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The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

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.

    Can Doctors Use Testimonials in Australia?

    Can Doctors Use Testimonials in Australia?

    Can Doctors Use Testimonials in Australia?

    Can Doctors Use Testimonials In Australia?

    Doctors and other registered health practitioners can only use testimonials in a very limited fashion. 

    As a general overview and in simple terms, the limits are:

    • star ratings are acceptable, without commentary
    • general commentary like “friendly prompt service” or “nice offices, comfortable waiting chairs” and similar comments that are not about the health service received, are acceptable.

    Registered health practitioners in Australia are required to comply with AHPRA (Australian Health Practitioner Regulation Agency) advertising guidelines, which are set out in section 133 of the National Law (short for the Health Practitioner Regulation National Law).

    Due to the complexity of what is, and what is not allowed in advertising of health services, AHPRA has created an advertising hub on its website to assist practitioners.  

    Since the National Law commenced in 2010 testimonials have been specifically prohibited under section 133(1)(c) as follows:

    1. A person must not advertise a regulated health service, or a business that provides a regulated health service, in a way that—

    (c) uses testimonials or purported testimonials about the service or business; …

    In May 2022 hope appeared in the form of proposed amendments to the National Law which were tabled to remove the prohibition on testimonials. It was proposed that section 133(1)(c) would be deleted and that testimonials would be treated in the same way as other forms of advertising. 

    The explanatory notes to the draft legislation acknowledged that the prohibition on testimonials was “…out of step with consumer expectations and current marketing and advertising practices. Testimonials and reviews are common online, and new forms of advertising, particularly on social media, have blurred the lines between information and advertising. Consumers increasingly expect to have access to reviews and testimonials when purchasing health services and expect to be able to share their views about health services and practitioners.

    The removal of that prohibition would have meant that doctors and other health practitioners could have started using testimonials, provided that the testimonials continued to comply with the other rules around advertising, such as not being misleading or deceptive. 

    Note that a testimonial saying “Dr Yu cured me of diabetes with acupuncture” is still likely to be prohibited, because the practitioner who uses that testimonials would be required to produce evidence-based research showing a cure was possible through acupuncture treatment. The practitioner in that instance, if testimonials were permitted, would be wise to ask their patient to amend the comment to say something like – “After three months of treatment with acupuncture by Dr Yu I no longer experience any symptoms of diabetes.” 

    Any use of the word “cure” raises red flags with regulators. 

    However, we are getting ahead of ourselves. 

    Although testimonials are still prohibited, penalties were increased significantly under the new legislation to $60,000 for an advertising offence by an individual and $120,000 for a company.

    Some concerns were raised about removing the prohibition on using testimonials. One report that surveyed consumers on their beliefs about testimonials found “Testimonials were reported to be lacking in reliability (67.7%) and that they should not be used in healthcare in the same manner as they are used in other industries. Only 44.8% of participants reported that they felt confident to spot a review that was not written by a genuine user of a service.

    The straw that broke the camel’s back and reversed the proposal to remove the prohibition on testimonials, which was removed from the draft legislation before it was passed in October 2022 – is the fault of cosmetic surgeons. 

    Cosmetic surgery is not an identified area of specialty governed by AHPRA and the title “cosmetic surgeon” is not a protected title. What that means is that a person can call themselves a cosmetic surgeon even if they have no special training or qualifications to carry out cosmetic procedures. 

    In late 2021 an investigation into the cosmetic surgery industry by AHPRA and the Medical Board of Australia (also part of AHPRA) was announced in the wake of media published by Four Corners and Nine newspapers based upon their investigations into a string of clinics owned by an identified plastic surgeon. 

    The media reports alleged hygiene and safety breaches, and patients suffering ongoing pain, physical and psychological issues. 

    The report from the AHPRA investigation was published on 1 September 2022 and a number of recommendations were made around managing advertising of cosmetic procedures. 

