Where do I start?
Buying into an existing business or starting your own business can be a daunting process, and which can involve a lot of decision making and negotiations.
Investing in a good accountant to give you guidance as to the taxation and financial aspects of what you are proposing to do, and a good lawyer to draft the agreements to give effect to the transaction from the outset, is crucial.
As a commercial firm, we see clients from both sides of the fence – those coming to us for help to draft or review contracts such as shareholders agreement, leases, employment agreements; and those coming to us with disputes, usually because there was not a proper agreement in place between the owners of the business.
Incurring costs preparing appropriate documents at the start, can save you a lot of stress and costs in the long run, when you want to leave the business, sell your shares in a company, or if you have a disagreement with your business partner – as the contractual documents regarding the running of the business, such as a shareholders agreement, or partnership agreement, will usually set out the steps the parties need to take in these circumstances. It minimises, but obviously does not guarantee, the chances of the matter ending up in court down the track.
What are some of the things to think about when starting or buying into a business?
Choosing the appropriate structure
What is the proposed or existing structure? E.g. sole trader, partnership, company, trust.
Your accountant can provide you with advice and guidance as to what is the most appropriate structure for you to operate through from a financial and taxation perspective; whilst your lawyer can help you with the legal side of things; such as advising on ways to limit your liability and ensuring you have contracts in place to govern the operation of your chosen structure.
Having the appropriate agreements in place
If your chosen structure is a partnership, then you should engage a lawyer to prepare a partnership agreement which will set out the terms upon which the partnership will operate. Whilst there is a Partnership Act in NSW, it does not cover all elements of how the partnership operates, and to ensure that your business runs seamlessly or in the event of the dispute, that there is an agreement to refer back to for guidance as to how to resolve the dispute, it is important that you have a proper partnership agreement in place.
If your chosen structure is a company and there is, or there will be in the future, more than one shareholder, then you should engage a lawyer to prepare a shareholder’s agreement. A shareholder’s agreement will govern the way the company is to conduct its business, and likely will include provisions covering:
- The objectives of the company (it may also annex a business plan);
- Set out the dividend policy, that is, the policy for how profits of the company will be distributed, including how frequently and what percentage of the profits will be distributed (taking into account cash flow and liabilities);
- The decision-making processes;
- Funding requirements – how the company can raise money if it requires further capital;
- What occurs if a shareholder is in breach of the agreement;
- Importantly, the procedure for the sale of shares – an exit strategy, and including how to value the shares;
- Non-compete – to protect the business interests, a shareholders agreement may include a restraint from engaging in the same or similar business to that operated by the company for a certain period and in a certain geographical area;
- Dispute resolution –a dispute resolution clause will set out the procedures for the parties to follow in the event of a dispute which usually includes a requirement for the parties to engage in alternative dispute resolution processes such as mediation, before they are permitted to commence legal proceedings regarding the dispute.
Do I need a business premises?
If the business is to operate from a premises, once you have located a suitable premises, have your lawyer review the lease proposal, the lease and negotiate terms on your behalf. For more information about the lease review process, here is a link to one of our articles on leasing https://www.rslaw.com.au/should-i-get-a-lawyer-to-review-lease/.
- Loan Deed – If you require finance either from an investor in your business, or a family member, a third party, or a bank, there will need to be a loan agreement in place governing the terms of how and when the money will be advanced (i.e. in a lump sum or as a drawdown facility); how and when the money will be repaid (i.e. by way of instalments, on the occurrence of a particular event, or by a certain time); the interest rate (if any) charged on the loan; if there is to be a default interest rate (if the payments are not made on time); what is to occur in the event of default; and whether there will be any security or charges (i.e. security over the assets of the company);
- Employment agreements – If your business is going to engage employees it is important that the terms of the employment is recorded in writing, including whether there is an award applicable to that employee; their rate of pay; their hours of work; the type of employment (full time, permanent part time, casual); a description of their role and duties; whether they are entitled to any other kind of benefits (such as a motor vehicle, mobile phone); the policies they will need to comply with; termination of employment; and whether they will be subject to a restraint of trade or non-compete clause;
- Terms and conditions of trade – setting out the terms upon which you supply the goods or services, payment terms, how you may terminate the agreement, and limiting liability where appropriate.
If you are contemplating starting or buying a business, contact Rockliff Snelgrove Lawyers and we can help you ensure that you have appropriate agreements in place to run your business.