by Jane Latham | Jul 17, 2024
You might think that family-owned businesses have a natural advantage. They do – but keeping both the family and the business happy requires effort and careful management.
The Melting Pot of Emotion
Family-owned businesses often find themselves entangled in a web of emotions including
- Old Wounds: unresolved issues and misunderstandings among family members can resurface, causing tension.
- Feeling Undervalued: a family member may feel their contributions are not adequately recognized.
- Sibling Rivalry: competition among siblings.
Balancing Business and Family Issues
Running a family business involves juggling both professional and personal issues. Key issues that have to be addressed include:
- Entitlement: who is entitled to what within the business?
- Founder’s Role: wat role will the founder play as the business evolves?
- In-Laws: should in-laws be involved in the business?
- Should shares stay within the bloodline?
Contingency Planning
Planning for the ‘what ifs’:
- Selling Shares: what if a family shareholder wants to sell shares to an outsider or gift them to a partner?
- Divorce: what if a family shareholder divorces, what happens to the shares?
Clarity and Fairness
Whether the founder or one of the adult children, clarity and fairness are essential. This requires:
- Establish clear roles and responsibilities.
- Create policies for ownership and succession.
- Think through, document, and file away agreements for future use.
Final Thoughts
Family-owned businesses have the potential to be incredibly successful. However, they require careful planning and a framework that supports both the business and family members. These are delicate matters that need to be handled with fairness, transparency, and pragmatism.
I am always available for an informal discussion, free of charge and without obligation, to help address these critical issues.
by Jane Latham | Jul 2, 2024
A shareholder or ex-shareholder competing with a business can pose a significant threat.
Unfortunately, some business owners may face the challenge of “the enemy in the camp”—shareholders who possess intimate knowledge of the business and can potentially use it to compete directly against it both when they are no longer a shareholder but even whilst a shareholder.
Shareholder’ Agreements: A Different Emphasis
Many business owners express scepticism as to the effectiveness of non-compete provisions, believing they are not worth the paper they are written on. Courts have indeed been cautious about overzealous non-compete clauses which unfairly restrict an ex employee’s ability to work. A shareholders’ agreement is fundamentally different as courts recognise the need for business owners to protect the legitimate interests of the business and the fairness of imposing reasonable restrictions on shareholders who have entered into a mutual commercial risk taking venture.
Why Non-Compete Provisions Between Shareholders Are Essential
- Protecting Business Interests & Trade Secrets
A shareholder’s inside knowledge of trade secrets, strategic plans and confidential company information can be incredibly valuable. Non-compete clauses help ensure that this information is not used against the company, protecting intellectual property and exclusive processes.
Preventing the loss of critical supply chains, trade connections and partnerships that are fundamental to the company’s operations. Non-compete provisions help protect these vital connections from being exploited.
Protecting the existing client base from being solicited or poached by a shareholder or ex-shareholder.
Safeguarding potential clients that the company has been actively cultivating.
Key employees are critical to the success of any business. Non-compete clauses prevent shareholders from poaching staff or disrupting the workforce.
- Trade Secrets and Confidential Information:
Protecting information that could be used by competitors to gain an unfair advantage.
Ensure Fair and Effective Non-Compete Provisions
To be enforceable, non-compete provisions must be carefully and fairly drafted, there is no ‘one size that fits all’. They should be reasonable in scope, duration, and geographical area – shaped to the particular dynamics of the business ensuring they protect the business without unduly restricting the shareholder’s ability to earn a livelihood.
Conclusion
Non-compete provisions in a shareholders’ agreement are an essential tool for protecting the business. While they must be drafted with care and fairness, their role in safeguarding the company’s interests, maintaining key relationships, and protecting confidential information cannot be overstated. By including well-crafted non-compete clauses in a shareholders’ agreement, the business remains secure and continues to thrive, free from the threat of internal competition – the enemy within.
Feel free to call or email me for an informal, no obligation chat.
Jane Latham
01225 287516 jane.latham@lcls.co.uk
by Jane Latham | Feb 16, 2024
Every limited company has a set of articles of association. This is a document governing management and administration of the company, it is lodged at Companies House and is therefore a public document.
Many small companies have standard articles, not always the best solution particularly when in business with other shareholders as they are not tailored to the needs and circumstances of individual shareholders.
When you are in business with other shareholders you should have in place either articles tailored for your circumstances or a shareholders agreement to deal with:
- the shareholders in their dealings with the company
- the shareholders in their dealings between each other
- the company and its dealings with shareholders.
