The legal industry is geared toward winning business from large corporate clients with already large legal departments. Yet, most businesses in the United States are small businesses, and these small businesses contribute 44% of the country’s economic activity. It seems as if the legal industry is somewhat negligent of such a vital part of the economy. To an extent, this negligence is understandable: there are millions of small businesses, and the number of big businesses numbers in the thousands. It’s easier for those big businesses to organize and drive the agenda, and winning one big client can make a law firm. Because they are so many, small businesses cannot adequately manage, and the rewards of winning one small client are trifling. Consider that the industry’s average revenue refers to a Corporate Legal Operations Consortium, which is in the region of $18.8 billion. These consortiums have legal departments with an average headcount of 104. On the other side, 95% of the over 30 million small businesses in America do not have a legal department at all. Yet, the lack of legal resources in small businesses presents unique opportunities for a savvy legal firm. Therefore, it’s essential to understand what small businesses need from a lawyer, develop more attractive resources, and tap into this vast market opportunity.
A recent study published by Kingston University titled “The Legal Needs of Small Business” provides valuable insights in tackling this question. The study was based on a survey of over 10,000 small business leaders operating in businesses with 50 or fewer employees. These small businesses come from a broad cross-section of industries, from agriculture to wholesale. Some of these businesses are very old, and some are very young. There is a mix of business models, from business-to-business to business-to-consumer. The profitability profiles of the businesses range from pre-profit to profitable.
The study has several findings, many of them quite surprising.
Major Legal Problems Suffered by Small Businesses
Small businesses had an average of 10 legal problems a year, which amounts to under a legal problem a month. Half of these legal problems stemmed from commercial/contract issues or were related to business tax:
- Commercial/contract: 37.5%
- Tax: 22%
- Labor: 14.5%
- Intellectual Property: 8.8%
- Real estate: 7.1 %
- Regulation: 4.5%
- Business Structure: 2.8%
- Finance/Debt: 1.1%
- Other: 1.8%
There seems to be a turning point at which an organization of a certain size (in terms of staff) is likely to encounter a certain kind of legal problem. This turning point varies according to the legal problem:
- Intellectual Property: 46 people
- Corporate Structure: 34 people
- Regulation: 31 people
- Employment: 29 people
- Commercial/Contract: 27 people
- Tax: 26 people
- Finance/Debt: 25 people
- Real Estate: 24 people
The effects of these legal problems range from loss of income to business interruption and failure. Among the most striking consequences of a failure to deal with these legal problems are the following:
- Loss of revenue: 25.6%
- Loss of customer or contract: 9.2%
- Additional costs: 8.8%
- Interruption of scheduled work: 8.7%
- Reputational damage: 8%
- Damage to business-to-business relationship: 7.4%
- Difficulty getting new work: 5.2%
- Property damage: 1.9%
- Changes to business structure or ownership of the business: 1.9%
- Loss of employees for reasons other than dismissal: 1.8%
- Ceasure of trading: 1.8%
How Small Businesses Respond to Legal Problems
Small businesses, by their nature, tend to be very tight-knit businesses. With a staff of 50 or fewer people, everyone knows everyone else. Often, these businesses are family-owned or run by friends and family. Therefore, the impact of legal problems has a more personal effect than it would with larger businesses. If a company is your family’s, business interruption or failure is not a purely financial issue. It affects the family’s legacy as well as its livelihood. In addition, 16% of respondents said that they suffered from a stress-related illness after having gone through a legal problem; 5% reported being physically ill; 4% suffered from mental health issues, and 20% felt some combination of these problems.
Interestingly, 52% of respondents said that they dealt with legal problems entirely on their own, not seeking any legal help whatsoever. On the other hand, 23.4% sought the use of an external advisor. However, 16.8% of respondents turned to friends and family for legal advice, even though they rated their friends and family as having adequate or bad legal knowledge. Indeed, 9% of respondents said that their friends and family had “no knowledge at all” of legal matters!
Regarding resources, 21.5% of respondents consulted the internet to getpre-profit lawyers and legal advisors; 21.3% used the internet to get legal advice, and 15.1% surfed the web to research their legal problems.
Of those small businesses who sought the services of a legal professional or friends and family, several criteria played a part in their decision as to who they hired:
- Reputation: 30.1%
- Specialty: 24.5%
- Prior use: 24.4%
- Cost: 15.7%
- Referral from friends and family: 9.9%
- Convenience: 9.8%
- Friends and family were believed to have requisite expertise: 9.4%
- Referral from accountant: 8.6%
- Referral from a trade organization: 8.4%
- Speed of delivery: 7.6%
How Small Businesses View Lawyers
A primary reason small businesses seem so reluctant to use the services of a lawyer is that they do not believe that lawyers are a cost-effective way to deal with a legal issue. Only 13.4% of respondents believe that retaining or hiring a lawyer is cost effective, with 47.1% believing that using lawyers is not cost-effective, and 15.35 having powerful beliefs that, indeed, lawyers are not cost-effective.
Small businesses look to lawyers as a cost-effective last resort option, not the first port of call when there is a problem. The study found that 49.9% of respondents only used a lawyer when they had no other option. 6% strongly opposed using a lawyer as a last resort and 14.1% disagreed with the idea that lawyers should only be used as a last resort.
The results of this study are food for thought for lawyers looking at providing better service for small businesses.
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