Dan
Welcome to sound business insights. I’m Dan Watkins. This episode is about why you need an experienced business lawyer. This podcast is not intended to provide legal advice.

Neil
Dan, a lot of business professionals, especially entrepreneurs don’t understand the real value of a business lawyer. So in a few words, why do you think any person needs an experienced business lawyer,

Dan
People who have their own businesses or are forming or purchasing their own businesses, should seek a business lawyer as a counselor, sort of like an advisor and an older experienced lawyer. Like we have at the Watkins firm. We’ve seen it all. We’ve seen every type of company, every type of business. And we’ve been there through the good times and the bad times. And so we have a lot of insight above and beyond just forming your entity, like some kind of form you find on the internet. We give you real world business advice that is tied to the law.

Neil
So you mentioned business formation. Can you give us an overview of the process of business formation and what you do as an attorney when you’re helping to set up a company?

Dan
Well, the purpose for a business formation is varied and wide. You have different types of companies, different types of licenses, different types of product, different types of ways of making a profit companies that just hold asset. You have companies for asset protection. You have companies for professional corporations, companies for real estate development companies for healthcare companies, for international business, the list goes on and on. And so when you come to an experienced lawyer who has experience with your type of company, and you’re going to get insights and you’re going to get formation and you’re going to get a custom fit for the documents that are required in your specific type of business and for what your business goals are.

Neil
So it’s the first and most important job, selecting the right entity.

Dan
That’s one of them, selecting the right entity. It could be just a fictitious business name, or it could be a corporation. It could be a couple of companies, two or three companies. It could be a combination of the above. For example, here’s a good example. You have a company and you own a building and you run your company out of that building. A lot of our clients will have a corporation for the business and they’ll have another company or their own entity for the building and lease the building to their own company. And when you have a experienced lawyer, we usually come with experienced tax professionals and experienced bankers and experience other service industry individuals that are entities that help business.

Neil
Then the other thing they’ll underestimate is the importance of getting the corporate documents, right? How do corporate documents set them up for success?

Dan
Well, one as we decide with the client on what’s best for them, and we’ve guided them through the process of questions that we ask them that lead us to the conclusion, they need a limited liability company or a corporation or general partnership or whatnot. If it’s a corporation, then we’re going to form that for them, for the person who’s hiring us. Because most people don’t understand lawyers or advocates, not just in the courtroom, but we’re advocates. When we draft your documents, we’re your advocate. We are thinking, how can I best protect my client and achieve their goals for them when we form and create the corporate documents?

Neil
What types of customizations are you talking about?

Dan
We customize our documents when we form a corporation. Unlike when you go to the internet or some of these companies that give you a, a bland agreement, that’s neutral, we give you an agreement that is biased in your favor, which is important because is you may want to have investors. You may want to sell the company someday. You may want to own the intellectual rights. You may have an invention that you’d like incorporated in that company. On top of that, one of the big reasons for performing a company is making sure that it’s protects you. I mean, that’s the corporate veil. If your documents aren’t formed, right? If you are not set up and organized correctly, if all of the legal requirements for having a separate entity are not in place, then you’ve wasted your time and money because you will have no protection corporation is somewhat like an insurance policy.

Dan
If you do everything right, and something goes wrong some, one of your employees does something bad. You are personally protected. You’re only liable for the amount of money you capitalize that corporation with. So that means you are protected. If you do everything right, and you can also use this corporation, sell it, merge with it and everything with it. And all of the time you try to do those things. The other lawyer who wants to do business with you is going to look at your corporate documents and say, yes, they did everything right. And it’s professional

Neil
Dan, something I know that you do a lot here at the Watkins firm is advise people when they’re buying or selling a business.

Dan
And that’s right. We get all kinds of companies and business people in here who want to buy or sell their company are, who are brokers or who are companies that buy and sell lots of, different entities so we have a wide amount of experience in doing that

Neil
Mergers and acquisitions is a term that’s abused in the legal industry. And it may sound pretty complex to a normal business person, basically, what are mergers and acquisitions?

Dan
Buy or join. Just make it simple. A merger means you’re joining with another company and you’re both going to contribute something in an acquisition means you’re just going to buy it. But there’s so many different ways. You can buy a company, you can buy it through financing, you can buy it through stock. You got to value the Goodwill. You got to value the assets. And then you got to look at the tax implications. And then you also have the, your voluminous due diligence in some cases, and other cases, you just know, know what you’re getting, and there’s no mystery. So buying and selling a company is really important to anyone who has a business. You’ve all heard the statement you hear online. And even in movies, don’t go into a business without an exit strategy. And that’s sound business advice, very smart and intelligent business.

