Board Meetings and increased accountability and cooperation in follow up procedures, the organization was able to avoid dissolution and began its journey and transition toward collective, independent control by individuals other than the founders themselves. Patients’ interests were thus protected and the good works of the organization for over 30 years were preserved.

Business Start-Ups

ARE YOU A CONFUSED OWNER OF A START-UP BUSINESS ANXIOUS ABOUT A MYRIAD OF UNANSWERED QUESTIONS AND DECISION- MAKING FROM THE HIP?

THE ENDLESS ANXIETY OF THE INFINITE TO DO LIST

A group of professional licensees desired to form a new business entity. They were excellent and skilled in their profession but had little idea and no experience in how to form a new business. Some, but not all, of them met with an experienced advisor to discuss how to form a new entity and brought with them a list of questions they needed answered.

Their list was in fact quite typical of the issues faced by the owners of a new business in the process of forming an entity to operate the business. The following matters appeared on their list and required explanation and action:

What kind of an entity should we form? The choices were either a C or an S Corporation or an LLP. What do those entities consist of and how do they differ operationally and as to the cost of setting one up?
How should the new business entity be capitalized? Should the existing practices of the individual professionals be contributed to the new entity? Should additional cash or other property be contributed? How are these contributions to be valued for purposes of establishing capital accounts for the members of the new firm?
What kind of an accounting system and books and records do we need? Who sets those up?
What tax filings are required, Federal and State, at the outset? Who performs these tasks?
What processes of registration with the governing professional agency are required? Who arranges for registration?
How much working capital do we need to start with? How is that capital obtained? Can owners loan money to the new entity or must all of the working capital be contributed?
Do we need an accountant? If so, how do we find one?
What other outside professionals do we need. What is the cost of their services typically?
What kinds of contracts do we need internally in order to document the relationship between the owners of the new entity? Who prepares these documents?
How do we decide who should be the officers and managers of the new entity? What should their duties and authority be?
How do we decide how each of the new owners should be compensated? How is compensation for administrative duties determined?
Do we need to provide for disability, death or retirement of one of the owners? How do we do that?
What kinds of insurance do we need?
What bank should we use? What kind of a banking relationship do we need? Do we need a line of credit to start with?
What do we do about a lease for our new offices? Who negotiates the lease? Who is liable on the new lease? How to we fund the cost of tenant improvements for the new location? Who is authorized to design the new offices?
Who owns proprietary properties which individual owners have developed over the years and which are used in the new practice? How are those properties valued?
How do we decide on hiring and firing of employees? Who decides on employee policies? Do we need a written employee policy manual? How do we design employee compensation and benefit plans? Who is responsible for that task?
How do we decide what kinds of marketing to engage in? What if there is disagreement among the new owners as to the types of marketing available?
What do we do if the firm is successful and grows quickly thus requiring more capital, larger space, additional employees? How are these decisions made?
What do we do if the firm never develops new business and fails? How do we unwind the firm? Who is responsible for the winding-up process?
How do we resolve fundamental differences among members of the new firm as to important firm matters? Is it simple majority rule?
What do we do if a member elects to simply quit the new firm? How do we determine what rights and obligations the member and the firm each have? What if the departing member decides to compete directly with the firm?
How do we dissolve the firm? If there is a dissolution, who is entitled to which assets and who is responsible for which liabilities? How does the firm operate during the process of dissolution?
How many of these questions must be resolved at the outset and which ones can wait until a later date?

This seemingly inexhaustible list of questions and concerns is quite typical of those encountered by any inexperienced person or group of persons forming a new business. What is required is the formation of a team of advisors to assist in responding to all of these concerns to assure that the proper steps and actions are taken in the proper order and within reasonable budgetary boundaries.

Generally, at a minimum, formation of a new business requires an experienced business lawyer and a skilled business CPA. These are specialized areas of expertise and cannot be replaced simply by an owner’s brother-in-law who just happens to be a lawyer or an accountant. There is just no substitute for hands on experience and specialized knowledge. Those individuals should be able to refer the client to other required professionals such as insurance providers, commercial real estate brokers, space planners, architects, bankers, etc.