    Whilst no specific recommendation was made about the use of testimonials, it was noted that the use of testimonials would not be helpful in avoiding a lack of reliable information for consumers because “Testimonials, when selectively used by practitioners, are more likely to be the opposite; subjective and biased (even when they may not be false, misleading or deceptive). In these circumstances, the review is concerned that testimonials have the potential to further contribute to misunderstanding and confusion among consumers.” [page 87]

    Due to the findings made in the report and the limited resources available to AHPRA to implement and monitor changes in its policies, procedures and guidelines, reforms for cosmetic surgeons have taken priority over the removal of the prohibition on testimonials. 

    The explanatory notes to the legislation as passed note that the issue of patient testimonials needed to be consistent with actions and reforms for cosmetic surgery.  

    There is no timeframe for AHPRAs work in reforming how cosmetic surgery is regulated, so doctors and other health practitioners should not anticipate a lift in the prohibition on using testimonials any time in the near future, and should keep in mind the significant increase in penalties. 

    How can Onyx Legal help you?

    If you are a health practitioner and worried about the risks in your advertising contact us to have it reviewed.

    Save Money with Business Name Registration, Australia

    Save Money with Business Name Registration, Australia

    Save Money with Business Name Registration, Australia

    Save Money with Business Name Registration

    You may be using a third party provider to keep your business name registrations up to date, but registering your business name directly through ASIC yourself may be the cheapest option and provide you with more certainty and control.

    You can register for an ASIC Connect account, or you can use the ASIC business registration system.

    If the website you are using to register a business name doesn’t include .gov.au in the domain name, then you will be paying extra to use the service. In 2022, you can register a business name directly with ASIC for just $39 per year, or $92 for 3 years. 

    Once registered, provided you keep your contact details up to date, you will receive notice of renewal from ASIC before your registration expires. If you discover that your registration has expired, then you will still have 30 days after the registration date to apply to re-register that name before it becomes available to the public.   

    If you receive letters from third party registration providers, they will usually be looking for annual fees that are more than what you would pay ASIC. Their additional fees cover the cost of their operations and their profits. ASIC publishes a list of what third party providers can and cannot do and you can complain to the provider if you have any concerns. 

    You should definitely NOT be paying more than one third party provider for registration services of the same name, and NOT for registration of your own name. 

    Do I Need An ABN To Register A Business Name?

    Yes, you need an ABN to register a business name. 

    An ABN is an Australian Business Number, and it is attached to whatever entity you use to conduct your business, whether that is as a sole trader, through a trust, or as a company or incorporated association. 

    For people setting up private foundations who think they don’t need an ABN – check here

    Do I Need To Register My Company Name As A Business Name?

    No. 

    If your company name is the same as the name of your business, then you don’t need to register them separately. 

    If you register a business name, no one will be able to register a company with the exact same name, and when you register your company name, no one will be able to register exactly the same name as a business name. 

    On the other hand, if you want to have separate business divisions with different names under the same company, then you can register multiple business names and, through your company ABN, they will be linked to your company, even though the company and the businesses have different names. 

    Sole traders can register multiple business names consistent with the different areas of business they are involved in. Those business names will be linked to their sole trader ABN.

    Be aware that some third party providers will write to you encouraging you to register your business name without checking to see if you have changed your business structure and set up a company with the same name. Their interest is in receiving your payment for registration, whether or not it is required. 

    Do All Business Names Need To Be Registered?

    Yes, and No. 

    Under the Business Names Registration Act 2011 (Federal), it is an offence to carry on a business under a name that is not registered. The penalty is 30 penalty units, which in 2022 equates to about $6,660. Doesn’t seem worth risking when its only $39 per year to register, does it?

    Did you know you can be fined $6,660 for carrying on business without registering your business name?

    If you use your personal name as a business name with a description of what you do – eg. “Emma Lee Accounting”, or “Sanjay Singh Consultants”, then you don’t need to register it, as using your own personal name for your business is not an offence. The same goes for a company that uses the company name to operate a business.

    How Do You Check If A Name Is Taken For A Business?

    Business name availability is easy to check, and a quick check can save you lots of money in the future.

