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Key Takeaways

  • Selling and running your business at the same time could be very challenging.  While in the middle of running your business, you have to deal with prospective buyers who ask several questions about your company – and that takes a lot of time and could feel “invasive.” Jeremy recalls his experience as “a bit like trying to design a new part of your ship while you're sailing.”
  • As a business owner, you need to have a hands-on approach in selling your own company. You’re the best person to talk to prospective buyers because you know the intimate details about your company. Seeking professional advice and guidance, however, could save you a lot of time by making the sales process more efficient.
  • Morgan & Westfield enables a company owner to approach selling a business in a way that he or she might have never thought of. Jeremy shares how Morgan & Westfield helps him during the sales process from preparing a “very impressive” business summary, to the screening of buyers, and to providing a personalized coaching that enables him to have a much broader perspective on how to sell his business.  
  • Selling your business during tough times could be tougher.  This is where a coach could be very helpful.  Morgan & Westfield makes selling a business less stressful despite the tough times Jeremy has been in to. 
  • Moving on after a successful business sale is part of the process.  As a business owner, Jeremy is excited to be working on a software platform that he would soon be launching. On the artistic side, Jeremy continues to create his own fine art and do photography. He also looks forward to going back to the entertainment industry as an actor. 

Read Full Interview

Jeff: We've all heard that there may be more to life than owning that business that you love. But if you want to find out how a fellow business owner who just sold his company is actually putting that hypothesis to the test you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world this is "Deal Talk", brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

Who better to learn from than a fellow business owner who has been through the process of selling his own company. And we like every once and a while here on "Deal Talk" and you've heard a couple of shows before to talk to folks who've been through the process who've managed to live through it and if gone on to other exciting chapters in their life. Once again today we happen to have the honor and privilege of speaking with one of our fellow business owners on the line right now. And his name is Jeremy Wells. Jeremy Wells, the former owner of Imago Dei and we're going to talk a little bit about what that business is. First of all, Jeremy, welcome to the program, it's good to have you.

Jeremy:Thanks Jeff. I appreciate it.

It's very difficult when you started a company and you've worn every single hat. It’s very challenging to take that hat off and put it on somebody else. And most business owners find themselves being technicians within their business instead of entrepreneurs that are managing an organization.

Jeff: It sounds to me like you're on the road. Tell us where you're at right now.

Jeremy:Well, I'm actually parked in a beautiful shady park in Austin, and I'm in an '87 Westy. It's camper van with a high top. My son and I are on a red shirt to meet up with mom and the girls out at Garner State Park for the weekend and do some swimming in the river and camping. So I pulled over for this and I got a little office setup back here. It's pretty great little setup actually.

Jeff: That is sweet. So selling your business can afford you to now take some time-out for yourself and do some things that maybe you didn't have time to do before. And this goes for anybody who's listening to this edition of “Deal Talk.” Tell us a little bit about your business.

Jeremy: Sure. I started Imago Dei in 1999 in California, relocated to Houston where my wife's family is in 2001. The best way to describe it is it's a creative arts service firm. I'm an artist, my wife is an artist. We started producing commissioned works and pretty soon found out that there is a bigger market for decorative finishing as well, interior plaster work, decorative painting. So we quickly started getting into that, really found ourselves owning a small construction firm.

Over the years we built that up and it had various crews that were out doing insulation and sales staff that were trained design professionals but they would design solutions for people, and for walls, ceilings, furniture pieces, cabinets, and then of course still doing the artwork, but the finish is quickly surpassed even the artwork side of things.
 
 Jeff: Jeremy, altogether how long did you own Imago Dei?

Jeremy: It was about 17 years.
 
 Jeff: So you made it through the process of selling your company. Had you ever sold a business before? 

Jeremy: No, I have not.
 
 Jeff: You had not. Was it as difficult as you expected it might be?

Jeremy: Yes and no. I was expecting it to be very difficult. I'm kind of from a family of entrepreneurs. Both sides of my family they've always been doing entrepreneurial things. I watched my grandfathers build businesses and pass those on. And watched my dad build a business and sell that. And I remember seeing how difficult that was for him. Because this is sort of a specialty niche business I figured that it was going to be a bit more challenging than let's say a dry cleaning business or something like that. 

So I was geared up and expecting that it would be a bit more challenging but I didn't think that it was impossible because we've built so many systems and processes, had a really established clientele, lots of repeat clients within the design community. We have a great team and a great product. I just knew it was going to be a challenge to find the right person that would take it over. Working with a broker made it possible for me. I don't think I could've done it. I know I wouldn't have done it with the time I did it without working with a broker. 
  
Jeff: So really I think it sounds to me like the concerns were really based a lot on just kind of the unknown really about the process of selling a company, and they probably are not necessarily unique to you to Jeremy but to other business owners who are interested perhaps in selling or have thought about selling their company but they're just not exactly sure about how that would work given maybe some of the complexities of their organization, the people involved, etc.

As far as initial concerns about selling your business, I'm talking about the nuts and bolts decisions and concerns, and issues here that anybody would kind of have to mull over about whether you are actually prepared in fact to sell your company, about how long it might take or any other potential hurdles that you might have to overcome first before you know that you would be ready to go in a way of helping you get what you wanted out of the sale, anything like that? Was any of that a concern or a worry to you, or anything that kept you up at night?

