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Revenue Share Deals for Online Business – the Legal Side

Revenue Share Deals for Online Business – the Legal Side

by | Jan 31, 2023 | Business Structures, Contracts, Law for Online Business, Legal

Revenue Share Deals for Online Business – the Legal Side

Revenue Share Deals for Online Business

What is a Revenue Share Deal?

Revenue share deals are a type of business agreement in which two parties agree to share the revenue generated by a specific product or service. The revenue is typically generated by sales, but it can also come from other sources such as advertising or subscriptions.

Revenue share agreements work well in the online business environment  and are subtly different from a joint venture, although share many of the same features.

Whilst a joint venture might be intended for a specific project, and may also be time or project limited, revenue share deals can be perpetual and unending, provided the parties maintain their good working relationship.

Generally speaking, in a revenue share deal one partner has unique skills which can enhance the performance of a business beyond its current state (eg. strategy), and the other party has a business they want to improve, without the knowledge or experience to do so (eg. operations). As the operations person, the strategic partner often becomes your objective, trusted advisor and promoter, without having any control, ownership or decision making in the business.

This makes revenue share deals attractive to business owners who do not want to give up control or equity in what they have created, don’t have the immediate capital or cashflow to pay a high level advisor, but still want to leverage the knowledge and skills of an advisor.

It’s important to note that in a revenue share deal, both parties are sharing the risk as well as the rewards. If the product or service doesn’t sell well, both parties will earn less revenue.

Revenue Sharing Business Model Examples

1.  Revenue sharing companies

Employee share schemes or other incentive programs, bonus payments to high performing distributors and distributions to shareholders are all forms of revenue sharing in companies. Whilst having an underlying performance base, typically the company retains control over the decision making around whether or not a distribution is made.

2.  Sports and entertainment industries commonly use revenue sharing arrangements

Coaches and managers might take a share of the revenue a player or an entertainer receives from participating in an event. By way of example, for the popular sport of Australian Rules Football, the AFL Players’ Association requires agents to be accredited with them and publishes as a guide

“Typically agents won’t charge a fee during a player’s first season or if they are on a rookie contract. From their second year on a list, it’s usually in the 2% to five per cent range on any football payments a player earns. In relation to any commercial or promotional activities, the typical rate is 20 per cent.”

The league generates its revenue from the promotion of the game. Player salaries typically come from the revenue distribution to their club received from the governing league. This was highlighted in early 2023 when the association for rugby players rejected the salary cap issued by the NRL.

3.  Commission and affiliate based arrangements

Straight commission or affiliate agreements without underlying retainers are really a revenue share model. Payment is calculated on each sale over a threshold, even if that threshold is only one sale. Sales are dependent on the efforts of the salesperson and the work of the salesperson only costs the business a percentage of the sale made. Provided that costs of the product or service are not excessive, both parties benefit. 

4.  Revenue Share in Ecommerce

Cost per click advertising is a form of revenue sharing, provided the click converts to a sale!

Advantages and Disadvantages of Revenue Sharing

Some Pros:

  • equal risk to the parties, which can mitigate potential financial losses for either party
  • revenue sharing is performance based – if either party stops performing, revenue decreases
  • both parties can benefit from increased sales and revenue
  • generally speaking, the contributions of the revenue share party extend the business beyond what the business owner could achieve on their own
  • the revenue share party doesn’t have to acquire ownership or liability for businesses it partners with, but can generate a steady stream of revenue from the relationship
  • easier calculation than profit share, as cost of sales is not taken into consideration

Some Challenges:

  • revenue sharing arrangement require a high level of trust
  • if a revenue party is brought in to improve strategy, the operations partner needs to be willing to change existing business practices
  • it can have a slow start – strategic changes may take time to produce tangible increases in revenue
  • an operations partner may not still see the value in the arrangement after the strategic implementations are completed and there is less input from the strategic party

Cons:

  • revenue share works best where the product or service being sold has an identified market and demand
  • revenue share works best with standard products and services, rather than bespoke offerings
  • both parties are likely to be dependent on each other for revenue and success, which can create tension in the relationship
  • the terms of the agreement may be difficult to renegotiate if one party is not satisfied with the arrangement
  • revenue sharing arrangements are generally not attractive to strategic partners when the business is not ready for sales, or is ready, but hasn’t made any sales
  • regulatory, environmental or social changes that significantly impact a business (think COVID impact on hospitality) can ruin a revenue share opportunity

Someone looking to rapidly scale may be seeking a significant involvement of the revenue share partner from the beginning, with feedback potentially reducing over time. It is important to understand that this is different from a standard coaching relationship and that the time contribution of the strategic partner may vary significantly over the life of the relationship, without changing their impact on the business, and therefore entitlement to revenue share.

 

Example Revenue Share Formula

Before establishing a revenue share model, it will be useful for you to consider what it is you want to achieve.

Consider an education and coaching business offering online programs with some live video coaching sessions.

The creator of the business has the knowledge and experience in the subject matter, but would like to increase sales, their current sales are $500,000 per year, which returns a profit. The creator enters into a revenue sharing agreement with a specialist online marketer for the purpose of increasing earnings from their existing products and services.

