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February 8, 2013

The Virtual Office

Modern technology has revolutionized the way we do business.  Digital copies of documents are emailed instantly, faxes are sent via on-line services, fillable digital forms make transferring information simple and efficient, mobile phones allow business people to field calls almost anywhere and a vast array of information is instantly accessible via the internet.  These conveniences reduce the need for receptionists, secretaries and other staff, and as a result reduce the need for physical office space.  Many San Diego business owners find it practical to work from home without the need for any office space, virtual or otherwise.  However, some businesses necessarily require client contact and in such cases it is more important to have an actual office.  Lawyers, accountants, architects, doctors and other professionals must consider the client's first impression.  Meeting at home might convey a host of negative impressions whether real or imagined.  While the home office is becoming more and more accepted, there remains a stigma that professionals in new business ventures seek to avoid.  Yet, the cost of leasing an office can be prohibitive especially for new and growing businesses.

922004_-team_ii-.jpgThe virtual office provides an economical alternative while simultaneously conveying a professional impression on clients.  Moreover, in today's business climate, customers and clients are developing a healthy respect for businesses that are able to keep overhead low.  They recognize that a virtual office results in savings that are passed on to them.  There is a variety of virtual office space available throughout San Diego offering diverse services including the use of offices and/or conference rooms, shared receptionists and secretarial support, phone and internet services and in some cases actual support staff.  

Typically, young professionals are offered a fixed number of hours (say 30) for the reservation of an office or conference room.  They pay a relatively low monthly rent and perform most of their work at a home office.  The virtual office provider can answer the phone for them, take messages and/or transfer calls.  Their mail and deliveries are sent to the virtual office.  When the time comes to meet a client, the professional sets an appointment with the client and reserves an office or conference room through the virtual office provider.  When the client appears for the meeting, he or she is greeted by a receptionist without ever really knowing that they are meeting at a virtual office.  Coffee and other refreshments may be offered, and most of the virtual offices available in San Diego are at prime locations like downtown, Mission Valley or La Jolla.  In short, clients are treated to maximum professionalism for a minimal cost.  The level of service offered by the virtual office provider will depend on the rent agreed to but the rent is always affordable when compared to leasing permanent commercial space.

Twenty to thirty hours of reserved office space is significant client time for most new businesses.  When twenty to thirty hours is no longer sufficient, many of the virtual office providers offer permanent office space.  The rent remains significantly better than most office space by taking advantage of the shared receptionist, conference rooms, scanners, copiers and other office support.  Some providers, such as Intelligent Office in La Jolla offer enhanced services including on-site virtual assistants that will actually help with business tasks.

Ultimately, new business owners are provided maximum flexibility with the virtual office concept.  Most of their work is done at home while clients are treated to a professional environment.  In fact, the home office is now portable.  With a laptop, the new professional can work just about anywhere.  They can even save on day care and take their kids to places like Kid Ventures where parents have access to the internet while their kids are entertained.  Kid Ventures is expanding and considering separate office space with printers, copiers, fax capabilities, phones and yes a virtual office.  The technological possibilities are endless.
January 19, 2011

Why Most San Diego Businesses Should Incorporate in California

The question of where to form a Corporation or Limited Liability Company, like everything else in law and business, depends on your particular circumstances.  For most small and medium size San Diego businesses, incorporating in California makes the most sense.  Incorporating in another state requires additional resources in time, paperwork and expense, and access to court and government services is geographically inconvenient.  In addition, there's the possible inconvenience of having to prosecute or defend lawsuits in a foreign state.  There is a common misconception that forming a Nevada Corporation is worth the additional cost and inconvenience because businesses can avoid California's higher tax rates.  However, companies doing business in California, no matter where incorporated, are required to register in California as a foreign corporation and are required to pay taxes on their corporate profits.  Unless you plan on moving your business to Nevada, there are no real tax advantages for companies that do business solely or primarily in San Diego.  

