Typical life cycle of a business5.05.2017
Gullands’ new Business Hub practices a wide range of business law – helping you and your business at every stage of its lifecycle.
On starting up a business, you need to consider whether you intend to operate as a sole trader, a traditional partnership, a limited liability partnership or a limited company. The great advantage of the latter two options is that your personal assets are unlikely to be called upon to satisfy any of the business’ liabilities. You will however have to comply with the legal formalities of running such entities, which will have cost implications and there will be tax considerations to be addressed.
If you are going into business with someone else, you should enter into an agreement with them setting out matters such as how the business should be run, how the finances should be dealt with and how you may withdraw from the business. It is import to decide these matters at inception while you are still friends because, if things go wrong, it may be costly to extract yourself and your finances.
Hiring an employee
Before advertising make sure those involved in the recruitment process have an understanding of equal opportunities and draw-up a job description and a person specification.
Think carefully when writing the advert. Protection from discrimination because of a protected characteristic covers all areas of employment, including job adverts. Ensure any employees absent from work (including women on maternity leave or those on long-term sick leave) are informed of the vacancy to enable them to apply.
Use a standard application form to enable individual applicants’ answers to be directly compared against the selection criteria more easily and help avoid potential unlawful discrimination claims. Draw up a shortlist using the same criteria used in the job description and person specification. Every applicant should be marked against the same criteria.
If a business is making redundancies, it must consider applications for suitable vacancies from employees selected for redundancy ahead of external applicants. Women selected for redundancy while on maternity leave are entitled to be offered a suitable alternative vacancy (where one is available) in priority to other potentially redundant employees.
In the interview, ideally, all shortlisted candidates should be asked the same or similar questions to allow answers to be compared and to avoid the possibility of a discrimination claim. Avoid asking questions about a candidate’s personal life unless they are directly relevant to the requirements of the job. Keep a paper trail throughout the process to demonstrate how the business reached its decision to select the successful candidate.
Make a written offer to the successful candidate. Consider whether to set a time limit for acceptance and specify that acceptance should be in writing. A business can make the offer conditional on a range of criteria, provided they are not discriminatory. Before making a job offer, ensure the applicant confirms they are not bound by any restrictive covenants from their previous job; otherwise the business could be sued by their former employer. Restrictive covenants are used in employment contracts to protect an employer’s business by restricting the activities of an employee, generally after employment has ended.
All businesses will need to contract with others, be they customers or suppliers. As the business grows, the contracts will increase in value. That equates to an increase in exposure in the event of a default by either party. It is advisable to review all contracts carefully before they are entered into. In particular, you should consider limitations of liability on either side in light of the implications of a default. Today much of business is conducted via the internet. The same considerations apply although they are often forgotten in the immediacy of the medium. You should be careful to ensure that your terms and conditions apply where required. Your contracting party may seek to impose their own provisions. Careful drafting will avoid problems.
You may need to seek investment as your business expands. This could be by way of bank finance or loans from third parties. The lender is likely to seek some additional security. This could be by way of a debenture or mortgage. Alternatively, guarantees may be demanded. The implications of security should be considered carefully and the documentation reviewed prior to completion.
A key issue in the life cycle of a business is how and when you exit. It could be by way of a sale to a third party, a management buy-out, a flotation on the stock market or a winding up. The process needs to be managed to protect your interests. You may be asked to stay on for a hand-over period or to take deferred consideration dependent on the future profits of the business. All such arrangements must be structured to ensure that the desired outcome is reached. The buyer will undoubtedly seek some assurances as to the assets of the business and its liabilities following an extensive review process called Due Diligence. The information provided is obviously confidential and it would be prudent to impose a duty of confidentiality at the outset. Such a duty could be coupled with a period of exclusivity during which you would not speak to any other potential purchasers. The Due Diligence process can be onerous and time consuming and it is advisable to seek legal assistance. Such involvement will ensure that potential issues are identified at an early stage which avoids delays at a later date. It also results in your lawyer being aware of all the facts which is vital in protecting you from future liabilities under the assurances as to the assets and liabilities. The most important stage of your exit will be the successful negotiation of the terms and legal input cannot be sought too early.
For advice on your business interests at whatever stage of the cycle they are, contact [email protected]