The revenue share formula might look like this:
– 12% of all sales revenue over $500,000 per annum
– sales are calculated 30 days after purchase and exclude any refunds or cancellations
– distribution of revenue share is made once per quarter for sales occurring in the 90 days ending 30 days before the end of the quarter

In this model, any additional costs incurred by the business do not need to be taken into consideration. The cost of changes in marketing recommended by the specialist online marketer will be covered in the balance (88%) of increase in revenue.

What to Think About Before Entering a Revenue Share Deal

Some things you might like to consider are:

  1. your role and expectations in the revenue share
  2. are you starting from a zero base, or is there existing revenue?
  3. what skills or attributes you are looking for in a revenue share partner
  4. the other party’s role and expectations
  5. structuring the deal
  6. the amount of revenue share
  7. what happens when the revenue share is not paid?
  8. what is the business is sold?
  9. what happens if one party wants out?
  10. meeting and reporting obligations

 

Ending a Revenue Share Agreement

It is important that you are clear on expectations and what will happen if the agreement ends. You will find the proposed revenue share agreement more useful if you can clearly identify any areas where there is potential for dispute and address those things in the agreement, up front.

Open and frank negotiation should always be the first resort (having some tough conversations) but that can stop being feasible if the relationship between the parties has broken down. It is important to have a quick and effective dispute resolution process to avoid damaging the business – the revenue source for each party. With international transactions, international commercial arbitration is often the most accessible and sensible course, but if the parties are in the same country, other options may be preferred.

It is common for there to be a form of earn out included when a revenue share agreement comes to an end by the operations partner. This is in recognition of the contribution of the strategic party’s efforts at the start of the relationship when the changes suggested took time before showing results. If the strategic partner wants out, depending on the reasons, the earn out might or might not come into effect.

It is also not unusual for a strategic partner to request an entitlement to a share of the revenue on a sale of the business, in place of that earn out arrangement. This is because revenue share agreements are so dependent on the relationship between the parties and are unlikely to be transferred to a new owner of the business.

How can Onyx Legal help you?

Make an appointment with one of our team to discuss how to implement a revenue share model for your business.
If you are considering a revenue share deal, download our Revenue Share Questionnaire here to help you get started.

Make an Appointment

What Are Shareholder Agreements and Why Are They Important?

What Are Shareholder Agreements and Why Are They Important?

by | Dec 7, 2022 | Business Structures, Buying or Selling a Business, Contracts, Dispute Resolution, Law for Online Business, Legal

What Are Shareholder Agreements and Why Are They Important?

What Are Shareholder Agreements and Why Are They Important?

As with all business relationships, it is important for all parties to understand their rights and responsibilities, contributions, and entitlements. 

This is the same for the shareholders of a company.

If you have the chance to think through how you want to structure the company, what you want for the business, and the future in case unexpected events (like a death or disability) occur, and document those expectations, you create a situation where dispute is unlikely. 

Documenting these expectations in some form (usually a shareholder agreement) is important because even if there is a dispute, you will still be able to use the terms of the shareholder agreement to resolve it with the least amount of time, effort and fuss.

 

Why Do You Need Shareholders Agreement?

 

Clients spend considerable time and money with us to resolve disputes about what they are each entitled and not entitled to, how to exit or remove someone from the company, and what will happen to those shares, IF no shareholder agreement was ever entered into. 

When people stop agreeing and there is no effective mechanism to rely on to resolve the disagreement, they can be stuck in a deadlock that can only be resolved by a court.

A shareholder agreement can include a mechanism for dispute resolution that is quicker, easier and cheaper than court. Not to mention private. 

Think about it. 

If there are two shareholders who are also both directors (which is not an uncommon situation), then every decision about the company will have to be unanimous. It is rare for business partners to be on the same page 100% of the time, so situations will arise where the parties are deadlocked on a decision and there is no clear way forward. 

A shareholder agreement can provide the way forward. 

Without a shareholder agreement, court may be the only option. 

Does it make sense to ‘save’ $5,000 now to lose $100,000, or your house, later?

What Is The Difference Between a Shareholder Agreement, Partnership Agreement, and Joint Venture Agreement?

 

There are many different types of business structures –

1. Partnership

If you are a sole trader and have decided to collaborate with another individual without setting up a company or trust, that formation is a partnership. Different sorts of entities can set up in partnership, but it tends to be most common between individuals, or their family trusts. 

A partnership is not a separate legal entity, which means each partner is exposed to liabilities the partnership incurs. For example, if one partner commits fraud by stealing money from clients, whether the other partners know about it or not, the innocent partners may be required to repay the stolen money. The people who have suffered the loss don’t even have to pursue the defrauding partner first! 

You would need a Partnership Agreement to clearly set out the rights and obligations of each partner, and how to exit or dissolve the partnership.

2. Joint Venture

If you wish to pool resources and share expertise with another person or entity, that formation is a joint venture. A joint venture is very similar to a partnership. It may also not be a separate legal entity by itself, but it does not have the disadvantage of liability for the actions of the other parties.

You would need a Joint Venture Agreement to define each joint venture partner’s roles and responsibilities, and entitlements. 

