Truelegal has a great client base of enthusiastic entrepreneurs, individuals ready and willing to react to the market place.  Part of that strategic adaptation may involve structural changes to the business, or a decision to buy a distressed competitor.

With our commercial background we have managed to assist many business owners recently to mskr not just their own business more robust, but to msximise the many opportunities out there for those willing to step up.

If you need a business solicitor able to meet the current challenges please contact us for a no obligation meeting – at a location to suit you. We believe we can make the business case that we can add value to your business rather than being a legal fee-drain on your bottom line.

The main advantages of a Joint Venture are independence, cheapness and simplicity as compared to a partnership agreement.

There are great benefits to entering into a joint venture including:

• Access to new markets and distribution networks
• Increased capacity and more resources
• Sharing of risks with your partner
• Access to specialised staff and technology

Success in a joint venture depends on thorough research and analysis of aims and objectives. These should then be incorporated into a written joint venture agreement. Trust forms a key element of successful joint ventures and agreeing exact terms when you set up your joint venture will help to minimise these risks and give the confidence to enter fully into your relationship without reservation.

Key clauses in a Joint Venture Agreement include:

• The initial and future contributions of the joint venture partners
• The structure of the joint venture, eg whether it will be a separate business in its own right or on a contract basis
• Management and control, eg respective responsibilities and processes to be followed
• How liabilities, profits and losses are shared
• Resolution of disputes between the partners
• Sale and transfer of partnership status
• Ending the joint venture

There are two main types of joint venture. The most common is a contractual joint venture, where you can establish an agreement to co-operate, without setting up a separate business. For larger or more complex projects an incorporated joint venture, where you set up a separate business in order to carry out a particular activity or project may be more appropriate.

There is no contract of sale between the supplier and the ultimate purchaser of the goods.

Put simply, the distributor will buy the goods from the supplier and sell them on to its customer.

Key clauses in this agreement include:

• A detailed breakdown of the duties and responsibilities of both parties
• The geographic region in which the Distributor will operate
• Whether the Distributor will have exclusive or non-exclusive rights
• The rate, method and timing of payments
• Any non-compete agreement
• Protection of trade secrets and confidential information
• Supply of goods and minimum stock levels
• The duration of the agreement, termination and how breaches of the agreement are handled
• The principal’s option to buy-back products on termination of the agreement
• Although there should be terms and conditions of sale in place between the principal and distributor, it is less important for the supplier to be concerned with the terms on which the distributor sells on to his customer as it is the distributor who will be liable to the customer, not the supplier.

For anyone setting up a distribution network a distribution agreement is key to its success. It helps to promote trust and good will between both parties and gives them the confidence to maximise profits.

The purpose of an agency agreement is to set out the terms and conditions of the relationship between the business which wants to sell stuff (the Principal) and the intermediary who agrees to sell it on their behalf (the Agent). When a sale is made by the Agent, the law deems that a contract is formed between the Principal and the end customer.

Not to be confused with?

• A distribution agreement, in which a supplier sells goods to a distributor who then, as a separate transaction, sells the goods to his or her customer. There is no contract of sale between the supplier and the ultimate purchaser of the goods.
• A franchise agreement

• Subsidiaries or branches

A word of caution…

If you are planning on using a business intermediary, you would be wise to seek professional legal guidance. Not only does the law attach special legal meaning to agency relationships, but it’s possible for parties to find that they have entered into such a relationship without being aware of it.

Key clauses in an agency agreement include:

• A detailed breakdown of the duties and responsibilities of both parties
• The geographic region in which the Agent will operate
• Whether the Agent will have exclusive or non-exclusive rights
• The rate, method and timing of payments
• Any non-compete agreement
• Protection of trade secrets and confidential information
• Level of authority to make commitments on behalf on of each other
• The duration of the agreement, termination and how breaches of the agreement are handled

It is important that the Principal and Agent have clear written commercial terms agreed so that both parties know what to expect from their deal. Many relationships between suppliers (Principals) and Agents have gone wrong because they do not have this simple document in place. They have often relied on orally agreed terms or negotiations which have proved costly in terms of lost sales, commission and subsequent legal action to define and enforce the commercial terms. An agency agreement will make your relationship clear, giving both sides confidence in making the most of the opportunity.

