The First Time I Had to Call a Business Lawyer Cost Me $52,375: Here Is How You Can Avoid It
My agency was just pulling out of the recession that brutalized us at the end of 2008 and through 2009. Finally the bigger projects started coming again at the beginning of 2010. I can’t tell you how excited I was when we landed our first six figure project in the post recession era! Oh man, I was filled with joy…until six months later.
At the time I thought I was impervious to legal issues in my business. We crafted a scope and agreed on a price and payment terms with our client. Since the project was large and would extend for approximately one year, the client wanted to make monthly payments. I was hungry for bigger projects and probably would have said “yes” to anything at the time, so of course I said “yes” to their request to $10,000 per month spread over the course of the year for a total project price of $120,000.
Their first payment came in and we were ready to rock! We immediately got started on creation of their brand and then information architecture of their website which were both part of the project scope.
The first month went well. Then in month two they had some delays in decision making but the payment came in. Month three had continued decision making delays but payment came. Then month four and five, same slow decisions but payments were made. All of a sudden I found myself having collected $60,000 of my clients money, of which I had used to pay my employees, and we had NOT completed 50% of the work. In fact, we had not completed very much at all.
Then the disaster came. The client let us know about some internal politics that were delaying their progress. They were disappointed that we hadn’t made further progress (not sure we could have done much more without their involvement, but I digress). The client wanted to cancel the project and wanted a refund of their money.
Cold sweat dripped down my forehead. I had money in the bank, but in my head, the money the client had already paid my agency was property of my agency. I didn’t have all of it to refund without some financial trauma.
It was the first time I had to hire an attorney to help me sort through the mess I was in. His recommendation was to negotiate a value for the work we had completed and then avoid a legal battle and send them back the difference. Which is what we did. The value negotiated for the work we completed was $7,625. I wrote the refund check of $52,375, licked the envelope and dropped it in the mailbox. My “business buffer account” took a major hit, as did my confidence.
Want to spare yourself of an experience like this? Every part of this story could have been avoided if I would have done the following things…and I threw in a few other lessons I learned in the process…
- Be careful how much money you collect from a client versus how much work you have completed. If you are in a situation where the client has paid a lot and you have done a little, you are at risk. And the inverse applies, if you have done a lot and the client has paid a little, you are at risk. Try to maintain a balance of work complete versus the amount the client has paid.
- Client delays and project politics are MASSIVE red flags that can easily lead to project cancellation. If the client is delaying progress on the project, stop collecting money until they get caught up on their side.
- Don’t spend client money until you have done an equally justifiable amount of work on their project.
- Always keep a rainy day fund in your business. Your fund should be at least 3-6 months worth of business expense coverage. This experience wiped out half of my rainy day fun, but I am so grateful I had it in place.
- Don’t be afraid to call a lawyer. I spent a few hundred dollars on my legal consultation and it was worth every penny. The conversation resolved my fears and made me feel like everything was going to be ok (after a few painful conversations with the client and a big check was written).
- No matter how good you are at business and how ethical you try to be, it is inevitable that someday you will find yourself in a legal predicament. It doesn’t make you bad. It is just part of the game of entrepreneurship.
Apple employs 500 attorneys and Amazon has more than 800. It is likely that someday you might need at least one hour of one attorneys time. It’s completely normal and it is part of your tuition payment into the global club of entrepreneurs just like you.