Jeremy: Oh, definitely. I wouldn't say kept me up at night. There's definitely a concern. I read a book called Built to Sell. I highly recommend for anybody that's thinking about selling their business. I read that probably five years ago. And also The E-Myth which is another highly recommended book. The E-Myth, reading it five years ago it's probably my third time reading that.
 
 Jeff: Is that right?

Jeremy: Oh yeah. I probably read it every three years just to refresh myself because it's easy to fall into that habit. And that book is really excellent in setting the course straight again. In this book Built To Sell it talks a lot about what you need to do to prepare your business for sale. That was really eye opening for me because I've been doing it 12 years to that point and I loved what I did and loved the company. 

But it felt like it was time for a new challenge. There were other ambitions I had and other companies I had already started and I wanted to really pursue those a bit more. But I didn't want to just close the company down, it was too good of a company to do that. So I thought, "Let me look into selling it." Reading that book really exposed a lot of things that I needed to shore up in terms of building better processes.

One of the biggest things I tried to think about is what am I doing in the company that somebody else is not doing? And then how do I either document that process and create a procedure for it that anybody else could do, or how do I hire somebody else who could do this. And that doesn't mean necessarily that they need to be the only person to do it, or maybe in addition to me.

That was blankly processed. I can imagine most business owners that are small businesses. That's kind of a challenge to hear because most of us we take such pride of ownership in our companies that we kind of feel like if it can be done right I better do it myself kind of thing. It's delicious really because there's so many good people out there.
 
 Jeff: And so the idea is to kind of get your head around the idea that it is okay in fact to take a hand off the wheel so to speak and let somebody else maybe do some of the steering, certainly at least over in this area with respect to a one maybe or two aspects of the job that you normally might have handled yourself, but this would free you up to handle more important things in other aspects of the business that need to be addressed.

Jeremy: Yes, exactly. It's very difficult when you started a company and you've worn every single hat. It’s very challenging to take that hat off and put it on somebody else. And most business owners find themselves being technicians within their business instead of entrepreneurs that are managing an organization. 

And I found myself kind of doing both. Half the day I was doing this and the other half I was doing that. It was a lengthy process to get through that. Once I felt like it was out of place for us heading in the right direction, maybe not fully there yet but at least knowing what my exposer was and have a plan B, sorted that out. That's when I started looking for somebody that can help me with the process and looking for a broker.
 
 Jeff: Who was that broker? What company did you end up going with if you don't mind my asking?

Jeremy: No, of course not. Actually I gave myself a year and I interviewed several different brokers. I met with some folks from Austin, I met with Houston people, I met with a few people out of state. I ended up finding Morgan & Westfield. And over the course of that year which is clear to me they were going to be the best fit. I was right on that. They were invaluable. I really would not want to go through the process without them. 

One of the things that was helpful about them in particularly was the knowledge base both on their website but also just having a person to reach out to and saying, "Hey, is this normal? What do I do with this situation? Or this person is asking for this. Is that something I should give them at this point?" I got several offers along the way, too. And running those offers by them and going, "Hey, this seems good. Is it?" And they would poke holes in it. They would see things that I didn't see because they have that experience of doing so many more transactions. So I looked at them more as a coach. I was still the one who was talking to perspective buyers. 

Because I'm kind of a metrics guy I built an app to manage this whole process, so the analytics on it were interesting for me. Over the course of about 10 months I had 106 people that I spoke with. That was way more than I anticipated. Out of those 106 I think I met with 30 or 40 and then progressed it to different stages.

Jeff: Were all these people folks who you approached yourself or who approached you? Tell us how that worked. Would you say 140 people altogether?

Jeremy: I think it was 106. I don't have...

Jeff: Okay.

Jeremy:None of those people were ones that I approached myself. The nice thing about Morgan & Westfield is they wrote up a wonderful business summary describing the company based on an in-depth profile and interview with me and tons of reports and numbers, and looking at all that. They wrote up a really good business summary. I think it was over 50 pages. It was very impressive.
 
 Jeff: And they listed that summary on several different sites. I want to say 20-25, something like that, way more than I had time or desire to manage. And then I would pay them a monthly fee to manage that ongoing, very reasonable, and it was great. 

And so out of those sites that they have the listing out there I would get emails sent to me after... After an interested buyer had signed an NDA they would send you an email and start a conversation with them from there.
 
 
Jeff: My name is Jeff Allen. We're talking with Jeremy Wells. He is now the former owner of Imago Dei. That's a custom paint and custom wall covering if you will, or wall treatment type of company. He's now going on and doing other things with his life after having sold his business. We're going to learn more about his experience and having sold his company when "Deal Talk" returns right after this. 

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on the future edition of Deal Talk.

Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com. 
Selling your business may be the most important business transaction you'll ever undertake so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. Morgan & Westfield will help you every step of the way. From helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
Are you a professional adviser, accountant, attorney, or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834. 
 
