California Corporations Laws

Buying a Small Business

Hi, my name is attorney Andrew Gale and what I wanted to cover in this video is what you should avoid at all cost when buying a small business. Earlier this week I had a call from a friend of mine who is an accountant and he had a client of his in his office and wanted me to come over and talk to her about a business that she’d bought. We’ll call her the buyer.

Financial Statements

The buyer had been contacted by a friend, seller who wanted to sell a business, and the business went up for sale for $30,000, and there was a couple months left on the rent. The friend prepared for the buyer a short one page financial statement indicating how much the business made a month, and what the basic expenses were, and a bottom line of what the profit was on a monthly basis. Armed with that and with a bill of sale, the buyer bought the business. When she got into the business she’d realized that the representations made by the seller weren’t true and the money was losing business (business was losing money) and she wanted to know what she could do about it.

Buyer Mistakes

One additional factor was a couple of months into this purchase the original lease that the seller had ended, and the buyer went out and renegotiated a new three year lease at $2500 a month with the landlord. So now the buyer was very upset, the business was losing money, she couldn’t pay her mortgage or her rent, she was having a hard time paying employees and was wondering what she could do about the business, and what she could do about the landlord. The bad news for her was probably very little. She got stuck into a bad deal because she had made three simple but very critical mistakes in getting the business started. So let me just walk through these with you quickly, and hopefully you’ll keep them in mind if you ever get your situation or get in the situation of buying a business.

Review Financial Statements

The first mistake that she made was that she did not properly review the financial statements and/or go out and seek the advise of someone who understood exactly what would be required to put an accurate financial statement together. I asked her whether or not she’s has actually met with the CPA who called me over prior to the purchase of the business. She said, “No.” I asked her whether or not she’d consult with a business lawyer before she signed the bill of sale and she also said no. I said well why did you wait until now to talk to some advisers? And her answer was, “I just didn’t want to spend the money. It didn’t seem to be that complicated. I did some research on the internet and I thought well I could just save myself some money.” It’s true she did save herself some money in getting into this transaction. The problem of course is that it’s going to cost her a whole lot more money to get out of other transaction. So first she didn’t have any proper advice in looking at the financials. Had she just met with an accountant, the accountant would have been able to ask for supporting documentation. Which would have easily told her that this business was not generating what the seller alleged it was, and she wouldn’t have gone into the deal.

Review Purchase Agreement

The second critical mistake that she made was that she didn’t have a lawyer assist her in reviewing and drafting a purchase agreement. In a typical purchase agreement there would be terms where, if the seller had made false representations the buyer would’ve had recourse in terms going back and making a claim against the seller and trying to get out of the transaction and getting out of the deal. But rather than seeking the advise of a lawyer before hand, now she was seeking the advise of a lawyer at the end of the deal, and it was going to cost probably more money than she’d even invested in the business to get into a litigation over the matter. So that wasn’t very good.

Negotiating With Landlord

The third mistake that she made was that she went out and negotiated the lease arrangement with the landlord without again, seeking the advice of a business attorney. Had a business attorney been involved in the transaction, it would have been entirely possible to negotiate terms with the landlord. Especially in this economy. She would have had a possibility of getting out of the lease if her business had gone so good that she’d have needed to expand or move to another location. On the downside if the business hadn’t gone anywhere was she might have been able to negotiate a term that would have allowed her to get out of the business that is pay a few months worth of rent. The landlord would have excused her from the balance of the rent. But she didn’t know any of this. So instead of saving $1,200 or so in professional fees at the start, now she’s lost $30,000 in the business. It’s likely to go bankrupt, plus she’s now going to have a landlord chasing her for three years worth of rent at $2500 a month. All of this could have been easily avoided. So I would strongly urge you that if you’re in the mood to be purchasing a business, please go out, higher a trusted advisor, meet with your business lawyer. They’re going to be one of the best tools in your business toolbox that you could possibly use. They do cost a little bit of money, but they typically will save you far more money in the long run.