Dan
Clients all know it. And we get to meet these amazing business. People who buy and sell companies usually more than once in our representation of them. We have clients we’ve had for 30 years that we’ve been helping them buy and sell different entities all around the country. So we have buying and selling mergers and acquisitions, actually mergers and acquisitions is a, is too short because there’s more than mergers and acquisitions. There’s asset sales, there’s stock purchases, there’s definite tax planning, there’s 401k issues. There’s all of the issues you can imagine put together in sometimes complex stock documents. And then other times it’s just a simple asset purchase agreement that doesn’t cost very much money. We have set up different industries of businesses. We buy and sell, where we have created our own sets of forms that we can present to a, a client who’s selling a company for a hundred thousand dollars. And because we’ve done that set aim transaction for 25 or 30 other similarly situated businessmen or women, we can give them a discount on the price because we’ve done it so many times. It’s just like, that’s what I talk about before, about an experienced business attorney. We’ve got eight of them here and we set up the company for sale or merger or dissolution if they want to retire. And then we follow through with whatever the client needs, when it comes to business.

Neil
You mentioned both the asset purchase and the stock purchase. What’s basically the difference between the two

Dan
Asset purchase means you are buying the assets of a company, but you are not taking over the operation. Well, like we talked about before, when you set up a company, you’re creating a living, breathing entity under the law, this company with its tax ID number, which is like, your social security number is alive. It doesn’t vote, but that’s about it. It can do anything it wants. And if you respect all of the requirements, you have this living, breathing entity, and the choice is, do you want to buy the entity itself? That’s a stock purchase and all it owns and all it owes, or do you want to buy its assets and leave all it may owe behind

Neil
You’re talking about contingent liability.

Dan
Sure. Yes.

Neil
Risks that you may not be aware of that are out there, that if you do a stock purchase, you’re basically taking on a huge problem. You’re not even aware of

Dan
Correct,

Neil
But there are ways to protect against that in the documents as well. Right? Dan,

Dan
Oh, yes, stock purchases. You can have a stock purchase and you can avoid liability, but you have to through do some steps. You have to provide notice to the general public. You have to have an escrow for 60 days or so. And if you follow all the rules, you can have the stock and the corporate entity, the live being as I call it without having to do an asset sale, however, there are different taxes that have to be considered when you’re thinking about an asset sale versus a stock sale. We work with three or four different accounting firms. We work with regularly. And we also work with other accounting firms that other law firms and other entities work with. And they all speak sort of the same language that are all looking for a situation where the tax benefit, both parties to the transaction.

Neil
So when you’re selling a business, I think most business people you’ve talked about in the past underestimate what it’s going to take to sell their business. What are some of the steps that they have to go through to get it ready for sale?

Dan
Well, I would say let’s cut it into two categories. A lot of our clients very savvy. We learn from them. They’ve already set their company up perfectly for sale or merger or whatever. And they have their tax professionals, they have their bookkeepers and they have everything classified correctly. So when it comes time for due diligence, I keep talking about that. That’s these 15 at 20 different categories of investigation into how you run your company to find those liabilities. And so if you’ve worked with a good business lawyer who understands business and how to run it, who understands employment, human resources, a little bit of tax has tax professionals. He works with understands lease liability, real estate, all those things that are going to be part of the boxes that have to be checked. If you want to sell your company, then you’re going to be ahead of the game.

Dan
And the value of your company is going to be much higher because anyone looking at it going to say the risk here is minimal based on my due diligence. So the value’s higher. If you have some things that are not done under you know, generally accepted accounting principles, GAAP, well, then you’re going to have somebody on the other side, advising a buyer who may want to give you top dollar, oh, there’s a little risk here, because we are concerned about the accounting. Or if you don’t have your HR, your, uh, human resources documents, your employee manuals, all those things that you’re supposed to do, your training, your annual training, your certificates that you conducted, the annual training required by law. If you don’t have all those, you’re going to get less money or you’re going to have a hard time selling your company for top dollar. It’s sort of like a mechanic. You know, they say, pay me now or pay me later. Yeah. You can pay a lawyer, very little money and gain great advantage in the sale of your company or when you want to retire or whatever you want to do just by maintaining things. And at the same time, avoiding potential lawsuits and gain value just by having someone who’s experienced, advising you how to run your company. It’s like a tuneup versus a brand new engine.

Neil
Another party that’s often involved in these transactions, which we advise are the brokers. What does the Watkins firm do to help business brokers?