European Directive and UK Commercial Agents Regulations 1993

Agency law is one of the areas where European legislation has had significant impact, and most of it is in favour of the Agent. An EC Directive was introduced to harmonise the law relating to commercial agents across Europe. In the UK, the EC Directive was implemented by the Commercial Agents Regulations 1993. They contain important provisions, which the Principal or Agent ignores at their peril, including:

• The right of the agent to have a written agreement
• The entitlement of the agent to a reasonable commission in the absence of any fee or percentage agreed in advance
• When commission is payable and on what transactions
• Minimum periods for notice of termination of indefinite agency agreements
• The right of the agent to either “compensation” or an “indemnity” on termination

The most important change which resulted from the Directive and the Regulations was the right of the agent to claim compensation or indemnity on termination of the agreement. Many Principals have been caught out here and many Agents have been unaware of their rights.

As a Principal it is important to structure your agency agreement to take into consideration the Commercial Agents Regulations 1993 or any dispute could be very costly in terms of compensation.

The benefit of this type of company over a partnership is that the shareholders have limited liability so if the company fails there is no claim on the assets of the shareholders (beyond their original investment). As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. As long as the business is operated legally and within the terms of the Companies Act, directors’ personal assets are not at risk in the event of a winding up or receivership.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses. Banks also appear to favour limited company customers, although they will often seek personal guarantees from the directors.

Forming a private limited company is reasonably straightforward and many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business following recent changes to the Companies Act which have further simplified much of the legislation relating to limited companies.

The benefits of a a private limited company formation include:

• Suits the majority of commercial trading requirements in the UK
• Can undertake any nature of business
• Can operate anywhere in the world
• Members (i.e. shareholders) have limited liability
• Can have a sole director and sole shareholder
• Enhanced credibility with customers and suppliers
• Changes to legislation over the last few years have meant much lower costs associated with limited companies

• As there is no obligation for a limited company to commence trading within any set time period after its incorporation, the formation of a limited company is also a simple and low cost way to protect a business name for future use.

Company Limited By Guarantee

A company limited by guarantee is usually used for a club or an association. It also has limited liability. The liability of its members being limited to the amount each member undertakes to contribute to the assets of the company in the event of its being wound up, normally £1.

No shares are issued and the company has members who agree to contribute a membership fee or subscription. Normally they have equal voting rights and elect a board of directors. Any profits (often known as “surpluses”) are not distributed as dividends, but may be used to support the activities for which the club is formed.

Public Limited Company (PLC)

You must form a public limited company if you want to trade shares with the public. A PLC must have a minimum authorised and issued capital of £50,000. At least 25% (£12,500) of this minimum must be fully paid up before the Registrar of Companies can issue a Certificate for Commencement of Trading. As a private company can be converted to a PLC most PLCs start life as normal private companies and convert at a later date prior to flotation of the stock market. However, just because a company is a PLC does not automatically mean its shares a publicly listed.

While the effort involved to get started can be considerable and lengthy, the long-term rewards can be immense if you go about it the right way and involve professional help from the outset.

Benefits

Growing your business using the franchise method is an exciting and proven method to accelerate your business and, if you have the right business model and the right systems in place, there can be many benefits including:

• relatively low level of investment – franchisees must pay for their franchise so, essentially, you are using their capital to fund your business growth
• the power of duplication – once you have a successful business model in place you prepare one set of standard operational guidelines for each of your franchisees to follow
• quality business partners – you have ultimate control over who runs your franchises and the franchisees should remain motivated to succeed because they’ve invested upfront in the business

• effective quality control – each of your franchises will be following the same formula and have a contractual duty to maintain the same standards.

Disadvantages

As with any business expansion, there are difficulties and pit-falls to be aware of when thinking of starting a franchise operation.

