by: Danita Ferreira | Senior Associate
So, you recently started a business. That business is now booming, growth has been exponential, and it has become bigger than you ever imagined. So what’s the problem?
While rapid expansion can be a measure of success, it's essential to navigate this growth carefully. There are several pitfalls you could fall victim to if your business grows too fast. Heading into a year end and a new year full of resolutions, it's a good time to take stock and consider whether you have the foundations in place.
Get the structure right
Ensuring your business structure is appropriate can be the difference between smooth sailing and treacherous waters. Different legal structures have different tax/accounting considerations, so it's important to involve both your lawyer and your accountant early in the process. An incorrect structure could mean you are dealing with adverse tax or accounting consequences. Things to consider:
It is almost always easier to make structuring decisions at the outset, rather than when your business is already established and find yourself potentially needing to unwind some decisions to fix it - which can be a costly and lengthy process. It’s best to do it once and do it right.
Good governance is also key. If proceeding with a legal structure, for example, a limited liability company, take the time to ensure you understand the roles, responsibilities and duties of directors and shareholders to ensure you act in compliance with applicable laws. At this point, it may also be appropriate to put in place a shareholders' agreement and constitution for your new venture.
Protect your brand
When a company expands quickly, it might overlook protecting its most important intellectual property (IP) - its brand. Neglecting to secure protection of relevant IP can expose the business to risks of infringement, unauthorised use, loss of competitive advantage, and potential legal disputes if you end up inadvertently copying someone else's brand. Things to consider:
Robust, written contracts/terms are key
Whether you buy product from a supplier or supply your own goods/services directly to customers or on-sell to a distributor, you need to have a written contract or terms of trade. The best position you could be in is that you buy and sell on your terms rather than have unreasonable terms imposed on you - this is obviously circumstantial and will depend on who you are contracting with. So, do what you can to be in this position, invest money and time early to make sure that you have appropriate contracts or terms of trade to contract with. Things to consider:
Failing to have comprehensive and legally sound contracts/terms of trade in place can lead to issues down the track; how to ensure you are paid, when can you terminate an arrangement that is not working, how do you get your money back if the supply isn't what you expected. There are endless scenarios that can be mitigated by both parties being on the same page.
Employ or engage on proper terms
With rapid growth comes an increased need for employees or contractors within your business. New Zealand has strict employment laws governing aspects such as minimum wage, working hours, employment contracts, and health and safety. Ensuring that any employees or contractors you engage are on appropriate terms for their role will save you time and money in the long run. Things to consider:
Like building your dream house, rapid business growth can be exciting, but it can also go wrong if the foundations aren't strong or if you build in the wrong place. If you are thinking of setting up a business, or have recently set up a business, get your lawyer and accountant on board early - and together. This gives you the opportunity to focus on the "business" bit (which you are good at) while we, along with your accountants, focus on the legal and accounting bits (which we are good at).
Let's not forget the reputational advantages of legal protection and having sound written documentation in place. If you feel like this article has raised a question for you, we would love to hear from you. Let's chat!Disclaimer