I was recently asked to speak about “Teachable Moments in Business” from my perspective as a business attorney. Not surprising, the first thing that came to mind are many of the family and small businesses that we have assisted in Central New Jersey. The opportunity to be involved in so many local businesses enriches our experience of this community, and is a very rewarding part of our work.
That said, the most teachable moments in business arise out of the mistakes that some of these businesses have made, which mistakes have brought them into our office in the first place, in need of costly legal services.
Typically, the most important thing to small businesses is the bottom line, financially. Limited budgets have driven some business owners to avoid investing in legal services. Some borrow forms or buy them at office supply stores or online. But such forms often cause more harm than good.
Examples where we see businesses avoid legal fees, and conduct business without legal counsel, include: forming partnerships; borrowing from family and friends; renting commercial space; writing purchase orders or standard services contracts with clients, vendors, and customers; hiring agreements and policies; and any similar “routine” matters. However, this often leaves the small businesses vulnerable to even costlier legal issues and unintended tax consequences. Many businesses take these risks and get by well enough, for a while, without issue. This only encourages such risk taking. Risk taking is further encouraged by today’s “Do-It-Yourself” culture, unrealistic depictions of attorneys in media, and the many regulatory and tax pressures on small businesses.
Realistically, unanticipated legal problems nearly always cost $significantly$ more than the legal services required for business formation, lease and contract review, and asset purchases, and similar less contested matters. If you are considering a new business relationship, whether it be a partner, landlord/tenant, long-term or sizable contract, or similar, you want to know you are dealing with someone reasonable. In practice, using an attorney at the inception of these relationships is helpful in testing the reasonableness and fairness of the relationship that is being created. If a party won’t be reasonable with maintenance requirements, shared expenses, confidentiality, commissions, or similar – do you really want to do business with them?
Examples:
Partners often start businesses with assumptions and misunderstandings that would be fleshed out by a well advised partnership agreement. Alternative dispute resolution provisions can protect the long-term viability of the relationship, and reduce costs, should a serious dispute arise.
Commercial lease agreements contain numerous negotiable terms that vary in their balance between landlord and tenant interests, and should always be negotiated by an attorney. Tenants beware – in commercial/industrial transactions, the rules are not nearly as tenant friendly as in residential. Landlord’s beware, if you fail to comply with Chapter 91 demands, your triple net lease tenant may have claims against you for discrimination in increased real estate taxes. Again, just examples.
Loans from family and friends are often flimsy agreements, if written at all. This leaves the relationship vulnerable to misunderstandings, abuse, sweeping issues under the rug, and breakdown in general. The more important the relationship, the more important the thoroughness of the agreement. And, tax consequences must be understood through collaboration of your attorney and accountant.
Independent contractor and employee agreements need to be evaluated for risks facing each party. We’ve seen hired contractors steal clients, leaving the businesses in a position of litigating loyalty claims publicly, or walking away from the issue. Winning the legal battle isn’t always a win for the business, if it is expensive and only leaves a bad taste in the clients’ mouth. Properly drafted non-compete, non-solicitation, and confidentiality covenants would have provided most appropriate relief.
We’ve seen numerous standard form contracts used by businesses fail to comply with regulatory requirements. New Jersey’s reputation as a state that burdens its small businesses with heavy regulation is well earned. But those regulations can be navigated with proper counsel. Facing strict liability violations in litigation puts a small business in an untenable position.
And, we’ve litigated on contracts that lack the protective terms we wish our clients had negotiated, such as provisions awarding them attorneys’ fees and costs should they prevail. Even an unfairly selected choice of law and venue clause in a contract can make enforcement of the contract impracticable.
These are just a few examples of the many circumstances we face on a regular basis, where clients learn the hard way that they waited too long to obtain legal counsel.