Show me the MONEY!

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When you are starting a business, you need MONEY. When you are growing a business you need MONEY. Most businesses do not make it off the ground because of cash flow issues. They have no money to invest in their product/service. NOW, I know that financially smart people avoid debt and credit cards etc BUT when it comes to business, debt is your FRIEND.

Debt is cheaper than equity because the lender faces less risk than a shareholder would, and also because the debt interest is tax deductible in the UK (and most other countries too). Debt gives you the means to make a profit. Your profit pays off the debt AND reinvests in your business producing more profit. So, hopefully you can see how you should not be afraid of debt when it comes to your business. Let’s look at some different types of lending.

Line-of-credit loans: These are short-term loans. They allow you to access a specified amount of money that is deposited into your business  account on an as-needed basis. You will only pay interest on the amount that is actually loaned to you. Line-of-credit loans can be used to buy inventory and pay operating costs for working capital, among other things, but usually not to buy real estate or equipment. For example, you have a line-of-credit loan of £3,000. You want to draw down £1,500 to purchase some fresh lobster for your restaurant. So, you provide your bank with evidence of the cost for the lobster and your bank, satisfied with your evidence, approves the the draw down of £1,500. You only pay interest on £1,500.

Overdrafts: Overdrafts are very flexible. They are easy to set up with your bank and you can usually pay back the overdraft, quickly and informally if your company can afford to do so. However, overdrafts are so informal that a bank can usually withdraw an overdraft facility at any time, which could leave a company in financial trouble. Overdrafts are good safety nets for if you come across unexpected liabilities. Every business should have one…in my opinion.

Revolving lines of credit: This loan offers you a certain amount of money in a specified period of time, and allows that certain amount of money to be borrowed again upon repayment within that specified period of time. For example, say you take out a one year loan of £50,000 on 1 January. You draw down the full amount of the loan on 2 January and subsequently pay off the full amount in May. You can then, if you wish, draw down the full amount of £50,000 again, at any time within the life of the loan. You can keep repaying and drawing down up to £50,000 until the end of the loan. This type of loan is great if you want to draw down monies on an as needed basis BUT you also want security that such monies will be available to you unlike with an overdraft or a line-of-credit. You will usually have to pay a commitment fee for the unused part of the loan. The commitment fee is generally specified as a fixed percentage of the unused loan amount.

Bullet loan: A bullet loan is a loan where a payment of the entire principal  (fancy way of saying the “amount”) of the loan, is due at the end of the loan term. For example, if you take out a one year bullet loan of £50,000, the loan repayment is due at the end of that one year term, in one swift BULLET payment. Under these loans, you usually have to draw down the full amount of the loan immediately and you do not have the option of repaying it and drawing it down again. Interest can be paid periodically within the term of the loan OR it can be paid with the principal, in a bullet payment at the end of the term of the loan.

Angel investment:  There is also the option of getting a loan from an angel investor. These investors are usually experienced entrepreneurs looking for the next big thing; they’re in it to win it. Therefore, angel investors typically demand three things: a) equity, b) a high return on investment and c) a well-defined five-year plan in return. If you want a better idea of angel investors, watch the BBC’s The Dragon’s Den.

So these are the ways in which you can assist cash flow for your business. These are very, very BASIC definitions and as always, lawyers are key in looking over the detail so that you are protected. Also, debt has its draw backs too, for example it shows up on your accounting books as a liability and it comes with unavoidable interest charges. There may also be restrictions imposed on your business whilst it is a borrower of a bank. For example, most banks will require a right to possess and sell your business property if you fail to pay back the loan, or to seize your inventory. Again, this is why you need a lawyer. Think about what type of debt your business needs at the moment and then ask your lawyer to look at your bank’s paper work.

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Legal fees can be flexible.

 

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How many of you pay your legal fees as part of a pay as you go plan? It’s expensive right?The reality is that a good lawyer with some sort of experience, should be able to give you a fee quote give or take a few pounds. They should be able to offer you some sort of fixed fee arrangement . HOWEVER there are circumstances where legal fees can easily spiral out of control and such circumstances tend to arise in litigation. Often lawyers can get away with saying “how long is a piece of string” when it comes to estimating their legal fees in litigation and this is UNFAIR because in litigation there is NO guarantee that you will win. You could easily pay £50k in legal fees and not see a dime from the other side or even have to pay the costs of the other side too! SCARY!