Dan
We work with business brokers. Business brokers are great. They generally have a lot of experience in drafting agreements. They have a lot of experience in the market business brokers and real estate brokers. They have a lot of similarities. A lot of people say, I don’t want to pay commissions to a real estate broker. And our experience has been after 35, 40 years, that real estate broker, if it knows the market well enough will save you more than the five or 6% commission. They get you’ll save 20% and you’ll get a, a valuable asset, same with a business broker, but they’re, they’re harder to find the good ones are definitely harder to find. But when you do find one who knows that industry, then you’re going to get way more than you’ve ever had to worry about in paying a commission. And on the buyer side, you’re going to end up getting, you know, a, a number of menu items in businesses that you can buy that, that fit your needs. And you’re going to have someone who has a pulse on the market, which is an invaluable tool for any business owners. So we work with the business brokers, we cooperate with them and then we try to get a deal done without, you know, unnecessarily calling alarms for minuscule items. That really don’t mean that much.

Neil
So Dan, now that you got your business entity, you’re in business contracts. So what make a business work and succeed? Why are carefully crafted business contract so important to any San Diego business?

Dan
Well, when you’re doing business and you’re face to face with somebody and you want good value and they want good value, whether it’s services or money, you need to know that a contract gives you power. Simple as that. If you have a written contract that’s signed and it covers certain things, especially when prepared by a lawyer that lawyer’s going to be your advocate and that lawyer’s going to give you power. I mean power. Like let’s say you don’t have enough money to beat up the big guy. But if you have a strong contract, all of a sudden you have the same power as that same big guy with the big resources and the money contracts, well drafted, don’t cost that much money and can give you not only state what you’re supposed to get. He gets this, she gets that, those kind of things, but remedies, if you don’t this, if you don’t do that, if something does go wrong, they can put in power for you, which means 95% of the time.

Dan
It means nobody breaches the agreement hate to say it. But if you have a weak contract and it’s to the financial advantage of your party on the other side, and they’re all of a sudden, everybody’s making a lot of money. If there’s a way out and they don’t see any power on your side, they’ll rationalize why they, they deserve more because you don’t have a contract. But if you do have a strong contract, they won’t rationalize. They’ll just live with the deal. The only time you need a good strong contract is when you make money. When you don’t make any money, everybody’s friends, they’re all buddies. But when somebody wins a lottery, everybody comes up with a reason why they’re not going to pay the two or three friends in the room who helped pay for the lottery ticket.

Neil
So Dan, a lot of people try to use contracts that they have laying around or that they’ve downloaded. What’s the disadvantage of using the contract that you created?

Dan
Well, everybody knows the statement that contracts will be interpreted against the person who drafted them. And so when you draft your own agreement, you can be in a situation where you’re can be kind of accused of being a conman. But if you have a lawyer draft it, we put in a clause that says the party stipulated, the one who drafted this contract, the contract cannot be interpreted against them. So we put in a clause that eliminates that assumption in the law, along with 40 or 50 other types of clauses that eliminates those assumptions. A good example is when you have an agreement where you’re resolving a dispute with somebody and they say okay, you know, I’m going to draft this agreement. And after the agreement, something unknown comes up and they say, okay, now the agreement’s not enforceable. That’s called civil code section 1542.

Dan
We put in a clause in our agreements that say the parties hereby specifically waive the provisions of civil code, section 1542. And we quote it as we are required to do as lawyers in the agreement. So that it’s clear. And then when something comes up later that nobody knew about, they can’t say, well, I didn’t know. So if you’re just a regular businessman on the street, you’re not going to know to do that for your own client contract. And you’re not going to review them. When you find then on the internet or you find them in your old folder full of, of documents, and you don’t have computerized database of laws that come across your desk, uh, your computer now, every, every day of new laws and statutes or, or decisions made by the court of appeals, you don’t pay, you’re not going to pay $5,000, $10,000 a month to update your database of what is good and not good in the form of contracts and, and law. You just, you just got to be part of the business establishment, pay your lawyer and then, and take advantage of all the services they offer

Neil
And protect yourself

Dan
Yes. And protect yourself.

Neil
So speaking of protecting yourself, you know, one of the largest groups of people, the needs protection or California employers, um, how do we help? How does the Watkins firm help California employers?

Dan
I’ve talked about this before, but California employers have got to be the toughest people on the planet, especially in the country because doing business and California is hard on employers. In the last five years, they’ve passed more laws to change things for employers than they have in the last 20. The laws changed so dramatically, especially AB five to make it so much more difficult and so much more expensive to be a California employer that every single person thinking about hiring somebody should have a lawyer, who can help them should have a law firm that can provide HR services. We have that if you can’t afford your own in-house HR person, we have HR people here that can answer your questions and set you up and make sure you’re in compliance with all the regulations, all the training for your executives training for your regular employees, that you can have signed off. Doesn’t take that much money to do, but if you don’t do it right by the right entities or people, then you could find yourself in trouble in the form of employment lawsuit.

Neil
And speaking of trouble. That’s another way we help is if they’re in accused of retaliation or if any of the myriad of things that an employee can accuse an employer of we’re there to help them.