1037036_scenes_from_the_mall_2.jpgThe question becomes more complex if your company is doing business nationally or in multiple states.  Every state in which a business operates will tax at least some portion of that business' profits based on a standard apportionment formula used to determine each state's share of the business profit it taxes.  Your accountant can help you better analyze your tax liabilities in these circumstances.  There are additional legal considerations that tend to favor incorporation in Delaware and Nevada that typically benefit larger publicly held corporations.  Delaware has one of the most advanced and flexible corporation statutes in the country.  Delaware courts have a great deal of experience handling business disputes, and large corporations count on the courts' consistency and experience.  Consult with a San Diego Business Lawyer if you are uncertain about the effect incorporation in Delaware or Nevada will have on your business.
October 25, 2010

Purchasing Existing Businesses In San Diego, Part Two

Continued from Considerations When Purchasing a San Diego Business, Part One.

The Valuation: Add your own critical assessment to the appraiser's valuation by personally reviewing the company's records. For small businesses, the valuation can be done without the assistance of an appraiser if necessary. The process of conducting a thorough valuation will be discussed in a follow up article. Either way, think about the intangibles. Will there be a future market for the goods or services provided? Will the company maintain the same goodwill with existing customers that the current ownership enjoys? Is there a likelihood that competitors will open up in the same geographic area? Is there a potential for a shock to costs such as a shortage of a key ingredient or an anticipated new law that will increase licensing fees and/or taxes? The fact that a business enjoys a positive revenue stream today doesn't guarantee a future revenue stream.

183701_next_store.jpgCompare Other Options: It is common for prospective purchasers to fall in love with a particular business (much like first time home buyers). Recognize that the temptation is there, and look for other options, or if you are working with a broker ask that they provide several options. You may ultimately decide to go with the first business, but at least you have done so after comparing its value with other companies. Where possible, try and perform your own valuation before paying a professional appraiser. Narrow the field first, and then pay a professional to be sure you have chosen wisely. In addition, there's no reason not to consider starting a brand new business if you have the expertise in a particular area. Put a lot of time and thought into your initial decision before committing your time and resources to a new venture.

Know the business: It's a good idea to know something about the business you are investing in. If you have been in the restaurant business for twenty years, buying a manufacturing business may not be the best choice. Consider you personal expertise.

Escrow: Purchasers are often tempted to bypass escrow believing it an unnecessary complication. This is not a good idea. Escrow protects both the seller and the buyer. Sellers are reassured that deposits and purchase funds have cleared before closing. Buyers retain the ability to take deposits back upon discovering deficiencies in the seller's representations during the due diligence period. Escrow also performs a UCC search to ensure that the seller doesn't have other liens or encumbrances against the assets of the business, and that a "Notice to Creditors of Bulk Sale" is published putting other creditors on notice of the transaction so that they can file claims they may have against the business prior to closing.

Deal Killers: While it may seem counterproductive for this attorney to call lawyers potential "deal killers", it is in fact a common occurrence. However, lawyers are a necessary part of the contract negotiation. Sellers will almost always have a good business lawyer on their side negotiating the best possible deal. Buyers should do the same. To avoid problems, prospective purchasers should work closely with an attorney they feel comfortable with, and clearly define their objectives. Clearly defined objectives let the attorney know where the client wants the line drawn, and facilitates the decision making process when the attorney has concern about a particular contract clause. Your attorney should understand the art of the deal and relative bargaining power. If the seller has all the bargaining power, it's a deal killer to insist on every conceivable contract advantage. A reasoned and tempered approach works best.

October 19, 2010

Considerations When Purchasing a San Diego Business, Part One

As with any new venture, the purchase of an existing business is fraught with risk. Is the business viable? Does it have growth potential? What are its hidden weaknesses? Is the purchaser experienced enough in the company's business? Is current goodwill and reputation dependent on existing ownership? Is the revenue stream consistent? The list of questions is endless. Ultimately, the decision rests on the purchaser's due diligent efforts at valuing the business. This article briefly addresses some important considerations:

1302622_hh3_kitchen.jpgThe Seller is the Seller: Whatever the business and whoever you deal with, whether directly with the seller or a broker, the seller is determined to get the most value for their business. Aside from their financial investment, most sellers have poured their hearts and souls into the business. Either way, you can be sure that the product is going to be pitched in the light most favorable to the seller. Avoid being lured in by "pie in the sky" stories of marketing genius, unlimited revenue and unreported incomes. Take everything at face value and let the professionals (an appraiser and/or a CPA) give you a frank assessment of the stream of earnings you will be purchasing. Even then, it's wise to assume there are skeletons in the closet. Look for clues. If you have uncovered a minor misrepresentation, it might be a clue that they are hiding bigger secrets. Rely on your common sense and gut feeling about the seller and his or her representatives.