The good news is that there is a way to get lawyers to buy into the risk of litigation and CARE about that piece of string. In the UK there are Conditional Fee Agreements (CFAs) and Damage Base Agreements (DBAs) and they are pretty good at encouraging realistic assessments of litigation, from your lawyer. Here’s a brief breakdown.

CFAs

A CFA is an agreement whereby a lawyer and a client can agree to share the risk of the litigation by coming to a financial arrangement whereby part or sometimes all of the solicitors’ fees will only be payable by the client in the event of success. So for example you might agree that you only pay your legal fees if you win (your lawyer will scream) but in return for the risk that you may lose, your lawyer might say ok but you will have to pay me an additional amount of X% of my fees if you win (you will scream BUT it’s not a bad offer as this only arises if you win). Or you may say to your lawyer I will pay you half of your fees and if I win, I’ll pay the other half. Your lawyer may say ok but, again, if you win, you pay the other half and a success fee of x% of my total fees. Can you see the bargaining power shift and settle in these examples. Each side has a stake in the litigation. You care because it’s your law suit BUT now your lawyer cares because he or she may not get paid!

DBAs

A DBA is an agreement between a lawyer and a client under which the client agrees to pay the lawyer a percentage of its damages if it wins its law suit. So for example you might agree with your lawyer that if you win your claim for breach of contract which is worth £300,000, your lawyer will get half of whatever you recover from the other side. This is  a huge risk for your lawyer as they won’t be getting paid unless you win BUT it forces your lawyer to consider if the claim is actually worth bringing. Your lawyer will be forced to seriously consider whether they will realistically get paid and therefore whether you have a decent case. You can make DBAs more complex too. For example you may say if you win £300,000 from the other side, your lawyer gets 50%, if you win £200,000 from the other side your lawyer gets 40% and if you win £100,000 your lawyer gets 30%.

Also do not forget FIXED FEE arrangements. If you are instructing your lawyer to do some standard conveyancing work or some corporate work, get a fixed fee! They do that kind of work all the time so the variables never really grant a “pay as you go” regime. If you are not in the UK I’m sure that these payment plans exist in some form or other in your country, so look it up!

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Do you need a break?

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When you’re running an up and coming business, costs are always on your mind. The less costs you have, the more profit you can make. So what do you do? You look for savings, HOWEVER, one of the biggest overheads of any business, often gets overlooked; RENT. In the UK most businesses rent their premises from a landlord as tenants under a lease. When the market was booming (pre-credit crunch) landlords had the upper hand setting high rents and long leases however in today’s challenging economic climate, landlords and tenants have found that long leases and high rents are no longer sustainable; there needs to be a compromise. This is why most commercial leases contain a BREAK clause which enables either the landlord or the tenant or BOTH to end the lease early and seek better terms elsewhere.

How does it work?

Say for example, you own a restaurant. You have a three year lease. In year one, business is booming however in year two, it’s not doing so well because the government has got rid of a big housing estate next door causing footfall to significantly decrease. You still have to pay your rent which in year one, was a piece of cake but now in year two, is a massive burden. You review your lease agreement but ALAS you’re locked in until the end of year 3. You go to the bank to apply for a loan. Whilst doing this you spot a great  empty space in a shopping centre round the corner. You know that your business would thrive there. You review your lease again, alas,  NOTHING HAS CHANGED, you’re STILL locked in until the end of year 3.

In the above scenario, not having a break clause in your lease prohibits you from getting out of a high rent deal in a poor area for your business. Your overheads increase and your profits decrease. Let’s look at this scenario WITH a break clause.

You have a three year lease. As soon as business starts to fail in year two you begin to review your options. You look closely at your lease agreement and to your joy you see that you have a break clause that kicks in after 18 months. You serve a notice to your landlord in accordance with the lease agreement, notifying him that you want to end your lease early. Your landlord accepts and at 18 months you move out of the premises and into the space that you spotted in the shopping centre. HAPPY DAYS.

