Jeff: Welcome to Deal Talk, brought to you by Morgan and Westfield; I am Jeff Allen. If you are selling or buying a business or just an interested in this subject, this is the place to be. Our mission is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses, so that you will be better equipped to make some very important decisions when the time comes to sell your business or buy one.
Today on deal talk, we are going to talk about legal staff due diligence why you need an attorney and why having the right attorney is as important to you as a business owner and your company. I am happy to be joined by Mr. Hanwei Cheng, senior Counsel Ed Lee Law Group PC in Los Angeles. Mr. Cheng focuses his practice primarily in the areas of business litigation and transactions and real estate law. Mr. Cheng utilizes his skills and experience to advice and counsel corporations and small businesses as well as individuals in matters involving business entity formation business torts, breach of contract, fraud, unfair business practices and a variety of other matters of business law. Hanwei Cheng, welcome to Deal Talk. Good to have you.
Hanwei: Good morning Jeff. Thanks for having me on the show.
Jeff: You are welcome, of course, and we're glad you were able to take time out of your busy schedule to join us. We have a number of people in our audience who are making plans for their startup business or maybe they have been in business for a while. It's just them and another person running the business or them and an employee or there even a sole proprietor and they are doing all this on their own. Now they are thinking that they have things under control, but why should every business owner consider retaining the services up on attorney if do not already have one?
Hanwei: Well, Jeff I believe the answer to that question might be two fold. First of all, a lot of business owners believe they have everything under control, but they do not necessarily have the legal expertise that an attorney does What we do best is problem solving, so we can look forward to certain contingencies that may arise in and we try to prevent those before they actually happen. Now when that actually happen, that's when we have the expense of small business owner. By then, he has found our litigation practice and when you seek out the litigation practice that gets extremely expensive and so with the transactional side, we try prevent any sort of problems that arise that could lead to litigation. So, a lot people think that they have everything under control but then there is the a heck down the line or there some sort of dispute with employee or some sort of dispute with a landlord and that is when you could get into litigation, whereas taking a little bit of extra time and possibly a little bit of extra money to retain attorney from beginning then those problems would have been nipped in the butt before they actually grow.
So, a lot people think that they have everything under control but then there is the a heck down the line or there some sort of dispute with employee or some sort of dispute with a landlord and that is when you could get into litigation, whereas taking a little bit of extra time and possibly a little bit of extra money to retain attorney from beginning then those problems would have been nipped in the butt before they actually grow.
Jeff: And a point to that as a business owner you are so wrapped up in the day to day and just kind of running an operating things to the best of your ability particularly if you're a new business owner and you can't necessarily expect or anticipate some of the things that come up in life and there are conflicts and things like that that sometimes get in the way they present themselves and if you don't have an Atty. it can be very difficult for you to kind of fend for yourself and do what is necessary to kind of keep everyone happy and prevent yourself from the potentially ending up in court and in a nasty situation like that. So really you're talking about the importance from the get go of being prepared for every eventuality or as many eventualities as possible and really preventative of getting involved in legal situations where it could absorb a lot of time in Financial Resources so I think that it is a really important point that you bring up.
Now, some small business owners, Mr. Cheng, have long-term relationships with general attorneys that they have return for years; maybe their family attorneys, friends of the family in fact, they use them for their own personal needs, their business notwithstanding but can a general attorney provide the kind of service that a specialized attorney can? Where their business is concern, they need them for business related reasons.