Funding: Marshaling the resources needed to purchase a business is not as prohibitive as many imagine. In fact, it is possible for some, especially those with good credit, to purchase an existing business entirely through seller financing. While the chances of obtaining 100% seller financing might be slim, seller financing of a portion of the sales price is common. Sources of funding include personal savings, asset backed loans, business loans and seller financing. Prospective buyers can expect to pay a 20% to 30% down payment on a business loan and sometimes a higher percentage for seller financing. However, a large cash layout isn't always necessary. The Small Business Administration (SBA) can assist with loans of all sizes with as little as 10% down, and sellers are often more flexible than expected. Diligently investigate options and shop around for the right deal for you. You might be surprised at how low the sales price is for many businesses. The key is to think creatively about funding the purchase. Explore all options and combine the most attractive and practical sources.

Entity v. Asset Purchase: There are two ways to structure the purchase of an existing business: an entity purchase (purchasing the Corporation, LLC or other formal business entity) or an asset purchase. Purchasing an entity involves taking on the company "as is" and absorbing all of its financial, contractual and legal obligations. Asset purchases are typically the better option for the buyer. With an asset purchase, you buy all of the company's assets, tangible and intangible including inventory, real estate, equipment, copyrights, patents, trademarks and trade secrets without absorbing any of the company's liabilities. In some cases, sellers may insist that the buyer in an asset purchase agree to take on some liability such as accounts payable, but this is all part of the negotiation. Prospective buyers should also talk with their CPA or tax attorney regarding the tax consequences of either approach.

Line up Professionals: Prospective purchasers of an existing business benefit from experienced advisors. In addition to diligently investigating the business, buyers should consult with experienced professionals: an appraiser to ensure the business is adequately valued; an accountant to ensure continued economic viability; a broker to expand your options; and a business attorney to protect your interests. Don't rely on your broker to value the business. His interest is in making the deal.

Continued in Purchasing Existing Businesses In San Diego, Part Two.

October 11, 2010

Purchasing an Existing Business Offers Benefits Often Overlooked

San Diego has seen a steady stream of young entrepreneurs starting up their own businesses over the last few years.  This is in large part attributed to the collapse of the financial markets and the ensuing recession.  Professionals in transition and the recently unemployed see starting their own business as an alternative to the continued disappointment they face in a tight job market.  An often overlooked alternative is to purchase an already proven business.  The idea perhaps gets little consideration.  In reality, purchasing an existing business is not that far out of the reach.  The option should at least be on the table for anyone thinking about starting a new business.  With numerous financing options available, many businesses can be purchased with the same up front capital typically necessary to start a new one.

566067_workers_01.jpgIn general, purchasing an existing business is less risky.  It doesn't matter whether one is purchasing a contracting business or a law firm.  An existing business has a proven track record.  It has developed a strong customer base and good will in the community; has invaluable systems in place for operations, accounting and employee management; and has reliable and trusted vendors, suppliers and professional advisors.  The purchaser takes over an operation that is already generating profits.  Of course, the quality of the existing business can vary widely.  Ensuring that the business is viable requires an in depth analysis of the company's history and finances, or what attorneys call "due diligence".  The importance of a "due diligent" examination of a prospective business cannot be overstated, and will be discussed in more detail in a follow up article.  

The point of this article is to highlight the benefits of purchasing an existing business and to inform prospective entrepreneurs that the alternative is feasible.  It seems that the biggest barrier to entry is an erroneous belief that purchasing a business is too costly.  People tend to see the buying and selling of businesses as a game played by large investors.  It is not.  Individuals motivated to go into business for themselves can and do buy existing companies.  They do so by marshalling personal resources, securing investment, securing seller financing, taking out business loans, and/or resorting to other creative financing.  In some cases, the purchase of an existing business is entirely financed by the seller.   

