Bread & butter
but they want
small-business clients
The law sector is a small world, after all — a small-business world. Large corporations may move and shake the industry with high-profile lawsuits and big-money contract negotiations, but small businesses make the world go ’round with their consistent and ever-evolving legal needs, say local business lawyers.
Michael Nixt, an attorney at Minneapolis- based Moss & Barnett, calls them the “bread-and-butter” clients. His firm isn’t the only one tapping into that market. Several prominent Minnesota law firms boast special units specifically designed to cover the wide range of advice and services small businesses require. And in the current bear market, with the tide of mergers and acquisitions receding in the Twin Cities, small-business clients provide law firms a steady diet of work.
There’s plenty to do. Given all the hoops emerging companies have to jump through to establish themselves — from obtaining venture capital rounds and incorporation services, to protecting intellectual property and drafting contracts, and then employment issues, litigation and real estate transactions — lawyers say they are rarely lacking business from these clients.
But small businesses don’t just represent a quick fix. They represent longterm investments as law firms are willing to wager that their emerging-company clients — even as cash-strapped and anonymous as they are in their development stage — will mature into successful public corporations that stay loyal to their firm during headier years.
“Attorneys look at small businesses for developing the base of a relationship so when a company grows up, they become the prime supplier of legal advice,” says Vern White, small-business consultant, retired senior vice president of performing- arts equipment-maker Wenger Corp. and adjunct professor at the University of St. Thomas.
“It’s a portion of the market share we don’t want to give up,” says James Patterson, founding partner of Patterson, Thuente, Skaar & Christensen in Minneapolis. “Small businesses grow up to be big clients.”
Humble beginnings
For all the pie-in-the-sky aspirations on both sides of the lawyer-client relationship, the beginning is quite humble. Unlike the Best Buys and the Targets of the world, small businesses often lack the necessary in-house departments to conduct run-of-the-mill business transactions. Most companies enter the world with little more than a founder, a business plan and some start-up capital — human resource personnel, accounting offices and legal departments are merely chicken scratches on a strategic plan at this stage. Law firms can provide a backbone as companies flesh themselves out.
That’s been the case for Karen Arnold, an avid business developer, former CEO of one company and co-founder of another. Two years ago she and a group of investors bought the assets of a bankrupt dot-com and turned it into Education Platform Group, the provider of a prospering Web-based student information system for K-12 schools and school districts. Most recently she established St. Paul-based Nanomedica, a medical device firm still in its development stage.
While Arnold has embraced her entrepreneurial passion, her attorneys at two large firms have handled the behind-thescenes transactions ranging from incorporation work to licensing agreements and patents. Lawyers helped her when she had to let go a co-founder of Education Platform Group’s predecessor. “It could have potentially gotten messy, but they helped us make it not messy,” she says. Arnold sold that company to an investor in January.
The needs of these businesses don’t end with filling gaps and pushing papers. Young companies need business guidance and direction just as much as they need more hands and feet. “What small businesses don’t need is to take their eye off what they really need to do to make them successful. Lawyers help them keep their eye on the ball,” says White. As consultant to small and large businesses for more than 30 years, he advises small businesses to develop a relationship early with a law firm because their needs go beyond cut-and-paste legal matters.
“Small businesses need a lot more advice that isn’t strictly legal — advice that bridges business and legal,” says James Diracles, managing partner at Best & Flanagan of Minneapolis. With their breadth of experience with various types of companies and industries, lawyers can be good judges of what works and what doesn’t work, he says. Lawyers say they’re often pulled to work as de facto business consultants as much as legal advisers. To accommodate such diverse and complex needs, some larger law firms have instituted special units or practice groups for small businesses.
These units usually work in conjunction with a firm’s other groups to handle most clients’ legal needs. Law firms also make referrals for other legal and nonlegal services. Such a one stop shopping approach, say company owners, is convenient. The extensive menu of offerings doesn’t make their heads spin because lawyers provide a personal touch.
“The scope of the services and the way they’re organized make you feel you’re not lost in a firm,” says Rolf Peters about his company’s law firm. Peters is the CEO of St. Paul-based AgMotion, an Internet marketplace that guarantees the origin of the agricultural products it buys and sells. He says he’s had the same attorney — a friend from law school — handle his business transactions for the past six years, from revenue of $10 million to more than $60 million today. During that time he’s added to his business, transforming it from strictly a commodities trader in early 2000 to also a mission-critical software development firm.