 
Jeff: Welcome back to "Deal Talk." You can hear our show any one of four channels, iTunes, Stitcher, and Libsyn. But the only place that you can get all of the show notes, that is the complete text of everything that we're talking about right now, every word coming out of my mouth and my guest's mouth is morganandwestfield.com. Just look at directly under the media player there and then you'll see all of the show notes. You can take and copy and paste, or better yet there should be a PDF link there. You could just simply download the document to your PC, or your iPad, or mobile device, whatever the case may be. And you can refer to it again, and again, and again, just like you can refer to this show again and again, and play it over and over again because there's always going to be, some information that you may never catch the first 5 or 6 times that you'll listen to the program. 

Jeff Allen with you and my special guest today on this edition of "Deal Talk" is Jeremy Wells. He is the former owner of Imago Dei. He is a business owner, and we want to talk to him about his experience having sold his company recently. And I think it's through these experiences Jeremy that we can help other business owners understand what it's like going through the process because we would like to think that so many of our business owner audience members and regular listeners to "Deal Talk" do have it in mind at some point down the line to move to another chapter in their life or to the next chapter. And be a little bit more comfortable with the idea of selling their company when the time is right for them of course.

And so it's kind of here I'd like to get back into our discussion about after contacting Morgan & Westfield to help you sell your business, and it made you feel a lot more comfortable involving obviously a professional in the process and kind of I freed you up did it not to kind of do some other things and just continue to run your business, is that correct?

Jeremy: Yes. Part of what I was not looking forward to was it's very challenging to try to begin the process of selling the company when you're right in the middle of running your company. It's a bit like trying to design a new part of your ship while you're sailing. 

It can be invasive. There's prospective buyers calling and wanting to know about the company, and meet with you, and ask you lots of questions. In some ways it feels like you're taking away the opportunity to meet with somebody for selling something new or designing something new. It feels like I'm taking time away from that. 

One other processes that I really enjoyed out of that was that working with a broker and working with Morgan & Westfield they handled a lot of that for me. So they would do all the initial intake. So people that were just kicking the tires, that sort of thing, I didn't even know about that. Out of the 106 or so people that contacted me, who knows how many others there were that I didn't even hear about. There is a major efficiency gain by working with somebody in that sense.
 
 Jeff: What was your role Jeremy in kind of throughout the process. What largely was it that you had to do to kind of help Morgan & Westfield to help you so to speak? 

Jeremy: I was the one who speaking with all the prospective buyers. They were the ones who were... I would look at them as a coach really. I was the one out there on the field playing ball, but it was really nice to be able to come back to the coach and be able to get a larger perspective of the field and see what plays next. Get critique on how the past play just went, and trying to make each one a little bit better and just constantly advancing the ball. 

That's how I would really describe them, as kind of the coach for you along the process. It's your company. You got to be the one to sell it. They were great in terms of providing the initial business summary and being able to describe your business in a way. Answering all the questions that most people would have which also had saved you a lot of time. Because there are things that I wouldn't have thought to put in a business summary. But at the end of the day you're the only one who can speak to the intimate details of your own business. So you've got to have a hands-on approach to it. And I was totally fine with that. Working within that framework allowed me to sort of build that into my normal routine.
 
 Jeff: These prospective buyers we'll call them because only one person ended up buying your company of course. But this all came through in a matter of how much time, from the time that you picked up the phone to call Morgan & Westfield to the time that you started getting these calls coming in. How much time went past?

Jeremy: That's a good question. I initially reached out to Morgan & Westfield. It was in the spring. And it wasn't until I was still interviewing other brokers, it wasn't until the fall that I decided to pull the trigger. It took about 2 months to get the company ready for listing. It was the end of January that we actually posted the company on the networks. 

So from that time until we actually had a contract in place I want to say we were under contract by September. It was eight or nine months or so. And then during that time it was about four more months until we actually closed.
 
Jeff: Okay. The process took about a year, which is not really an unusual amount of time. That's kind of what we understand is kind of normal for a business transaction any more these days. So did things go pretty well? Did they either meet your expectations or beyond kind of what you expected based on maybe what little you knew about selling a business in the beginning?

Jeremy: It's hard to say. It was a difficult year for me. I had some health issues come up with some family members that required a lot of my attention immediately. And that happened three weeks after the business was posted for sale. And it was difficult to manage that and the company, and selling the company on top of that with my other business. And then on top of that business it's a little bit slower that year. It was a stressful year. But again, that's where that coach principle is really helpful because even during that process and throughout that stress I had somebody who was kind of coaching me along and helping me with the process.

Obviously we got through it. Our sales were quite a bit lower actually than they had been historically as a result of all those things. That's where, again, Morgan & Westfield is helpful in kind of looking at that thing. "Hey, your numbers aren't where they've been historically. I really think we should consider lowering the asking price." And we did. But it was still in the number that I felt was fair and justified given the year we had had. 

I could've waited another year, a year and a half or two, and built sales back up and that sort of thing. But once you're already engaged in that process it's really difficult to make that mental shift to go back. And I'd already started on so many other things.
 
 Jeff: I know that you and your wife obviously very passionate about your business. Was there at any time of point where you were kind of doubtful about your decision to sell or being able to get a decent amount for it? Was there ever that point that, "Is this the right thing? Are we doing the right thing here?