Purchasing an existing business may not be right for everyone, but it is a viable option for most people who have already chosen to go into business for themselves.  Barriers include lack of resources, bad credit ratings and inexperience in the particular business being considered.  However, these are the same barriers to starting a new business.  Where the motivation exists, entrepreneurs choose to make it happen.  If they have limited resources, they turn to specialized lenders like the Small Business Administration.  They solve credit problems by seeking investment partners and/or seller financing.  They substitute hard work and commitment for lack of experience.  If opting to purchase an existing business, be sure to consult with trusted advisers such as your accountant or business attorney before making the leap.  In addition, consider working with a broker but be careful about relying on his or her opinion about the valuation of the proposed purchase.  In the end, there is no substitute for due diligence.  See Considerations When Purchasing a San Diego Business, Part One and Part Two for further information.
November 30, 2009

Managing Business Litigation Costs - Is Flat Fee Litigation Possible? Part Two

Part One of this article discussed the general concept of flat fee litigation, and the associated relative risk shared by attorneys and their clients. Part Two explores potential flat fee litigation schemes further. The greatest challenge in devising a flat fee litigation scheme is making reasonable estimates of the attorney time necessary to effectively litigate any given case. Experienced litigators can distill the facts and the law in advance and make reasonable estimates of the time necessary, and they routinely offer estimates to prospective clients in the billable hour context. Unfortunately, lawyers' estimates are often understated and clients end up paying significantly higher fees than originally expected. This is likely because attorneys are loath to give worse case scenarios and risk turning clients away.

1083976_labyrinth.jpgSo long as clients are willing to absorb a share of the risk (see Part One) in exchange for certainty in billing, attorneys can and should offer their clients a flat fee option for most litigation matters. In order to reduce the risk to clients of over paying for matters that may resolve in the early stages of litigation, attorneys can offer flat rates for the different stages of litigation. A flat fee litigation scheme may look something like the following: a flat fee for pre-filing negotiation; a flat fee for post-filing/pre-trial litigation; and a flat fee for trial preparation and trial. The pre-trial litigation phase could be broken up further into a flat fee for post-filing/pre-discovery work and a flat fee for all remaining pre-trial litigation including discovery.

The difficulty of course arises in deciding how to calculate the flat fee. Litigation is a complex process mired in factual, legal and procedural uncertainty, and it's the attorney's job to navigate the maze for the client. Nonetheless, experienced litigators have the skills required to make reasonable estimates. They can estimate the number of witnesses to be deposed, the volume of documents to review, the potential discovery burden, the extent of expert discovery and an average time for expected motion work. In some cases, they'll be able to include the skill and determination of opposing counsel in the equation. They will not get it right in every case. In fact, the estimates may be off more often than not. Whatever accuracy is achieved, they can at least assign risk value to the estimates. The goal is to present a marketable alternative to the inefficient and client unfriendly "billable hour" practice.

It's important to note that setting a flat rate for attorney fees doesn't eliminate all uncertainty for clients. Litigation costs can vary considerably and attorneys should provide their best estimates of those costs while explaining the inherent unpredictability.

Compared to the entrenched "billable hour" practice, the flat fee approach is an attractive prospect to the San Diego law firm looking at creative billing practices to lure new clients and keep existing clients who are increasingly more frustrated with the status quo.

November 18, 2009

Managing Business Litigation Costs - Is Flat Fee Litigation Possible?

Attorneys and law firms have visited the issue of flat fee litigation in the past, and there are San Diego litigation attorneys today that offer some of their business clients the option under limited circumstances. However, there can be little doubt that the overwhelming consensus amongst legal professionals is that flat fee litigation simply isn't practical. In part, this view stems from the difficulties in predicting actual attorney hours necessary to litigate any given case. Even if a law firm could adequately estimate the number of hours necessary to complete a case, it is virtually impossible to know whether the matter might resolve informally long before significant attorney hours are expended. In fact, a good attorney will strive for this beneficial result for his or her client. Avoiding long drawn out litigation is always a healthy result. Apart from the monetary costs, the emotional and time consuming roller coaster ride takes a toll on business owners.

