by Kurt Andrew Schlichter
This article first appeared in Business Insider Magazine’s first issue
While the economic downturn will increase most businesses’ exposure to legal problems, it can also be a good time to get your legal house in order. Companies and individuals in trouble often look to the law as a quick way to avoid debts or to collect on real or imagined claims that in good times would be put aside. But when things are slow, business people have the chance to focus on legal matters they would otherwise exile to the backburner, and many lawyers will be eager to help at discounted rates.
A small investment of time, effort and perhaps a little money answering seven legal questions now can help your business avoid enormous costs down the road – and maybe set you up for even greater success when the tough times end.
1) Are Your Contracts And Agreements All They Can Be?
As a business lawyer, it pains me to say that many of my clients’ lawsuits could have been avoided if they had come to me sooner rather than later to talk about their homemade agreements. Whether it is a partnership agreement or a customer contract, a big part of every business lawyer’s workload is devoted to undoing the damage caused by poorly drafted, vague contracts. Start with any agreement among your business’s owners. Does it still reflect how you are actually running your business today? Many arrangements evolve over the years, but no one takes the time to update the actual written contracts.
Simple moves like changes in profit distribution or responsibilities can be drafted by the parties themselves. More substantial changes should go through your business attorney. Next, review your leases. Ensure your landlord is meeting obligations – and that you are meeting yours. And where your business is the lessor, the same applies.
Finally, take a look at your “standard” customer agreements. Chances are that it has been a while since you updated them. Make sure they accurately reflect how you actually do business – clients are often just as surprised as I am to see what their homemade agreements contain. There are some things that you should seriously consider including in any agreement, like an attorney’s fees provision. Unless contained in the agreement, parties bear their own legal fees even if they win a lawsuit over the agreement. Without a fees provision, litigation for sums under $50,000 is often economically impractical because legal bills will eat up most of the recovery.
2) Do You Have The Right Business Entity?
Many people do business as a sole proprietorship, often called a “DBA.” That is not necessarily a bad thing – it is cheap and simple – but from a legal perspective, it does place the risk for the business’s obligations onto the owner. Incorporating or becoming a limited liability company (LLC) can change that. Just as important are the tax issues – your business lawyer and accountant should both have input in deciding what is the right business form for you.
3) Do You Have Disputed Receivables?
When things are good, there is often little time to focus on unpaid bills. But when things are slow, you have the time. Keep in mind that your customers are having a tough time too – in many cases there may be nothing there to collect. Most of your customers do want to get you paid. If the only way to get paid is a payment plan, agree to one. You can also choose to settle a debt for less than the amount due. Memorialize whatever you agree to in writing. Remember the golden rule of collections: Better all of a little than none of a lot.
The first step is to choose your fights. Identify the debts you will probably never collect – you know who they are – and pack them off to a debt collector. If you get a few dollars down the road without risking any further effort, so much the better. For the others, first try a personal phone call. Be polite and constructive. If that fails, take the next step and have a debt collector or your business lawyer do the negotiating.
Some debts will require an actual lawsuit. Many lawyers will charge $300 per hour or more. Consider a contingency arrangement where the lawyer takes a percentage of monies collected – the percentage can be 33 1/3 and up. Go ahead and negotiate with your attorney – maybe he will take 30 percent. Legal fees are not set by law, and your lawyer might be willing to take a loss leader case now to get future work when things are up and running again. Understand that collections work can be time-consuming for the lawyer, and be leery of any attorney who seems to offer too good a deal. If he will not protect his own interests, then he certainly will not protect yours.
4) Do You Have Disputed Payables?
The converse applies to debts you owe. If you know that your creditors are having a tough time, it might pay to call them up and propose a deal – cash now for a discount. Remember, suing you is just as unattractive for them as suing a debtor is for you. It might also pay to ask your lawyer to consult about some of your bigger debts – settling them at a discount is easier if your lawyer has armed you with a few good arguments about why a collections lawsuit might not succeed. You can also ask your lawyer to handle the negotiations, perhaps at an agreed flat fee.
5) Are You Properly Insured?
The best time to find out is before you get sued. Remember that insurance does two things for you – it pays the claims against you and, equally important, provides you with a free legal defense for covered claims. Review your policies with your broker. You are looking at three things – the type of insurance, coverage and exclusions, and policy limits. Start with your Comprehensive General Liability (CGL) policy. This is the one that covers accidents and injuries. Does it cover the type of problems you are likely to have? For example, make sure it covers all of your employees’ accidents while on duty, including while driving their own vehicles (yes – the law places you firmly on the hook for negligence and even some intentional acts committed by your workers within the course and scope of their employment… and “the course and scope of employment” is construed very broadly). Also, make sure all your locations are identified in your policies, and review your “errors and omissions” policy, which can protect officers of your business. Make sure the limits are high enough to protect you. Finally, make sure you have workers’ compensation insurance.
6) Are You Complying With the Labor Laws?
The labor law field is booming and courthouses are swamped with lawyers suing businesses on behalf of employees complaining of missed meal breaks and unpaid overtime. There are plenty of resources out there on the Web that discuss California’s numerous and convoluted labor laws. Learn the rules and enforce them. It is stunning how many savvy businesspeople fail to obey the law and are shocked to find themselves facing huge defense fees on top of damage awards and penalties. For more detailed projects like creating an employees’ handbook, you should contact your business lawyer.
7) Is Your Lawyer Right For You?
This is a good time to think about it, and a good time to fix the relationship if it is not meeting your needs. Start with the basics. Can you actually get your lawyer on the phone? If you feel like you are always at the back of the line, you probably are. Do you understand her bills? Your invoices should clearly explain exactly what she is doing during your billed time (but do not be surprised to be billed for phone calls – after all, your lawyer is selling you her time). Are things like faxes, copy and long distance charges a profit center? Fortune 500 companies do not put up with that nonsense and neither should you. Most importantly, are you getting results commensurate with her rates? If not, this might be the time to talk candidly with your lawyer – she might just need you more than you need her right now. And there is a fringe benefit to these tough times. If you are not happy with your business lawyer, this is a great time to shop your business around.
This article does not constitute legal advice and does not establish an attorney-client relationship. Consult an attorney regarding your individual situation.