    The first thing you should do is complete a quick Google or other browser search on your chosen name. If you find a competitor in the same country with the same or a very similar name – go back to the drawing board. It’s not worth the hassle and you create the risk of having someone send you nasty legal letters telling you to stop using that name. 

    Secondly, complete a trade mark search. In Australia, you complete a trade mark search through IP Australia. If someone has a registered trade mark in broadly the same area of business as you, you risk getting a nasty legal letter telling you to stop using that name. The Onyx Legal team can help you assess whether or not you have any concerns about a registered trade mark, or would like to register your business name as a trade mark. Simply send us an email to advice@onyx.legal with “Trade Mark Registration enquiry” in the subject line and we will respond to your promptly. 

    Thirdly, and now that you are reasonably certain no one else has a name the same or very similar to what you want to use, then do a name availability check on ASIC. Select “Organisation and Business Names” then complete some or all of the words you want to use in the “Name or Number” field and select “Go”. 

    A list of Organisation and Business Names should appear. If there are more than 10 names, there will be multiple pages. You can change the settings to display up to 50 names at a time. When looking at names, anything that says “Registered” next to it in the “Status” column is not available to you. 

    For example, we searched “forthright”, which produced 20 results. 10 of those results are registered. In the “type” column, you can identify whether they are business names or company names.

     

    You won’t be able to register a business name if it is already being used by a company, and vice versa. Names that are identical or nearly identical to an existing registered business name are not allowed.

    You can, however, add an additional word to the name – in this example some additions are “consulting”, “international” or “enterprises”, to register the same name.

    Do I Have To Register My Business Name With ASIC?

    Yes. 

    Until 2012 business name registration was state based, but it has now moved to one national register managed through ASIC. 

    Because your business name is linked to an ABN, your business name contact details will also be searchable through the ABN register. 

    What Is The Difference Between A Trading Name And A Business Name?

    A trading name refers to a name a business might use that is not currently registered. If you are using a trading name, or have used a trading name in the past and you want to continue using that name, then you should now register than name as your business name. 

    ABN Lookup will continue to display trading names until 31 October 2023. From 1 November 2023, ABN Lookup will not display trading names and will only display registered business names. What this means for your business is that anyone who checks ABN Lookup to ensure your business is legitimate is unlikely to find you unless you have a registered business name. 

    Business Name Registration Renewal

    You don’t have to renew your business name registration every year. If you register through ASIC, you can register the business name for three years. 

    Provided you keep your contact details up to date, you will receive notice of renewal from ASIC before your registration expires. If you discover that your registration has expired, then you will still have 30 days after the registration date to apply to re-register that name before it becomes available to the public.

    Business Name Registration Qld, NSW, Vic etc

    Business name registration moved from a state based system to a national system back in 2012. If you had previously registered under the state system, your registration should have been migrated to the national ASIC register. Some registrations were lost in that process because people did not keep their details up to date. 

    If you lost your registration and someone else is now using that name, you may need to adjust your business name in order to get it registered again. 

    You don’t have any ownership rights in a business name. The purpose of registration is to identify who is behind a business and demonstrate the credibility of a business. 

    What Happens If My Business Name Is Not Registered?

    Failing to register your business name, or to keep your registration up to date, can mean that someone else can register that business name and use it instead of you. If you allow your registration to lapse and someone else registers the same name, you have lost it and don’t have any automatic legal right to demand it back from the new business. 

    There may be a legal argument as to why they should hand it over, but to prove that right and get the order for them to handover the name, you would have to go through a court process. Court is costly, time consuming, stressful and provides no guarantee of success.

    Can Someone Else Use My Business Name?

    There are various legal arguments why someone else cannot use your business name without your permission. Whether you have an argument depends on all the circumstances, and we would need to have a discussion with you about your situation before advising. 

    Do I Own My Business Name?

    Business name registration does not give you ownership rights. If you want the right to stop other people from using your business name, or something similar to your business name, then you may be better to register that name as a trade mark. Be aware that not all names are capable of achieving trade mark registration.

    How can Onyx Legal help you?

