Insights

How A Good Lawyer Can Save Your High Growth Company Millions

Tuesday 8 June 2021

Every entrepreneur needs to understand the value an experienced lawyer can bring to their business. This is especially important for those who are entering that period of high growth or may be looking at an acquisition in the next three to five years.

This article is all about helping entrepreneurs understand the legal building blocks that are fundamental to any high growth company and why you need a good lawyer to help you set them up.

 

Not being a lawyer myself, I decided to chat with Jon Davage, who is the head of Corporate at Bermans law firm. Jon played an instrumental role during the acquisition of my previous company, Cake Solutions, back in 2017. Since then, we have worked together across a number of different companies, and his expert advice has saved me a fortune!

 

You can listen to the full conversation Gary and I had with Jon by tuning in to episode 21 of our weekly podcast, “Extraordinary Entrepreneurs Together”.

  

Why do companies need a lawyer?

 

Jon: “Traditionally, people are used to seeing lawyers as wearing wigs and being in courtrooms, but my job is to make sure it never gets to that stage. I do that by properly preparing all the necessary legal details early on in the company’s journey which are crucial to its success. 

 

For example, every business needs an equity document which is called the shareholders’ agreement.

 

These are contracts written up between the founders and the shareholders, which state who owns what shares. The shareholders’ agreement makes sure that if anything does go wrong, those documents are referred to rather than everyone having to go to court, which can be very expensive.

 

Essentially, entrepreneurs need to treat using a lawyer like they would an insurance policy and insurance premium. You need to spend some money upfront so you’ve got the structure and the proper commercial documents in place that can be referred to in the future if anything were to happen.”

 

Finding the right lawyer is well worth the cost

 

Jon explains the importance of a lawyer very clearly here. You would never trade in a business without having an insurance policy, would you? No one questions paying insurance fees, it’s just something you have to do to trade, and that’s the mindset an entrepreneur needs to have when it comes to using a lawyer too. 

 

It may not look like a top priority to have all this legal framework in place, but once you’ve done it properly, it can go in a drawer until a problem happens. And if a problem does occur, you will be very grateful you sorted out all the paperwork beforehand. 

 

Jon: “A lot of business owners out there are worried about the costs of a lawyer, but if you get a good one who you trust and believes in your organisation, they will want to back you.

 

If cash flow is tight, but the company is prepared to guarantee the fee over three to six months, some good lawyers will be prepared to back you on that basis. This means you’re not cutting corners and downloading documents from Google that don’t work and can end up costing you a fortune!”

 

Legal must-haves for high growth companies

 

There is no doubt in my mind about the value a lawyer can bring to a new business. However, as a business grows and you maybe start to think about funding or even an acquisition, what are some of the staple services you would need in order to ensure all your ducks are lined up properly? 

 

As always, Jon provided some valuable insights:

 

Jon: “First and foremost, you need to make sure you are absolutely clear on your share capital. You need to know who owns those shares, when shares were transferred, and who paid for what shares. This is particularly important if you’re going through private equity investment or seed investment, and can be taken care of with the shareholders’ agreement document. 

 

Then you go down to the next level, which is your commercial contracts. These are important once you start to commercialise your intellectual property. You need to make sure that your licensing of any intellectual property is all drafted correctly, because if you have something like a software licence, that’s going to be exploited globally. These commercial contracts also cover you for things like data protection and GDPR. 

 

Next up is tying in your key employees to the business. This is where things like restrictive covenants come in. They ensure that if an employee leaves, they can’t take valuable information to competitors.

 

These are the main areas you need to focus on when you’ve set up the business and you’re looking to drive growth, because they are the first things any investor will look at when valuing your business.”

 

Legal details influence the value of your business

 

The main thing that any entrepreneur needs to take away here is that these legal details actually play a big role in the value of your business.

 

You might have a wonderful company set up, but if the governance isn’t quite right and everything isn’t where it should be legally, when you come to sell, you’ll find a large chunk of value chipped off. That can really hit the entrepreneur where it hurts.

 

However, if you get a good lawyer to line up all your ducks correctly, it gives the acquirer nowhere to go at the last minute to try to chip away at your value. 

 

So, even if you aren’t close to a sale, you still need to be thinking about this kind of stuff. A good tip is that when it comes to the legal details, think like a big company, even if you’re a small one and have everything set on the legal side as such. 

 

Here is how Jon put it:

 

Thinking about the future

 

Jon: “If you cut corners on the legal details and do things cheaply without the right professionals, it might not affect you when the business isn’t worth a lot of money, but five years down the line, when you’ve tripled in size, it will; and what could have cost you five or six grand then, could cost you millions down the line.

 

In one case, a company we worked with did not draw up their documents properly, which meant that an old shareholder, who they had fallen out with, still had 25% of a company that had grown from £2 million to £50 million!”

 

This just goes to show what can happen if you don’t have someone who has been there, done it and got the T-shirt helping you on the legal side.

 

You can end up with this “phantom shareholder” (as Jon likes to put it), which can almost be like divorcing your partner and still living in the same house!

 

The thing is, you never want to fall out with your shareholders or your investors, but if it happens, you need to be covered.  

 

Helping you maintain your relationships

 

A good lawyer can also help you maintain your relationships with shareholders, buyers and potential investors.

 

They are the ones asking those hard questions, and you can always deflect any hostile responses onto the lawyer by saying, “Don’t blame me, I’m just paying for professional advice!”

 

The lawyers can play the bad cops and fight on behalf of their clients, whilst the entrepreneur and investor step back and stay friendly.

 

So, if you run a business that is moving into this period of high growth, do yourself a favour and get the best, most trustworthy lawyer you can afford. It could save you millions of pounds in the long run!

 

I hope you have found this useful.

 

For a more in-depth discussion on EHE Capital and building a community, check out episode sixteen of our podcast “Extraordinary Entrepreneurs Together”. Alternatively, you can email us with your questions at guy@ehe.capital.




 



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