When you think about opening your own business, lots of possible challenges immediately come to mind: intense competition, supply chain issues, finding the right marketing tactics, and many others. But there’s one other that’s much more relevant than you might realize: lawsuits.
Across America, small businesses are sued every day, and the hit to a business’s bottom line can be hard or impossible to absorb. These four statistics will help open your eyes to the realities that small business owners face from the threat of legal actions. Then, we’ll take a quick look at some of the most important steps small business owners can take to mitigate the risk of being sued.
1. 36 to 53 percent of small businesses are sued in a given year.
A study by the Small Business Administration found that every year 36 to 53 percent of small businesses surveyed had to deal with a lawsuit. In another study, 43 percent of small businesses said that they had been at least threatened with a lawsuit.
At those rates, it’s a problem that no entrepreneur can afford to ignore. Being sued can eat up enormous amounts of time and money, and it can create severe risk to a business’s reputation. The key to managing these risks is to know why businesses get sued, how to avoid lawsuits whenever possible and how to deal with them when they can’t be avoided.
2. 31.4 percent of lawsuits filed against small businesses are for breach of contract.
The same SBA study found that breach of contract (BoC) lawsuits were the most common type of lawsuit filed against small businesses. A breach of contract lawsuit happens when one party (usually a client or supplier of a small business) claims that the business failed to honor their obligations in a contract.
Since BoC lawsuits are so common, it’s important for business owners to know the types of contract breaches and how to avoid them. When in doubt, remember the golden rule: Leave a paper trail by getting every contract, and every negotiation involving that contract, in writing—preferably in legal documents with signatures.
3. When a case goes to trial, it can cost anywhere from $3,000 to $150,000 to resolve.
It’s probably no surprise that lawsuits are expensive, but it might be surprising just how expensive they are. The SBA’s study found that business owners’ litigation costs had a wide range–from $3,000 on the low end to $150,000 on the high.
To get a better idea of what each type of lawsuit costs, we can look at a study from the National Center for State Courts. That study found that the median combined costs of lawsuits for both parties can easily top $50,000 and reach above $100,000:
- $54,000 for a premises liability lawsuit such as a slip and fall suit.
- $66,000 for a real property lawsuit such as a home defect suit.
- $88,000 for an employment lawsuit such as discrimination or workers’ comp suit.
- $91,000 for a contract lawsuit such as a breach of contract suit.
- $122,000 for a malpractice lawsuit such as a medical malpractice suit.
Paying even half of these costs can be financially ruinous for a small business. However, there’s another component to this statistic: The trial phase is by far the most expensive part of the litigation process, so any way to keep the case from going to trial will reduce costs dramatically.
4. As many as 95 percent of lawsuits are settled before they go to trial.
In contrast to what you see on TV, very few lawsuits end in a courtroom showdown. The huge expenses of taking a case to trial mean that both plaintiffs and defendants are often eager to settle, which is why some statistics report that as many as 95 percent of cases end in a settlement. It may hurt to write the check, but it probably won’t hurt as much as losing the case and being responsible for attorney’s fees—and the same statistics say that in some case types, such as personal injury, plaintiffs are heavily favored to win.
Alternative dispute resolution (ADR) processes are also popular for many businesses. There’s a wide range of options available, from legally binding arbitration to non-binding mediation, and you can even create clauses in contracts that disputes must use certain types of ADR. The bottom line? Settling a suit or using ADR procedures often result in a faster and less expensive outcome that’s satisfactory to both parties, so don’t be too eager to fight a case to the bitter end unless your legal counsel advises you that you have a strong chance of victory.
How Can the Threat of Lawsuits Be Avoided or Mitigated?
Dealing with legal risk is part of owning a business. So, how do the experts recommend that it be handled? Here are some key tips, based on the above statistics and conventional legal wisdom, that can help you reduce your risk, handle disputes outside of court and prepare for the cost of a suit should other options fail:
- Retaining the services of a lawyer and seeking their counsel on how to minimize the risk of legal action.
- Getting all contracts in writing and keeping detailed records of all transactions.
- Carrying surety bonds such as employee theft fidelity bonds can protect your customers against acts of theft, larceny and/or fraud.
- Taking the time to listen to customers’ complaints and being open to a mutually acceptable solution.
- Considering ADR options such as arbitration, including adding arbitration clauses to contracts.
- Carrying small business insurance policies to help you pay for the costs of common suits.
Part of the definition of entrepreneurship is assuming risk, and the risk of lawsuits is certainly a fact of life for small business owners. The only way to deal with those risks is by being aware of the facts and taking the necessary steps to control and mitigate them. By being creative and open-minded in resolving disputes, and by taking the necessary preparations such as carrying the right insurance, small business owners can rest a little easier–even if the threat of a lawsuit will never totally go away.
Jason O’leary is the co-founding of Surety Bonds Direct and brings 15 years of deep technology, product development, and marketing experience to the company. He has been leveraging Agile practices for well over a decade and is versed in various Lean practices as well. Jason makes his home in Charleston, South Carolina with his wife and 3 children.