Sometimes, a successful joint venture can lead to incorporation, or be established as a company from the start.

3. Company

A company is an incorporated entity which is separate to the people behind it (shareholders and directors). The most common structure for a company is a proprietary limited company, which means each shareholder is only liable up to the amount unpaid on their shares.

Here is the typical structure of a company:

 

Company

TitleRole
ShareholderOwner
DirectorLegal liability + strategy
WorkerDaily operations

In a company, the director is legally responsible for the company and its strategic direction, the people who work in the business are responsible for daily operations, and the shareholders own the company. 

Even with legal responsibility, there are some decisions a director or board of directors cannot make without approval of the shareholders. Some powers are reserved to the shareholders (eg. the power to replace directors) even though they rarely have any involvement in the day-to-day business activities. 

It is important to understand what ‘hat’ you are wearing in a small business and try and focus on the responsibilities of that role only, rather than trying to be everything all of the time. 

As an owner of the business, you should be interested in the finances and the risks the business is taking and feel confident the board has it managed. 

As a director, you should feel confident you understand your legal liability, and that the company is operating within the kind of risk tolerance appropriate to your industry, and you have a plan for where the business is headed.

Workers need to get the jobs done.

As an aside – 

What is the difference between a ‘board’ and a ‘director’ or ‘the directors’? 

Nothing. 

The ‘board’ is just the collective name for the directors working together. In a shareholder agreement, even if there is only one director at the time it is initially signed, the document will usually refer to the board, rather than a director alone to avoid having to make changes once another director is appointed. 

Whether your company has a sole director or a board, they each are responsible for making the same decisions and all members are legally responsible for the company.

What Is In a Shareholder Agreement?

 

As with all business relationships, it is important for all parties to understand the proposed arrangement, their contributions, entitlements, and rights and responsibilities. 

Essentially, a shareholder agreement is more specific than a constitution and can cover a broader range of topics such as:

  • the business activity to be carried out
  • what each shareholder owns
  • whether, and if so, how new shareholders can become involved
  • what rights shareholders have in appointing directors
  • whether directors can act in the interests of their appointing shareholder
  • dealing with shareholder loans
  • outlining specific requirements for business operations, eg. business plans and budgets
  • when distributions can be made
  • how shares can be transferred
  • valuing the company
  • what happens if a director or shareholder exits
  • what happens if a director or shareholder does something wrong
  • rights if a buyer comes along
  • what happens to assets and intellectual property if the company is wound up
  • dispute resolution

How Do You Write a Shareholders Agreement?

 

A shareholder agreement needs to set out important matters relating to the shareholders including how they make decisions, their entitlement to dividends, and how they can exit the company or vary their interest in the company. 

Other important factors include bad leaver provisions, restraint provisions and funding provisions.

Consider a scenario where you no longer wish to collaborate with the other shareholder (say, if they have acted recklessly or even fraudulently) and you want to either exit the company or remove the other person from the company, how do you do that? We have seen many situations where the lack of a Shareholders Agreement (or an effective mechanism within the Shareholders Agreement) caused stress and detriment to the shareholders as well as the company which may have to cease operations

Who writes a shareholder agreement?

We strongly recommend you go to a lawyer to help you draft your shareholders agreement.

This is a document that needs to be tailored to your situation and is not a standard form document like the company constitution which can usually be prepared by accountants when setting up the company.

Is a Shareholders Agreement a Contract?

Yes. It is a contract between the company and the shareholders, as well as between each shareholder. 

It is possible, and common, to set different rights and obligations for each shareholder. For example, for a shareholder who has the knowledge and expertise to run the business or steer it in the right direction, it may be good for them to have the power to vote and make decisions for the company. On the other hand, if you have a shareholder who is an investor shareholder and purely contributes funds to the company, you may want to restrict their control over the company by giving them no voting power and only entitlement to dividends.

Does a Shareholder Agreement Need to be Signed?

Signatures are often the easiest way to prove that someone has had the opportunity to read and agree to the terms of a document. 

Shareholder agreements can be signed, or a resolution (also in writing) passed unanimously by all shareholders at the time, can be passed to prove agreement and approval of the terms of the shareholder agreement. This requires a poll of shareholders. 

Every shareholder, and the company, sign the shareholder agreement. If it is a resolution, then it is not passed without the unanimous approval of every shareholder.  

Is a Shareholder Agreement Legally Binding?

Yes, provided that it is either signed by the company and each shareholder, or adopted by unanimous agreement of the shareholders by passing a resolution.

What Happens If You Don’t Have a Shareholder Agreement?

Your business could still operate smoothly in the absence of a shareholder agreement.

Case STUDY

Two builders set up business together on a handshake. They establish a company where they and their respective life partners are directors (4 people all together) and their respective family trusts are the shareholders. Each family trust holds 50% of the shares. The shareholders must vote on the appointment or removal of directors and a decision must be a majority decision. Because each family trust holds 50% of the shares, that means every decision has to be unanimous. 

They each contribute equipment to the company. 

