The legal industry is geared towards winning clients of large companies with already extensive legal services. Yet most businesses in the United States are small businesses, and these small businesses contribute 44% of the country’s economic activity. It appears that the legal industry is somewhat neglectful of such a vital part of the economy. To some extent, this neglect is understandable: there are millions of small businesses, and the number of large businesses is in the thousands. It’s easier for these big companies to organize and drive the agenda, and winning a big client can make a law firm. Because there are so many small businesses cannot manage it adequately, and the rewards of winning a small customer are insignificant. Consider that the average industry turnover refers to a consortium of corporate legal operations, which is located in the region of $ 18.8 billion. These consortia have legal departments with an average workforce of 104. On the other hand, 95% of the over 30 million small businesses in America have no legal department at all. Yet the lack of legal resources in small businesses presents unique opportunities for a savvy law firm. Therefore, it is essential to understand what small businesses need from a lawyer, to develop more attractive resources and to exploit this vast market opportunity.
A recent study published by Kingston University titled “The Legal Needs of Small Businesses” provides valuable information to address this issue. The study was based on a survey of over 10,000 managers of small businesses operating in businesses with 50 or fewer employees. These small businesses come from a wide range of industries, from agriculture to wholesale. Some of these companies 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 companies range from pre-profit to profitable.
The study has several results, many of which are quite surprising.
Main legal issues faced by small businesses
Small businesses have an average of 10 legal issues per year, which equates to less than one legal issue per month. Half of these legal issues stemmed from business / contractual 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%
- Company structure: 2.8%
- Finances / 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 some type of legal problem. This turning point varies depending on the legal problem:
- Intellectual property: 46 people
- Company structure: 34 people
- Regulation: 31 people
- Employment: 29 people
- Commercial / Contract: 27 people
- Tax: 26 people
- Finances / 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 not addressing these legal issues are the following:
- Loss of income: 25.6%
- Loss of client or contract: 9.2%
- Additional charge: 8.8%
- Interruption of scheduled work: 8.7%
- Reputation damage: 8%
- Damage to business-to-business relationships: 7.4%
- Difficulty finding a new job: 5.2%
- Material damage: 1.9%
- Changes in business structure or business ownership: 1.9%
- Loss of employees for reasons other than dismissal: 1.8%
- Cessation of trading: 1.8%
How Small Businesses Respond to Legal Problems
Small businesses, by their nature, tend to be tight-knit businesses. With a staff of 50 or less, everyone knows each other. Often these businesses are family owned or run by friends and family. Therefore, the impact of legal issues has a more personal effect than it would with large corporations. If a business is family owned, business interruption or failure is not a purely financial matter. It affects the family’s inheritance as well as its livelihood. In addition, 16% of those surveyed said they suffered from a stress-related illness after experiencing a legal problem; 5% said they were physically ill; 4% suffered from mental health problems and 20% felt a combination of these problems.
Interestingly, 52% of those surveyed said they solved legal issues on their own, without seeking any legal help. On the other hand, 23.4% requested the use of an external advisor. However, 16.8% of respondents turned to their friends and family for legal advice, even though they felt their friends and family had adequate or poor legal knowledge. Indeed, 9% of those polled said that their friends and family had “no knowledge” of legal matters!
Regarding resources, 21.5% of respondents have looked to the Internet for for-profit lawyers and legal advisers; 21.3% used the Internet for legal advice and 15.1% surfed the web to research their legal issues.
Among small businesses that sought the services of a legal professional or friends and family, several criteria played a role in their decision to hire:
- Reputation: 30.1%
- Specialty: 24.5%
- Previous use: 24.4%
- Cost: 15.7%
- Friends and Family Referral: 9.9%
- Convenience: 9.8%
- Friends and family were believed to have the required expertise: 9.4%
- Accountant’s benchmark: 8.6%
- Referral from a professional organization: 8.4%
- Speed of delivery: 7.6%
How small businesses view lawyers
One of the main reasons small businesses seem so reluctant to hire a lawyer is because they don’t believe lawyers are a cost-effective way to solve a legal problem. Only 13.4% of respondents think that retaining or hiring a lawyer is profitable, 47.1% believing that the use of lawyers is not profitable and 15.35 are convinced that indeed, lawyers are not. profitable.
Small businesses look to lawyers as a cost-effective option of last resort, not the first port of call if something goes wrong. The study found that 49.9% of respondents only used a lawyer when they had no other choice. 6% strongly oppose the use of a lawyer as a last resort and 14.1% disagree that lawyers should only be used as a last resort.
The results of this study are food for thought for lawyers looking to provide better service to small businesses.
Learn more about business and law and issues such as the benefits of limited liability companies (LLCs) at this page.
Legal Scoops editor-in-chief Jacob Maslow founded several online newspapers, including the Daily Forex Report and the Conservative Free Press.