Jeremy: Sure, definitely. There's always going to be times like that. I don't know if I was ever doubtful about the decision to sell. If you study this idea of vocation. It's a Lutheran term and it gets back to this idea, from the Latin, it's a voice within you speaking. So it's the idea that God designed each of us to do a specific thing and have a specific purpose in life. and I've been really doing a lot of soul-searching over the last few years and studying this idea of vocation and what has he designed me for.

As I began to get more and more clarity around that I just realized that it's time for me to move in a different direction. Questioning the sale wasn't really something that I struggled with. It was more a matter of just managing all of the moving parts. Because you've got personal life, business life, the sale of that, it was a lot. I don't think that most people would've gone through that because of all those other issues. So my experience is probably a bit different than what most people go through.

I would look at them (Morgan & Westfield) as a coach really. I was the one out there on the field playing ball, but it was really nice to be able to come back to the coach and be able to get a larger perspective of the field and see what plays next. Get critique on how the past play just went, and trying to make each one a little bit better and just constantly advancing the ball.

Jeff: What are you going to do now Jeremy? You've sold your company and you got through some rough times. You had some family illnesses and you just talked about vocation and being able now to kind of go on and look at that next chapter, kind of take that next road, that new road often to the horizon. What are you thinking about?

Jeremy: One of the things that I'm working on right now that I'm really excited about is a software platform. It's something that I'd been developing within Imago Dei specifically for use in that industry. One of the things I realized is that there's no software out there for anybody that builds a recipe for a service. And so what I mean by that as a painter there's a certain amount of steps that go into something. I've got prep the wall, I've got to paint the wall, I've got to put maybe two or three coats after the primer. And then maybe even a top coat on top of that.

So there's four or five layers that go into something but I'm not going to charge the client for each individual layer, just one of those. So I give them a single item on their invoice. I developed a software that calculates all of the individual component cost, their labor cost. And then adds on your cost of goods sold and whatever the user determines as their profit margin, and spits out a price. And not only that but it also applies a volume based algorithmic discount to each individual item. It does an incredible amount of computing on the back end.

It's something that I developed for my own business and out of a need. And then a couple of years I realized, my goodness, I couldn't run my company without this. It's called Productive. The website is productive.pro. And so over the last couple of years I realized, "If I can't run my business without this I bet there's other businesses out there that would benefit from this as well." So we've been turning it into a web-based application. We've got it now on Amazon servers so it's nice and solid. I've done a lot of work on the front end, on the back end, making it where it can support volume and growth. 

We're getting really close to launching that. We're doing a kind of pre-beta signups right now and getting other users. Flooring companies, caterers, obviously painters, photographers, concrete guys, there's a whole lot of trades out there that deal with selling a single item that's composed of multiple parts and it's a really great platform for that. Anyway, I'm really excited about that.

On the artistic side I'm still creating my own fine art. I do photography and I'm also an actor. I have an agent in Houston. There's a big market for film and television right now in Austin, Atlanta, Louisiana, all over Texas, and of course L.A. So that's been a lot of fun is getting back into that. But I grew up in the entertainment industry as a kid, so it's been fun to get back into that as well.
  
Jeff: My gosh, with all those things you got going on, with all the hatch you were and the things you were interested in I don't how you have any time to get in that van of yours and take off with the family and go have a good time. But it sounds to me like you deserve it and you're looking forward to it.

Jeremy: I am. One of the things I'm trying to do this summer is it's really hard for us to just pause in life and we have this tendency, we have this drive that we have to be productive with our time. And I really feel like I've been given a little window here. And before I just dive into the next venture I want to take a moment to reflect, and pause, and listen for what's next. I felt like if I stayed in Houston I would just get busy behind my computer and starting another company or two or three. 

And so what we're doing is we're going to hit the road and we're just going to drive from national park to national park across the country and see beautiful spaces, and get in wide open places, and find that sacred space.
 
 Jeff: It sounds to me like you're doing all the right things. And Jeremy Wells, it's just been a tremendous conversation today, really enjoyed having it with you, learning more about the sales process. All the best of success and good luck to you in the future my friend.

Jeremy: Thanks Jeff. I enjoyed it as well. I appreciate it.

Over the course of about 10 months I had 106 people that I spoke with. That was way more than I anticipated. Out of those 106 I think I met with 30 or 40 and then progressed it to different stages.

Jeff: That's Jeremy Wells. There he goes. He's a business owner and also too an experienced now business seller, having sold his business Imago Dei. We enjoyed our chat with him. And we'll be talking with other folks just like you who owned businesses and who are now doing other things, because they were able to actually experience that process of selling their companies themselves.

If you'd like to have more information about what Morgan & Westfield does by the way all you have to do is simply get in touch with them on their business line at 888-693-7834. Morgan & Westfield brings you by the way "Deal Talk" on each and every episode, and we're glad that they do. My name is Jeff Allen. Until next time, thanks so much for listening. Here's to your success.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

 

Key Takeaways

  • The real estate broker and the attorney are really serving two different functions.
  • Unlike residential real estate, commercial contracts are very specifically drafted and negotiated, and there's a lot of upfront work with that.
  • There's other ways of evaluating what a commercial property is worth other than just the typical comparative market analysis.
  • When you're going to buy a piece of property for your business I strongly recommend that you purchase a property in an entity that's separate from the one that you operate your business out of.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value. 