Hanwei: I really like that question because I always refer back to general knowledge that everyone can kind of relate to. Everybody has sort of a general practitioner or some sort of General Doctor, do they go to get checkups. Now why do we go get checkups when we believe we're extremely healthy and no problems -- nobody ever had a problem for the health so far but you are recommended to get an annual checkup. It is kind of the same thing with an attorney, you want to go get some sort of a checkup to have an attorney, look for your stuff make sure everything is OK so that no problems to arise. Maybe there is some that you did not catch, but if you do go to a general practitioner or general Dr. You do not want to go to one if you have a specific problem with a broken arm or let’s say you hurt your back or eye sight, so off you'd go to an eye doctor, you would go to an orthopedic surgeon or some sort of orthopedic doctor. You go to a specialize attorney, you do not go to a general practitioner for every sort of ailment that you have. So, because the law is too extensive and there are so many different topics it is literally impossible for one attorney to be specializing every single area, there are so many area such as family law, such as an electoral property, there is employment, business - and even business and itself has still many different areas that it covers that not one attorney can be specializing in every area -- in our firm, for example, we have a handful of business litigation cases and some transactional work, but we do have another attorney who does mergers and acquisitions and then we have an attorney specifically who does labor employment law and, so, even in those areas we still cover certain other areas to further extend so that we can provide a specialize service for our clients.
Jeff: Your firm is actually pretty much full service where business law is concerned, isn't it Hanwei?
Hanwei: Yes. Definitely, we do. A lot of our clients will come to us with just an idea for business or just an idea for a product and because we do a lot of property - we do corporate governments, we do business formations, we do labor and employment, we do all source of interrelated services related to business, we were able to take that idea and then we are up to form the company for the individual to pay on how they want to structure either an LLC or corporation and then were able to take that idea and also provide the electoral property protection such as patterns, copyrights, any trademarks they want for their names or slogans and then we also help with the product development and if, let us say, this idea for a product then connect them with the proper vendors and help them kind of develop their product into fruition and so, at that point, you know we provide a certain service for the business and we can do general in Health council work, we can also provide the labor of employment once they start growing their business and need employees. California's labor employment laws are very stringent compared to the rest of the country and so there are just so many loopholes nowadays, everybody is litigious against employers for almost everything and so it could be meal and rest periods, it could be wage and hours, there are just so many areas to cover with regards to that debt. Even any sort of employer, even the law from large to small businesses, they really do not know whether covered or whether not covered.
California's labor employment laws are very stringent compared to the rest of the country and so there are just so many loopholes nowadays, everybody is litigious against employers for almost everything and so it could be meal and rest periods, it could be wage and hours, there are just so many areas to cover with regards to that debt.
Jeff: And that is not meant to scare anybody, that's just the reality of the situation and if you're a business owner on the West Coast and you would be interested in talking Hanwei Cheng we can connect you with him a little bit later on and we will ask you to stay tuned for that. Hanwei Cheng is a business attorney at Lee law group PC. My name is Jeff Allen you’re listening to deal talk.
Mr. Cheng, technology is always changing the face of the law, what had been the legal implications of using the Internet to connect conduct business transactions such as buying or selling businesses?
Hanwei: I guess, the benefits would be the best to start off with, and the benefits are: you can go and do your due diligence, whether you're buying or selling, let’s say you have a comparable business, so you want to go into the realm of selling a certain product, like with ice cream, so you have a company that you want to sell, you have an ice cream business and you have a small business, you are thinking about selling it, putting it on the market, so first thing you want to do is see how much do you think you’ll sell it for. I mean, you go out there, see what kind of other ice cream business there are. Depending on how many stores you have, you are not going to compare yourself to a cold stone, you compare yourself to something a little smaller. So you can see what is there and sold for in the past, what kind of valuations they give, I mean, nowadays the Internet provides so much information for both buyers and sellers that when it comes to the table, you have the more information you have the better because you'll be able to know what the starting price is, you will be able to ask specific question to see what red flags there might be, whether or not they are running their business properly, whether it is efficient or not, what kind of records they keep, and what kind of employees they have, so that when you come to table you know what you are buying. It is like buying a car and you are not just going to go to a car dealership and just take out a car, "hey I like that car because it is yellow, how much is it?” Nowadays, everybody use internet, you go to cars.com or whatever and you research the car, you research every types of car, you look at reviews, you see everything about the car before you to get in there.
