For most clients, legal costs are a complete mystery. There are several reasons, but the main one is clients often don’t understand how much legal work is required. This is most definitely not the fault of the client, and it is incumbent on the attorney to explain in advance estimated costs, and if warranted, lower-cost alternatives. That said, for most projects – and especially the purchase or sale of a business – it is difficult to estimate in advance what the legal costs will be. That’s because when there are multiple parties involved, the time required to reach final agreement is determined by how many issues there, their complexity, how aggressive or accommodating the other parties are, and new issues or obstacles that may arise during negotiations. Thus, what the client may view as a “simple” agreement or project may actually be far more complex or time-consuming.
Here are five tips to help small business owners control their legal costs.
Be clear and decisive about your goals, your priorities and your risk tolerance.
One of the biggest drivers of legal costs is uncertain or shifting client goals and priorities. That does not mean clients are blameworthy for asking questions or taking time to make decisions. . But it does mean that as client goals and risk tolerance changes, or evolves, the resulting attorney time and cost increases as well. Hiring a business attorney is sort of like calling an Uber. The lowest cost is a ride-share with multiple stops, one destination and no traffic or detours. For the same trip, the highest cost would be a premium SUV, with bad traffic and passengers who keep changing their destination.
Before hiring a business attorney, ask yourself what end result you want to achieve. For example, if you’re selling your business, naturally you want to sell for the highest price and with few or no post-closing risks or obligations. But is that realistic ? Any serious Buyer will want the very opposite – to buy for the lowest price, and with maximum recourse to the Seller if the business doesn’t perform well. Reconciling those conflicting interests requires a series of many decisions and negotiations that will eat up attorney time, increasing legal costs for the principals. In addition, the attorneys will raise issues or ask questions the principals may not have considered. Contrary to stereotypes, good attorneys don’t do this to run up billable time or “kill the deal”. They do it to protect their clients and make sure they’re fully informed of all relevant risks and considerations before accepting final terms.
Similarly, clients should honestly assess their priorities and tolerance for different risks. If you want to sell your business quickly and with little or no post-closing risk, achieving that will invariably mean accepting a lower price. For other transactions, such as a license agreement or a vendor agreement, think about the trustworthiness of your counterpart. If you have an existing relationship or a successful history of doing business together, you may be willing to accept a higher level of risk (such as payment terms) than you would with an unknown quantity.
Discussing with your attorney, in advance, your goals, priorities and risk tolerance will help focus the legal work and minimize wasted or unnecessary attorney time.
Understand – and respect – the differences between legal and business decisions
Negotiating any contract or transaction will involve many decision points, all of which involve legal, business or financial risks. There is no bright line distinction among them since every risk in some way involves a potential loss of money, rights or benefits. That said, some decisions are purely – or mostly – legal decisions, while others are purely or mostly business or financial decisions. Two simple examples of legal decisions are whether to give or demand indemnification, and compliance with regulations. Examples of business decisions are whether to launch a new product or service, or terminate an existing one, or form a new alliance with a strategic partner. Decisions that are primarily financial in nature include whether to borrow money, cut expenses or increase investment in the business.
Frequently, these decisions are interrelated. That said, clients sometimes expect their attorney to make what are really business or financial decisions. Your attorney can certainly give common sense advice, and ask common sense questions, about business or financial matters. However, the client is and must be the ultimate “decider” on those issues. The attorney’s primary responsibility is to negotiate for the client maximum legal benefits and protections, and inform the client about important risks — but it is the client who must decide what the business objectives are, and what legal, business and financial risks are acceptable.
Discuss with your attorney up front your budget and the scope of legal work.
There is an ancient and notorious tension between the attorney’s obligations — to give the client the best advice and zealously negotiate to maximize the client’s benefits and protections — and the client’s desire to pay as little as possible for those services. While some clients may be unreasonable in their demands, and/or unrealistic in their expectations, in the first instance it is incumbent upon the attorney to explain the range of legal costs the client should expect in a given matter. A candid, up-front conversation about the client’s budget and ability to pay is the best way to avoid surprises and possible ruptures in the attorney-client relationship down the line. Some clients honestly do not understand how complex or time-consuming the required legal work can be for transactions or projects that may appear to them to be “simple”.
