Work in progress and transition issues when buying a business are sometimes difficult issues to resolve, but they need to be reconciled before escrow closes. A blog reader emailed me the following question about this process:
"I want to purchase a bakery. If the seller has accepted deposits from customers for future work that would occur after COE, what should I stipulate in the offer? I am afraid that in the case of a speciality cake like a wedding cake, the person who originally contracted with the seller would be distraught to learn that there is a new owner and all cake designers have their own style, however standard. Should I ask the seller to contact all people they have contracted with to notify them of the sale or would a publishing of notice of sale in the paper as required by escrow be sufficient? Another issue is that a 4-week escrow period is not much time to contact a bride and tell her that the person who was going to do her cake will no longer be doing it (doesn't give bride much time to find another baker). I'm afraid of legal issues that may arise from this situation. I did speak with one seller who had listed on your site thru a business broker and the seller wanted to keep the deposits, have me collect the remaining balance then make the cakes. Any advice is appreciated! Thank you."
Below is the feedback on this particular situation I received from various business brokers, agents, and advisors throughout California:
From Ken Oppeltz, at VR Business Brokers in San Diego:"From a practical and non-legal point of view (read contact your attorney), I do not believe that most buyers or sellers feel obligated to contact their customers to advise of a pending sale. Certainly cake decorating, that is specialized and artistic in nature, is different than a postal store. However, assuming that you have the skills to "fill the owners shoes" I would see no need to advise the customers.
Deposits are an entirely different issue. Of course, everything is up for negotiation, but usually a common ground is found using the common sense approach. The seller cannot expect to keep "profits" from cakes that you will make, deliver, and incur all costs. However, it is entirely reasonable to allocate a portion of the deposit towards the sellers "costs" in obtaining that order. For example, lets say the total order was $600 and the seller had collected a 50% or $300 deposit. Perhaps it might be reasonable for the seller to credit $200 of the deposit to you at closing, thus keeping $100 for his efforts. Every situation is different, but I am sure the seller spent time with that bride designing the cake and certainly he spent money on some advertising that brought that bride to his bakery. I think it is reasonable to compensate for the work and cost involved up until the time of closing.
In the end, a deal needs to fair and equitable and both parties need to feel good (or equally bad) about the deal."
Advise from Ken Sherman at Quantum Business Solutions Network, Inc:
"The deposits represent an asset of the business which should be transferred to the buyer. In the event that no services have been rendered through COE toward making the cakes, then the seller would not be entitled to any portion thereof. In the offer, we would suggest that you negotiate for a Management Assistance – Training period which would cover the period of time during which it would take to fulfill all of the pending wedding cake orders. In the event, the Seller was available for guidance, etc., we would further suggest not alerting the customers of any change of ownership and seek the Seller’s design and input advice as necessary for each cake."
From Joe Sandbank at the Law Office of Joe Sandbank:
"This is a valid concern because these customers (especially if there’s a “Bridezilla” in the mix) could conceivably argue that they contracted for a personal service from the seller and didn’t just purchase a cake from the business.
Normally, the purchase agreement will provide that the seller will provide the buyer with a certain amount of training in the business. Typically, a relatively short period (a few weeks) of training is included in the price. Often, the buyer contracts with the seller for additional training/consulting for a much longer period for additional compensation.
Here, one possible solution would be requiring the seller to prepare the cakes for all customers that have already submitted deposits. This might occur during the free training period, during an extended consulting period, or on an as-needed basis in the future. If the seller requires compensation for this agreement, perhaps you could agree to let him keep those deposits, agree to pay a per cake fee to him, or agree to split the income from the project. This way, the customer gets what the customer expects.
If this solution isn’t feasible because the seller won’t be available when the cakes are due, I do recommend advising affected customers immediately and offering refunds. I suspect that very few customers will request refunds, and you’ll be perceived as a business owner that cares about his customers."
From Orange County Business Broker - Christina Krikorian:
"Any deposits the seller collected for future work should be reimbursed to you through escrow. If the clients decided that they are not comfortable proceeding with you, now you can return their deposit. The seller should have no issue with this because no work was performed yet. After you take over I would call the people who have ordered the cakes & tell them that you are the new owner. Offer to show them pictures of your work & do your best to sell yourself but if they don’t feel comfortable then refund them their deposit. Best of luck to you in your new venture!"
From Ron Hottes at Business Team Southern California:
"1. Notify the customers that have deposits that the business has been sold and that a new “designer” will be doing their cakes. Invite the customers in to see the work of the new designer and see if the new designers work will be acceptable. If it is, bake the cakes and deliver them, if it is not, return the deposit with an apology. Obviously the Seller should transfer the deposits to the buyer. If the customers are not notified and the new designer delivers unacceptable cakes in the eyes of the customer, it could hurt the reputation of the bakery and the new owner.
2. My second solution (and preferable) would be the to have the Seller stay on a part time basis to complete all existing orders and offer to share the revenue with the buyer."
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