As a small to medium-sized enterprise, you may have viable business plans that need funding and for which a loan would be appropriate. However, you may be struggling to access the finance or working capital required because of the additional risks arising from the economic downturn. The newly announced Enterprise Finance Guarantee is intended to overcome this by providing lenders with a government guarantee, mitigating their risk exposure to just 25 per cent of the loan value. The Guarantee is part of the government’s Solutions for Business portfolio and is (supposedly*) available to businesses throughout the UK through approved lenders. *Supposedly, I say, because we have only just started to see evidence of it at the coal face with bank managers.

Participating lenders administer the eligibility criteria and make all commercial decisions regarding borrowing. The decision whether or not to use the Enterprise Finance Guarantee with any loan rests with the lender and follows their commercial assessment of the proposition. You can find out more about the Enterprise Finance Guarantee on the Department for Business Enterprise and Regulatory Reform (BERR) website.

The main features and criteria of the scheme are:

• a guarantee to the lender covering 75 per cent of the loan amount, for which the borrower pays a 2 per cent premium on the outstanding balance of the loan, payable to BERR (the first year premium will be 1.5 per cent)
• the ability to guarantee loans from £1,000 to £1 million and with terms of up to ten years
• availability to qualifying UK businesses with an annual turnover of up to £25 million
• availability to businesses in most sectors and for most business purposes, although there are some restrictions

The government has also introduced a package of support and further financial measures as part of its Solutions for Business portfolio. This has been designed to provide help for businesses through the economic downturn. You can find out more in a guide published by Business Link about the support offered by the government’s Real Help initiative.

Subjects covered in the Business Link guide are:

• Introduction
• Loans
• Where to look for a loan
• Obtaining a loan and offering security
• Overdrafts
• Loans from friends and family
• Providing a guarantee for your loan
• Enterprise Finance Guarantee
• Here’s how securing the right loan helped my business develop

1. Look out for opportunities to buy businesses in distress. These could be competitors, suppliers or businesses that add value to your existing client base.

2. If a deal comes your way, you will have to be very focused on making it work rather than completing a normal deal process with all the due diligence and legal processes.

3. Time will be of the essence. If you buy a company from administration, the information in sales particulars will not be guaranteed, so a physical inspection of the assets is recommended.

4. Obtain as much relevant information as possible by quizzing the administrator, before submitting your bid. It is important, if possible, to establish what issues affect the business, the quality of the stock, the extent of retentions of title and the status of any major contracts.

5. Ensure that appropriate releases are obtained from any existing funders who have debentures or legal charges. Check that the administrator has been properly appointed and has the authority to sell the assets.

6. One of the riskiest areas is taking over the workforce. Analyse this properly so you can assess those risks. In certain circumstances, the liabilities attaching to the employees will be so substantial that they outweigh the commercial advantages of going ahead with the purchase. Beware “TUPE” – if you don’t know what it means ask Truelegal.

7. If the business wants or needs to carry on trading in the existing premises, you need to check the existing property arrangements. You may need to negotiate separately with a third party landlord to ensure continuity.

8. To buy a company out of administration, you have to act quickly and accept you will have to take a commercial view on some parts of the deal.

9. Don’t stand on ceremony with the legal contract. You have to remember that you are buying the business from the administrator – not the previous business owners. There are certain key things which your lawyer will need to check but the administrator will not be prepared to accept personal liability for anything and will not guarantee legal title to the assets. There will, therefore, be gaps in the contract.

10. You won’t have the opportunity to carry out full financial, commercial or legal due diligence. As time is so critical, you will need to take a view on many of these assets. The risks associated with this should be reflected in the price you offer. Don’t expect to be able to make any claims after the event. In a normal transaction, warranties and indemnities and completion accounts are used effectively
to adjust the price if there is a post-completion problem. This will not be available in any insolvent situation.

All forms of leasing are basically rental agreements giving you (the lessee) the right to use an asset owned by the lessor (finance company) for a specific period of time in return for regular payments (rental payments).

You can lease almost anything, from equipment valued at a few thousand pounds to assets worth millions. Leasing contracts are flexible and can be tailored to your needs.

Types of Financial Lease

• Direct Lease : You identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you.
• Sale-and-leaseback (also called purchase leaseback) :You sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back.

In both cases, the lessor owns the asset , not you, and rents it to you. As with any other rental agreement, you return the asset at the end of the lease to the lessor.  Some leases grant you an end-of-lease option to renew the lease at a minimal cost (secondary period) or to sell the asset to a third party as agent of the lessor.

Often equipment manufacturers themselves act as lessors or have an affiliated leasing company. This allows them to more easily help their customers finance transactions. The other two groups of lessors are banks and independent leasing companies.

