The New York Freelance Isn’t Free Act

On November 16, 2016, Mayor de Blasio of New York City signed into law the Freelance Isn’t Free Act (the “Act”). The Act is important legislation and has far reaching implications for anyone who uses freelancers in New York City. Freelancers are independent contractors under the Act.

The Act gives freelancers the right to sue for double damages if the hiring party does not give them (i) a written agreement that contains certain required provisions; and (ii) they are not paid by the date stated in the agreement. If no payment date is stated in the agreement, then the freelancer must be paid within thirty (30) days after they complete the services.

If you use freelancers who live or work in New York City, the Act applies to you, even if you are headquartered outside of New York.

Who is covered by the Act?

The Act defines a “freelance worker” as  any single person who is hired as an independent contractor to provide services for compensation. A freelancer is only a single person. This is true even if the freelancer does business as a limited liability corporation (“LLC”). The LLC must be a single member LLC. If it has more than one member, it is not a freelancer under the Act.  There are three exclusions from the Act: sales representatives, lawyers and medical professionals.

What provisions must the contract include?

The Act covers any contract between a freelancer and a hiring party that has a value of $800 or more. If the Act applies then it requires that the contract must be in writing. The contract must include the following provisions:

1. the names and mailing addresses of the parties;

2 a list of services to be provided;

3. the “value of services to be provided;”

4. the rate and method of compensation; and

5. the date when the “hiring party” must pay the compensation or the “mechanism by which such date will be determined.”

It is common in the freelance community that the understanding between  the hiring party and the freelancer is documented by emails or oral statements.

In view of the requirements of the Act, email “agreements” should no longer be used. Formal independent contractor agreements that comply with the Act must be used. The City will be posting free examples of agreements that comply with the Act.

What are the payment obligations under the Act?

The Act provides that compensation shall be paid to the freelancer on the date payment is due under the contract.  Payment must be made no later than 30 days after completion of the freelancer’s services under the contract if the contract is silent on a payment date.

Disputes frequently arise as to when the freelancers services are deemed to be complete. The freelancer may think that the services are complete and that the specifications in the agreement have been met. The hiring party may think that the services did not meet the specifications or were delivered late. Sometimes the late delivery will harm the hiring party.

All independent contractor agreements must clearly define when services are deemed to be “complete.” If there are quality specifications and delivery requirements, they should be clearly spelled out in the agreement.

The Act does not include a provison that the hiring party can refuse payment or offer partial payment if the worker has not satisfactorily performed all of the services under the agreement.

No intimidation of freelancers

The Act also provides that, once a freelancer has commenced performance under the contract, “the hiring party shall not require as a condition of timely payment that the freelance worker accept less compensation than the amount of the contracted compensation.”  Put simply, this means that the hiring party cannot intimidate the freelancer into accepting less money to receive any money at all under the agreement. Hiring parties may not harass or discriminate against freelancers.

Freelancers have the right to file complaints under the Act against hiring parties. There are procedural sections in the Act which describe the process to be followed.

What are the penalties for non-payment, partial payment, or late payment by the hiring party?

The Act allows a freelancer to bring a civil action for damages if he or she is not paid the full amount due under the contract or is not paid in the time required under the Act. If the freelancer wins, he or she will be awarded damages and reasonable attorney’s fees and costs.

If the freelancer wins, then he or she is entitled to receive twice what they are owed. This is true even if there is a legitimate dispute as to whether the services where completed on time, in a satisfactory manner or even at all.

What happens if  no written agreement is provided upon request?

If the hiring party fails to enter into a written agreement upon request and that meets the requirements of the Act, the freelancer is entitled to receive statuatory damages in the amount of $250.

Some problems with the Act

Even though the Act was written to protect freelancers from abuse, it has  problems. The most important is that the contractor may be awarded double damages for failure of the hiring party to pay for services on a timely basis even if there is a good faith belief that the services were not performed in a satisfactory manner or if the agreement is breached by the freelancer. It appears that the hiring party does not have a defense to the double damage penalty even if he can prove a good faith reason that he was not obligated to pay the money in question.