Disadvantages include:

• cost and effort involved in setting up. You’ll need to budget carefully as there’s an awful lot of work involved in the beginning, e.g. clearly documenting your business model and systems, researching the market to see if your business idea is viable in other locations, producing information packs and operations manuals, marketing and advertising, interviewing potential franchisees etc
• difficulty in finding suitable franchisees – you need to apply rigorous selection criteria, after all, your success is dependent on them
• time and cost involved in establishing a suitable management structure – chances are your existing management team won’t be able to cope with a rapid expansion. Good management is critical to the success of a franchise operation and may cost a lot of money

• legalities – even the simplest franchise will require considerable involvement from an experienced lawyer. Having the right terms and conditions in place will be critical to the success of your venture.

Getting help from the outset

The first thing you should do if you’re considering franchising your business is to speak to an experienced commercial lawyer. It may seem like a big expense at the outset but it’s sure to save you money and heartache in the long-run.

Truelegal will guide you through the process and ensure that you make informed decisions. Most importantly, your lawyer will draft your franchise agreement – probably your most valuable business document. If you get the agreement wrong, rogue franchisees may ruin your franchise brand and reputation or even copy your idea and start up in competition.

The franchise agreement

In essence, the franchise agreement will determine how enforceable your rights are against your network of franchisees.

Key to your success is having a set of terms and conditions that are sound, clear and fair – these are people that (hopefully) you will have a long-term working relationship with and you want to do everything possible to ensure that that relationship is a harmonious one. A poor franchise agreement could deter new applicants or leave you unable to get rid of a bad one causing you and other franchisees difficulties and problems.

The terms and conditions will vary from franchise to franchise but should include the following:

• Term
  The term of the franchise agreement covers how long the franchise lasts, how it is renewed and on what terms. It also looks at how the franchise can be terminated early and may include performance criteria.
• Territory
  This is the geographic area which each franchise will cover. Will the franchisee have exclusive rights and how will the borders of franchise territories be covered?
• Fees
  Usually the franchisor will charge an initial fee, royalties on sales and a regular management fee. You may also want to charge for additional costs such as joint marketing.
• Support
  The amount of help you provide is often critical for success both when the franchisee starts their business and on a continuing basis, as they progress.
• Restrictions
  Most franchisors place restrictions on what franchisees are and are not allowed to do. It is normal to stipulate how the franchisee should run their business. Minimum stock and staffing levels are common, as are where the franchisee purchases their stock and how much they can sell their product or service for.
• Exit
  What happens if a franchisee wants to sell their business, or what happens if they can’t continue in business for some reason – perhaps due to ill health or lack of funds? You will need to retain control over who they sell their business to.
• Other items which need to be considered include how “goodwill” is treated, provisions for insurance cover, and protection of your intellectual property rights.

From your perspective, a franchise agreement should encourage good franchisees whilst providing positive, proactive remedies for those who are under-performing or causing difficulties for you or other franchisees. In addition, the agreement needs to allow your franchisees the right amount of freedom so that they feel the business is their own whilst protecting you from fraud, misconduct and the stealing of your intellectual property. It’s important to provide the right amount of support for your franchisees but you must also make sure that this operation does not cost you too dearly in terms of resources and money.

This type of agreement is usually made for relationships of a long term nature. For people who wish to work with a company or individual on a short term basis then a joint venture agreement or consultancy agreement may be more appropriate.

Without a partnership agreement the actions, powers and rights of each partner are controlled by the Partnership Act 1890. This act has many provisions but those which can have a significant effect include:

• All partners are entitled to share the profits equally no matter how much capital, effort or skill they bring into the business.
• Any partner can bring the partnership to an end just by giving notice to all the other partners. It is also dissolved if a partner dies.
• All partners are jointly and severally liable for the liabilities incurred by the company. This means that if a debt cannot be paid then the creditor can pursue all the partners individually and one may be forced into the position of paying the whole debt by themselves.
• Should a partner get into financial difficulties then their creditors can take assets from the partnership to settle them.
• All partners are considered “agents” of the business and act on behalf of the other partners. They can enter into contractual and financial arrangements which are not good for the business but these will be binding.
• All partners have an equal say in the business and decisions can take time or the business break down in the event of a severe dispute.

