Why You Need To Hire A Business Lawyer Right From The Start

Why You Need To Hire A Business Lawyer Right From The Start—with E. David Smith

David, thank you for joining me on the show.

Meny, it’s great to be here. I’ve been long enough a fan of yours and it’s amazing the work that you’re doing to help everyone learn how to build their businesses better and have a better life.

Every episode excites me for something else, but this episode excites me, first of all, to speak to a friend, but second of all, I’m speaking for the first time to an attorney. I spoke to the accountants, business owners and leaders. I felt that there are so much to share on this topic with our audience. Tell us a little bit about what you do and your background.

My firm provides solutions to smart business people. We solve their complex problems. That involves corporate law, corporate transactions and corporate litigation. Everything to do with the business employment issues, intellectual property, corporate tax issues, and so forth. Our goal is to represent clients that have integrity and help them have a better life. We represent families that have substantial assets that they need help guiding themselves how to keep the family together, how to keep focused on what they need to be doing, how to keep business owners focused on what they need to be doing and to make sure that 150 years from now, they’re going to have a family and a business on that solid foundation.

I want to dive deeper into something you said. There’s a hidden message over there and I want to try to see if we could dissect it and speak about it. You mentioned a line while you were explaining what you do is you work with clients with integrity. Was this a deliberate decision you made? Is this something that you stand by? Usually, attorneys if somebody comes to them with a case or with an issue, if they feel they’re suited to do the job, they’ll take the case.

I once had a case many years ago when I first started the practice of law. It was in New York Supreme Court and we represented a guy who owed money. He owed $400,000 defending a note that he owed on and this client kept getting sick during depositions. He kept not turning over his materials and so forth. As a young attorney, I continued to represent him. One day, I was in court and my opponent, the plaintiff’s attorney stood up and he said, “I lodged all these complaints against my client and his behavior.” Justice Kahn, who was on the bench at the time looked at me and he said, “Is this true Mr. Smith?” There was nothing I could deny. It was all true. It was all on the deposition records and so forth. I said, “Yes, your honor.” He says to the plaintiff’s attorney, “Do you mind if I speak to Mr. Smith privately in chambers for a few minutes?”

To my surprise, the plaintiff’s attorney said, “Okay.” You have to picture that this is one of these old big courtrooms that are 50 or 60 attorneys waiting for their turn to come up for their case. He motions to me to come to follow him off the bench into a room behind the courtroom. He sits down at his desk and he motions to me to sit down. He leans over the table and he says to me, “I know what it’s like to be a young attorney to do everything possible to try to feed your family, but this is not a client for you. You need to strive. People see you for what you are and you need to represent honest clients and clients with integrity.”

I was flabbergasted. I appreciated it. He related to me as a person. I said to him, “Your honor, are you saying that if I make a motion to withdraw, you will grant it?” He said, “Yes.” I ended up making a motion to withdraw. I lost $17,000 in that case because the client didn’t want to pay after I said I was dropping out, but it was a gift. It set me on a straight course that I recognize in a lot of attorneys say, “They’re doing a job.” Maybe someone else is going to represent them anyway, but it doesn’t have to come through me. I want to know that my clients have an honest position. Some of my clients have done things that are not the best things in the past, but I’m happy to help them clean that up and start a fresh start.

I don’t want to be part of a scheme to defraud other people or to defraud the court system. That’s not what I want to be part of. I find it effective because when I go into court because of the authenticity of my belief in my clients, I’m able to represent the client on a completely different level. When I make my arguments to the court and to the bankers that are pressing my clients to pay up and my clients can’t that I can show them how legitimately the clients are doing their best, but they are in a difficult situation. That integrity and authenticity pay off for my clients.

Would you look back and say that was a pivotal moment in the way you positioned your firm?

Yes.