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Business owners would like some certainty as to the final cost of litigation. Attorneys are concerned with compensation for the actual work performed. Under standard billing practices, attorneys do their best to provide estimates, explain the process and most often stress the inherent uncertainty that comes with any litigation. Unfortunately no matter how well explained, clients rarely anticipate the actual costs ahead. Moreover, although attorneys are bound by ethical considerations, the reality is that there is little incentive for efficiency. Nor is there a desire to scare off clients with worse case scenarios. Yet, worse case scenarios are common in litigation, and the result is an ever increasing dissatisfaction with litigation and the legal profession in general.

The question then turns to one of sharing risk. From the litigation attorney perspective, agreeing to take on a litigation case for a flat fee comes with great risk. They know the potential for a long drawn out process consuming unanticipated attorney hours. At best, underestimating attorney time results in reduced average hourly rates. At worst, the attorney finds himself or herself overwhelmed by a single case at the expense of others. For clients, knowing what attorney fees will be in advance makes it possible to evaluate whether anticipated litigation is an economically feasible alternative to informal resolution. However, in exchange for certainty in billing, they risk overpaying for their attorneys' time, and the overpayment can be significant if the case resolves in the early stages. Paying an attorney for an anticipated 80 hours that resolves after 5 hours of work can be just as dissatisfying as expensive ongoing litigation. It's clear, nonetheless, that consumers are looking for alternatives.

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October 14, 2009

Consider a Legal Check Up for Your San Diego Business

At one time or another, every San Diego business owner questions how well their business is protected from risk, liabilities and infringement. Should they incorporate, form an LLC or partnership? Does the current business entity offer the best tax advantages? Are their personal assets protected? What are their rights and obligations under leases and contracts? Are key contracts enforceable should there be a dispute? Can existing contracts be improved? Are trademarks, logos and business names protected from infringement? Could they be infringing on others' trademarks? Is there any legal exposure to the company from its website and blog? Is insurance adequate? Do insurance policies meet regulatory requirements for the business or meet the minimum standards agreed to in a lease agreement? Is the company in compliance with government regulations pertaining to employees? Do they need to consult an attorney? The list is as long as businesses are prolific. For most new and growing businesses, addressing every potential legal issue is cost prohibitive. However, an attorney evaluation summarizing and assessing areas of concern is within reach for most businesses. Once an assessment is provided, business owners can better prioritize and plan for the future.

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Virtually every car owner at one time or another has taken their car in for service. Most often, the service includes a check up of every major component of your car. Brakes, fluid levels, suspension, tires and electronics are all examined and in the end you are provided a list of recommended repairs and maintenance. Some of the suggested repairs stem from visual inspection and others are derived from manufacturers' mileage triggered recommendations. It's not uncommon for folks to prioritize perhaps electing to have the front brakes replaced and a tune up performed while putting off the replacement of shocks, hoses, and the water pump. Ultimately, whatever decision the consumer makes regarding actual repairs, the cost of the examination is relatively small and the examination alerts the owner of potential trouble spots.

A business lawyer can perform the same kind of affordable analysis for your business - they can evaluate your business profile from top to bottom, provide an assessment of the current state of affairs, highlight areas of risk and other areas requiring attention and make recommendations regarding priorities. This type of evaluation can generally be performed for a flat fee which would be determined by the size of your business. Once completed, the business owner (like the automobile owner above) can prioritize. Whatever decision the business owner makes, at the very least, he or she has been alerted to potential trouble spots and can plan to address those concerns as time and economics permit.

October 8, 2009

What You Need To Know About Home-Based Businesses and Zoning Laws

Most people don't think about zoning laws when they first decide to start a business out of their home, and most home-based businesses never hear from local governments about zoning violations even where they are clearly in violation of local zoning laws. The reason why is that most home-based businesses are stealthy. Modern technology allows entrepreneurs to conduct virtually all aspects of a business' operations (short of manufacturing and direct sales) without leaving the computer. Employees can work from their own homes, products can be delivered via on-line companies and services can be provided off site. So long as signs aren't posted, traffic isn't increased beyond what is normal for residential neighborhoods and excess noise isn't a factor, no one notices that a home-based business even exists. In fact, a neighbor's complaints are generally the only thing that ever puts a home-based business on a local government's radar.

