Commercial contracts

Shareholders’ agreements: protection from loss or unnecessary expense?

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.

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An essential weapon for all SME’s when dealing with larger organisations.

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 it’s worth negotiating or perhaps in certain cases worth walking away.

The curse of the Verbal Agreement.

So what’s the problem with verbal contracts, it seems sensible on the surface, why can’t people just get on with doing business based on a rational conversation?

The problem with verbal agreements as per the famous quote by Sam Goldwyn (film boss from 1930’s)” is that they are not worth the paper they are written on”.

Of course it’s legal in certain circumstances, (depending on the type of law) also a budget to argue the issue will help, without money to contest the issue in court, how else can you prove the contract exists?

As demonstrated by the England bid to host the world cup in 2018, verbal contracts when they go wrong, generally lead to post event denial, bad feeling and an overall shambolic situation.   Listening to the commentary you would think the parties were describing two different situations rather than the same event.

Verbal agreements represent an unnecessary business risk and create ambiguity from the beginning of the client or supplier meeting.  Clear communication with clients is a difficult thing to achieve at the best of times, so omitting a written contract and relying on what everyone remembers to be the truth appears ludicrous.

The physiology of a verbal contract seems to suggest a keenness to be flexibility as a service provider or accommodating as a client.   An immediate willingness to trust without knowledge of the people involved or the full extent of the circumstances is an interesting way of exposing your business to uncertainty and all to avoid some paperwork or explore the client or supplier’s service offering or business intentions.   This isn’t to say doing business with friends is a walk in the park, sometimes familiarity can lead to you being last to be paid or expected to deliver a lot more because of the friendship.   So, arguably formality tests the strength of commitment.   Trust is a very important part of business and perhaps should be earned over time.

It only takes two minutes to type “problem with verbal contracts” into Google to find out how problematic it is to embark on a non-written agreement.  Perhaps a written contract is our way as humans, to get to know each other under the banner of legal protection, so post contract we can demonstrate those charming traits of over delivery and flexible customer service.  Impressing a company under contract is more likely to lead to both parties being satisfied rather than one disgruntled party.

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Crackdown on Unfair Terms & Conditions

 

by EasyEditor Newswire

Firms have been warned to make sure their terms and conditions are clearly defined after the Office of Fair Trading announced a crackdown on contracts which are detrimental to customers or breach consumer protection laws.

Currently around 70 per cent of enforcement cases handled by the OFT relate to terms and conditions with at least a fifth of consumers claiming to have had a problem with the small print in contracts over the last 12 months.

Research carried out by the OFT found many contracts contained small print terms that altered the deal consumers believed it to be, or had made it difficult to understand by hiding unfair terms in plain view. At least 80 per cent of cases investigated found people who had experienced a problem said that they had been caught out by a surprise.

Examples of unfair conditions were a football club selling season tickets without guaranteeing seats, extended warranties offering limited cover and an increasing number of sale and rentback deals where the tenancy offered was much less secure than many people realised.

The OFT has also raised concerns about complex, deferred or contingent charges that exceed costs such as businesses which include small print charges that don’t correspond to any service provided or which include obstructions to consumer switching such as imposing onerous cancellation terms.

“The recent economic difficulties have resulted in a lot of companies trying to tighten up on their terms and conditions but great care needs to be taken that any small print cannot be deemed unfair to customers,”

said David Reilly, Commercial Director of Create Ts and Cs, a company specialising in creating tailor made terms and conditions. “A set of Terms and Conditions drafted in plain English, can help a company to differentiate themselves by communicating clearly and openly with their client in mind”

“The OFT will take a dim view of any firm which deliberately or not tries to tie down consumers to unfair contracts.

“Every business needs to review their contracts to make sure their customers are treated properly. Creating fair and transparent terms and conditions is good business sense as it not only offers protection for both parties but builds trust with customers and encourages repeat business.”

However, the use of small print clauses are not automatically unlawful as it depends on the specifics of each contract and a number of other factors.

