In this interview, we discuss a variety of topics with Hanwei Cheng, Senior Counsel at Adli Law Group, P.C. As a practicing attorney specializing in business litigation, transactions and real estate law, Mr. Cheng was named “Top Attorney” for Civil Litigation by Pasadena Magazine in 2012 and 2013. Here, he discusses a broad range of topics such as business purchases and sales, business appraisals and intellectual property law. Mr. Cheng also emphasizes and explains the importance of due diligence when buying or selling a business.
Tina: Technology is always changing the face of the law. What have been the legal implications of using the internet to conduct business transactions, such as buying or selling businesses?
Hanwei: Buyers and sellers are able to use the internet to perform extensive research on businesses and their respective markets. The internet also gives access to information on specific businesses, including, but not limited to, a business’ legal history, corporate management, business valuation, net worth and any competitors. Since lawsuits are matters of public record, a business’ legal history can be easily researched. Buyers and sellers, including their respective attorneys, are much more educated regarding the business transactions that they involve themselves in. As such, it is much more difficult to hide negative information in business transactions.
Tina: What are some of the most imaginative and creative things that you have done for a client in relation to buying or selling a business?
Hanwei: As a litigation attorney, I have come up with a number of imaginative and creative ideas in settling lawsuits in my client’s favor. I once represented clients who were members of a limited liability company who were sued by a former member. The former member filed suit to recover his percentage of the business. I was able to convince the other side that my clients’ company had a very low valuation. In turn, this lowered the amount my clients had to pay to the former member to buy out his share of the company. Many litigation attorneys are not well-versed in the valuation methods of a business. Therefore, litigation attorneys who are educated in business valuation have an edge when it comes to lawsuits concerning a business’ value or net worth.
Tina: What kind of people do you find most difficult to work with? Are there any clients that you do not accept?
Hanwei: Unrealistic clients are extremely difficult. Some clients come to me with an unrealistic goal or request. I attempt to counsel these types of clients to accept a more realistic outcome. If I do not feel as if I would be able to, then I will not take the case because, realistically, I will never be able to please these types of clients. This is because they have an unrealistic goal they wish to achieve, and will not settle for anything less. Since their goal is unattainable, I would never be able to please them, no matter how good of a result I obtained for them. Ironically, these types of clients are usually extremely intelligent. Generally, they are very experienced and have done extensive internet research on their issues before contacting me. The issue lies in the fact they have already formed an opinion before even speaking to me. They already have a plan in mind and simply want an attorney to execute it. I try to analgize to them by saying – if you needed heart surgery, would you research heart surgery online and then require your heart surgeon to follow your directions when performing the operation? Or would you simply trust that the heart surgeon knows how to perform the operation and let the surgeon make the decisions?
Make sure you do your research and due diligence. Looking into a business' legal history and background is just as inportant as looking at its financial statements.
Tina: What aspects of a job do you consider most important when assisting an entrepreneur in buying or selling a business?
Hanwei: Looking after my client’s best interest is most important, regardless of whether the client is buying or selling a business. If my client is purchasing a business, performing due diligence is extremely important. Peforming due diligence can be time consuming, but it is the only way to ensure my client will be getting a good deal. The more information I have, the better I can negotiate a good deal for my client. If my client is selling a business, the terms of the sales agreement are vital to my client’s interest. My goal is to obtain the best value for my client. Again, knowledge is key. Important information includes: information about competing businesses and their respective values; the present and future state of the market; the value of the business’ assets, both tangible and intangible; and the buyer’s and seller’s goals and expectations. When representing any client, I can never have too much information.
Tina: Should an entrepreneur hire a specialized attorney or a general attorney?
Hanwei: An entrepreneur should hire a specialized attorney. This is a great question because most entrepreneurs take the cheapest route possible and try to do it themselves or retain cheap legal counsel. I have had too many clients who encountered expensive legal problems which could have been prevented from the beginning if they simply spent a little more money to retain competent legal representation. Specialized attorneys know their resepective area much better than a general attorney. The specialized attorney knows the special exceptions and tricks which a general attorney would not.