Maintaining or improving your company's value important across every stage, every step, and every decision that you make and that includes when it's time to grow, it's time to look for new markets and that might include perhaps purchasing commercial property. And when it comes to looking at commercial property it's important to consult the services of an attorney and really, particularly one who specializes in real estate interests for small business owners. We have one of those people on the line right now. His name is Chris Cali. He's an attorney specializing in real estate, business, and corporate planning and transactions with the firm Latimer, LeVay and Fyock in Chicago, Illinois. Chris Cali, it's a pleasure to have you on Deal Talk sir, welcome aboard.

Chris: Thank you, a pleasure.

 

Jeff: Chris, if I hire a real estate broker why do I need an attorney?

Chris: First and foremost the real estate broker and the attorney are really serving two different functions. The real estate broker's main job is going to be one to help find you, locate the property that you're looking to purchase, and also get the value down. The brokers do comparative market analysis, they can have income analysis depending on the type of the commercial property that you're buying into. They're going to help you find that, they're going to help you figure out what you pay for it. Once you figure out what you want to buy and what you pay for it, now you got to figure out how to get from that space to the closing table. That's really where the attorney takes over. 

The real estate broker's main job is going to be one to help find you, locate the property that you're looking to purchase, and also get the value down.

Jeff: The attorney kind of helps to step in and if there are questions that the business owner doesn't ask, or doesn't know to ask, or things that he or she doesn't know what to look for, you're there to serve their interest in making sure that there isn't anything that's hidden away, things that are going to be really, really important that the business owner know about before they get involved in something that really at the end of the day could have either a positive or very negative impact on their business. Do you work directly with the real estate broker at any point during the deal? Do you actually have any communication back and forth?

Chris: Absolutely, because when it comes to commercial real estate typically what'll happen is when you found a place that you want to buy, you'll have your broker put together what's called a letter of intent or an LOI. If you hear people throwing around the phrase LOI that's letter of intent. And that'll basically outline the basic terms of the transaction, purchase price, what the due diligence period is going to be, if there's going to be some financing, your anticipated closing time frame. It's basically a large two-page outline of the important aspects of the deal. That then comes to the attorney who's going to help put the contract together. And unlike residential real estate, commercial contracts are very specifically drafted and negotiated, and there's a lot of upfront work with that. And obviously the real estate broker's input is important when it comes to knowing how the deal is negotiated, if there are certain terms regarding the price that probably aren't going to change or if we're going to be looking to renegotiate once the due diligence period is over, and we're seeing certain things at the property.

 

Jeff: We're going to get to that by the way in a second. We'll talk about the real estate purchase contract. You touched on a difference between buying a house and buying commercial property. Can you tell us about maybe another important difference, or even differences between buying a house and buying a piece of property for your business?

Chris: Sure. Obviously, the things that you're looking for in each are going to be different. But from the deal itself, a lot of residential real estate contracts are pre-drafted and there's kind of a basic streamline way that it goes. You have a contract, and most times since they're trying to get these contracts executed quickly and they don't necessarily want to have attorney's fees spent on negotiating the actual terms of the deal, the various bar associations, real estate associations put together form contracts. So in Illinois I can tell you, if you're buying a piece of real estate residential, I may not speak with you as the attorney until you actually sign the contract and there'll be an attorney review provision post contract where I can change certain things. But for the most part if you're buying a condominium you don't look at the condominium documents and that sort of thing, but it's pretty straightforward. Commercial real estate is just completely different because there is really no ... A single family home is a single family home, a condo is a condo, but commercial real estate can either be free standing, it could be a shopping center where you're going to occupy one space and then lease out space to other tenants. It's unique. And each deal is unique, and that's really the main difference. There's no real way to streamline it like you do in residential real estate where they kind of push a lot of these out quickly.

 

Jeff: Let's say for example, this is jumping way ahead, I understand that. But let's say I'm a business owner and I've looked at several properties and I like many of them, but I'm ready to move forward on one. What information should a real estate purchase contract absolutely, positively include on it?

Chris: Good question. It absolutely needs to include the basic terms like the purchase price and then your closing time frame. What you absolutely need to have is you need to make sure that there are specific contingencies in your due diligence sections of the contract, that give you the opportunity to, one, get information that's going to be relevant to you in underwriting the deal and determining whether or not this piece of property is going to work for you. And second giving the ability to pull out and give yourself enough time to pull out if it looks like this isn't going to work out for you and you've already committed 10, maybe a hundred thousand dollars in earnest money that's sitting upfront. You want to protect that. You want to make sure that you know "Am I going to go in paying cash or am I going to finance it? If I'm going to finance it is there a provision in the contract that will allow me to pull out if I can't get the kind of financing I think I'm going to be able to get?” 

What you absolutely need to have is you need to make sure that there are specific contingencies in your due diligence sections of the contract, that give you the opportunity to...

