Anyone who has started a business will know that each new day is a blizzard of ever demanding (and shifting) priorities. Successful entrepreneurs operating within the start up phase will often have a one eyed focus on cash flow, sales and sheer survival. It’s about fire fighting first and process second.
But this leaves certain areas of the business exposed and none more so than with the legals and potentially fundamental structural issues about the business. This business critical area can and is often overlooked by entrepreneurs who tend to deal with things that immediately prevent them from “getting on with it”, rather than legal agreements which can be written up any old time.
Because of this, legals often head down the list of priorities, particularly when cost is involved and there is a perception that legals = large chunks of cash from limited start up or seed fund.
However, once that first product is produced, a sale made and a bank account opened, the dye is cast. The court will imply what rights and to whom, from behaviour and circumstances, whatever the intention of the parties.
Well, if the business becomes sustainable and starts to build value, then the importance of legal agreements such as contracts, ownership, risk and liability emerge as business critical. A laissez faire approach about documentation might feel comfortable at the start of a business, particularly with partners who are friends, but when that business starts to become successful it’s the legal uncertainty or ambiguity that can fracture key relationships, driving down success (and value) of that business.
How many rock bands have foundered on the basis of ‘legal differences’ as well as the more traditional ‘musical differences’?
The issues are often time and cash. Time, because there is always something else to focus on when starting/running a business and cash, because legal agreements and structures have a cost and it’s often perceived that this cost is too high.
But these issues need to be balanced alongside the potentially greater cost and business damage created by disputes that may subsequently arise from their absence.
It’s particularly prevalent to ignore these issues, amongst businesses set up by friends. How many people have been tempted into a business by friends based around vague promises of future success and fairness when (not “if”) sales sky rocket? Only to feel disappointed when the reality of that promise (or the perception of that promise) is not delivered? How secure is its shareholders agreement if someone dies and/or wants to leave? That’s if the business even has a shareholder agreement!
Being in business with people is not far short of a marriage and anyone involved in any type of divorce negotiation will endorse the truism …. “that it is easier to negotiate an agreement whilst both parties want something from each other rather than when one party has what they wanted.”
Negotiating legal agreements is not always easy but is often crucial for creating a more secure business, greater certainty and airing important issues early. Parties often bury the difficult issues, only for the very same issues (which have often been lurking mischievously in the background) to reappear at a later and more damaging stage. Only then, they’ve become expensive and potentially insurmountable.
The answer is to try and have at least some basic written legal agreements in place, agreements that will become the bedrock for future relationships and working practices, whether about premises, employment, partnership, supply and sale of goods. Agreements only last as long as parties want them to or until new agreements replace them, but better to have certainty than risk the opposite and future (often painful) litigation.
Even a simple pro forma deals with the basics and helps create clarity about where parties stand. The more legal certainty within a business, the more secure the value you are creating within that business. It also provides a platform where future agreements can be negotiated if/when success follows and when the cost of more complex agreements can be better afforded.
The key here is to find lawyers who understand the commercial realities of where you are in your business life cycle and who can create products and services suitable to your specific need and immediate cashflow.
There are lots of great lawyers around who can deliver high value advice to smaller businesses – without it being out of synch with need or budget. Don’t overlook the legal fundamentals – find the right lawyer, tell them what you need and mark clearly across the top of your instructions …“No over-lawyering required here”
Additional resource: What is the best legal structure for your businessWhat Is Best Legal Structure For Business. Image souce: Entrepeneur
Andrew Weaver is an entrepreneur, investor, mentor, blogger and Cranfield MBA. Brought up in Cornwall he has since worked in cities around the world including Melbourne, Cairo, Bilbao and London. He has extensive knowledge and experience within the SME sector across a wide range of sectors including professional services, property, distribution, leisure. He was also once a barristers clerk and has incorporated this wide range of experience into the recent launch of LawyerFair, a free to use legal comparison service aimed at increasing choice and competition in legal services. He is particularly interested in how technology and the internet will drive better value from professional services. With a Spanish partner and young daughter, he splits his time between London and Bilbao – including regular trips to San Mames and the home of Athletic Bilbao.