Sweet spot
Definitions of what constitutes a small business or emerging company vary among firms. Each has a target market or sweet spot based on a revenue range.
Dorsey & Whitney deals almost exclusively with pre-market development- stage companies. Faegre & Benson’s emerging companies practice group draws a distinction between the small “mom-and-pop” businesses that plan to stay small, and those companies that have a rapid growth strategy or set their sights on national and international markets.
Firms that don’t offer special small business units, such as intellectual property firm Patterson, Thuente, Skaar & Christensen, nonetheless have such a large percentage of small-business clients that they equip their entire legal staff to work with them. Moss & Barnett, too, lacks a specific small-business unit, yet offers special services, among them quarterly newsletters sent to small-business clients from its six practice areas that highlight industry news and tips.
But the door to these services isn’t open to every company out there. Law firms pick and choose their clients much like selecting a mate — substance trumps style, and common interests solidify a strong long-term relationship. Getting to know a client includes meeting the company’s management team, learning its business plan, and attending board meetings, says Andrew Humphrey, partner and chair of the emerging companies practice group at Faegre & Benson.
For intellectual property attorneys, determining if a client’s a good fit involves a critical evaluation of a company’s ideas. “We can help them determine if they’re going to have a strong patent,” says Patterson of Patterson, Thuente. “We also look at principals — do they have any experience in their industry, in their business? Have they paid their dues working for another company, or working their way up the ranks? Is the guy trustworthy?”
Interesting dance
If a company is judged to have all the right ingredients for a success story, law firms usually allow a degree of fiscal flexibility. Many small businesses are in the middle of venture capital rounds and don’t yet have a product on the market. But extending credit in a slow economy involves a bit of self-sacrifice on the part of law firms. “It is an interesting dance,” says Kevin Crudden, a partner at Robins, Kaplan, Miller & Ciresi. To assist strapped companies, many firms forgo the common practice of billing by the hour, and instead provide a package of services for a fee.
Nixt of Moss & Barnett says he assesses a $500 flat fee to most of his small business clients for “routine matters that, by and large, do not require a high degree of customization.” It’s a way to streamline business, he says.
Crudden says he in some cases lets a client defer payment for six months, unless the debt gets to a certain level. “We don’t take on a lot of companies without thinking those things through,” he says. “We can only partner so far without someone else participating.” Others offer discounted hourly rates that can be negotiated up front, or in some cases, after-the-fact. Some law firms take a gamble by taking ownership stake in a company in exchange for services, although it’s becoming a less popular practice in today’s high-scrutiny, post- Enron climate.
In any case, says Patterson, the motivation is to help businesses lower their costs and build their trust in the firm. “We’ve always felt that if our services put them under instead of help them, then we’re not providing much of a service, are we?” says Patterson. In client relationships where there is ongoing litigation, attorneys often extend credit or establish contingent fees based on their perception of the strength or weakness of a case.
Firms who help small businesses keep their heads above water with deferred costs and discounted rates do so at a risk. They ultimately take on the debt of by clients whose businesses fail. “You need to negotiate something with a company that, when all is said and done, is fair to them and fair to us,” says Patterson. But for all the risks that come with supporting small business clients, lawyers also confess they get an emotional boost from investing in the future of Minnesota business.
“It makes sense to build a relationship early with companies that, if successful, are going to be significant players,” says Humphrey of Faegre & Benson. “ It’s all very satisfying work — the stuff you dream of in law school.”
arnoldkm@msn.com. Kevin Crudden, Robins, Kaplan, Miller & Ciresi: 612.349.8500; klcrudden@rkmc.com; www.rkmc.com. James Diracles, Best & Flanagan; 612.339.7121; jcdiracles@ bestlaw.com; www.bestlaw.com. Andrew Humphrey, Faegre & Benson; 612.766.7000; ahumphrey@faegre.com; www.faegre.com. Michael Nixt, Moss & Barnett: 612.347.0300; nixtm@mossbarnett. com; www.moss-barnett.com. James Patterson, Patterson, Thuente, Skaar & Christensen: 612.349.5740; patterson@ptslaw.com; www.ptslaw.com. Rolf Peters, AgMotion: 651.225.7500; rpeters@agmotion.com. Vern White; vernw@mnic.net