Can you see the benefits for your business in having a break clause? It gives you some leeway to reassess one of your business’ biggest expenditures. In some circumstances where the location and premises still suit your business needs but the rent is just too high notifying your landlord that you are thinking of sending a notice to activate your break clause could help to bring your landlord to the negotiation table and agree a more sustainable rent. Landlords are business people too and what they value more than anything else is reliable tenants. However, as with everything in law (and that’s why you need a lawyer) there is more to it than just having a break clause and sending a notice. Here are a few considerations to bear in mind:

  1. Form and Service of Notice – You must comply exactly with method and form of service of a notice to exercise a break clause. Also once the notice has been served, it cannot be withdrawn. If the notice complies, you WILL be moving out so consider it seriously.
  2. Timing – It is important when drafting and negotiating the break clause that it is clear when the break date is and what the required notice period is. A break clause may occur on one or more specified dates or be exercisable after a specific period of time has elapsed. Your lawyer can help you work out what works for your business. Landlords usually never want to lose a tenant so they will hold you to strict compliance with the break clause notice provisions; the best thing is to diarise them so that you always have them on your radar and  consider them well in advance.
  3. Break conditions – These conditions must be strictly adhered to. If these pre-conditions are not complied with, your break notice may not be accepted. The most common pre-condition is that all rents due under the lease must have been paid. You must make sure that your lawyer negotiates this condition carefully. A lot of money is wasted in court where it is not clear whether a tenant has to pay a full quarter’s rent or just the apportioned rent up to the date of the break clause. There have been instances where a tenant has had to pay the full rent with no refund. Another pre-condition is that the tenant must give up vacant possession meaning the premises should be EMPTY. Take all your stuff and go.

So do you need a break? Yes! Make sure that you are always giving your business options and do NOT forget to use them.

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HOW TO…negotiate.

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In business, negotiation is a very important skill. You negotiate practically every day! From getting better wholesale deals to giving a pay rise. We are surrounded by negotiation. Negotiation leads to improvement and progress so it is important that you know HOW to negotiate effectively! Here are some tips from my experience as a city lawyer!

  1. Do your homework – You know that saying fail to prepare, prepare to fail, that basically sums up negotiation. You cannot just turn up and blurt out what you want. You need to know a) who you are going up against and b) what they want. This is the only way that you can determine a best case (your dream outcome)/worst case (your bottom line) position for yourself. Study your opposition’s motivations, obstacles and goals. Research them and ASK questions in the negotiation, ask and listen and think about how you can manipulate that information to get what you want. FOR EXAMPLE, Bob is negotiating better wholesale prices from his fish supplier for his restaurant. Dave, the supplier, cares about getting rid of his entire catch of the day on the same day. Bob knows this having done his homework and so agrees a 30% discount on prices if Bob buys the remainder of the catch of the day at the end of the day.
  2. Don’t be afraid to ask for what you want – If you don’t ask you don’t get, simple. That’s not to say that your requests should be outrageous. They should be considered requests based on doing your homework above. Start by listing what you want from the negotiation and why. For example, following on from our example above, Bob may have listed that he wants cheaper prices for the fish that he buys so that he can offer cheaper prices to customers and attract more business. Dave may have listed the fact that he no longer wants to have to chuck away leftover stock at the end of each day. When an opportunity arises to discuss anything on your list of wants, leap in and talk about it. The trick is to always go in with your best position; start with your hopes and dreams then work down to your bottom line (but this is still better than where you are).
  3. Persuade them – So following on from the above, you have your list of wants but how can you get the other side to buy in to them. You present them as a solution or a benefit. Think of everything you want out of the negotiation and how it can actually help the other side. Having done your homework, you should always try to present your wants in the best possible light, not as things that the other side is giving away but as things that HELP them. HOWEVER this will not always be possible. Some things you want are just things you want BUT you can attach them to other potential benefits for the other side. For example, Bob might decide that he doesn’t need all types of fish in Dave’s catch of the day. He may only need Cod and Plaice so that’s what he bargains for. Dave is annoyed because ideally he wants a guaranteed buyer for all of the remainder of the catch of the day. Dave is losing out with this proposition. He may have a catch of the day that is all Cod or that is Cod, Haddock and Mackerel, he still faces wasting produce and losing money. Bob addresses this concern by saying “hey, you’re still getting a guaranteed buyer for Cod and Plaice which you catch REGULARLY.
  4. Don’t be in a hurry – The reality is that some negotiations take longer than others. Some issues are more complex. Some concerns affect more than the parties negotiating. If you face such a negotiation, you won’t get anywhere rushing the process. You have to go in at a realistic pace. Rome wasn’t built in a day and a sensitive negotiation can’t be agreed in a day. If you push too hard you could chase the other side away leaving you at square one. It is ok and a smart move to suggest “some time to think about it“. This shows the other side that you really want THEM to consider YOUR WANTS because you are serious or that YOU really want to consider THEIR WANTS because you are serious. You  can suggest a night, a couple of days or even a week to “think about it“. The amount of time will depend on the issues being negotiated.
  5. Keep your cool – DO NOT under any circumstances rise to negativity from the other side. Keep your cool! It will intimidate them. If you’re met with a stone wall or ridiculous counter arguments, take a minute and think about what the other side is saying. Then make them defend themselves. Ask them WHY they take a position. What’s their rationale? In most cases they can’t do this and hey presto, you’ve shifted the balance of power in making them realise that they can’t defend their ridiculous idea. In exposing the fact that they cannot actually defend their position, you then have the opportunity to launch into what you want, eloquently explaining your rationale and persuading the other side as to why they should agree.
  6. Stay flexible – Do not LIMIT yourself to a single strategy. You should have done your homework so well that you give yourself different ways to get to a solution. If you are met with heavy resistance to one option, build in the next and work on that. If the other party makes a demand, ask them to explain the reasoning behind that demand then brainstorm. Think – how can I get there another way?

