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Ask for an indemnity.

Posted on by thelegalknow

elephant

Commercial contracts are packed with risks. In fact the contract itself is one big risk. However, ironically, contracts are the safest way to conduct business; we need them! So, since we cannot avoid contracting with each other we have to ensure that we protect our interests in every contract that we sign. A key way to do this, is to ask for an indemnity clause.  An indemnity clause is a contractual transfer of risk between two contractual parties to prevent loss (you are not liable if X happens) or to ensure compensation for a loss (the other party reimburses you for any loss suffered if Y happens) which may occur as a result of a specified event (X or Y event). Let’s take a look at some examples of indemnity clauses:

  1. Basic Indemnities – Party A indemnifies Party B for all liabilities or losses incurred in connection with specified events or circumstances. For example, if you are contracting with a construction company to build your new store, you will want a basic indemnity saying that the construction company will compensate you for all losses if one of its subcontractors fails to do the job to the specification set out in the contract. If a subcontractor tiles the roof poorly, the construction company is liable for all losses ensuing from that subcontractor’s poor job. Pretty good right? However, basic indemnities can be troublesome as they do not set out any specific limitations on the indemnity. They are silent as to whether they indemnify losses arising out of YOUR own acts and/or omissions that cause the subcontractor to tile the roof poorly. What if you give the sub-contractor the wrong instructions or you don’t give the subcontractor access to the site on time?  This basic indemnity operates so that the construction company indemnifies you for the poor job of the subcontractor, even if the poor job was your fault. You may be thinking well, that’s great, but it’s only great if you are the party receiving such an indemnity. That’s why basic indemnities should be avoided where possible.
  2. Proportionate or Limited Indemnities – These indemnities rectify the potential unfairness of a basic indemnity (explained above) as they limit the indemnity. Sticking with the example above, say you obtain an indemnity from the construction company to the effect that the construction company is liable for all losses ensuing from a subcontractor’s poor job – a limited indemnity will go on to state “except those losses incurred as a result of [your] own acts and/or omissions”. If the subcontractor’s poor job is your fault you don’t get compensated. Seems fair.
  3. Third Party Indemnities – If third parties are involved in the operation of the contract, as in the example above, you may not want anything to do with them since you are contracting with them. Following on from the above example, what happens if a subcontractor isn’t paid for their work? You wouldn’t want to be liable for that. You can protect against this by asking the construction company to indemnify you for all liabilities relating to its subcontractors so that the subcontractors are always the construction company’s issue and not yours.

These are very high level examples which would make most lawyers (if they’re good) chuckle. Indemnities can be very complex and they should at the very least always be more than a basic indemnity. Here are some of the things your lawyer should consider when drafting an indemnity clause for you:

  1. Scope – The scope of the indemnity must be clear so that the intended protection is given.
  2. Context – An indemnity clause should always be drafted in consideration of the wider commercial context of the agreement. Is it applicable?
  3. Extent – Who does the indemnity cover and are there any limitations to the indemnity? If the indemnity is given by the other side but not its contractors or representatives, then the extent to which this offers protection will be limited.
  4. Insurance: There is no point in having an indemnity if the indemnifier cannot pay out in an event of breach. An obligation to insure to a level consistent with the indemnity obligation will provide comfort that the indemnifier has the means to back up the indemnity given.
  5. Caps: Indemnities can be capped but any such cap should be subject to careful consideration. Where an indemnity has a financial cap, the indemnified party may, depending on any other limitation clauses, still have an uncapped claim in contract law for any breach of contract.

As with many of my posts, this is a very simplified overview. You really need a lawyer to draft indemnity clauses because they are essentially financial obligations with very serious consequences. The aim of this post is to make you aware of them so that you can ask your lawyer about them. You may want receive indemnities as added protection or you may want to offer indemnities to show the other side that you mean business (they can be great for negotiation)!  So go ahead and ask your lawyer about them. Pick up one of your contracts and check to see if you have a few in there already.