What should you do if you hire freelancers in New York?

Here are the key things that you need to know:

1. You must understand and comply with the Act. The Act was written to protect freelancers and contains penalties that you must pay if you violate the Act.

2. You must have a written independent contractor agreement. It must have the five items required by the Act.

3. You should pay the freelancer the compensation that is due under the agreement when it is due. It is a good practice for the agreement to provide that the freelancer must provide the hiring party with an invoice when it has completed the services. This will clarify when the obligation to pay is triggered. The contract should provide that the hiring party must pay the invoice within a certain number of days, such as 30 or 45 days.

4.  To protect the hiring party, the contract should provide that the hiring party is not required to pay the freelancer until he or she has fully performed the services required under the agreement, and the hiring party has actually accepted the services. There should be a procedure whereby the hiring party can reject the services and the freelancer must resubmit the services until they conform to the contract.

5. Hiring parties may be subjected to double damages (as well as statuatory damages, civil penalties and attorney fees) if they violate the Act.

Resources

Here is the link to the Act:

http://legistar.council.nyc.gov/LegislationDetail.aspx?ID=2530972&GUID=61F8754B-80AF-493E-895E-D6D17209776E

Commentaries on the Act:

http://bradlander.nyc/news/updates/first-of-its-kind-legislation-will-crack-down-on-nonpayment-epidemic-facing-nyc-s-13-mi

http://www.newyorklawjournal.com/id=1202771652331/Freelancer-Bill-Is-Smart-Law?mcode=1202615325582&curindex=0&curpage=1

Yoga Vida NYC Wins- A Ray of Light in the Darkness of Independent Contractors?

The Background

On October 25, 2016, the Court of Appeals of New York delivered its opinion on In the Matter of Yoga Vida NYC, Inc. v. Commissioner of Labor. The Court overruled the Unemployment Insurance Appeal Board (the “Board”) that had affirmed the Commissioner of Labor’s decision that Yoga Vida’s teachers were employees. The Board had decided that Yoga Vida exercised enough control over the teachers’ work to justify a finding of an employment relationship.

The Court found that the Board’s decision that the teachers were employees was not based upon “substantial evidence.”  The Court held that Yoga Vida’s teachers are not employees within the meaning of New York’s Unemployment Insurance Law.

Four reasons why this opinion is important

The Court’s opinion is important for several reasons. First, this is the first opinion of an appellate court I have seen that has considered the classification of teachers by a yoga studio. It is rare for a classification case to reach the appellate courts and even more rare for the case to involve a yoga studio. Most of these cases are resolved at the administrative level.

Second, the yoga studio won. Most studios lose their tax audits at the administrative level and pay the taxes and fines rather than appeal the decision to the court system.

Third, we have guidance from a New York appellate court on facts that support a finding of an independent contractor relationship. If a New York studio structures its relationship with its teachers the same way that Yoga Vida did, it can rely upon the Court’s opinion to argue that its teachers are independent contractors.

Fourth, the New York  Department of Labor has been very hostile toward yoga studios classifying teachers as independent contractors. If we are fortunate, this opinion may cause a sea change in New York. The Department may decide to reduce its audits of yoga studios because it may feel that its chances of winning an audit have decreased.

It’s precedent for New York only

Stare decisis is the doctrine of legal precedent. Courts rely upon stare decisis when the same case before them has been decided by another court. Courts will use the prior ruling as a guide on how they should rule. Generally, courts will respect the previous ruling and rule the same way. This is not always true because the facts between two cases are rarely the same.

This opinion is precedent only in New York. It will have little value outside of New York. If you are audited in another state and you cite the Yoga Vida case as precedent to support your position, a court will give it little, if any, weight.

However, if you are a New York yoga studio and you are audited, courts in New York will give this opinion a lot of weight.