For example, what happens it a shareholder becomes incapacitated or a shareholder dies prematurely?
Should all shareholders have the same voting rights? Should there be different rights attached to shares? Should there be different share classes dealing with different rights as to the transfer of shares? Should there be differing dividend entitlements?
A shareholders agreement will provide a framework for internal governance of the company and protect shareholder rights, facilitate effective decision making, provide clarity in the operation of the business and deal with events that will affect shareholders during the life of the business.
Feel free to call or email me for an informal, no obligation chat.
Jane Latham
01225 287516 jane.latham@lcls.co.uk
by Jane Latham | Jul 22, 2022
Buying a business
Whether buying or selling a business, the parties need to agree general principles as to how the deal will be structured: price, whether the shares or just certain assets are being acquired, timescales etc. These broad terms form the basis of the purchase and are usually set out in a Heads of Terms document.
As a very first step though, there are likely to be sensitivities around the seller divulging information to the buyer and the seller will likely want a confidentiality agreement signed.
Before agreeing terms, or generally too involved with how the deal will structured the buyer should consult their accountant and solicitor. If not, It could cause (in fact, very likely will, significant issues further down the line resulting in delays, misunderstandings and bad feeling between the seller and the buyer – leading to a loss of trust and making what is a stressful time-consuming process – more so…
In agreeing heads of terms [LINK] There will be crucial factors that need to be considered as to how the purchase should be structured and there will be external factors, which might not be apparent to the seller and the buyer but will be to their advisors and will affect how the purchase is structured as well as timescales and the best way to structure the purchase.
The buyer needs to be clear early in the process as to what it will/not be buying for example, factors for full consideration early in the process include:
- Stock: it is unlikely that the purchaser will want all the stock (for example, it will not want to be saddled with obsolete or damaged stock
- Fixtures & fittings
- Raw materials
- Work in progress
- Debtors: will the income from work billed by the seller pre completion
- Creditors: will the seller keep all amounts owing to creditors at completion?
- Office equipment: will all of this be acquired – down to every laptop (also be sure that all office decoration/fittings will remain in place if that is important to you
- Goodwill
- the customer base
- Intellectual property rights
- The website/domain names
- Telephone number
- Employees
The transaction will be subject to the buyers and its advisors carrying out a full investigation – i.e. a ‘due diligence’ process. The temptation for the buyer is to rely on their solicitor to carry out – which the solicitor would, but the purchaser should glean – and continue to glean – and have evidence of as much information as it feels it needs. It becomes harder further down the line and the sell. However, the purchaser needs to get its sleuthing hat and use laser focus on carrying out due diligence – the buyer needs push back on the seller on the information needed and start this process asap. Often buyers rely wholly on their solicitor to conduct this process it needs to be a 2 pronged approach. The solicitor can (and should) it deems appropriate, but it is the buyer who will know some of the key issues it needs to investigate.
Due diligence could include:
Property: searches & enquiries
Intellectual property – whether registered (for example, trademarks)
Investigation of the seller’s accounts
Actual physical examination of various assets – again, don’t rely solely on the solicitor, if the purchase involves machinery, or there is air conditioning or (in a restaurant) extractor fans – insist on seeing them in action
While the purchase agreement will give protections, the purchaser needs to get under the skin of the business. Far better to flush out the issue before contracts are signed & having to take action against the seller post completion. In fact the rationale both behind the due diligence process and focusing on relevant issues
There may need to be consents from 3rd parties before the purchaser can acquire the business – for example, from landlords. Key customers agreement.
The buyer should not underestimate the resources, time and processes that will need to be pulled in from other parts of its existing business in order to service the new business.
No Obligation Call
If you would like to have a no obligation chat as to how to protect both your business and your family then I am always happy to talk, without obligation:
Tel: 01225 287516 or e mail: jane.latham@lcls.co.uk
by Jane Latham | Jul 15, 2022
Don’t get in a bind…
In many commercial transactions the parties agree some form of Heads of Terms (or Letter of Intent) as a first step, setting out key principals agreed between the parties.
This process should not be taken lightly. Clear drafting is important so that the Heads do not become legally binding. That said, there may be some terms in the Heads which are intended to be binding such as confidentiality provisions or perhaps a period of exclusivity locking out other potential interested parties for a period of time thereby allowing the legal documentation to be finalised.
