D is for Danger - a Guide to Defending Your Business
Friday, March 14, 2008
by
Catherine Feechan
Running your own business is a risky endeavour but there are some defensive steps that can be taken to guard against the most obvious dangers:-
1. Disruption
How would your business cope in the event of a fire or other serious disruption to its premises? Would major disruption to IT or other equipment have a serious impact? Every business should have a disaster plan in place for dealing with the occurrence of a variety of disruptive events. This could range from being unable to gain access to premises to a failure of computer systems. Taking steps to prepare such a plan will allow senior staff to be aware of what action is required in an emergency to ensure that the business suffers the minimum disruption. In addition to putting your disaster plans in place, proper levels of insurance cover should also be put in place.
2. Disputes
Unfortunately, commercial disputes are part and parcel of doing business, whether they are with suppliers or customers. You should make sure you know which commercial relationships would have the highest financial impact on your business if a dispute arose and take steps to ensure that these relationships are carefully managed in order to minimise that risk. The cost of litigation in relation to any dispute is a strong deterrent to avoid going to Court where at all possible. Not only is there the actual cost of the legal action, but also the additional cost of the time spent by management. Again, insuring against litigation costs may be worthwhile, depending on the level of risk in your particular business.
3. Departure
Whether you are trading as a limited liability company or as a partnership, it is likely that at some point, one party may wish to realise their share of the value of the business and move on. Planning ahead is important in order to ensure that an exit route can be found without damaging the business’ ongoing prospects. Shareholder or Partnership Agreements should be drafted to provide for how the business is to be valued, how any sums payable to the exiting party should be calculated and when these should be paid. Setting up the correct model for this at the outset of your business relationship when relations are good is money well spent as disputing these matters at a later date can be costly in terms of both time and money.
Departure of key employees is also an area for concern. Make sure you have systems in place to capture the knowledge of these employees and that appropriate restrictive covenants are in place to prevent them opening up in competition.
4. Divorce
Divorce is a fact of every day life and yet many people fail to consider the impact it may have on their business when they set it up. In the absence of any other agreement between the married couple, it may be the case that the business will require to be sold in order to pay a divorce settlement. Alternatively, a spouse who has not been involved in the business prior to the divorce, ends up with a share in it which can be extremely difficult on an ongoing basis. If the business is required to be sold quickly to satisfy a settlement, clearly it may be difficult to realise the optimum price. It may be wise to consider putting provisions in your Company’s Articles of Association that if a party divorces, his shares are automatically to be offered for sale to the other parties if it is seems essential to keep shares within the family.
5. Disability
Nobody likes to think of a situation where they may become unable to continue to work in their own business. However, if you are key to the business, this could seriously affect its performance. Again, if you are trading as a limited company, the Articles should provide for the other shareholders to be allowed to buy out shares at fair value if you become unable to work any longer. Insurance protection should also be taken out by individuals or the Company in case they are forced to stop working in these circumstances.
6. Death
The final frontier – this gives rise to two issues. The need to protect and provide for your heirs and also the need to protect the business. Consideration requires to be given to whether your share of the business should be left to your family or whether it should be offered for sale to any other shareholders at a fair value in order to provide your family with cash and relieve them of the need to become involved in a business of which they may have very little day to day knowledge. Insurance policies can be put in place to allow the funding of a purchase of shares on your death by the Company or by other shareholders. It is vital to agree what is to happen on death and make sure that proper agreements are put in place during your lifetime. Failure to make proper provision can leave your family exposed and your Company at risk.
D is for danger but D is also for defence. Take the defensive steps needed to protect your business – if you need any further advice, please call Catherine Feechan on 0141 228 8000.