Oftentimes it is a balancing act evaluating the strength of the existing relationship vs. the exposure you are taking on for your own business.
I spent the first decade or so of my legal career practicing exclusively in the field of civil litigation. Today, I still maintain a busy civil litigation practice, but have been focusing heavily on cannabis law for the last six years.
The experience of spending over 15 years caught between feuding parties over sizable sums of money has provided me a unique perspective on the way matters go awry in business, as well as what people can do to best protect themselves from their relationships heading south. This is especially relevant now during an era of looming recession and tough economic times.
It is often said that good paper makes good relationships, and I could not agree more.
No one likes spending money on legal fee and so many business owners feel that they are capable of drafting their own agreements, or worse, they feel as though a written agreement is not required because they “trust” the other party. This is, of course, troubling because every business deal is consummated when the parties are on good terms.
The problem is that at some point in time, many, if not most business relationships deteriorate from the honeymoon phase. And you should count yourself exceptionally lucky if this has not yet happened.
Perhaps your supplier begins turning their attention elsewhere to a larger customer at your expense. Or perhaps your customer who is overextended on credit terms suddenly finds themselves in a financial pinch and are unable to pay their accounts. Maybe the person you’re in business with is simply unscrupulous and attempts to work you over in any way possible.
Many are shocked and appalled when they experience terrible business behaviours from people they thought they knew. However, ask any lawyer who has practiced civil litigation for more than a couple of years and they will certainly inform you that some simply show no remorse in the face of personal gains.
Actions to take to protect yourself against law suits
The first lesson is to make sure you have the proper written agreements in place at the outset of the arrangement. The cost of putting these agreements in place is nominal compared to the cost of litigating, which is astronomical even for modest sums of money. And even with the proper agreements in place, it is prudent to constantly monitor and evaluate the ongoing business relationships you have.
For example, when push comes to shove, if your defendant has no assets to collect on, you are going to be left holding the bag.
Next, ask yourself this — has your supplier begun delivering late, here and there, and/or is the quality of what you are receiving slipping?
If so, it is always best to address these issues (in writing whenever possible) as soon as they arise. Doing so ensures that everything is properly documented in the event that you need to go to court, and just as importantly, it allows you to begin obtaining feedback on where the relationship may be headed in the future. Ideal business partners will immediately apologize and remedy the wrongs moving forward. If your partner apologizes but the pattern continues to repeat, this is often a sure sign of trouble on the horizon.
Unsuspecting behaviours to watch out for
Are you monitoring your accounts receivable? Are your customers taking longer than usual to pay? Address this as soon as you can. Most clients will have an explanation (often a legitimate one) as to why they have been a bit tardy remitting payment.
It is possible to be sympathetic to their situation while at the same time making it clear that if the situation persists, then the ability to provide credit terms will be impacted.
Most people do not want to take a hard line with good customers who have long standing relationships. However, great customers will understand and appreciate your need to look out for your own interests, as their conduct impacts your business and your employees as well.
In fact, the largest debts are often owed by a business’ “best” customers because they are given excessive credit and leeway in terms of repayment, which they take advantage of because their own business is struggling. They may have the best intentions of paying it back once business turns around, but the problem remains that business does not always turn around.
No one is saying that you must suddenly eliminate your best customers’ ability to buy on credit, or dramatically alter the existing relationship. Oftentimes it is a balancing act evaluating the strength of the existing relationship vs. the exposure you are taking on for your own business.
Remember to always be mindful of where, and to what degree your exposure lies, because it is often your oldest and best customers that may leave you holding the bag.
Trust me, I’ve seen it, many times over.
Matt Maurer is a partner and co-chair of the Cannabis Law Group at Torkin Manes LLP in Toronto, Ont.