Many small businesses consider the use of professional advisers a sign of extravagance. The truth is, it all depends on need. And the need for competent advice is rarely clearer than in matters involving law. Good legal services can be used to great advantage. Or they can be wasted. The difference is up to the client.
You have the right to remain silent, as they say, but that's a good way to insure a relationship with your lawyer that is more prodigal than productive. If your company is not getting its money's worth from its attorney, if you feel that you're being overcharged or underrepresented, it's up to you to present the evidence. If you don't question your attorney's advice or fees, he or she has the right to assume that you understand and accept both.
Although the small business executive and the typical lawyer consider themselves in different professional leagues, the two have much in common. Both operate in an independent sector of the economy, and neither has a sheltered market. Both place great importance on the freedom to pursue their own objectives and to choose their own customers and clients. And both face the usual problems of running a business -- reducing paperwork, billing delinquent accounts, resolving personnel problems, maintaining facilities, and deciding whether to grow or to remain relatively small. Yet the relationship between small businesspeople and attorneys is often antagonistic. Lofty professional and lowly client often are paired, one to grapple with the problem while the other grumbles about the fee.
But small businesses and law businesses are vital to each other. A recent INC. study shows, for example, that more than 9 out of 10 (94%) small companies regularly rely on outside legal counsel, while close to 9 out of 10 (88%) attorneys consider small business clients important to their practices.
To help small companies improve their rapport with the legal profession, INC. surveyed some 5,000 small business executives and over 5,000 practicing attorneys (see "How We Reached Our Verdict," page 56). The results of the study provide five guidelines on how to be a better client and how to make your attorney a better adviser.
1. Treat your attorney as an insider. If your company is like most small businesses, its two most important outside advisers are its accountant (INC., March, page 81) and its attorney. Depending on company size and business circumstances, one of them probably holds the edge as your chief outside adviser. To build good working relationships, however, you should treat them equally -- as insiders.
Since the need for legal advice is not as predictable or as regular as the need for accounting services, keeping your attorney on the inside track takes greater effort. It requires frequent and candid communication with your legal counsel. Too often, small companies call their lawyers only when it's time to draw up a contract or when litigation is imminent. Yet providing your lawyer with timely and cumulative information should be the rule. For example, copies of management memos regarding the current concerns or status of your business should be sent to your attorney as background for his files. If you hold a special planning meeting to discuss goals or future directions, invite your attorney to attend. As a confidant and participant, your attorney will be in a better position to provide advice and to respond readily to your company's legal needs.
Very few small companies -- only 2% -- employ their own full-time, in-house attorneys. In these cases, the legal adviser is literally an insider, generally functioning as president, vice-president/general counsel, or secretary/treasurer. Since a house counsel is impractical for most small businesses, many have discovered the next best step -- tapping their attorneys to serve on their boards of directors. Directorship formalizes the attorney's status as an insider.
INC.'s study shows that the use of lawyers as directors is related to company size. About 10% of the companies with sales of less than $1 million enlist their attorneys for board duty. The figure rises to 20% among companies in the $3-million-to-$5-million category and to 30% in companies with sales of $5 million to $25 million. Judging from the responses from attorneys surveyed, the legal profession is not averse to director service -- 61% of them indicated that they currently serve on the boards of smaller clients.
2. Find out how you rate as a client. Small businesses are loyal, if not lucrative, accounts for most law firms.What they may lack in billing size they make up for in their preference for single long-term relationships. Some 68% of the respondents to the INC. survey rely on only one law firm, while 22% employ only two. The use of more than one attorney generally reflects the need for legal specialists rather than divided loyalty or competition. Most of those who employ more than one legal adviser are larger firms whose sales are more than $5 million and whose needs exceed the capabilities of a single general practitioner.
Not only do small companies generally rely on a single source for legal services, they also tend to stick with that source. The majority of the INC. respondents represent older companies founded before 1970. Yet 44% of them report that their present law firm is the only one they have ever had. Among those who have switched law firms, three out of four have changed atorneys only once or twice. On average, the survey participants have retained their current legal counsel for more than nine years.
The limited turnover is testimony to the value of retaining competent advisers who know your business. But the loyalty it represents also helps explain why most law firms value small businesses as clients. Small companies account for the majority of the clientele in almost half (48%) of the law firms responding to INC.'s study. Only 1% of the attorneys reported they don't have smaller businesses as clients, and only 11% rate small companies as less important than larger clients.
Most attorneys agree that small companies not only represent a solid customer base but also offer broader potential than many larger clients. For this reason, three out of five law firms now employ full-time small business specialists; on average, the small business legal staff consists of three professionals.