They buy computers and motor vehicles through the company. The vehicles are expensive, under finance and registered in the name of the company, even though each builder takes one for their exclusive use and one builder puts personalised number plates on the vehicle they use.  

A meeting with the company’s accountant highlights that there are unexplained transactions by one of the builders. The parties get into a dispute. As a result of the dispute, each of the life partners resign.

It takes 12 months for the builders to come to an agreement about the vehicles, equipment and jobs in the business. They cannot reach an agreement about the $300,000 + sitting in the business bank account, which was frozen by the bank pending their agreement. 

To resolve the dispute, it is likely the parties will have to go to court, with the likely result that the company is wound up and the money in the bank is used to pay legal fees in getting to that decision. 

If the parties had a written shareholder agreement, that dispute could have been resolved in a few short months, at a significantly lower cost.

However, not having a shareholder agreement would be problematic IF the shareholders cannot agree on a particular matter. It would be more difficult to resolve the dispute without a binding contract to rely on.

We strongly encourage you to put a Shareholders’ Agreement in place if you have not already done so, and have it regularly reviewed by a legal professional to ensure it remains up to date and compliant with regulatory requirements. 

How can Onyx Legal help you?

If you have been in business with someone for a little while and everyone is still friends, or you are contemplating setting up a new company to run a business with someone new and would like to understand your legal risks, make an appointment with a member of our team.

Make an Appointment

The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

by | Nov 8, 2022 | Buying or Selling a Business, Contracts, Dispute Resolution, Law for Online Business, Legal

The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

1. Not Rushing In

You might be incredibly excited about buying a business, and we have come across people who have decided they want to work from home, have a look on Facebook marketplace and agree to spend money they don’t have, all in one day. No consultation with a lawyer or accountant, no real understanding of what is involved in the business. It did not last and it cost them money. 

We’ve also come across people who buy a business with unrealistic expectations of the work involved and an expectation that if the bank is prepared to lend them the money, they would be able to make a success of it. 

A business purchase is a big commitment. It is not just the cost involved, but running the business afterwards. The next three case studies to show why it is important not to rush into a purchase.

Case Study 1 

A young lady came to us with an offer from her employer to purchase the hairdressing business she was working in ‘cheap’, and to take over the lease for the business. She was keen to sign the agreement, as the seller (her boss) wanted to get out of the business before the end of financial year and it was already June. 

A quick review of the deal suggested that our client would be taking on a business that was only still operating because of her work, a lease that had three years remaining and was not cheap, and the need for some refurbishment of the salon. The landlord was offering a $5,000 incentive for fitout, but the likely cost was probably going to be higher. 

Fortunately, we were able to get our client to slow down and get accounting advice on the business, and to identify to our client that the seller would benefit to the tune of $30,000 per annum by being out of the lease. We encouraged our client to get an estimate of fitout renovations, which came in at a little under $70,000. 

Our client decided there was no benefit in the deal to her and other opportunities were out there. 

Case Study 2

A client came to us after having already taken over a beauty spa business. She thought she had a good deal because the replacement cost of the relatively new equipment in the business was significantly higher than the requested purchase price, and the vendor was providing finance. 

By already being in the business and having paid a deposit of $5,000 to the seller, our client was committed, and there was nothing in writing. The client came to us desperate to get a sale agreement documented because the seller had said they would do it and hadn’t. Our client was already paying the rent, COVID restrictions came into effect and the seller was suddenly very cooperative in getting the paperwork complete. The landlord was fortunately agreeable to transferring the lease, but our client did not want us to advise on the lease, which was very basic. 

Two years down the track it became apparent that the appropriate council certifications had not been obtained for the plumbing work on the premises and the premises were non-compliant. The lease and assignment of lease were silent on responsibilities and our client ended up footing the bill. 

Difficulties with the lease could have been resolved before the purchase was completed if the client had not already been in the premises and operating the business before getting advice. 

Case Study 3

Our client was looking to buy his first business at around $200,000 and had found a business through a broker that he was keen to buy. He arranged the finance, did his own due diligence and asked us to become involved at contract stage. The broker had prepared the contract on behalf of the seller. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. On talking to the broker, they had moved from selling residential property into business broking and were inexperienced in the area. They were also quite frustrated that our client hadn’t simply signed the agreement and sent it back. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive. In addition, the landlord wanted the buyer to enter into a new lease at a rent $10,000 per annum more than the seller had disclosed to our client. 

Fortunately, our client did not rush to sign and when answers to our questions were not forthcoming, and his circumstances changed, he decided not to go ahead. In that instance he had invested in getting legal and accounting advice and told us he had a very valuable learning experience.

2. Knowing What you Are Buying

So, what are you buying? If the contract isn’t clear, then you might be handing over money and not getting what you expected. You need to know what is important to the day-to-day operations of the business and how much of that is being transferred to you. You don’t want to purchase a cafe and upon settlement, find out that the seller cleaned out all the cupboards and fridges the day before and you have to restock before you can trade. 

