Articles Posted in Ready to Exit Phase

New Jersey CapitolThe overall economic outlook for New Jersey is cautiously optimistic, at least according to some sources. The New Jersey Business & Industry Association (NJBIA) describes a gradual increase in “business confidence” in its annual Business Outlook Survey, but it also notes several downward trends. People are apparently leaving the state in substantial numbers, as are many businesses, resulting in fewer jobs and less income statewide. The NJBIA offers possible explanations for why this is happening and what might be done about it. The state is also taking steps to evaluate the situation. A bill that recently passed the New Jersey Senate, which is now awaiting action in the Assembly, would direct the New Jersey Department of Labor and Workforce Development (LWD) to conduct detailed surveys of businesses that are leaving the state.

In 2007, the New Jersey Legislature enacted the Millville Dallas Airmotive Plant Job Loss Notification Act, also known as the NJ WARN Act. P.L.2007, c.212; N.J. Rev. Stat. § 34:21-1 et seq. The law applies to employers that have done business in the state for over three years and that have at least 100 full-time employees. Covered employers are required to provide a notice, in a specified form, to any employee who is terminated as part of a “mass layoff” or to all employees who lose their jobs as a result of a “transfer of operations” or “termination of operations.” Id. at § 34:21-2. The law also directs the LWD’s response team, whose purpose is to assist laid off employees, to offer to consult with the business’ management and workers.

While the NJBIA’s 2017 Business Outlook survey shows optimism among business owners, another study published in early 2016 shows significant rates of “outmigration” by both residents and businesses. From 2005 to 2014, the NJBIA estimates that more than two million people moved away from New Jersey, and this cost the state about $18 billion in net revenue. It further estimates that the state has lost about 75,000 jobs and $11.4 billion in “lost economic activity.” Despite these grim statistics, other measurements seem much more hopeful. Another organization, for example, reported that home sales in New Jersey have increased by more than 30 percent since early 2015.

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Collaboration_logo_V2.svg.pngA new year often provides an opportunity for business owners to review their goals and their progress towards those goals, to consider whether those goals remain the same, and to make adjustments to the business based on changed circumstances in the market or in their own lives. Small businesses, especially closely-held and family companies, often depend on the hard work and dedication of their owners. It can be difficult for owners to step back from the business, even when necessary. Succession planning, which allows a business to continue operations in the event that the owner or owners cannot continue in their previous role for whatever reason, is a critical responsibility of a business owner. The arrival of a new year may be the perfect time, if an owner has not thought about succession planning yet, to start thinking about it. Here are four steps in succession planning to help small business owners on their way.

Identify the Organization’s Needs. Every business is unique, obviously, so each one will have its own unique needs for a smooth transition in leadership. Some small business owners may designate someone to take over for them, but all succession plans should have clearly-defined procedures for identifying a successor and moving them into a leadership position. If running the company requires a high level of expertise in a particular field, or even professional credentials like a law or medical license, a succession plan should include a process for keeping the business in the hands of qualified individuals. If such individuals are not already part of the organization, the plan should include a way to locate and recruit someone.

Identify Personal Needs. Small businesses often depend on leaders working together, and discord is frequently the cause of a small business’ failure. A succession plan must consider the personalities and relationships of the people who currently comprise the business and, to the greatest extent possible, plan for the continuation of the business with minimal feather-ruffling. It should also consider personal issues like income and estate tax.
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file2581243266765.jpgA business owner may have violated the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 et seq., when he closed his wholly-owned corporation and began working for another company in the same field, according to a New Jersey appellate court. Del Mastro v. Grimado, et al, No. A-1433-11T4, per curiam (Sup. Ct. N.J. App. Div., Sep. 5, 2013). The plaintiff, who had obtained a judgment against the defendant in a separate matter, claimed that the defendant fraudulently transferred business assets in order to prevent her from collecting the judgment. The appellate court ruled that the client list of the defendant’s corporation was an asset for the purposes of the UFTA. The ruling could be important for any New Jersey small business that seeks to reorganize, dissolve, or merge with another company while certain debts remain outstanding.

The defendant was the sole shareholder of Internal Concepts, Inc. (ICI), an S-corporation that brokered electric motors used in medical equipment for about fifty clients. According to the court, the business had gross sales of $1.3 million in 2003 and $1.7 million in 2004. In August 2005, the plaintiff obtained a judgment against the defendant in a separate suit for invasion of privacy and intentional infliction of emotional distress. The court awarded her $531,000 in compensatory and punitive damages, based on an evaluation of the defendant’s assets, including ICI. The defendant closed ICI shortly before the 2005 trial began. He testified that the closure of the business was completed in July 2005. The defendant went to work for Precisions Devices Associates, Inc. (PDA), a company that had worked alongside ICI, and which began to perform many of the services ICI had performed once he joined as an employee.

The plaintiff filed suit against the defendant, as well as ICI, PDA, and PDA’s owner in July 2009, claiming that the closure of ICI and transfer of the client list to PDA hindered her efforts to collect on her judgment, and therefore violated the UFTA. The trial court dismissed the complaint in October 2011, finding in part that the plaintiff had not provided clear and convincing evidence of fraud.
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file551263252097.jpgA partner in a general partnership based on an oral agreement could unilaterally withdraw from the partnership, the New York Court of Appeals held, because the partnership agreement did not define a specific duration or objective for the business. Gelman v. Buehler, 2013 NY Slip Op. 01991 (N.Y. Sup. Ct., Mar. 26, 2013). New York law allows any individual partner to withdraw and trigger the dissolution of a partnership if the underlying partnership agreement does not identify a “definite term or particular undertaking.” N.Y. Pship L. § 62(1)(b). The court rejected the plaintiff’s argument that a general goal, defined in stages, was sufficient to meet this legal standard. Business lawyers often advise their clients to put agreements in writing, and this case demonstrates one possible outcome if business partners fail to do so.

According to the court’s opinion, the plaintiff and defendant agreed to form a partnership in 2007 shortly after graduating from business school. The plaintiff would later describe their business plan in seven stages:
1. Raise money to start the partnership’s operation;
2. Find a business to purchase;
3. Raise additional money to buy the business;
4. “Operate the business to increase its value”;
5. Reach the “liquidity event,” the point when they could sell the business at a profit;
6. Identify a buyer for the business; and 7. Sell it at a profit.
Gelman, slip op. at 4.

The two partners reportedly anticipated a four- to seven-year time frame for their business plan. They spent several months looking for investors, but the defendant withdrew from the partnership after a dispute with the plaintiff.
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file0001476330609.jpgJust as new businesses start every day, some businesses must cease activities, wind up their affairs, and dissolve. This can occur for any number of reasons, including bankruptcy or the decision of the owners to stop doing business. Any New Jersey business that must wind up and dissolve must follow procedures established by state law, which include notification of creditors, payment of debts, and disposition of other assets.

Reasons for Winding Up a New Jersey Business

Businesses may wind up voluntarily or involuntarily. An involuntary dissolution usually results from bankruptcy or a court order in some other legal matter. A court-appointed trustee may handle the dissolution of a business in a Chapter 7 or Chapter 11 bankruptcy case, but in other situations, the management of a business must handle the winding up process itself. Court-ordered dissolutions in non-bankruptcy cases are rare, but might occur in a dispute between partners in a joint venture or some other single- or limited-purpose business entity.

Shareholder or partnership agreements may include provisions for mandatory dissolution if certain events occur. Voluntary dissolution usually results from a decision by the business’ owners, made according to the procedures established in a shareholder agreement, partnership agreement, or other management agreement.
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