Taking Care of Small Business

From The Practice November/December 2019
What small and midsize companies need from their lawyers

Small and midsize companies need lawyers too

In “Smarter Law,” Trevor Faure explores how large corporate clients are approaching their legal needs and how they might rethink their legal purchasing methodologies. There are good reasons to focus on clients with the largest budgets and the most sophisticated in-house legal capacities. At the same time, the market for legal services is filled with a myriad of actors, including millions of small and midsize businesses (SMBs), who also rely on high-quality legal work, albeit not at the scale of large corporate actors, and need to find lawyers.

According to the U.S. Small Business Administration (USSBA), 99.9 percent of all U.S. businesses are small businesses (defined as having fewer than 500 employees). Likewise, within the data set of the U.S. Census Bureau’s 2016 Annual Survey of Entrepreneurs, the average number of employees across the more than five million businesses was just more than 20. For context, roughly 89 percent of those businesses had fewer than 20 employees. Lastly, a recent USSBA report estimated small businesses’ share of national GDP at 44 percent. All this is to say that SMBs account for not just a vast majority of potential corporate legal clients but a significant part of the U.S. economy.

The market for legal services is filled with a myriad of actors, including millions of small and midsize businesses.

In this article, we explore how SMBs think about their legal needs and how they find their legal counsel through a case study of one, not-atypical SMB. Founded in 2011, TruQC develops digital process-management tools to help companies streamline their reporting needs and workflows. The St. Louis–based SMB started out serving clients in industrial painting and has since expanded its offerings to serve industries such as petrochemical, infrastructure, marine, and others with more than 30 employees. We spoke with Aaron Boyll, TruQC’s president, and Megan Brinker, its COO, to learn more about how they have thought through their legal issues over the years. We also spoke with their lawyer, Sara Stock. In addition to founding and leading a 12-lawyer St. Louis law practice, Stock Legal, Stock is also vice chair of the American Bar Association’s Middle Market and Small Business Committee. Her target client base is stated right on the firm’s website: “Our clients range in size from start-ups who are pre-revenue, to emerging companies who are scaling, to mature operating companies with over $100M in annual revenue.”

What are SMBs’ legal needs?

It is useful to start with the legal needs of SMBs. On the one hand, there is a significant degree of variability when it comes to SMBs—a restaurant is going to have different legal issues to think about than a fitness center or a trucking company. On the other hand, there are areas of overlap and, in fact, the legal needs of an SMB have a lot in common with those of a larger company—albeit on a smaller scale and with fewer resources. “A lot of the problems an SMB will encounter are the same as large companies,” Stock says. Indeed, there are a few broad categories that characterize the legal issues facing SMBs.

Corporate governance. Businesses of all sizes must grapple with the laws for forming and operating a business. The scope and scale will depend on the circumstances of the business in question—its size, structure, location, and so forth—but SMBs invariably have some degree of corporate governance work that requires legal attention. “Maybe they’re forming a new company, or they have risen to a stage in their operation where they’re an LLC and the old two-guys-and-a-dog operating agreement isn’t cutting it anymore,” says Stock. “Either way, corporate governance is first and foremost. It’s typically an education opportunity, and we walk through best practices, risks such as piercing the corporate veil or owner disputes that turn on corporate governance issues, and practically how to streamline the corporate governance process.” It is worth noting, of course, corporate governance for an SMB is very different from corporate governance for a large, multinational, multijurisdictional public company—and thus matching lawyer with need is critical.

Contracts. Contracts range from basic sales contracts to highly complex ones. An SMB might have one contract sufficient for a homogenous-enough client base or many contracts for customers of all types. Lawyers will offer services to SMB clients not only building these contracts to fit their needs but also teaching clients how to use them.

Employment. Whether an SMB’s HR function is internal or outsourced, there are common employment agreements (involving such basic things as wages and insurance) and events (such as hiring or letting someone go) that have legal implications for the business.

I don’t think we looked online at all for our company lawyer.