Certified Public Accountants

Also get integrated into your toolbox a good CPA. It’s best for you if the CPA and the business attorney have a relationship. But at minimum at least have these two advisors out there working for you. I think you’ll be much happier as a business person and you’ll tend to make much better business decisions. If you have any questions, please call us. We’re more than happy to consult with you and give you some guidance on what should be a very happy and profitable experience for you. Again, my name is Attorney Andrew Gale. Thanks.

By: Andy Gale

A big motivator in lawsuits is expense. One of the primary expenses for smaller lawsuits, and when I say smaller lawsuits, I’m referring to something that’s between 50 and a $100,000 or less in sums. The big factor is attorneys’ fees. Attorney’s fees are incredibly expensive. They’re prohibitive. They’re why attorneys have a bad name sometimes, but, to be honest, all the attorney has to sell is his time. And so an attorney deals with your matter for 12 minutes, 6 minutes, 18 minutes, they have to bill somebody for that time. Sadly enough, the clients are at the receiving end. What we do is we make sure that the client gets value for those attorney’s fees, and the time is spent. At the end of the day, these attorney’s fees are noted in a row by row, detailed accounting each month, as far as what you’ve spent and why – what value did you get for it as a client. The explanation is kept that way, not just for your benefit, and also a Dear Diary of what’s happened through the month, but also at the end of the lawsuit there is in many cases either a statute or by contract a provision that someone is going to pay the prevailing party their attorney’s fees – either an insurance company, a defendant, someone else is going to pay. The main kicker there is make sure your defendant or your opposing party is not judgment-proof – either bankruptcy, have they filed bankruptcy in the last six, seven years? Do they have property that has equity in it? Those kind of background research reports are available and those are things we can do during these courses of litigation to make sure that we do our best to predict, because there’s never any assurances, but you want to do your best to predict what’s going to be the outcome of litigation, and if you do win, do you have something more than a pretty piece of paper on your wall, but actually money that’s going to go back in your bank account to refund you the attorneys’s fees you’ve spent.

By: Attorney Lenden Webb

Clients have often asked me about contingency cases versus hourly cases. They’re something that I firmly believe in because there are risks in both hourly cases and contingency cases. In hourly cases, you have the risk of an attorney, and I’ve seen it time and time again, where attorneys are billing by the hour. They’re racking up a legal fee that is just going to pad their budget. In the contingency land, there’s a risk with clients, because sometimes clients are not telling their attorney all the skeletons that are in their closet. An attorney and their staff may do diligent work on a case, only to find out that there is a fatal flaw in their client’s defense or offense far too late down the road. The law firm has risked their livelihood in order to prosecute or to defend the matter to no avail. So those are concerns on both the contingency side with unscrupulous clients, and on the hourly side with some unscrupulous attorneys. In my mind, from a plaintiff’s point of view, and a plaintiff’s point of view only, you can choose to do a hybrid of the two. This works fairly well for many of our clients, where the client pays a percentage of our hourly rate, and the firm has an interest in the outcome. In this relationship, in my mind, there is a truly mutualistic relationship, where the client has an invested interest, the attorney has an invested interest. There is skin in the game from both sides to make something work, and to make it work as quickly and as rewarding as possible. This is something that I think is under utilized in the legal industry. As long as you’re a plaintiff, or you’re a defendant seeking a recovery in a cross complaint, this can be a very meaningful and sensical way to draft an engagement letter and have a fee agreement.