Jeff: Is that kind of commonplace? There is kind of a pull out provision in these contracts? I know that perhaps in your part of the country in Chicago in Illinois in the Midwest, but is that pretty much common, is that what you can look for, or will there be some deals in some states where there isn't a pullout provision?

Chris: Absolutely, and Illinois is actually unique in that we're one of a few states that do real estate closing, the actual closing itself somewhat differently. Most of the country does a deed in money escrow situation. But it's really going to depend on the terms of your contract. I've got contracts here that don't really have a pullout provision. You got to typically have an ability to do your due diligence before you're fully committed. So I would imagine for my experience there's some sort of way to pull out or at least to pull out and maybe you give up a little bit of your earnest money for the seller's cost of having to keep the property off the market for however long it took you to do your due diligence. But at least in the Midwest there's definitely an understanding that you're going to get to do your due diligence, and if the due diligence doesn't pan out you got the ability to walk away.

 

Jeff: Let me ask you something Chris, and we're talking by the way with Chris Cali in case you're listening over someone's shoulder. He's an attorney specializing in real estate, business and corporate planning and transactions with Latimer, LeVay and Fyock in Chicago. You're listening to Deal Talk. My name is Jeff Allen. I'd like to kind of jump over. If I'm touring a property there are going to be some things that I see that are going to be great. They’re pluses, and there are maybe some things that I see that I'm a little bit concerned about, but I can make a list of these things. What are some red flags though? Maybe some things that aren't readily apparent, and maybe some questions that I don't know as just kind of a Joe Blow business guy to ask about a new potential property for my business that I've got to get answers to. Maybe these might pose some red flags. Can you tell me and give me some examples of those?

Chris: Some examples that may or may not be readily apparent is the condition of certain aspects of the property. Like for example you may go and tour a property and you look at the roof. And the roof may look fine, but maybe there are issues with the roof and it hasn't been replaced in 20 years, and you're going to buy this property in the winter time and then the spring is going to come and you're going to get a bunch of rain, and you're going to find out that this roof needs to be replaced and it's going to cost you about $50,000 to do it. So when you're looking at the property you want to pay attention to the mechanical systems of the HVAC and just kind of take a look and see does this property look like it was built 10 years ago or 50 years ago? Does it look like it has an old boiler, or does it have a more modern HVAC system? That kind of gives you an idea of the condition of the property, and obviously you'll have an inspection done, or you'll want to have an inspection done by a qualified building inspector who can look into this. But aside from the property itself and this may or may not seem obvious, but look at the other properties in the area. Are you buying in a shopping center that has other units that appear to be vacant, or a commercial condominium and you've got a lot of vacancies, or the neighborhood is just looking like it's not well kept as a neighborhood. We've got a lot of nice properties in certain areas that are being built, but the neighborhood hasn't quite turned yet. So in addition to the property itself you want to look at the surrounding properties and see if you see a pattern of vacancies, or other things that just would not be attractive for your business. Would you want customers coming to this location, to this building? Are you proud to have this building represent your business - because it will.

 So in addition to the property itself you want to look at the surrounding properties and see if you see a pattern of vacancies, or other things that just would not be attractive for your business.

Jeff: And we know that it all really depends on the industry. If you're a manufacturer maybe it doesn't really matter what the appearance looks like so much, Chris, but your points are very well taken indeed. What about certain things that we hear that manufacturers often need for example. Like environmental studies and reports, and things like that. How common is that? Does it really just depend again by industry, or how often is this needed?

Chris: It's actually needed a lot and it's not necessarily always just by industry but it's also by location. Manufacturer plants or industrial areas you're absolutely going to want to have due diligence done, one, just as if there's any outstanding environmental matters that need to be taking care of prior to closing, or that you may be taking subject to. But even if it's not an industrial area or a manufacturing area, you may be buying a free standing building that's close to, say next to a gas station, or maybe the building that you're buying to put your new pizza franchise in used to be a paint shop 20 years ago or an auto repair shop 20 years ago, and there could've been some environmental leakage or some sort of exposure that wouldn't be apparent just by looking at it. And this is going to be important to know for a couple of reasons. One, because there are a number of state and federal laws that you can be caught up in if you're buying a site that has some sort of environmental hazard or some sort of violation on it. And there are certain exemptions from liability based on the due diligence that you do before you want to buy it. The most common one you're going to hear is a phase one or you'll hear the phase two environmental report. And the phase one environmental report will basically want to have a qualified environmental specialist and physically inspect the property, do a review of the title and the other transactions in the neighborhood to see if there's any red flags that could be raised that there could be, or there was at some point in the past an environmental problem. And these can absolutely come up and bite you particularly if you're going to be in the food industry, or some sort of other industry where you're going to be having customers coming to your property. There's an outstanding environmental issue, it can be very expensive to clean up post-closing and you may not be able to get your business license to operate there.

 

Jeff: Those environmental studies, who pays for those?