Undercapitalization is the bane of new businesses. If there is insufficient capital available to establish and operate the new business properly, with rare exception, the resulting anxiety and pain will far outweigh any potential benefits. A clear business plan in writing should precede the formation of any significant new business entity. In the absence of a well thought out business plan, the owners of the new business are risking their capital and careers on what amounts literally to a gamble.

Anticipate that the time involved in the proper formation of a new business will be at least several months from the initial planning stage to actual operation. It takes at least that amount of time to meet with professional advisors, formulate plans, raise capital, find locations, prepare proper documentation, build out tenant improvements if required, hire needed employees and commence operations.

Litigation Avoidance

ARE YOU AN OWNER OR MANAGER OF A BUSINESS WORRIED ABOUT POTENTIAL LAWSUITS?

THE LEAKY NIGHT CLUB

The owner of a night club in the Los Angeles area decided to purchase another club in the desert. The new club was located in a chic area of a well known oasis and featured jazz, drinks and limited food service. It was located on the second floor of a building over a clothing store.

Shortly after the new owner’s takeover of the club, he received a call one night that water had leaked from the club down into the clothing store below destroying inventory and impairing the business of the store. Further, he was informed for the first time that this was the fourth time this had happened, a fact not disclosed at the time of his purchase of the club.

The former owners protested that the leakage problem had been repaired prior to sale. The landlord disclaimed any responsibility. The store owner downstairs hired aggressive counsel to pursue damages on behalf of his client as well as mandatory, immediate repair of the leak condition.

The leakage was caused by faulty water and drain lines associated with the bar fountain equipment as well as by the fact that the floor drains in the club were installed incorrectly.

In response to the claim by the store owner below, the new club owner insisted that the former owner and the landlord take responsibility for this condition which had been concealed from him and which was very expensive to repair.

After much threatening back and forth, and virtually at the courthouse doors, Mr. Dallinger persuaded all parties to engage in a private mediation process to avoid what would have been very expensive litigation.

In the mediation process, Mr. Dallinger creatively persuaded all involved that the most rational approach was (i) to arrange for the sale of the club to a new owner, (ii) for the landlord to repair the condition of the floor forthwith and to accept reduced rent for a period of time while the business was up for sale, and (iii) to disburse the proceeds of such sale on an equitable, though somewhat complex, formula.

Ultimately this plan was realized and the parties were thus able to avoid litigation and its intensely negative effects on all concerned. By virtue of Mr. Dallinger’s lengthy experience in the sale of businesses as well as his expertise in litigation and dispute resolution in the related areas of real estate and business, he was able to facilitate the sale of the business to all parties' satisfaction.

Real Estate Transaction Planning

ARE YOU HAVING DIFFICULTY PLANNING A RESIDENTIAL OR COMMERCIAL REAL ESTATE TRANSACTION OR MAKING DECISIONS CONCERNING A BUSINESS RELOCATION?

THE MOBILE MUSIC SCHOOL

A well-known music conservatory had been in the same location in Los Angeles for over 25 years. The school was operating under a month-to-month tenancy and had been so for most of the 25 years.

Quite suddenly, and without any warning, the building in which the school was located was sold. The school then received a 30-day eviction notice from the new owners. This precipitated months of litigation which ultimately resulted in the new owners backing down and granting to the music school a lease extension for six months in which to find a suitable new location. The school was represented by Mr. Dallinger.

The conservatory relocated to a new facility and signed a five year lease. Within the first year of occupancy, representatives of the City arrived at the new facility and cited the school for having too few off-street parking places to operate a school. This precipitated approximately four years of administrative and judicial proceedings in which the school was attempting to obtain a variance from the applicable parking ordinance and in which the City was trying to prosecute the school for a criminal violation of its zoning ordinance and to shut down its operations.

After no success in a long series of administrative hearings held under auspices of various agencies of the City itself, the conservatory, represented by Mr. Dallinger, initiated a judicial action against the City in order to have the rights of the parties determined and the City enjoined from its capricious actions against the school. Shortly after the action was filed, broad discovery was propounded by the school.

