Legal checkup can help lawyers protect small business interests

By Mike Scott

Legal News

Physicians and financial planners provide different services from lawyers. But the approach in how those services are handled can make all the difference for the end client.

Small business clients have legal needs that should be reviewed annually, and a legal "checkup" or review is an approach many law firms are taking to not only meet their client needs, but also to potentially boost future revenue and increase billable opportunities as some of these small businesses and start-ups become more successful.

For many small businesses a finance department can keep owners abreast of the company's financial picture. But without an in-house counsel it can be difficult to keep up with legal requirements. Southfield-based Beals Hubbard PLLC has created a "Legal Health Assessment" that allows one of its experienced and knowledgeable business lawyers to meet with clients once per year to review a business' legal health for an affordable cost that could save them tens of thousands of dollars in the future.

"We review the topics that businesses should be most protective of: its assets, personnel and equity holdings," said business lawyer Mark Snitchler. "The assessment includes a detailed review of such topics as ownership requirements, shareholder profiles and succession plan strategies."

Clients are asked to answer "yes" or "no" to such as questions as "Can an owner be fired?" and "Can your partner sell his/her interest in the company to anyone?" The checklist can provide a comprehensive overall review of legal issues that need to be addressed.

This assessment gets to the root of potential threats to the business and its stakeholders. It can help identify risks that could threaten a company with lost and costly legal battles in the future. There could be situations where a company is unknowingly taking risks that it can and should avoid, according to Snitchler.

"An annual assessment can help small business owners identify potential risks, and as needed simple steps can be taken to remedy such a situation," Snitchler said.

Larger law firms also recommend such annual reviews for smaller businesses. Common topics that are reviewed include annual minutes of elected officers and directors, the approving of transactions and succession planning, said Andrew Curoe, a business attorney and partner with Bodman, LLP in Detroit.

"We often like to have these meetings at the end of the year when we can also look at projected income, whether a company can afford bonuses and when they should be paid and other such topics," Curoe said. "The topics that you review will be different based on the industry that a business (operates) in. So for software companies you will also look at licensing and trademark issues."

Succession plan issues can comprise a large portion of a review. Ownership and stockholder issues, how to reward key employees who will play important roles in the future of the organization, and setting expectations for future management personnel are all critical components to review, Curoe said.

For example, some employees may be loyal to owners, but not the children of those owners who may be slated to take over management, Curoe said.

"We can go over how and when to communicate your future succession planning details to your employees because this can help improve morale," Curoe said.

Buy/sell agreements, such as the purchase of redemption of a stock, and the review of different financial formulas, such as earnings, EBITDA and more also are discussed during these annual reviews, Curoe said. And lawyers often will conduct annual property and casualty insurance reviews to detail coverage/loss history and whether a policy should be put out for bid.

"It is important to note that legal fixes generally represent a cost/benefit issue," Snitchler said. "As a business lawyer, it is my job to help you understand risks and any associated costs so that you can make more informed decisions regarding the legal health of your business.

"There are some instances when litigation must occur when all other options have been exhausted. But it is my goal to help you avoid litigation if at all possible and ensure that your company is in a strong legal position without having to spend a fortune in legal fees," Snitchler said.

Employee issues should also be reviewed as part of a schedule legal health review, said Rebecca Simkins, a partner with Barris, Sott, Denn & Driker, PLLC in Detroit. Wage compliance, new employee hiring procedures, and any relevant law changes that impact employees are three of the most critical areas.

Lawyers will often review with small business owners the requirements of the Michigan Payment of Wages and Fringe Benefits Act, a statute which outlines many details such as the need to obtain an employee's signature before garnishing wages from his or her paycheck, Simkins said.

New employees should have a signed employment application and all employees should have an open personnel file as well, issues that some small businesses might not have been aware of without counsel assistance.

"You want to make sure that the owners have a line of communication with their employees," Simkins said.

Others changes to such laws as Family Medical Leave Act and the American Disabilities Act also can change the way employers need to deal with personnel issues. These should be reviewed annually.

"We've had some significant changes this year that impact both FMLA and ADA for those businesses with at least 50 employees," Simkins said.

In the last few years, another component of the small business legal health checkup that has been discussed is whether a real estate tax appeal is appropriate, given that a business's property may have been assessed at values that are too high, Curoe said.

"Our approach with start-ups is that we want to be long-term counselors for them and even as a large firm we want to maintain a sense of flexibility and be entrepreneurial," Curoe said.

The idea is that for businesses, now is the time to conduct a legal health checkup. During a time when new business can be difficult to find, such an approach can allow law firms to meet with clients and prospects, possibly identifying future work.

"We can certainly help you with the necessary technical requirements such as resolutions, assessments of management and other statutory obligations," Snitchler said. "But even if your business is currently in stable condition, there could be some critical elements that could severely impact your short-term future."

Published: Wed, May 26, 2010