How to manage and minimise the legal risks to small companies

In this article, Guy Hollebon from Bevans Solicitors looks at some key legal risks that can affect small businesses and how to manage and minimise such risks. Guy has approached the matter as an expert lawyer and also as a small business owner, providing both legal and practical tips.

For any SME, particularly in the early stages of the business existence, the main focus is on the operational side – making the products or providing the services which the business was set up for.

Unfortunately there is an increasing amount of red tape involved in running any business and this burden can be disproportionately placed on SMEs.

There are numerous legal and commercial risks affecting an SME and this article will focus on the key areas of ownership issues, employment issues, matters arising with customers/clients and issues with suppliers.

Ownership Issues

At the outset all is rosy in the garden, however it is important to consider how the business may develop and to consider the risk that the relationship between the owners may deteriorate over time.

There is also the very common scenario where peoples’ priorities and objectives change and someone who was initially instrumental in setting up a business may, over time, wish to leave entirely or to reduce their role.

In order to avoid getting into ownership disputes which are very time consuming to SME owners and potentially costly, consideration should be given right at the outset to these matters. It is extremely prudent to have in place an agreement that deals with key matters that may cause disputes down the line.

The initial outlay in getting a well-drafted agreement prepared and put in place is significantly less than the costs (in management time and legal costs) involved if the relationship sours and a dispute arises.

A well-drafted agreement will cover issues such as where there may be a deadlock (for example if there are two shareholder directors in a business and they each have an equal vote what if they do not agree?). It is also vital to look at providing for an exit route in the event that any owner wishes to leave.

You do not want to find that your business partner has sold out to a third party who you do not know and do not trust.

There should be a clear mechanism for valuing the outgoing owner’s share of the business and acquiring this (possibly over a period of time to assist with cash flow).

A minority stake owner in a business will also want to ensure that he or she has some protection as to how the business will be run. Again a well-drafted agreement will cover this point.

Employment Issues

Employment Law is something of a minefield for the SME owner. It is free for someone to bring an Employment Tribunal claim and lodging this can be done online. With compensation being unlimited in discrimination claims the cost of getting something wrong can be vast.

One very easy way to reduce the risk from Employment Tribunal claims is to put in place well-drafted Contracts of Employment.

These do not need to be voluminous documents but need to be tailored to the particular business.

There are certain particulars of the Terms of Employment that must be provided to all employees within two months of commencing employment.

While a Contract of Employment cannot cover every eventuality it does help to reduce disputes as the Terms of Employment are clearly defined.

The right to vary the contract in the future should be reserved so that the employer can have flexibility as the business develops and grows.

Great care should be given to ensuring that an employer does not discriminate against employees on any of the protected grounds (sex, race, nationality, disability, sexuality, religion or beliefs and age).

Care should also be taken to ensure that any provisions which apply to all staff do not disadvantage and discriminate against individuals for any of the prohibited reasons set out above.

It is our experience that a large proportion of Employment Tribunal disputes could have been avoided had proper legal advice been taken before steps were taken against an employee.

Issues with Customers/Clients

The customer is always right, so the saying goes. Your customers/clients are probably the most important people for your business and you want to avoid, or at least reduce, the risk of getting into dispute with them.

Clear and simply drafted Terms of Business are critical here. These will set out the agreed terms between you and your customer/client and should cover key areas such as payment terms and any limits on your liability.

It can be particularly useful with customers/clients to try and avoid ending up in a court dispute with them and we very often include alternative dispute resolution mechanisms within the Terms of Business; for example providing for a dispute to be referred to mediation which is a faster and more cost effective way of resolving disputes and which can often preserve the ongoing relationship in a way that Court proceedings rarely do.

Issues with Suppliers

Often suppliers have their standard Terms of Business. You should be very careful what you sign up to and you should understand the effect and possible impact of any Terms of Business.

Often the bargaining strength is with the supplier and there may be very little scope for amending standard Terms of Business, however in the current economic climate it is much more of a buyers’ market and therefore SME’s should not automatically accept standard Terms and Conditions if there are clauses in there which cause concern.

It is important that there is a written record of key matters such as what the supplier will do, when it will do it, how much will be charged and what happens if there is a breach.

If time is of the essence in respect of your arrangements with customers/clients then you should, ideally, ensure that this is mirrored in your arrangements with suppliers.

If you are legally obliged to provide goods or services to a customer by a certain time you do not want to find that your supplier lets you down and the small print gives you no right of recourse against the supplier.

This advice was kindly written by Guy Hollebon, a Director and Head of Employment Law at Bevans Solicitors.

Last updated: 24th June, 2022

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