Though things are coming along well, the journey would not be interesting if it was purely smooth sailing. After our buyer opens escrow, they are forced to push the closing date back when suddenly a letter from an attorney was received claiming the business, we are buying has a trade mark on the name! Now it’s time to for our buyer to either back off or buck up and fight for our Trademark rights!
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business. This is our sixth episode of Behind the Buy, in our series where we uncover the business transaction of buying a business and you get to hear the inside scoop of our calls with our client. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: This episode, there’s just so much to set up here. It’s pretty dense, but I think we’re gonna try to do it here. In this episode, there’s two phone calls. At this point, if you guys recall in episode 5, the buyer and seller have gone through some periods of due diligence, there were some hiccups there with the lease and the seller made a dumb mistake by telling the employees prematurely. But we did get past that and we actually ended up signing an asset purchase agreement after it was drafted. Luckily, as soon as you sign the asset purchase agreement, it’s not like the transactions over, you still have another period of due diligence, and that’s a little bit more intense than the LOI due diligence period. That’s about where we are right now.
MATT: If you recall from the previous episode, we had, I think it was three different contingencies in place, so like you said, just because the agreement signed doesn’t mean the transaction’s done and the sellers getting paid at whatever the closing date is. What’s funny about this episode is if we look back when we had that issue with all the employees finding out, that seems like it’s really a drop in the bucket compared to this. This is like a grab bag of issues that came up. Listen to the call, it’s just one after the other without even any transition to the next one just because there were so many things on our mind that I think just needed to get them all out there and discuss with us.
NASIR: If I recall, after that happened in the last episode and the call before, you could tell that the seller is just gonna be fun to work with to say the least. There’s two calls. The first call is really short. This is basically talking about the escrow period, but the second call, I just want to set it up a little bit because it’s actually set very close either a week or so before closing. Our client actually sent us an email, it was late in the night or something like that and I remember, it was relatively urgent and so Matt and I talked first and then we got on the call with our client to discuss. I just wanted to set that up a little bit. Of course, like every episode, we have some defined words that we need to go over to make sure that it doesn’t go over anyone’s heads. I guess that’s a little insulting to say, I probably shouldn’t say that, or just a reminder of certain words that maybe some people may need a reminder of.
MATT: Well yeah, it’s not even just the listener, I think attorneys too with this first one indemnification clause. I’m not even sure there’s a full understanding of that, but it’s a very common provision that’s — I don’t wanna say every contact, but most contracts, but essentially what it is is you have two parties, the indemnifying party and the indemnified party, and it’s basically if there’s a third-party claim made against the indemnified party, the other party then would — I probably should not describe it like this because I’m just saying indemnify over and over.
NASIR: It sounds like a big party, but it sounds great though.
MATT: Long and the short, there’s a third-party claim against one party, and then the other party to the transaction, in this case, would then have to indemnify that other party, meaning they’d have to basically become responsible or liable for the claim as a result of their actions, is that good? I don’t know if that made sense or not.
NASIR: Well I can define your definition maybe. Matt’s absolutely 100% correct, but of course to maybe break it down even further, I would just look at it this way is that if a party is harmed because of some other third party — We have two parties here, the buyer and seller. An indemnification clause in this sense is triggered where if the seller sells their business to the buyer and later on, some third party whether it’s a patient for their urgent care or an employee sues the buyer who’s now owning the business for something that the seller did, then the buyer is going to ask the seller to indemnify them or to reimburse them for their loss It’s very common in pretty much every purchase agreement, asset purchase or regular purchase agreement that the buyer is going to indemnify the seller for anything connected to conduct after the closing, and the seller is gonna indemnify the buyer for anything that occurs prior to closing It’s usually a mutual indemnification but it does go both ways.
MATT: Yeah, and if you think about it, it makes perfect sense. The seller should be responsible for anything that happens prior to close because they still own the business and on the flip side, the buyer should be responsible for anything after closing because then they own the business and the seller shouldn’t be responsible, hopefully, that two-minute definition made sense.