I must also emphasise that an indemnity is a distinct right from the right to claim damages for breach of contract. If the construction company breaches a clause in the contract you still have your common law right to sue for damages. Any limitations under an indemnity will be for that indemnity only. This is important because limited indemnities often exclude any loss ensuing from your own negligence whereas a claim for breach of contract can be brought even where you too have been negligent. Ask your lawyer, they’ll break it down for you!

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Stand your ground

Posted on by thelegalknow

gorilla-standing

I’ve been practising law for some time now and one of the things that I have learnt, which was incredibly difficult to learn, is to stand one’s ground. I can now firmly stand my ground with YOU (the client) and the senior lawyers I work under. Why do you care? Well, simply because my confidence as a lawyer saves you money (yup, you know that paper we all want…). There are two scenarios which have played a recurring role in my career to date and these scenarios have taught me to stand my ground. Let’s take a look at them and then I’ll tell you how you can help your lawyers get to the level of confidence I have now (smug face) which should save you money.

Scenario 1 – A client desperately wants to do something that cannot be done but a dedicated lawyer, knowing that it cannot be done, still struggles to find a way. The client wants and the lawyer strives to give BUT it just isn’t possible. This is a rubbish scenario for everyone because the lawyer looks for the source of a myth whilst the client pays unnecessary costs to gain nothing.

Scenario 2 – A junior lawyer (they do all the ground work by the way) doesn’t think that a certain course should be taken but unfortunately the senior lawyer, eager to please the client and incur more fees (money, money money), doesn’t listen. A longer more difficult route is taken. As in scenario 1, the client pays unnecessary costs but to gain something it could have gained more easily and more cheaply.

I used to hate these situations. A junior lawyer pushing back against an experienced, Tom Ford wearing senior lawyer or a great lawyer too client whipped to be frank and say “sorry, this won’t work”. The disappointing feeling I experienced in these scenarios taught me to stand my ground in my profession. I will never lead you on a wild goose chase; if it can’t be done or it can only be done at a cost detrimental to your business, I will tell you and that will be it. If I’m working for a senior lawyer who is putting pressure on me to do A or B when I think C is best, I will throw all my toys out of my pram to get C, only giving up when I have been absolutely convinced that A or B is better. Sounds good right? Here’s how you can help to make sure that your legal team adopts this cost saving mentality…Ask to hear the best and the worst from your legal team AND reassure them that you’re READY to hear the worst. Also, direct your emails at the WHOLE legal team, not just the “front of house” senior lawyers, but the juniors too (those silent names that are cc’ed into every email to make sure that they pick up the work). In doing this you let the senior lawyers know that you value EVERYONE in the team and that at any given time you may ask for the junior’s opinion.

Deploy these tips and see the difference in your service. You should hopefully spend less time chasing dead ends and more time progressing to where you want to be.

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Be smart but don’t cheat…

Posted on by thelegalknow

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There is a reason why mega successful businesses spend thousands, sometimes millions of pounds/dollars on legal advice. I cannot tell you the number of times that I have almost cried because a client has brought me a problem that could have easily been avoided IF legal advice had been sought in the first place. In the long term, getting proper legal advice could save you so much MONEY and isn’t that what it’s all about – MONEY? You know that saying, what’s worth doing at all is worth doing well…it’s said for a reason! I don’t feel good billing you for my time when it’s for an issue that really shouldn’t have ever become an issue!

Think of it this way, when you have a tooth ache you go to a dentist -you don’t pull out the tooth yourself. When you feel sick you go to a doctor you don’t diagnose yourself. SO, if you need a contract drafted, guess what, you DON’T do it yourself. You go to your lawyer! You should be focusing all your energy into your product/service/idea not struggling to draft a 30 page contract or represent yourself at Court.

So what am I saying? I’m saying be smart BUT don’t cheat.

I am a lawyer and it took me 6 years of training to qualify to be one (a 3 year degree, a 1 year professional practice qualification and a 2 year training contract at an international law firm in the City). You cannot read this blog and become a lawyer BUT you CAN read this blog and become legally smart so that when you seek proper legal advice you are not doing so blindly. You are firing out questions and demanding the best service possible!