By Attorney Lenden Webb

Many clients come to my office, and they have a stack of papers from a letter writing campaign between their prior council and another attorney or the other side where they say, nothing came of this. I spent hundreds if not thousands of dollars and all that happened is they wrote letters back and forth. Maybe there’s an agreement reached, but everything fell through. To me, the saddest thing about that is that there was no lawsuit filed. If there’s a lawsuit filed with a backstop of litigation and with the thundering cloud of a trial moving and advancing steadily forward, settlement is a beautiful thing because settlement, with that backstop of litigation in place and with the case number in hand, any settlement that’s reached has the forces if a judge or a jury decided it. Without that case number, without the lawsuit, without a filed complaint, you have nothing more than a breach of another agreement. Then you’d have to go in to still in to the lawsuit, still in to the discovery, the depositions, the trial, everything that costs so much and gives attorneys a bad name as far as the expenses.  What I suggest is shoot first, ask questions later. We already know that by the time you, as a client, are in our office, the problem is not resolvable on a client to opposing party level and then an attorney is necessary. For the $435 of hard costs that it costs to file with a State Court, with the $70 that most process servers take to do up to three attempts at the service of a summons and a complaint, the amount of monies have attorneys spend a couple hours drafting a complaint and getting all the other accouterments of documents that need to be filed, that’s the best way to start your litigation. At that point, you have something if you reach a settlement agreement and you propound discovery along with the demand letter for settlement, even if there’s payment plans involved right at the inception. Instead of a defendant lawyering up, often times you can encourage them to enter in to a settlement or a payment plan or the terms that are sensical and make sense for all parties involved. That’s just another example of what we do to manage litigation costs.

By: Attorney Lenden Webb

California has at least 58 counties in the whole city of California. Each County has different judges, men and women sitting on the bench and almost all of them are good people who are trying to make decisions possible. By and large though, each judge may have their own peculiar tendencies and may have a little bit of a unique take on the law or some procedural differences that are sometimes noticeable. Even to the point of many local judges in their County court houses have webpages and they have what– instead of just local rules, they have what’s called, “Local-Local” meaning that specific judge’s take on how their court room is to be run. This is completely understandable. We deal with this on a day-in, day-out basis but above and beyond that, the general tendency throughout the city of California is that the California rules of court, the California code of civil procedure, the California civil code, and all the other [?] of the codes that are out there are statewide. So we can practice law in the city of California throughout in any county and have an assurance that the law is going to be interpreted in a similar fashion regardless of which judge you’re in front of. Now, fast forward to right now, in this [?] age with fax filing, with e-mail tend of rulings where the judges are sending their tend of rulings to the attorneys the day before the law of motion matter, to video conferencing, to telephonic appearances. There are so many ways for a client to save their dollar with the attorney not having to drive to the lawsuit and be able to appear telephonically, work on a client’s other matters at the desk or even other client’s matters. There are so many savings that are out there that we’ve been able to take advantage of these savings and practice throughout the State. I think I practiced in upwards of about 18 or 19 different counties in California. I’ve been in trials in San Diego, Orange County, LA County, Riverside County, Kerman, Kings to Larry, Merced, Madera, San Joaquin, San Francisco, Alameda and the surrounding counties all because of the uniformity throughout the State of California. When clients come in and say, “Can you handle a matter that’s in another County?” Well, the fact is I’m going to handle that matter the same that I would handle a matter in any County because California’s laws are statewide and the processes and the technology or such, that you can have conference, that you’re going to be taken care of regardless of which County your matter is in.

By: Attorney Lenden Webb

There are two different attorneys as far as most legal work. There’s transactional, and litigation.  At our firm we focus on litigation. The type of transactional work we typically do is a by-product of litigation. Oftentimes, a client may come to me during litigation and realize that their transactional house, their corporate compliance work, their governance documents are in a state of disrepair.  I’ve been in law suits both on the giving end and on the receiving end of looking down the barrel of an alter ego or a successor corporation liability suit, where there is a piercing of a corporate veil; going into someone’s personal accounts, based on corporate malfeasance. There is a list of about 23 different factors. You could narrow them significantly if you group them together in different theories.  But the courts look at these different factors in ways to pierce the veil, and it’s not a pretty sight. I’ve been in court rooms when judges have granted me the right to go into people’s personal bank accounts for something that a corporation was doing. And I’ve also been on the receiving end, when a client is just doggedly determined to fight to the bitter end for something where there is a significant risk, based on their corporate paperwork and handling.  What I’m getting at here is, even though we’re not a transactional firm, we do have someone on staff who handles and focuses on the corporate compliance work, and making sure that your paperwork is in order before you go to trial; and that things are taken care of and you have a fair assessment of what kind of liabilities you may face individually, even though you’re doing business as a corporation.

By: Attorney Lenden Webb