Dan
Welcome to sound business insights. I’m Dan Watkins. This episode is about why your business attorney should be a valuable partner. This podcast is not intended to provide legal advice.

Neil
So Dan we’ve covered a lot of topics on our podcast so far, and we have a lot more to go, but today’s topic is really one, which I think surprises a lot of business people, but I can’t stress how important it really is. Your business attorney really should be one of your most valued and trusted business advisors. You’ve always said, Dan, that a business attorney is the part of a core team. Can you tell me a little bit about your philosophy on that?

Dan
Sure. After 35 years of doing this and after thousands of different companies, a lawyer tends to know more about how to run a business than most people would expect. We go to college for seven years, but we learned our whole career from other people’s mistakes and other people’s successes. And so the three core things that I’ve come away with is if you’re going to have a business, you should have an experienced business attorney. You should have a banker (source of finances) and you should have a CPA. Most people are kind of clueless about what a CPA does, not for taxes but for advising you on how to be profitable.

Neil
So from a business formation point of view, Dan, as a partner to our clients, you’re a lot more than helping them pick the right entity. This is about where their business is going to go. It’s about the journey, isn’t it?

Dan
Yes. When they come in, they tell us the story and we ask them questions about what kind of business this is going to be – we want to know from a lawyer’s perspective. Is this a high risk business? Is this a trending business? Is this a highly regulated business, those kind of things. So we can advise. And then we ask about other things and what they’re doing and just to get a gauge on how sophisticated they are or how unsophisticated they are so we can help.

Neil
Sure. And how to structure a business so that if they need to bring people in down the road, it’s set up to do that. Or more importantly, how’s this all going to end ?

Dan
Exit strategy. Yeah. We talk about that. We talk about one year, five year, 10 year plans. We just try to get a feel for where they’re going, what their game plan is. And if they don’t have a game plan, we tell them how other companies have done it and give them a menu of things that they might want to think about.

Neil
We’ve talked about when it’s time to create a company or to consider a transaction, or even to implement a contract, we’ve been doing this for four decades. So we have a host of existing contracts and templates and things that have worked before that we’re drawing upon, right?

Dan
Yeah, we do. We have very old attorneys here. and we also have, we pay a lot for our database and we also have our own database of prior agreements we’ve done over the last 40 years.

Neil
So Dan, one of the things we can help clients with is what’s trending and the changes in an industry. And one example I was thinking of recently is our medical and healthcare clients and how the implementation of management service organizations or MSOs has really changed that business

Dan
It’s changed. And it’s constantly changing. The law is always under review. It seems like for the last 30 years, healthcare providers are under a tremendous amount of regulations. It’s a combination of understanding how insurance companies pay yours. Providers all do business with each other and the government’s concerns that there’s going to be self-dealing or other advantages taken. And also the federal government with Medicare and the Medicaid and who pays for what? So there’s so many regulations. We have to come up with an understanding of what our client’s business is going to be like. And we have to let them know what they can and cannot do, and the best way to do it. And sometimes a management services organization fits their needs.

Dan
And that’s an example of how getting to know our clients up front and then down the road, as things change, we can bring them ideas and say, Hey, have you thought about this? Or this might be a great fit for you.

Neil
It’s breaking it up into categories.

Dan
That’s exactly right. You break up a company that provides healthcare services into different types of categories and expenses. Then you organize it. So they’re in compliance with the law and they’re more efficient and they can compete in the healthcare environment.

Neil
Yeah. And actually provide a better quality experience for their patients at the same time.

Dan
That’s true.

Neil
So another area in the area, formation and startup, Dan that I think most especially entrepreneurs, younger entrepreneurs, don’t really value is the importance of getting the structure of the business, right. The business documents. And I’m specifically talking about the operating agreement or the shareholders agreement. Can you talk to me about the importance of those and the number of clauses versus a download situation?

Dan
Well, they change the law every so many years and then the courts interpret it and they change it. And so we keep up with it every month. but if you just take a bland form from the internet and try to create your own contract and you’re acting like your own lawyer, and if you’re going to invest a ton of money and then skimp on the planning, it’s like taking off on an airplane, not having a flight plan so I think it’s, as they say, it’s better to have a lawyer who provides you with a reasonable fee for services and a game plan than just doing it on your own.