NASIR: Absolutely. There’s a couple industry-specific terms that we can just talk about really quickly, it’s not a huge huge part of the episode, but we mentioned the MSO structure again. If you recall from a few episodes back, that’s the organizational structure that allows a non-health care provider entity or a non professional entity to be involved in the business or operations of a professional entity, basically a management company that provides management services to the actual professional entity providing the healthcare services so that the non-healthcare entity does not have any undue influence on the actual practice of medicine and that is protection of the corporate practice of medicine. We also mentioned that a particular individual, I think we mentioned last time, the physician’s assistant sometimes, we use the word PA. If you hear the word PA, it just means physician’s assistant which is a type of a healthcare professional, not quite a physician, but they do quite a bit of what a physician would do. There’s so many things that went on in these two calls, but I think maybe we’ll just go in chronological order, how it went so we don’t miss anything.
MATT: On the first call, like you said, it was pretty short, but basically we were just discussing that the purchase agreement had been finalized and that escrow had been opened. There wasn’t too much action. I think we’ve talked about it before, but we had the escrow in place so that our client could deposit funds into escrow to be held for the seller’s sake. At that point, everything seemed fine and there were no issues and then we got into the second call.
NASIR: Let’s take a listen, this is the first call and then we’ll chime in for the second.
NASIR: Hey [Buyer] how are you?
BUYER: Hi Nasir, I’m doing well.
NASIR: So you feel relieved?
BUYER: Yeah, I’m just glad we got everything signed.
NASIR: Agreed, big milestone so I think it does get easier from here, trust me. This call is more of just a general update and debrief from where we left off just for the record so to speak. We are recording of course.
BUYER: Yeah, no problem.
NASIR: The finalized APA, it was signed yesterday. Mat lined up an escrow company that we’ve worked with in the past, really important to get an escrow company that has a good experience with business transactions because a lot of them only do real estate. This particular escrow company, they’ve worked with us before, they’ve done these types of transactions, so I hope everything runs pretty smoothly with them.
BUYER: Okay that’s great. I’ve got the wire info so I’ll probably wire the deposit later today and we have the rest of the money lined up already, so should we go ahead and transfer everything?
NASIR: I probably wouldn’t do that. First, it’s not really necessary and I don’t think there’s any advantage kind of showing the buyer that you have the money in there and deposited and since we’re in this escrow period, there are a couple things that may come up, I’m not sure, but just in case they do, it’s nice to not have that in our pocket to push later.
BUYER: Yeah, that’s fine I was just mentioning it as an option.
NASIR: Yeah, no worries. We’ll be in touch, let us know when the deposit is made and we’ll go from there.
BUYER: Okay, I’ll let you know as soon as I make the deposit and have a great rest of your day.
NASIR: Yup, thank you, see you later.
MATT: All right, well that was the first call and here’s what happened next.
NASIR: Good afternoon.
NASIR: I have Matt here as well of course.
BUYER: Hey, Matt.
NASIR: We got your email and I thought it would just be better to get on a call.
BUYER: Yeah, I know, it’s a mess.
NASIR: Well, let’s discuss it. Trust me, this is part of the process.
BUYER: I know, but Dr. [beep] was having second thoughts now and so I have to manage him and figure this whole thing out.
NASIR: I get it. If I understand it correctly, I actually think there’s some opportunity here, so let’s get into that and I’m sorry to ask you to do this, but do you mind describing the situation again for our recording from where you started speaking to the physician assistant or actually, Matt, do you want to just give us some background and maybe pick up where we left off?
MATT: So we opened escrow about three weeks ago and we’re set to close next week which besides this issue, I think we probably need to push that closing day back anyway in order to make sure provider agreements are lined up with the payers.
MATT: And as discussed in our original call about the purchase agreement, we wanted to make sure that one of the employees of the urgent care was lined up with an employment agreement prior to closing.
NASIR: Correct, and for whatever reason, despite having a fully executed purchase agreement and with you depositing a sizable down payment to escrow, the seller kept putting off introducing you to that employee, but you finally met with her.
BUYER: It was on Monday, so two days ago.
NASIR: Okay, got it. Please tell us how that went, how did it go?
BUYER: Okay, so I met with her in person. Not all the staff knows yet that the sale is pretty much finalized, so I met with [beep] at a coffee shop a couple blocks near the urgent care.