It’s quite simple, do things properly at the outset and you will reap the rewards.

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The impossible: force majeure clauses

Posted on by thelegalknow

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Before you read on, please note that this post is not for the faint hearted. This clause is really important in any contract and I’m going to try and give you a full explanation of it.

Force Majeure translates to a “superior or irresistible power” in the beautiful French language.  In English law, it refers to a clause in a contract which protects the parties from their contractual obligations in circumstance where that contract, by no fault ofthe parties, becomes impossible to perform. In such a scenario, the parties will usually have the right to terminate the contract or to suspend the contract, if the impossible circumstances are likely to come to an end within a certain time frame. This is a very useful clause when faced with the effects of acts of God (tornadoes, lightning strikes, floods), governments and regulatory authorities – none of which give a hoot about your contracts!

There are generally three essential elements to an event being determined force majeure:

  • It can occur with or without human intervention.
  • It cannot have reasonably been foreseen by the parties (for example your machine breaking down is foreseeable and so is not a force majeure event).
  • It must have been completely beyond the parties’ control so that they could not have prevented its consequences (for example a riot, like the London riots).

A very basic force majeure clause will look as follows:

“A party (affected party) shall not be liable to the other party for any failure to perform the Agreement caused by circumstances outside the reasonable control of the affected party.”

What exactly is “circumstances outside the reasonable control of the affected party”? Well the answer is, how long is a piece of string! This is where your lawyer steps in. Over time, lawyers have come up with a list of events which are generally considered to be force majeure events. These events are as follows:

  • Fire, flood or other natural disaster;
  • malicious injury;
  • strikes, lock-outs or other labour troubles;
  • riots;
  • insurrection; and
  • war.

However, please note that the above list is not exhaustive so lawyers have also taken to adding sweep up language to cover anything else that might occur with force majeure characteristics. For example many clauses end their list with “ and any other reason of like nature not the fault of the party in performing the contract”.

The better force majeure clauses oblige the party relying on the force majeure event to do certain things so as to help the contract to survive as far as possible. The relying party must usually promptly notify the other party of the force majeure event. The relying party is then only excused from the contract for the period of the delay caused by the force majeure event. During that time, the relying party must take what steps it can to mitigate the effects of the force majeure event on the contract. In other words, the relying party must do its best to find another way, where possible, to fulfil its contractual obligations. HOWEVER, the period of delay can’t go on forever, so where the force majeure event exceeds a certain timeframe the party entitled to the performance of the relying party may terminate the contract. For example “if any delay exceeds six months, then the party entitled to such performance shall have the option to terminate this Agreement”.  Such force majeure clauses are GRADE A (my own personal labelling)!

Let’s consider an illustration of a GRADE A force majeure clause.

  1. Happy Fruits Ltd and Love Fruits Ltd are in a contract for the sale and purchase of fruits. Happy Fruits Ltd sells fruit to Love Fruits Ltd.
  2. Under the contract, Happy Fruits Ltd must provide Loves Fruits Ltd with a case of tomatoes by X date.
  3. Before X date, a flood occurs making the delivery of the tomatoes impossible.
  4. The contract contains a GRADE A force majeure clause, therefore as soon as Happy Fruits Ltd learns that the flood is preventing the delivery of the tomatoes to Love Fruits Ltd by X date, it must notify Love Fruits Ltd of the flood in writing, stating a “force majeure event”.
  5. Happy Fruits Ltd must then attempt to mitigate the effects of the flood on its delivery to Love Fruits Ltd. For example, it must try to supply the tomatoes to Love Fruits Ltd from another branch not affected by the flood, or from another supplier with similar produce.
  6. If Happy Fruits Ltd cannot mitigate in the manner above, it must at the very least strive to deliver the case of tomatoes at the next available opportunity. So for example, if the flood passes a day after X date and all modes of transport go back to normal, Happy Fruits Ltd must do its best to deliver the tomatoes to Love Fruits Ltd on that date.
  7. If Happy Fruits Ltd fails to deliver at the next available opportunity or to reasonably mitigate against the impact of the flood on its contractual obligations, Love Fruits Ltd could have a claim for damages under the contract. That’s right. Even though the flood has nothing to do with Happy Fruits Ltd, Happy Fruits Ltd may still be on the hook. However, Happy Fruits Ltd only has to do what it can reasonably do. In English law, reasonably is pretty broad and forgiving. This is why this type of force majeure clause is Grade A, it offers just enough protection AND wriggle room to both parties.
  8. If the effects of the flood surpass the force majeure cut off point then Love Fruits Ltd may terminate the contract.