[bctt tweet=”If you want to have a successful business, legal has to be at the foremost of your thoughts, not just an afterthought.” via=”no”]

There are two lessons over there. First, you never know where your lesson could come from. It could be that you’re sitting there and waiting and then all of a sudden, somebody else has something to say. Instead of moving on with the case, they took that time and even the judge helped you figure this out because that person would never know where they would take that advice and how you would shape your firm from thereon. For our readers, this is the lesson. If you feel somebody, a friend, a neighbor, a family member, somebody that’s doing something in business or you have a piece of advice that you could help them, you never know how far this could go. This is the first lesson we’re learning in this episode. The deeper lesson is when we speak about core values and companies. I also spoke to somebody on your team and he shared this story with me what type of clients you handle. The terminology, the words that you used were exactly the same, which led me to believe that the core values are something ingrained in your culture.

It leads me to something that we do in our leaders’ forum, where we teach business owners how to develop core values and make sure that they can live by it. Many times, I get pushback from people and saying, “Could I go to a marketing firm to create the core values that I could put on my website?” People don’t realize that core values are something that you live by. It’s something that you have to make decisions about, you have to take or dismiss a client. It’s important the way you said it and how it’s playing a role in the types of clients you are taking or not taking. Thank you for that.

Let’s speak about the legal side of things. The reason why I was excited about this interview is we live in a world that businesses are done differently than years ago. Businesses and transactions have been done for years in the business world, but a lot of times, it was the person building and developing something, milking the cow and then sawing the milk in the corner. There wasn’t a lot of stuff that we have to deal with now, which is employee agreements. There are partnership agreements, outside partnership agreements, internal partnership agreements, litigation, lawsuits, and many things that touched on legal. What’s your take on it? For a person or a business owner reading this, how should they approach legal in general?

Legal has to be at the foremost of someone’s thoughts if you want to have a successful business and not an afterthought. An extreme example is we were once approached by someone that wanted to hire us or they wanted to help us and introduce us to investors. They came with this $50 million project. They were going to do fish farming and I get this beautiful pro forma of how they’re going to build their business. I’m looking at it and the first thing I look for is someone has a line for legal and accounting and the line was completely missing. I realized these people were completely not serious because if you’re planning to build a $50 million business and you don’t have a plan to hire legal or accountants, you don’t know what you’re doing.

It’s important to not be an afterthought. What we see often are clients are coming to attorneys after they realized that they didn’t have an agreement with their partners. They lent money without an agreement and security. Even on a personal level, people are giving credit cards, access to other people and things that are absurd. I don’t mean to embarrass anyone who’s done this, but if you were to think things through in advance and say, “Am I truly protected?” It’s the amount of trust that people have and the trust goes hand-in-hand with sloppiness unfortunately. They trust the other person and then they’re sloppy not to put it into the paper.

Someone I used to work for said something profound. He said, “The courthouses are full of people that were so in love that they decided to get married.” That same thing applies to business. You have people that are, “This deal is fantastic. This is amazing. We’re going to be successful.” No one pays attention to the fact that there’s always going to be things that will be a dispute. When the money starts coming in, there are going to be differences of opinion of who did what and who deserves what. If it doesn’t work out, everyone’s going to have a different opinion as to who deserves what and who shouldn’t have to pay for it. The key is thinking things through in advance and you’ll notice that the successful people, they have a lawyer, an accountant and a financial advisor at their right hand.

Right from the get-go, this is not something that they’re putting on and doing it after the fact. There’s a little bit of lulling people into a sense of complacency around this because you could sell on Amazon. You don’t think you need a lawyer. Maybe you’ll sell your business and hire a lawyer, but often, those lawyers are not thinking through or advising you thoroughly. They don’t understand your situation or your business. They don’t understand making sure that you’re going to get paid. They don’t understand the complexities. In the end, you are unprotected. I’ve seen this with clients sold a business for $115 million. They did not realize that even though they paid $500,000 to a different law firm to do the transaction, that law firm did not advise them that the earnout based on EBITDA was going to be something that could be used against them.

Because the acquiring company can play games with how EBITDA has either calculated or what gets put in as expenses, either shared expenses or expenses for that company. That law firm, even though it’s a reputable law firm, they had $500,000 in legal fees, they lost $50 million because they were not properly advised. You need to have a lawyer that has the experience and is with you every step of the way in thinking things through much more than something that’s an afterthought.

Would you say that comes because that firm took it as a transaction at that time without understanding what transpired up until now?

