From the September 1997 issue of Entrepreneur

Any time you use a lawyer, chances are you'll be coping with uncertainty. That's certainly true in litigation cases where you don't know what the judge or jury will decide. And when you're putting together a business deal, there's always the question of what might go wrong and whether the contract covers that possibility. What shouldn't be uncertain, though, is what to expect when you receive the lawyer's bill. To properly budget, you should know how the lawyer computes the bill and what a given matter is likely to cost.

Especially for business law, lawyers traditionally charge an hourly rate for legal services. That system came under fire from business circles about five years ago, with critics charging attorneys with inflating the number of hours worked. Although most respected lawyers are scrupulous about keeping track of hours and attempting to get the best results in the shortest time possible, articles in business and legal magazines trumpeted abuses by big-firm lawyers caught padding their bills. Distinguished judges blamed the hourly billing system for detracting from lawyers' professionalism and commitment to their clients. They argued that someone paid by the hour has less incentive to use that time efficiently or strive for the highest quality of work than someone whose payment is tied to results.

In the wake of all this, businesses and entrepreneurial lawyers began drafting new methods of billing designed to reward efficiency and excellence: contingency fees for business deals, value-based billing, fixed fees bid in advance and various other hybrid forms. "People thought it was the end of the billable hour," says Elbert Kram, an attorney with Bricker & Eckler LLC in Columbus, Ohio, who specializes in business law. As it turns out, the changes haven't been that dramatic. "It's difficult to track costs if there are no billable hours," Kram says. Nonetheless, many lawyers are willing to make creative arrangements to suit their clients' needs and desires.

Just My Type

"In the abstract, there are just as many choices as people have imagination," Kram says. "Lawyers are more willing now to consider alternatives." Here are a few options that might work for you:

  • Start-up packages. When you are starting a business, you're short of money for just about everything, including legal services. Attorney Charles McCallum, managing partner of Warner, Norcross & Judd LLC in Grand Rapids, Michigan, notes that many law firms charge a set fee for a package of legal services, such as drawing up initial documents, attending meetings, preparing minutes, drafting ownership agreements and stock certificates, reviewing contracts, and offering routine legal advice. "That way, the client can budget for legal fees or go to the bank for financing," McCallum says.
  • Fixed fees. You can also negotiate a fixed fee for a given legal project. Just as you'd take bids for construction work, you can talk to more than one attorney about what you'd like to have done and ask for a bid on the job. As with construction, though, the low bid isn't necessarily the best. Be careful to evaluate the attorney's reputation and the quality you'll get for your dollar. With a fixed fee, the lawyer has an incentive to be efficient, and the client understands the costs upfront. If it's a one-of-a-kind deal, however, or a type of work the attorney hasn't done before, fixed fees may be problematic because neither party knows how much time it will take and what it should cost.
  • Volume discounts. If your business requires a large number of the same type of documents or services, you might be able to negotiate a volume discount with your attorney. A law firm with enough expertise in the area to produce what you need without much effort may be willing to offer a lower price in return for a larger quantity of work.
  • Caps. Often the most trying aspect of legal billing is having no idea what a particular service will cost. Many attorneys are willing to estimate an upper limit so the business can establish a budget. Actual hourly charges might be less, but the attorney guarantees they'll be no higher.
  • Contingent fees. Common for lawyers working on plaintiffs' lawsuits and on collections, a contingent fee arrangement shifts the risk to the lawyers: If they win the case, they receive a set percentage of the settlement, typically one-third. If they lose, they get nothing. This arrangement helps discourage frivolous lawsuits with no realistic chance of winning. Some lawyers now offer a contingent fee structure for transactional work, too, such as putting together a major business deal. If the transaction is concluded successfully, the lawyer gets a percentage of the deal.

"The goal is to move the transaction along rather than just grind out the hours," Kram says. "The lawyer agrees to assume part of the risk." Be careful, though. Some state bar associations frown on this arrangement as unethical because the attorney has a financial incentive to conclude a deal even if problems arise that could harm the client. Many lawyers avoid these arrangements because this essentially makes the attorney an investor in the deal.

  • Partial contingency. In this arrangement, also known as "value billing," the law firm charges less than its normal hourly rate with the agreement that the client will pay a larger fee if the work is done faster or with a better result than anticipated. A lawyer who saves or gains you thousands of dollars through excellent work gets to share the windfall. Before agreeing to such a plan, though, make sure the lawyer will accept a lower payment if the result is worse than expected.

If you think an alternative billing arrangement could work for you, talk to your lawyer. "No client or lawyer should be embarrassed to talk about fees," McCallum says. "Raise the issue of fees early on, and be candid. If the attorney is not willing to be candid, that's a danger sign." Discuss what you're willing to pay to get a deal done, and ask for a guarantee that it won't go higher. When you've worked out a satisfactory arrangement, get it in writing to avoid unpleasant surprises when the bill arrives.

Work It Out

What if your legal bill turns out to be unreasonably high? Many bar associations offer a program called "fee arbitration," in which the lawyer and client appear before an independent panel to present their sides of the story. The panel then dictates a reasonable fee for the work performed to settle the dispute quickly so you can get back to work. For more information, contact the ethics office of your local bar association.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Contact Sources

Bricker & Eckler LLP, 100 S. Third St., Columbus, OH 43215, ekram@be.bricker.com

Warner, Norcross & Judd LLP, 900 Old Kent Bldg., 111 Lyon St. N.W., Grand Rapids, MI 49503.