Hopefully you followed that! Basically each and every business contract should have one of these clauses in them! You just never know what might happen out of your control that may prevent you from performing your side of the contract. In such a scenario, you do not want to be contractually liable for anything. In recent years, a new force majeure event has sadly come to the forefront – acts of terrorism, the effects of which are devastating. Get your lawyer to review your contracts to ensure that you are adequately protected.

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Cut it out: the beauty of a severance clause.

Posted on by thelegalknow

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It is said that the law is the fabric of society, without it we would have nothing but unruly human beasts roaming the earth’s surface. However in business, sometimes the law actually gets in the way. Yes you read that right. English law believes in freedom of contract, however there is always a risk that a contractual clause may be invalid or illegal – e.g. it offends against public policy or competition law – often this is the case with non-compete clauses and restrictive covenants (clauses that tell a party what they cannot do). This is why clever lawyers make use of “severance clauses” when drafting contracts.

A severance clause (or severability clause) tries to mitigate the damage that may be caused by the interference of the law in a contract. How does it do this? It ensures that a contract will continue to be enforceable even if one of its terms is found to be illegal, invalid or unenforceable. Severance clauses assist in helping a contract to SURVIVE. Pretty cool right? For example, if a contract for the sale and purchase of various vegetables is suddenly subject to a new law stating that no one can sell or purchase carrots (ridiculous but it’s an example), why should the contract die just because the sale and purchase of carrots is illegal? A severance clause would carve out or sever the ILLEGAL part of the contract and require the parties to continue to perform the remaining LEGAL part of the contract i.e. the selling and purchasing of courgettes (zucchinis), potatoes, aubergines (eggplants), peas and so forth. In other words, business shouldn’t stop if it doesn’t have to stop. This is why a severance clause is simply beautiful.

Let’s look at an example of a basic severance clause:

“If a Clause of this Agreement is determined by any court or other competent authority to be unlawful and/or unenforceable, the other Clauses of this Agreement will continue in effect.”

The above clause severs the illegal part of the contract. BETTER versions of a severance clause will try to sever as little of the illegal clause as possible. Here is an example:

“If any unlawful and/or unenforceable Clause would be lawful or enforceable if part of it were deleted, that part will be deemed to be deleted, and the rest of the Clause will continue in effect (unless that would contradict the clear intention of the parties, in which case the entirety of the relevant Clause will be deemed to be deleted).“

Even BETTER severance clauses will give the parties the option to modify or correct the would be severed clause, in order to make it legal. Here is an example:

“If any provision or part-provision of this agreement is or becomes invalid, illegal or unenforceable, it shall be deemed modified to the minimum extent necessary to make it valid, legal and enforceable. If such modification is not possible, the relevant provision or part-provision shall be deemed deleted. Any modification to or deletion of a provision or part-provision under this clause shall not affect the validity and enforceability of the rest of this agreement.

If  any provision or part-provision of this agreement is invalid, illegal or unenforceable, the parties shall negotiate in good faith to amend such provision so that, as amended, it is legal, valid and enforceable, and, to the greatest extent possible, achieves the intended commercial result of the original provision.“

Severance clauses are usually included in any contract as a boilerplate (standard) clause – however don’t take that for granted. Go check your contracts and flag this magical clause with your lawyer. Get your lawyer to advise you – could your severance clause be better? Do not rely/use the examples in this post, they are EXAMPLES. Your lawyer will draft a robust severance clause tailored to YOU.