The City’s response was to deny that it was obligated to respond to the demands for documents, etc. The presiding judge ruled that the City did indeed have a duty to produce its internal files which would have shown that it had discriminated against the conservatory by permitting other music schools located within the City to operate with insufficient parking for many years.

Upon the judge’s ruling, the City, unable to justify its historically inconsistent and erratic actions, offered to settle the matter by permitting the conservatory to remain in its premises until the expiration of its lease. The parties so agreed.

The school then set about a lengthy effort to find suitable facilities with adequate parking, not an easy task. After several negotiations concerning potential locations, during which the school was forced to relocate on an interim basis twice, the school finally found a permanent location with more than adequate parking and space available and entered into a 15 year lease.

The build-out of highly specialized tenant improvements was then commenced and, after a year of planning and extensive construction, the conservatory re-opened in sparkling new quarters custom designed for a music school and with plenty of parking.

To the credit of the conservatory and its teaching and administrative staff, never did their enthusiasm for their mission to bring music into the lives of young people wane. Their student body has remained virtually intact throughout and, today, the school enjoys success in its new, beautiful location.

Mr. Dallinger’s commitment to this matter remained strong, effective and unrelenting throughout the entire period of approximately seven years between the original threat of eviction, the City's ill-conceived persecution, interim re-location, and the anxiety and extreme cost of negotiating a new lease, construction contracts, the planning process and the actual construction.

As a result, young people and adults are still served by a wonderful music conservatory with a 39 year national reputation for excellence.

LAWYERS REPRESENTING LAWYERS NEGOTIATING WITH LAWYERS

Two small law firms had occupied the same premises for over 15 years. At one time they owned the building in which they were located. After the sale of the building, they became master tenants with a lease for several years.

Upon expiration of their lease, they expected to be welcomed back into the building with open arms on a lease renewal. Instead, the new landlord had an overblown idea of the rental value of the building and demanded inflated rent from the lawyers. They, in turn, hired real estate counsel to represent them in their negotiations with the new owners of their old building.

Things went nowhere. Lawyers for the lawyers were negotiating with the lawyers for the landlord. Lots of “lawyerspeak” – no progress.

As the expiration date for the lawyers’ lease drew nearer, Mr. Dallinger, in an effort to facilitate negotiations, spoke to the landlord candidly and recommended that he speak directly to the tenant lawyers rather than working through outside lawyers for each side. The same recommendation was made to the lawyer tenants. Each side was reluctant at first to speak directly to the other side and insisted on maintaining the buffer of their respective lawyers. No progress.

Ultimately Mr. Dallinger asked the lawyer tenants if they would at least accept a call directly from the landlord if the landlord was willing to initiate such a call. They agreed to do so. Then he persuaded the landlord to call the tenants directly by explaining that, though they were lawyers themselves, they were not real estate lawyers and were really laymen when it came to negotiating commercial leases.

The landlord’s fears were thus lessened. In addition, Mr. Dallinger pointed out to the landlord that if they did not become more flexible in their approach to the tenants, they would end up with an empty building owing to the fact that many of the tenants other than the lawyers relied upon the facilities provided by the law firms and that if those facilities disappeared along with the law firms themselves, the independent tenants would also of necessity disappear.

The landlord worked up his courage, with his own lawyer’s consent, and called the lawyer tenants directly and negotiations finally proceeded and progress was made almost immediately.

The lesson was that, though a lawyer himself for over 35 years, Mr. Dallinger recognized the limitations of indirect negotiations through representatives and how important candid, direct communication between the real parties in interest can be in certain circumstances.

But for Mr. Dallinger’s earnest persuasion of all parties to deal with each other directly and openly, all parties would have experienced unnecessary inconvenience and expense. Instead, the interests of all parties were well served and business was able to continue uninterrupted in the normal course.

Community Associations

ARE YOU A BOARD MEMBER, OFFICER OR MANAGER OF A HOME OWNER OR CONDOMINIUM ASSOCIATION FRUSTRATED BY CONFLICTS OR A DEADLOCKED BOARD?

