Eric is really angry. Less than a year ago, he started a business with four guys he knew from friends of friends. They shared the dream of opening a sports bar dedicated to soccer that would serve international beer and bar food.
They found the perfect spot and signed a lease. Eric personally guarateed the lease and put $30,000 down for a deposit. He paid for all the kitchen equipment and hired a contractor to bring the building to code.
His partners (they were all equal according to the one page document he typed up) chipped in for a little while. One brought in some TVs. Another bought some beer and tended bar sometimes. Another pitched in a few thousand dollars to buy some advertising to announce their grand opening.
After a month, the first partner was run out by Eric after taking cash from the till. He never came back.
Then one of the partners got sued for pinching the waitresses. Eric became embroiled because they were not a registered partnership or corporation.
Six months in, Eric ran out of savings before the bar started turning a profit and he got behind on rent. He asked the third partner for money. Instead, the third partner took all the TVs and left.
The waitresses quit because they were paid late. There was no cash for food or beer. And the landlord said that Eric was personally responsible for the five year lease — a debt of $250,000 at least.
After a few more months of barely scraping buy, Eric closes the doors to his dream bar. And the landlord sues.
Although this is a fictional story, I get a call from someone like Eric at least once a month. The details vary, of course. But the story is more or less the same: an erstwhile entrepreneur gets burned by less-than-honest partners or landlords and now has major problems. He’s broke, depressed and ruined.
It’s a really depressing story for an optimistic entrepreneur like me. But sadly, 80% of businesses fail within their first year. And the blow up is usually spectacularly devasting for an owner like Eric.
I am CONVINCED that many businesses would not fail if they had simply started off right. New business owners make a lot of the same mistakes that lead to failure. These include:
- Not organizing legally, following ALL the steps necessary (e.g. just filing an LLC is not good enough)
- Failing to keep professional accounting records from Day 1 and getting into tax problems
- Not having good contracts with business partners and investors (this is one of the biggest mistakes)
- Getting stuck in a bad commercial lease
- Not having adequate resources to deal with all the things a new business must do because of lack of planning or education, which destroys cash flow because of constant traps and problems
- Failing to follow good employment and pay practices from Day 1
- Underestimating what starting and running a successful business takes
Eric didn’t call me before starting his business. If he had, I would’ve given him my ebook, How to Start A Business… Legally: A Quick and Easy Checklist.
I cannot stress this enough. Getting set up right and under the guidance of someone who has started or help start many businesses will save you thousands of dolalrs and help prevent failure.
Someone like Eric spends $100,000 to open his bar, only to crash and burn in just a few months. Now he’s liable for another $250,000 just with a broken lease…. There are still employee liabilities and taxes to deal with (and that’s if the partners all just disappear). His legal fees with me are going to be a minimum of $50,000. Alternatively, he will bankrupt and lose everything.
In a more perfect universe, Eric would have come to me a year ago. He would have hired me for between $5000 and $18000 and I would’ve helped him set up everything and given him the benefit of my years experience in business start ups.
He would’ve avoided the bad partners, the bad lease, the sexual harassment lawsuit and the waitresses quitting.
He also would have been on track to avoid the plethora of other problems that come from starting a business.
And then his $100,000 investment would not have been such a hopeless risk!
If I practiced law just for money, I would rather have people like Eric pay me $50,000 or more to pick up the broken pieces of their dreams and help them move on.
But I’d rather more small businesses be successful. And the odds of that are much improved when you invest in the foundation when you start up.
Either way, you’ll be calling me.
I know how busy you are.
You barely have to get through your email inbox everyday, so you certainly don’t have time to ready everything that comes across your desk.
This means you sign “paperwork” without thoroughly reading it.
You don’t have to admit this out loud but, chances are, you are just like every other business leader I know. (To be totally honest, I’m a lawyer, and even I do this sometimes.)
The copier guy delivers a new machine and you “sign for it.”
The guy who does your pest control work takes off his mask (which is actually a chemical filtration respirator) long enough to hand you a pen to sign the “standard service form.”
You pick up a car at the rental counter and you sign a 3×12 card in two places and initial it in 3 other places…and you can’t even read the print with a magnifying glass.
We’ve created a cultural norm that makes it perfectly acceptable to sign things without full and complete knowledge of the information contained on the very document we are signing. I bet you use a website every single day and agree to their terms of service without reading a single sentence!
As a reality check – I don’t think I’m ever going to convince you not to sign a car rental agreement or make changes to your copier lease. And some of these agreements do not have enough at stake or are non-negotiable, so I wouldn’t even try to convince you to read every word.
But there are some really risky documents you sign all the time without a second thought. Here are five documents you should examine closely before you sign:
Commercial Leases: Commercial leases are written for the benefit of the landlord. It is not uncommon for them to include personal guarantees, rent escalation clauses, and fees and liability shifts for everything. At best, you receive a form agreement that does nothing to protect your rights. In fact, in just a couple days, I’ll be going to trial in a commercial lease case where $350,000 is on the line, because the landlord snuck in a fraudulent clause without my clients’ knowledge. Commercial leases are a big deal.
Insurance Paperwork: Insurance companies make a lot of money. They do so by limiting their liability. All of us assume there are regulations that protect us when we purchase insurance. (There are, but insurance companies are also one of the most powerful lobbies around.) In short, you don’t want to comb through your insurance documents after a catastrophic event to make sure you are covered. You should have a good idea what it says in advance. And you should check the policy changes at renewal every year, because they can change the coverage definitions.
Contracts with Your Clients: Many businesses rely on template contracts they get off the internet when a client engages them. Or worse, they just do a bill of sale or a purchase order, without any contract whatsoever. Your business is not the same as every other business pulling contracts off the internet. So why would you assume that the same contract can work for all of you? Bad contracts and lack of a contract causes a good amount of litigation. Review contracts your customers given you carefully. And have a well-drafted Master Services Agreement for your business that is written by a lawyer who knows all about what you do.
Employment Agreements: So first of all, I do not recommend having a bunch of employee agreements because they might interfere with the at-will employment doctrine that (if you had me write it) is so jealously guarded in your handbook. But offer letters, policies and (sometimes) arbitration and confidentiality agreements are necessary. Executives also may require specially negotiated employment agreements. A template document cannot cover you for employees and unconsidered employment agreements should not be bandied about (unless you like wrongful termination lawsuits).
Indemnity Agreements: These can come up in several contexts. For example, an equipment supplier may require you to indemnify them if someone gets hurt. Or a landlord could require you to indemnify them if the building is not up to code. Data privacy is also a big deal, and when you are working online or with partners who have trade secrets or collect sensitive data, you may end up indemnifying them in the event of a hack. Whenever a document is not prepared in a way that minimizes your exposure, you should think long and hard before signing it.
Here’s the reality: You shouldn’t sign legal agreements without having a lawyer review it.
Because those documents were prepared by attorneys and they were designed to protect the interests of the other side. Who is looking out for your interests when you sign something without an attorney’s review?
Yes, most of the time you’ll be fine without taking your car rental agreement to your lawyer for review. But it would be nice to know if you should accept the collision damage waiver, right? When I skim these things, at least I have the benefit of knowing what they mean!
And no, the exterminator will not be happy with you if you don’t sign the standard service form. But what happens when someone visiting your office gets sick from the formaldehyde in the bug spray and, by signing that form, you have waived all liability and indemnified the pest control company?
Bottom line: If a lawyer wrote it, your corporate lawyer should review it BEFORE you sign it.