How did Yoga Vida win?

Yoga Vida has two classes of teachers: “staff instructors” and “non-staff instructors.”  The staff instructors are employees and the non-staff instructors are independent contractors. The Court found that Yoga Vida did not exercise control over the non-staff instructors and therefore, they were not employees.

Although the determination of whether a worker is an employee or an independent contractor is complicated, the basic test is whether the business exercises “control” over the worker. There are many federal and state tests to determine whether practices that regulate worker behavior constitute control. The more control the business has over the worker, the more likely the worker will be an employee. The less control it has over the worker, the more likely it will be an independent contractor.

In reaching its decision the Court found that Yoga Vida did not control the non-staff instructors because they:

1. made their own teaching schedules;

2. chose how they wished to be paid (i.e., hourly or on a percentage basis);

3. could teach anywhere they wished and market their classes at other studios to Yoga Vida students; and

4. were not required to attend any staff meetings or trainings.

The staff instructors, on the other hand, were subject to non-compete restrictions and were required to attend staff meetings and trainings. They were paid for teaching even if no students attended their classes.

The Court rejected the Board’s finding that Yoga Vida controlled the non-staff instructors. The Court called these factors “incidental control” that did not show enough control to establish an employment relationship. These factors were that Yoga Vida:

1. inquired if the instructors had proper licenses to teach;

2. published the master schedule on its web site;

3. provided the studio space for the classes;

4. determined the fee to be charged and collected the fee directly from the students;

5. provided a substitute instructor if the non-staff instructor could not find a substitute; and

6. received feedback from the students.

The Court rejected these incidental factors as insufficient to constitute control and said the requirement that the work be done properly is required equally of an independent contractor and an employee.

Guidance for  yoga studios in New York

If you are a yoga studio within New York and structure your relationships with your teachers the same way that Yoga Vidya did and are audited, you now have legal precedent to strengthen your case.  However, this case is not a silver bullet. If the facts of your case are materially different from those in the Yoga Vida case or if you are otherwise found to have exerted “control” over your teachers, you can still lose an audit.

Guidance for yoga studios outside of New York

The Yoga Vida case is not precedent if you are located outside New York and are audited. However, the federal and the state tests to determine control are similar. If you use the same structure as Yoga Vida, it will strengthen your case in general. I think it is a good practice to classify your teachers separately and to treat them differently the way Yoga Vida did. For those teachers whom you are classifying as independent contractors, you should exert as little control as possible over the way they perform their jobs. You want to build your best case so that, if you are audited, you are in a strong position to settle on favorable terms or to win.

Resources

Light on Law: A Guide to Independent Contractors and Employees for Yoga Studios and Wellness Businesses (Second Edition)

Gary Kissiah Light on Law Newsletter

 http://garykissiah.com/light-on-law-newsletter/

 

 

Don’t Be a Health Club!

A New Regulatory Problem For Yoga

As yoga has become a mainstream practice and turned into a multi-billion dollar industry, many regulatory agencies have taken note and are regulating yoga. Both the IRS and state taxing authorities are auditing yoga studios over the classification of teachers as independent contractors, state education boards have sought to regulate yoga teaching programs as secondary education schools, local sales taxes are being imposed on yoga studios, and ASCAP is collecting royalties from studios for performing music during yoga classes.

There is a new regulatory concern that may affect yoga studios across the country. Almost all states have laws that regulate the health club, gym and spa industry (“Health Clubs”). Health Clubs have a history of using unfair membership agreements, engaging in deceptive trade practices, and going out of business (which has caused their members to lose their advance payments).

Consequently, most States have passed laws that regulate the agreements that Health Clubs require their members to sign and require Health Clubs to post bonds to protect members in case they go out of business.

These laws require that specific legal language must be contained within membership agreements. They also prevent certain kinds of provisions-such as waiving legal rights-from being included within membership agreements.