NASIR: She’s the PA.
BUYER: Correct. As I said before, I had a good feeling that she was pretty much the one running the center and it’s pretty impossible to do what you are already living out of the state as a seller is. She was pretty much an open book and gave me the whole rundown, like the good, the bad, the ugly and how Dr. [beep] how he’s never there and how he treats his staff and how he handles patient complaints and everything like that.
NASIR: Okay, what did she say about how he treats his staff?
BUYER: Well she said a bunch of stuff. He didn’t, not that I’m aware of, do anything too crazy, but apparently, he would berate staff in front of patients and he was rude to patients as well. I guess he would make people document what they did during the day, especially during slow hours or days. It was just kind of a mess. From what the PA said to me, it seemed like the urgent care is actually doing better now that he’s left, but things seem to kind of always slide backwards anytime he visits which is about once a month at this point. But anyway, so the main thing though is she said that they received a letter from an attorney about a month ago. She didn’t know the exact date, but it would have been around the time that the seller and I were discussing buying terms. She showed it to me and she’s supposed to send me a copy via email later today and I’ll send it to you as soon as I get it, but essentially some other Urgent Care on the East Coast is named and they’re saying that [beep] is violating their trademark or something, so I’m a little worried about this.
MATT: Okay so basically, you both have [beep] the name, but the one you’re buying has the word urgent in it, is that the only difference?
BUYER: Yeah, I think so. I’ll have to look at the letter again, but I’m pretty sure that’s it.
MATT: Okay, just send us a copy of that.
BUYER: So I definitely do not want to walk into a lawsuit, but part of the value of the business is that the seller did a bunch of marketing in the community including like a big billboard and that’s been kept up for a while, so the name is kind of known and I really would like to keep it, but this is just a huge mess. There are other issues now that I have to ask you about, but this is the main thing.
MATT: Okay and I assume you haven’t brought this up to the seller yet?
BUYER: No, but I’m pretty sure he knows. I know because the PA told him to show it to me, so I’m pretty sure he knows. Why he waited a week until before closing to tell me, I’m not sure. He knows I wanted to keep the name, so I don’t understand.
NASIR: Okay, like I said, I do think there might be some opportunity here or at least some easy way to solve this issue. I don’t think it’s a deal killer, but before we dive into that, you mentioned some other issues. What are the other issues you wanted to discuss?
BUYER: Not necessarily issues, mostly questions. There was one issue that I think we need to talk about which is the PA. She said she’s not an employee, but she’s actually a contractor, but she’s willing to do an employee arrangement but she would want to make sure that her net pay is still the same which means I would have to pay her a little more.
MATT: So she works full-time right?
BUYER: Yes, actually I think she works six days a week along with another PA and they split the shifts.
MATT: Okay, well, it’s a common problem, but she probably should have been classified as an employee.
BUYER: I’m pretty sure all of the staff are contractors because they do really short shifts and [beep] said that before she started handling most of the operations, they had a lot of turnover with staff so he just started contracting people out for part-time positions and things like that. I think he was just trying to diversify the staff so he didn’t become too reliant on anyone and he actually does pay pretty well.
MATT: Okay, so approximately how many staff members does he have from a full-time equivalent perspective since he’s a lot of part-time workers?
BUYER: I think he has probably seven people in total, but only about two or three are working full-time. You have to run urgent care really lean in order to make a good profit so Dr. [beep] and I have already talked about we’ll probably be cutting the staff pretty quickly after we evaluate everyone’s performance in about a month or two.
NASIR: Okay, so obviously, Matt, we have to look into the classification issue, but frankly those individuals probably need to be hired as employees which may be problematic, but I think it’s more for the seller because he’s the one that first of all made the mistake. He’s the one that would be liable to the IRS and also have state ramifications with the state of California. Also, this is one of the reasons why there’s a benefit of doing an asset purchase because the IRS follows the tax ID, not the asset so that should be good. In any case, we still have an indemnification clause, so any of these liabilities that occur prior to closing is gonna be his and so he has to cover you for those.