Jeff: It is unbelievable, Mr. Cheng, because I know that you're younger than I am but even I can imagine what it must've been like a few years ago even 20 years ago, 15 years ago to a want to get into business saying you have to conduct your due diligence you research and back when there was no Internet the amount of time that was required for somebody who was really diligent about conducting that research before they get started I mean they have to go to the library they have to remember those they have to conduct all research through an attorney possibly or through an accountant or maybe a series of number of different people, or maybe even back when people used to look all uncle Joe for his business advice, those days are gone and so it's really just as simple as conducting several Google searches over a period of days before you have a just a mass, an incredible amount of business so indeed very interesting to call those key points up.
Before we go to a break and we're not going to do that here, just a couple of minutes. I wanted to ask you Mr. Cheng, are there some common needs among business owners they call you about for may be the first time or maybe you see these types of things come up all the time in they are really common among many business owners the types of things that their coming to your office to help them address or there are issues and they want to try to avoid this all going to court and the litigation that comes up what are some of the maybe one or two of the most common things that you would dress for first time clients that come to you?
Hanwei: It could be a wide range thing; I mean, I touched on the topic before about how some clients come to us with just an idea. I mean, you could come as early just to say: "I was in the shower during the day and I came over this idea for a product, how can you help me?" We are a good place to start with that, we can help grow that idea develop the idea, form your company for all that but then there's also clients who have to reform their company and they already have an idea what they want to do so they come to us and say: "Hey, what is the next step?" Again, we can do property, we can trademark your name, we can patent their product if they can and then there's other clients who say: "Hey, I have everything, I have already negotiated some sort of lease with the landlord somewhere where I want to setup a brick and mortar.” And with those clients what we do is the transactional thought, we review the commercial lease agreement. I mean, commercial lease agreements nowadays can go from 30 pages to 150 pages, and when she gets to a 150 pages there is just so much fine print that you could read it hundred times and still not be able to reference what this provision really means because they relate back to another provision, then they comeback to another provision then there is 15 other exhibits. I mean, it can be a little extensive and that is where you would really need to hire a specialized attorney, just to make sure that you are getting the best terms possible, because we're the commercial lease agreement, you are tied in for about 10 years to 15 years and you do not want to have those hidden charges that could hurt your bottom line.
It could be a wide range thing; I mean, I touched on the topic before about how some clients come to us with just an idea. I mean, you could come as early just to say: "I was in the shower during the day and I came over this idea for a product, how can you help me?" We are a good place to start with that,
Jeff: Due diligence and the importance of a business attorney to your company's success is the topic you are listening to Deal Talk, I'm Jeff Allen with Attorney Hanwei Chang and we'll be back after this.
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Jeff: Welcome back to deal talk, my guest is Hanwei Cheng, Senior Counsel at Ed Lee law group PC in Los Angeles and we're talking about due diligence and why you need an attorney. If you're a business owner or looking to buy a business. Hanwei, welcome back. What I would like to do is ask you now about some of the most imaginative, creative things that you've done for a client in relation to buying or selling a business.
Hanwei: Well, one situation that comes to mind, just at the top of my head, is I had this one place with a client there were about three or four members of an LLC and this actually went to litigation because there was client who wanted to be bought out of the business. So, especially in terms of buying and selling, they could not arrive to a certain price or what number to buy them out on, so they went to litigation and we went into some sort of settlement mediation conference to discuss what the price would be. At mediation conference, a lot of litigation attorneys, even if their business litigation attorneys were well versed and the actual business transactional side, which is valuing a business, trying to determine how much is the business worth, obviously that would be the most fair way. So, one member is trying to be bought out, they have a corporate 25% of the company you just take 25% evaluation and you would buy them out, now they come to litigation attorney who is not very well versed in evaluation they're just looking at numbers then you can you make that argument you try to get the valuation low as possible, then you try to get if it is a 25% you tried to take 25% off of million dollars is way different than 25% off of two million dollars, so if they agree to that valuation then they do not know otherwise you can obviously get your client a better buy out so you do not try to -- I would never change the numbers, but there are just so many ways to valuate a business, there are so many methods that you can valuate based on just revenue: you can value to goodwill at a certain amount, you can valuate trademark and whatever intellectual property they have in order to increase valuation. Then we went with the simple revenue valuation for last couple of years and the last couple of years they were not doing very well, until we went 25% of that and it came out to be a reasonable number for them and where, in essence, the number was a lot higher because the one that did not value and trademark, goodwill, they did not value in certain factors, which lower the valuation last couple of years, So, again, at least back to the due diligence, the more you know, the better position you are in order to negotiate any sort of a buy sell.