As the saying goes, “Jack of all trades, Master of none.”
Tina: In the past year, what seemed to be your most popular request from business owners who are selling their business?
Hanwei: Sellers are always looking to increase the value of their business. This has been a main concern in the past year, as well as years before. The simplest way to increase one’s business is to sell more products/services or increase revenue. However, there are many, many other ways to increase a businesses value. For instance, a business with registered intellectual property, such as trademarks, copyrights or patents, is much more valuable than a business without any intellectual property. Hiring an attorney to register a company’s trademarks, copyrights or patents can increase a businesses value without any increase in revenue. This is simply one of many ways a business can increase its value without having to generate more revenue.
The one piece of advice that doesn't change is advising my clients to register their trademarks, copyrights, or patents of their business.
Tina: Is there anything in the news lately regarding your specialty that you would like to comment on?
Hanwei: With more and more people becoming entrepreneurs, Intellectual Property is becoming a growing area ripe with new issues. Entrepreneurs normally do not have the means to hire good legal counsel. As a result, they do what they believe is legal. Many times this involves either selling a product similar to another company or using a similar name. These types of situations could lead a business owner straight to bankruptcy. A business owner must make sure he isn’t infringing on another’s trademark, patent or copyright. This type of litigation can get very, very expensive. All businesses should seriously consider registering their business name and logo. If the business sells a product, the business owner should also explore whether the product can be patented. With this type of protection, a business owner not only increases the value of the business, he also ensures that his hard work and creativity can not be stolen.
Tina: With the shifting economy, has your strategy in helping a client buy or sell a business shifted in any way? How has your advice changed?
Hanwei: My strategy changes based on the state of the market and the economy. The one piece of advice that doesn’t change is advising my clients to register their trademarks, copyrights, or patents of their businesses. By doing so, this gives my clients a wide range of options when they consider selling their business. For sellers, I try to negotiate a two part sale: 1) sale of the business; and 2) license out the intellectual property to the seller. This will allow the seller to receive licensing fees or royalties even after the business is sold. For buyers, my advice is to try to negotiate a complete package sale. As a buyer, you do not want to have to keep paying the seller royalties or licensing fees. If the intellectual property costs to much, a buyer should consider whether or not the intellectual property is vital to the business. If not, then the buyer would be able to purchase the business at a greater discount without the intellectual property.
Tina: Have there been any changes in the law regarding your specialty?
Hanwei: One law specific to California that is taking effect in 2015 will increase liability for certain employers who use staffing agencies. Employers and staffing agencies can be jointly liable for wage violations and failure to provide workers’ compensation. This puts increased pressure on employers to ensure the contracts with staffing agencies include indemnity clauses. This is a significant law which impacts the buying and selling of businesses. There have been a number of new employment laws in the past few years. These laws have significant impacts on business owners and have increased the amount of employment litigation by employees against employers. Business owners are advised to ensure they are up to date on all the recent employment law changes. A single lawsuit by a disgruntled employee could collapse an entire business.
The specialized attorney knows the special exceptions and tricks which a general attorney wouldn't. As the saying goes, "Jack of all trades, Master of none."
Tina: What practice areas do you anticipate growing in the next few years?
Hanwei: Labor and Employment Law, as well as Intellectual Property Law (Trademark, Copyright and Patent Infringement).
Tina: Do you have any other tips or advice for anyone buying, selling or appraising a business?
Hanwei: Make sure you do your research and due diligence. Looking into a business’ legal history and background is just as important as looking at its financial statements. If the business owns or uses any intellectual property, make sure the business owns the intellectual property. A Trademark or Patent Infringement lawsuit could cost you your entire business. Make sure everything is appraised, all tangible and intangible assets, as well as intellectual property and goodwill. As a seller, you will be able to get full value for your business. As a buyer, you can decide on which piece(s) of the business you want to buy – a business is comprised of many pieces, and the seller is bound to overvalue at least one piece of the business.