Firstly, who are we and what would we know about expanding your business?
The firm was started in 2009. Our founder often gives talks on the mistakes she made, the lessons she learned and the things she would have done differently. She has turned those lessons into our success story; our firm has grown significantly and is now a leading entrepreneurial firm in the city.
We act for an array of clients including start-up businesses & established businesses, SMEs, entrepreneurs and investors. We specialise in packaging and preparing clients for investment or sale. Those with investment we seek to carefully protect the founders interests; we advise on the options available to you, other than traditional equity sales, and understand the long-term exit strategies. As such we can offer genuine experience and practical advice in this area.
What are the most common mistakes that a business makes when starting out?
At start up it is hard to determine what is important and whether the costs are justified. As you look for investment or begin to scale up these issues can become ever more important and may slow your development down.
1. Good Advisors: Paying for a good lawyer and accountant often seems a lot when you first start out, but often they save you much more in the long run. When you are ready to invite in investment, expand or sell your business their paperwork is absolutely the key to your success. Choose those advisors carefully though because they must understand you and your sector , if you need specialist advice make sure they do have experience in these areas, read their testimonials to make sure their approach suits you. You must lead your business, with their support, a lawyer/accountant must never seek to control how you operate as their goals and outlook will always be different to yours.
2. A clear business plan between co-founders is often overlooked (A Co-founders Agreement). Disputes can arise when a third party wishes to be engaged or one founder wants to sell (or take on investment) and the other doesn’t . A transparent agreement at the start is the only way to adequately prepare for the future and for that day when you move the company on to the next level. This will contain the drag along and tag along provisions you need to move your company onto the next level;
3. Reliable & concise legal documents. We have seen start-ups using templates and/or fail to update their contracts as they expand. Client terms , staff restrictions , IP assignments and shareholders agreements are the bare minimum an investor will want to see and as you grow these are increasingly more important for the company’s protection.
4. A lack of employment and contractual documentation in the early days could hamper your chances of successfully expanding or securing investment. If you don’t have the confidentiality clauses or restrictive covenants your business is exposed to significant risks. Staff or even co-founders can set up in competition or poach your clients and if you are ready to scale up this activity would be distracting and detrimental
5. Not carefully considering intellectual property protection. The cost of registering trademarks and patents in the long run is far cheaper than trying to fight off infringement actions or re-branding if someone seeks to stop you using your own brand. Keeping what could be one of your most valuable asset protected and secure is not only essential but it makes your company far more valuable. As you launch abroad or into a new market this can be even more important as your IP will be more publicly exposed and more valuable.
‘we had a client in 2015 move his brand into the USA, he received a notice to cease due to an IP infringement. We tried to resolve this, but the client had decided not to trademark his name or logo or check the new jurisdiction for its use. They had 5 years in the UK of goodwill and now had to completely re-brand and change their name at great cost and start earning goodwill all over again’ . Expansion overseas without due care lost them business and money.
6. Not understanding your finances and protecting cash flow. I have seen people enter into contracts without real consideration of the terms and how they can perform the contract say for example when payment is an advance and the rest is made upon completion. The bigger you grow and the larger the clients the more risk you expose yourself to. Your overheads increase, servicing a contract exposes your liabilities and yet cash flow and insurance remain even more important than before. Don’t become reactive rather than proactive.
A small start up in year 2 decided to accept a large contract, which required double the staff. He signed the deal without taking advice and defaulted on delivery at month 6 due to a design flaw that needed rectification. This put the contract timescales back 4 months and he had to work this period , with those extra staff, unfunded. They didn’t make it and defaulted on the next contract date. The company terminated the agreement refused to pay the next stage and the company was wound up. Get good advice, negotiate terms that work for you and don’t expand until genuinely ready and able.
You are ready to expand, how can you resolve any mistake already made?
It is never too late to secure concise legal agreements, register IP and take tax advice. Before you sell, expand, take on an investment or as soon as you can we suggest:
1. Agree terms with your co-founders by way of a shareholder’s / Partnership agreement. If you have this already make sure its concise , its been updated to cover the current business position and its bespoke to you
2. Discuss how you set up the business with an advisor as early on as possible.
a. Make sure your legal documents, such as your articles or share allocation, is done correctly and reflects your accounts and true running of the company. You would be amazed at how many companies make errors here that takes some time to unravel and if you get the attention of HMRC this may delay your plans.
b. Have you kept you accounts clear and taken advantage of all reliefs and tax benefits out there?
3. Update the contract between you and your clients and with employees: Sounds obvious but it is usually the one thing that is done using a template or is out of date. As you expand or move into territories outside of the UK these can cause tremendous problems. There are many rules when contracting with consumers which can cause significant problems (including criminal liability and unenforceable terms) if not included.
4. Register your Intellectual Property
5. Make sure you have debt recovery policies & cancellation terms in place to protect your cash flow as you increase your overheads . Also make sure your insurance is in place to cover your liabilities
Securing investment don’t get pressured into the wrong decision.
Meet different advisors, explore all the options and understand what is available and what each practically will mean for you. What may appear too restrictive to a lawyer or accountant may still be worth the risk to your expansion, but also what may appear a dream offer could come with too many strings – juggle advice against what you need carefully.
You do not have to give control of your company away. If you are concerned about giving shares away consider there are other options available to you.
Consider all financing options such as:
a. Bank loans with low interest rates presently available
b. Debt financing such as corporate bonds;
c. EIS/ SEIS as tax incentives for investors
d. Joint venture agreements
e. Government and social grants
f. Tax reliefs
g. Other investments
Getting this right from the start or before you take the next stage to expand or secure investment secures your business and your personal interests. The money you can save by getting your house in order and having the best possible tax and legal advice means you can develop and expand without the usual risks effecting other businesses.
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