What is the Business Legal Lifecycle?
What is the Business Legal Lifecycle?
Providing advice for Small to Medium Sized Businesses is our main focus at Streten Masons Lawyers. Business owners often grapple with the fact that, from a legal point of view, there are so many considerations that need to be made in relation to a new business. However, in the early stages of the business it is often difficult for this to occur, as time and money is at a premium. To make this process easier, we have developed the Streten Masons Lawyers Business Legal Lifecycle. The Business Legal Lifecycle is aimed at educating our business owner clients as to when a business typically needs to address certain legal aspects of their business.
In all businesses there are noticeable and predictable cycles, which when managed properly will contribute to a healthy and more complete business.
The different phases of the Business Legal Lifecycle are:
- Phase 1 – Conception
- Phase 2 – Start-up
- Phase 3 – Initial Clients
- Phase 4 – Bringing on Employees
- Phase 5 – Protecting Intellectual Property
- Phase 6 – Maximising your current business/brining in investors
- Phase 7 – Expansion/franchising /Licensing or buying an existing business
- Phase 8 – Estate Planning
- Phase 9 – Investing in Property
- Phase 10 – Litigation
- Phase 11 – Sale of whole or part of your business or listing on a stock exchange
- Phase 12 – Retirement
- Phase 13 – Insolvency/Winding up
Each phase of the Business Legal Lifecycle has a different effect on the efficiency/profitability of a business. The phases are based on our experience in dealing with business owners, and the stages they experience during the life of their business.
Of course, some business owners may decide not to go through a particular phase, or another phase may arise earlier. Your company may enter in to litigation much earlier in its Lifecycle, similarly you may decide to invest in property early. For some business owners, franchising is just not part of the grand plan.
However, the Business Legal Lifecycle is designed as a guide for business owners to get an idea of where your business is currently, where it is headed and the stages that commonly occur for other business owners at similar stages.
Each particular phase has its own unique characteristics as follows:
Phase 1 – Conception
The initial phase in the Business Legal Lifecycle begins when you first have the idea for your business. The Conception Phase involves everything you need to consider before you actually start up the business.
At this phase of your business, you are simply trying to breathe life into the idea. The phase is built on the entrepreneur’s enthusiasm and commitment to their idea for a new business, product or service. You need to satisfy the market’s needs and establish if the new business, product or service is a viable business offering. During this phase, funds are always at a premium and capital is scarce. You are often living day-to-day or week-to-week to make ends meet for your dream.
Phase 2 – Startup
The Startup phase commences the moment that you take the plunge and start your business. This can occur through the setting up of an entity to operate your business, signing a lease for a premises from which to operate the business or borrowing money to invest in your business.
If you have not successfully completed the Conception phase of the Business Legal Lifecycle, the Startup phase will be a scary prospect as you will not be in control of all aspects of the business. Problems and pitfalls will pursue you on a daily basis and you are likely to experience a number of road blocks preventing you from getting to the next phase (The Initial Client). Generally a business in this phase will be opportunity-driven and action-oriented. The business owner will generally react strongly to different ideas and try to be all things in the Startup of their business.
You should recognise that as a business owner you are supposed to be stressed during this phase, that is completely natural, you are taking your first steps into the business world without the ‘safety net’ of employment.
Phase 3 – Initial Clients
Now you have conceived and set up the business properly it is time to start finding clients to pay your costs, expenses, and of course, yourself. We personally find the Initial Client phase to be the most interesting and fun of the first three steps of the Business Legal Lifecycle. The reason for this is that you are starting to put all of your efforts from the first two phases into practice. At the same time, it is also a daunting phase in the Business Legal Lifecycle. You may be apprehensive as to whether your business can be a success, and this is the phase where you begin to find out.
The bright side is that once you get through this phase, the business starts to earn some real cash and you can start looking at all of the other aspects of your business in its progress through the Business Legal Lifecycle.
Phase 4 – Bringing on Employees
Once you have a few clients or customers you will need to consider bringing on employees to assist you in the business. There are a number of different types of employees that you may need to hire during the Business Legal Lifecycle, however the first employee is always the most interesting and the one that you need to get right from the start.
Once you complete this phase properly you will be able to really leverage your business and move it from strength to strength.
Phase 5 – Protecting Intellectual Property
While this phase may seem like it should occur much earlier in the Business Legal Lifecycle, the practical reality is that most start up businesses do not have the resources to take this step until after they have a viable business and start to leverage with employees.
‘Intellectual Property’ is the legal term given to the assets of your business that have been created by the business owner, their staff or consultants, for example trademarks, literary and artistic works, designs, inventions, names and images. It is imperative that you put steps in place to properly protect your intellectual property from misuse by third parties. Not doing so could irreparably damage your business.
As a business owner, you start building intellectual property from the moment you enter the Business Legal Lifecycle. Intellectual property is often the key asset of your business that you are going to sell or pass on in the future, a business’s unique intellectual property is what sets itself against its competitors and defines itself in the market place.
Phase 6 – Maximising Your Business/Bringing in Investors
In setting up the business properly, you have started working for a variety of customers and clients, brought in some employees and protected your intellectual property, you have a proper business asset. Now that you have reached this stage, you must consolidate your business and ensure that it operates like a well-oiled machine.
By consolidating your business at this phase of the Business Legal Lifecycle you will avoid the pitfalls that are commonly encountered when businesses move into the next phase of Expansion, Franchising and Licensing.
Phase 6 covers optimising your business through your existing channels, fully utilising your staff and bringing in investors. However, if the business has not been through all of the preceding phases of the Business Legal Lifecycle, this will show and any problems or incomplete systems will be amplified during this process.