Jeff: When you come to this type of situation, with regard to transacting businesses, buying selling, how closely do you work with professional appraisers who are out there who may be working on behalf of the business owner that you're dealing with?
Hanwei: Oh, I definitely try to work with them as close as possible and just because, we review a lot of the terms and we do negotiate the numbers but if we do not get in there and actually know the business we don't know how much comparable will businesses are going for, we do not know how efficient the business is running, what kind of numbers they produce other than the fact that is on some server financial statement or some sort of balance sheet then we are not in the position to be able to negotiate very well because they know their stuff, they're prepared for that numbers and all we can do is either agree to disagree, and if we disagree obviously you are going to have present a reason and if we do not have that reason and then our position is a lot weaker than decide that is more apparent that also leads back to due diligence So, being able to talk with a businesses' CPA or professional appraiser or even their Financial analyst or financial adviser is very helpful when performing a buy sell arrangement.
Jeff: What aspects, Hanwei Cheng, do you consider most important when assisting in an entrepreneur in buying or selling a business, are there certain issues that come up that repeatedly perhaps even we all know they are all businesses are different but are there certain things that really come that you really have to work very closely with the business owner in getting them to understand or with a person buying a business getting to understand these are the things that really need to -- they deserve a lot of focus and attention?
Hanwei: Yeah, definitely. It's always the fine print. Business owners believe they know their business well. They believe with the internet they can do their research, they believe they know the laws, they believe this is the price we agreed to and so once people see the price, they will be like “okay we are done. I am selling my business for a million dollars and that is a very reasonable price, they agreed to a million dollars, we are done.” It is a million dollars, just review the contract, it is done but then the fine print will actually catch them, and what are they actually buying? One is the closing day, how long is it? What contracts to they get? What contracts they did not get? Who would pick up the insurance, on what day? I mean things like that or the contingencies and the fine print that could essentially damage them and hurt the valuation of million dollars. I mean, they could lose a lot of money, let's say they are responsible for the insurance up to a certain date and then the other side has took up the insurance. Now if you're the buyer you have to pick up the insurance at a certain date and something arises between then, that's significant difference and they would damage the business or who gets the proceeds from insurance? Is it the seller who just sold you the business who now gets the proceeds from the damaged business or is it the buyer who gets the proceeds in orders to repair the business that was damaged? So it's always the little fine print that a lot of small businesses overlooked, they believe that they can do this, Oh, we agreed to a certain amount, we are good to go, we set up escrow, we sell it in 30 days, we are good to go. But now that's when the attorneys are really important because they work with the fine print just in case certain constancy arises. Which could definitely damage or destroy entire deal or even just wipe out all the value just you saw on your buy sell agreement?
It's always the fine print. Business owners believe they know their business well.
Jeff: Hanwei Cheng is a Business Attorney with Ed Lee Law Group in Los Angeles, this is Deal Talk; my name is Jeff Allen, and if you can go back and thinking over maybe the last year or so Mr. Cheng, for those people selling their business, was there something that you ran into or a common request or a particular need that came up time and again or that comes up time and again with people who are interested in selling their business any special request that they make a few word or try to get you to address as they are preparing for this activity?
Hanwei: Yes, every seller I have ever encountered, they want their money as fast as possible. Now, sometimes it is just unreasonable because again like I said before, they agreed to the price, we are supposed to close in 30 days, now just look at this over real quick and we are good to go. But, as an attorney, you're hired because of your expertise, you are hired because you want to protect your client. So, unfortunately, it takes a little bit of time to make sure all the terms and conditions of the buy sell agreement are correct, they are in the client's favor or they are fair and sometimes it is completely written to favor the buyer in which case you have to go back and forth and negotiate with the other side and that depends on how fast the other side's attorney can get back to you with their comments or revision. So sometimes it is just a lot better to do your due diligence and make sure everything is proper, even if takes a little bit of additional time but as sellers, they always want to get their money as fast as possible, completely understandable.