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“Hey Joe”….How to… get your point across in negotiation.

Posted on by thelegalknow

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Ok, so I didn’t want to give away this secret BUT this blog is about helping you in the legal world, so I can’t keep this from you! I’m about to tell you the secret of the best lawyers for how to really get your point across at the negotiation table. Now, when I tell you, some of you may laugh and say “but of course!” or “durr, that’s so obvious” but it is amazing how many lawyers just don’t do this and so never really get their client’s points across. You can take this tip and apply it to your day to day negotiation.

The best lawyers start formally but as soon as things heat up, they recognise that it’s time to drop the barriers and get right up and close to the people on the other side of the table. How do they do this? It’s really simple and I feel guilty that I’ve built this up so much but hey, I want you to read this! The best lawyers say “Hey Joe”,  “Hey Sarah”, “Hey Mick”… they switch to a first name basis. Lawyers are renowned for being stuffy and posher than the Queen of England, but the really good ones know that sealing the deal is about getting through to the opposition on a personal level, and the quickest way to do this is to use their name. Not from the outset – we start off with “Our client  is concerned about” or “Our position is that” – but as soon as we see that flicker of mutual understanding we transition to “look Phil, between you and I, they [not client] just want to get this done and they think that [name of company that you are negotiating with] is the best to do it”.

I remember some time ago, it was the run up to Christmas and work was crazy. I was representing a client in a claim against a very stubborn defendant. They didn’t want to agree a Court extension which meant that we would all be working over the Christmas holidays. My client was furious with how unreasonable they were being. Tired of sending letters by email to and fro, I simply picked up the phone and called the Defendant’s lawyer. The conversation went as follows:

Me: Oh hi Barry this is Emma here, how are you doing?

Barry: Fine thanks, crazily busy as I’m sure you are too.

Me: Yup, crazily busy, which leads me to the matter of this Court extension on X case.

Barry: Oh yes, my client’s position is very clear on that.

Me: Well Barry, off the record, Joe Bloggs LTD, doesn’t want the extension to secretly build an even stronger claim, they just want a break this Christmas! They literally want to go offline for at least a week. If we don’t agree this extension, we’ll all be working unnecessarily at one of the best times of the year.  I don’t know about you but I’d quite like to catch up on Suits.

Barry: [laughter]. Yes, I know what you mean, well I’ll see what I can do and get back to you.

Me: That’s great, thanks Barry and good luck with the last minute shopping.

Barry: How did you know? [laughter]

End of call

We ended up agreeing the Court extension and it was a sweet Christmas break! There is power in just getting a little personal and a little real! Try it!

Ps. I have not used real names in this post.

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3 things you should be happy about before you hire a lawyer.

Posted on by thelegalknow

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Hiring a lawyer is a big, BIG deal. As I’ve said before, a great lawyer will facilitate your business and help you get to the next level, a bad lawyer will leave you feeling frustrated, perplexed and out of pocket. So when you decide to give some of your hard earned profits to a lawyer, you need to make sure that you get it right. Here are 3 things you should satisfy yourself of before you sign that retainer!