That’s a good way to put it. In addition, a lot of lawyers’ work is they will paper whatever you tell them. For example, if you went to a lawyer and you want to lend $100,000 to a guy in Arizona at 25% interest, they’ll write it up for you, but what they’re not going to necessarily spend the time doing is to tell you that the Usury Law in Arizona is 15% or 18%. That note is not enforceable. You will lose all your principal and your interest and you’ll not be able to enforce it. I’ll tell you two examples. I had a client that came in with Arizona deal. He wanted to lend $100,000 to a company in Arizona. We could’ve charged for writing the note up. What happened was our client was explaining to me that he was lending the money to a company that did road paving. Since it was government contracts and it took a while for the money to come in, therefore, they needed some cash to keep the business going.

What I noticed was that the loan was going to the two individual principal owners of the company. I said, “If it’s a company’s cash, why are the individual owners taking the loan?” He couldn’t explain that. I got a call back the next day from his daughter thanking me that we saved him from this disaster of losing $100,000 because they realized it was a scam. I’ve had clients come into my office, two people who want to form an LLC. They want to create a business. In the end, I’ve told them, “I don’t think that you guys should go into business together because you’re not compatible. You have completely different viewpoints and it’s not going to work.”

I didn’t get a fee for writing an operating agreement, but I think that’s what’s best for the client. You have to advise a client. What we strive to do is what’s in the client’s best interest. Maybe this deal is not a good deal. That’s what I think was missing for the clients I mentioned when they had that other firm representing them. They were just papering whatever the term sheet said, whatever the handshake was. They didn’t put into question the validity or the well-being of their client’s success based on that term sheet.

Let’s say, I meet with clients and I speak to them about partnership agreements. They’re doing all kinds of different deals. A lot of people are afraid of opening a can of worms, especially if they have partners for a long time. What would you say to those people thinking, “I don’t have an agreement?”

Listen to the expression itself, they’re afraid to open a can of worms. That can of worms already exists. The only question is when is it going to get opened? Are you going to get it open now while everyone’s still on good terms and you have a chance to work it out and discuss it and all the different possibilities or you’re going to open up later on when people are at each other’s throats and no one has a recollection of what happened? Maybe everyone is well-meaning and doesn’t recall it correctly. Maybe people are trying to steal. The better time is now.

There’s such a resistance to go into these areas and you see it. I tell my staff this in training them, how I believe is the best way to practice law. Whenever you’re reviewing a contract, there are some terms that are difficult to understand or difficult to write in a way that’s going to cover all the possible details that we’ve been discussing with the clients. There’s an inclination to say, “Let’s just do the way it is.” That’s the human inclination.

My experience is any time that feeling comes up, “Let’s not go there. Let’s not deal with this,” that is a warning sign. That exact clause or issue that we don’t want to deal with, or the client doesn’t want to deal with is the thing that will come back to haunt everybody. My advice to everybody and our clients is this needs the time, the intention and the attention to address it now. Let’s think it through. What happens if one person passes away? What happens if the person decides to leave the business on an active basis? What happens if the person decides to roll out new products and it’s not part of the main thing? There are million different issues where they vary from business to business and industry to industry, but the smart people and wealthy families that succeed over generations are those that take these into account.

What would you say to somebody that wants to take some action on what we’re discussing? What is a proactive approach to somebody that has an established business? Where do they start thinking, what do I need to take care of? What is the list of my laundry list when it pertains to legal?

We have a checklist that we use to check what systems and what legal documents are in place. The next question is once we’ve identified that, it’s a question of triaging it because sometimes a client might find that they don’t have an operating agreement or an employee handbook, then you have to decide what’s more important. If their resources are limited in terms of how much legal spend, they want to engage in this month or this year. We try to help them triage that. Usually, as you can imagine, an operating agreement has to be put in place or sometimes they exist, but they haven’t been updated to accommodate new partners or changes in the business. If you started your business with $500 in cash or $50,000 of cash or $1 million and you decided to do a cheap operating agreement that was simple, it doesn’t help you when you’re a bigger company and thinking about a sale of the business.