New York has sought to impose its Health Club laws on yoga studios. Since New York is seeking to regulate yoga studios as Health Clubs, there is a risk that this will spread to other states. We have seen this occur in other regulatory areas.

Regulation in New York

In New York, the Attorney General sent a letter to a yoga studio asserting that it was in violation of the New York Health Club Services Law (the “Law”).  The Law defines a “health club” as a business offering instruction or facilities for the development of “physical fitness or well being.” The Attorney General took the position that the yoga studio was a “health club” within the meaning of the Law. As a “health club,” its membership agreement must comply with the requirements of the Law.

These requirements are: (i) posting a bond in case the Health Club goes out of business; (ii) including language in a membership agreement that paying the full amount in one payment is risky, (iii) giving members the right to cancel their agreement for a three day period; (iv) requiring that certain language be in bold face type; and (v) prohibiting provisions that waive a member’s legal rights.

There are civil penalties of $2500 for each violation.

If a “health club” loses it case before the Attorney General, it must also send a notice to its members that it has revised its agreement to comply with the Law and that the new agreement will be in effect in the future.

My Argument to the Attorney General

The Attorney General of New York permitted me to file a brief that argued yoga studios are exempt from the Law.  I am happy to report that the Attorney General was convinced by my brief and we won the case. However, it is important to note that this decision was based on the specific facts concerning the business of this studio. Other studios with different business models in New York may violate the Law. Also, studios located in other states may also be in violation of the local Health Club laws.

I have outlined the arguments that I made to the Attorney General below. I am providing this so you will have some insight into how you might present your case if you are contacted by the Attorney General in your home state. Naturally, you should hire a lawyer, but this should give you a head start on building your case!

Here is my argument:

1. I defined “yoga” as a spiritual rather than a physical practice. I relied upon the Yoga Sutras as authority. In Yoga Sutra 1.2, Patanjali defined yoga as the cessation of the fluctuations of the mind. Yoga Sutra 1.3 says that, when the mind becomes still, one becomes unified with the true Self. Thus, the principal concern of yoga is the transformation of consciousness. It is not physical fitness. I observed that, out of the 196 Yoga Sutras, only three referred to a physical practice. I also noted that “asana” (the basis for physical movement in classical yoga) refers to “seat” within the context of a meditation practice.

I quoted Dr. David Frawley, Nayaswami Gyandev McCord and Swami Ramananda who are included in the discussion of yoga on the Yoga Alliance website. All of these experts view yoga as a spiritual discipline to strengthen the point.

2. I compared my definition of yoga with quotations from the offerings of several gyms, health clubs and spas in New York City which all emphasize physical training, physical fitness and sports. This yoga studio does not offer the same types of classes or services as gyms, health clubs and spas

3. The Law defines a “health club” as a business offering instruction or facilities for the development of “physical fitness or well being.” This includes such businesses as health spas, sports, tennis, figure salons, health studios, gymnasiums, weight control studios, martial and “any other similar course of physical training.” By definition, a yoga studio is not within the list of businesses that are “health clubs.” I did make some technical arguments to show that this yoga studio is not in the business of developing “well being.”

Based upon my definition of yoga as a spiritual discipline, I argued that yoga studios are not “health clubs” within the meaning of the Law.

4. I  found surveys of the Health Club industry that the Attorney General and the City of New York had conducted. None of these surveys included any yoga studios. This made it clear that, based on precedent, they did not consider yoga studios to be Health Clubs. The New York State Department of Taxation and Finance also published some rulings that did not include yoga studios within the definition of Health Clubs.

5.  Based on an analysis of the Law, defining yoga as a spiritual rather than a physical practice and relying upon precedent, I concluded that the yoga studio did not violate the Law because it is not a “health club” nor does it enter into “contracts for services” within the meaning of the Law.

I want to emphasize that this studio is small and devotional. It does not offer any hot yoga, power classes, spinning classes, pilates or other classes that emphasize the fitness side of yoga. It is not a combination of a yoga studio and a gym.  If your studio has these types of offerings, it would be much harder to argue that you are not a “health club”.  Of course, this will depend upon the laws of the state where your studio is located.