Megan Brinker, chief operating officer at TruQC

Regulatory. SMBs must also deal with a host of local, state, and federal regulatory issues (for example, issues around food safety or environmental rules). Knowledge of, and the ability to adapt to, regulations drives to the heart of what many SMBs must contend with from a legal perspective—and therein the role of lawyers.

Contextual. An SMB might have countless other legal considerations. They might be acquiring another SMB or perhaps selling their own. They might have intellectual property that requires protection. They might have industry-specific or other legal considerations depending on where specifically they work. It all depends on the SMB’s particular set of circumstances.

How do SMBs find a lawyer?

If you are an SMB, where do you go to find the right lawyer? Despite the proliferation of online lawyer-referral networks like Avvo and Super Lawyers, Brinker and Boyll suggest that online resources played a negligible role in identifying TruQC’s outside counsel. Instead, they value referrals from people they trust with some expertise or experience.

“I was just getting involved with TruQC when they found Stock Legal, but the first thing I did was call some of my friends who are lawyers and ask what they thought,” says Boyll. As he explains, when he is looking for legal counsel that will best serve the business, it is about finding the best fit—and getting personal referrals, whether from other lawyers or industry peers or even customers, seems a more efficient and trustworthy route to finding a lawyer for the long haul than sifting through online directories. “I don’t think we looked online at all,” adds Brinker. “We all had people within our circles whom we trust to know what we’re looking for. At the end of the day it made more sense to turn to them.”

Stock confirms that this approach fits a larger trend she sees at her firm. “For SMBs, finding lawyers is still based primarily on in-person networking referrals from other trusted advisers,” she says. This means for a firm like Stock Legal, whose target client base is SMBs, maximizing opportunities to engage potential clients offline is key. “I built our client base at Stock Legal by having lunch, dinner, drinks, or coffee with literally thousands of people,” Stock adds. She also sits on several boards and participates in networking groups (which also allows her to recommend just the right service provider for whatever issue a client might be facing). All of it has added up to help direct SMB clients to Stock Legal.

I have a few friends who are lawyers at large law firms here in St. Louis, and they know I can’t afford them.

Aaron Boyll, president of TruQC

At the same time, Stock refers to this as the “old-fashioned” way of connecting with her client base. Indeed, the firm is beginning to see more and more clients coming in through its website. “This year especially, we’ve seen a significant uptick in online intake,” Stock says. A part of this is the product of a more-deliberate online strategy that includes polishing the firm’s profile on social media and producing a blog designed to educate potential clients on common SMB legal issues. Nevertheless, Stock cautions that much of the firm’s online success owes to the fundamentals that built their client base to begin with. “Our opportunity today is to leverage online tools to convey to the marketplace what people feel when they meet with us,” she explains. “And that feeling is incredibly important. When clients meet with us, we are able to engage with them and their issues in a way that demonstrates we genuinely care. In order to scale, we are working on converting that feeling into an online presence.”

Who serves SMBs?

Stock defines SMBs as private businesses with annual revenues ranging from what she calls “pre-revenue” (or startups) up to $100 million in annual revenue—her firm’s stated client base. The ABA Middle Market and Small Business Committee that Stock vice chairs is a global convening space for lawyers with similar clients. “As you might expect, there are some smaller firms and some midmarket firms, but there are a surprising number of big-firm lawyers who are also in this space,” Stock says. “It’s a heavy lift for Big Law because their rate structure and their fee structure typically isn’t set up for SMBs, but they are trying to figure it out.”

Indeed, TruQC tried working with larger law firms in its early years. But, as Brinker and Boyll describe, Big Law simply was not the right fit for a company their size. TruQC needed quick turnarounds, and the processes in the big firms took too long to deliver their solutions. They found the service was depersonalized. Because it was not a big institutional client generating a lot of revenues, often TruQC would be working primarily with one associate. If that associate moved on from the firm, TruQC would have to explain themselves all over again from the beginning with another one. And, of course, the big firms were expensive. “I have a few friends who are lawyers at large law firms here in St. Louis, and they know I can’t afford them,” laughs Boyll. “Not only that, we cannot drive enough revenue for them with our limited amount of work. It doesn’t make sense for either side.”

