As a broker serving mid-sized or middle-market businesses, you are in a unique position to observe the operational practices of your clients and identify potential pitfalls and opportunities for growth as they get ready to be sold. Small businesses, in particular, are prone to certain common mistakes that can jeopardize their success. Here, we outline some of these critical errors and provide suggestions on how you can help your clients navigate these challenges effectively.

HANDSHAKE AGREEMENTS

One of the most common and dangerous mistakes small businesses make is relying on informal, handshake agreements. While trust and goodwill are essential in business relationships, they are not substitutes for legally binding contracts.

  • Risk of Misunderstandings: Without a written contract, parties may have different recollections of the terms of the agreement, leading to disputes and potential litigation.
  • Lack of Legal Recourse: In the event of a breach, enforcing a verbal agreement in court is significantly more challenging than enforcing a written one.

Example: A client verbally agreed to a substantial order with a supplier. When the supplier failed to deliver on time, the client had no written contract to hold the supplier accountable, resulting in financial losses and operational setbacks.

FAILING TO MAKE ANNUAL FILINGS WITH THE STATE

Compliance with state regulations is crucial for maintaining a business’s good standing. Failing to make annual filings can lead to penalties, loss of liability protection, and even dissolution of the business entity.

  • Penalties and Fees: States often impose fines for late or missed filings, which can accumulate and burden the business financially.
  • Administrative Dissolution: In severe cases, the state may dissolve the business, stripping it of legal protections and making it difficult to operate.

Example: A client neglected to file their annual report with the state. As a result, their LLC was administratively dissolved, complicating their ability to sign contracts and secure financing.

FAILING TO DOCUMENT RELATIONSHIPS BETWEEN OWNERS

Documenting the relationships between business owners is essential for clarifying roles, responsibilities, and expectations. This includes creating shareholder agreements, operating agreements, and buy-sell agreements.

  • Avoiding Disputes: Clearly documented relationships help prevent misunderstandings and conflicts among owners.
  • Succession Planning: Proper documentation facilitates smooth transitions in ownership, whether due to retirement, sale, or unforeseen circumstances.

Example: Two co-founders of a business had no formal agreement outlining their roles and ownership stakes. When one wanted to exit the business, disagreements over the valuation and sale terms led to a protracted legal battle.

GIVING NON-OWNERS TOO MUCH POWER

Granting significant authority to non-owners without proper checks and balances can jeopardize the business. It’s essential to define and limit the powers of managers, employees, and other stakeholders.

  • Risk of Mismanagement: Non-owners with too much control may make decisions that are not in the best interest of the business.
  • Lack of Accountability: Without ownership stakes, non-owners may lack the commitment and accountability needed to drive the business’s success.

Example: A small business gave a senior manager carte blanche authority over financial decisions. The manager’s poor investment choices led to significant financial losses, and the owners had limited recourse to address the issue.

NON-COMPLIANCE WITH LAWS

Staying compliant with all relevant laws and regulations is critical for avoiding legal troubles and maintaining the business’s reputation. This includes employment laws, tax regulations, environmental laws, and industry-specific regulations.

  • Fines and Penalties: Non-compliance can result in hefty fines and penalties, which can be financially crippling for a small business.
  • Legal Liability: Failing to comply with laws can expose the business to lawsuits and other legal actions.

Example: A client failed to comply with labor laws regarding overtime pay. This led to a class-action lawsuit by employees, resulting in substantial legal fees and settlement costs.

HOW BROKERS CAN HELP IDENTIFY OPPORTUNITIES FOR GROWTH

As a broker, you can play a vital role in helping your clients avoid these common mistakes and identify opportunities for growth.  All of the above items can significantly impair a company’s value and even ability to go to market to get sold.   By recognizing the common mistakes small businesses make and advising your clients to seek an attorney, you not only protect their interests but also strengthen your relationship with them. As their trusted broker, your proactive approach can help them navigate challenges, avoid legal pitfalls, and seize growth opportunities.

About GNS Law

GNS Law is a boutique business and corporate law firm dedicated to serving small and mid-sized businesses. We offer expert legal services in business formation, compliance, contract drafting, and dispute resolution. Our experienced team ensures that your business is legally sound and positioned for success. For more information, contact us at info@gnslawpllc.com.

By guiding your clients to seek legal advice when necessary, you help them avoid costly mistakes and ensure their business thrives. GNS Law is here to support you and your clients every step of the way.

 

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