Action Item

I recommend that you run  a search in your home state to see if it has any Health Club laws. The search can be as follows:  “_______ (name of your state) health club regulation.”

If you state does not regulate Health Clubs, then you are in luck.

However, if your state does regulate Health Clubs, they you can either (i) hire a lawyer to advise you if you are subject to the laws; or (ii) read the law and make your own determination.

The benefit to using the lawyer is that he or she can advise you if your studio is covered by the law. If you are covered, you will need the lawyer to amend your membership agreement so that it contains the required language and complies with the law. If you are not covered, then you do not need to do anything at all.

If you decide to make your own determination, take the most conservative view. You may find that the law is ambiguous as to whether you are covered or not. In that case, the safest approach is to comply with the law. It may be fairly simple to include the required provisions in your membership agreement and they are designed to protect your members anyway.

Light on Law Newsletter

Please sign up for my Light on Law newsletter so you can keep on top of current legal issues in the yoga and wellness world. Please click here to subscribe:

http://tinyurl.com/clakwyn

Light on Law Books and Other Resources

My Light on Law series of books provide yoga studios and teachers with everything they need to know about the law and yoga. These books also include large collections of legal templates. For information about these books and my other offerings, please visit my website:

http://garykissiah.com/#top

So You Want To Buy or Sell a Yoga Studio? What You Should Know!

As the yoga world has expanded, I have seen an increase in purchases and sales of yoga and wellness studios.

Some owners want to sell their studios because they are moving, their interests have changed, or running a yoga studio proves to be a much harder and stressful business than they imagined. Also, as the number of yoga studios has increased, so have competitive pressures and conflicts between yoga studios.

On the other hand, others are interested in purchasing existing studios. They fall in love with the practice or the lifestyle, or want to dedicate themselves to service through yoga.

Their are many advantages to buying a pre-existing studio. The new owners can step  into a lease, and acquire pre-existing relationships with a student and teacher community. The yoga supplies and office equipment have been purchased, the studio has been built out and software systems such as Mind Body have been set up. Many owners view buying an up and running business as being easier than building a business from scratch. Of course, it is not all unicorns and rainbows, and there are many potential problems that may arise from buying an existing business.

What are the legal and business issues that both buyers and sellers should consider? Be mindful that the interests of a buyer and a seller are very different. The seller wants to receive the highest price and the avoidance of future liabilities coming from the studio. The buyer wants to pay the lowest price and for the seller to protect the buyer from future liability. This article will present both sides of the discussion.

1. Asset or Stock Sale?

The first issue is whether the sale will be an asset sale or a stock sale. If the transaction is an asset sale, then the seller is selling a specific list of assets of the business. The liabilities are not sold with the business, and the seller remains responsible for the liabilities. In some cases, the seller may retain a few specific assets or transfer certain liabilities if the buyer agrees. If the seller owns the business through a legal entity such as a corporation or a limited liability company (“LLC”), the seller will keep ownership of the entity. It will not be transferred to the buyer.

If the transaction is a stock sale, the legal entity that owns the studio is sold to the buyer. If a corporation owns the studio, all of the shares of corporate stock will be sold to the buyer. If a LLC owns the studio, all of the membership interests in the LLC will be transferred to the buyer. It is possible for the seller to retain shares of stock or membership interests such that the seller becomes a minority owner after the transaction, but this structure would be rare in the yoga world.

In a stock sale, the buyer takes the entire business. This means that the buyer purchases all of the assets and liabilities of the business. The seller would not be responsible for the liabilities of the business after the sale closes.

This decision can involve complicated tax, accounting and legal issues. I recommend that you consult with your accountant or lawyer in making this decision.

2. What Are The Assets and Liabilities?

Under either structure, it is important that the seller is able to accurately account for all of the assets and liabilities of the business.

