Now or Later? How Legal Advice Now Could Save Your Bottom Line Later
Friday, July 25, 2014
Posted by: Rhette Baughman
Every business owner knows who to call when a dispute lands in their inbox or something goes wrong with the business. Lawyers are great at cleaning up messes after the fact.
But what most small business owners don't know, is that lawyers do more than take out the trash and clean the floor. Obtaining legal advice on a regular basis helps keep business affairs in order. Without being distracted by disputes or problems that could have been mitigated or avoided altogether early on, a business owner can focus on the growth and success of his or her business.
Small business owners are necessarily attentive to the bottom line. Legal fees are often viewed as nothing more than an expense that negatively impacts the bottom line. Because of this perception, a small business owner may avoid hiring a lawyer until there is an urgent and unavoidable need. A company typically needs a lawyer when it has to defend against a claim asserted against it or to protect its intellectual property rights from being stolen or otherwise infringed upon. When a company finds itself needing a lawyer, either as a plaintiff or defendant, the company must hire an attorney to manage the entire litigation process, starting with the demand letter, continuing with the pleadings and motions, dragging on through discovery and pre-trial hearings, and culminating with what may be either a trial or a settlement that no one is truly happy with. And even after all of that, the company might need the lawyer to file or respond to appeals or enforcement of settlement agreements or judgments. The entire litigation or settlement process from start to finish may cost a company tens or hundreds of thousands of dollars. These costs can be fatal to a small business.
Obtaining good legal advice on a regular basis can minimize the chance that a company will need to engage a lawyer for costly litigation that could take months or years to resolve. A good business lawyer can provide a variety of legal services depending on the type of business. For example, a lawyer can serve in a role similar to the general counsel of a larger company by providing legal advice to mitigate risks that relate to:
Shareholder and Board issues
Sale of the business
Purchase of a similar business to help the company grow
Investment and growth capital
Protection of intellectual property rights
Regulatory and compliance issues
Other ordinary or extraordinary issues that come up during the usual course of business.
Another consideration when opting for sooner, rather than later, is that when a business owner develops a good relationship and rapport with his or her company’s lawyer, the lawyer has the benefit of getting to know and understand the business. This level of knowledge facilitates a lawyer’s ability to anticipate and advise the client of certain risks.
The cost of hiring an experienced lawyer to provide these general advisory services to the company usually costs significantly less than the legal fees and expenses that a company would incur defending against, or asserting its own claim.
Here are some common examples of the benefits (and the potential consequences) experienced by companies that seek legal advice in specific situations:
Maintaining corporate and tax records. If a company is a corporation, and the company maintains its corporate and tax records in accordance with applicable state and federal laws, the company could avoid costly penalties or fees that a government agency could impose on the company for failing to maintain records as required by law. For example, if ABC, Inc., an Arizona corporation, fails to file an annual report with the Arizona Corporation Commission, ABC, Inc. could be administratively suspended. The cost to reinstate ABC, Inc. could easily be avoided by asking an attorney to regularly handle these administrative matters, leaving the business owner time to focus on day to day operations. And the opportunity costs may be devastating if ABC, Inc. is trying to obtain financing but is not in good standing with the Arizona Corporation Commission.
Understanding commercial contracts. By having an attorney draft, or at a minimum review, supplier agreements, professional services agreements, purchase order terms and conditions, referral agreements, manufacturing agreements, etc., a business owner can negotiate for more favorable provisions that protect the company against unlimited liabilities. For example, a customer may ask ABC, Inc. to sign the customer’s standard form of services agreement before ABC, Inc. can provide services. Such an agreement may be very one-sided and favorable to the customer. The agreement may require ABC, Inc. to pay for all types of damages that may be incurred by the customer, or even a damaged third party, without any type of limitation. If a lawyer reviews this contract before the small business owner signs it, the lawyer would advise him or her to ask the customer for reasonable limitations. Companies are constantly negotiating contracts, but without sound legal advice, companies may not necessarily know what risks or complications they are inadvertently inviting. The result and related expenses to a company could be devastating.
Defining relationships among partners and shareholders. Involving an experienced attorney in drafting or reviewing limited liability company agreements or shareholder agreements will minimize disputes among business partners that could be costly, and in some cases fatal to the success of the company. For example, some business owners do not realize how important a buy-sell agreement may be (let alone what a buy-sell agreement is). But without an agreement in place that places restrictions on transfer, a business owner may find him or herself in a relationship with a partner that they would not have otherwise gone into business with. More and more business owners are relying on forms that they find online or have used in other business ventures. These are the business owners that most often find themselves in need of protecting their rights or the company’s rights.
Obtaining financing on reasonable terms. Lawyers can help business owners understand and negotiate the restrictions in financing documents. Whether obtaining funds from a financial institution or an investor, there are a number of possible pitfalls in an agreement that could place the company, and potentially its owners if they are guarantors, at risk. For example, negative covenants that restrict ABC, Inc.’s ability to freely acquire or sell assets, incur additional debt, seek remedies, etc. are common in the standard documents that lenders or investors will propose. In this situation, ABC, Inc. usually needs the money, and lacking leverage, the owner of ABC, Inc. may agree to overly restrictive terms in an effort to gain access to the capital ABC, Inc. needs. Signing an agreement without understanding the risks and attempting to negotiate away the unreasonable restrictions can be devastating. If a company is overly and unreasonably restricted, it may not be able to sustain itself and pay off the debt in the long run.
Perhaps the greatest financial advantage in obtaining regular legal advice from an experienced attorney is the overall likelihood of an increase in the value of the company. Following the examples above, if a company maintains good records, has limitations of liability in its contracts, has pre-negotiated a buy-sell agreement among shareholders or partners, has not entered into financial arrangements doomed for failure at the outset, then upon an owner's exit from the business (whether by succession or sale), the value of the company will likely yield a greater return on the owner’s investment.
About the author: Jamie Cole is a business attorney with the national law firm Polsinelli and a member of the Arizona Small Business Association. She advises businesses at all stages of development. Ms. Cole will be giving a presentation at ASBA on Thursday, September 25th, from 11am to 1pm, entitled “Now or Later? How Legal Advice Now Could Save Your Bottom Line Later”. Lunch will be provided. Please RSVP to firstname.lastname@example.org