Clients should always remember that the business attorney is providing a purely customer-driven service. In contrast, the primary role of a physician is to treat or prevent illness, and for an auto mechanic, to repair cars. While everyone wants to be treated fairly and with respect, customer satisfaction isn’t exactly the highest priority for doctors and mechanics. Their first and most important job is to solve your (or your car’s) problem. Solving problems is certainly part of the business attorney’s job description as well, but our first job is to advise and protect our client while helping to achieve whatever objective the client chooses. Since the client may be uncertain about those objectives, or about what risks or burdens they are willing to assume, and since those objectives can and often do change mid-stream, the business attorney is always incurring additional time to adapt.
For those reasons, clients should not hesitate to directly ask for a budget and written cost estimates up front. Lawyers much prefer an honest “money talk” early, than a billing and cost dispute with the client later.
Why do business attorneys charge by the hour ? Why can’t my attorney tell me up-front what their services will cost ?
The short is answer is because we usually don’t – and can’t — know in advance how much time your matter will require. For example, a simple LLC operating agreement between two LLC members who agree to make all decisions jointly should only take a few hours to draft and finalize. But a more complex operating agreement, with multiple members, can take 10 to 20 hours or more. The reason is that, except for simple or boilerplate contracts (think sales forms or confidentiality agreements), most complex agreements are “curated” or customized for the client’s specific needs. Drafting an agreement with complex needs and several “cooks in the kitchen” is sort of like designing a building while it’s being built. By the time it’s finished, a lot of time and effort will be used up before the builder, the developer, the contractor, the architect, and the local building department are all satisfied. There will also be a lot of “change orders” in the process.
As Abraham Lincoln famously said, a lawyer’s time is his (and her) stock in trade. Simple agreements, or even complex agreements with clear and complete client input, can sometimes be charged by a fixed fee (which is a set fee, regardless of the time spent by the attorney) or a capped fee (or a “not to exceed” fee limit, regardless of time spent). In several hundred years, no one has discovered a complete solution that would make time-based billing obsolete. That’s because the client’s perception of “value received” sometimes differs from the attorney’s reality of time and effort expended, knowledge given and judgment applied. That is also why 30 minutes on a phone call might save a client $10,000, while, conversely, the client may be billed $10,000 for extensive drafting and negotiation of an agreement that the client decides not to sign.
That, in a nutshell, is why business attorneys generally charge by the hour.
Why can’t business attorneys work on contingency, like other attorneys ?
Contingency means the attorney’s fees are dependent, or “contingent”, on a successful outcome, which in litigation means either a settlement or a favorable trial verdict. It is standard for personal injury attorneys to work on contingency because once harm has occurred, there is a very strong likelihood someone else is legally at fault. While some high-stakes cases go to trial, the vast majority of lawsuits settle, usually with the defendants paying an agreed settlement to the plaintiff. Contingency works in these cases because the attorney can assess, before even taking on the case, the likely value in settlement or at trial. Put differently, contingency is a bit misleading since attorneys generally only accept it when they know up front there’s a high probability of a settlement or favorable verdict. Contingency also relieves the client of some or most of the burden of paying for legal services out of pocket, and it fully incentivizes the attorney to get the best settlement or trial result possible.
In contrast, business attorneys are really working to prevent harm to the client. A key part of our job is applying our knowledge and judgment to different facts and circumstances, so we can give advice and explain legal risks and benefits. That, in turn, allows us to give clients our best advice, which sometimes means not signing an agreement or not moving forward with a transaction. Other times it means advising a client to change their objectives or expectations, or proposing alternative arrangements to achieve a similar result.. That role often does not produce the same kind of discrete result, or “output”, as clients would expect from a personal injury or patent lawyer, whose job is to achieve a specific outcome (namely, recovery of money for damages or the filing of an effective patent).
Therefore, it is often impossible to define success in a way that allows a contingency fee arrangement. Success is sometimes found in a deal not done, or an agreement not signed. In fact, for that very reason, state legal ethics rules often prohibit business attorneys from handling transactional matters on a contingency-fee basis. We have an ethical obligation to give our clients our best advice – and a contingent fee arrangement for that advice would create a serious conflict of interest between the client’s need for sound legal guidance, and the attorney’s financial incentives.