Costs of Not Consulting Your Business Lawyer

Article by Joanne Cassidy

Most start up companies are cost conscious. They have to be. There may be enough money in the bank account to get the company off the ground but not enough to provide for all the uncertainties of business growth and development. One thing is certain. Failure to get sound business legal advice in the beginning and during the life of the company can be extremely expensive in the long run. For example:

Case #1:

Mary started a janitorial company. She wanted to save the expense of hiring a business lawyer to organize her company, so she went online. She found a company that would organize her business for $350 plus filing fees. All she had to do was fill out a form and the company did the rest. They even sent her a nice corporate minute book when they were finished. It was easy, and she had saved about $500 by not hiring an attorney.

Mary was the sole shareholder of her company, but because her husband had helped her with a little advice along the way, she decided to name him as a director of the corporation. Big mistake!

When she tried to get her business certified as a Women Business Enterprise, she was denied. Although she owned 100% of the company, because her husband was a director of the corporation, she did not qualify under the rules of the certification organization.

The moral of the story: A good business lawyer would have discussed certification with her. Mary would have known not to name her husband as a director. Mary will never know how much that one mistake cost her, but it is fairly certain that the value of her lost opportunities far exceeded the initial savings.

Case #2:

John was an astute business owner and had successfully operated his company for 17 years. His business required that he sign contracts for sale and purchase of goods and services on a regular basis. I was his business lawyer and frequently reviewed contracts for him. My role was to analyze the contract, make notes about provisions that were particularly beneficial or harmful to his interests, and discuss the notes with him. Typically, he would negotiate the final agreement based on my notes, suggested language and our discussion.

For various reasons, John’s industry began a slow decline and he decided to cut costs by downsizing his offices. He found suitable space and signed the lease without consulting me.

The slow decline became a more rapid decline and John decided to close the business to protect his investment as best he could. Upon looking at the lease, he realized that he had signed it in his own name rather than in his name as a representative of the company. Based on that signature, the landlord held John personally liable for payment of rent for the remaining balance of the lease term, nearly $300,000.

The moral of the story: Upon review of the lease, a good business lawyer would have made sure the signature block of the lease clearly showed that the company was leasing the property and that John was signing only in his capacity as a representative of the company.

Case #3:

Sarah wanted a new building for her business. She had never purchased a commercial building before but found one that was under construction and would be perfect for her company. She spoke to the builder’s representative who told her that if she financed the loan through an affiliated lender, she would save thousands of dollars over the life of the loan due to an interest rate substantially lower than that offered by most banks. She was told she qualified for the lower rate and proceeded with an application to the affiliated lender.

Sarah gave notice of nonrenewal under her current lease and prepared to move the company’s office and warehouse in anticipation of the closing. A few days before closing, the builder’s representative informed her that the lender would not give her the rate he had quoted and in fact, if she did not agree to the new interest rate, which was much higher than market rate, the builder would terminate the contract and sell to another buyer. Sarah could not afford the higher rate, even temporarily. The contract was terminated and she lost the opportunity to buy the building.

The moral of this story: There are two morals, really. (1) Get all agreements in writing. Just because a salesman tells you something, that doesn’t make it so and (2) Have every contract you intend to sign reviewed by a business lawyer who is experienced in writing and reviewing contracts. In this case, a good contract lawyer would have told Sarah what might happen if she did not qualify for the more advantageous rate and encouraged her to look elsewhere for financing.

I understand that both businesses and individuals are cost conscious. No one wants to spend money unnecessarily. However, there are times when paying a reasonable rate for quality legal services is far more cost effective than trying to save money up front only to find out later that the cost of your mistakes far exceeds the cost of obtaining good legal counsel who can help you avoid them.