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So what's all the fuss about zoning laws? Although most home-based businesses are stealthy, some business owners are looking to more visible home-based options. The recession has encouraged many would be entrepreneurs to consider starting a business, and one of their first major cost decisions is location. For a small business requiring employees, product assembly and manufacturing, customer visits, vendor deliveries or any combination of the preceding, understanding local zoning ordinances is critical. Otherwise, they risk being shut down. 

Some localities forbid home based offices completely. Others allow home based offices for professionals such as lawyers, doctors and accountants. Even the most liberal of localities will allow home based businesses only under certain circumstances, and the zoning laws can vary greatly from municipality to municipality. Generally, they have the following in common: they require that the business be only incidental to the home as living quarters taking up less than a certain percentage of the home's overall space; they require that all employees of the business reside in the home; they require that increased vendor and customer traffic is not beyond what is normal for the residential neighborhood; they prohibit the use of equipment that creates a nuisance such as noise, vibration or fumes that are detectable outside of the home; they prohibit the use and storage of hazardous materials; they prohibit the warehousing of business inventory; and they prohibit any changes to the outside appearance of the home (including signage).

If you are considering a home based business that for any reason will be noticed by neighbors, it's important to know the zoning laws in your locality. The easiest way to check your local zoning laws is at the main branch of your public library. You can also contact your local Planning or Zoning office. However, it's probably better not to put yourself on their radar. It may be better to have a friend in the neighborhood call and check for you. You can also try contacting the city clerk's office or your local Chamber of Commerce, or check your city's home page online. If you live in or are considering moving to a planned community with a homeowner's association, the CC&Rs (covenants, conditions and restrictions) are likely even more restrictive than those set forth above.

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September 2, 2009

The Internet Plays Important Customer Service Role for San Diego Business

In today's climate, San Diego businesses are loath to suffer any negative publicity.  Instead, they are looking for an edge wherever they can find it.  Whether businesses know it or not, the internet is filling an important customer service role.  Websites like Yelp.com and Amazon.com provide actual consumer reviews on a wide range of products and local services.  More and more, the average consumer turns to the internet first for information and first hand customer insight.  Whether looking for a car wash or an San Diego attorney, review sites on the internet are a powerful tool allowing consumers to look inside a company's windows before trying out its goods or services.  For instance, a modern consumer with car trouble today might do a search on Yelp.com for a trustworthy automotive repair shop in San Diego County.  He or she would find out rather quickly that Advantec Auto Repair comes highly recommended (reviewed by 98 customers with a perfect rating of 5 Stars out of 5 Stars by all 98 customers).  This is precisely the confidence builder that the savvy consumer is looking for before trusting their car to a mechanic.
 
Customer Service_827556_sign.jpgIf your business provides a service in San Diego, odds are there are already some reviews on Yelp.  You may be surprised (pleasantly or to your consternation) at what people have to say.  Either way, internet review sites are here to stay and managing this new facet of customer service must be part of any business' marketing arsenal.  "Managing" does not mean you get to go in and change the reviews.  It does mean that you will have to pay closer attention to customer service and customer satisfaction.  No business can afford to ignore negative publicity, especially during a recession.  If reviews are negative even in the slightest, a business owner needs to act immediately to cure whatever deficiencies might exist including making necessary changes to how he or she does business.  It's true that some reviews may be vindictive and unwarranted.  In such cases, business owners are allowed to post their own response.  However, this is a good idea only in unique cases because it most often appears defensive and disingenuous.  The better solution to an unwarranted negative review is to work toward an increase in the number of positive reviews which in turn increases the business' overall average rating on Yelp.  One negative review against 75 positive reviews carries little weight.  Encourage your customers to share pleasant experiences with others on Yelp.  