A list of all assets being sold must be prepared so that they can be legally transferred to the buyer. Assets include the yoga props and equipment, office furniture, studio art, boutique merchandise, other tangible assets, accounts receivable, customer and student lists, website and domain names, social media accounts, cash, and intangible assets such as intellectual property and goodwill.

All of the liabilities must be understood so that they will be either conveyed to the buyer or retained by the seller. Liabilities include such items as the lease, promissory notes, account indebtedness, contingent liabilities, tax liabilities, employee or independent contractor liabilities, and contractual obligations and liabilities. Any contingent liabilities such as lawsuits or tax audits must also be identified.

This shows that it is important that all yoga studios keep accurate accounting records. It will help you keep your taxes straight and will be important if you ever decide to sell your studio.

3. The Letter of Intent

I recommend that the buyer and seller prepare a letter of intent. This is a simple letter agreement which sets forth the important points about the proposed sale of the business. It is written in plain English, and does not contain legal language. It is designed to help both parties identify, discuss and resolve all of the issues.

Here are the points that the letter of intent should cover:

a. Is the sale an asset sale or a stock sale?

b. If it is an asset sale, what are the assets of the business? Are any assets being excluded from the sale?

c. If it is a stock sale, what type of legal entity does the seller own? Is it a corporation or a LLC? What State is it organized in, and how many stockholders or members does it have? How many shares or membership interests are issued and outstanding? How many shareholders or members does it have? Is it in good standing in the State where it was organized? Has it filed all of its federal and state tax returns?

d. What are the liabilities of the business? Is the seller retaining any liabilities (under either structure)?

e. What is the purchase price of the business?

Valuation of small businesses is very difficult because there are few comparable sales that can be used as guidance. It is “fuzzy math.” Generally, the calculation is based on net cash flow. This could be 100% of net cash flow or a multiple of net cash flow. Net cash flow is usually averaged over a several year period.

There is also a component of goodwill in valuing a small business. This is an intangible asset (as distinct from a tangible or physical asset), but it does have value in a sale. Goodwill could be the brand name of the studio, the reputation of the owners, the value of the yoga community, the length of time that the studio has been in business and similar factors.

Another method is an asset-based valuation. This is a straightforward method in which the value of the business is determined by the total value of the company’s tangible and intangible assets.

The amount of the lease payments should also be considered because it is a significant liability that the buyer is assuming.

I have done transactions in which the price was based on the fair market value of the studio’s physical assets plus a small amount for the goodwill. The seller was primarily interested in transferring responsibility of the lease to the buyer.

f. How Is the Purchase Price Paid?

There a few options: all cash, cash and a promissory note, and cash and an earn-out.

Sometimes the buyer cannot afford to write a check for the full purchase price of the business. Sometimes the buyer pays a portion of the price in cash and the balance in a promissory note. The note should be secured by the assets of the business.

Cash with an earn-out means that the buyer makes an upfront cash payment and then pays the seller the balance of the purchase price by giving the seller a percent of free cash flow or a royalty payment each year. That way the buyer pays the purchase price over time.

g. Post-Closing Duties of Seller

Is the seller willing to help the buyer with the business after closing the sale?  Is the seller willing to help transfer the business in an efficient and elegant way? This could mean participating in an announcement to the student community and working with the teachers to help them feel comfortable with a change in ownership. It may also mean that the seller is willing to be available for a certain period of time to teach the buyer about running the business. The duties of the seller, if any, should be described.

h. Consents

What consents are need to sell the business? The consent of the landlord to assign the lease will almost certainly be required. There may be a need to amend business permits to reflect the change in ownership. These permits are usually issued by the city or county where the business is located. If there are other stockholders and members who are owners in the business, their consent would be required.

i. Due Diligence

The buyer should have the right to examine all of the books and records of the business. This helps the buyer understand the profitability of the business, and all of the assets and liabilities that it may be assuming, and will have effect the purchase price.

j. Non-Disclosure Agreement

A non-disclosure agreement  (“NDA”) is usually signed before the seller gives the buyer the books and records of the business for due diligence purposes.

k. Public Announcements

When will public announcements be made about the sale? Who will make the announcement? What will it say? Will the seller participate in the announcement?