  1. Do you believe them? Lawyers are great talkers AND charmers. As soon as you tell them what you need help with, they will tell you that that specific thing is their particular expertise (sorry fellow lawyers). I’ve seen it done many times. A prospective client asks for help contracting with aliens on Mars and suddenly that lawyer has not only done some similar work in the past, they’ve been to Mars and had dinner with those very aliens! Don’t get me wrong, lawyers are excellent at coming up to speed on any issue, even if they’ve only remotely come across it before however you should still make them prove themselves! So the questions you have to ask are why can they do the job and will they do the job? The answers will help you to decide whether to believe them. WHY – ask for their qualifications and their actual experience. Ask them questions about your business and your industry – do they really know what they’re talking about? WILL – as you already know, in business, execution is key. You need to be confident that your lawyer will actually do what they say they will and that you won’t be chasing for updates. Do they have the relevant resources? In respect of bigger instructions, do they have a team to carry out the work? If they prove that they can do the work and will do the work in good time, then you can believe them. Stay away from the lawyers that reel off their client list to try and impress you….you could end up being the back of the queue.
  2. How do they help their community? Good old corporate responsibility! Do not over look this. Lawyers will flatter you to high heaven and impress you with their catalogue of work BUT a good way to tell if they really CARE is by assessing their charity. The best law firms know this and have a glossy pro bono team offering free legal services to those unable to afford legal representation. They also send their lawyers out to lecture, teach or tutor in their spare time. If you hear about a law firm or lawyer working in the community, that’s usually a sign that they have a soul and really will do what they say they will do. Ask the prospective lawyer what they do outside of work in their wider community?  What are their interests? This will also help you to get to know their personality and decide whether you  actually LIKE them.
  3. Meet everyone! In most cases your lawyer will be supported by a team of junior lawyers which they may head up and those junior lawyers will be the ones doing the work.  Ask to meet those people so that you can assess their personality and their experience. Are they bright? Do they know about your business or will they just be taking orders? How does the team function? It is important to feel confident that you will be looked after and that everyone who handles your work will give it the same level of care and attention. Also, meeting the team will inspire them. If that junior lawyer can out a face to the email address, they’ll work harder!

Ok so those are my 3 things to be happy  about before you hire a lawyer. It is well known that legal fees are not cheap BUT that doesn’t mean that you should part with your money just like that. You need to make sure that you’re in good hands. It’s not just about getting the work done. Engage a lawyer that you would want to hire as an employee in your business. The lawyer/client relationship is one that is built up and developed over years, so get it right!

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HOW to…sell your business.

Posted on by thelegalknow

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This is a follow up to my post “The bigger picture – selling your business”. In that post I gave you tips on how to polish your business into an attractive product to be purchased by a rich buyer. In this post I’m going to briefly explain HOW you can sell your business. There are two main ways. Either an asset sale or a share sale. There are pros and cons to each but ultimately your lawyer should be able to advise you on the best method, having considered the nature of your business.

In a share sale, the buyer will purchase everything to do with a company including all assets and liabilities, known and unknown. In an asset sale, the buyer will purchase the assets which make up the business of a company. In the former, pretty much everything stays the same save that the company has a new owner, in the latter, the company will still exist but it will usually be an empty shell harbouring only those assets and liabilities that the buyer did not want to buy.

Below, are some key considerations that will be influential in determining HOW you should sell your business.

  1. Liability

In a share sale, due to the fact that the buyer purchases the shareholding in the target company, it inherits all of the assets and liabilities in the target company. This means that the seller gets to walk away from any problems with the company and the buyer as the new owner, takes them on. If a buyer wants to purchase the shares in a company but it is riddled with liabilities such as ongoing litigation, tax investigations etc, it will negotiate a discount in the price of the shares that it is purchasing to reflect the risk of these liabilities or it will negotiate indemnities from the seller. A seller indemnity is basically a promise from the seller to the buyer that if things go wrong with said liability, the seller will pay to the buyer a sum of money as compensation.

In an asset sale, the buyer can effectively cherry pick which assets it will purchase and which liabilities it will assume. For example, the buyer can refuse to assume tax liabilities but it may take on certain ongoing disputes which are inherent in taking on, for example, service contracts.

  1. Employees

Usually, in an asset sale, employees do not need to be taken on by the buyer, though commonly the seller will require the buyer to offer new contracts to all or most employees on terms that are substantially similar or identical to their existing contracts (including a recognition of prior service) so that the seller avoids wrongful dismissal claims from the employees.

In a share sale, the target company’s employees remain employed by the company because nothing really changes. It’s just a sale and purchase of shares!