Case Study 4

Our client was looking to buy his first business at around $200,000 and had found what he thought was a printing business and that everything was done onsite. He had no experience in printing and was planning to hire someone to run the business. He arranged the finance, and asked us to become involved at contract stage. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. There was no mention of printing equipment, paper, card, inks or other stock. We also suggested our client carefully go through the accounts with their accountant to ensure there were sufficient profits in the business to be able to hire someone to run it. The seller was an owner/operator. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive, what equipment was in the business, or even if the seller owned the equipment being used and had the right and ability to sell it. 

Without ensuring the contract was clear, it is possible that our client could have only received business branding, a client list and the liability for a lease – expenses without immediate income.  He would then have also had to immediately spend additional money purchasing the necessary equipment to operate the business. 

Fortunately, our client did not rush to sign and when answers to our questions were not clear, and he was offered a role interstate, he decided not to go ahead. That client is looking to purchase a business for income without him having to be involved in the day to day. He hasn’t done that before and said that it had been a very worthwhile investment in getting legal and accounting advice before signing anything. He now feels better prepared to assess potential deals in the future. 

3. Profit is in the Purchase

When you are buying a business, it is very important to get appropriate accounting and financial advice. It is possible to buy a business that needs to be turned around, but only if you can do so at the right price. 

The profit is in the purchase. 

What opportunities do you have to increase revenue immediately or very soon after you buy the business? It is not uncommon that people who are ready to sell are at that point because they have lost real interest in the business and there is lots of room for improvement. If you can see the opportunities, and know how to leverage them, then you might be looking at a good deal. 

A lawyer who had bought a law practice on the Gold Coast once applied to work with Onyx Legal. They claimed they had been misled about the value of the business, paid too much and there was no opportunity to make money because the Gold Coast was a low socioeconomic area! Naturally, they didn’t get the job. You attitude to the business you are buying can influence your ability to make a success of it. 

When you go into business, success or failure is up to you. Know what the business is worth once the owner walks away (are customers attached to the owner and likely to follow them?) and understand what you are willing to pay to secure that opportunity. 

It is not unusual for cafes and restaurants to be sold for nominal amounts (like $1) because the owner is losing money and is better off getting out. Someone who understand the area, likely clientele, available workforce and marketing can potentially come in and make a success of it. There are stories of a Gold Coast restaurateur selling and buying back a restaurant a couple of times because he knew how to make it a success, but the purchasers didn’t. 

One of the early Australian online tipping platforms was bought from the founders by a larger company, and then bought back by the founders 18 months later at a much lower cost because that company didn’t know how to make a success of it.

4. Assets vs Entities

When you buy a business, you are either buying shares in a company, in which case you are buying the history, or you are buying assets – which is everything necessary to operate a business. Assets can be tangible (like a desk) or intangible (like a website). 

When you buy shares, everything in the company comes with it, so you must understand what loans or other liabilities are sitting in the company, and how they will be dealt with at settlement. Things like tax debts, overdue superannuation, bad credit ratings, court proceedings, embarrassing media stories and so on are all associated with the entity, and that is what you are buying. 

When you are buying assets, you need to understand what is transferrable and what is not. Not all supply contracts are transferable without the prior approval of the customer. So if the profits in the business are in one or two large contracts and it is not clear if they are transferable, you may be losing money as soon as the purchase is completed. 

These sorts of things need to be checked. 

5. Transferring Intellectual Property

Intellectual property – copyright, trade marks, patents etc, need to be transferred in writing, by the owners. It is important to check who owns what when buying a business. In particular, copyright belongs to the creator unless transferred in writing. Software, graphic design, website copy etc all belong to the creator. If the creator is an employee it is ok, the copyright vests in the company, but if they started as a contractor before becoming an employee, there can be uncertainty about what they company owns and is able to sell. 

Case Study 5

Our client was buying a health business and searches showed that the domain name and the website (separate things) used to advertise the business were not actually owned by the seller. A lot of patients found the business through the website. It was essential to have the sale of business contract adjusted to ensure that transfer of the domain name and website occurred as part of the sale. 

Case Study 6

A client was interested in buying a business which used a particular bespoke software for all of its main operations. The due diligence process disclosed that the software developer had been contracting to the business for years and there was nothing in writing about the ownership of that software, or its ongoing use by the company. The seller was unable to produce anything in writing to show that it owned the software, even though it believed it did. 

The buyer of the business walked away. 

6. Competition by the Seller

Online businesses are a big area where competition is a concern after settlement. Most business sale contracts contain some form of restraint on the seller about what they can do in an area that will compete with the business you are buying after the date of the sale. 

A restraint provision in an employment agreement is more likely to be enforceable when it is structured to protect the interests of the buyer, and not likely to be enforceable if it puts the seller in a position where they cannot earn a living. 

Tougher restraint provisions are likely to be enforceable for commercial agreements than they are in employment situations, because the courts will also expect the parties to have made a commercial decision about what is acceptable to them, or not. This is an issue for sellers who do not carefully consider what they plan to do after completion, and how they may be limited by a restraint. 