Chris: If you know there's going to be ... Typically it's going to be the buyer. The buyer typically pays for their own due diligence. That being said, if there is reason to believe at the time of contract that there could an issue or if the seller's kind of aware that there is an issue and it gets negotiated, you can negotiate a split. I've had deals where sometimes they didn't think they were going to have to do an environmental, or they did an environmental phase one and it turned out that there was a problem. And now we’ve going to go on to phase two. What the phase two does is actual physical testing. So they'll drill holes into the ground where they'll pull up soil samples and do some actual testing to see what's down there. Those could be more expensive, and a lot of times those might be negotiated during the due diligence period. But from your phase one standard just the initial inspection of the property, it's typically a buyer expense. And like other things, buyers are looking at their costs and wanting to save as much money as possible. But the money you're spending on your due diligence is money well spent, even if you have to pull out. Because it's that money that you spent to do the due diligence if you need to try to get out of the transaction or re-negotiate the terms based on what you found, that could just save you tenfold if you didn't find the problem upfront. 

Because it's that money that you spent to do the due diligence if you need to try to get out of the transaction or re-negotiate the terms based on what you found, that could just save you tenfold if you didn't find the problem upfront. 

Jeff: Pay a little now versus pay a ton later and potentially to the very detriment of your company and we've seen stuff like this over the course of history happen before. Chris Cali is that man over on the other side over there. He's an attorney specializing in real estate business and corporate planning, and transactions with the firm Latimer, LeVay and Fyock in Chicago. We're happy to have him. My name is Jeff Allen and we'll continue our conversation when Deal Talk returns after this.


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Jeff: Welcome back to Deal Talk, Jeff Allen with Chris Cali, attorney in Chicago with Latimer, LeVay and Fyock and we're talking about commercial property. We're talking about purchasing commercial property when you're growing your business no matter where you're growing it, the things that you need to know, the things you need to watch out for. And right now what I'd like to do, Chris, is I'd like to kind of ask you about what kinds of questions should we make sure that we ask that will benefit us both in the short and long-term when we're out looking for a brand new venue.

Chris: Sure. First of all, before you even get into the process and you should answer the same thing of all your professionals, make sure that your real estate broker knows how to value commercial property. Commercial property is valued a number of ways. There is comparative market analysis, there's income analysis, there's other sorts of ways of evaluating what property is worth other than just the typical residential, commercial comparative market analysis. That's your first question. That should be your same question to your attorney as well because there are some nuances between residential and commercial property. But assuming you've got a broker who knows what they're doing, obviously location's going to be important, but make sure your broker helps you pull up some background information on the property that's not necessarily always provided upfront like the property tax history. And other sort of leasing history on the property that may give you an indication of what this property is actually valued at and what the county or the taxing authority thinks it's valued at. Because you may be buying a piece of property that was foreclosed on say by a bank in what's called an REO. You're buying it from a bank that foreclosed on the property. And perhaps it was vacant for a number of years. So the seller may say, The taxes I hear are $10,000 a year” but what you don't know is that the place has been vacant for five years and the county is taxing it as if it's vacant. And all of a sudden you're going to buy it and your tax bill's going to quadruple because now you've got an operating business there. And now you've got an expense in the future that is a little bit more than you were anticipating because you're looking at your budget and you're thinking, “Tax is about 10,000 a year and that's part of my business cost”, you weren't expecting to pay 40. So getting as much information about the background, and a lot of the stuff can be found on commercial or broker websites, LoopNet’s one that I know a lot of brokers use. And just from county information and state information, a  lot of those background information can be found and it can be useful in kind of making an informed decision what the true value of this property could be. And what potential increase in costs you could face based on your particular transaction.

 

Jeff: Does “as is” Chris really mean “as is”, or can I pursue certain kinds of improvements, renovations that I need to suit my particular business that the seller should be responsible for making, whether those be repairs due to wear and tear or are there other major or significant damage that would be very costly for me to make?

Chris: Yeah, that's actually a great question and I get that a lot from clients who may run into a problem with a physical issue with the property or some sort of expense with the property or problem that they just weren't anticipating at the time they made the transaction. And they're saying, "I said this was going to be as is. I guess there's nothing you can do.” As is if you're still on your due diligence period, you still have an opportunity to tell the seller, “Based on my due diligence of the property, this isn’t the deal I thought it was and I'm going to pull out”. You can always renegotiate. And as long as the seller is being reasonable and willing to, even if there's something written in stone, the two parties can always change it. What's important to know is really when it comes to as is what that really means is the seller is not making any sort of representations or warranties with respect to the property. Once this property closes or once you get to post closing or post due diligence you're taking it subject to whatever happens to be wrong with it. And depending on as where or how the expensive the contract is you may be taking subject to building code violations and other things with it. If you find out after closing because you didn't do proper due diligence and your professional didn't do due diligence that there's a building code violation or some sort of other major issue, you can't go back to the seller then because you were doing this without any representations or warranties. As is in a practical sense, it can be renegotiated either upfront or during the due diligence period. But as a legal matter, once you close the deal you're taking it literally at that point as is.

First of all, before you even get into the process and you should answer the same thing of all your professionals, make sure that your real estate broker knows how to value commercial property.

