Business Services: Propping up a business with your personal finances?

Legend suggests, any business that makes it past their third anniversary has a strong chance of long term survival. It’s a commonly accepted fact that most, if not all, businesses go through financial sticky patches during their life span. In practice it is important to identify these issues and deal with them head on by implementing change for the long term and the greater good.

Running and sustaining a business takes dedication, sheer determination and a steady hand when things aren’t going to plan. Businesses, particularly owner managed businesses, often find themselves in exactly this predicament with stakeholders using their own personal savings, investments, pensions or additional income streams to keep the business going. Occasionally, a short term solution can successfully fix a short term issue, but, when each month comes and goes and your personal financial stability is at stake, it is better to call upon financial expertise to steer you through rocky waters.

Many businesses are established with ample enthusiasm and drive but entrepreneurs often forget to lay the essential foundations before building their business. Setting up your business properly may feel like a laborious task when you are ready and raring to go, but without these vital foundations you are essentially building your business on quick sand.

Adam Gilbert, Partner and Head of Corporate and Commercial at Else Solicitors, has identified five top tips to check off when setting up a business:

1. Know your business inside out

Complete thorough market research and identify a clear business plan. Set clear goals and objectives which can be measured and scrutinised through KPIs and tangible reports to ensure accountability.

2. Establish water tight Shareholder Agreements

Why do you need shareholder agreements? If there is no formal written shareholder agreement then the relationship between shareholders and their company is regulated by the company’s constitutional documents (Memorandum and Articles of Association). However, a written agreement negotiated between all shareholders is the best way to ensure everyone is covered adequately, knows their rights, and knows their obligations.
A shareholder agreement provides extra clarity because it formally sets out rights and responsibilities.

3. Familiarise yourself fully with the obligations of directors under the Director’s Statutory Duties

Company directors will be liable to ensure certain basic obligations are met and adhered to during their time in the role, including;

  • Act within powers;
  • Promote the success of the company;
  • Exercise independent judgment;
  • Exercise reasonable care, skill and diligence;
  • Avoid conflicts of interest;
  • Not accept benefits from third parties; and
  • Declare interests in proposed or existing transactions or arrangements with the company.

4. Keep accurate, up-to-date records of EVERYTHING!

It is generally considered good practice to keep all your documents and records up to date. At Else we advise all clients to run their business as if they are selling it tomorrow. Whether this happens in one, five or twenty years’ time it means that, not only from a legal point of view, all the necessary documents and controls are in place, which adds value to your business. That includes having all paper work, contracts, terms of business, supply and sale agreements, contracts of employment etc. signed and stored safely, all credit control procedures maintained and up to date, important business documents including property lease agreements and so on are easily accessible so if you suddenly chose to sell or alternatively if the business hits trouble, you can quickly put your hands on everything you may need access to. More importantly, this approach maximises the value of your business and is a professional and organised way of working.

5. Utilise a specialist accountant to ensure your management information paints an accurate picture

Steve Bull, Elite MI explains,

“Management information (MI) is key from the outset. Without it you cannot set about a proper course, and moreover, you may not even be able to see where you and your business are heading. MI is very important in analysing key trends and helping to forecast the future. Everything you do in your business ends up within a number. Having a clear financial model that is sustainable is absolutely critical for future success. Most importantly, you must understand the context in which your numbers are achieved. Only then can you identify and navigate the problems that may lie ahead.”

Looking speculatively at a business’ bank balance only paints half the picture, a true overview of wider finances can only really be assessed through accurate analysis of management information.
As previously highlighted, directors of a business are bound by the responsibilities identified under the Directors Statutory Duties within the Companies Act, summarised below;

“[Director] must act in the way [they] consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”

When a shareholder is heavily invested into a business (financially, emotionally, and physically), identifying and accepting what is best for the business can be a difficult pill to swallow. Using an outsource resource to scrutinise your management information removes the complication of emotion. The advice can help directors make sound business decisions in line with the sustainability of the businesses finances, which could prove essential in future proofing opportunities for a profitable business.

There is a common misconception that Insolvency Practitioners (IPs) are only called in once a company has actually become insolvent, but this is not the case. The role of an IP includes the provision of advice to directors whose company is still solvent, but who needs help to turn its fortunes around and trade profitably again.

If a business is threatened by creditor legal action or experiencing temporary cash flow problems, obtaining professional advice can make a significant difference to the fate of the company. Speed is of the essence in these circumstances, and acting without delay opens up a wider range of options, including:

  • Company restructure
  • Sale of assets to inject cash into the business
  • Voluntary liquidation
  • Sale of the business as a going concern.

More often than not, a business with potential and opportunity to improve its financial position can be salvaged but taking professional MI and IP advice at the right time is key.

At Else Solicitors we have a highly skilled team of business advisors to help you and your business negotiate a wide range of challenges. Else can not only protect your business proactively through commercial services such as contacts, terms of business, credit control procedures, funding options and implementing business structures but they can also support you reactively when things go off piste, specifically with regard to commercial property, debt recovery, dispute resolution, employment advice, insolvency and so on.

If you would like advice relating to setting up your business and establishing shareholder agreements, please email adam.gilbert@elselaw.co.uk.

If you need support in dealing with any problem your business may be facing, Chris Else can assist you and advise the appropriate course of action and teams of professionals to handle your matter, please email him directly via chris.else@elselaw.co.uk to discuss your enquiry.

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