MATT: True, but I can see some staff members not wanting to be paid as an employee either but I don’t think I’d see a huge issue as everyone’s gonna expect some changes once a new employer comes in.
BUYER: Yeah, and like I said, the PA wants to get a pay increase if she goes as an employee, but the good news is she’s willing to stay and she actually seems pretty happy that someone else is buying the business.
NASIR: Okay, there’s some risk here obviously, but it’s not a huge issue. It would have been a bigger issue if you hired them as 1099 incorrectly when they should have been W2 so we’re catching this issue really early, but let’s go back to the trademark issue. Matt and I spoke a little bit before this call after reading your email and I think we have a pretty decent plan. Our first thought is if you decrease the sales price knowing that you’re gonna have to deal with this trademark issue that may be an option, we thought the best way to handle that was a combination of both renegotiating the purchase price, but also more importantly holding back a certain amount of money at closing. Okay, this is the concept. You want to keep the name, right? But you don’t want to buy a business and then find out later you can’t use the name because it’s infringing on someone else’s trademark, but I assume if you had another name you like, you would still buy this business. You’re not buying the business just for its name, right?
BUYER: Yeah, but it’s the cost of rebranding that’s the problem even if I do find a better name.
NASIR: Exactly, and that’s kind of my point. What’s the cost of rebranding?
BUYER: Honestly, I really don’t know.
NASIR: Ballpark for now. Think about this here for a second. There’s signage, marketing, interior all that stuff, how much do you think that would be, ballpark?
BUYER: I don’t know exactly, I would guess, I don’t know at least $20,000, probably more. We would need to do a remarketing campaign, mailers or something to re engage the community.
NASIR: Okay so let’s just say $30,000 for the sake of discussion. First, what you do is you negotiate the purchase price based upon the fact that you may no longer be able to use the name [beep] and so at closing, you hold back $30,000 in escrow, and then that amount will not be released until you’re given time to figure out whether you can actually keep the name or not and of course if you are able to keep the name, then you release 30k, if not then, it goes back to you. In the meantime, Matt and I deal with his company on the East Coast after closing. You see, a lot of these companies that own these trademarks, sometimes they can be overly aggressive, frankly needlessly and enforcing their trademark. This may be one of those cases, but without really diving into the issue and possibly contacting these other guys in the East Coast now, we won’t be able to really know what exactly the issue is whether it actually does infringe or not.
MATT: Yeah, I actually already looked up their mark while we were on the phone, so it’s a little bit of good and bad news here. They do have a registered mark and they registered last year, and obviously, the seller’s urgent care has been around for three years. There’s a good chance that if you want to keep the name we can, but the fact that the mark is registered obviously doesn’t help us.
NASIR: Right, so I just want to go back for a second. We hold back this 30 grand post closing and at that point, you will be able to decide let’s say within six months, Matt and I say you can use this trademark for free without any kind of risk of liability or maybe we tell you there’s some risk and so you may or may not want to use it. If you decide to use the trademark, then you release the 30 grand to the seller. If you choose not to use it because it’s too risky and you want to create your own brand, then the 30 grand gets released to you.
BUYER: You know honestly, I think it’s a great idea, that way too — I was a little concerned when [beep] said that he was being rude to patients, so maybe a rebranding would actually help us.
MATT: Right, we talked about giving it like a six-month period where you decide whether you want to continue using the name or not. If not, the holdback funds will go back to you, otherwise, it’ll be released to the seller. That decision to use the trademark and release the funds is completely up to you.
BUYER: Okay and that can work. I’ll see how long he would agree to, but I really think that should work.
MATT: One other thing I wanted to know is that this East Coast company may agree to what’s called a coexistence agreement, so that’s where each of you agree to use the mark with certain limitations for example like you agree to only use it in California or only for urgent cares because if I looked up Signature Care’s website and they’re only located in New Jersey, they’re also more expansive, include everything from urgent cares, hospitals and surgery centers.
NASIR: Yeah, it sounds like they’re a mini health system of sorts.
NASIR: So that coexistence agreement, that might be a good out for you too. At the end though, if the seller agrees, this is a good way to minimize the impact. I think this solves your problem from the get-go.
