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High price to pay for SMEs that neglect the law

A new study has found that small firms are losing more than £13.6 billion a year by failing to take care of their legal issues.

A survey of UK SMEs conducted by YouGov for LawBite has investigated the financial impact when businesses fail to take care of the legal issues they face. The results were analysed by the Centre for Economics and Business Research (Cebr).

The findings show that the average SME in the UK is likely to encounter more than eight legal issues a year; of these, 43% result in costs of £5,000 or more.

The highest average annual loss was found in these sectors: business administration and support services (£44,958), food and beverages (£36,011), publishing, broadcasting and media (£17,499), finance and insurance (£15,976), construction (£13,028) and charity/voluntary (£12,601).

More than half of all issues were found to be in five key areas:

  • Disputes (13%);
  • Employees and key contractors (12%);
  • Customers and suppliers (11%);
  • Terms and conditions (9%);
  • Software (9%).

It seems that SMEs are over-optimistic about the prospects of losses occurring because of legal problems, with only 12% thinking these issues are “likely to pose a significant risk” to their business. However, this more than doubles (25%) when business owners are asked to forecast whether these problems are likely to affect other businesses.

When asked about their expenditure on legal expertise, 60% of small business owners polled were not able to say how much they spent on legal services in the past year. For those that did know, 59% spent less than £1,000 per year on lawyers.

Despite this, 83% of SMEs said that using a lawyer to deal with legal issues in their business had reduced the risk of higher costs. Of those that had not used a lawyer, 86% said that it could have reduced the risk of higher costs and losses if they had.

While SMEs typically take out insurance policies to protect their business, the report concludes that they are less inclined to protect themselves by “taking out the simple ‘insurance policy’ of using a lawyer”.

Part of the reason for this is a negative attitude to law firms. The YouGov findings show that only 8% of SMEs say that legal fees are good value for money. Only one in five SMEs rate law firms as “good” in terms of ease of access.

The report concludes: “The biggest issues (and most expensive ones) you’re likely to face are all often easily preventable. Simple matters like having contract terms and conditions checked or drafted properly to ensuring your employment or contractor terms are clear and up to scratch will de-risk your business rapidly.”

LawBite offers a free legal health check for SMEs .