Ultimately the worst negotiators are those who never move from their best case or shout down the other side instead of listening. Just remember that negotiation should lead to progress, negotiation is successful when a compromise is reached. HOWEVER there will be circumstances where it just won’t work, the parties interests are just not aligned. This is when you 7. WALK AWAY. Never ever force it. Good negotiators know when to cut their losses and walk away. In my opinion such negotiators have still won as they have been able to definitively rule out a business relationship thus freeing them to focus on another.

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HOW TO … chase debts!

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The most important thing when you own your own business is ensuring that you get PAID. Late payments and outstanding debts disrupt cash flow which can literally kill a business. This post is all about a) preventing late payment and b) chasing up late payment. The goal should always be to never have clients owing you BUT if they do, as they occasionally will, it’s all about getting that debt settled as amicably as possible.

Prevention

Ideally you do not want to be chasing up a late payment therefore prevention is better than cure. You can protect your cash flow by making it extremely difficult for a client to make a late payment. You basically need to be honest and upfront at the outset, so that there can be no doubt as to what you are expecting to be paid and by when.  Take note of the following tips:

  1. Make sure that your clients know and understand your payment terms. Display your terms clearly in every invoice and explain how (“payment can be made by BACS transfer/SWIFT/Paypal etc”) and when (“payment is due by X date”) payment should be made. The idea is to make it as EASY as possible for your clients to pay you. You should also include information as to any late payment penalties i.e. “if your payment is more than one day late we will charge interest at a daily rate of X%”. If I know you are going to charge me interest at a daily rate of X%, I’m most likely to pay you on time. The invoice should be a one stop shop of how and when to pay, and the consequences for late payment. This is the basic starting point to getting paid and preventing client debt. If your invoices do not do this, REVISE them.
  2. Double check the details.  Your invoice details should be perfect, quoting all the information the customer needs to identify it. Include your reference code and THEIR reference code. Give a good description of the work/product that the invoice relates to. You do not want a late payment to be YOUR fault so just make sure that all the details are correct.
  3. Send your invoices out promptly. If you want your clients to pay you on time, you better invoice them on time. If you invoice me a day or week late, I’ll take that to mean that I can pay you a day or week late and then some!
  4. Do some credit checks. You should credit check all new significant clients as part of your due diligence (due what? read this), but proceed with caution. A client may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Carry out your general due diligence and use your judgment – is it likely that this company/person can afford my services/product?
  5. Make them pay a deposit. The deposit method of payment is great for damage limitation with late paying clients. If you are going to ask for deposits, make the booking of your product or services conditional upon receipt of the deposit payment up front. No deposit, no deal. After a certain point in time make that deposit non-refundable too.  The deposit provisions should be stated in the actual contractual agreement between the parties as the deposit happens at the start BEFORE the invoice which is issued after the provision of the services or product.

