If you run a business, you will need to engage legal counsel at some point.
Attorneys are expensive. There’s no denying it.
However, the legal industry and its outdated fee structure are changing. Business owners play a key role in this change.
To hire counsel without getting burned by fees, it helps to understand the traditional legal billing model and the modern options that firms are more and more open to.
The problem: the billable hour
In 2016, the Wall Street Journal reported that top tier law firms had passed the $1,500 per hour mark for its rates.
Whether an attorney is worth $1,500 per hour is rightly contested. But, many small business owners can’t afford legal fees at half this rate.
Increasing rates are a problem, but the hourly fee structure is a bigger problem.
When attorneys bill by the hour, you have no insight or control over the legal work you pay for. The billable hour:
- Has no relation to value your business receives
- Provides no certainty about total legal spend
- Rewards attorneys for spending large amounts of time on a single matter
To push back on the broken billable hour model, business owners have partnered with law firms to create fee structures that reward value and promote predictability and efficiency.
These alternative fee structures generally fall into three categories:
- Set fees
- Results-based fees
- Hybrid models
Fortunately for you and your business, more and more law firms are adopting alternative fee models.
Flat fees, fixed fees, and retainers are examples of set fee arrangements.
A flat fee is a single price for a specific legal task. Flat fees are typically paid at the completion of the specific task.
A flat fee is a good option for a clearly defined legal task that is limited in time but might be needed on a recurring basis.
If you sell your products or services to customers on credit terms, you may require customers to sign a security agreement. Your security agreements are based on a standard form and don’t change too much from customer to customer. Accordingly, a lawyer might be willing to draft and/or review your security agreements for a flat fee per security agreement.
Other legal tasks that lend themselves well to a flat fee include:
- Corporate governance: board minutes drafting, state and federal filings, license and lease renewals
- Agreements: nondisclosure agreements, customer challenges to your company standard terms and conditions
- Finance: security agreements, financing statements
- Policy creation: employee handbook, anti-harassment policy, IT policies
Each of these tasks has a clear beginning and end. The scope of the engagement is limited, but the need for the task might occur again and again.
A flat fee encourages the attorney to efficiently produce a quality result because the price remains the same regardless of the time the attorney puts into the work. Further, the attorney will become more efficient with the task the more he or she completes the task for a client.
The flat fee lets the business owner know the exact amount due and the work product to expect for the business.
If you are questioning the affordability of engaging an attorney for a particular task, propose a flat fee.
Fixed fees are similar to flat fees in that you know exactly what your legal fees will be. Fixed fees can be paid upfront, in milestone payments, or at project completion.
The difference between a flat fee and a fixed fee comes from the scope of the engagement. Where flat fees generally apply to a specific task, fixed fees apply to projects that typically include multiple tasks or more complicated analysis.
For example, if you engage an attorney to help set up a new company, an attorney might charge a flat fee for filing your Articles of Organization. However, company set up includes more than filing Articles of Organization. An attorney might be able to bundle all legal tasks associated with setting up a company into a single package for a fixed fee. The total project might include:
- Corporate governance (articles of organization, bylaws, operating agreement, etc.)
- Operations (insurance procurement, registered agent, bank account setup)
The fixed fee gives the attorney some flexibility to spend more time and effort on any one of these tasks, but keep the entire project limited to a certain amount of attorney time.
Other legal projects that are candidates for fixed fees include:
- Intellectual property (trademark, patent, or copyright applications and filings)
- Employee benefit plan creation and review
Similar to the flat fee, you get the benefit of a set price; however, the time frame and the overall scope of the project might adjust depending on the facts and needs specific to your company.
Retainers are one of the more traditional alternative fees. A retainer includes two elements:
- A set, recurring fee paid to the attorney (typically on a monthly basis), in exchange for
- An attorney being available to complete any legal work needed in a certain area (typically for all general legal work, or a specific area of expertise)
Retainers work particularly well in two situations.
First, if your business doesn’t require a great deal of legal assistance, but legal concerns you face span a large range of issues, retaining a general business attorney might be a good alternative to hiring a full-time, in-house attorney.
Alternatively, if your business requires frequent attention to a specific legal area, retaining an expert for the particular area might be a good fit.
For example, if you run a freight forwarding business, a trade attorney might be a good candidate for a retainer relationship. If you extend credit to a large customer base, you might put a credit attorney on retainer.