“On the one hand, we all know that people don’t read the small print of contracts. On the other, small print is a necessary fact of life and consumer law isn’t there to protect the careless or the over-hasty,”

said Heather Clayton, Senior Director of the OFT’s Consumer Group which is calling for the need for small print to be reconciled with the real life behaviour of consumers.

“Consumers should be free to focus on the main elements of the deal, confident that there will be no unwelcome surprises in the small print.”

ENDS

Websites Suffering Under-Investment as Designers Face Tough Competition

 

by EasyEditor Newswire                                                                                                                                                             16/12/2010

Web designers across the UK are routinely over servicing and under charging clients in a bid to keep the e-commerce revolution on track, claim experts.
While 72% of website designers have seen a rise in expectations from their SME clients the majority are struggling to maintain increasingly sophisticated sites on lower budgets and against cut-price competitors.
According to web hosting provider Fasthosts at least a third of web professionals have provided clients with out-of-hours overtime and half have performed work free of charge in a bid to demonstrate the benefits of a properly designed and maintained website.
In the last two years at least 60% of web design firms have been forced to slash their hourly rates while 56% admit to losing clients to cut-price competitors. Many have also had to deal with projects being changed half-way through or work added because client’s under-estimate the maintenance required for a good website.
“For many small firms, using external web professionals is a very sensible and rewarding option,” said Steve Holford, marketing director of Fasthosts Internet Ltd which conducted the research and found low technical understanding from clients was hindering the success of many web projects.
“It’s clear that in recent years, web designers have worked hard to adapt to the needs of clients and demonstrate the value they can deliver. With the right approach from both small businesses and the web design community, online revenues can be successfully built and so help the UK economy in its return to growth.”
However, with many web design firms feeling the pinch as a result of over servicing and under payment leading business experts have urged a review of how client expectations are managed at the outset.
“Having a bespoke set of Terms and Conditions can help manage customer expectations and encourage smooth client cooperation to ensure projects stay on track and web companies to manage cashflow,” said David Reilly, Managing Director of Create Ts &Cs. “A lack of relevant terms and conditions often leads to longer projects, lack of payment and scope creep resulting in the client taking advantage and in some cases retrospective price discounting.
“A set of properly written terms and conditions places the supplier in a position of strength allowing negotiations to start from a sensible position and reach a conclusion both parties can be happy with.
“E-commerce is now big business, worth billions of pounds a year to the UK economy. If British businesses are to compete on the world wide web they have to be prepared to invest in the technology to attract consumers. For their part, web designers have to set out the value and benefits of what they can do in unambiguous terms.”

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Firms Urged to Impose Penalties for Late Payments

by EasyEditor Newswire

 

Contracts between firms which include late payment clauses need to become a common feature of everyday business practice, claim legal experts ahead of an EU update of a directive aimed at tackling business failures.

On average, the majority of small and medium firms have to wait at least

41 days longer than the time scale for payment agreed with customers before they get their money.

The latest research from Bacs Payment Schemes found that in the current economic climate at least 37 per cent of late payers take up to three months to settle invoices, leaving small and medium enterprises (SMEs) out of pocket to the tune of over £24billion at any one time.

According to the Law Society the growing trend means businesses will have to include late payment clauses in contracts as standard if the number of firms going out of business due to cash flow difficulties is to be reduced.

“Average commercial debts caused by late payments are high in the UK, and for SMEs a lack of cash flow can be crippling. With credit less available to those businesses from banks, late payments have a far more serious consequence for SMEs,” said Robert Heslett, President of the Law Society in England and Wales.

“Considering the amount of red tape SMEs and start-ups are faced with, it is no surprise that seeking protection against late payment from customers does not come top of the to-do list. However, it could be the difference between the business surviving or not, especially in the uncertain economic climate.”

As the imminent increase in VAT to 20 per cent is expected to add to SME cash flow problems legal and business experts claim firms must take advantage of the protections already available to help them safeguard against late payments.

“Carefully worded terms and conditions can set out in clear terms how and when payments should be made with penalty clauses if a deadline is missed,” said David Reilly, commercial director of Create Ts and Cs, which specialises in tailor made terms and conditions for SMEs.