Chasing for payment

No business is perfect. Even your best clients can let invoices become overdue. Chasing and securing payment of an overdue invoice is a fine art in the world of business as you never want to offend a client. However, your company is entitled to the money, so don’t shy away from collecting what is due to you. Even charities hound their loyal supporters for donations!  At this point, it is all about having a uniform procedure based on a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails (absolute last resort). Here are some tips:

  1. Know when your invoices are overdue and act immediately. In some industries it is easier and more acceptable to just pick up the phone and ask “hey where’s my money?”. However if you are dealing with a new client or are operating within a more formal industry, you should write a letter of reminder stating (politely but firmly) that your invoice is now overdue and please make immediate payment. You should send this letter by email or fax followed by a hard copy in the post. This way you get the reminder to the forgetful client asap whilst providing them with a hard copy for their records. I would recommend a  letter of reminder regardless of industry norms because I’m a cautious lawyer and I believe in leaving paper trails in instances like this. In order for your reminder to have an impact, it needs to be prompt so keep a calendar of all invoice due dates and keep an eye on them. Send your reminder the day after late payment or your company’s grace period. Allow seven days for a reply.
  2. If there is no reply within seven days, send the invoice again. Send it by recorded delivery to ensure it has been received and keep your receipt as evidence that you sent it.
  3. If you still do not receive a response, make a phone call to find out what the problem is. Your client may have accounting issues or queries that it needs help with. Find out the reason for the non-payment and help them out. Negotiate if you have to and try to extract a promise of payment.  ALSO use this phone call to find out if the customer has a regular weekly or monthly pay run and find out the day on which this is done. Keep calling until you receive payment, especially two or three days before the pay run. This is where chasing payment becomes a fine art. You need to tread a fine line between harassing the client too much and keeping the pressure up. It’s best to keep up a persistent chase! “Hey Bob How are you? Pay me please”, “Hey Sheila, I’m great thanks. Spoke to Bob the other day…pay me please”.
  4. If the pay run date passes and you still do not receive payment, consider turning up in person to collect it. Of course this is not desirable and it is not even possible in some instances. This is the last resort before the ABSOLUTE last resort.
  5. If you have tried all of the above steps and you have still not received payment, you need to consult your lawyer. There is nothing like a letter from a lawyer to scare the crap out of a client. The letter should threaten to take legal action to recover the debt or to start bankruptcy or winding-up proceedings (depending on how much you are owed, in the UK, you can end a company if they haven’t paid you – read this). The letter could also threaten to use a debt collection agency. Keep a copy of all correspondence and accept that if you are at this stage, you have lost that client forever. Not so bad as a client is only worth it if they value you and they show that they value you when they PAY you.

The legal/debt collector route is your absolute last resort, but don’t be afraid to use it. However if you get to this stage, ask your solicitor’s advice and evaluate how far you should sensibly go to collect the debt before cutting your losses.

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Essential Contracts: An Overview

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Right so you’ve set up a business. Great! HOWEVER, don’t pat yourself on the back just yet. You need to ensure that you are legally ready to actually start FUNCTIONING as a business. So what am I talking about? I’m talking about those ESSENTIAL CONTRACTS that you should have READY at your fingertips so that you don’t a) look like an amateur (even though you may actually be an amateur) b) fall prey to the lawyers for the other side (if they present you with their standard contracts first, they MAY get the upper hand…depends on whether you’re legally smart or not) or C) miss out on fantastic opportunities because you don’t have the necessary documents ready and rearing to go.

There are many standard contracts a company should have depending on the industry within which the company operates. However here is a list of contracts that are applicable to all industries.

1. Shareholder Agreements

In the UK, if you are setting up a limited company, you will need a Shareholder Agreement. This contract regulates the dealings between the shareholders of the company. It sets out who owns what and who can vote and make decisions on what. It also sets out what particular shareholders cannot do. It effectively contains the framework for operating the company. This document should be drafted and agreed by all shareholders of a company at the outset. NEVER assume that just because you are friends or respectable members of society that things will not, one day, get ugly (this is business we’re talking about). A shareholder agreement protects every one.

2. Investor Agreements

Money, money, money…MONEY! If somebody is investing or loaning money to your company they will want to see the terms written down….SIMPLE. If you don’t have a standard form of this document ready for negotiation, you could run the risk of not being taken seriously and missing out on a great opportunity to gain capital for your business. An investor will want to know specific things and they will want to see these specific things neatly set out in concrete. What shares do they get? What is the value of those shares? Will those shares get diluted if more money comes in? What control do they get? What are the procedures for running the company? What is an exit for the investor if they want out? Setting these terms out clearly also protects YOU.