BUYER: I agree, and it makes me a lot more comfortable for sure. I’ve actually scheduled a call with the seller later today to talk about the trademark issue, but I’m pretty sure I can convince him of this deal, but do you guys think you could get in on the call with me so that you can help me explain it?
MATT: Yeah, definitely I can and we can draft an amendment of the purchase agreement outlining this and he can review it then.
BUYER: You think we can get that out today?
MATT: Yeah, I think given the circumstances, we can.
NASIR: Okay yeah, so let’s get that done.
MATT: Sure and I’ll reach out to you after this call. We have a couple other smaller items I need you to review. We’ll also need to finalize how much we’re going to hold back before we speak to the seller.
BUYER: For sure, I’ll also give Dr. [beep] a call so that hopefully, it can make him feel a little more comfortable about this whole situation too.
MATT: Okay, great, no problem. I’ll call you now.
BUYER: Bye, thanks again guys.
NASIR: Yup, see you.
NASIR: Alright, welcome back. That was a phone call to say the least. A lot of things to talk about there, but before we do, let’s talk about our sponsors. A law firm that has been supporting us since the beginning of this series. I can’t say enough how much I’m thankful for their support. Matt, why don’t you give them a proper introduction?
MATT: Yeah, so this episode’s sponsor is Pasha Law PC, a corporate law firm that operates in California, Texas, New York and Illinois. And for here, I actually used them recently. I had a contract that needed to be reviewed and so I reached out to them and they were able to do it on a pretty quick turnaround and I think they negotiated pretty well, and that’s pretty overall I’d say 8 out of 8 stars for their work on this.
NASIR: Wow 8 out of 8, that’s pretty high. I would have given 10 out of 8, but I think you’re probably more realistic than I am.
MATT: Yeah, I didn’t know if you met, it was the overall system was too high or the score was too high but it sounds like both.
NASIR: Okay, so let’s get to this call. Obviously, I don’t want to diminish our sponsors, but besides paying the bills, we also need to get to the actual substance of this episode and there’s a lot of substance. The seller is just a piece of work right?
MATT: Like I said previously, there’s just so many issues going on and they can’t really get out of their own way. What was the first thing that came up, I think that the seller was having second thoughts is that what was happening?
NASIR: Yeah, was it the seller? Or actually no, the buyer’s partner, he was even having second thoughts because of just how ridiculous this transaction was getting. I just want to put this call in context. This is the second call, this is a week before closing. A week before closing, the buyer finds out that number one, they may not be able to use the trademark name that they thought they would or the brand that they thought they would. Second is apparently the seller is a horrible boss, that may have been predictable, but that doesn’t help. Then the personnel that they’re using is probably not classified correctly and the buyer basically needs to transfer everyone to employees which means that they’re gonna get a pay cut because of payroll taxes, etc if they keep everything the same. So most likely, they’re gonna have to raise it up a little bit. This is all literally a week before closing and unfortunately, our client had to deal with it, fortunately she had us as attorneys to kind of help her through this because even though that may sound a lot, I think they were all very manageable issues.
MATT: Yeah, and the thing I’ll say about that is all of them were known things prior to the buyer finding out about him and I guess the seller could say we just received this demand letter, but they still knew — I shouldn’t say know, but the name issue was something that existed prior to the demand letter being sent. These are all problems that were pre-existing that our clients finding out about one week before the transaction’s set to close.
NASIR: Right and frankly, this is what happens. I would say it doesn’t usually happen so close to closing and I think that’s more of a testament to the disorganization of the seller not the buyer, but it is very common for the real due diligence, all the real facts to come out after escrow opens so that now, the parties are a little bit more serious in the past, the letter of intent, people are just dancing with each other a little bit, but now it’s like this is serious. We’re actually gonna close this thing. Let’s get to looking really close under the hood. On one hand, it’s a good thing right? We uncovered this because imagine that our client had purchased the urgent care after or I should say before receiving this cease and desist from this health system on the East Coast that had a similar trademark name or a similar name, then it would have been a lot more difficult to negotiate with the seller and so that’s why I think we even begin the call, I think there’s some opportunity here.