Neil
Yeah. And it’s not about soaking for services upfront. It’s about really you’re investing in our clients as much as they are in you.

Dan
That’s true. We advise starting companies all the time and then later on when they have trouble or they have success and they want to move to the next level, we have a client that we know all about. We have the background about, and we can help.

Neil
So why is it that the operating agreement or the shareholders agreement, why is that document such a critical document?

Dan
Nobody fights unless there’s money to be made or lost. And if you have an agreement that identifies what everybody’s rights and obligations are ahead of time, then you won’t have a fight because everybody will know, but if there’s no agreement, then you’re going on. People’s understanding. And when money is involved, emotions are involved and they’re understanding changes to fit what they want. Right. But if there’s an agreement there, that’s already covered all these, what ifs, then their emotions won’t run wild and they’ll realize they’ll be bound by what they agreed to before. And so you’ll end up without a big dispute.

Neil
So when you sit down with a brand new company, you’ve got a proven template that we’ve used. There are, correct me if I’m wrong, Dan, there’s more than a hundred customized clauses and phrases that we have to work through and decide what’s best for this situation. Aren’t there.

Dan
There’s probably more than that. What we have is a basic templates that we use. We have ones that we pay for that are updated every month. And then we also have templates that we input into agreements based on different factual circumstances. So, and also some that we have to custom make. So once we get a whole big picture idea and we get into the details, that’s when we draft things up to fit the client

Neil
And then like those corporate documents, the next biggest area of contention for a business is the quality of its contracts. You’ve always said, show me a contract. And I’ll tell you if a business is successful or not. Why is a contracts and the quality of their contracts so important to the success of a business, Dan

Dan
Contracts determine how much you pay for materials and labor and everything else. And also contracts determine how much you charge and how much you can collect. If you don’t have an understanding and detailed description of what you’re going to pay other people and what you’re going to get paid written down and thought about, you’re going to have a little bit harder time running your company.

Neil
So Dan, can you gimme an example of a client or even if it’s a mythical client that might have gotten into trouble because they really didn’t take the time to put solid contracts in place

Dan
For purposes of this interview, we’ll call this a mythical client. Good. I have an example of a client,

Neil
A mythical client,

Dan
A while back where we drafted many contracts for them. They had investors, they had services and products and everything they provided and they’re doing very well. Then they introduced a partner and decided not to go and pay the fees for customized contracts. Even though they were million dollar deals, each one of them, they took some contracts that we had with some contracts that another law firm had and they blended them. And then they went along business as usual. And they did well really well. Then the market changed. The economy changed their area of profession got affected and they weren’t able to pay back their investors. So finally, the investors got an attorney involved, looked at the contracts and they were blended. And some of the clauses that are required were taken out. Some of the clauses that shouldn’t have been in there were put in and it wasn’t in compliance with statutory regulations and they went to jail.

Neil
Wow.

Dan
So that’s about as sad of a story as I can come up with. But yeah, these things happen. And in today’s day and age, there’s no reason not to just go ahead and get a relationship with your lawyer, your CPA and your banker. And you can include the cost of that upstart and maintenance into your business plan. And it’ll be pennies on the dollar compared to the risk you’re taking. If you don’t

Neil
And the value that you receive.

Dan
Correct.

Neil
So Dan, another important area, I think that we should focus on why your business attorney is a valuable partner is a lot of times business people don’t understand the types of intellectual property that their company has developed that are really valuable and how to protect it.

Dan
Correct. And the thing is most business lawyers handle some amount of IP, but intellectual property is not all the same. The way you do business is IP. The way you communicate your contracts, your customer list, they’re all different types of intellectual property. And then there’s the formula for Coca-Cola, that’s an intellectual property, but that’s a trade secret and that’s different as well. Right? So we do draft agreements that include clauses and protections and descriptions of intellectual property. That’s one area of law we do. But when we identify areas where it’s going to be more complicated, for example, we have lawyers that we know that we have done business with all around the country and uh, around the globe that handle intellectual property, patents and trademarks internationally. And sometimes that’ll be your business and you don’t want to just have a lawyer that says I’m going to try to do everything.