While restaurants, products and retailers remain the most critiqued of all categories, it is only a matter of time before every business is under the internet microscope, including doctors, lawyers, banks, investment companies, real estate agents, dentists, cell phone companies and individual professionals.  Go on line today and see what people are saying about your business.  If you don't find your company on Yelp, add your business.  This allows you to provide accurate information about your location, phone number, website, pricing and other facts such as whether you accept credit cards.  By adding an inbound link to your website, it also has a positive impact on your site's optimization.
August 19, 2009

San Diego Businesses Find Purchasing Commercial Property Increasingly Attractive

In today's San Diego commercial leasing market, some business owners are taking advantage of increased bargaining power when negotiating lease terms. Others see an opportunity to purchase property as the commercial real estate market continues to decline in value. The primary advantage of buying commercial space over leasing is the generation of equity over time via market appreciation. There can be no doubt that there are some real bargains in San Diego today, and the potential for equity growth is strong. However, the decision to buy commercial property instead of leasing requires thoughtful consideration.

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One of the most important considerations is the balancing of a growing business' cash flow against the 20% down payment generally required for the purchase of commercial property. If a down payment depletes needed cash flow from a new or growing business, it's likely not the time for a risky real estate investment. If a business has excess cash in its coffers for capital investment, there may never be a more obvious time than now to snap up a great value. Most businesses, however, are somewhere in the middle and will want to prepare a detailed evaluation of both options analyzing net present value cash flow (taking into account the anticipated appreciation of purchased property versus anticipated rental increases, interest rates, costs associated with lease expiration and other expenses over the term of the lease), the value of the respective locations to the business, growth considerations, cash flow needs and opportunity costs (potential economic gains from the alternative use of cash). Moreover, in many cases commercial properties have multiple units adding to the complexity of the decision. With multiple units comes the potential for additional income, but also additional responsibility and the risk of unleased space. These considerations are especially difficult for start up businesses which require greater flexibility. Start up businesses will want to attach greater weight to its cash flow needs.

The idea to purchase commercial property instead of lease is often an accident. Businesses stumble across property for sale as they search for suitable leasing space and see an opportunity they hadn't previously considered. Whatever the reason, the benefits of ownership are appealing. It allows for complete control over the property, equity growth (especially in the long term), long-term customer relationships and permanent visibility in the community. The benefits are even greater in today's real estate market where bargains are plentiful. Consult a commercial lease attorney and/or a commercial real estate professional for assistance.

August 14, 2009

San Diego Start Ups Affected By Credit Companies' Decisions

Credit card companies' decisions to unilaterally lower credit limits can have a severe impact on start up San Diego businesses.  During recessions, high unemployment rates drive many to consider going out on their own.  As they contemplate the decision, young entrepreneurs often factor in their credit worthiness.  Start up costs and monthly expenses loom heavy.  In addition, the young business owner worries about personal expenses.  If possible, they set aside funding to help pay personal expenses six months out or more providing breathing room while the business has an opportunity to grow.  Credit worthiness provides comfort during these initial months and impacts a business' future ability to obtain company credit.

Credit4.jpgToday, many young entrepreneurs with a history of responsible financial planning and credit management are unexpectedly finding themselves with lower credit scores despite exceptional credit histories.  Credit companies are reevaluating credit reports and lowering credit limits based on high balances on other revolving debt despite the fact that their customers have stellar records with them.  The negative impact is twofold: first, needed credit lines disappear; second, credit scores are lowered making it more difficult to look elsewhere for alternative credit lines particularly in the midst of this current credit crunch.  For the entrepreneur, this can be devastating.  

While many argue the practice is legal, there can be little doubt that there is something inherently wrong with it.  There are alternative ways for credit card companies to reduce their risk profile - namely higher standards for new applicants.  Penalizing good customers is a tough model to stand behind while maintaining even a modicum of goodwill.  More importantly, credit customers rely on the good faith of the companies they decide to pay interest to.  They had other options at the time they selected which card to apply for and use.  They cannot go backward and elect a different company (one of the many credit card companies today that are not engaged in the practice of lowering limits).  And worse, their current options are limited because of the lower credit score.  Other creditors are raising interest rates instead.  While not very pleasant for customers, it is far less impacting than reducing lines of credit and lowering credit scores.
 

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June 4, 2009

Billable Hours - San Diego Businesses Should Ask How Much Is Too Much?

San Diego businesses should be asking themselves how the "billable hour" law firm culture affects their bottom line. A recent article about a patent holder's defense of a patent infringement action focused on the business's desire not to cave into the demands of what it believed was a patent pirate despite the knowledge in advance that the legal fees would exceed the $400,000 licensing fee sought. Although the battle itself was inspiring, one can't help but be awed by the last paragraph telling the story of the corporation's victory and it's new battle to recover over one million dollars in attorneys' fees.