What would you say are the common legal things not addressed from your checklist? Would you want to share a couple of those? We could link up the full checklist. What would you say are 2 or 3 most common areas where people are neglecting legal?

I want to follow up on something I said about this sale of a business. One thing I explained to the clients is that when you have a buyer coming to buy your business, if they’re a professional organization, they will be turned off by the fact that your business does not have the proper documentation. They’re going to walk in and see there’s no operating agreement. There are no sales agreements with the sales staff. There are no contracts with the customers. There’s no proper fine print on the billing or bill of lading. There are no employment agreements and employee handbooks. They’re going to say to themselves, “This is not a professionally run company.”

In terms of presenting yourself, it’s important to look like a professional company, in addition to the legal benefits of it. That’s a critical point for clients to recognize. In addition to that, a lot of times, people come to us and their investors are coming into the company. If they don’t have an operating agreement in effect, the investors will get to dictate what the operating agreement is going to include. If you could show the investor that you already have an operating agreement that’s been in effect, “We’re willing to modify this, but not this.” If you have nothing, then the investor will say, “Here’s the operating agreement we want to use as the investor.” You’re then completely behind the eight balls. You have no leverage to get it back where you wanted it to be.

[bctt tweet=”It’s better to open a can of worms while you’re still on good terms with a partner instead of when you’re already at each other’s throats.” via=”no”]

To go back to your question then about what kind of documents or things that we see that are completely missing are loan agreements with friends and family. People put things in people’s names and they don’t have that properly papered. Whether it’s among partners or family members, operating agreements are not taken care of. Buy and sell agreements. What happens if one of the partners passes away? Is the other partner going to deal with his or her spouse? Are they going to buy them out? Employee handbooks and employee contracts. There’s a highly regulated environment around employees and people are not doing the proper work in their offices to document employee conduct and employee performance. The end result is they want to fire the person the next morning and they call us up and they will tell us what’s in the file. We don’t have a file, but I can tell you this problem is happening a lot of times. If it wasn’t important enough to write it down, it’s not going to carry in the court. What’s going to carry in the court is something that’s in writing.

If I’m not mistaken in New York, there are no rules about companies that must have employee handbooks.

Even if they must, they still have to get the right one. Meaning to say, downloading one off the websites is not necessarily for your company. You could set up whatever rules you want, but within the guidelines. You have to write something that’s customized to your own business.

I want to speak about something that maybe is not spoken enough. I’ve seen the content you’re putting out there. You were speaking about not jumping to litigation too quickly. Could you speak a little bit about that?

The problem with the litigation is that it’s extremely time-consuming in terms of the client’s time and energy, especially if it’s contentious among partners or among key suppliers. That’s something that’s going to be extremely expensive. To do litigation right, which means keeping it on the front burner, both in our file and the court’s file is time-consuming from a legal perspective. The other thing that people don’t realize is when they go into litigation and some people will come in and say, “I’m going to litigate.” Let’s say we filed the litigation, I ask them, “What kind of claims will the defendant make back against you?” That’s something that is the Achilles’ Heel of any business owner who decides that he’s going to cut corners.

For example, if a person is not paying taxes or overtime, doing all kinds of different games to try to think he’s going to make more money that way. If anyone knows about that, either they’re going to end up being a whistleblower. They will use that to bargain for very generous severance pay or if you end up suing them, they will say, “You want to sue me. Let’s see what we’re going to put in the court papers about your activities.” People don’t think about that.

We always advise clients that they should be running a clean business, but if they haven’t, then they have to realize they have a severe open flank over there. Even if the client’s running a clean business, they have to understand, what could be potential counterclaims? On the other hand, sometimes litigation is important because there’s a right at stake. It’s necessary to send a message to the marketplace that you won’t be taken advantage of. There are counter-appealing factors, but they have to think of clearly as to what the client’s objective is.

Another thing that comes up a lot and I could speak for myself is we deal with a lot of new ideas in business, which is the concept of NDAs. It’s been thrown around a lot almost every second. If you want to speak to this, “I have got to sign an NDA.” What’s your take on those on the NDAs? How important and enforceable are those? Is there any risk on the person signing it without knowing anything where the person will be sharing with? It could be an idea or a client type of business that you’ve already worked with.