Dan
And so we try to identify those types of situations where we will recommend let’s go get a specialist on board because not only do you have to describe what you have adequately for the courts everywhere, but you have to have a teamwork of people that may want to enforce it for you. So yeah, if it’s, if it’s going to be a big issue in your company, you want to make sure your business attorney can refer you to or recommend you go somewhere. The real problem is your typical IP attorney doesn’t know how to form a company or get you going in the right direction. They’re not geared up for that,

Neil
Right.

Dan
But they’re geared up for the IP. They’re completely knowledgeable. They’re members of the patent court. They’re the guys you want to go to, if you have a fight over that, or you have a sensitive issue that you want to be sure is described and transferred property. So we look at all those issues and we try to work with different types of law firms if the need arises.

Neil
So Dan, another aspect of intellectual property and trade secrets is to protect yourself from an employee, taking what you teach them and competing against you.

Dan
Well, I wouldn’t put it that way. but that’s another reason because you described it that way. That’s the reason you need a lawyer because you’re not supposed to use trade secrets as a weapon to help you compete against your own employees. But you’re also allowed to stop employees from taking unfair advantage of you and going and competing with you. A big one is your customer list, that happens all the time. And if you don’t identify it as a trade secret, then you’re missing out because you’re just telling everybody that your best customers and all the information you know about them, and you paid your employees to learn about them are just free to the public. And they’re not. They’re your customer list, your formulas, your business practices, as long as you have it in your agreement. And you also practice what you preach, meaning that you maintain a level of confidentiality. You maintain all the formalities when it comes to your intellectual property and trade secrets. And you follow the advice of your lawyer who knows about this, which would be us. And you actually comply with all those things.

• A. if someone tries to do it to you and it’s devastating, we’re going to win in court
• B. If they know you’ve done everything correctly and protected, it they’re way less likely to actually attempt to do that.

 

Neil
Right? So if we’re talking about someone, who’s thinking about these things, we’re probably talking about an employer and Dan, what’s it like to be an employer in California?

Dan
It’s the hardest state in the country to be an employer. , there’s a lot of regulations and you’ve got to get it right. Or there’s going to be someone out there ready to take your employees, case on a contingency and Sue you.

Neil
Can you talk to us a little bit about how you partner with our clients to protect them as an employer and to protect the processes that they have?

Dan
We have of course, very knowledgeable attorneys, but we also have a higher percentage of support staff, paralegals, administrators in house, HR people so that when our clients have a basic question about employment practices and they don’t want to spend the high attorney rate, they can contact one of our administrators or one of our paralegals and ask a question, cost them a lot less money. And everybody here has been working on these cases for years and years. So the knowledge might not be at the fingertips of the employer, but we answer that same question every week

Neil
And the employee handbook and policies and procedures. I think these are two things that many young employers, especially are new employers tend to overlook the value of. Can you talk a little bit about how important those two documents are and how they work together?

Dan
We update ours our own. Every year, the law changes we want to be on top of it. As a law firm, we do the same thing for our clients. We want to make sure they’re on top of everything. So that number one, the employer can say that everybody at the firm was given notice in advance of the practices of the company. That way , you don’t have to completely rely on, well, I told you, and didn’t you get the email it’s right there in the E manual and they’ve signed it and it’s in their employment file. So those kinds of professional things are important when somebody starts arguing, you said this, and he said that, and then you can say, yeah, but we have an agreement. And it covers that.

Neil
Dan, I know you’re in trial a lot. Has that ever helped you win a case for a client?

Dan
Every time, every time I have a client that has a good employment manual, I use it when I defend them, I use it to show the issue at issue is covered in the agreement, but also to show the jury or the judge that this is a very professional, straightforward company that has a professional employment manual. And they are serious about compliance. The ones who have trouble are the companies that appear totality of the evidence that they’re not serious about compliance.

Neil
And when you ask, “is this, see your signature right here?” That’s kind of hard to answer. Isn’t it.

