Small businesses typically don’t get much attention from law firms and often, they do not see any reason to retain a lawyer. Law firms love big corporate clients because of the billing prospects and the prestige of working for them. Yet, the reality is that most of America’s businesses are small businesses and that even with the legal industry, small businesses make up the majority of clients. Whereas the mean revenue of a Corporate Legal Operations Consortium (CLOC) member is $18.8 billion, with an average legal department staff size of 104; 95% of small businesses do not have an internal legal department of any kind. The nation’s 30.2 million small businesses generate 44% of its economic activity and employ 47.5% of its workforce. This suggests that small businesses are neglected by the legal industry. Law firms have to do more to understand the specific needs of small businesses in order to offer them solutions that meet those needs and in order to take advantage of this market opportunity. One study, The Legal Needs of Small Business, sheds some light on the needs of small businesses. The study surveyed over 10,000 people from small businesses (defined as employing fewer than 50 people) across the economy, over several years. The small businesses differed in business models and were a mix of profitable and unprofitable businesses. In this article, we will go through the key findings of that study in order to determine what small businesses need from lawyers.
The study found that the average small business had 10 legal problems a year, which works out to just under a legal problem a month. Half these problems were a result of contract/commercial issues (37.5%) or tax (22%). Other issues involved were employment (14.5%, intellectual property (8.8%), real estate (7.1%), regulation (4.5%), corporate structure (2.8%), finance/debt (1.1%), and others (1.8%).
One fascinating finding from the study is that there were “turning points” in each class of legal problem, and these turning points were a kind of threshold size after which a company began experiencing a specific kind of legal issue. Intellectual property issues seemed to affect a small business just as it was growing past the small business category. At 46 employees, a small business was likely to have intellectual property issues. The other legal issues occurred at the following tipping points: corporate structure (43 employees), regulation (31 employees), employment (29 employees), commercial/contract (27 employees), tax (26 employees), finance/debt (25 employees), and real estate (24 employees).
Legal issues faced by small businesses can have a material effect on them. The study found that 25.6% of small businesses suffered a loss of income as a result of a legal issue. 9.2% suffered the loss of a contract or customer. 8.8% suffered additional costs. 8.7% were unable to complete scheduled work. 8% suffered reputational damage. 7.4% suffered a deterioration in relations with another business. 5.2% were unable to get new work. 1.9% suffered damage to their property. Another 1.9%9% had to change their ownership or business structure. 1.8% lost employees for reasons other than dismissal. Finally, 1.8% had to cease business.
The above statistics demonstrate the significance of legal problems for small businesses. Yet, small businesses are not just faceless organizations, they are made up of people, and legal issues can hurt the people, directly and indirectly, involved in small businesses, for instance, a family’s livelihood could be taken away, or its legacy destroyed. 16% of those surveyed reported suffering from some stress-related illness. 5% of those surveyed reported becoming physically ill. 4% suffered a decline in their mental health. 20% of respondents suffered from a combination of the above stress-related illnesses.
Perhaps unsurprisingly, given the extent to which small businesses are neglected by law firms, 52% of respondents said they tried to deal with these legal issues on their own. Just 23.4% hired independent counsel. 16.8% resorted to their friends and family even though they admitted that their friends and family’s legal expertise was “adequate” or perhaps even worse. 9% of those who sought counsel from their friends and family said they had “no knowledge at all”. 21.5% of respondents said they resorted to the internet to get contact details, while 21.3% used the internet to seek counsel. 15.1% went online for legal research.
The question is, for those who did seek to retain a law firm, what were the most common factors in determining their choice? 30.1% of respondents said that reputation was important for them. 24.5% said that it was important for that law firm to specialize in their legal problem. 24.4% said they simply went to the law firm they had used before. 15.7% chose their law firm for reasons of cost. 9.9% were referred by a family member. 9.8$ said their law firm was just convenient. 9.4% said that their friends or family believed it had the requisite expertise. 8.6% were accidentally referred to that law firm! 8.6% were referred by their accountant. 8.4% were referred by their trade organization. 7.6% said the speed of delivery was crucial to their decision.
It’s interesting that when asked about their attitude toward legal fees, only 13.4% said they believed that retaining a lawyer was a cost-effective way of dealing with their legal issues. 47.1% disagreed with that and 15.2% disagreed strongly.
What we have here is a perception by small businesses that lawyers are not worth the money. Many small business owners retain a lawyer as their very last resort. They would rather go through illness, or ask their friends and family for advice, or go online for counsel than seek the assistance of a lawyer. Lawyers have to rebuild their reputation and show how their work can be of benefit to small businesses and that they can be trusted to act in the client’s best interests. As we have advocated in this website, legal counsel is important for protecting the business and personal assets of entrepreneurs. The disconnect between lawyers and small businesses has led to lawyers missing out on a great market opportunity, and to small businesses suffering from a want of legal advice.