Phase 7 – Expansion/Franchising/Licensing or Buying an Existing Business
The Expansion, Franchising, Licensing phase of the Business Legal Lifecycle is all about building a bigger business, which becomes a bigger asset. When a business expands, all of its issues and problems are amplified and become obvious. It is for this reason that this phase can only completed after Maximising Your Business/Bringing on Investors.
Phase 7 covers expanding your business by opening up new premises or offices as well as franchising or licensing your business to third parties. Often business owners choose one of the three, but you may even decide to do all of them together. You may also consider expanding your business by purchasing an existing business. In this instance, careful consideration must be given to what it is that you are purchasing and how that business will assist in the expansion of the existing business. Consideration also needs to be given to how the new business will integrate with the old business from a management and systems perspective.
Phase 8 – Estate Planning
Unsurprisingly, Estate Planning is a task that most business owners put off, or do not want to consider. However, it is important for business owners to make plans for the operation of their business should they not be around to do it themselves. This phase of the Business Legal Lifecycle is about looking to the future and planning what will happen with your business, assets and family when you die or become unable to continue working in the business.
Considerations need to be put in place as early in the Business Legal Lifecycle as possible, however often you will be so caught up in running and building your business that you do not take these considerations into account in the initial phases. Once the business has been developed into a sustainable business, the business has maximised its clients and has expanded, you need to protect your asset in the event of your death or incapacity.
Phase 9 – Investing in Property
Now that you have a business that is pumping along and making lots of money you need to consider what you can do with your profits. You should not spend all of your profits on throw away items. You need to consider what is going to happen in the future. If you do not want to continue to work in the business for the rest of your life, you need to consider other sources of income that you can invest in to allow you to work less and enjoy life more.
One method that has been used by successful investors over many years is to buy real property with their profits so that they can earn an income from the real property. The term ‘real property’ refers to physical land or other property such as units. There are many other options out there that you may choose to invest in (such as shares listed on the stock market), however we have found that for most business owners at this stage in the Business Legal Lifecycle, property is the most appropriate investment.
Phase 10 – Litigation
Litigation is the term that is given to the court process and involves either commencing proceedings in a court to sue someone, or defending an action in a court. This phase occurs in the Business Legal Lifecycle due to the fact it is likely that, no matter how successful your business is, you will have to deal with some form of litigation while running your business. Our experience is that usually after a business starts to become successful, is well set up and experiencing strong growth, it may be necessary for litigation to occur.
Going to court is not a pleasant experience for any business owner. It means that something has gone wrong in a business relationship and that it cannot be resolved. Statistically only one in every 1000 disputes results in litigation, and of those, less than five per cent of litigation that has been commenced will proceed as far as a trial. That is a miniscule amount of disputes that actually end up in litigation, so it is important to understand the process as avoiding it can save you tens of thousands of dollars.
Phase 11 – Sale of Whole or Part of the Business or the Listing of the Business on a Stock Exchange
Previously I have said that in acting for business owners, the Startup phase is the most exciting. Acting for a business owner in the sale of a good and profitable business has to be a close second. This phase is all about selling the whole or part of your business, or even consider listing it on a stock exchange.
Phase 11 often sees the culmination of all of the effort that you have taken over the years of the business, leading to the asset being sold. For that reason it occurs naturally toward the end of the Business Legal Lifecycle.
In any business the goal is to build it to the peak business that it can be. Whether that be a lifestyle business that brings in an income allowing you to lead your ideal lifestyle, or whether you want to build a massive company with turnover over $10million a year, consideration should be given to the sale of the business at some point in the future.
Essentially this phase is at the peak of the Business Legal Lifecycle, as it tracks the business owner’s specific involvement in the business. The time to sell a business is when it reaches its peak in profitability, turnover and staff based on what you are able to achieve and willing to contribute.
This does not mean that the business cannot continue being profitable or even become more profitable. In fact it is quite the opposite; a business that is at the top of its game will then be able to be sold to another business owner who will start again at the beginning of the Business Legal Lifecycle.
Phase 12 – Retirement
Where a business owner has decided not to sell their business and wants to continue to trade, they will want to trade the business until retirement. When you decide to go through this phase of your business you will need to ensure that you are properly set up for the rest of your life.
This phase usually happens after the business has reached and surpassed its peak, that is, after selling whole or part of the business. Retirement may also be forced on you earlier in the Business Legal Lifecycle if you become ill and are not able to sell the business. This phase could also occur where you have sold the business and continue to work in the business for a time after the sale.
The decision to retire is one of the biggest that you will make during the Business Legal Lifecycle. Taking care of all of the aspects of the business and ensuring that you can comfortably retire is an important consideration for you to make. It is critical that you take the advice of your financial planners, accountants, lawyers and other business and personal consultants to ensure that you can properly navigate their way through this phase to allow you to live the lifestyle that you want.
Phase 13 – Insolvency/Winding Up
The Insolvency/Winding Up phase is the last phase in the Business Legal Lifecycle. It is the phase that completes the Lifecycle and signals that the business has come to an end. Some business owners may not reach this point as they may retire or sell their business before the business reaches phase 12. However, more often than not, the vehicle that operates the business will need to go through this process once the business is sold to ensure that all of the funds and obligations are properly dealt with from a legal and tax perspective.
For this reason this phase is not necessarily a negative one to go through (although it can be), and properly managed you can avoid some of the common pitfalls that occur in some businesses during insolvency or winding up
Join the Free Webinar & Pre-Order your Copy
Understanding the Business Legal Lifecycle is critical for any business owner. It is essential that you understand the different phases your business will go through, and times when different legal processes should be followed. It is also important to have a basic understanding of the 12 key legal concepts that you will likely deal with in your life as a business owner.
Join me on Tuesday 24 November 2015 for a special free webinar that provides a further introduction to the Business Legal Lifecycle. Register here.