THE MOST EXPENSIVE FORECLOSURE IN THE HISTORY OF MANKIND!

An owner of a condominium for over 20 years became delinquent in the amount of approximately $4,000 in his monthly dues owing to the fact that he had suffered a stroke and could not afford to pay both his dues and his mortgage while he was unemployed and recovering.

After almost a year of non-payment, the owner, having regained his health, offered a payment plan for his arrearage which would have resulted in payment in full of all back due and current dues within less than one year. The Board of Directors of the Condominium Association (“Association”) hired counsel to advise them how to proceed.

Their lawyer, in his infinite wisdom, advised the Association to reject the owner’s offer. Further, the lawyer advised the Association to initiate foreclosure proceedings immediately to collect the dues. The Association, some of whose Board members had known the owner for 20 years, followed its lawyer’s advice.

On the advice of a foreclosure consultant, the owner attempted to stop foreclosure by engaging in an unsuccessful, age old tactic involving bankruptcy proceedings. Ultimately the owner’s unit was sold at a trustee’s sale after more than six months’ delay.

From the proceeds of the sale, the Association collected all principal sums due, interest, attorney’s fees, trustee’s fees and ended up with a moderate surplus. Instead of giving the surplus to the now homeless owner so that he could rent a new abode, the Associations’ lawyer advised that the surplus be deposited with the Superior Court to be determined whether the owner was entitled to his own surplus funds. The Association (along with the foreclosure Trustee) once again followed its lawyer’s advice.

Then, rather remarkably, the Association, again upon the advice of its counsel, filed an action in court against the owner claiming that somehow there were still sums owing to the Association and questioning title to the now foreclosed unit even though the Trustee’s deed had been duly recorded.

The owner at this stage hired his own counsel, Mr. Dallinger, who contacted the Association’s lawyer and asked him to dismiss the baseless lawsuit against the owner and to release the owner’s funds held by the court. The Association’s lawyer, again in his infinite wisdom, refused both of Mr. Dallinger’s requests.

With no other practical alternative, Mr. Dallinger defended the owner pro bono in the lawsuit against him by the Association and responded to the proceeding in which his surplus finds were held by the court. After over a year of litigation, the owner prevailed in the action brought by the Association and persuaded the court to release his surplus funds.

The Association unsuccessfully appealed the action which it had filed and lost. Based upon certain language in the Association’s CC&Rs, the court awarded attorney’s fees to the owner against the Association, though not the entire amount that would have represented the true value of Mr. Dallinger’s services.

The owner, still represented by Mr. Dallinger, then sued the Association, the Trustee and the lawyer who had represented both for malicious prosecution in two separate actions – one related to the surplus funds and the other related to the Association’s action.

The action regarding the surplus funds was settled by means of the Trustee and the lawyer jointly paying the owner a moderate sum to obtain a dismissal of the action.

In the other action for malicious prosecution against the Association and the lawyer arising from the Association’s baseless suit, the Association early on settled with the owner and agreed to pay him a hefty sum to obtain dismissal of the action against it.

The lawyer, again in his infinite wisdom, refused to settle and the malicious prosecution action against the lawyer proceeded to a full five-day trial by jury. The owner prevailed and the jury awarded hefty sums for damages for emotional distress and attorney’s fees in addition to punitive damages against the lawyer personally. The lawyer’s appeals were all unsuccessful.

When all was said and done, the foreclosure proceeding by the Association which started this entire affair generated approximately $125,000 of gross sale proceeds of which only $4,000 represented the principal portion of delinquent dues owed to the Association.

The jury verdict (which was collected in full) and settlements in the malicious prosecution actions combined, in addition to attorney’s fees and sanctions awarded to the owner, amounted to in excess of $850,000!

Needless to say, the Association sued its former lawyer for malpractice and obtained a judgment as well.

The simple lesson for all Condominium and Home Owner Associations here is never to engage in ruthless tactics against owners and always to act reasonably in operating the associations. Simple common sense in the face of a stroke victim’s reasonable offer would have saved the Association, the Trustee and the lawyer for both over $850,000.