At the start of 2016 the Department for Business Innovation and Skills reported that 99.9% of all private sector businesses were small or medium-sized (SMEs) and that these businesses provide employment to 15.7 million people. Arguably these businesses are the lifeblood of the UK economy.
With this in mind the phrase “prevention is better than cure” has never been truer when you look at the financial impact of neglecting the legalities of operating a small to medium-sized business in the UK. There is reluctance by the UK’s Small and Medium Enterprises (SMEs) to use lawyers to take care of their legal business, which can result in significant financial loss. Interestingly, these legal costs can often be avoided which is particularly important for smaller businesses where minimising all costs is so crucial to staying in the black.
YouGov has conducted a unique, comprehensive and independent survey of UK Small Medium Enterprises to discover the financial impact when they fail to take proper care of the legal issues they face. The economic analysis of the YouGov results was carried out by the Centre for Economics and Business Research (Cebr). There is an important message here for every business owner so we wanted to share the survey highlights with you. The results are startling with an upper estimate indicating that SMEs are losing more than £13.6 billion a year by failing to take care of their legal issues.
What are the potential risks to your business?
The survey has provided some results that should make every business sit up and take notice. It’s difficult to imagine what impact the loss of £13.6 billion might have on the SME economy so it’s easier to break the figures down into real-world terms and look at the risks every business faces.
Firstly, results show that the average SME in the UK is likely to encounter more than 8 legal issues a year. Secondly of the legal issues SME respondents experienced, 43% resulted in costs of £5,000 or more. With the highest annual loss found in the Business Administration and Support Services (£44,958), Food and Beverage (£36,011) Publishing, Broadcasting and Media (£17,499), Finance and Insurance (£15,976), Construction (£13,028) and Charity/Voluntary (£12,601) sectors.
More than half of all issues were found to be in five key areas:
- Disputes (13.2%)
- Employees and Key Contractors (12.5%)
- Customers and Suppliers (11.4%)
- Terms and Conditions (9.2%)
- Software (9.1%)
- Other (44.6%)
But it won’t happen to me… Will it?
Given the number of incidences of these kinds of issue, SMEs are over optimistic about the prospects of future losses occurring because of these problems – with only 12% thinking these issues are ‘likely to pose a significant risk’ to their business. Interestingly, this percentage more than doubles (25%) when they are asked to forecast whether these problems are likely to affect other businesses rather than their own. SMEs follow the typical trend in assuming that risky outcomes are more likely to happen to other businesses than to themselves. Having uncovered the number of times issues arise and in spite of the potential cost to SMEs of the losses involved, the survey found SMEs are remarkably casual about using lawyers to reduce their risks.
When asked about their expenditure on legal expertise, 60% of those surveyed did not know how much they spent on legal services last year. For those SMEs that did know, the majority (59%) reported spending less than £1,000 per year on lawyers.
Paradoxically SMEs do understand that using lawyers is likely to make them better off. Of those surveyed 83% said that using a lawyer to deal with legal issues impacting the business commercially had reduced the risk of higher costs and 86% of those who responded (and didn’t use a lawyer in such instances) said that it could have reduced the risk of higher costs and losses if they had.
Why are so many SMEs not prepared to use lawyers more?
The survey results show that even though SMEs know legal issues affect them frequently and cost them significant amounts of money they are reluctant to invest in lawyers. However, SMEs do take out insurance policies against a wide risk of other contingencies (directors insurance, employer’s liability, public liability). Insurance companies typically report that only 9% of SMEs make an insurance claim a year, whereas this YouGov survey shows that on average SMEs encounter more than 8 legal issues a year with significant adverse consequences from commercial legal issues.
Yet SMEs are far less likely to want to protect themselves by taking out the simple ‘insurance policy’ of using a lawyer than they are by taking out an insurance policy against other risks. A likely underlying cause for SMEs’ reluctance to use lawyers lies in SMEs attitudes to law firms, which the YouGov survey also covered. 70% of respondents say that legal documentation is not easy to understand, while only 8% say that legal fees are good value for money. Only 1 in 5 SMEs rate law firms as ‘good’ in terms of ease of access (how easy it is to contact a lawyer; how speedy their response is and how easy it is to get a situation alleviated). However, the survey results indicate that SMEs are able to clearly articulate what they do want from lawyers and law rms. Of those who gave a response, over 4 in 5 ranked all of the attributes below as important:
Ease of communication (96%)
Value for money (95%)
Taking time to understand the issue (95%)
The speed of service provided (93%)
Understanding the business’ sector (90%)
A bespoke approach to their need (87%)
Making the business feel safe (82%)
What should smaller businesses conclude from this research?
As an SME business owner in any industry, tackling any legal issues properly as well as guarding against them could potentially save you thousands of pounds a year. You are far more likely to have a legal issue than any insurance claim and the biggest (and most expensive) legal issues are often easily preventable. For example simple matters like having contract terms and conditions checked or drafted properly to ensure your employment or contractor terms are clear and up to scratch will de-risk your business rapidly.
What’s crystal clear from the survey results is that respondents from SME’s are not getting enough of their needs met by traditional law firms to persuade them to work with lawyers regularly and reduce their legal risk. This is an issue that the legal industry itself needs to address by providing what’s needed legally to support the UK’s smaller businesses. Easy access to legal advice, clear and understandable legal documents and affordable fees are all paramount in changing current perceptions, a responsibility which lies firmly on the shoulders of law firms.
Jo Fortune, LawBite.