Different things that restraint provisions can cover are:

  • Area: Does the business operate locally, nationally, in a region like Oceania, or worldwide? Does the seller plan to expand the area of service, or combine it into an existing business that covers a larger area? Is it fair? 
  • Industry: A bug-bear we have is when a buyer attempts to include ‘a similar business’ without defining what that is, or to include the businesses operated by a group of companies related to the buyer, whether or not those businesses are in the same industry or something completely different. Restraints should focus on the business being sold, not something broader.
  • People: It makes sense to restrain a seller from working with existing or potential customers already known in the business being sold, however, we have assisted sellers in being permitted to retain a client list for the purpose of communicating a new business, where that business does not compete with or adversely affect the buyer. 
  • Key contacts: It can be also worthwhile include a restraint against poaching staff, suppliers or distributors for a period of time after completion. 
  • Time: Periods of restraint can vary significantly, anywhere from months to years. Times and areas of restraint vary depending on the type of business and the reach of that business. It is also common to have cascading provisions, which leave it to a court to decide what is fair if a restraint is breached. We encourage our clients to consider the period of time it would take a knowledgeable competitor to set up a similar business, and to be reasonable in setting the time for restraint. Where a large infrastructure investment is likely to be threated by competition from the seller, then a longer restraint period is likely to be considered fair and reasonable. 

7. The Limits of Each Adviser

It’s tempting to think that your advisers will have all the answers when you are buying a business and be able to tell you what to do if you end up in a situation where you feel a little lost. This can happen for people who have never bought a business before. 

As legal advisers, we can review the contracts and check that the contracts properly describe what you think you are buying and what your obligations, and the obligations of the seller will be, after purchase. We can highlight potential rights and flag decisions you must make – but we cannot make those decisions for you. 

The truth is, it is your responsibility.

Your accountant, lender or financial adviser are all in the same boat. They can highlight information for you, but they cannot make the decision whether or not to buy, and they cannot determine how much importance you place on any piece of information. 

Case Study 7

Many years ago when working in a national firm, a client who had borrowed significantly (millions) to fund a purchase was part way through the due diligence process and wondering whether or not the purchase was going to be worthwhile. It got to a point where the client was saying “we’ve spent too much (around $300k) now not to go ahead.” 

There was an element of wilful blindness on the part of the purchaser in that transaction. They had put their reputation, and their house, on the line to fund a purchase that was looking more and more questionable the more they learnt about the business. Going through with the purchase was more about their ego and being ‘clever’ at getting the deal done. 

About 6 months after settlement, the business failed and was placed into liquidation and the director was forced into bankruptcy.   

It is your money. It could be your reputation, your family and your future that you are staking on this purchase. As much as professional advisers can provide you with advice, advisers cannot tell you what to do and all the important decisions are up to you. This makes it important to be up front with your advisers, whether legal, financial, accounting or otherwise, and ensure they understand your priorities and concerns. 

A binding contract requires offer, acceptance and consideration. Consideration can be the doing of some thing or the payment of money. 

At every point before consideration has passed, you are likely to have the opportunity to exit from a transaction, no matter how much has been spent getting to that point. Sometimes, a small loss can be better than taking a risk that doesn’t feel right.  

When you are buying a business, you will also have a period of time to complete due diligence and should use that time to ensure that your assumptions about the business are correct, and if not, whether you still want to go ahead, negotiate further, or walk away. 

As we said at the start – don’t rush in.

    How can Onyx Legal help you?

    If you are interested in buying a business, whether this is your first time or your tenth, and you know you need help in the process, make an appointment now to talk it through with one of our team.

    Make an Appointment

    How to Complete a Quick Legal Audit of Your Business

    How to Complete a Quick Legal Audit of Your Business

    by | Jan 24, 2022 | Law for Online Business, Legal, Legal Issues for Small Business

    How to Complete a Quick Legal Audit of Your Business

    Running your own business can be a juggle. So how do you know if you are putting yourself at risk? Consider doing a quick legal audit of your business to find out whether there are any potential cracks that you may need to fix.

    We’re going to focus on structure, relationships and risk management.

    Start with your Business Structure

    When was the last time you thought about what business structure you have and if it still works for you?

    Many people start small businesses as sole traders and continue that way until something bad happens, like a threat of court action or an unexpectedly large tax bill. Other people set up multiple companies or trusts and then lose track of them. Some people change the style of delivery of their business and then need to review how everything is done.

    Some recent examples for our clients have been:

    • A client selling a business discovered that the business trade mark was registered to a company they had forgotten about. They had moved and hadn’t updated their contact details with the company register. The company had ‘strike- off action in progress’ recorded against it in the register. The quick fix there was to pay outstanding invoices to the register and update contact details.
    • Another client set up a second company in the US and separated its business delivery by area, some under its Australian company and some under the US company. Customers are now able to choose their area before checkout. Taxes had to be accounted for in each different country and in Australia that meant the invoicing had to identify the Australian company and the GST paid, which initially it didn’t. A few technical tweaks in the delivery software fixed the problem.
    • A couple started a business as a hobby as a sole trader under the name of one of them. Twelve months later they came to us asking about asset protection. Initially, it appeared that the structure didn’t need to change because they hadn’t really started generating any income. A little further in the conversation disclosed that one of the partners held shares, an investment property and crypto-currency in their own name and it became clear that a different structure was needed to isolate those assets from any potential risks in the business.