Parties should discuss how to manage the yoga teachers and studio staff. The sale of the business may be quite stressful to the teachers and staff, so it may be a good idea to hold a meeting to answer questions.

l. Expenses

Who will pay the closing expenses? Usually each party pays for its own expenses, including lawyers and accountants. Sometimes legal fees are split between the parties because it may be unfair for one party to pay all of the legal fees.

m. Closing Day

When and where will the closing occur? What documents need to be signed and exchanged?

n. The Purchase Agreement and Other Documents

The parties should agree to work together in good faith to negotiate and sign a purchase agreement, and any other documents that may be needed for the sale to close. Other documents may include a bill of sale, a domain purchase agreement, an assignment of intellectual property,  and a promissory note (if part of the deal).

4. The Lease

The lease is one of the most important issues in the sale of a yoga studio. It is one of the biggest expenses of running the business, and the consent of the landlord is needed to assign the lease.

Landlords often take this as an opportunity to raise the rent or impose other conditions before they will give their consent to transferring the lease to the buyer.

Be aware that the seller may remain obligated on the lease even though it has been transferred to the buyer. This means that, if the buyer defaults in payment of the lease, then the seller becomes liable.

It is a good idea for the buyer to ask the seller to get an estoppel letter from the landlord. This letter states that the seller is not in default under the lease and that the lease is in full force and effect. This will prevent the landlord from making the buyer pay for problems that the seller caused under the lease.

The return of the seller’s security deposit should also be discussed.

It is common for the buyer to ask the landlord to build out or modify the space. If this is the case, a letter agreement should be signed between the landlord and the buyer. It is important that a deadline be included in the letter. I know of situations where the landlord has delayed opening the studio because they were in no hurry to get the construction work done. I have also seen disputes over who pays for the buildout when unforeseen problems arise.

5. Allocation of Purchase Price

When selling business assets, the federal tax rate on gains can vary from 15% (long-term capital gain) to 35% (ordinary income rates). Seller and buyer should reach an agreement on the allocation of the total purchase price to the assets acquired. Guidance from an accountant is necessary to properly allocate the purchase price.

6. The Purchase Agreement

The purchase agreement is the primary document that governs the sale of the business. If it is an asset transaction, it is called an asset purchase agreement. If it is a stock transaction, it is called a stock purchase agreement.

The purchase agreement should be prepared by a lawyer. There are too many legal and business issues involved in the sale of a business to handle without a lawyer.

Here is an overview of the main sections contained within a standard asset purchase agreement:

a. Description of assets to be purchased.

This includes tangible and intangible assets. Tangible assets are physical assets such as bolsters and mats. Intangible assets are intellectual property and good will. If the studio is selling teacher training manuals or trademarks, then an intellectual property assignment needs to be used.

If social media accounts and domain names are to be sold, these should be described and legal mechanisms to transfer these assets should be included within the agreement.

b. The purchase price.

As discussed above, how is the purchase price to be paid?

c.  Excluded liabilities.

These are liabilities that are kept by the seller. These may include general liabilities (i.e., any liability of seller either known or unknown), debts, taxes, violations of law, contractual liabilities, employee liabilities and litigation.

The employee liabilities are important. These include any liabilities relating to present and past employees of the business. These could include employee benefits, liabilities arising under employment agreements, or any liabilities associated with mischaracterizing the employees of the business as independent contractors. These may include: (i) liability for workers’ compensation; or (ii) liability for benefits earned by any employees prior to the closing date; or (iii) any federal, state or local back taxes, penalties and interest.

