The final stop along the SME road will show you some of the legal pitfalls you might face during your business journey and the potential exit strategies which you may be able to use to cash-in on your success. This article is for guidance only and should not be used in replacement of professional legal advice.
Managing your legal risks
Let’s be frank, being in a small business is a risk balanced with reward. It is recommended that you seek professional business legal advice for any important decision that you make – at LawBite you can ask us a question and receive a free 15-minute consultation with an expert LawBriefs lawyer.
In this final part of the LawBite SME Roadmap we take you through:
The vital importance of cash flow and credit control.
Insurance to protect key parts of your business.
How to avoid, defend and win legal disputes.
How you can approach exit strategies to your maximum benefit.
One of the biggest threats to an SME is a lack of cash. Even businesses with great ideas, products and staff can suffer from cash flow problems. A robust credit control policy is essential in managing this part of your operation.
You should always ensure that you check your customers’ creditworthiness. As part of this, your customers should complete a credit application form before you begin to do business with them. Once you have the form you will need to check the information using the following sources:
- Register of Judgements, Orders and Fines (www.trustonline.org.uk)
- Insolvency Registers (www.insolvencydirect.bis.gov.uk)
- Companies House (www.companieshouse.gov.uk)
- Bank references
- Trade references
- Status reports from credit agencies
Your credit control policy should be supported by your business’ Ts and Cs. Here, be sure to include:
- Clear credit terms and limits
- Retention of Title clauses
- Termination clauses
…and when it still goes wrong
Invoice discounting and invoice factoring are two ways in which you may want to address cash flow problems. They help you to secure funding against the value of invoices for which you have yet to be paid.
Of course, the ultimate action you can take to control your cash flow is court action. That is a whole new ball game and one for which you will require expert business legal advice. If you’re heading in this direction you may wish to take advantage of our free 15-minute consultation with an expert LawBrief to help to begin assessing your options.
Controlling credit and making sure that your insurance is correct is a vital part of your business as it grows. You should use insurance policies for the most vulnerable parts of your business.
Insurance is the way to address many of the potential risks that your business might face. Whatever type of insurance you decide to get make sure to always shop around for quotes, be aware of exclusions and any excess amounts.
Employers’ liability insurance
Any business that has workers must have employers’ liability insurance under the Employers Liability Act (1969). It covers you against claims by employees who’re injured at work or suffer a work-related illness. The key issues are:
- level of insurance cover
- certification of insurance
- keeping a record and previous certificates
- using an authorised insurer
- status of workers
Public liability insurance is not a legal requirement, but with the definition of ‘public’ here being anybody who isn’t an employee, you will definitely want this too. If, for example, a member of the public is injured on your premises and makes a compensation claim the financial consequences for you if you do not have this in place will be severe.
Other forms of business insurance to consider cover the following:
- Directors’ liability insurance
- Professional indemnity (PI) insurance
- Product liability
- Business interruption
- Credit risk
- Key person
Top 5 tips for dispute management
Inevitably any business will at some point be involved in a dispute of some description. It goes without saying that the avoidance of disputes is generally the best course of action for your business, but in cases where that is not a realistic option, here we will outline what steps you can take to increase your chances of winning.
These are our top tips to avoid disputes:
- Prevent contractual problems from escalating.
- Know under what legal basis you’re entitled to claim.
- Work out in advance what it’s going to cost you.
- Manage the legal process efficiently.
- Don’t forget there are other ways to resolve disputes such as mediation and arbitration.
How to deal with contractual claims
Many disputes arise due to issues surrounding contracts. Sometimes wording isn’t sufficient or clear enough to avoid differing points of view. Other times there may not be an actual written contract at all.
Having an agreed contract in place is probably the most important way to minimise your chances of being caught up in a dispute. Your contracts must then of course be thorough. We covered in The SME Roadmap Part 2 the 4 Rs as essential parts of any well-formed contract. So remember to cover in detail the rights, responsibilities, rewards and risks within the agreement’s terms.
