Wednesday, May 5, 2010

5 Ways to Minimize Litigation in Your Small Business

No business wants to have to deal with litigation, especially not a small business.  The cost of initiating or defending a lawsuit can be crippling to a business owner.  While not all litigation is avoidable, here are 5 ways you can seek to minimize litigation risks for your small business.

1) Do you homework

Doing your necessary due diligence before entering in to a deal is a great way to minimize litigation risks to your small business.  What is the nature of the other party?  Have they been involved in litigation in the past?  What is their capacity to do this deal?  What is your capacity to do this deal?  How are they structured?  When you take the necessary time to properly evaluate the deal before you, you are more likely to make an educated decision which in turn often minimizes risk.  This helps weed out the bad parties or individuals that are most likely not going to perform adequately.

2) Clearly define relationships

A well-drafted contract or agreement can go a long way in protecting all parties to a business deal.  Critical to this is using clarity in defining what the duties and responsibilities are of all involved.  When each party knows and understands their duties and those of the other party, it is less likely that there will be confusion down the road about what should or should not be happening in a business deal.  It also helps to clearly outline what the penalty is for failure to perform under a given deal.  When you have done your homework as outlined above, it allows you to better be able to define duties and responsibilities of each business party.

3) Be flexible

Especially in an economy such as this, once you are engaged in a business relationship, it is critical to have a necessary level of flexibility.  Sometimes unforeseen things happen and people are going to need to make adjustments to the original agreement or payment schedules.  Be willing to engage in reasonable changes to the agreement and be clear about what those changes do and do not entail.  People are going to be more likely to work with you now and in the future if you are flexible and understanding in how you deal with them.  If your due diligence has sufficiently removed bad actors from the pool of clients or customers, it is less likely that you flexibility will be inappropriately taken advantage of.

4) Stay level headed

Also, it is critical that you as a business owner keep a level head and resist the temptation to make things personal and become excessively confrontational.  It can be frustrating when a deal falls through or other individuals fail to perform as they had agreed.  If you are level-headed and solution-oriented in your approach to the situation, you can more often than not come up with an amicable settlement and a new plan going forward.  Ultimately, this route is also just better for your peace of mind.

5) Seek alternative resolution methods

Businesses also have access to alternative dispute resolution methods such as mediation and arbitration.  You can set these up through formal mechanisms and via contract or you can also create a more informal structure with each individual party.  Setting up a day when both parties can re-evaluate their position and communicate about concerns can go a long way to diffusing a difficult situation.

Although, not all litigation is avoidable, doing the above with help to minimize litigation risk for your small business.

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