MATT: Yeah and just real quick. He mentioned the three issues. He goes from easiest to deal with to hardest to deal with. The part about the employees, she can get over that. I don’t think that’s too much of a concern, then we get into, like you said, the trademark issue and what I thought of when I listened to the call again was what to do if a demand letter or a cease and desist letter received when you’re in escrow, how is that handled? I think in this case, the actual seller wasn’t the one to disclose it to the buyer, it was the physician’s assistant that ultimately did, right?
NASIR: Yeah, that’s kind of weird that the seller instead of contacting the buyer directly, instead gave the letter, basically knew about the letter, had the PA tell the buyer about this which again that seems a little odd, a little passive or what have you trying to avoid, but this stuff does happen. These escrow periods can be very long, 30, 60 even 90 days even more in bigger transactions. What’s gonna happen, you may get lawsuits, you may get certain complaints, you may get certain claims and so usually nothing is triggered. I should say the closing date is the relevant date. We talked about at the beginning of the call, the indemnification clause where things that happen before the closing date is gonna be the responsibility of the seller and vice versa, things that happen after the closing date are going to be the responsibility of the buyer, but just because it’s their responsibility, you don’t also want to be chasing money. Just because it’s their responsibility, doesn’t mean anything automatic in the sense that if you think about a lot of times these indemnifications have a limited value because if a business owner is retiring or this is their main source of income, once they sell the business, they may not have any assets or money to indemnify you anyway even if they wanted to and so doing the due diligence and not just relying upon an indemnification clause is pretty critical.
MATT: We did a couple things here. We assessed the general possible damage or I guess the cost of rebranding in this case, and then 2, we suggested doing the post close holdback of funds and really trying to find a way to mitigate the potential damage for the buyer.
NASIR: And that’s what we do, when something comes up, we do a risk assessment and then also go through best and worst case scenarios, In this case with the trademark, the worst risk is that somehow this company in the East Coast gets really aggressive in their in their litigation with using the name and so they sue for trademark infringement and they could very well sue both the buyer and the seller because from their perspective, they may not know who’s who even if the buyer stops using the name and changes their name because once you’ve been friends, there may be some potential liability, but that’s worst-case scenario. I think the more likely issue is can you use this name that she was purchasing in a long-term or do you need to change it? And if you need to change it, how much does that cost to change it? Because there’s nothing free about that. This Urgent Care had signage, it had of course their intake paperwork and had a billboard, it had marketing material and all that. The assumption is when you’re buying an existing business that you’ll be able to utilize that initial investment in branding to do that. I recall the logo was good, it was a good brand so after we assessed, think in the call, I don’t remember where we landed in the actual document or what the parties agreed to, but what we were thinking ballpark was about $30,000, that’s a substantial decrease in purchase price. The reason why we presented it as a hold back, it does add a little more complication, probably others may say more than necessary, but given that the reason our recommendation — I don’t think this is this played out in our call, the seller had a personality for which if you ask for a discount, it would have been a lot more difficult to get rather than hey this is how much it’s gonna cost to rebrand. We don’t know if we’re going to rebrand, but give us the option to do so and that way there’s some connection to the value that you’re decreasing the purchase price. We felt that it was a little bit better too for the seller to actually take that revised offer.
MATT: Right, let’s look at the alternatives like you said, one would be to try to discount the purchase price which we just didn’t seem like was a viable option, or 2, would just be do you know I guess ignore it and roll the dice which the buyer didn’t really want to d. Like you said, there’s definitely cost that comes with rebranding and they don’t want that uncertainty either. This was kind of the compromise between the two options which ended up working well for both sides I think.
NASIR: Right and so let’s talk about this issue with the relationship between this seller physician and their employees. I think you mentioned this, there’s some positives and negatives to this from a risk assessment. The positive is that okay, you come in, you’re coming in as a hero, you’re the new employer, you’re gonna treat them right and so forth, so you’re gonna mitigate those issues. The downside is that sometimes you don’t know what are some underlying issues because if you have a lot of turnaround in staff or you’ve developed a reputation in the community, then you have to work against those that are tied to kind of fix that reputation. From a risk assessment, it wasn’t a huge deal. It’s the same thing if you’re buying any business, there’s a separation between closing. Your hope is that anything that the seller created before, it can be fixed by creating new management and new rules and bringing a new life to a business.