The key advantage of having well drafted Heads of Terms is that it gives a steer as to the broad terms agreed such as price and time scales. The Heads also have the advantage of creating a moral obligation between the parties as it is more difficult later down the line for a party to go back on principles agreed in the Heads. That said, the moral force of the Heads could work the other way in that it may limit the ability – or make the situation more tense – if, as part of agreeing contract terms, a party then wants to renegotiate a term agreed in the Heads. Again, careful, considered drafting of the Heads is needed to get the balance right.
Some useful tips in drafting Heads:
- set out any pre-conditions that must be met before a contract can be signed
- include a statement that the Heads are not exhaustive so the parties do not get involved in too much detail
- if there is concern about agreeing Heads without having all information needed at that stage, then a statement to that effect in the Heads would be a good idea
- do not fall into the trap of over negotiating the Heads so that it strays into the detail which will form part of the legal documentation
- if some of the terms in the Heads are intended to be legally binding they must be stated as such and the document should also clearly state which provisions are not intended to be legal binding
- sometimes parties use the expression “subject to contract” which might be helpful but it is not bullet proof in terms of preventing the Heads from potentially morphing into a legally binding contract so do not rely on simply stating that the Heads are subject to contract
- • care must be taken that statements in the Heads do not create an unintended liability for example, for fraudulent statement or misrepresentation.
If not drafted properly then Heads of Terms can pose a risk. Uncertainty and ambiguity will at best cause tension between the parties later in the process or at worst, morph into an unintended binding contract or, conversely, might mean that any terms intended to be legally binding fail to work, or careless drafting could even expose a party to claim for misrepresentation.
No Obligation Call
If you would like to have a no obligation chat as to how to protect both your business and your family then I am always happy to talk, without obligation:
Tel: 01225 287516 or e mail: jane.latham@lcls.co.uk
by Jane Latham | Jul 7, 2022
Business sale or share sale?
Business owners need to be aware of some of the steps they should take when they are thinking about selling their business, it is crucial to get the building blocks in place early in the process.
The first issue is whether to sell the shares or whether it should be a business sale which could be the sale of just certain assets of the business, or all the business assets.
Amongst the key differences in a business/asset only sale is that third party consents may be needed for example, landlord consent in respect of a lease or, various contracts may need consent of the other party so that they can be assigned to the purchaser. Also, if selling a business that has employees, then TUPE regulations will apply meaning that there will need to be a process of informing and consulting employees as to how the sale will affect them.
Broadly speaking, a share sale tends to be easier to implement as each of the assets or contracts do not have to be transferred individually.
Whether proceeding by way of a sale of assets or shares the seller should prepare and at an early stage:
- decide which assets are to be sold or not sold – in detail. Not only does this give both the buyer and the seller clarity but it pre-empts issues arising later in the transaction process. I have seen sales of businesses fall apart or cause last minute irate negotiations between the parties with the seller on the back foot because the seller did not make it clear that he was retaining certain low value assets. One such instance related to the seller’s car which, in the context of the business, sale represented very little value but it soured relations as it arose last minute. This surprised the buyer and the seller (by then extremely keen to get the sale complete) had to agree a last-minute price reduction but this would be unlikely to have been an issue if the seller was clear at the onset. A buyer does not like last minute surprises.
- provide recent financial information so that the buyer can determine the value of the business and, in turn, agree a purchase price. If the last accounts are not recent, the buyer may want sight of management accounts covering the period since the last accounts
- document all contractual arrangements and support services used in the business which the buyer will need to fully operate the business following the sale
- identify issues with the business and ensure these are openly shared with the buyer at the start of the process. It is not a good look if a buyer finds out about these issues at a later stage because it was stumbled across by the buyer or it came to light through the legal process – the buyer can start to doubt the seller.
Moving forward with the transaction, the buyer will want to carry out a due diligence process whereby it investigates the business to enable it to assess the amount of risk in relation to key factors that are important to the ongoing business for example:
- loyalty of the customer base
- potential areas of litigation from any third parties
- relationships with key suppliers
- full details of employees including full employment history and sight of employment contract
- property: there might be a lease that needs checking etc
- obtaining consents to assign important contracts – the buyer will need to understand the detail
Finally, business owners must of course ensure that there is a confidentiality agreement in place before disclosing information and the seller should take advice as soon as possible in the process.
No Obligation Call
If you would like to have a no obligation chat as to how to protect both your business and your family then I am always happy to talk, without obligation:
Tel: 01225 287516 or e mail: jane.latham@lcls.co.uk