3. Website Terms and Conditions

Do you have a website? Of course you DO. You’re not living in the stone age BUT did you know that you cannot just have a website, you need a collection of documents covering the way that the website is run. Consumers/clients/customers need to see your policies on data, privacy, cookies and cancellation. Make sure you draft Terms and Conditions that are bespoke to your company. DO NOT copy and paste from another company’s Terms and Conditions – something in the small print WILL come back to bite you later. Instead, think about what terms you need in place that are relevant to what you offer and to how you run your business for example “this company operates on a 12 day cooling off period, if you change your mind within 12 days of ordering, we will cancel the contract, no strings attached” or “bookings are only confirmed upon receipt of a confirmation email from our head office”.

4. Non-Disclosure Agreements

Your business is your secret. Everything from your trademarks, patents, copyright, software, recipes, formulas, processes, financial information and so forth is your business IDENTITY. Don’t make it easy for people to steal your identity. This is what makes you unique – McDonalds, Apple, Nintendo! Before prospective investors, trade partners and purchasers will deal with you, they often need to know more about you – a Non-Disclosure Agreement offers you some protection in relation to the information that you disclose. It is a deterrent against breach of confidentiality by the other party. If they breach it, you can take them to court and sue them for virtually all damage ensuing from that breach…the price to pay could be very costly, consequently, they won’t want to breach it and your business identity is SAFE.

5. Employment or Consulting Agreements

If you have employees or consultants, you need a document that clearly sets out your relationship. There are many considerations that you as an employer will need to consider and set out clearly in line with the law. For example the process of terminating the contract, dealing with employee data, dealing with disciplinary matters, and (currently at the fore front in the UK) employee pension rights. Additionally, considerations such as wages, bonuses, working hours, holiday, sick pay, shares etc. all need to be addressed and codified somewhere clearly. This is where you really need a lawyer. There are some benefits to engaging contractors over employees (basically that you are not responsible for them) BUT just because you label someone a contractor does NOT mean that they are LEGALLY a CONTRACTOR. If they are working full time and only for you, tax and the law may classify them as an employee. So again YOU NEED A LAWYER HERE.

So there you have it. This is NOT a comprehensive list BUT it is a very good start. If you operate in another jurisdiction, such as the USA or Singapore or Dubai, the above themes and considerations are pretty universal save for any legal particulars. So go and put your house in order. You can actually buy most of the templates to the above agreements online HOWEVER whilst you can certainly make a start on them ALWAYS get a lawyer to give them at LEAST the once over, remember these documents are ESSENTIAL so you kind of want to get them right.

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Beware the Double D’s – Directors’ Duties!


If you are a director of a UK company that is a big deal. To whom much is given much is EXPECTED and the Companies Act 2006 did not forget about this! Shareholders of a company delegate the day-to-day management of the company to the directors so EFFECTIVELY the directors ARE the company. This is why the law has prescribed certain expectations for directors.

BASIC POWERS

Firstly, let’s ensure that you understand the basic power and authority of directors.

Directors work as a board (basically a team). The BOARD OF DIRECTORS may (if the articles of association permit, as they generally will) delegate powers to a committee of board members (sub team) or to an individual director (so this individual director can make particular decisions without referring to the board).

An EXECUTIVE DIRECTOR is an employee (of the company) with specific powers delegated to them either by a resolution (decision) of the board or under their service contracts.

A NON-EXECUTIVE director is, as the name implies, a director to whom no executive powers have been granted by the board. HOWEVER they can VOTE at board meetings and still have the same duties as executive directors. A non-executive director is usually an expert of some sort who acts as a check on the executive directors by using their particular expertise to vote at board meetings.

A MANAGING DIRECTOR (sometimes called a chief executive) is granted more extensive executive powers by the company’s articles of association or by board resolution. As the name suggests,  a managing director manages the other directors.

IF you are a director, you should know and understand the extent of your powers within your company or else you could fall foul of an array of liability. The golden rule is to never act beyond your powers. Take any issues to the board if you are unsure.

STATUTORY DUTIES

As stated in my previous post, the Companies Act 2006 is really your wikipedia for UK Company Law and it is a great start for understanding your role as a director. A director’s general duties are owed to the company and NOT to the individual shareholders. It is the company that will have the right of action against a director if he or she misuses their position.

The Companies Act 2006 codifies certain key duties, as follows:

  1. Duty to act within powers (section 171);
  2. Duty to promote the success of the company (section 172);
  3. Duty to exercise independent judgment (section 173);
  4. Duty to exercise reasonable care, skill and diligence (section 174);
  5. Duty to avoid conflicts of interest (section 175);
  6. Duty not to accept benefits from third parties (section 176); and
  7. Duty to declare interest in proposed transaction or arrangement (sections 177 to 185).

