As a business and corporate lawyer, there are common themes and pitfalls that create problems for business owners on a regular basis. Among the most common problems I am asked to address are mistakes that are made at the inception of the business. By addressing these issues during the initial contracts phase, it’s possible to avoid major issues after the fact when business partners already have a profitable enterprise. In this 2-part blog series, we’ll examine the most common mistakes that entrepreneurs and business owners make when getting started with their business. Let’s examine the top two mistakes in this first post:
Substituting the Internet for A Real Lawyer
Drafting your own business agreements is one of the quickest routes to a business lawsuit. To be clear, this is not a knock on the intelligence of business owners. Rather it is merely pointing to the fact that people rarely do something perfectly the first time they try something. Most people, myself included, fell over a few times learning to ride a bike; it’s part of the learning process. When a business owner tries to draft their own legal documents, even when they start with a template, they are risking the success of their business and hoping that they will not fall over the first time they try their hand at complex contract drafting.
There are myriads of ways to set up the same business and the nuances matter greatly. Far too often when a business owner drafts their own documents, they fail to include necessary language or are unaware of all of their options. In either case the results are often fatal to business relationships and more often than not land business owners in court. Yes, in the short term you will seem to save a few thousand dollars by doing your own contracts, but the cost of taking this route is often ten-fold more in legal fees a few years later.
The best practice is to hire a lawyer with expertise in the area of corporate document drafting. Have this lawyer sit down with you, learn about your business needs, draft the corporate documents that reflect your needs, and then have your lawyer explain the nuances of these documents. Keep in mind that these documents serve as the legal bed-rock of your business. Having your lawyer take the time to explain the nuances of your new agreements is important because simply having a lawyer say “sign here” does not help you understand what you are agreeing to do. Spend the extra time to read every paragraph and ask questions about how the agreement works. In this way, you will not only get quality corporate documents, but you will know what they say and how they structure your business operations from a legal perspective.
Not Beginning With the End in Mind
Putting all of the focus on starting the business without giving real thought to the end of the business relationship is a very common mistake. This short-sighted mindset is especially problematic when the business has more than one owner. Avoid letting the fervor you have about your new business cause you to overlook the longevity of your business.
Neglecting to plan for the termination of a business relationship is unfortunate because 100% of business relationships come to an end in their current form. Business relationships can come to an end in a positive way when someone retires, the company is sold, or the company grows to the point it is offered for sale on a public stock market. The business relationship can also terminate for less enjoyable reasons, including the death of a business partner, bankruptcies, divorces, or disputes between business partners. One thing is certain, the business relationship will terminate in its current form and a new business relationship will be formed. Taking the time to lay out how this will happen saves everybody involved time, money, and mountains of frustration.
The best practice for a business is to begin with the end in mind. By laying out the processes by which you can terminate or modify the business relationship, you will save time, effort, and money by avoiding a legal fight over the future of your company.
If you are ready to learn more about business pitfalls, continue on to part 2!
Click here for Part 2 of this series.