Terminating contractual agreements
If the other side has breached a term of the contract you should have the right to terminate the agreement. You must follow the procedures specifically detailed in the contract to ensure that the termination is valid.
Ways in which you can claim for breach of contract
- Action for an agreed sum – where you claim the disputed amount as debt
- Damages claim – compensation for losses caused by a contract breach
- Specific performance – a court decrees that the party must meet contractual obligations
- Injunctions – another remedy where damages are not sufficient alone
Resolving disputes in an alternative way
In your efforts to avoid disputes escalating, you can:
- speak to the other side, before writing anything down
- negotiate firstly
- have clauses within the contract which encourage negotiation before more formal measures
There are two main forms of alternative dispute resolution: mediation and arbitration.
Mediation involves the use of an independent third-party in a role to facilitate constructive dialogue between parties.The mediator will talk confidentially to both parties and try to find common ground for an agreed settlement.
Arbitration is an alternative to litigation. Where the arbitrator hears the dispute and then has to rule on it.
Negligence occurs when your actions affect another party separate to any contractual relationship. Negligence claims are comprised of 3 overlapping elements:
- establishing a duty of care
- proving a breach of the duty of care
- demonstrating loss
Taking your claim to court
If you arrive at this stage you will be expected to have made reasonable efforts to resolve the dispute. The court can punish you if you cannot show the actions you have taken during the preliminary section of the claim.
As is the case with all legal proceedings you should, as always:
- follow the deadlines for serving documents to the other side
- state specifically whether you’re denying any claims against you
- keep an eye on the costs
Top 5 tips for selling your business
- Choose the right buyer.
- Talk to at least two interested parties at the same time.
- Be prepared for due diligence.
- Understand different ways your business can be valued.
- Make a clean break – minimise earn-out periods and warranties.
Negotiating with potential buyers
This is where a potential buyer will want to take a thorough look at your business. It applies not only when you are selling but also when you want to acquire another business or take on extra institutional investment.
The main information required will involve the following:
- Company details and structure
- Share capital
- Financial accounts
- Current contracts
- Litigation and disputes
Thinking about knock-on tax effects
Once you have agreed a price with the purchaser of your business the next item on the list will be how you will actually get paid. The likelihood of an upfront lump sum is slim. Far more probable would be what is known as an ‘earn-out’ where part of the purchase price will be deferred. The exact amount that will be paid is determined by the company’s performance following the purchase.
Warranties are another way in which the buyer looks to sweeten the deal at their end. Warranties are there to basically assure that the company is in the same state as you have promised in the purchase agreement. They typically will relate to all the information being correct regarding shareowners, any debt or liabilities, ownership of assets, intellectual property, employment agreements, any litigation and tax.
Indemnities are promises to reimburse the buyer in association to costs incurred in relation to warranties.
As a seller, some of the ways to reduce the effect of warranties and indemnities are:
- Warranty and indemnity insurance cover
- Disclosure letters
- Qualifying wording
- Time limits, the legal default is six years
- Financial limits
When you consider just how you’d like to be paid you will need to think about how different types of tax payments are taxed. At this stage you need the guidance of a good accountant. You may be paid your consideration with shares, a loan note or deferred consideration.
If you sell your shares you will be subject to Capital Gains Tax (CGT) – the rate is 18% of the gain below the basic income tax rate and 28% of the gain above the limit. It may be possible to apply for ‘entrepreneurs relief’ if you match certain criteria and this will reduce your tax burden all the way down to 10%.
For expert business legal advice and a free 15 consultation, please do enter an enquiry or call us today on 020 7148 1066 to speak to a member of our friendly Client Care Team.
The author of this blog post is LawBite’s Michael Jaiyeola. The article has been adapted from ‘Law For Small Business for Dummies’, by Clive Rich, LawBite Founder, A Wiley Brand