There are a couple of different angles. NDAs are a great test to see how easy it is to work with somebody. If someone forces you to sign an NDA that’s overly broad, the jurisdiction is in Utah. When you try to ask for changes that are completely non-negotiable, then you know this is what it’s going to look like when you get to a letter of intent or an actual deal. In terms of the actual content of the NDA, you have to be extremely careful because an NDA could trap you. That’s why the big companies, Bed Bath & Beyond, any of the big companies that they’re getting a million suggestions from people all the time of ideas, they will not sign any NDAs because it will be used against them.

There are five people trying to sell them some bedspread. Everyone thinks theirs is unique. The guy that they signed NDA will tell you it is a companion product and that’s a violation. You have to judge what your marketplace is and what the marketplace could tolerate. If you’re in a position like Bed Bath & Beyond, you’re not going to sign NDAs. However, if you’re trying to get a client and the client is worried that you’re going to disclose it, then the way to draft it is saying, “We will not disclose anything that we learn from you and your business, but nothing in here can prevent us from representing other people in your industry or with similar business.”

This is a great piece of advice. Most people on both sides of the aisle or the other person sending the NDA, they download a template online. Maybe it’s the most extreme NDA and the people on the other side are signing it off.

When you’re dealing with downloaded NDAs, it’s got to be applicable to your situation. If you’re signing any document, you have to read it carefully. This is an example. Let’s say you’re trying to land five clients a day or five a week or even five a month. If you’re going to go to a lawyer every time, the lawyer has to charge to review each one, that’s going to be expensive. There’s an inclination to say, “I’ll do this my own. I know enough.” On the other hand, what I would suggest for someone in your situation is you’ve got to come with the NDA. Work with your lawyer to develop NDA that you want to use so that you feel confident and you don’t have to hire a lawyer every time.

You can send those five times a day. If they come back with some change that is not clearly to you, no big deal. For example, they say they want to litigate New Jersey instead of New York. It’s an extra hour drive for you but you could probably make that decision without talking to a lawyer. Anything else, then you call up your lawyer and say, “They’re demanding this, what do you think? What are the consequences of this?” You’re starting with your template and you’re confident in it. You don’t have to read each one and hire a lawyer for each detail.

That’s a great piece of advice. I’ll take action on this immediately. Once upon a time in our business, I was against signing those NDAs because a lot of the times, people will come with the weirdest ideas that are way in the marketplace already. They’re not familiar and I didn’t want it to be used against us. We’re a little bit more inclined because a lot of those ideas and businesses have investors and have other parties that require vendors to have an NDA. What you said is a great idea, which is, “We have our standard of NDA and this is what we sign you off of.” Let me end the legal conversation with another important question, especially in the business community world where somebody will need an attorney on practicing those specific parts, should it be real estate, business partnerships agreement. They’ll ask friends and family, “Who do you recommend?” It’s almost like a recommendation. When a person is going into a relationship with an attorney, what would be the piece of advice you would give the client before hiring a law firm?

You want to check experience and also their ability to see things on a bigger picture. We see an issue around pricing. A lot of times, people are trying to do the cheapest lawyer possible. I have a client that said to me, he did well in real estate by hiring the most expensive attorneys. He doesn’t understand why people would drive around his neighborhood in fancy cars, but they hire the cheapest attorneys. They should be hiring the most expensive attorneys and driving the cheapest car or both. Have an expensive car, but at least I have the expensive attorneys because the right attorney is going to do a lot more for you than that car. You do pay for what you get. You want to look for the person who’s going to push back against your ideas and tell you what the difficulties are.

If you walk in and come up with some idea and the attorney says everything is fine. Maybe you did have a great epiphany and you have a great idea and everything’s fine, but we have found that it’s rare. We had a client came in and he was going to sell a company onto a large investment bank as part of a global conglomerate. There were many issues that came up with it. My first meeting with him went from 4:00 in the afternoon to midnight. There were many issues that had to be addressed that had not been addressed. He had shopped around attorneys and the other attorneys made it sound like it was going to be simple and not be complicated. When we sat down with him, we asked, “What about this issue? Why are you giving this up and arguing with him? Why are you willing to accept this?” He was willing to accept the low salary. I said, “That’s not acceptable. You’re doing all this work. You should be paid more.” I referred him to an expert in executive compensation.

