The word ‘lawsuit’ can make the mightiest of business owners, shrink to the fetal position in a dark corner. Whether you are being sued for breach of contract, wrongful termination, discrimination, malpractice, harassment, misappropriation of funds, or any other reason, lawsuits can wreak havoc on your business. Therefore, let me walk you through ways you can mitigate your lawsuit risks.
Before I talk about how to mitigate your lawsuit risks, I want to clarify the difference between lawsuits and litigation.
Technically, a lawsuit is a legal dispute between a plaintiff and a defendant that is brought to civil (not criminal) court for judgment. Individuals, businesses, or groups of people file suit against a person, persons, or a business they believe has wronged them. Once a lawsuit has been filed within a local, state, or federal court system, litigation begins.
Litigation is the process the lawsuit goes through within the court system. It can involve securing legal counsel, gathering evidence, giving and hearing depositions, recording and reading affidavits, filing documents, procuring witnesses, and more. Litigation of lawsuits between individuals can last a couple of years or more, so just imagine how long litigation between individuals and businesses can last! When I was involved in a “business divorce” many years ago, litigation for my lawsuit lasted almost seven years!
According to uscourts.gov, average discovery costs for small companies involved in lawsuits between 2006 to 2008 ranged from $621,000 to $2.9 million! That’s on average. That means that some businesses fall outside of the average. I’ve seen several of my clients take customers to small claims court for lack of payment. Typically, those clients spend between $3,000 to $15,000 for something as “simple” as that. However, I’ve also seen small business clients spend hundreds of thousands of dollars year upon year on litigation costs for lawsuits filed against them.
According to Business Practical Knowledge, “An average small business earning $1 million per year spends $20,000 on lawsuits each year.” BPK also mentions a study that the Klemm Analysis Group did that “estimates that perhaps as many as 52% of all civil lawsuits target small businesses each year.” If those statistics don’t catch your attention, I don’t know what will!
Business owners are constantly at risk of being sued. You currently may not be worried about a lawsuit, but perhaps you should be. No matter how good a person you are or how upright your business practices are, you are not impervious to lawsuits. So when you are trying to maximize the value of your business, one of the things you can do is try to avoid lawsuits. Yet, that’s easier said than done.
Generally, I tell my clients to follow Patrick Fraioli, Jr’s advice in the article Avoid Legal Time Bombs:
Obviously and perhaps most importantly, you want to have an attorney on your advisory team. Most likely, you don’t have a law degree. You can’t anticipate all the risks within your business, but a good lawyer can. A sharp attorney can help protect you and your business from lawsuits as much as is humanly possible.
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Yet, what happens if you are served? What do you do if someone files a lawsuit against you or your business?
Friends, I hope you never have to face litigation as a small business owner. I can tell you from personal experience that being sued is a nightmare. Whether you are culpable or not doesn’t matter. Any lawsuit you face can send you and your business into a tailspin. Maybe you can get back on your feet, but maybe you can’t. Regardless of how protected you think you are from lawsuits, you should still “lawyer-up.” Have your attorney review your contracts, agreements, operations, and practices. Shore-up your legal protections to protect you AND to protect the value of your business.
Join us in our next article dealing with insurance… which policies you need to have to protect you and your small business.