Dan
Now they already know it’s their signature and you just confirm it. And then you move right to the paragraphs that are important. And then you describe, you know, if they voluntarily signed it and then you just let the document speak for itself.

Neil
Speaking of things that we’re keeping our clients abreast of, there has been a host of changes in wage and our laws, not only in the past couple of years, but the past couple months. Can you talk a little bit about two of them? One of them is this misclassification of independent contractors. Can you tell us what’s happening in the law lately in California, with independent contractors versus employees,

Dan
It’s still in the courts on some respect at all times, it feels like, but they legislature passed new laws, basically making it very difficult for anyone to be independent contractors. And like you have heard the ride shares, the Uber and the Lyft. They’re trying to go to court and constantly fighting it all around the country. But California is the strongest when it comes to trying to force employers to call everybody and employee. And so we are up to speed on all the laws when it comes to that every month. And we review every court of appeal decision and follow it intensely. So if you got a question about that, well, we can answer it in a few minutes.

Neil
Sure. And then the other idea is PAGA, the Private Attorneys General Act, that’s really roared to the front recently as plaintiff’s attorneys have tried to take advantage of this. Tell me a little bit about PAGA and how we help our clients. And this is another area where we’re a valuable partner.

Dan
Yeah. PAGA and basic class actions. First of all, PAGA has been in Vogue for the last three years, at least. And then on top of that, some firms are ignoring PAGA and just filing full blown class actions, which are more expensive for everybody involved, but can be more damaging because they have to go through class certification and all these other things, and they can cost the employer a lot of money. So when we get one of these we want to jump on it. As soon as possible. We want to know about all the little detailed claims about whether the paychecks are written correctly, meal, time breaks, rest, time breaks, which ones are ones that have attorney’s fees, clauses attached to the statute, which ones are not how many people are involved. We want to know right away so that we can:

• • A. fix it, B. cure it, or C. ensure that our client is not in compliance. And they’re just being hit by a frivolous action and then take action against opposing counsel in that regard.

 

Neil
And even if there’s a genuine issue, there’s an opportunity to mitigate that. Isn’t there ?

Dan
Now fix and cure and mitigate all those things have to be done quickly because there are short fuses on the statutes. When you get even a letter exactly. You get a letter from an employment attorney, it seems so nice and sweet, but it’s just the clock starting to tick. And if you don’t respond quickly, providing them with documents and things like that, then all of a sudden, you’re past the statute, you’re past the deadline. And you’re at a disadvantage.

Neil
Dan, another area where we provide genuine value is one of our clients ready to sell their company. How do we work with our existing clients when it’s time to sell?

Dan
We sell a lot of companies every month here. And we have a whole team of lawyers and paralegal and assistance that if we’re selling, we get through the letter of intent offer process. And then we identify, help our clients identify all the disclosures they have to make, put together their schedules. And we have wonderful transactions attorneys that actually close deals. So I know we’ve talked about this, but a transactions attorney is someone you’d really like to hang out with and talk to because they’re nice guys, and ladies! and a litigator is someone you want to know their opinion on who would win in a fight. Right?

Neil
So Dan, after we’ve had these clients for so long, it really transcends the client lawyer relationship. Doesn’t it

Dan
We’ve had clients for decades. And when our clients do well, our attorneys feel like they’re doing well outside of whether they’re getting paid a whole bunch of money or not or fees or anything. We have long term clients. And our attorneys really feel good when things turn out for them because a, on the litigation side, they go through stress and we go through stress. And when we resolve a dispute and our clients are happy, we’re happy. And we’re relieved transactions. Our clients have owned their company for years and years and years, and they want to sell it. They believe they have a good deal on the table and we want to do everything we can to make sure that goes smoothly. And our client gets all of their benefits of the bargain, everything they wanted. We want to do our best to make sure they get that. And if it happens and they’re happy, then we are proud. We’re very proud and we’re happy for them. So this combined knowing someone for 30 years, their highs and lows, their difficult times, their good times, you can imagine, you really feel a bond for your clients.

You can learn more about the Watkins Firm at watkinsfirm.com or call our office at (858) 535-1511.