One million dollars in attorneys' fees! Presumably, this is independent of costs necessary to defend the case. A sole practitioner has to shake his head at the staggering amount. Even experienced litigators prosecuting or defending multimillion dollar cases involving multiple parties and hundreds of attorney hours have to wonder. Law firms will undoubtedly counter that their rates are competitive and that a patent infringement case can easily reach into the 1000 hour range or higher. This is is not unheard of.  Five weeks of deposition, five weeks in a document review, law and motion practice, other discovery and a six week trial can easily exceed 1000 hours.  A six week trial with multiple attorneys working on the case could alone involve more than 500 attorney hours.  Undoubtedly, the stakes are high and corporations are willing to pay big dollars for the right legal representation.  Some may feel there is no substitute for the big firm experience.  But one million dollars?

Billable 1.jpgEach case is different of course and will have varying levels of complexity.  At the heart of this discussion rests two key components: efficiency and incentive.  The two components are interdependent.  Law firms typically hire young associates who are first and foremost expected to bill a minimum number of hours per year (billable hours).  The "billable hour" is the benchmark by which their performance is rated.  They are most often raw inexperienced  practitioners with little or no practical understanding of the complexities of the cases assigned to them, the procedural time lines important to litigation or the ultimate evidentiary effect of their decisions.  Combine this inexperience with the "billable hour" and you have a recipe for inefficiency.  Inexperience or not, minimizing attorneys' fees for the client and maximizing billable hours in the real world are mutually exclusive.
 

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May 25, 2009

San Diego Small Businesses Struggle During Credit Crunch

Whether San Diego small business can survive the current credit crunch may depend more on each business's determination and grit than on the Obama administration's attempts to ease credit. Some established businesses with excellent credit may not feel the impact of the current credit crises, but new businesses, start-ups and other businesses struggling in this current recession have to find ways to stay in business. Typically, new and struggling businesses fund themselves through difficult times with loans and credit cards. When credit dries up, businesses are left to fend off failure by cutting costs in whatever creative ways they can dream up, including sometimes laying off employees.

Unfortunately, there doesn't appear to be any immediate relief in sight. President Obama's administration is struggling to ease the credit crunch as part of his recovery plan but so far with little practical effect. Recent announcements regarding TALF (the Term Asset-Backed Securities Loan Facility act) reflect a promise to cure some of the TARP deficiencies. TARP (the Troubled Asset Relief Program) was the centerpiece of President Bush's Emergency Economic Stabilization Act. However, it appears that most lending institutions cannot or are not participating in TALF, at least not so far.  This is not to say that President Obama's overall plan has failed or will fail. At this stage, it is simply too early to tell.  There are some promising signs for small business.  For instance, the Small Business Administration has temporarily raised its size requirements making more businesses eligible for small business loans (Reuters "U.S. makes more businesses eligible for loans").  The only thing certain for now is that credit to business remains tight.    

Credit crunch 2.jpgThe solution for small business today - ride out the recession and credit crunch.  This is easier said than done of course particularly as struggling businesses typically turn to credit during recessions. Nonetheless, American entrepreneurs are resilient and often exhibit their greatest potential during tough times.  First, businesses shouldn't assume that the credit crunch means there are absolutely no loans.  Businesses should exhaust all potential sources before giving up.  The San Diego Daily Transcript, a good resource generally for small businesses in San Diego, offers some financing tips.  Small business owners can also use their personal credit card lines, and if necessary look to family and friends for short term loans.  More importantly, smart business owners will look for creative ways to cut costs and strive to maximize an efficient use of business resources. 

One powerful tool available to businesses during a recession is to lessen profit margins by discounting goods and services and then aggressively marketing these "good deals" to the ever increasingly cost conscious consumer.  Letting customers know that your business is sensitive to the hard times of others often sets businesses apart during recessions.  With grit and determination, creative business owners can ride out the current credit crunch while simultaneously building brand loyalty.  Whatever the methods of survival, keeping San Diego small businesses alive during these tough times is good for all San Diegans.