You can’t predict all the legal matters that will impact your business on a month to month basis. But, you may be able to budget a certain amount on a monthly basis.
In this case, you may be able to keep a full-service firm (e.g. a firm that offers all areas of legal expertise) on retainer for an allotted amount of hours per year.
Some months, the firm may work more than the fee allows for. Some months, the firm may not work at all. The goal is for the engagement to benefit both your business and the firm over the longer term of the relationship.
An added benefit of a retainer relationship arises out of a single attorney, or firm, providing ongoing counsel to your business. Over time, the attorney becomes more familiar with your business. This helps the attorney tailor expertise to your business and improve communication which should deliver a better result to your business.
Contingency fees, success fees, and holdbacks are examples of results-based alternative fee arrangements.
Contingency fees have traditionally been used by plaintiffs attorneys in cases where an attorney gets paid a certain percentage of the total amount recovered in a lawsuit or settlement.
If you have ever heard an attorney advertisement where the attorney claims, “I don’t get paid unless you win,” that is a contingency fee arrangement.
But, contingency fees apply to more than just slip and fall cases you see advertised on TV and billboards. Your business can benefit from contingency fee arrangements as well.
For example, if you need to collect an overdue balance from a customer, you can structure a contingency fee with collections counsel. You offer to pay the attorney some portion of the total amount collected. Based on the potential compensation, the attorney can then decide whether to settle the case or take it trial.
Businesses can use reverse contingency fees on the defense side of a legal dispute.
If you are sued by a customer or another business, a reverse contingency fee tiers legal fees so that the higher the settlement or award, the less your attorney gets paid.
A reverse contingency fee incentivizes your attorney to amicably settle a case quickly and for as little as possible.
Think of success fees as bonuses for your legal counsel.
Why would you award an attorney that you didn’t want to hire in the first place? So the attorney will focus on getting the result you want, as quickly as possible.
Assume you want to sell your business. Acquisitions can be painfully long, and expensive due to their complexity.
If you want to avoid these traditionally long process, you may incent your attorney to negotiate and reach an agreement for the deal in a short amount of time for a bonus (e.g. finalize the deal in one month, and earn 30% bonus).
Or, if you and the purchasing party differ widely in the valuation of your company, you may offer a success fee if your attorney can negotiate a certain price.
A success fee awards the attorney for achieving your business goals. It provides value to your business by compelling the attorney to focus on your business goals instead of billing hours.
Holdbacks are the opposite of success fees.
Assume you have agreed to a flat fee for a particular engagement. You can hold part of the fee back until the attorney completes the work, or achieves a certain goal.
This encourages the attorney to timely achieve the task and goal you set. Only upon successful completion do you release the amount held back from the fixed fee. (Self employed? Here’s a tool to estimate your taxes.)
Although many law firms are open to alternative fee arrangements, not all firms are structured to completely abandon the billable hour. Accordingly, if you propose an alternative fee, the attorney or firm may counter by proposing a hybrid model.
A capped fee is a common example of a hybrid model. An attorney may ask you to pay the standard hourly rate with the total amount not to exceed a predetermined amount (i.e. the cap).
A capped fee is good for the business because of the certainty it provides. It also incentivizes the attorney to be efficient.
The potential downside of a capped fee is if the attorney misjudges the total time anticipated for completion. In this case, the attorney may rush to finish in the final stages of the project.
Tiered schedule fees
An alternative to the capped fee is a tiered approach. In a tiered schedule, you pay full price for an allotted amount of time, and then a discounted rate for any hours beyond the budgeted time allowance.
The goal of the tiered schedule is to promote efficiency, but avoid the rush job that can arise due to a capped fee.
Hybrid models stretch beyond the examples above, and attorneys and business owners continue to develop new hybrid models all the time.
If you know a law firm or attorney that you desire to use, and the attorney cannot reasonably accommodate a pure alternative fee arrangement, start a conversation. Determine the business needs of the attorney’s firm to uncover potential for a hybrid fee arrangement.
Conclusion: Everything is negotiable
Attorneys are the biggest advocates of everything being negotiable. This applies to hourly rates as well.
Even if an attorney can justify a $1,500 per hour rate, not all legal work is equally valuable. Always negotiate with your counsel to ensure you receive value and get some oversight into your total bill before the attorney begins work. (Thinking about starting your own business? Check out this comprehensive guide.)
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
Featured Image Credit: DepositPhotos.com.