It was recently suggested that I begin writing stories of my colorful consulting adventures. That would be self-indulgent, though possibly entertaining to readers. I like to make my articles beneficial to readers so they may be better positioned to build their businesses stronger. With this in mind, I’ll share a few stories about largely incompetent attorneys with the hope that readers will see the need to hire the highest quality legal advisors they can find.
The first time I experienced a serious level of legal incompetency (or maybe it was an innocent mistake, I’m trying to give the attorney the benefit of the doubt), it involved a buy/sell agreement where the purchase price was set at two times premiums. This is not a typo on my part and it was not a typo on the part of the attorney. The attorney did not know or take the time to learn the difference between premiums and commissions. That point became an expensive endeavor to correct. I’ve since seen several attorneys make the same error.
It has also become apparent to me that many attorneys cannot do math. This may be why they are attorneys. They put mathematical formulas into contracts that make no sense. Furthermore, attorneys have a penchant for prepositions, often extremely useless prepositions that only muddy the contract. What they don’t seem to understand when writing formulas is that the word “of” is not a preposition in a mathematical formula. Instead, it is an “order" meaning to multiply. This makes a difference!
For example, in one buy-sell agreement, the attorney did not seem to understand math resulting in the shares totaling around 140% of the actual existing shares. In other words, the shareholders all thought they had way more value than they actually did.
Similarly, many attorneys know next to nothing about finance or valuations. As a result, they write entirely wrong formulas. For insurance agencies, they often omit the need to consider the balance sheet in the value of the agency. This is a serious sin. Not considering the balance sheet is prohibited by the IRS and in every valuation case I’ve ever read along with every finance and valuation class I’ve ever taken. For example, in one contract, the buy/sell formula was 1.5 times commissions. But the agency was out of trust by $1 million. The buyer was forced to pay 1.5 times commission and then find another $1 million to fix the trust money deficit. At the very least the buy/sell formula should have read, “1.5x commissions plus or minus the balance sheet value.”
If your generic attorney thinks they know how to write a buy/sell agreement for you without learning or understanding the insurance industry, you should find a better attorney. At the least, get them to agree to work with an industry expert. For example, I had an attorney argue with me that contingencies and commissions were the same thing. The agent probably should have fired that attorney.
Another important point is contracts are supposed to have definitions. Why an attorney would write a contract that does not define the key terms is beyond me. Key terms in a buy/sell agreement that should likely be defined include words like revenues, commissions, assets, liabilities, default, and failure to perform. Contingencies should also likely be considered in the formula and defined. Timelines should be defined, such as “100 monthly payments are due beginning August 1” rather than “You have 100 payments to make” (that is a quote from a buy/sell contract!).
A few years ago, I was an expert consultant in a case regarding an agency’s value. It involved a purchase agreement and the contract switched back and forth between the terms “Fair Market Value” and “Fair Value”. Legally and in the valuation world, these terms have two different meanings. When asked what the correct value of the agency was, I asked, “Under which definition?” All the attorneys looked at me as if I was an idiot. I had to explain, and then I had to find the legal cases and statutes explaining the difference. After the lawsuit is already filed is a bad time to learn the contract is missing basic and important definitions.
Beware of attorneys who use boilerplate contracts, especially if they charge you for the hours required as if they had written the contracts from scratch. I once reviewed a buy/sell agreement, supposedly written for an agency that was for an office building!
Quite often the tipoff that an attorney is using an inappropriate boilerplate agreement is that within the contract, different sections will contradict one another. For example, one section will refer to two shareholders and another section will be written as if only one shareholder exists. Another tipoff is the fonts will change. Or the definitions or terms will not be consistent. If you’re buying a generic contract, call 1-800-generic attorney but don’t get sucked into thinking that your local attorney is providing personal advice of any quality. If they were competent and providing good advice, they would write the contract so the contract is at least consistent! And then there is their common response, “Sorry about that. I’ll fix it, but I don’t think it’s that important.”
Generic boilerplate contracts cannot be used correctly for insurance agencies. At the very least, use a boilerplate contract that is written for generic insurance agencies. Then ask yourself if your agency is generic.
I also see many buy/sell agreements lacking a divorce clause. Maybe contract attorneys do not intermingle with divorce attorneys? Whatever the reason, divorce clauses are critical in buy/sell agreements.
Some attorneys’ perspectives on employment contracts totally befuddles me. I cannot figure out, for the life of me, why anyone with a license to practice law would ignore the law in writing a contract. An attorney that does not understand the law or in some cases does not feel the need to write a contract that complies with the law is to be avoided. For example, one attorney advised that hourly employees could work 12 hours a day and then take Friday off without paying any overtime. This makes me wonder at what point they took the “law” out of lawyer.
Another attorney is still advising agency owners to pay themselves next to nothing to avoid paying employment taxes. I think the landmark case prohibiting this was sometime around the year 2000. Maybe because they finished law school in 1999, that ruling wasn’t covered, and then maybe their CLE classes just didn’t provide updates.
I recently had an attorney tell their client they should ask me to give them a contract because the attorney apparently did not write contracts, although the attorney was advertised as a business attorney. I still haven’t figured that one out, but at least he or she did not write a bad contract!
I know some amazing attorneys who protect my clients with high quality knowledge and the work ethic to research each situation. They do cost more. I hate paying attorneys too, but the $150 difference between paying $250 an hour for an incompetent attorney and $400 an hour for a competent one, is most often worth it because you might as well be flushing the $250 down the drain.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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