Your Business Basic Legal Issues

A major part of our practice is helping clients to sell or acquire a business or set up a new business. As part of the purchase procedure we conduct a review of the major components of a business to ensure that all legal supports available to the business are in place. If any of these items are not properly maintained the value of the business may suffer. Unfortunately, too many business owners overlook all these issues except when they come to buy or sell a business. It would be a good idea for everyone to conduct a review of their business on a periodical basis to ensure these items are in order. The benefits of this include:-

  • It will provide for better business, continuity of income stream and fewer unexpected disruptions;
  • It provides a more stable capital value for your business adding extra value if you need to raise funds against the business, or sell the business;
  • It makes the enormous investment that you’ve put into a business more secure.

The major items that we look at, probably in descending order of importance, are as follows:-

1. Business Name

The Business Names Act provides for every business name to be registered. Registration costs less than $100.00 with a nominal annual renewal fee. This will ensure that your business remains uniquely yours and assists in stopping other people from copying your business name or trading off your good reputation. For those of you operating under a proprietary limited company your company name will of course be registered with the Australian Securities & Investments Commission and you will be used to filing annual returns to maintain that registration.

You should check your business name registration now to ensure that it is current and the details as to proprietors and business address are still correct. You’d be surprised how often business name registrations are not corrected to reflect the changes in partnerships or changes in address.

2. Your Lease

Most businesses operate from leased premises. It’s your location together with your business name that represents a large part of the goodwill of your business. If you are asked to leave unexpectedly it would cause an enormous disruption to your business and what’s worse your existing customers may not be able to find you. If there is no lease or only a short term left to run on the lease there may be some doubts about the capital value of the business.

You should ensure that you have a current lease to ensure the continued operation of your business from its current premises. Many leases contain options to renew. Usually those options must be exercised at least three months prior to the end of the lease term. You should have a close look at your lease to ensure that you know (and note in your diary) when your options must be exercised, to ensure you don’t miss the renewal.

3. Franchise Arrangements

For those of you that operate a franchise business your Franchise Agreement represents your entitlement to carry on that business. It determines what you can do, and how long you can do it for. Like a lease, a franchise will have a fixed term. It is in your interest to ensure that there is a reasonable term left to run, and that you have the right to renew it if possible. Again, review your Franchise Agreements to find out exactly when you must renew any option, to avoid disappointment of missing out on those dates.

4. Zoning, Licences & Permits

Every city and town will have a town plan which will define which parts of the town can be used for business, industrial or residential purposes. It is therefore imperative to ensure that any business our client might be buying is within the correct zone. These days zoning is moving towards consent uses for most sites so it is usually a matter of checking with the council to ascertain what approvals exist for a particular site and whether there is a permit to carry on a particular business. For most of you this will have been checked at the time you set up or bought your business but in any event it will be worthwhile to check it again now.

Likewise most different types of businesses will have different permits/licensing requirements. For example, food preparation premises should be registered with the Brisbane City Council Health Department. There are a great diversity of licensing requirements. It is a good idea to ensure that the relevant licenses are in place. We are in constant contact with Commonwealth, State and Local Government departments who have a large number of business support programs which allow us to check on the relevant licensing for particular businesses. We will be happy to help you with that if you require.

5. Key Employees

In most businesses there will be a long standing employee who has a good understanding of the business systems and a good rapport with the business customers. Such employees add real capital value to the business but also create risks that need to be managed. What if that employee were to leave? Worse still, what if they were to leave and set up in competition with their intimate knowledge of your business systems and your customers.

You can overcome these problems by having a simple Employment Agreement which provides two benefits:-

  • It can tie those employees to longer term arrangements e.g. a twelve month appointment; and
  • Such agreements can contain a limited restraint of trade restricting the employee from soliciting your former customers in the event of their departure.

Just the existence of such restraints in the Employment Agreement will reduce the likelihood of the employees leaving to set up their own business, or being poached by a business competitor.

6. Key Contracts/Sales

Most businesses will find that a large proportion of their income will come from a small number of customers. When buying a business it is important to ensure that those customers will stick with the business. On an ongoing basis however, it is obviously prudent to stay in close contact with such customers to ensure they are happy with the service and if possible have them commit to a long term agreement to lock in those future revenue streams.

7. Key Contracts/Supply

If you can be lucky enough to tie in your future sales over a period of months then it might be prudent to tie in the supply contracts that you need to provide those sales. If you can do this on a fixed cost basis then you can effectively fix your company’s profitability for the term of those agreements. This can add real value to the business.

8. Budgets/Business Plan/Finance

Every business should have budgets or better still a detailed business plan outlining their expected growth, revenues and expenses. Having gone through the exercise above of identifying your key contracts in sales and supply, you should be able to project reasonably accurately the profitability of the business and the capital and finance requirements of your business.

Have a close look at your financing, too many businesses continue to operate on overdraft or short term funding which is traditionally much more expensive than the longer term funding that might be available to your business. Many people are surprised to find that their overdraft or other financing arrangements are repayable on demand. What a catastrophe it would be, if your financier demanded all their funds back effectively without notice. These risks can be overcome by tying in your finance arrangements to fixed repayment dates in the future.

It is often a good idea to have several different financiers to ensure that no one financier has a security over all of your assets. In this way a falling out with one financier minimises the impact on your business and allows you to replace that financier by drawing down against other facilities, or mortgaging other assets to raise funds. All too often I see clients who have all of their assets secured to their one financier and upon a falling out they have no ability to negotiate or raise funds elsewhere. Don’t put all your eggs in one basket.

9. Business Check Lists

The acquisition of a business can be a fairly complex procedure and we approach it in a very methodical fashion, not only for ourselves but for our clients. We have a number of check lists which cover all sorts of different situations. These check lists are your guarantee that all legal matters will be covered fully and in a professional manner. We also have check lists to help our clients when reviewing a potential business purchase and to assist in the smooth transition of ownership once the contract has been signed.

This is just a brief overview of the important legal issues arising in your business. Keep this list and conduct a ½ yearly “checkup” to ensure your business stays in top shape.

If you need any assistance with any of the above matters or any matter of a legal nature please don’t hesitate to contact us.

Please call Peter Lee on 3329 3999 or email peter@plee.com.au if you have any enquiries.