Your Legal Costs Budget

If you run a business then you have monthly and annual items budgeted in to your expenses. Or at least you should have…

So what kind of costs are your looking at when considering legal expenses?

Somewhere in my legal career I came across the idea that legal costs be budgeted at 4% of turnover. I've just done a search on Google to see if I can find any independant research to back that up, but didn't find any. So for now we will just assume that it is a purely hypothetical proposition to help you work out what might be a reasonable legal spend for your business.

With a broad general suggesting that legal costs be budgeted at 4% of turnover, your legal expense budget could look like this:

Legal Expenses at 4% of Business $ turnover

Business size Gross Monthly Business Income Legal Budget
sole trader $1,000 $40/mth
  $7,500 $300/mth
small business $15,000 $600/mth
  $50,000 $2,000/mth


The reason I've considered this question is that I have, in the last couple of weeks, had a number of people enquire about legal services. Without fail, every one doesn't want to spend much money, which I do understand. What they might not have considered is the ongoing impact of that decision.

Consider this –

Scenario 1

You have done all the market research and decided that you have landed on an online business idea that, with a little effort, is going to earn you a modest $100 per day. That is $36,500 per year or just over $3000 per month.  You are prepared to pay $5000 to set up the website, payment systems and so on to generate that income.  In your excitment around the idea, you've actually gone over budget and spent $7000. Now you think legal fees are excessive and you've already gone over budget and its a low risk anyway, so you decide to copy and paste of someone else's site and hope for the best.

If you'd included in your budget a 4% expense for legal fees, that would have been only $1,460 for the year, or a little over $120 per month.

That small investment up front could have saved you all sorts of trouble in the long run with copyright or trademark disputes, claims of misleading conduct, losing your business to your business partner because you shook hands on the deal instead of putting something in writing…

Scenario 2

Your business idea is so great an investor wants to give you some money for equity in your business and they are offering you $100,000 for a 20% stake. Yahoo! But the whole thing is new and you don't want to spend a lot of money and the investor is going to run it by their lawyers anyway, so you'd rather the $300 advice than the $4,000 advice and you've downloaded something off the internet and it looks ok. Who needs a lawyer?

6 months later the investor sues you for their money back for failing to perform and there is nothing you can do about it except pay up because you didn't want to spend the money to protect your interests in the first place. Then you see a lawyer and they tell you its going to cost you $40,000 to defend the claim.

Scenario 3

You've got someone really excited about selling your products and they want a cut above the normal affiliate commission because they actively want to go out there and promote it. They've given you an agreement and you just want a quick run through because it looks ok to you and you haven't really included legal fees in your budget. Development of the product was so much more important!

You end up with some one who is behaving like a competitor and who has hijacked your business and you can't stop them because the agreement they wrote that you didn't want thoroughly considered doesn't allow you to stop them. Now you're upset at your lawyer and wanting to instruct another lawyer to have a go at both the first lawyer and your sales rep and this lawyer wants $5,000 in trust up front before they even look at it.

Think about it!

If you want a business that works for you then you need to budget in legal fees with everything else.

I've just read a story from a lady on facebook who had her content stolen, trademark protected by a competitor and then they sued her for being in breach of trademark and she's lost the lot because she didn't get legal help to start with.

Happy to provide inexpensive solutions for people, but beware, if you only want to pay $300 for advice it might not be as comprehensive as you need to protect your business!

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