Stock explains that while some of this can be chalked up to law firm economics, SMBs are also a qualitatively different type of client from their larger counterparts—and being geared for that type of client requires specific organizational and strategic mindsets that not all firms have. “Working with SMBs means you’re working all day, every day, with the owner or owners of the company,” she says. “These are people who are pouring their blood, sweat, and tears into trying to grow and scale the business. And not that you don’t get that same passion and excitement from some of the larger, public companies. But the relationship is different.”

It’s a heavy lift for Big Law because their rate structure and their fee structure typically isn’t set up for SMBs.

Sara Stock, founder of Stock Legal and vice chair of the ABA Middle Market and Small Business Committee

Capacity is another major consideration that lawyers serving SMB clients will need to bear in mind as they offer advice and forge that relationship. Perhaps most important, these businesses often do not have internal counsel, instead relying on lawyers like Stock to serve as a sort of external general counsel for their company. Available data appears to support this dynamic. A 2015 study conducted by Kingston University’s Small Business Research Centre, which surveyed more than 10,000 small businesses to examine their legal capacities, found that only 5 percent had “a qualified lawyer or a person trained in handling legal issues in-house.” (And within that 5 percent, in most cases the worker with the legal training appeared to be the only person at the company, lawyer or otherwise!) SMBs are relying on their outside legal counsel in ways that large corporate clients need not given their in-house functions.

“That external general counsel piece is incredibly important to these SMBs because they don’t have anyone thinking strategically from a legal perspective,” says Stock. “A lot of what we do is educate. They need someone they can trust to really streamline the legal information they need to make their next business decision. So it’s a much more practical brand of legal advice, and that can be a real challenge for lawyers.” Indeed, in addition to having their own types of legal issues to deal with, SMBs have their own perspectives on what matters to them in their legal service.

What do SMBs want?

What qualities are SMBs looking for in a lawyer or a law firm? What do SMBs value? If there is no in-house counsel, that means that law is likely not at the center of anyone’s role at a given SMB—a fact that inevitably shapes what they are looking for in their lawyers. “SMBs want experienced lawyers who are creative problem-solvers and clear communicators who engage with them relationally,” says Stock. While all of these elements might feed on and strengthen the others, each adds a different dimension to an SMB’s ideal lawyer.

Relational. The external general counsel role that Stock notes above captures something many SMB clients are looking for: a lawyer who can act not only as legal translator for the SMB but also as a member of the team despite being formally “outside” the company. This means investing significantly in relationships. “When you’re looking at how SMBs choose lawyers, that relational piece of it is so critically important, because, at some level, part of what they need is already commoditized in the market,” says Stock. “Law firms all have great documents. We’re all great technical drafters. The differentiator is who can provide that human support that helps SMB clients apply the legal advice to their business problems.”

SMBs are relying on their outside legal counsel in ways that large corporate clients need not given their in-house functions.

Experienced. Just as large companies might take issue with new associates billing time to their matters, SMB clients want experienced lawyers handling their affairs and advising them. An SMB client will look for a lawyer they view as mitigating their risk—not exposing them. Thus, the more a lawyer or law firm has dealt with businesses of comparable size and with businesses in the same or similar industries, the better a fit they are likely deemed to be. As Boyll explains, the benefits of such experienced legal counsel often lie in their ability to draw connections that might otherwise slip through the cracks:

Use insurance as a simple example. If we get a contract next week from Client A and they require us to have $2 million worth of a certain type of insurance, a lawyer who has been working with us can say, “Well, that’s not an issue for you guys because your contract with Client B already requires $3 million of that, so you’re covered. We can give on that.” How all those agreements play together when something new comes up is critical in understanding what the risk truly is.

Transparent. Clients of all sizes would likely say they want transparency from their lawyers and law firms, but the margin for error for an SMB is, by definition, smaller. “In the client base we serve, much more so than at the big firms, we communicate regularly with our clients about cost,” says Stock. Fixed-fee arrangements are one way firms communicate costs to SMB clients in simple and effective terms, but of course there is always fluctuation beyond legal fees. Stock emphasizes the importance of being open and upfront with clients about the factors that will impact their bill.