Dan
Yeah, we have litigators. I’m one of then. We have litigators in our office that have been doing this for 25 years, 35 years. Sorry. I forgot how old I was. Um, and we have a page on our website called war stories, and we have one cases there. We don’t have all of our cases. We won. We have won cases where our employer clients have been sued wrongfully that are, that seem hard to believe, but you know are very true. Sometimes a plaintiff’s lawyer will just insist on going to trial and you have nothing else you can do. You can’t pay them five, 10, 60 million. You have to go to trial and you have to win. And so we’ve devised a unique way of winning these cases. If any of my clients ever get an employment claim against them, they, they know to contact me right away. And most of the time, because of all these cases, we’ve won people who sue our clients, the minute they find out we’re the defense council, we end up getting the ridiculously low settlement offers, because we know how to go to trial and win.

Neil
Dan unfair competition is a big bucket in California law. Can you tell me a little bit about It?

Dan
Yes. if you’re in business and you’ve been sued or you’ve been in a lawsuit, you’ve probably heard of business and for professions code section 17.200 and all the 17 hundreds all the way to 17.500, it is the law, the big bucket as you call the catchall for any time, one of your competitors or a consumer or anyone thinks you are doing something unfair, unfair in the marketplace, unfair advantage, unfair advertising, deceptive practices, anything that anyone can’t think about, how to plead or allege, they just throw in that cause of action. And there’s a lot of law on it. And there’s a lot of complex issues you have to understand to avoid. So from a transactions point of view and an ongoing business point of view, and when we draft our agreements, we always keep this code section in mind because it’s, it’s important.

Dan
And, and the way we keep these laws in mind is we ask our clients, what are you doing about this? And they ask us, can we do that? What about this? And we give them advice and we tell them more than just don’t do this, or don’t do that. Or yes, you can do this, or yes, you can’t do that. We tell them here’s where you sit in the area, how close to the line do you want to be? Yeah. I mean, no one runs down the football field down the middle. A lot of times you got to run on the, on the edge, because your competitors are doing the same thing. And so you have to take educated guesses, educated analysis, be well advised and make your own business decisions. If you don’t ask us those questions, but you get close to it, we’ll bring up the issue for you. And then you can make your business decision. But knowing the law and understanding how we look at it will give you a great advantage in deciding how you want to compete.

Neil
Dan, in the end, isn’t a business attorney like a coach.

Dan
Definitely. We coach a lot of our clients. We learn from our clients. It’s like almost being on a team. I mean, we may be the coach calling the plays, but we have three components. Every businessman should have, you should have a business lawyer. You should have a good, CPA, not just for taxes, but for business advice. And you should have a good banker or financial entity that you can relate to talk, to speak to somebody who will give you advice on what kind of loan you can get. And then you put all those together and everybody talks to each other and all of a sudden you’re operating like a fortune 500 company. You have the insights, you have the same business acumen. You can do things with your company that you may have overlooked just by having regular meetings. Maybe every quarter, twice a year, just having these people in place, pay your dues, get them all, set up, put the fiduciary responsibility on the professionals.

Dan
One thing businessmen women should know is when you go hire a lawyer and say, here form my company and look at my agreements. The lawyer’s reaction is, oh great, I’m getting paid to do something, but they’re also looking at this like a doctor, patient situation. Only in business. I have a fiduciary responsibility. I need to care because how they do reflects on how I do. And that’s the same with the CPA. No, not, not so much with the banker. They just want your business. They don’t have a fiduciary responsibility, but you and your CPA and you and your lawyer, there’s this feeling of, I have to advise them correctly and make sure they understand what I’m giving them and make sure they have the best information so they can make the best decisions.

Neil
That’s our motivation of fiduciary duty is you have to act in the best interest of your clients, correct?

Dan
No unfair business practices from your lawyer. Your lawyer has to maintain ethical standards in giving you advice. And when you’re in law school and when you’re in continual education and when you’re in front of the judge that is pounded into 99.9% of every lawyer I know.  Be ethical.  Be ethical with your clients.  Be ethical in everything you do. That’s a guiding principle. When we hear about these lawyers who do terrible things, it just every lawyer, I know it just, it just, it hurts. It makes you angry. Like they broke the rules. We’re not supposed to do that. We’re to help our clients. We’re supposed to help them and we’re supposed to give value too. And when a client comes to us with a business, we give them not just legal advice. We give them business advice and we tie it to the law. Once you have good business advice, which comes from experience, you know, when I was a two year lawyer, I, I guess I wasn’t giving great business advice guys, but most of the lawyers here are 25, 35 and 40 year lawyers. And the younger lawyers we have here, all work with the old guys or the old gals and provide business advice tied to the law.

Neil
Thanks

Dan
Sure

Dan
You can learn more about the Watkins firm at Watkins, confirm.com or caller office at (858) 535-1511