MATT: You assume there’s always going to be — we’ve mentioned this plenty of times, there’s always gonna be some transition, some learning curve entering as the new owner and whether that’s good or bad depends on their circumstances. We felt pretty confident that the new owner here is going to be an overall positive both for the morale of the employees and just things moving forward. There’s no right answer or I guess there’s no way to answer this question without looking at the specifics of the actual transaction, but in this case like we said, it’s overall a plus.
NASIR: Right, and then I think the last issue was the employee versus independent contractor issue. Matt, you deal with this all the time in fact. This is a pretty common issue in general for everybody, but it seems like this is an issue that you personally have to deal with quite a bit with just our regular practice right?
MATT: Yeah, definitely particularly in California where the laws shifted quite a bit at the beginning of 2020, but yeah I would say, just kind of ballparking, 90% of new clients, I don’t want to say they have a definite misclassification on their hands, but there’s at least a concern if there’s not an outright misclassification. It’s just difficult to avoid unless you’re going to just come in and make everyone employees and not have to think twice about it. There’s obviously costs involved with that as well from the employer side and that’s why you don’t see all companies do it, but there always seems to be some sort of misclassification issue. I guess in this case, it was a little bit more drastic in the sense that it seems like everyone was classified as an independent contractor.
NASIR: Right and this is more of a tidbit for the seller because we don’t want the seller to get in trouble, that’s not our purpose here, but when you make a mistake in classification and you change from an independent contractor to an employee, it begs the question from an employee’s perspective, okay I’m doing the exact same thing, now I’m being paid as an employee and I’m getting paid less because of taxes, what’s going on here? And it could really bring up some issues. Then in this case, what if for example it didn’t happen, hopefully I’m not giving anything away, but what if the buyer ended up terminating some of the employees or should I say not hiring some of the employees? Now, they’re gonna know that all their colleagues have been transferred to W2 and those people that haven’t been hired and are now independent contractors. They may go to the unemployment office and say hey I was just fired, can I have my unemployment? And of course, independent contractors do not qualify for that and so this actually may raise an issue for the seller. What we’ve done in the past when we transitioned from an independent contractor to an employee with some of our clients and so forth, it’s always a very delicate position. In this case, we’re only representing the buyer and so we don’t really have a particular concern on how that transition is occurring only that from our client’s perspective to make sure that they’re following the law and that it doesn’t raise any issues in that transfer for our client.
MATT: It’s a good way to put it, and at the end of the day, it’s essentially the seller’s problem here, but it’s always something to keep in mind on the buyer’s side as well because it’s something that’s gonna have to be dealt with and like we said before, you don’t know and I guess the terminated a contractor/employee, they don’t really know who to go after either and sometimes they’ll just try to go after the buyer in this case, but I guess my point is this, the previous acts of the seller are gonna trickle down to the buyer in some fashion most likely, so it’s just something to keep in mind. There’s no way for her to avoid it in this sense because the damage is already done, but you know it’s one thing and like I said, there’s a grab-bag of problems that’s gonna have to be dealt with.
NASIR: This is our sixth episode, we have two more episodes left. This transaction is coming to a close, or is it? We ended at a period where right before closing, let’s see what happens next. In the meantime, what I would suggest to all of you is to stop whatever you’re doing — well, that doesn’t make sense because you’re listening to this podcast. Stop whatever you’re doing except listening to this podcast, go to the websites for which you listen to our podcast, whether it’s iTunes or some other podcast player, whatever, and leave a very, very, very, very, very positive review and comment and that is your obligation to us as we are obligated to provide you this content.
MATT: Just one ask and I think that’s a pretty reasonable one.
NASIR: Right, and if you don’t, then well I don’t like you anymore. I used to like you. Of course, we’re also very active on social media and on all the typical Instagram, Facebook, etc. Definitely reach out to us if you have any comments or questions or you can email us at firstname.lastname@example.org.
MATT: Many ways to reach us.
NASIR: Very good. Well, two more episodes left. Thank you for joining us.
MATT: Yup, keep it sound, keep it smart.