    Audit questions for you

    1. What legal structure do I use for my business? Can I find the documentation?
    2. When was the last time I reviewed that structure?
    3. Are my business contact details up to date with all regulators?
    4. Do I know my business identification number (in Australia it is an ABN)?
    5. Are my invoices correctly set out for compliance purposes?

    Then Think About All Your Business Relationships

    Mind mapping might help you identify all the different types of business relationships you have. Think about your business from the inside out, starting with you and ending with the general public.

    You might have relationships with some or all of the following groups:

    • Business partners
    • Investors
    • Employees
    • Contractors
    • Suppliers
    • Affiliates
    • Sponsors
    • Advertisers
    • Joint venture partners
    • Clients
    • Customers
    • Subscribers
    • General public

    Each different relationship potentially has different risks, obligations and responsibilities, and those things are much easier to keep track of if they are documented.

    Lots of people who come to us have operated their businesses on verbal agreements or exchanges of emails successfully for years. There is nothing wrong with that, but if something goes wrong, your options are likely to be more limited than if you had a written agreement to refer back to when resolving the problem.

    Most people can’t remember what they did a week ago. Don’t expect to be able to remember exactly what was agreed with someone months or years ago.

    Some recent examples for our clients have been:

    • A business break-up. The parties had not documented their relationship or what would happen if the business came to an end. They had a meeting with their accountant to agree on how to close the business, but then one party decided not to follow that plan, and it hadn’t been documented and agreed in writing on the day, so became a dispute. The simple fix would have been to have a shareholder agreement in place within a short time before or after starting their business, whilst relationships were still good, and the parties were able to speak sensibly and logically to each other.
    • Another client had been operating their business without any hassles for years. The nature of their business meant that there was always a sponsor between them and their end customer. For the first time, a sponsor acted as gatekeeper and stopped the supply of products from our client to the end customer based on their assessment of the quality of the product. Each product was developed by our client’s labour, unique to the client, and our client could not be paid if the products were never put in front of their clients. Difficult situation. We prepare terms and conditions of service between our client and their sponsors to ensure that sponsors who behaved in that way would have to pay our client and amount equivalent to their lost income.

    Consider whether you have anything in writing to help you manage all of the relationships in your business. Some examples are as follows:

    Business Partners

    A business partnership works well when both parties are on the ‘same page’. A clear and transparent agreement will help you quickly resolve any potential issues in the future, regardless of the structure you are using to operate.

    Business relationships will be covered to a limited extent in founding documents, like constitutions or trust deeds, but those documents are designed more for setting out the rules of governance of an entity, than managing the relationships of the people involved. For older businesses, governing documents might be completely outdated and no longer compliant with changes in law.

    Types of documents you may already have in place or like to have in place could include a partnership agreement, or a shareholder’s agreement, or a unitholders agreement. If you’re working with someone on a side gig, you might need a contractor’s agreement or a joint venture agreement.

    Employees

    Whenever you employ someone, you will have certain information you need to collect and compliance obligations you need to meet, before even considering whether you want to create company policies to help guide your workers.

    Consider the following:

    • notices required under regulation (in Australia we are required to give a Fair Work Information Statement to employees before they start work)
    • information that needs to be securely collected and protected, like tax information
    • an employment agreement
    • a position description
    • health and safety information
    • company policies – social media policies and work from home have been important recently

    Also think about any insurances you are legally required to have in place for your employees, in Australia that will be Workcover insurance.

    Contractors

    Engaging a contractor without a written agreement is not an ideal position to be in if something goes wrong. Even if you have a written agreement, sometimes it isn’t sufficiently clear.

    The biggest issue we’ve managed for clients when contractor agreements have gone wrong is clearly identifying the required deliverables and whether they were met or not.

    If you engage a contractor on their terms and cannot measure what was to be delivered by the end of the month before you pay them, then don’t be surprised if you don’t get what you expected. Be clear before you engage a contractor what you want them to deliver, and if you can’t, at least have the ability to set measurable results you expect on a weekly or monthly basis. If you don’t, make sure you can end the agreement at any time without penalty.

    In some industries there are minimum legal requirements for contractor agreements which can include terms of payment including frequency.

    Clients

    Your clients are an integral part of your business, and it is essential that you have agreements in place with them appropriate to the type of business you operate.

    There is an increasing level of awareness of what happens when you hand over personal information and an expectation that it should be protected. Platforms like Facebook and Google require advertisers to have a privacy policy before they can publish any adds. Most importantly, a privacy policy gives you the opportunity to show you clients how you care for their information. Do you have one? Is it on your website or otherwise easily available to your clients?

    For online businesses, your agreements are usually contained in the terms and conditions you have published on your website or shopping cart.

    If you’re delivering consulting, coaching, mentoring or similar services, you want something documented to ensure you get paid. We usually encourage an element of upfront payment for coaching or consulting services to ensure you don’t deliver services then have to chase to get paid.

    Suppliers

    If you have credit arrangements with any of your suppliers, you will be purchasing their goods or services under their contract terms. Often people don’t review those terms until they want to end the services and then check the terms to find out how to make that happen.

