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Avoiding Legal Hazards When Starting or Buying a Business

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New York City business attorney Rubin Ferziger says “2008 is a terrific year to go into business for yourself. The key to success is setting up your venture using proven business principles. Just remember to avoid the legal pitfalls when you do.”

Ferziger has seen new businesses fail for all sorts of reasons in his years of practice. There are numerous potential dangers for startups. Recent cases and government regulations have created several legal trends that impact many companies. If you don’t have effective strategies for dealing with these issues, your new business can get into trouble quickly.

Ferziger has published a special free report exclusively for those who want to work for themselves. How to Successfully Start or Buy a Business in 2008 details 25 specific strategies new business owners can use to succeed. Here are a few of them of them:

1. Buy or begin with success. Avoid buying a business that is losing money, or starting one in an industry that is trending downwards. Choose an industry that has been on an upswing for at least three years. Also, pick something you know. Your chances of success are much higher if you start or buy a business you have experience in. Try it out before investing your money. Get a job in the industry, even if it’s a part-time or temporary position. Being in business is like being married. You don’t know the complete story until you live together.

2. Your best employees can become your deadliest enemies. Good employees who put in extra hours can end up being your greatest source of liability. If your people work overtime, have a policy that requires written permission for doing so. Put an accurate system in place for consistent daily recording of hours and payments. If you pay bonuses, have a clear performance-based formula to determine amounts, and apply it fairly to all eligible employees.

The Federal Fair Labor Standards Act now imposes greater restrictions on employers with regard to overtime pay. This has recently become a hotly litigated area. If your business is in violation, you can be liable for significant fines and back wages. They can sink a small enterprise.

3. If the owners are thieving, plan on them deceiving. If you are interested in buying a business and find a pattern of theft or dishonesty by the owners, walk away. Some of the common danger signs include: tax evasion, royalties or license fees that intentionally haven’t been paid, deliberate customer overcharges, or any other type of illegal or unethical conduct. If you find these and other types of illegal activities, don’t get involved. Immediately remove yourself from the deal. As a buyer, you may inherit legal and tax liability for prior dishonest conduct of the owner.

4. Know thy partner well. A partnership is only as good as the partner you select. You’ll want to carefully analyze what skills, resources and other attributes each of you brings to the table, and whether your work styles and preferences are complimentary. Have a detailed discussion about whether you share the same goals for the business, and how the work will be divided. Don’t go into partnership with someone who doesn’t put money, or something of equivalent financial value, into your deal. This decreases the chance of a partner suddenly walking away from your business, leaving you with all the responsibilities. Whatever agreement you come to, put it in writing.

5. Keep your eye on sales. Sales are the lifeblood of any business, and are ultimately responsible for generating the income that pays for everything else. No sales, no business-it’s that simple. Therefore, a major concern is the quality of that revenue stream. Here are six major factors to consider in evaluating sales: repeat business, secondary products and services, profit margins, existing customer base, new prospects, and collection issues.

6. Develop alternate financing. If you’re applying for a loan through a commercial lender, work on developing contingency financing at the same time. That way if you don’t get the loan or don’t like the terms, you won’t be stranded. Put together a list of private financing sources that may be willing to participate in your venture, and start talking to them before you apply for commercial funding. The main keys to convincing potential backers to invest in your company are clearly showing: how you intend to make money, share profits, limit their risk, and return their capital.

7. Do a background check on each new hire. In 2008 and beyond, the job market is likely to become even more competitive. Overseas outsourcing to reduce labor costs is a growth phenomenon. Skilled foreign employees can do work at a fraction of what it costs to employ people locally, and entire industries are rapidly awakening to that fact. If competition for jobs becomes tougher, the incidence of employee misrepresentation on past work experience and accomplishments can increase.

Have a professional background-checking agency to do a public records search on each employee you hire. Insist on a drug test, and consider psychological and aptitude testing. Also, new regulations require employers to obtain and check the validity of all personal identification and right-to-work documents. If you don’t, as an employer you can be arrested and suffer the consequences of a criminal conviction.

Rubin Ferziger is a commercial and residential real estate attorney in New York City.

For more information and to receive the entire How to Successfully Start or Buy a Business in 2008 report visit: www.ferzigerlaw.com.

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