28th Oct 2013
Setting up a new business can be a costly endeavour. Between the new website, marketing and the expense of looking for new customers, many businesses do not consider risk management as a priority from the outset. The introduction of a contract such as a shareholders’ agreement is often put on the back burner and the function and profitability of the business become the main priority. The forming of such agreements can be seen as time consuming and costly but actually this business expense can save the company money in the long run and can creates a foundation and ultimately an incentive for all shareholders and directors to work together.
A shareholders’ agreement is put in place not only to resolve shareholder issues, but to resolve them quickly and quietly, keeping the business’ reputation and income intact. It can govern the actions of each shareholder and consequently the directors of a company, as the people who form small businesses tend to occupy both roles. It is a valuable mechanism in situations of shareholder disagreements or removals. It may prevent an ex-director providing the same services while attempting to poach the previous company’s customers. This would essentially save the company from spending both time and money on unnecessary court proceedings. A further attractive characteristic of a shareholders’ agreement is that it is not in the public domain. Therefore, any boardroom disagreement can be kept quiet to preserve the company’s reputation.
An article from the Independent newspaper, explains the benefit of using a shareholders’ agreement and how the alternative involving court action is much more expensive than putting a shareholders’ agreement in place, “In any event court action is usually expensive and time consuming and may damage the company’s reputation and the goodwill of the business. It is therefore important that there is a contractual procedure in place to resolve any deadlock as quickly and as privately as possible.”
It makes sense putting a shareholders’ agreement in place from the beginning to cater for changes in the shareholders’ interest and business direction. Consequently, the implementation of such a contract would be much trickier after the shareholder changes focus. Resolutions to such situations are more time consuming and generally uncomfortable as the negotiations take place under a cloud of changing priority and frustration.
The article continues, “the directors and shareholders’ personal plans and expectations may diverge over time, making it harder to agree the terms of the shareholders’ agreement later on in the lifecycle of the company.” So, putting a shareholders’ agreement in place may also result in a business being more profitable. The agreement can also regulate the everyday functions of the business, allowing decisions to be made quickly and fairly, taking account of the views of each shareholder. It can also regulate the responsibilities and remuneration of each shareholder, which could potentially prevent many misunderstandings and disagreements.
David Reilly, Director at Create Ts and Cs commented, “We believe a shareholder agreement is not only a mechanism for solving problems within a limited company and promoting the sustainability of the company but it’s also a way of managing governance in the business; reflecting the particular culture of the business. Managing the consent issues and the shared responsibilities of each shareholder/director (in most small businesses the directors and shareholders are the same person); this way responsibility is allocated and incentive built into the agreement to ensure that each director/shareholder (small business model) is part of something that is theirs’ to grow as a team. This is best done through a tailored agreement, which is a shareholder agreement that is first discussed with the shareholders/directors and the key issues agreed beforehand and then reflected in a tailored contract.”
Yes, it is a relatively costly instrument and is not always utilised. However, this does not take away from the fact that these agreements are an essential tool for your business. It should be common practice for these agreements are formed at the start of the venture alongside forming a company.
Self-drafted or general off the shelf contracts are not adequate for those businesses who want to manage their liability, a case from www.lexology.com (legal website that explores business issues and law) shows how self-drafted or off the shelf contracts just don’t manage the risk within a business and can lead to businesses issuing contracts that are simply unenforceable.
The High court found that an exclusion clause contained within the standard terms and conditions of an IT supplier was unenforceable leading to an award of damages of £110k in favour of the Client. The case (Kingsway hall hotel limited V red sky IT limit  EWHC 965 (TCC). Legal firm RPC (www.rpc.co.uk) commented on this case saying, “from this case it was clear that there existed a clear disconnect between red sky’s standard terms and conditions and the manner in which red sky sought to sell their software. Suppliers should ensure that their standard terms accurately reflect the sales and contract process. Any gap between the process envisaged in the standard terms and the actual process may result in clauses being unenforceable. Standard terms and contract processes should be reviewed regularly with legal advisers to ensure enforceability and maximise their benefit”.
It’s not uncommon for a client to sign a contract where the content is not understood, the origin of the information unknown or is drafted by an unqualified hand? There are a variety of reasons for this; one of the key reasons is that legal services appear to be an expensive luxury rather than a must have for your business. Generally this type of contract is unenforceable and this can cause a problem for both parties when a dispute arises.
The danger of contracting with an unenforceable contract is expressed in an article posted on lexology (www.lexology.com), “Am I being unreasonable”? by legal firm Nabarro LLP, the article comments on the importance of a contract containing clauses that are reasonable and in-line with the Unfair ContractTerms Act 1977 (UCTA), “it is always been in a contracting party’s interests to consider the reasonableness of the contract clauses; take advice on whether the court would be likely to uphold the clause should it be subject to challenge”. So knowing what’s enforceable and what’s reasonable defines the credibility of the contract.
Its key to remember that this is not just a legal issue but is a business issue, a think tank aimed at creatives/designers called Creative Latitude (www.creativelatitude.com/articles) believe that the contents of the contract is a key client communication, “If we have to take a deep breath and are physically uncomfortable when we present the contract, that uneasiness is bound to be communicated to our client. The last thing you want to do is cause your client to see the worried look on your face and wonder, what the heck is in this contract”?
David Reilly, director at Create Ts and Cs commented, “Our client acquire bespoke contracts ratified by a solicitor so they know that the contract is enforceable (deemed reasonably). It’s critical that their potential customer knows they have gone to the trouble to invest in a contract that is enforceable and protects both parties”.