Jeff: Well, it is understandable and in that, that answer was not entirely unexpected. That is kind of what I thought too. There are so many changes in the laws that happen from one year to the next and particularly business law and you have a full staff there at your law firm, to address just about every possible need that could come up, but how much does the economy, Mr. Cheng, how much does the economy kind of come into play when it comes to your strategies in your group's strategies in helping a client buy or sell a business? I mean, we saw the great recession obviously about seven years ago, are really coming in change things dramatically but has that-- does that working and working with those legal changes that happen, does the economy come into play with regard to your strategy in helping business owners buy or sell their business?
Hanwei: Definitely, it is like you referenced the recession before, now you can’t value property unless you can foresee the economy in the next year or two, because a lot of these deals, the larger the deal gets, once you get to the million or even to tens of millions of dollars, it is going to take a little bit of while to close. So you do not want to lock yourself into a price to soon when you believe that the economy is going to go up but if you believe the economy is going to go down obviously you do want to lock yourself to a reasonable price at that time. Now, one problem I have seen before the path is with the lease agreement, now some lease agreements provide for a certain purchase option for a certain price. Sometimes attorneys may put in a specific price in there without knowing what the real estate is going to go up and let us say in the next couple years. Now just in the path 8 to 10 years, the real estate is gone, definitely crashed but now it's gone up significant amount, just so real estate in general fluctuating itself. So you can only imagine how businesses fluctuate a penny on what kind of revenue, what the public is interested in that time with, what is the new fad, what is the latest fad, what is up and coming. So, projecting certain values and projecting the valuation of business is extremely important.
Projecting certain values and projecting the valuation of business is extremely important.
Jeff: We are kind of winding things down a little bit and what I would like to end with now, Mr. Cheng, is any guidance tips, free advice that you can give to anyone in just a matter of maybe 2 minutes. Anyone buying, selling or appraising a business that they need to be mindful of to, maybe provide them with some help going in and then of course as we end we will kind of give everybody your contact information in case they have any other detailed questions.
Hanwei: That is great. I do not want to necessarily try to sell myself but something that is really important is the whole reason why we're talking today is to obtain an attorney if you are even considering in buying a business. I mean without an attorney, how you are going to know the terms and conditions especially if you are a startup, you've never sold a business, you never bought a business before? So, a business attorney is someone that specializes in this line of work, would be able to tell you the ins and outs and because there are so many attorneys nowadays you can actually try to get maybe a free 30 minute consultation with just something that my firm provides. We will give you a little consultation if that is something you want to hear then obviously we explore it a little more to see how we can help you. But that is something that would definitely take a look at probably, looking into retains an Atty. to help you negotiate the deal or even draft the contract or review a contract but the earlier you retain one the better off because there is a very good chance that the other side will be retaining an attorney as well.
Jeff: And if people have any specific questions for you, based on anything they heard you talk about on our program today Mr. Cheng, how can they reach you?
Hanwei: You can reach me at Ed Lee Law Group, we are located at 444 Cell Flower Street Suite 1750 in Downtown Los Angeles and my direct line is (213)-537-1671.
Jeff: Hanwei Cheng, we have run out of time thank you so much for being with us on deal talk today hopefully we can have you back on the program soon.
Hanwei: Great. Thank you very much, Jeff. I appreciate it.
Jeff: Attorney Hanwei Cheng, senior Counsel, Ed Lee law group PC in Los Angeles. Deal talk is presented by Morgan and Westfield, the nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business call Morgan Westfield at (888)693-7834 or visit MorganandWestfield.com. Make it to a point to check in with us again soon for valuable information and insight from our growing list of small business experts on Deal Talk. I'm Jeff Allen; we will talk to you again soon.