Ed Alexander believes the surest way to go out of business is to enter into the “handshake” deal.
During his 18 years as an attorney, Alexander has seen plenty of companies go out of business because they did not protect themselves from common legal missteps. Alexander is the founder of The Entrepreneurship Law Firm, a small, Orlando-based firm that advises startups and small businesses in Central Florida.
“Most small business owners are sales driven. They're used to closing deals,” says Alexander. “They approach legal issues the same way. They'll tell me, 'Just get the contract done.' Well, what does 'done' mean?”
Alexander says companies commonly make three key legal mistakes. Here's his his advice on how to prevent them.
1. Have the proper contracts in place.
Although that seems straight forward, some small business see contracts as overly formal. “It's about expectations. What do you expect in the deal and what does your customer expect,” says Alexander.
And it's not enough just to have a written contract.
“You need a document that spells out all the details in specific language,” says Alexander. “You can't predict the future, but you need to address all the reasonable issues of what could happen.”
Most of a company's business, about 80% Alexander estimates, will be routine transactions that rarely raise issues. “When a company does something different is where it runs into trouble,” he says.
2. Create partnerships in writing.
Alexander has seen plenty of friends go into business together only to watch their company fail because a proper partnership contract was not in place.
The key is to discuss goals, roles and expectations for each partner, he says. For instance, which partner is responsible for day-to-day operations? What is company's growth plan? How will each partner be compensated? What is the company's tax strategy?
Once those issues have been addressed, it's important to put them in writing. It's also important to include a buy-sell agreement in the partnership agreement.
“Partnerships are not for life,” Alexander says. “At some point, one of the partners will leave. It could be because of illness, death or a change in interests.”
The buy-sell agreement lays out the process for how a partner or partners buys the interest of another. Included in that agreement will be how the partners will determine the value of the company and how the buy-out can be funded.
3. Define employee policies to minimize risk.
Many small companies do not have a written employee handbook, either because they believe their company is too small or they don't have the time and resources to create one.
“Business owners underestimate their risks when it comes to dealing with employees,” says Alexander.
Failure to have written policies on wages, job descriptions, benefits, hours and codes of conduct lead to conflicts, especially if an owner dies or suddenly becomes ill. For example, heirs won't know details like how vacation time is accumulated unless it is spelled out in a handbook.
Alexander also advises companies to implement well-defined non-compete contracts and restrictive covenants. Small companies in particular shy away from these legal agreements because many view their employees as friends or family members.
“Employees leave, and when they do you need to make sure they don't steal your clients or intellectual property,” says Alexander.
Startup companies should look for an attorney with experience in early-stage companies. Established businesses should look for law firms that focus on business law. It's also important that the business owner feel comfortable with the lawyer representing the company, says Alexander.