“Ts and Cs do not need to be complicated as they are intended to simply represent the formality of a business relationship.

“Properly prepared terms act as an effective deterrent for late payment and, should there be a dispute, can help solve a problem without the need for drawn-out legal action. However, if a firm needs to go to court to recover a debt it is more likely to succeed if it can be shown the debtor is in breach of an unambiguous agreement.”

The European Union is currently looking at updating a directive aimed at tackling late payments, such is the impact on the SME sector across Europe as a whole, but any resulting legislation is likely to take some time before it comes into force.

According to the Federation of Small Businesses, which represents more than 213,000 members across the UK, many government departments and agencies are still paying late despite making commitments at the start of the recession to settle invoices within 10 days.

A survey of SME cash flow found that on average 34 per cent of payments from the private sector are late compared to 31 per cent of UK central Government receipts, 30 per cent of those from Government agencies, 30 per cent from EU institutions, 29 per cent of NHS money and

25 per cent of local authority payments.

Formality and Informality in Business – Getting the balance right!

By David Reilly, Founder and Commercial Director of Create Ts and Cs                           17/04/2010

As a business owner, getting paid for the work I do is an important part of building or growing the business .  We all know cashflow is ‘king’.

With that in mind, let me establish context for the following;  this blog was inspired by a number of recent visits to the sheriff court combined with observation and personal experience.  The subject matter – which is also a talk I’ve delivered at various events across the central belt of Scotland – positions the idea that an absence of formality within business is more likely to lead to dispute, for example ‘non payment’ compared to business relationships supported by a contract or written Terms and Conditions.

So, what do I mean by Formality and Informality; formality is the presence of a contract, or progression of a business relationship from prospect to customer by way of a written agreement.  The word ‘contract’ implies Terms and Conditions of sale or bespoke contracts written to formalise the business relationship, communicating for example how the business is to be paid or how the business’s IP (intellectual property) is to be treated.  Informality on the other hand, in this instance describes an ‘absence of contract’.  Interestingly, the majority of small claims cases I’d witnessed and the overwhelming number of disputes I encounter on a weekly basis have a common theme, the business engages and transacts with another business ‘without’ the presence of a contract.

On the face of it, informality is an attractive exchange, no paperwork is required, there’s a perception of ‘getting on with the business of doing business’, a no nonsense approach and a chance for you to communicate your ability to be ‘flexible’ to your new client.

When disputes occur, particularly disputes that involve ‘non payment’ it seems the SME sized client tend to emotionally react and can take ‘non payment’ more personally than a larger organisation.  This can result in an emotionally charged dispute, as the individual feels ‘let down’ and ‘disappointed’ as a result of their unpaid efforts.

It’s clear that if you fail to Pay BT or a similar sized organisation, a process unfolds, initially involving letters and reminders, finally ending in termination of services and possible court action.  With departments dedicated to such activities and armies of staff ready to pounce, large companies are geared up for these eventualities.

So, when the individuals or directors of SME businesses reach court, generally within the Small Claims process; a natural clash of jargon ensues!  The law is interested in ‘points of law’, or what business contract exists.  The presence of a legal document or contract can help avoid unnecessary disputes in the first place and assist to communicate within the legal system which requires relevant legal criteria.  The legal system can appear alien to businesses who fail to communicate appropriate legal based arguments.  It’s not about right or wrong, it’s about ‘points of law’.

Arguably the use of contracts to encourage agreement between two companies prior to ‘doing businesses’ is an opportunity to create an environment in order to build trust between two companies, laying the path for future business and increasing the likelihood of success.  Why allocate that much trust to a business or an individual with whom you’ve never done business before!  Perhaps informality or the demonstration of the businesses to be flexible should be delivered after a contract is signed? We all like to over deliver for our clients, perhaps we should attempt to protect ourselves and the business first to ensure everybody gets what they want for the experience before we ‘over deliver’.   Maybe, part of the issue regards a businesses fear of requesting a contract reflects our own perceived value of our business.  If we believe we do a good job and can deliver a quality product or service, is it only reasonable to request formality or a contract from a potential customer before we deliver our services.

