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How to Manage Your Early Startup Legal Hurdles

At what point should entrepreneurs seek professional legal help for their growing businesses?

Global Influencer

Global Influencer
Global Influencer

It never ceases to amaze me the trials and tribulations that befall entrepreneurs on a daily basis. There have been clients of mine that I would assume would face more than their share of issues while conducting business. On the other hand, I’d be surprised if any of my ‘A Team’ clients I‘ve worked with fell into a bad situation with their business.

I have two young female founders of a trendy fitness studio in Vancouver. They are a mentor’s dream. They are organized planners. They choose the agenda for our monthly meetings, they come prepared, and take copious notes. My colleagues who meet them see them as winners on the road to success.

I don’t want to infer that it is easy for them but they have done their first business together the right way. While some would choose a passion and build a business around their lifestyle, these young women researched and identified a business model and market that they felt they could dominate in time. They have systems in place (a la Michael Gerber) and use my input wisely.

I was surprised at our recent monthly meeting to hear of issues that could be catastrophic to some entrepreneurs. Four separate issues they faced in the last month required a legal assessment and intervention on a diversity of issues.

The first good news was that a big competitor, having been in business for more than 10 years suddenly closed their doors. It was dramatic because they were still taking year-long membership applications with full payment the day before they closed for good. They knew it was coming as it came out later that they had been shopping their client list around for a month. I drooled at the idea of a client list floating around but then thought of the hard feelings those people might harbor after being dumped so unceremoniously.

That aside, the good news is they were able to hire some very talented instructors who were left high and dry without a job. They didn’t even get a notice or severance.

My fitness clients had bad news of their own. They had been toying with the idea of adding a wellness service to their fitness and had brought in a supplier who worked with them for a couple of months in return for a small room for her equipment to see if their existing clients would be receptive. When they parted ways, the supplier moved across the street within hailing distance. In her business she was billing the government for physiotherapy procedures using part of my client’s company name (without their knowledge) as well as their phone number and address.

They got the odd phone call for the supplier but didn’t think too much about it until they tried to register a new wellness division of their own. The government name registry wouldn’t register the name because the woman was already using their trademarked name, the insurance company refused to grant them permits because by now the ‘supplier’ was embroiled in possible fraud charges and their new business was essentially stalled until the supplier came clean or they could convince investigators of their innocence –ahghg!

The second issue came about because one of the new hires expressed interest in partnering with my clients in their original fitness business in another location. I’m sure the person was a decent enough person but due diligence had to be done. The partnership needed a new corporation to protect their ‘flagship’ business and legal agreements had to define the roles of the partners. Amidst all this activity my clients still wanted to set up yet another corporation for their new division, the Wellness branch.

My clients had shown an interest in franchising in the past so we had to find a franchise expert to identify the pros and cons of franchising versus opening new locations with different shareholders.

Let’s recap their new problems; possible fraud by association, trademark infringement by a former contractor, reorganizing their corporation, creating a new division, developing a partnership/shareholder agreement for a new corporation and possibly someone to negotiate lease agreements for new locations. They need more lawyers than you can shake a stick at. I guess they will be putting their Christmas party off until spring.

The more advice I proffered, the more it became obvious that they needed to hire a team of lawyers to deal with the situations. Since they didn’t have legal representation, they asked if I knew of a good lawyer. Without being sarcastic or offer a joke, I looked at the range of issues facing them.

At first, I thought an independent lawyer versus a law firm would be a good place to start. I think the small business might end up with an articling student at a big law firm but the independent might not have the breadth of experience my clients needed.

Most lawyers in Canada will offer a free consultation by phone or in person, which will give you a good idea on how to proceed as well as giving you a feeling for what the lawyer would be like to work with. A friend of mine had some good advice. He called it ‘pre-loading’ the lawyer. He pointed out that before consulting a lawyer you need to have a complete statement of the facts written down as if you are planning to go to trial. When I was a Parole Officer years ago, I followed that advice out of necessity because I was often called on to be an expert witness before the courts.

Organizing your ‘story’ will keep you from wasting you and the lawyer’s time. My friend has free lawyer consultation down to an art. He is so organized that often the consultation is enough for the lawyer to give actionable advice with no need to proceed further.

The Canadian Bar Association has a referral plan that provides a consultation with any lawyer for a small fee. Based on my experience you can usually get a 30-45 minutes meeting without cost. I’ve been fortunate that after talking to a lawyer the way out of a situation presented itself in that first meeting.

Besides being organized, I’d say that knowing when ‘to pull the trigger’ on hiring the lawyer is critical. My way of dealing with problems is to roll them around in my thick head for a long time trying to figure them out on my own. Asking for help by a professional could have alleviated the stress and worry. I must be a sucker for punishment because I often ‘pre-pay for the pain’ until I absolutely have to get someone to help.

Lawyers for the most part scare the heck out of me. With prices ranging from $300-$600 an hour, even a little problem could cost you a small fortune. On the other hand, one piece of good advice could be worth more than the price of a quality lawyer if it fixes what you thought was an insurmountable problem.

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