False Economy: Why Saving a Few Dollars on Legal Fees Now Can Cost You Big Later

A. Thomas DeWoskin

By A. Thomas DeWoskin

 

 

  • You’re about to sign a lease for your company’s new premises. Should you have a lawyer review it, or save the money?
  • You’re about to sign an employment agreement with your new employer. Should you have a lawyer review it, or save the money?
  • You and your best friend are going to start a new business. Should you have a lawyer advise you, or get the forms off the internet and save the money?

Both in jest and with some seriousness, business people, especially entrepreneurs, tend to view lawyers skeptically. Their perception is that lawyers run up fees, make simple transactions complicated, and sometimes cause deals to fall apart completely with all of their questions.

This is a short-sighted view of how attorneys can help you and your business. Experienced business minds understand that lawyers, when properly used at the beginning of a transaction rather than later after problems have developed, can be problem avoiders. And a problem avoided can be big money saved.

In the lease situation above, for example, your lawyer would be sure that you signed the lease in such a way that only your company, not you personally, would be liable. She might negotiate a provision that you don’t pay any rent while the space is being readied for your occupancy or for reduced rent if the landlord doesn’t provide promised services. An experienced attorney has seen a lot of leases, and knows the traps they often contain.

Lawyers aren’t deal breakers. Their job is to point out the potential risks in a transaction so you, the client, can decide whether those risks are worth the potential benefits of proceeding. If the risk/reward ratio isn’t to your liking, then YOU break the deal. If the risk is acceptable, then you proceed. In either event, you have made the decision in an informed and practical manner. You are in control; your lawyer, like all of your professional service providers, works for you. Your attorney’s role is to provide advice, share wisdom and insight, and help you make the business decisions.

Let’s go back to our lease situation. Suppose your lawyer advises you that the landlord wants a personal guarantee or will not lease the space to your company. Is the space so good as to be worth the risk? Maybe you can negotiate a trade – the personal guarantee in exchange for reduced rent, or no security deposit. Maybe your lawyer can negotiate some limitations in the guaranty.

Whatever you pay the lawyer to review the lease and advise you regarding its terms can pay for itself many times over.

Although a good lawyer can be an indispensable ally when problems develop, whether of your own making or forced upon you by others, savvy business owners recognize that legal advice early in a transaction is a tremendous investment in the future success of the project.

One of the saddest cases I’ve ever been involved in concerned two friends who decided to start a business together. They had limited funds, so they “saved” by incorporating their own company, found some by-laws on the Internet, and off they went. Legal fees were not in their limited budget.

You probably can guess the rest of the story. They did EVERYTHING wrong. They funded the business with credit cards, some in their own names, some in the business but signed for by them, and some you just couldn’t tell. They obtained credit from vendors by signing their own names, not that of the corporation.

But the worst thing they did was not to plan for a major disagreement between them. They each owned 50 percent of the company, and there was no mechanism in place to resolve it. One of them wanted to keep growing, and borrow more money to do so; the other, worried by the ever-increasing debt, wanted to cut back for a while and let revenues catch up with expenses.  With no way to resolve the dispute, the business stagnated.  Nothing was done either to grow the company or pay off debt, and the business failed due to the gridlock.

With the failure came the recriminations. “You misled me as to the projected profitability of the business.” “You ran the business for your benefit, not mine.” “You lied to me about your goals.” The friendship crumbled along with the business.

They should have sought advice from a business attorney at the outset of their venture on this and many other issues. They didn’t have to go to the biggest firm in town. There are plenty of competent attorneys who can advise start-up businesses at a reasonable cost.

The attorney could have asked about their business plan, their financing, and their risk tolerance. Importantly, the attorney could have asked what they planned to do when they disagreed or ran into other types of problems. Should they enter into a shareholders agreement to cover this and other potential problems? For instance, such an agreement could have provided a trusted mutual friend to break the tie, or had buy-sell provisions in place before the problem arose. The question could have been addressed early, in friendship and with a desire to succeed, rather than later.

Most of us are good at a few things, and some of us are good at many. None of us is good at everything. Many entrepreneurs, as well some with experience, excel at innovation, marketing, or some other aspect of the business. Most don’t know the ins and outs or actually running the business. A good corporate attorney will look at your business from a different point of view than yours, and can be a friend and advisor to the business for decades to come.

Before you embark on a new venture, consult your attorney. It could save you big later on.

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals, with difficult or unusual financial situations. He is one of only 14 attorneys serving on the panel of bankruptcy trustees for the Eastern District of Missouri.


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