 Partnerships do have their advantages which include:

• Each partner is able to specialise in their own area of the business
• More finance can be raised than by sole-traders as more owners are investing in the
  business. As it is often a larger business than a sole-trader, it often has a better chance at generating other sources of finance e.g. bank loans, etc
• There are no legal formalities to complete prior to starting the business
• Partners can cover each other during times of absence, e.g. holidays or illness

The are three types of partnerships

General
Two or more individuals as co-owners of a for-profit business. All partners are responsible for the liabilities and debts of the partnership. For tax purposes, partnerships enjoy single taxation. Income is reported as part of each partner’s personal income.

Limited Liability
A general partnership which elects to operate as an LLP. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership’s debts and liabilities. For tax purposes, the income of an LLP is taxed in the same manner as a General Partnership.

Limited
A partnership with at least one General Partner and one Limited Partner. A limited partner’s liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership. For tax purposes, the income is taxed in the same manner as a General Partnership.

As you can see it is folly to operate a business under any partnership basis without an agreement in place.

The aim is to provide a written structure of your business with respect to each partner’s responsibilities, rights, profit/liability sharing, entering and leaving, and also the terms on which disputes are resolved and the partnership can be terminated. Some of the topics covered in the partnership agreement are:

• Ownership interest
• Loans by partners
• Allocation of profits
• Management
• Duties of partners
• Salaries & compensation
• Borrowing money
• Reimbursement 
•  Non-compete
• Power of attorney
• Admission of new partners
• Meetings
• Arbitration
• Leaving or retiring
• Termination and more 

Shareholder agreements are so important because they provide a method for:

• Resolving shareholder disputes
• Preventing the personal circumstances of one shareholder affecting the company or other shareholders
• Defines the powers of the shareholders
• Defines the procedures and limits within which the company operates

• A shareholder agreement also provides clarity and peace of mind to all shareholders about what can and cannot be done and what happens if there is a dispute if things go wrong.

New Companies

Newly formed companies often do not worry about having an agreement. Optimism is high and everyone is getting along well. Money can be tight so making formal arrangements is seen as an unnecessary expense.

It is only as the company grows and matures that problems can begin. The majority of new companies fail within the first five years and it is at this time when debts and responsibilities come can tear the shareholders apart without a shareholder agreement.

Falling Out

Disagreements between shareholders cannot always be ended simply and amicably. A shareholder agreement will provide for a structured way for all parties to work within, making the resolution of disputes quicker and more effective. Having an agreed structure often stops conflict before it begins.

Death or Divorce of a major shareholder

Should a shareholder die then without an agreement in place his/her spouse or other family member could take their place. They probably would not know much about the company and may well cause problems whether intentionally or unintentionally.

A shareholder agreement can prevent this by providing a way for shareholders to have a right of first refusal to purchase the deceased’s shares.

Should a shareholder get divorced then their former spouse may turn up at board meetings and cause problems out of spite. Again a shareholder agreement can prevent this.

Sale of Shares

Without an agreement then a shareholder may sell their shares to anyone. For example, in the event of a dispute they could sell them to a competitor. Personal financial difficulties may force the sale of the share to the highest bidder. Again, this may not be in the best interests of the company.

A shareholder agreement provide a right of first refusal which means that existing shareholders have the right to purchase shares in advance of anyone else. This can be to a set formula or by matching the price of an outside bidder.

Controlling Finances and Obligations

Did you know that your fellow shareholders are able to enter into contracts and other commitments on behalf of the company without proper consideration to the effects they may have. This could spell disaster for the company and the other shareholders.

With a shareholder in place an individually’s ability to do this on behalf of the company can be limited to an appropriate level with an agreed procedure for levels of commitment required by the company above this.

This will ensure all shareholders’ exposure to risk is minimised as people overstepping agreed structures will become personally liable.

In practice this part of a shareholder agreement gives confidence to all concerned and makes for good profitable decisions within the business.