How does your law firm rate small business in general and your business in particular? Is there a sense of loyalty between your company and its legal counsel? Is your attorney responsive to your needs as a small company? Does your law firm intend to expand its small business practice in 1982? Positive answers to such questions indicate your standing as a client and provide the foundation for making a good relationship even better.
3. When you call, make it count. If your company is like most small businesses, you rely on your law firm primarily to draw up contracts and agreements, wrestle with the personal needs of top management, and represent you in litigation. Other common needs for legal counsel involve real estate and insurance problems, estate planning, and matters as mundane as dunning delinquent accounts. Beyond these typical requirements, small business's demands for legal advice range from matters involving taxes and patents to labor relations and public offerings.
Maintaining regular communication with your lawyer is important. But how often should you be in touch and how do you make every call count?
The majority (58%) of the companies responding to INC.'s survey talk with their attorneys at least once every 30 days, although the frequency of communication varies widely, depending on company size and circumstances. Among the smallest firms, contact with legal counsel ranges from once a week (10% of respondents) to once every six or seven months (36%). Among larger companies, with sales of $5 million to $25 million, the percentages are almost reversed -- 33% are in touch with their attorneys at least once a week, while only 11% go beyond the six-month mark without communication.
Good communication with your legal adviser helps create the kind of rapport that prompts him to call you, for example, when he spots a change in legislation that might affect your business. Assuming that you don't have immediate need for counsel, contact once a month should suffice. A personal visit is preferable, but a phone call will do. Plan to cover at least three or four items or questions that you have jotted down and accumulated during the month. The continuity of relationship will be valuable in resolving routine matters but will count most when your need for legal advice is immediate and unexpected.
4. Forget the dollars, worry about the sense. Regardless of how smooth the relationship may be, legal fees are a perpetual burr for most small businesses. The problem is a practical one, with two sides and a single solution.
Clients often don't understand exactly what services their attorneys are performing and why they cost so much. They are mindful, however, that the matter is always running. In turn, attorneys are deficient in making clear to their clients just when they'll be billed, what the charges will be, and why. As a result, their bills always seem too late, too large, and too vague in terms of time spent and work done.
The solution is to establish a clear understanding about cost and then put it in writing. The written agreement should specify what services will be performed, what the fees and reimbursable expenses will be, and how you will be billed, including frequency, itemization, and -- if applicable -- progress summaries. As a matter of practice, several dos and don'ts apply. Don't ever hesitate to call your attorney. But when you ask him to do something -- whether it's a request to attend a management meeting or send a dunning letter to a customer -- don't expect him to do it for nothing. Do ask for an estimate on specific jobs, but don't continually try to negotiate fees.
How do most small businesses pay their attorneys, and what's the typical tab? Almost 7 out of 10 respondents to the INC. survey compensate their lawyers on an hourly basis; the rest rely on negotiated fees, flat rates, and retainers. Not surprisingly, the use of nonhourly payment methods directly relates to company size. Flat fees, for example, are generally found among the smallest companies, while retainer agreements are more common among the largest firms.
While annual legal costs among the survey respondents range from $150 to $75,000, the majority (63%) of companies manage to keep their legal fees under $5,000. Depending on company size, average annual legal expenses range from about $4,300 to nearly $43,000. Figures from the attorneys surveyed corroborate the data. Some 93% of the lawyers reported that small companies pay for their services on an hourly basis. While the average annual legal fee paid by their small business clients is $6,948, 55% of these clients pay less than $5,000.
Do small businesses enjoy any special break in rates? Not among most law firms. However, 17% of the attorneys surveyed offer what amounts to special concessions for small companies. Such breaks take the form of lower hourly rates, running as much as 30% less than larger clients pay, discounts of up to 25% for start-ups or repeat business, and deferred payment terms.
5. To find a lawyer, look beyond the local bar. Knowing how to select a lawyer -- whether to replace or to reinforce your existing counsel -- is part of being a better client. There are various reasons, negative and positive, for switching attorneys. The negative ones range from consistent disagreement and general neglect, to incompetence and exorbitant fees. On the positive side, a change may be in order because your business simply has outgrown your legal counsel's capabilities or your needs have become more complex and require an experienced specialist. In the latter case, your present attorney may even instigate the change for you.
Regardless of the motive, how should the search for another law firm be launched and what criteria should you use for selection? Most larger libraries have a copy of the Martindale-Hubbell Law Directory -- a national listing of the legal profession. Your local and state bar associations may be a better place to start. And your best source will be the references and recommendations provided by your business peers, accountant, banker, broker, and other advisers.
Based on the responses from small business executives and attorneys who participated in the INC. survey, the chief criteria for choosing a law firm include personal chemistry and accessibility, reputation, expertise in your specific area of need, overall competence, and fees commensurate with services performed.