Efficient. Just like their large corporate counterparts, SMBs demand efficiency when it comes to their legal spend. On one level, this means getting a quick turnaround on urgent legal matters. As Brinker and Boyll describe, their company needed to be nimbler than many larger law firms’ processes allowed, which was in part what led them to Stock Legal. But on another level, there is a more holistic type of efficiency that SMBs like TruQC are after with their lawyers. In short, they do not want to have to call up their lawyer for each edit they want to make to a contract—they want their lawyer to help them build a good contract, teach them how it works, and then be able to carry on themselves to the extent possible. “We don’t want to have to go to a lawyer for every little thing,” says Brinker. As Brinker and Boyll explain, they are willing to do their homework to save on cost. Before checking in with a lawyer, they will often do their research and put together a succinct list of questions. “You also tend to get a much faster response if you put the effort in to frame up the question and really break it down to exactly what it is you need to know,” adds Boyll.

Law firms all have great documents. We’re all great technical drafters. The differentiator is who can provide that human support.

Sara Stock

Another avenue toward efficiency that appeals to an SMB like TruQC is having a lawyer who knows and understands their business. Having been with Stock Legal for some time, TruQC has lawyers who not only are prepared to help them navigate their legal problems but also know their business from years of experience and know what they want and need from their legal advice. Boyll explains:

It’s so important, especially for a complex business like us, to stay with a law firm going forward because I don’t want to have to go back and read five different contracts to figure out if this or that small detail matters. I’m paying Sara to do that, but I also don’t want her to have to go read five different contracts again, because I don’t want to pay for that. I want that knowledge to just stay with her, and I think that makes your legal dollar much more efficient if you can find somebody you trust who is going to bother to dive into your business.

Creative. Likewise echoing a common refrain among large corporate clients, SMBs want solutions—not problems. And it takes creativity to get around roadblocks. “They want creative problem-solvers, because a lot of the issues SMBs face are outside-of-the-box problems,” says Stock. “It’s not like they have the standard contracting question, which is why it is so important to understand the client’s business. They may be trying to bring a product to market that the market’s never seen before.”

Already found the right fit?

SMB clients are not asking for a vastly different set of legal services from larger corporate clients—they are merely coming from a different set of circumstances. They have legal needs, but often not the internal legal counsel to help navigate them. As Stock, Brinker, and Boyll tell it, a lawyer serves the SMB best when he or she is part of the team—the external general counsel—investing time in knowing the business inside and out and acting with the business’s interests at heart. The elements above—trust, experience, communication, efficiency, and creativity—are likely all present in a lawyer doing well as de facto external general counsel.

From Brinker and Boyll’s perspective, they do not see any reason to change their approach to TruQC’s legal issues anytime soon. The rise of online resources for individuals and businesses—such as LegalZoom or Rocket Lawyer—does not present them with viable replacements for the qualities they seek nor address the problems they face. “Our situations are typically so unique that those forms are too standard for what we’re trying to accomplish, so they really don’t make sense for us,” says Brinker. These resources might be useful insofar as they help frame better questions for the SMB’s lawyer, but the products themselves simply do not provide enough cover for the business’s risk. “These off-the-shelf types of agreements might be less expensive, but if you find the right firm, they have their own versions of these agreements on their shelves, too,” adds Boyll. “They can make a few changes, and in 15 minutes it’s perfect for your business.”

A lawyer serves the SMB best when he or she is part of the team—the external general counsel.

At the same time, TruQC is in no hurry to bring a lawyer in-house. When they already have a lawyer and a law firm that has invested significant time in understanding how their business works and what they need, the idea of paying for a full-time in-house lawyer sounds like a needlessly costly prospect. “What’s more important for businesses our size, at our stage, to have in-house is finance people,” says Boyll. “As we grow, we’ll need more finance help and accounting help internally way before we need legal internally.” As far as they are concerned, their legal needs are already covered.