  1. Reduced Complexity

As you’ve probably cottoned on, share sales are much simpler than asset sales. The only documentation you need is in respect of the shares that are being purchasing. In an asset sale, each asset will effectively require its own contract. For example, there will be separate transfer documentation for equipment, vehicles, intellectual property, licenses, permits and real property.

An asset sale may also trigger the need to obtain third party consents to the transfer of the assets due to change of control provisions in contracts. For example a permit contract may say that the seller “must obtain written consent before it can transfer/assign the right to the permit”. In selling the permit as part of the assets, the seller must ask permission before it can go ahead. For obvious reasons, third party consents can be a pain to obtain; it just takes one unreasonable so and so to hold things up! It is always best to, if you can, give third parties a heads up and assure them of any changes in advance. This will make negotiation a lot easier.

So, the important thing to understand about a share sale vs an asset sale is that one method involves taking EVERYTHING whilst the other allows you to CHERRY PICK what you want. The form of sale that is best for your company really depends on the nature of your business and what it is that you want to sell. There is a heading that I have not covered but which is the most important consideration of all and that is TAX. TAX can determine how much you receive on a sale of your business and it differs in a share sale or an asset sale. This is where experts must be enlisted. I once worked on a deal where, three days before completion the whole structure changed because of TAX. I couldn’t believe it…so many sleepless nights!

As with all my posts, I cannot emphasise enough how important it is to get your lawyers involved but even more so when you are selling your business – after all you want to get the best price right?

Hope you found this helpful! Please like and please share!

The bigger picture – selling your business.

Posted on by thelegalknow

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Ok, so it’s great that you’ve got your own business and that you’re doing so well. BUT, the question is do you want to be doing this forever? I don’t think so. If your business isn’t getting passed on to another generation then you’re probably looking to, one day, sell it and make a hefty profit! This post is a heads up about the things you need to be doing NOW, in order to build a product (yes, your business is your product) that sells quickly and at the best price possible. Here are my top tips!

Keep it clean – Your business must not have skeletons in its closet. I’ve said this before. Either you eradicate those skeletons or you confess to them, preferably the former. If you have unpaid bills, taxes or ongoing litigation, your business will not sell or it may sell BUT at a DISCOUNTED price. This is because instead of purchasing a nice shiny product, the buyer is purchasing a whole lot of risk. Risk is financial uncertainty and in business we despise financial uncertainty. We are constantly mitigating against it. So, clean up your business and keep it clean. Carry out your due diligence REGULARLY. Do not neglect complaints from clients or scary regulatory letters. The buyer of your business will carry out its own due diligence and it will be thorough. Would you buy a car without a test drive or seeing under the bonnet? Nope, I didn’t think so.

Show them the money – If you want to sell your business you have to be super transparent with your numbers. Start planning now to make sure that your business has a financial record to attract a good buyer. Maintain a healthy working capital, renegotiate supply contracts and make sure that you are getting the best deals for your business. Also, get on top of your debt. Pay off as many of your loans as possible. Think about what is actually costing your business money. If your business requires a lot of machinery, are you using all of that machinery? Can you sell some of it? Don’t forget your forecasts – get them ready and back them up with evidence.

Create and implement a business manual – It is amazing how many of my clients do not have systems and procedures for the simplest of things to do with the day to day operation of their business. If you sell products worldwide, you should not be selling those products on ad hoc procedures. You should have a clear process that the buyer of your business can step into tomorrow and operate. You should have systems in place for every aspect of your business. You should have formalised documents. Get your lawyer to draft standard form employee contracts, terms and conditions, disclaimers, policies etc. Also, is the structure and ownership of the company clear? Make the ownership as clear and as transparent as possible.