Considering the investment of time and money to contact clients, coffees and lunches, sales systems and marketing campaigns, it makes sense to continue the good work and invest in a professionally written, assessable contract relevant to your business ensuring its ‘reasonable’ and ‘enforceable’ throughout.
Making your business an attractive proposition for an investor or potential buyer can be a time consuming task. Apart from the usual business day to day of ensuring you are making sales and keeping your clients happy while increasing profitability; there is the added preparation of documentation to allow the key business info to be viewed from the outside and understood by a potential suitor. The process of viewing and interrogating this documentation is generally classed as ‘due diligence’.
According to sellingbusiness.ca, “despite all the uncertainty regarding the due diligence process; some principles that if applied can assist the process and increase the chances of reaching a satisfactory sale. For example it’s advisable that the sellers prepare a large portion of the documentation needed for due diligence before putting the business up for sale, especially financial and accounting information and legal documentation”. This principle is applied to either investing-in or buying a company”.
Colin Munro, Director at Mi City, www.mi.uk.com comments on the need to impress an investor, “Small businesses need to protect their intangible assets in order to build value and if investment is to be attracted at any future date then clear legal definitions will be a requirement of the investor. It is much better to agree terms with a supplier prior to commissioning any work, clarifying any areas of ambiguity. This will help to prevent future disagreements and potentially costly negotiations”.
So, having the right contracts is important as it shows investors or buyers you can protect your asset and build value within the business. David Reilly, Director at Create Ts and Cs, “in my experience investors or potential buyers will feel a certain reassurance that you have gone to the trouble of putting in place the correct contracts with suppliers and customers to assist in managing risk and help contract in a manner that assists the process of getting paid on time, protecting your IP and generally providing a professional framework to protect both parties while doing business. Also a contract can demonstrate residual value where contract duration is signed up to; for example, a signed contract ensures a certain amount of revenue and value for the contract period. i.e. a 12 contract should yield 12 months revenue, which of course is attractive to a potential investor or buyer”.
It’s not unreasonable for a potential investor or buyer to be interested in a company that has invested in its own business processes and formally manages their client relationships.
Bill Christie, FCIBS is a Chartered Banker and Managing Director at CER, www.cerbusinessfinance.co.uk, who assists businesses identify the appropriate funding for their company commented “I cannot stress strongly enough the essential requirement for a business, no matter how small; start-up or indeed established to have an “approved” set of Ts & Cs; specifically designed for your business. Yes, you can obtain Ts & Cs from the Internet but they may well not be designed to provide the right protection that you and your business require. When discussing a funding/business proposal with a prospective client, I consider that Ts & Cs are just as important as Business Insurance”.
We recently drafted a bespoke set of terms and conditions for PHP Developers, Malt Blue Ltd and they’ve been kind enough to blog about the difference and added value bespoke Ts & Cs have made to their business.
Now maybe it’s just a matter of perception in my own mind here; maybe it is. But ever since going through this process, the tone and quality of the interactions with clients has definitely gone up a number of notches. I see myself taken more seriously and remunerated as such.
But maybe it’s something else. Maybe, it was just coincidental timing – I don’t believe that. Irrespective of what it is, I know two things:
- I’ve had a good solid look and think about my intent in running a freelance business
- I’m more focused and professional in my conduct
This isn’t to say or infer that I wasn’t before. But going through this process changed me, because of all the topics that I started considering in such depth; which in turn, led me to consider other aspects of how the world sees my freelance business. Topics such as letterhead, email signatures, they way that I write and communicate with clients and so on.
It’s always great when we receive such positive feedback from our clients. How can we make a difference with how you perceive your business? Contact us today.
According to Earl Nightingale, famous author and broadcaster “You can measure opportunity with the same yardstick that measures the risk involved. They go together”. He continues, “Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable”.
In many cases, especially with smaller business, (start-up or SME) negotiating with larger organisations, there lives both an opportunity and danger. There is of course an ‘inequality’ in bargaining power. This equality is generally apparent during negotiations. Most large organisations have legal departments and it’s not uncommon for a small company to be pitched into a negotiation involving a corporate legal department.
It’s during these situations that larger organisations may question or request your Terms and Conditions and subsequently changes to your contract or certain clauses omitted. In certain circumstances company contracts are compared and each clause examined individually; this is commonly known as the ‘battle of forms’. Experienced businesses use Terms and Conditions to position themselves professionally with potential clients and outline how they want to do business; for example getting paid, liability, protecting their IP etc. A well drafted contract will also help the business manage risk and ultimately save money by avoiding unnecessary disputes.
The following 5 points are worth remembering before you enter into negotiations;
1/ If you don’t have a set of Terms and Condition, then its leads to the smaller company inevitably following the only contract available, that’s the contract of the larger organisation.
2/ Smaller businesses can readdress the balance when negotiating with a larger player; its how you ask that counts and having Terms and Conditions gives the SME an advantage.
3/ Such negotiations can be tense and feel overwhelming, a company with a niche product or service can be in a powerful bargaining position and not realise it, distracted by events or potential size of the opportunity.
4/ Don’t feel flattered; you will end up working harder for less and obtain less appreciation for doing so, vanity costs money!
5/ Be confident, it’s ok to feel pressured by a larger company’s demands. However the same rules apply when doing business with smaller businesses, if you have the capability to deliver services, it’s profitable for you and the risk and scope can be managed then its worth negotiating or perhaps in certain cases worth walking away.