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The case for your own legal expert

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Many growing firms are reluctant to engage a lawyer – yet failure to cover legal issues costs SMEs more than £13bn every year. Taking action to anticipate legal problems is likely to be well worthwhile.

A client whose payment fails to arrive, despite reminders. A dispute over goods supplied that don’t match the description. A problem with an employee that leads to potential dismissal.

Most growing businesses will face these or similar problems sooner or later. On average, an SME encounters eight legal issues in a typical year, according to one survey. Some have a hefty financial impact: four in ten legal issues cost SMEs £5,000 or more.

Yet few small businesses prepare for these events in the same way that they would take out insurance against other risks. Research by the Legal Services Board found that half of SME leaders prefer to handle legal issues alone; one in ten simply tries to ignore them.

Payment structures

There’s an obvious reason for the reluctance to seek legal advice. “People fear it’s going to be expensive,” says Ryan Lisk, founder of SME legal specialist Hybrid Legal. “In many ways the profession doesn’t help itself in that respect: some firms are eye-wateringly expensive.

“But there are some great firms out there with sensible fees and different payment structures. And we would argue that it’s much more cost-effective to take the right advice at the right time, and prevent bigger problems down the line.”

Allocating a budget for legal advice is a sound way to take the sting out of the process. Find a well-regarded solicitor or a firm with a specialism in commercial law, or a background in your sector. It’s possible to find value for money by subscribing to a service, or negotiating a retainer arrangement.

Beyond handshakes

Disputes about payment or quality are among the most common legal issues. One of the ways an adviser can earn their keep is by careful reading or drafting of contracts to ensure they are watertight.

“A lot of SMEs see contracts as too formal and think they can do things on a handshake,” says Lisk. “In fact, a well-written, plain-English contract will manage expectations at the outset. It will build confidence in your client and help to prevent any future issues around cancellation or non-payment.”

Contracts between fellow business owners are also a wise investment, says Lisk: “Having a shareholder agreement in place at the start precipitates certain conversations, such as what happens to the business if one of you falls seriously ill, or if you fall out.”

Where a dispute reaches deadlock, commercial mediation offers an alternative to a more costly and bruising court action. This process is voluntary, with a mediator appointed jointly by both parties. The outcome can be much more flexible than a court judgment – for example, the parties might agree cash alternatives, or ways to work better together in future.

IP rights and data

Intellectual property is another common stumbling-block. It’s become more complex since Brexit, says Lisk, now that UK-registered trademarks can no longer be simply applied across the EU states.

He cites data protection as another issue that should be on the agendas of SME leaders. Providing a privacy policy that customers can see, and registering as a data controller with the Information Commissioner’s Office, are legal requirements for any business collecting personal data. That means just about any business.

“If you collect people’s names and contact details for a database, that is easily enough to qualify as data collection and processing under the law,” says Lisk. “We always recommend clients sketch out a data map to show the journey of the details they collect from customers, suppliers or employees.”

Stay focused

Staying on top of basic legal obligations and nailing down contracts will prevent many potential pitfalls. However, few growing businesses are likely to avoid being hit with legal headaches at some point.

At those moments, turning to a trusted adviser can ensure the business is not overwhelmed, says Lisk: “You can spend a lot of your own valuable time trying to resolve a legal problem, or you can pay someone else to do it while you focus on what you’re good at.”

People fear it will be expensive… but the right legal advice at the right time can prevent bigger problems down the line.

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