What happens if a studio is audited after the sale takes place but the audit period covers the period before the sale? Because the IRS and many state taxing authorities are auditing yoga studios over mischaracterizing their teachers as independent contractors  (rather than as employees), this may be an important liability that should be discussed.The buyer may end up having to manage an audit and pay the tax bill if the buyer loses the audit, even though the misclassification occurred during the time that the seller owned the studio.

The seller should reimburse the buyer for these liabilities. What if the seller does not have any money, has moved away or cannot be found?

d. Allocation of purchase price.

As discussed above, buyer and seller should agree upon the allocation of the purchase price with the guidance of their accountants.

e. Right of the buyer to conduct due diligence into the books and records of the business.

f. The date and time of closing.

g. Conduct of business in normal course.

Before the closing date, the seller should operate the business in the normal course. This means that the seller should not do anything out of the ordinary with respect to the business.

h. Lease

The issues concerning the lease as discussed above must be addressed. It is usually a condition to closing that the landlord consent to assignment of the lease. This means that, if the landlord does not consent to assignment of the lease to the buyer, then the buyer does not have to go forward and buy the studio.

i. Representations and Warranties.

The seller must make several representations about the condition of the business. If these representations turn out to be wrong, it must reimburse (or indemnify) the buyer if the buyer suffers a loss.

These representations usually cover: title to the assets, operation of the business in compliance with laws, the condition of the physical assets, and that the sale of the business will not violate any contract to which the seller may be bound.

j. Closing Procedures

The agreement contains a section about closing procedures. These are delivery of the purchase price against a bill of sale of the assets, the assignment of the lease, the consent of the landlord, delivery of any promissory notes, and other similar matters.

k. Indemnity

The agreement should contain a section under which the seller will indemnify the buyer if any of its representations are wrong. Indemnity means that, if the buyer suffers any damages, losses or expenses as a result of the seller’s wrongful representations or other actions of the seller, then the seller has to reimburse the buyer for its losses. The indemnity may also include covering the buyer for any tax liabilities for misclassification of workers during the period that the seller owned the business.

Lawyers often engage in complex discussions around indemnity. The seller wants it to be as narrow as possible. The seller seeks to make it expire in a short period of time, to put a ceiling on the amount of damages that the seller may need to pay and limit the scope of the section. The buyer, on the other hand, wants to do the opposite!

L.Confidentiality

The agreement will provide that its provisions are confidential and that neither side can disclose the terms of the transaction.

M.Bill of Sale

The agreement will include a bill of sale. The purpose of the bill of sale is to legally transfer title to the assets from the seller to the buyer.

N. Stock Purchase Agreements.

A stock purchase agreement is similar to an asset purchase agreement, except there are many representations and warranties made by the corporate entity that is being purchased.

Comprehensive lists of assets and liabilities are also made because the buyer will be assuming everything. There are also provisions that govern the transfer of the stock or membership interests, as the case may be.

7. Post Closing Covenants

The parties may agree to post closing covenants. These could include such things as working together on allocation of the purchase price, the seller’s support of the business during a transition period, a covenant not to compete, and payment of the buyer’s promissory note over time.

8. The Closing

Most closings for the purchase and sale of yoga studios are fairly simple. The parties will have already signed the purchase agreement so all of procedures for the closing will have been discussed and finalized.

At the closing, all of the related agreements will have been prepared. These may include the bill of sale, the promissory note, intellectual property assignment agreements, agreements to transfer domains and websites, assignment of the lease, landlord’s consent and any other agreements.

The purchase price is paid, all documents are signed and exchanged, hands are shaken, and the deal is done!

Conclusion

I hope I have given you some insights into some of the issues that are involved in the purchase and sale of a yoga studio. This is just a brief summary of the many issues that may be involved and there are many nuances to all of these issues. There perspective of the buyer and the seller on most of these issues is very different. As you can see, there is much to consider with respect to the purchase and sale of a yoga studio. It will be important to get the guidance of accountants and lawyers to handle business sales in a competent, fair and professional way.

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Resources

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