He was making concessions and I don’t think these are in your best interests. You might want a lawyer that’s going to push back. You want to make sure the deal is going to get done if it’s the right deal. You also want to make sure it’s done correctly. That your best interests are put first or you can do it win-win and everyone can still have their best interests put first. You also want to make sure that if it’s not the right deal, that your lawyer is going to tell you, “Pull out. Don’t do this.”

I once spoke to a client of ours who is very successful in the real estate market. They told me this line, which stuck with me. He says, “When you’re building a real estate project, never go cheap on the architect or the attorney. The rest of the vendors, you could always try to find the cheapest contractor, a window guy. The architect and the attorney are the two people you want to have on your side doing everything they could in order to represent you.”

It’s a very important point.

I want to ask you one more question before we have to conclude. We discussed everything legally, but you’re running and growing the company. What is the one piece of advice you could give to our audience about what are you seeing helping you in growing a company?

That’s one question with a limited amount of time, but there is a lot that comes to mind when you say that. I know Meny that you have a great book list and you recommend a lot of books. I read some of them. I wouldn’t say all of the books that you recommend, but Michael Gerber’s The E-Myth Revisited and a lot of great material out there, Grant Cardone’s work and other people that have done a tremendous amount. It’s great information and it’s inspiring and so forth. At the end of the day, each one of us has to trust our inner wisdom as to what is right for us and what is right for our way of doing business. We talked earlier about integrity and clients.

Integrity also means listening to my own inner voice. If something is telling me this doesn’t work for me, then that’s something that I need to listen to. You’re going to say, “Maybe it is my internal resistance or just my laziness and so forth.” That’s a question that could be asked, but at the end of the day, I need to be true to that. I need to also listen to my staff. I include my staff in all our discussions. I have a leadership team. They know how much money I make.

[bctt tweet=”Each one of us has to trust our inner wisdom as to what is right way for us to do business.” via=”no”]

Profit First is another great book that I learned about through you and the webinar you did with Mike Michalowicz. You had him speak at your last event. We have to understand that it’s a great system and we’re grappling this. As the business grows, there are a few blind spots in it as to how do you transition from one revenue level to the next, in terms of the owner’s pay, profit and taxes? That requires sensitivity to everyone’s needs, discussion and maybe bringing in experts to help with that. At the end of the day, God puts us here as leaders because our job is to follow our inner wisdom.

I figured this is true. I speak to business owners almost on a daily basis. Most of those people will ask me, “What is a good book? What is a good system? How could I find which process should I follow? I heard about The E-Myth and the EOS and stuff like that.” All of them are great, but nothing replaces the hard work of the leader. They have to be committed to taking it to the finish line. They have to use the best system out there that works for them and their business. Not every system works for every leader. Some people want to have a little more flexibility. Some people want to be more rigid and processes and stuff like that. I appreciate you saying that because it’s an important point. It’s not just you plug in a system and all the problems go away and then you sit back and relax. It’s hard work, but at least you have a guiding system that you could work alongside while you’re looking at your inner wisdom and trying to figure it out with what works for you and your team.

Remember that Steve Jobs built Apple without reading any biographies of Steve Jobs.

Let’s close with the four rapid-fire questions. A book that changed your life.

Profit First by Mike Michalowicz.

What is a piece of advice you got that you’ll never forget?

I think I told you that before with that judge.

Is there anything you wish you could go back and do differently?

I’ve had those thoughts before, but I realized that everything I’ve done, even if it was a mistake or a detour, it’s benefited me and brought me to where I am now. I’m thankful to God for everything that I have and every experience that I’ve had. It’s not for me to judge whether I should have had it or not. It’s part of who I am.

What’s still on your bucket list to achieve?

Being a chef.

David, thank you for joining us. I know your time is valuable. We will forever be grateful for sharing some of your time with us.

Thank you for everything you do.

It is my pleasure.