We’ve talked on this blog before about the current disconnect between small business clients and solicitors (solicitors need to position themselves as more affordable and more as a regular sounding board than for use when things go wrong and small business clients need to accept that legal experience and advice are important and should be prioritised) and the value of a regular review of where your business is at (which we call a legal audit).
A common mistake for a growing small business is to fail to recognise that the business has reached “stage 2”.
You set up your business as a limited company – good news – you are ringfenced from personal liability except for your investment in the business (unless you have given personal guarantees or have acted unlawfully or illegally). Your business has grown – fantastic – but it is now valuable and that creates risks.
Stage 2 is where you ought to think again about risk and ringfencing. Your business may be developing new assets, it may be offering new services which are more lucrative but also more risky, investment may be needed, you are probably taking on more staff and business relationships, but that in turn creates much higher risks. It may be a good time to consider splitting your business so that your new projects, which may translate into assets, are ringfenced so that if the worst happens you have several companies and a setback is not terminal because you still have parts of the business that survive and potentially thrive.
Another reason for ringfencing assets is if your assets, as is increasingly common, are intellectual property assets, which may be particularly valuable and/or vulnerable.
Good reasons for creating several companies and a group structure
- ringfencing valuable assets to protect them against claim if the trading company is subject to litigation.
- organisational reasons – operating separate companies for different areas of the business as it grows, due to different risk aspects, perhaps such as when a business starts trading internationally and especially if certain activities are regulated.
- when setting up employee share schemes for aspects of the business which you may want to limit to the business in which the particular employees work, so that they reap the reward of their own efforts, not those of others.
- thinking ahead about selling the business – you may not want tos ell your entire business or may extract more value from it by selling parts strategically and at different times. It is also often preferable to sell the shares of a limited company rather tan assets.
Timing is everything
If you don’t react or understand the significance of reaching stage 2, either in terms of risk or reward, and wait until your business is very valuable, things can become much more complex and definitely more expensive in terms of ringfencing assets and liabilities. If you leave things to a later stage, issues can include :-
- possible 3rd party finance and charges over the company or certain assets or liabilities which will need to released, paid off or renegotiated – in other words you may not be in control and at the mercy of others
- If assets need to be transferred from an existing company, an asset sale agreement will be needed to record the sale and the market price. Issues can include whether the sale price is left unpaid in the form of a loan and repaid from dividends paid as the business develops. The sale may well need to be made also at the market value.
- legal and associated work to document and formalise how the old company is able to access or use assets which have been transferred. This may include use of physical property, where a formal sub-lease or licence may be needed, intellectual property, licence agreements. Staff may also need to be transferred from one business to another and that creates employment law headaches.
For advice on strategic planning or to understand how best to structure your business, get in touch with me. I have over 40 years old business and legal experience.
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