    Need help understanding your business name situation, or want to register your business name as a trade mark? Make an appointment with one of our team

    What Happens When Business Founders Want to Split Up?

    What Happens When Business Founders Want to Split Up?

    What Happens When Business Founders Want to Split Up?

    Business Break-ups Can Be Messy!

    Unless the founders had something clear in writing beforehand, there is no end to the variety of things that can happen when founders want to go separate ways.

    If there is nothing in writing and the split is not amicable, all sorts of time consuming, distracting and stressful things can happen. 

    Here are some of the worst-case scenarios we have seen in practice, all where there was nothing in writing to start:

    1. A Founder Dies Unexpectedly  

    Whilst tragic at a personal level, it can also be very difficult for a business where one of the founders passes unexpectedly. Sometimes the family is aware of their business involvement, and sometimes they are not. In this case the family wanted the company to buy out the deceased founder’s interest in the business immediately and had some unrealistic expectations of what that interest was worth. 

    Animosity was growing between the parties due poor communications. We were able to present a strategy which allowed for the progressive buy out of the deceased founder over a two year period, without interference by the family in the business, and at an amount set by a ‘desk top’ valuation completed by the company’s accountant. The family of the deceased founder were offered the opportunity to get an independent valuation, but at their cost, and the $11,000 price tag put them off.

    2. One Founder Is Stealing Money From The Business, And Another Finds Out

    Unfortunately, this is not an uncommon scenario. 

    We’ve seen this occur in a variety of businesses from software to building and construction, and it is rarely pretty, and usually a long and slow process of separation if nothing was agreed in writing when the business was founded. 

    Too many people think “we don’t need a shareholder agreement, we will be fine” when they are all excited about getting started, and then when things go wrong, they have no protection.  

    In one example with a tech company, there were four sets of lawyers involved and the end result was a comprehensive deed of release covering the transfer of shares, forgiveness of debts, payment of money, and indemnities from the exiting partner. There were no admissions of liability in the deed. The deed took more than 15 months to negotiate and some shareholders meetings to approve decisions. 

    As long as the negotiations remain between the parties and their lawyers, law enforcement need not be involved. There is nothing that legally requires you to incriminate yourself or anyone else in the business. When fraud or theft is discovered and reported, it is usually through a third party.

    3. A Founder Walks Away Without Notice, Making Demands

    Things happen in people’s lives (like death, illness, an amazing job offer etc), and they can suddenly want out. This can be very hard on the people who want to continue with the business and a shock if not contemplated before one partner leaves. Business break ups are often referred to as like going through a divorce by the people affected. 

    Sometimes people want out, and they want their money, whether or not there is any owed to them at the time. Many people exiting a business think in terms of the future value of the business, rather than where it is as they exit, and vastly overestimate both what it is worth and the capacity of the other parties, or the business to pay for the exit. 

    If shares are to be transferred to existing business partners, then those individuals need to have the money to purchase the shares at the agreed value. In a start up phase, this is likely to be $1 a share and not onerous, but if the business has been running for a while and has some value, the remaining shareholders might not have thousands of dollars required to purchase those shares.

    If the shareholder is exiting and the company is making a distribution or buying back the shares (not a simple process) then there needs to be sufficient funds in the company to pay out the exiting party. 

    As long as you have clarity around ownership of assets, intellectual property and a realistic value of the business, then its just a process to be undertaken when someone leaves suddenly. If there is nothing in place, then it is a process of negotiation and often heartache before a resolution can be agreed. 

    4. A Shareholder Stops Contributing

     In situations where you have people with different skills coming together to build a business, not everyone necessarily has the same energy to keep the business on track. We’ve come across several businesses where a lot of effort was required of one party in the initial set up (for example someone building an App or a Website) and then their contribution become maintenance only. Another person in the business might be responsible for promotion, and there work is constant, requires review and reinvention, and never lets up. 

    An example we have is a digital business where the person responsible for service delivery got fed up with the lack of interest of the developer who originally built the website for the business. Their ongoing contribution was minimal and yet their deductions from the business stayed the same and the service deliver person felt like they were working to support two families, without any recognition.  