All of the above are designed to prevent directors abusing the position they hold within a company. Some of them may seem pretty obvious but you’d be surprised! Parliament didn’t pass the Company Directors’ Disqualification Act 1986 for nothing! In my experience, directors generally tend to fail to understand the restraints of 6 and 7 (go read these sections).

CODE OF CONDUCT

Alongside the statutory duties there is also what is known as the ‘code of conduct’ for directors. These include but are not limited to:

  • The likely consequence of any decision in the long term – so you have to demonstrate that you have thought about the future impact of your decisions for the company;
  • The interests of the company’s employees;
  • The need to act fairly as between members of the company; and
  • The impact of the company’s operations on the community and the environment.

Basically, directors have a lot to consider when they act. WHY should you CARE? Well sadly, directors are personally liable if they fail to comply with their duties. PERSONALLY (urgh) AND a director can even face criminal charges. That said, if you are a director, you can protect yourself by always taking difficult decisions to the board – you know, a problem shared is a problem halved…BUT if you ALONE are the board, it is important to document WHY you make a particular decision, to demonstrate that you have considered the code of conduct and the statutory duties.

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What exactly did Google do?

In a nutshell Google is RESTRUCTURING its business. Restructure basically means to “organise differently”. The new structure will be introduced in phases in the upcoming months.

As a result of the new structure Google will NO LONGER be the top dog company, this will be Alphabet. Alphabet will become the parent company and Google will become a subsidiary of Alphabet. Google will still own search, ads, maps, apps, YouTube and Android BUT many of its more “out there” ventures will join Google in becoming separate subsidiaries of Alphabet. For example Google X (the more experimental, top secret business e.g. self-driving cars and chip-embedded contact lenses), Calico (the company with the mission of tackling age and extended human lifespan) and Nest Labs (smart homes) will be transferred to the ownership of Alphabet to become independent entities.

So WHY would a company restructure its business?

Quite simply, to CLEAN UP. Restructuring is usually implemented when there are significant problems or risks in a company, which are causing or will cause some form of financial harm that could put the overall business in jeopardy. Restructuring is a form of risk management. The truth is, Google was housing a mixed bag of businesses which affected its accountability to and potentially its profitability for, its investors. A longstanding concern on Wall Street was the lack of transparency on how the Google businesses were operating. The crazy, loss-making experiments were seen as a costly distraction to the company’s highly profitable core search and internet advertising businesses. HOWEVER the new structure separates these unconventional business ventures from the safer, money-making companies, thus improving oversight and management which is good for investor relations. As Larry Page (CEO of Alphabet) stated in a blog post accompanying the announcement, “Our company is operating well today, but we think we can make it cleaner and more accountable”.

What can YOU learn from this?

As your business grows you will find yourself wanting to explore new avenues and take on new ventures, just like Google did. At this point your current business structure may not cut it, you may need to set up a subsidiary or two to manage risk and exposure. RESTRUCTURING enables you to tidy up your business by effectively allocating risk. This keeps your financial backers happy and in the long term this keeps YOU happy as you have the legal and financial FREEDOM to explore new things, just like Larry and Sergey!

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Read the SMALL print


Yup! It’s as simple as that. Read the small print! Read the disclaimers (this blog has one). Read the exclusion clauses. Read the terms and conditions.

I get so annoyed when I see companies or blogs or ANYTHING referring to the small print as “legal mumbo jumbo”. I can assure you that the small print it is NOT mumbo jumbo. It is a coherent stream of dos and don’ts that could NEGATIVELY affect your business – the SMALL print can have BIG consequences!

So do yourself a favour and take the time to read and understand the small print. Ask questions too! If you see something you don’t like, can you get a waiver? Can you negotiate out of it? Or maybe it’s not worth going ahead with at all? Again, reading and understanding contracts, offers etc gives your business options.

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Before you sign: Termination

exit 2

In continuation of the “Before you sign” series, I present the third potentially deadly clause for your review…TERMINATION. A termination clause is effectively your get out of jail FREE card in any contract so long as you DRAFT it that way. This is why you need to understand your contract so that you know a) what you want (life is good and business continues as normal) and b) what you do not want (often that the deal has soured and you need to end it). Termination clauses set out WHEN either party can LAWFULLY terminate the contract. The consequence of UNLAWFULLY (so not complying with the termination clause) terminating the contract is that you are most likely sued by the other party/parties to the contract for damages (compensation).

