Many machinery companies are small and medium-sized companies. Many are family owned. Many are leaders in innovation. This post covers five common legal mistakes that my firm often sees when we are asked to help small and medium-sized businesses. I first wrote this post a couple of weeks ago for LinkedIn. I hope it is useful to you.
1. Failure to have means of resolving intra-company disputes. People who genuinely like each other often go into business together. Hopefully, they have formed a corporation or limited liability company (LLC) to help protect their personal assets. Many times, however, the founders never consider what will happen if they later have a fundamental disagreement regarding the business, probably because they think it will never happen. To make matters worse, many people go into business on a "50/50" basis, which probably means there is no effective way to resolve disputes. There are many ways good lawyers can make sure that there is never an impasse while making sure the rights of the owners are protected, but it requires some planning before a dispute arises.
2. Failure to have an exit strategy. This is a variation of the first issue. When founders start a business, they rarely contemplate the possibility that one of them may wish to exit the business in the future. What if one owner wants to sell and the other does not? What if one owner wants to sell to someone who is incompatible with the other founder? Again, there are many ways these issues can be fairly addressed, but the issue should be considered before the issue arises.
3. Failure to protect intellectual property. Many new companies are successful because of a great idea: a new business model, new product, or new software. Unfortunately, many do not take simple steps to protect the most important thing they own (or think they own): their intellectual property (IP). The failure to have proper non-disclosure agreements, development agreements, employment agreements, and other basic protections can literally result in the loss of the company's "crown jewels." Note: Trying to protect IP without professional help is almost always a non-starter.
4. Failing to have proper terms and conditions of sale. Terms and conditions of sale should reflect the risk level a company wishes to assume in doing business. Unfortunately, many companies sell with no terms and conditions of sale, or with "home made" terms. Failing to have proper terms and conditions can result in making unintended warranties and assuming unintended liabilities. Having proper terms and conditions will not eliminate risk, but, in the event of a dispute, they often make the difference between winning and losing.
5. Signing the company's life away. Many small and medium-sized companies do business by signing whatever contract a larger company proposes. Needless to say, it is rare for a company to propose a fair and balanced contractual terms. On the contrary, "boilerplate" contracts are often draconian. Boilerplate contract terms often include unlimited indemnities (many not covered by insurance), lengthy warranties, a right to terminate for convenience with no recourse, and more. The key mistake is assuming that contractual terms are non-negotiable. Most of the time, they are. And, if the other party refuses to negotiate terms, consider whether it is worth pursuing the business in the first place. To quote an old mentor: "Some of the best deals are the ones we didn't make."
These five basic legal mistakes can be easily avoided. A more fundamental mistake is assuming the company cannot afford legal help to deal with these issues. There are very few certainties in the law or life in general, but one of the closest is that it always costs less to deal with these issues by proper planning than later in litigation. Cost is an issue, but it can usually be resolved in a frank up-front discussion with your lawyer.
1. Failure to have means of resolving intra-company disputes. People who genuinely like each other often go into business together. Hopefully, they have formed a corporation or limited liability company (LLC) to help protect their personal assets. Many times, however, the founders never consider what will happen if they later have a fundamental disagreement regarding the business, probably because they think it will never happen. To make matters worse, many people go into business on a "50/50" basis, which probably means there is no effective way to resolve disputes. There are many ways good lawyers can make sure that there is never an impasse while making sure the rights of the owners are protected, but it requires some planning before a dispute arises.
2. Failure to have an exit strategy. This is a variation of the first issue. When founders start a business, they rarely contemplate the possibility that one of them may wish to exit the business in the future. What if one owner wants to sell and the other does not? What if one owner wants to sell to someone who is incompatible with the other founder? Again, there are many ways these issues can be fairly addressed, but the issue should be considered before the issue arises.
3. Failure to protect intellectual property. Many new companies are successful because of a great idea: a new business model, new product, or new software. Unfortunately, many do not take simple steps to protect the most important thing they own (or think they own): their intellectual property (IP). The failure to have proper non-disclosure agreements, development agreements, employment agreements, and other basic protections can literally result in the loss of the company's "crown jewels." Note: Trying to protect IP without professional help is almost always a non-starter.
4. Failing to have proper terms and conditions of sale. Terms and conditions of sale should reflect the risk level a company wishes to assume in doing business. Unfortunately, many companies sell with no terms and conditions of sale, or with "home made" terms. Failing to have proper terms and conditions can result in making unintended warranties and assuming unintended liabilities. Having proper terms and conditions will not eliminate risk, but, in the event of a dispute, they often make the difference between winning and losing.
5. Signing the company's life away. Many small and medium-sized companies do business by signing whatever contract a larger company proposes. Needless to say, it is rare for a company to propose a fair and balanced contractual terms. On the contrary, "boilerplate" contracts are often draconian. Boilerplate contract terms often include unlimited indemnities (many not covered by insurance), lengthy warranties, a right to terminate for convenience with no recourse, and more. The key mistake is assuming that contractual terms are non-negotiable. Most of the time, they are. And, if the other party refuses to negotiate terms, consider whether it is worth pursuing the business in the first place. To quote an old mentor: "Some of the best deals are the ones we didn't make."
These five basic legal mistakes can be easily avoided. A more fundamental mistake is assuming the company cannot afford legal help to deal with these issues. There are very few certainties in the law or life in general, but one of the closest is that it always costs less to deal with these issues by proper planning than later in litigation. Cost is an issue, but it can usually be resolved in a frank up-front discussion with your lawyer.
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