Types of Asset Finance

There are three major types of leasing: finance leasing, operating leasing and contract hire.  Although strictly speaking not a type of leasing, there is also hire purchase:

• Finance Leasing (Full Payout Lease) : You effectively acquire all financial benefits and risks without actually acquiring legal title. The leasing rate is computed to collect the full value of the asset (plus finance charges) during the contract period. At the end of the lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time – unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods will be minimal (sometimes referred to as “peppercorn rent”).
• Operating Lease : Often with a shorter time frame than financial leasing (always significantly shorter than the working life of the asset), operating leasing is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end (this negotiation can only take place at the end of the initial rental period). As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.
• Contract Hire : A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if asset is in repair.
• Hire Purchase : This is an agreement for the hiring of an asset with an option to purchase. The legal title will pass to you when all payments have been made. The term of a hire purchase must be significantly shorter than the working life of the asset. You are able to claim capital allowances as if you had purchased the asset outright, gaining immediate use of it. Hire Purchase agreements are typically written for domestic users, not so much for business users.

End of Lease Options
At the end of the lease term, you have various options . Lease contracts can stipulate that you:

• return the asset
• have the right to act as an agent to sell the asset to an independent third party; and/or

• can renew the contract or enter into secondary periods.

Choosing the Right Type of Finance

All types of financing offer different advantages and it is important that you assess your circumstances and needs before committing to a specific finance contract.

1. Do you want to own the asset straight away? An outright purchase (cash or loan/overdraft) might be appropriate.
2. Do you want to own the asset at some point in time and want to take advantage of instalment payments? Hire purchase might be the best option.
3. If you do not want to own the asset at all but require it for most of its useful life, then consider a financial lease.
4. If you require the asset for a period of time significantly shorter than the useful life of it, consider an operating lease.
5. Advantages
   Better Cash Flow : Leasing gives you access to the asset with minimal up-front payments and spreads the cost over time. You to pay for the asset with the income it generates while minimising the drain on your working capital.
6. No debt : An operating lease preserves your credit options and does not influence your credit limit as it is generally not classified as debt but as expense (note that this advantage does not apply to finance leases).
7. Maximise Financial Leverage : Your lease can often finance everything related to the purchase and installation of the asset and may free up cash flow to pay for items such as training.
8. Simplified cash flow management : Lease payments are usually flat, making cash management more predictable and easier than with a variable rate loan. The fixed interest rate of a lease also helps if interest rates rise.
9. Tax advantage : Operating lease payments are generally tax deductible just like depreciation charges but are made with pre-tax money. Cash purchases, in contrast, are made with after-tax money. Hire purchase agreements allow the lessee to claim capital allowances.
10. Flexible time frames : Leasing contracts can be structured to fit your requirements. Use an asset as long as you need it without owning it forever.
11. Hedge against obsolescence : Depending on your end-of-lease option, just return the asset to the lessor. You will not have the hassle of selling the used asset or run the risks related to residual value and (technical) obsolescence.
12. Additional advantages :Some leases offer additional advantages such as cancellation options or asset maintenance.
    

Disadvantages

1. More expensive : A finance lease is usually more expensive than an outright cash purchase as the payments include finance charges. However, leasing may cost less than other forms of financing. Also consider the tax advantages when making this calculation.
2. Additional Guarantees : Depending on the credit rating of your company, the lessor might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank.
3. Fixed Term : It may be impossible, or at least costly, to terminate a leasing contract early.
4. Fixed Interest Rates : Interest rates are usually fixed throughout the lease which may prove a disadvantage in times of falling interest rates.

Things to Watch out for

1. Return of Asset Conditions : If you choose to return the asset at the end of your lease, the condition in which and the place where it must be returned are important aspects to consider carefully.
2. Notice Period : If your lease includes the option to renew take note of any time periods in which to give notice in case you do not want to renew the contract. Some leasing companies will automatically renew the contract if you fail to give notice.
3. Purchase Rights : If negotiating the right to purchase the asset at the end of your lease, a predetermined fixed price offers more value as the ‘fair market value’, which theoretically is always available to you.
4. Maintenance Responsibility : Clarify which service and maintenance programs are included in the lease. If you are responsible for service and maintenance, make sure you do not have to provide an unreasonably high degree of it.

Glossary

Direct lease : you identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you. (see also sale-and-leaseback)

Economic life (useful life) : the period of time during which an asset has economic value and is usable.

Fair Market Value : price at which an asset is sold and bought in the open market.

Lease : a lease is a contract in which the lessor purchases the asset selected by you and conveys the use of an asset to you for a specific period of time at a predetermined rate.

Lease Rate : the periodic rental payment to the lessor for the use of the asset. The lease rate is primarily determined by the total cost of the asset, the duration of the lease and the interest rate level.

Lessee : the lessee is the user of the asset being leased, i.e. you.

Lessor : the lessor is the party who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals, i.e. the leasing company.

Master lease : a contractual arrangement which allows you to lease other assets under the same basic terms and conditions without negotiating a new contract.

Purchase option : a provision by which you have the right to purchase the asset at the end of the lease term, either at a predetermined amount or its fair market value.

Residual value : the resale value of the asset at the end of the lease.

Sale-and-leaseback (also called purchase leaseback): you sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back (see also direct lease).

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.

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.