There are different circumstances in which you may want to terminate a contract. You may just want to try out a business relationship and give yourself the option to walk away if you don’t think there is a future in it. In this instance your termination clause should specifically enable you to end the contract on a short period of notice, for example 3 months after a fixed initial period of 6 months – this is termination for convenience or “without cause”. Either party can walk away after a set period of time simply because you have given each other the opportunity to do so. Of course it is also possible for a contract to just end naturally for example by effluxion of time (the contract runs its term), or by both parties performing their obligations under the contract. For example A contracts with B for delivery of 70 tennis balls on X date in return for A paying B a fee, once B delivers the 70 tennis balls in accordance with the contract and A pays B, the contract is over.

HOWEVER more likely than not you will want to make sure that you can terminate the contract when the other party BREACHES (messes up) the contract. Here are some examples of when that might be:

  1. The other party has committed a MATERIAL breach of the contract that CANNOT be remedied – so this is when you receive something SUBSTANTIALLY DIFFERENT from what the contract specified, for example, if the contract specifies the sale of a box of tennis balls and you as the buyer receive a box of footballs. Or you hire an artist to perform the piano at your event but they turn up with a guitar. Such a fundamental breach should entitle you to terminate the contract immediately without notice to the other party. 
  2. The other party has committed a MATERIAL/SUBSTANTIAL breach of the contract that is capable of being remedied but has failed to remedy that breach within a set period of time – so this is when the other party has breached the contract AND the breach is fixable HOWEVER the other party has  failed to fix it within the set period of time. In such circumstances you will want the right to terminate the contract. For example you order pink balloons and the other party delivers blue balloons. You still have balloons but they’re not the right colour, you will notify the other party giving them a chance to send you the correct colour balloons by a certain time in accordance with the contract (say 7 days). The other party fails to send the correct balloons by your deadline OR sends white balloons. You will want to terminate the contract and sue for damages. Please also note that even where a failing party manages to remedy its material breach within a set period of time, the innocent party could still seek damages for any loss caused by the breach. For example You have a restaurant that requires 100 burgers and 100 hot dogs but you only receive a delivery of 70 burgers and 70 hot dogs from your supplier. By the time your supplier has delivered the remaining 30 burgers and 30 hot dogs, you’ve missed out on business or you’ve had to buy more expensive burgers and hot dogs at short notice from another supplier to meet the demand of your customers. You will want to sue for the loss you suffered during this time even if you continue the contract with your original supplier.
  1. The other party persistently breaches the contract in MINOR ways which altogether have a negative impact on the performance of the contract E.G continuously delivering goods late, being late with services without a reasonable excuse, persistently making late payments (this can affect cash flow) or continuously failing to meet sales targets or sales quotas within a period of time. You will want the right to pull the plug on the contract after a while. It will be up to you to determine, in your contract, when enough is enough in respect of these minor breaches. For example you would not want to terminate the contract for one late payment but you might want to terminate it for three consecutive late payments.
  2. The other party has become insolvent or bankrupt or is in the process of becoming so – the other party has gone bust or is clearly in financial trouble. You will really want to get out of the contract in this situation so you must make sure that your contract allows you to do so.
  3. You anticipate that the other party is about to breach the contract (an anticipatory breach) – so this is where the other party has made it known that they will not be carrying out the agreed work or they effectively stop acting in accordance with the contract, leading the other party to believe that they have no intention of fulfilling their part of the agreement. For example the other party persistently fails to produce an ordered item or refuses to accept payment. You will want to end the contract and sue for damages WITHOUT WAITING for the actual breach to occur.

Termination clauses are complex and this is where you really need a lawyer’s help. If you do not expressly make provisions in your contract for the different scenarios in which you want to terminate the contract, your contract will be subject to common law (this is the case in the UK but check the consequence in your country). Common law is law developed by judges through decisions of courts and similar tribunals that decide individual cases. If you leave your contract to the mercy of common law you could end up spending heaps of money paying lawyers to work out which case law applies to your particular contract’s circumstances and then even more money when the other side says your application of the common law is wrong and takes you to court! 

Basically, ALWAYS make express provision in your contract as to when it can be terminated.

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