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The legal lifecycle of a business

May 9, 2018

 

 

My latest fictitious clients Anahera and Jaya are designers who, having done their homework, have decided to start a designer furniture business together.  As their lawyer it’s up to me to make sure they have the commercial legal advice and assistance they need to make their business a success.

 

As a business lawyer I see most businesses having 4 stages in their lifecycle.  What kinds of commercial legal work will need to be done at each stage?

 

For the purposes of keeping the fictitious business simple, the business model is:

  • design furniture and have it manufactured by contractors

  • retail directly online and through specialist stores

  • make to order only

Inception Legal Work:

  1. Register company with Anahera and Jaya as shareholders and directors.

  2. A and J to enter into a shareholders’ agreement to cover their rights and obligations as shareholders eg appointment of directors, approvals of transactions, entry and exit of shareholders.  Will need a matching constitution.

  3. Design branding and logo, and apply for brand and logo to be registered as trade marks.

  4. Finance – the business may need to apply for bank loans.  If the loans require security then the owners will definitely need a lawyer to advise and process documents.  This will be a requirement of the bank.  Security might be over business assets eg if borrowing to purchase those assets.  Security might be over owners’ homes i.e. mortgages.  This will require assistance from a property lawyer.

  5. Asset protection – people often consider putting personal assets in trust.  This won’t protect from the bank, which will need security from the trust anyway.  Consider specialist advice from accountants and a private client lawyer.

 

Operations Legal Work:

  1. If the owners can work from a home office that’s great – lower overheads!  Otherwise they’ll need a lease.  In many cases leases are onerous documents that place a lot of responsibilities on tenant, and liabilities as well.  Don’t sign until you’ve had advice!

  2. Employment agreements: if A & J employ staff they’ll definitely need these.  As shareholder employees, they’ll need their own agreements as well, and these will tie into the exit provisions of the shareholders agreement.

  3. All sorts of contracts will feature in their business.  For example:

    • Contracts with their manufacturers including confidentiality agreements;

    • Supply agreements with retailers;

    • Website/e-commerce terms;

    • Purchase agreements with raw materials suppliers.

  4. Intellectual property protection to consider:

    • Designs attract copyright as they’re original works, but consider applying for design registration as this is easier to enforce against copycats.  Similar to trade mark registration process

    • Restraints preventing all parties they deal with from copying the designs

  5. General legal compliance:

    • Decision-making to be done in accordance with constitution and shareholders agreement – a lawyer can help make sure this is done right.

    • Consumer laws need to be complied with, eg Fair Trading Act, Consumer Guarantees Act.

 

Growth Legal Work:

  1. The owners may decide they need more capital for the business.  This means taking on new shareholders.  Shares will need to be issued and the process will need legal assistance so it is done in compliance with companies and securities laws.

  2. The company may need to borrow more from the bank.  As before, the commercial lawyer will need to advise on documentation, especially if there is new security for the loans.

  3. A shareholder may decide to exit, so the company might need advice on the process of sale and transfer.

  4. The business might decide to open its own showroom.  This means a new lease.

  5. The business may want to export or import, so will need advice on international agency agreements, distribution etc.

  6. There may be an opportunity to purchase another business or product line.  This should be done with legal advice, so that all asset transfers are done properly.  Restraints on the vendors should be considered.

 

Extraction Legal Work:

  1. The owners have decided that they want to sell and take their equity out of the business.

  2. There are two processes for this:

    • Sale of business and assets

    • Sale of shares (also called selling the company)

  3. In either case the owners will need to make sure the balance sheet is tidy; the company records are in order and the businesses is generally appealing to the market.  Their lawyer and accountant can help with this.

  4. Once a buyer is found the sale will need to be documented in a sale agreement and once the agreement is signed the parties will work through to a settlement.

  5. The sale proceeds will be distributed!

 

This scenario is intended to be helpful, not scary!  If you’d like more information, please get in touch.

 

Photo by Franck V. on Unsplash

 

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