    When was the last time you reviewed your supply agreements? Are you happy with your suppliers, and if not, have you told them? It is possible to change the terms of an agreement in writing between the parties, so that your business relationship can continue, but in a way you are satisfied with, rather than being an unhappy customer.

     

    Audit questions for you

    1. Do we know where our founding/ governing documents the establish our business are kept? When did we last look at them?
    2. How many different business relationships do we have?
    3. Are those relationships documented in agreements?
    4. Do we know where our agreements and contracts are?
    5. Do we have written employment agreements or policies?
    6. Do we have a privacy policy on our website?
    7. Do we have a contract register so we know what agreements we have, with who, who on our team is responsible, when the agreements end and where they are?

    Now Think About Your Risk Management

    Have you thought about what the biggest risks might be for your business? COVID certainly surprised most people. Whilst some businesses were impacted by SARS and thought about adding in ‘pandemic’ as a risk factor in their risk management and business continuity, that was a very limited number of businesses. If you don’t stop occasionally and work out where the risks are to your business, you don’t give yourself the opportunity to lessen the potential impact on your business before they occur.

    Even if you have a written business plan, and a written business continuity plan (a set of actions to be taken when events or circumstances have an adverse impact on the business), if you haven’t reviewed them for some time then they might not be relevant.

    The key to risk management is thinking about what matters most in your business, how that might be threatened, and what you can put in place to reduce the impact of that potential threat happening.

    A great example is considering cyber risk to your business and then having all staff complete training as a result. The training is a way of raising awareness of the potential problems and helping people understand what they can do to reduce the risk. 

    If you have a business plan, that may help you identify the main areas of potential risk to your business. Consider –

    • Financials – processing payments; invoicing; paying employees, contractors, suppliers; tax changes; loss through theft or other means etc
    • People – what would happen if anyone in your team was gone for any reason?
    • Key Resources – physical, intellectual, human, network
    • Offering – competitors, changing environment, legal compliance
    • Key activities – what would impact your ability to deliver your product or service to your clients?

    Once you’ve identified your risks, then consider the likely chance of it happening, and the likely impact, to calculate a risk score. Typically, businesses identify 4-5 levels of risk for likelihood and impact. So, the likelihood might be from ‘rare’ to ‘almost certain’ and the impact might be from ‘minor’ to ‘catastrophic’. For a large proportion of business, if they’d had the chance to do this exercise with knowledge that COVID was coming, would probably have assessed a pandemic as ‘rare’ and ‘catastrophic’. That may have given it a risk rating in the HIGH range and ensured that measures were in place (like the ability to work remotely) before COVID happened.

    Hindsight is a wonderful thing.

     

    Audit questions for you

    1. Have we ever considered risks to our business?
    2. Do we know whether we have compliance obligations in our industry?
    3. Do we understand risk management?
    4. Do we have a risk register?
    5. Do we have risk mitigation in place for identified risks?
    6. What insurances do we have in place?
    7. Have we scheduled staff training to help identify and manage risks?

    Is it time for a refresh?

    If you’ve read through the audit questions and think it sounds all to hard, consider the future of your business. If at any time you want to apply for finance, look for an investor or sell your business, all these things will need to be sorted out to get the best value.

    If it seems overwhelming, consider working with us to help prioritise what is most important to support your future objectives, and then to work through the process with someone in your team to help you get organised and on top of everything.

    Onyx Legal offers cost effective day rate services to help you get on top of big projects that support the future value of your business. Let us know if you’d like a hand with identifying and understanding your structure, contracts or risk management. Make an appointment now

    How can Onyx Legal help you?

    Book an appointment to talk with one of our team about your business structure and whether it is still the most appropriate structure for what you are doing and what you’d like to achieve.

    Make an Appointment

    How to Deal with Unfair Contract Terms

    How to Deal with Unfair Contract Terms

    by | Jun 18, 2017 | Contracts, Law for Online Business, Video

    How to Deal with Unfair Contract Terms

    Rules Against Unfair Contract Terms Apply to B2B Transactions

    As you can see, I’m on the road today visiting some clients and business meetings, and that is a plane I can hear in the background.

    One thing I wanted to talk to you about today is we’ve got a client who has been involved in a business-to-business relationship. The relationship started early in 2017, so after the changes to Australian Consumer Law in November 2016, and some of the provisions in the contract that our client has entered into are unfair contract terms.

    Under Australian Consumer Law, unfair contract terms are terms that, for example, will give one party the right to do something but not the other party. So for example, only one party being able to end the agreement.

    In this particular instance, our client was signed up to do a certain thing for a certain period of time. The other party didn’t deliver, so they cancelled and they exited. But the person they signed up with is still trying to charge them money. It’s just not going to be enforceable under the changes to Australian Consumer Law, unfair business terms because it matches all the indicators that would enable the court to determine the provision void and unenforceable. As a business owner, you should be aware that unfair contract terms now apply in business-to-business transactions involving small business. 

    How can Onyx Legal help you?

    Make an Appointment to have us review your contracts and bring them up to date for ease of understanding and legal compliance. If you worried that your contracts include unfair terms that affect you, or affect your customers, we can let you know your available options.

    Book an Appointment