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As restructuring and insolvency practitioners, we often come across businesses that fail simply because they have bad legal documents or financial systems in place. Often the systems that keep a business running are never set up correctly and when tough times are encountered by that business, stakeholders turn to those inadequate legal documents or focus on the limited reporting that financial systems can provide. .
As a result, companies often fall into insolvency because they have no visibility into their numbers and cannot make the right decisions. It can also create tensions between shareholders without agreements in place to deal with this indecision or difference of opinion. A healthy business can fall at the mercy of a shareholder conflict.
Legal documents and financial systems
As advisors, it is important that your clients have an appropriate system to run the business. It is also important that effective legal arrangements are in place for the business to function properly.
With the advent of technology and systems like Xero, MYOB, Salesforce, and a myriad of add-ons that enhance these products, a small business can set up more efficiently, cheaper, and faster than ever before. However, it often happens that these established businesses struggle to update or replace their outdated systems just because they don’t want to change. New competitors are entering the market and these competitors are setting up their businesses with more powerful and cheaper technology outpacing established “old systems” businesses.
The same goes for legal agreements. Today we have access to legal agreements and documents that can be created, cheaper and faster than ever. Websites like www.krodok.com.au are a great example of using technology to ensure small businesses are properly protected. Matt Kelly of Krodok is an experienced banking and restructuring lawyer who left traditional law firms to create www.krodok.com.au. While Krodok specializes in setting up registered secured loan documents to protect owners’ personal investment in their business, Matt says of shareholder agreements that:
“It is essential that companies protect their rights by creating a shareholders’ agreement. I have often seen clients who had spent all of their time building the business, promoting the business and managing the operations but failed to put in place the legal documents that become the heart and the heart. center of how the business should operate from a legal standpoint. The company then suddenly found itself in difficulty or in conflict and because it did not have agreements to help it out of this dispute, it had a significant financial burden on the company. “
Matt continues to say:
“At first, customers are so excited about the business and they just want to grow and build their brand. While this is absolutely necessary, they have to accept that there has to be a tough discussion that focuses on the rules to be followed. . developed for situations where business partners may argue or one of the business owners has died or there has been a divorce, etc.
As a restructuring practitioner, I have been able to restructure and sell solid companies that have fallen into insolvency caused by these situations. The powers and processes authorized in a formal restructuring allow me to find new owners. These new owners benefit from hindsight because they see the problems that caused the financial problems. They then make sure they make the necessary changes required to properly put in place the legal agreements and financial systems needed to keep the business going and relaunching it.
As advisors, you should spend time with your clients asking them for the following:
- What legal agreements are currently in place to structure and operate the business?
- What are the tax implications of your business structure? Do i need a tax restructuring?
- What systems do you use to run the business?
- Do these systems accurately reflect the true financial position of the business?
- Do these systems need to be updated? If so, what are the best systems to use?
When designing or creating a shareholders’ agreement, there are a number of issues that the company needs to consider. Hiring a lawyer to help is necessary. The circumstances of each business can vary greatly depending on the type of industry it operates, the regulations in place, who are the shareholders, who are the clients / customers and where they operate the business.
A strong advisor will ask you many questions when creating a shareholders agreement for you. Common questions may include:
- Types of shares issued;
- Right to vote;
- Dividend policy;
- Governance around decision-making;
- Any particular restriction or obligation of the directors;
- Key man insurance;
- Approval of expenditures or budgets;
- Investment policy;
- Exit of the shareholder;
- Exit from key management.
A strong and effective agreement will have clear and concise clauses regarding decision-making. In addition, he will articulate a well-structured approach in the event of a dispute between shareholders.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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