Jeff: Chris, I can just imagine, we're listening to some of the things that you're saying and we're kind of putting ourselves into the position of someone who may not have legal representation when they work with a real estate broker in buying a piece of real estate, a commercial property. Maybe we're building on at some place where maybe there's some problems that end up manifesting themselves somehow, some way after the deal is already done. And so we're thinking about that and it just seems like it would be a mistake not to have an attorney look these things over with you before you pull this string on the deal. Can you point to maybe any examples that either you have come in and had to kind of advise a client after the fact on? Maybe they decided to call you after they've had some problems. Or any examples that you can think of that you've read about where someone got themselves involved in a property matter and it just became a big mess, and it ended up costing them a lot of money to get this matter fixed, or maybe ended up in them resulting in losing their business as a result of it?

Chris: Yeah, absolutely, and I wish I didn't have any examples to give you but unfortunately I do. I did have a client, this was probably about two years ago, this was in Chicago and was ... I did not represent this person when they bought this particular commercial condominium. I was brought in after the fact. But they did this commercial condominium and they were going to be putting a salon and massage parlor in this space. And they bought this brand new, beautiful building. They bought it and it was a new construction. They after closing went and then basically put everything in and they did $50,000 worth of remodeling. They got their tables in, the thing they were doing, nail manicures and pedicures as well. So they had a full service spa going on. They had everything set-up and they're going to get their business license and they found out based on this particular area, the Chicago department of zoning will absolutely not allow a massage parlor there. They have an appeal process where you can go before a zoning board of appeals and that gives you the opportunity and it also gives your neighbors the opportunity to either give an opinion for or against why they should go here. And after putting all those money into it and buying this specific location they were denied by the department of zoning to put their massage parlor there, and that was money down the drain. That was their business. They weren't going to be doing anything else with it. And unfortunately if they had come to me in the beginning, you're always going to look at ... There's a lot of general businesses that you can get a general business license. And every municipality space is going to be different, so you want to check with your local state, municipality, villages, cities and find out what the business zoning requirements is. And you'd think that this would be something that would, for someone who had everything else together, they would've thought about but for whatever reason they just didn't. And they didn't investigate the zoning before they bought it and they were stuck with a piece of property that they couldn't use for their business. Ultimately I told them, "I'm sorry, there's nothing else I can do for you at this point.” And it's unfortunate. I like to deal with small business owners because it's fascinating to see people who really put in hard work get great results and be successful, and unfortunately it doesn't always work out. And a lot of times it's because while they may be good at what they do they're not ... Real estate or other sort of business experts when it comes to some of this stuff and by not having the proper people in place to help guide you through that, you can run into these pitfalls.

 

Jeff: My gosh, I can't imagine what that must have been like for that company because it seems like there's no way that you could really overcome that and kind of move forward very quickly at all in any case. Chris, we're kind of nearing the end of the program and this has been a really insightful discussion and I could see us having you back on this program again to talk about matters in greater depth regarding real estate, and we can also talk about other matters as well because I know that you really do have extensive background and business transactions also of various types. What I was wondering is if you have just a few quick tips or important things that you would be able to leave for our listeners today in the form of take aways based on our discussion, things they need to be mindful of when they're considering moving their business or expanding their business that would involve purchasing real estate.

Chris: Absolutely. First I like to say it's definitely been a pleasure and I hope your listeners have enjoyed this, and I would definitely love to come back and chat with you some more. One thing I actually do have is a tip, and we haven't had it yet. And I think it's very, very important. When you're going to buy a piece of property for your business I strongly recommend that you purchase a property in an entity that's separate from the one that you operate your business out of. So if you're going to be operating the business under a corporation or an LLC you want to set-up a second corporation or LLC. And that second corporation or LLC, all that LLC does is own this piece of property separate from your business. And you can even have your business lease the property from your LLC that buys it. There are certain income and tax advantages which I won't get into, for doing that. But for liability purposes you don't want to have a liability against your property affect your business and vice versa. You don't want a claim against your business to attach to the property. And as much as you can you want to keep those two separate. I can't recommend that enough. That's probably my number one recommendation, is to not have the entity that's operating your business, paying your employees, and doing everything else be the same entity that owns the property.

Real estate or other sort of business experts when it comes to some of this stuff and by not having the proper people in place to help guide you through that, you can run into these pitfalls.

Jeff: Really huge, Chris, and I appreciate your bringing that up. And you're right, we did not talk about it. It was probably something that we could've talked about up toward the top of the show but very important indeed. If we've got people listening to the program today and they'd like to reach out to you. They may be in your area in the Midwest in Chicago area, anywhere in that neighborhood that your firm serves. They'd like to talk with you, any questions that they might have specific to their situation, how can they reach you?

Chris: Absolutely. We're located at 55 West Monroe St., the heart in the downtown Chicago, suite 1100. And our main office line is 312-422-8000. And they can absolutely call and ask for me and mention that they heard me on your show, and I would be happy to have a conversation with them and see if there's anything that I can do or follow-up on for them.

 

Jeff: That's Chris Cali. His last name is Cali, attorney specializing, once again, real estate business, corporate planning, and transactions with the firm Latimer, LeVay and Fyock in Chicago. Chris, we appreciate it. Thanks so much. We'll talk to you again.

Chris: Thank you.

 

Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. So if you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or of course visit morganandwestfield.com for more information. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening. We'll talk again soon.