    Differing levels of effort over time could have been written into a shareholder agreement and appropriately dealt with, with the service delivery person gaining a greater interest in the distributions over time. Unfortunately, they had nothing documented. Fortunately, the exiting party, being the person who initially built the site, was prepared to accept an independent valuation of the business and to be paid out over six months rather than an immediate exit. 

    In another tech company, the exiting person was someone who thought that they were indispensable to the business, but kept upsetting customers to the extent they left. Again, and independent valuation was agreed and they accepted payment over time, but the process of getting to that point took 4 months and was disruptive to the business.  

    5. A Founding Partner No Longer Gets On with Anyone Else In The Business

    This was a strange scenario and there was no shareholder agreement. One of the founders had moved into the position of CEO of the business but was no longer on speaking terms with anyone in the business, whether other founders or staff. There were six founders, four of whom no longer had any involvement in the day-to-day operations of the business, but all were looking for a financial exit. 

    The company did have prospects, but a sale was not going to be possible whilst the CEO still had voting power to stop it.  There was not enough cash in the business to buy out the CEO without adversely affecting cashflow. 

    Through a succession of negotiations including an independent business advisor, we were able to get the CEO’s agreement to retire and stop being involved in the day-to-day operations, as well as converting his shares to a preference share which would be paid first in the event of any declaration of dividends or sale. The preference share had no voting rights. Tax consequences for the business and the individual were also examined before the transaction went through. 

    Business operations were a lot smoother without the former CEO’s involvement and a sale was achieved within 12 months, with all founders getting paid. 

    It is always easier to think through future scenarios and what is fair when everyone is excited about the business and getting started, and still friends. It is significantly harder, and more costly, to attempt to resolve an acrimonious split a couple of years down the track. 

    We provide clients with questionnaires to help identify potential needs in the business, and how people might exit to get you thinking about what might become important when you get started, whether setting up a joint venture or a shareholder or unitholder situation. There a lots of options available.

    How can Onyx Legal help you?

    If you are or plan to go into business with someone else and you’d like to secure the future of your business, make an appointment with us to talk through your options. 

    Your Quick Legal and Cyber Check on Your Website

    Your Quick Legal and Cyber Check on Your Website

    Your Quick Legal and Cyber Check on Your Website

    Start by completing our quick audit questionnaire to work out what are some legal issues when creating a website. Then read below…

    Domain Name Legal Issues

    Your domain name is like a post office box. You lease it, you don’t own it. Your registrar is like the post office. They will only talk the person who is authorised as the registrant of the domain name. That might not be you!

    If you don’t know where your website is registered – GoDaddy is a commonly known registrant – this could be a problem if you want to sell your online business and cannot transfer the domain name. If you don’t ensure your registration fees are paid regularly, then you could lose your domain name and it is not easy to get them back.

    When agencies first started building websites for businesses, a lot of companies registered the domain names to their agency rather than you, their client. This became a problem for people when their small web designer gave up their business, or their web designer held them to ransom, requiring a payment equivalent to purchase before releasing the domain name.

    We’ve had a prospective client come to us running a business using a specific domain name, and no part of that domain name was protected by trade mark or copyright. For whatever reason, they let their registration lapse. Of course, the domain name was sold to someone else. That someone else happened to be a local competitor to them. They came to use 2 years after the domain name had lapsed and their competitor was using it and asked us to help them get it back. We told them we couldn’t help. There was no basis for them to claim exclusive ownership, it took them two years to take any action and the time, money and effort required to even attempt to get it back was more than they were willing to invest.

    Trade marks are almost the only thing that can give you superior rights to anyone else for registration of a domain name, and even that won’t stop someone using the same domain name in a different industry from using your name. Just try searching ‘Onyx Australia’. We might be the only legal firm with that name, but we are not the only business with that name in the country.

    ACTIONS:

    • Identify your registrar and make sure you have login details
    • Confirm the registrant name (hopefully not a company you since closed – it has happened)
    • Make sure you have auto-renewal and up-to-date payment details in place

    Our team at Onyx Legal can help you find out who the registrant is and make sure you have control over your domain name.