Show them your A team – Behind every great business is a strong and passionate management team. Your management team is a big part of your business’ valuation. It is therefore crucial that you consider if your business can retain good employees – this may require considered incentives. The buyer of your business will want all your key people to be a part of the sale. It will also want the assurance that your business is not a DIY job; show off your professional support. Your lawyer, your accountant, your consultant all make an impression. Those relationships matter because they instil confidence in the buyer that everything to do with your business has been done properly. Also seek advice from your A team. What do they think? Get your lawyer to review your business structure and advise you as to whether you need to change it in order for it to be an attractive purchase. Your lawyer will take you through the whole process and organise all of the legal paperwork to ensure that there are no unnecessary complications before and after the sale. You really need everyone on board advising. I have worked on an international acquisition where the whole deal was restructured because of tax. It was cheaper to do it another way! Three days before closing we had to change everything!

You may be far off from selling your business at this point in time, but if you want a big pay out someday, you should start doing all of the above now!

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How to… speed sign low value contracts.

Posted on by thelegalknow

Cheetah

Right, this goes against my lawyer instincts because in my opinion you should always read everything you sign, in as much detail as possible. However, if you genuinely do not have the time and it is a considerably low risk document (so not worth a million pounds/dollars), then here are three things to do before you sign which will alert you of any potential risks and give you some protection going forwards.

  1. Exclusion and limitation clauses – Look for these types of clauses or ask outright if there is such a clause in what you are signing (get them to refer you to it so you can check their honesty). This will list or summarise everything that the contract/document does not include and what the other party is not liable for. The best example of a document riddled with such clauses, is an insurance policy. When you sign an insurance policy, it is important that it covers what you want and one of the quickest ways to confirm this, is to take a quick look at what is excluded. For example Billy asks Janet for an insurance policy for his car. Janet gives him an insurance policy for his car. Billy is in a hurry for a meeting and trusts that he has been given a policy to insure his car, HOWEVER he flicks to the exclusion clause and sees that the policy does not cover RED cars. Billy’s car is maroon, so, arguably red. Billy takes this up with Janet. Janet amends the policy for Billy so that the operative clause clearly states that Billy’s maroon (and therefore not red) car is covered. Always check what a contract expressly excludes.  If it excludes accidental damage and you need it to cover all damage then obviously you are not signing. Another example would be a limitation of liability clause, often found in services contracts. Say for example you hire a professional polisher to polish your silver worth £3,000 but the contract of hire states that liability for any damage arising out of the contract at the fault of the professional polisher, is limited to £500 only. Obviously, you are not going to sign. Who’s going to pay for the remaining £2,500 worth of damage? Always check how liability of the other party is limited. If you sign a contract with a rubbish liability clause, that’s your fault.
  2. Payment provisions – Always check that the numbers are what you agreed. An extra zero here, a missing discount there is BAD for business. If you have agreed a specific discount just take that second to double check that it is expressly in the contract. DO NOT worry if the other party finds it offensive that you are checking, they will respect you for it. Even if my best friend gave me a contract to sign, I would check it right before their very eyes! Also, what happens if you pay late or you have a dispute with a charge? What does the contract say about that? Checking this clause or asking directly about this clause (then getting them to refer you to it specifically) will ensure that the most important thing of all, money, is properly accounted for!
  3. Termination – Imagine your face when you try to switch suppliers and you find that you have signed an indefinite contract! That’s a worst case, silly scenario but hopefully it highlights how important it is to know how to get out of a contract before you sign it (I’ve said this before). Business is unpredictable and you may need to get out of a contract really fast – knowing the termination provisions at the outset can help you to consider all possible scenarios in which you may want to terminate the contract early and therefore judge whether the contract in question is one you want to sign or amend.

I have to also add the obvious cautions, check who you are contracting with. If you are doing business with Joe Blogs Plc make sure it says Joe Bloggs Plc and not Joe Bloggs Ltd. Also, don’t forget the dates, it will take no time at all to make sure the document is dated correctly. Again, these are just TIPS for those of you ALREADY signing standard contracts without checking ANYTHING. If you are one of these people, at least check the above three things or else suffer the consequences. Once you sign a commercial contract, there is very little anyone can do for you if it turns out to be a bad deal. The Courts have no sympathy for business to business contracts because both parties are considered sophisticated.

Please like and please share with a friend, colleague or business partner who could benefit from the above tips!