Business litigation can be incredibly disruptive, time-consuming, stressful, expensive and, of course, when results take a turn for the worse, devastating. According to the U.S. Chamber of Commerce, large businesses spend an average of $1.2 million fighting litigation annually. While litigation costs for family-owned businesses may range from 30 to 150 thousand dollars, the impact of litigation remains nothing short of calamitous for most small business owners, undermining profit, draining resources, and damaging the reputation of a brand. Litigation can even threaten the existence of the company itself, especially if numerous or complex lawsuits are involved. By focusing on strategies to minimize or avoid business litigation and strengthen legal auditing and compliance, family run businesses can create a long-lasting foundation for their company’s ongoing success, now and in the future.
The following article will consider strategies which small to mid-sized business owners can adopt to avoid litigation or minimize the impact of business litigation. I focus on five (5) key areas where small businesses commonly face litigation: employment matters, business to business contracts, lending, and shareholder agreements, and succession planning.
Employment Matters
Employment litigation ranges from lawsuits alleging discrimination, retaliation, unfair labor standards, medical leave, and contract disputes. While it is important to have thoughtful employment policies and procedures in place, it is also important to educate and train your managers and employees in their use. A well written, easily understood and encompassing employee handbook can prevent allegations of unfair and unlawful employment practices and minimize the impact of litigation.
Written employment contracts are typically used for management level and sales employees and should be reviewed on a regular basis to ensure that they adequately address expectations, job duties, termination rights and compensation. Formulas for the award of bonus and commission compensation should be reviewed frequently to ensure the formulas and expectations are understood by the employee and the company’s owners.
Business to Business Contracts
Whether negotiating purchase and sale agreements, purchase orders, supply agreements, or leases, the terms and conditions of the agreement should be clear and unambiguous to meet both parties’ reasonable expectations. The length of the agreement and reasons for early termination should be spelled out. Business owners should note whether an agreement automatically renews and whether notice of termination is required to avoid automatic renewal. Payment terms should be clear. Business owners should also be mindful of representations, warranties and covenants contained within their agreements.
When submitting or receiving purchase orders, business owners should be mindful of the standard terms and conditions found on the reverse side or referenced and found on a website. If certain purchase order terms are onerous, objections should be noted on any purchase order confirmation.
It is recommended that legal counsel review all written agreements and purchase orders before they are executed. It is also wise to periodically conduct an audit of all your company’s significant business contracts to ensure that your company’s contracting needs are being protected.
Lenders
Business owners need to thoroughly understand their lines of credit, loan agreements, mortgages, security agreements, and guarantees. In particular, the representations, warranties and covenants of your company’s loan agreements need to be accurate to avoid default. Lenders retain many rights and remedies in their agreements and a thorough understanding of those rights is important to set expectations and maintain compliance.
Shareholder Agreements & Succession Planning
It is important for business owners to plan. Shareholder agreements, which include close corporation agreements and buy sell agreements, are an important part of any strategy to plan and to avoid litigation.
Buy-sell agreements must be reviewed and updated frequently. Purchase price mechanisms must be reviewed to ensure that compensation paid upon the death, disability or departure of a shareholder is understood and fair to all parties. Life insurance should be maintained to fund a buyout. And, to the extent that life insurance does not fully fund a buyout, the terms of payment for the balance should not cripple a business’s cash flow.
It is not enough to simply have a close corporation agreement or buy sell agreement in place. Shareholder agreements must be reviewed and updated frequently, especially as your company grows.
Alternative Dispute Resolution
Litigation in the court system is public for anyone, including your competitors and employees, to see. One avenue to minimize or avoid the impact of business litigation is alternative dispute resolution. Including a contractual provision in your company’s agreements requiring mediation and arbitration reduces exposure to expensive and time-consuming litigation.
Key Takeaways:
- Be proactive with legal counsel and have your counsel review key contracts and purchase orders before entering them.
- Periodically review all your company’s key contracts to ensure that your company is in compliance.
- Review and update your company’s employee handbook and educate and train your employees and managers on its use.
- Consider alternative dispute resolution provisions in key contracts.
For more information or to seek counsel from our team of litigation attorneys, please reach out to request a consultation or call us at 216-696-1422.