    Hosting & Backup Legal Issues

    All of the information that people can watch and read on your website is stored and then accessed via the internet. You pay a hosting provider to store that content and make sure it is available when people look for it online. If you don’t know who your hosting provider is, who can you talk to if your website is ‘down’ and not visible? You might be working through an agency and contact them.

    There is a lot of factors that can impact your website hosting including whether your website is on a shared server or an individual server. On a shared server, one website with malware can have every website on the server temporarily shut down. If you site is impacted by malware and taken down, it can impact your results in advertising or search results when clients are looking for you. The responsibility for those things may sit with you, or your agency, or your hosting provider. Check your terms and conditions of hosting.

    The type and local of your hosting provider can also impact the speed of data upload to or download from your website. If you don’t have automatic payments set up on your hosting, you might find your website is down and if you don’t know where your website is hosted, any information you collect through your website, like personal data, may be going around the world before it comes to you – which could be an issue in managing your privacy obligations.

    Backups are important in reducing your cyber risks.

    There are lots of products that enable you to backup your website to the server where it is hosted. This might not be effective if you get hit with ransomware. If you have a separate backup on a system that you know works and can be reinstated quickly, then you have a better chance of a quick recovery from a ransomware attack. Always check that your backups work and your site can be quickly reinstated. Backup regularly.

    Like backups, password protection and sensible username application can also make a huge difference in managing the cyber risks to your website and your business.

    The team at Onyx Legal can help you find out who your hosting provider is and how to protect your content.

    Website relationships and the terms and conditions to manage them

    In a high street shop front, everyone is trained in the rules of what is considered appropriate behaviour in stores from a young age, so much so that we take it for granted. Things like – if you break something, you pay for it, if the shop is closed then you can’t come in, you have to pay for what you buy before you leave the store and so on. The common courtesies like don’t disturb other shoppers, if you are asked to leave then leave, and don’t steal are also taken for granted.

    Online, you sometimes need to remind people of the rules. You can also set some rules to control your own online space.  Think about the big sites like eBay, Craigslist, Facebook, and Google. If you don’t follow their rules, they can stop you from using their services and there is almost nothing you can do about it.

    You have the same ability to control how other people access and use your website and the information you provide. Every different interaction available on your website creates a different relationship that you may need to manage through terms and conditions.

    You will normally find a link to terms of use in a website footer. Following that, convention is sensible if you want to argue that your terms and conditions are binding on your website visitors or users.

    We’ve had a client who neglected to have terms and conditions on their website and had to pay a $125,000 claim for defective products because they failed to disclose that they were just the importing agent for the manufacturer and set any contractual terms around their supply.

    If you are working in any sort of industry that is regulated, either by government or a professional organisation, a disclaimer may help limit the risks to your business. Disclaimers can also provide a great opportunity to remind your clients of their responsibilities

    Onyx Legal can help you tailor terms and conditions that fit your business, your industry, and make sense to your customers.

    Legal Issues with Website Content

    What you publish on your website, whether you put it there or someone else did, is your responsibility. If you have been creative with the truth, copied something from someone else, used a form of software that allows you to ‘snip and spin’ other people’s content and publish it as your own (We were horrified! It was so obviously copyright infringement, and the client thought it was perfectly fine because they paid for the software and assumed the developer was doing the right thing around copyright. Wrong! It slowed their website development down a bit) then that’s on your head – no one elses.

    You need to be aware of any regulations applicable to your industry (for example – health services in Australia can’t use testimonials about the health service), stay within the bounds of consumer protection legislation, not infringe the intellectual rights (trademark, copyright etc) of others and protect the privacy of visitors to your website.

    Onyx Legal can help assess your level of compliance, where you might have risks and make some recommendations around improving your website from a legal perspective.

    How can Onyx Legal help you?

    If you scored badly on the website legal and cyber self-audit and would like us to carry out a more comprehensive audit and make some recommendations, make an appointment with the Onyx Legal team now..