Minimise business risk – employ effective Ts and Cs – Getting Paid!

An article picked up and presented on various social media networks published by Flag Media News & Features  news@flagmedia.co.uk, written by Sean Murphy, Flag Media.  December 2009.

 

A lack of properly written terms and conditions can make the difference between failure and survival for thousands of businesses struggling with cash flow, claim business experts.
Recent figures from Bacs Payment Schemes Limited (Bacs) revealed that more than a million SMEs are owed over £30.4 billion in late payments, a rise of over £11 billion in the last 24 months.
Cash flow, always the single biggest problem facing any small to medium sized enterprise (SME), is now tighter than ever and experts have warned that failure to have specific terms and conditions can help or leave firms seriously out of pocket if a deal goes bad.
“Terms and conditions simply represent the formality of business relationships,” said David Reilly, commercial director of Create Ts and Cs, a company specialising in tailor made fixed-price terms and conditions for SMEs.

“If you want to buy or sell a service or a product it’s advisable to cut the risks of not being paid with a contract which sets out legal parameters. Properly drawn up Ts & Cs will cut the risk of an expensive legal battle”.
Last year more than 4,000 businesses failed because of late payment and, according to the Federation of Small Businesses (FSB) many small companies have to wait up to four months or more for their cash from customers.
In dramatic circumstances firms can try and argue their case in court or seek some sort of arbitration but without properly defined Terms & Conditions it can be an expensive uphill struggle.
“If a business finds itself in a dispute over an unpaid bill and there are no properly defined terms and conditions it means there is no formality to the contract and as a result there is no lawful communication about when they are going to get paid – there is only an assumption and an assumption isn’t enough.” said Mr Reilly.

“Unfortunately, when it comes to cash flow morality or fairness isn’t going to put food on the table but a set of clearly defined Ts&Cs spelling out payment terms is much more likely to win a court case and ensure debtors pay up.”
Over the years numerous surveys and academic research have identified cash flow as among the top three worries for small businesses with more than half believing their very survival is threatened by non-payments from customers.
”The biggest problem any small or medium sized business faces is late payments. You can end up employing somebody on a full-time a salary just to chase up invoices and they nearly always get the same response – the cheque’s in the post,” said Gordon Mowat CA of Aspire Management Services.
”The stress involved in trying to chase overdue payments can be crippling to a business and many owners or managers get so involved they often fail to recognise many of the solutions which can help solve the problem.
“You don’t always have to use a sledgehammer to crack a nut, Sometimes a minor change in procedures or the Terms & Conditions can make a huge difference.”

Avoid Disputes – Managing cashflow

By David Reilly, Founder and Commercial Director of Create Ts and Cs

Risk management in real terms is about managing cashflow and providing protection for you and your resources (cash, time and emotional energy) from petty long winded disputes which can drain a business. The small claims process exists for our protection and is a very efficient process which has been modified to protect businesses but it only deals with disputes under £5,000 (please note limited companies still need a solicitor when represented in small claims disputes).

Disagreements can take up a lot of time and money. Disputes are not about being morally right, its about being protected legally.

Ensure your company has put in place the facility to mediate, at times of dispute, you can introduce the option of discussion with the other party rather than progress straight to court. Its sensible to introduce terms and conditions that help to avoid disputes by incorporating as much self remedy where possible and encourages discussion to resolve disputes.  If a dispute reaches court, Sheriffs and judges are interested in what points of law exist within the agreement, contract or terms and conditions and what written documentation exists to support either party.  Cashflow problems, your business and the moral rights and wrongs are unfortunately irrelevant, so ensure you can deal with possible future disputes by putting in place a relevant set of terms and conditions for your business.

Create Ts and Cs provide a bespoke set of Terms and Conditions for your business at a fixed price, this unique approach to individualising commercial Terms and Conditions allow Start up and SME sized businesses the opportunity to protect themselves, manage risk and guard against future unnecessary disputes at an affordable price. Download: terms & conditions | privacy policy