As part of our special focus week spotlighting Lancashire’s growth ambitions, Daniel Fletcher, senior associate at Forbes Solicitors, shares three key areas every regional SME should know to fuel their next stage of success.
It is an exciting time to be a small to medium-sized enterprise (SME) in Lancashire, as the Lancashire Combined County Authority has published its Growth Plan, setting out a range of initiatives aimed at helping SMEs grow and level up.
While growth brings opportunity, failing to address legal risks can lead to costly disputes and missed investment. Here are three key areas for SMEs to consider.
Corporate structures
Many businesses start out as sole traders – a simple and low-administration model that often suits new start-ups. However, a key risk is that a sole trader has unlimited liability for any claims that arise in connection with their business, meaning that their personal assets may be at risk if a claim is brought against them.
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As a business expands, it is worth considering a different structure, such as a private limited company. A company has a separate legal personality from its directors and shareholders, which generally protects personal assets from business liabilities.
Other structures may also be suitable depending on the nature of the business, so advice should be taken on the best fit. This is particularly so if considering investment or a sale in the future.
Where a limited company has multiple shareholders, it is good practice to put a shareholders’ agreement in place. This governs how decisions are made, regulates the relationship between shareholders and sets out what happens if a shareholder exits (whether as a “good leaver” or “bad leaver”.)
A well drafted shareholders’ agreement reduces the risk of deadlock and helps maintain stability as the business grows.
Commercial agreements
As an SME grows, it will typically deal with more customers and suppliers, often involving higher-value and more complex arrangements. It becomes increasingly important to have clear commercial agreements in place to govern these relationships.
Many SMEs rely on terms and conditions (T&Cs) for their customer contracts. Well-drafted T&Cs define the scope of the goods or services to be supplied, pricing and payment terms, delivery obligations, termination rights, and limitations or exclusions of liability. Without such terms, it is far easier for a customer to allege breach of contract and seek damages from the supplier.
If an SME supplies consumers (individuals acting outside their trade), consumer laws provide rights for consumers that cannot legally be excluded. T&Cs must therefore be carefully drafted with the target customer in mind to ensure they are enforceable and compliant.
SMEs that operate on the basis of a recurring revenue model (many software businesses, as an example) are often valued based on the strength and enforceability of their customer contracts.
Intellectual Property
Intellectual property (IP) broadly covers creations of the mind, including inventions, written and artistic works, product and graphic designs, and brand identifiers such as names and logos. Many SMEs generate valuable IP (sometimes without realising it) and may create new revenue streams by licensing these rights to third parties. However, IP has real value only when it is properly identified, protected and enforced.
The first step is to identify the IP that already exists, as well as what may arise from future development. Trade marks can be registered for trading names, logos and sometimes packaging materials for products. A registered trade mark acts as a badge of origin and grants the owner exclusive rights to use the trade mark for the goods and services it is registered for.
Patents protect new and inventive technical solutions. If an SME develops a novel and non-obvious product or process, it may be patentable, giving the owner exclusive rights over the invention for up to 20 years. Alternatively, the shape and appearance of a product may qualify for registered or unregistered design protection. Designs are valuable assets for manufacturing, retail and consumer-goods businesses. The registrability of patents and designs may be adversely affected by public disclosures, so care needs to be exercised.
Copyright automatically arises in qualifying original works, including literary and artistic works (note that the source code for software can be classed as a literary work). Software does not require registration but it is important to ensure that the business actually owns it. Many SMEs commission third-party designers or developers without securing an assignment of copyright, meaning the SME may not legally own the output it has paid for.
Before investing in product development, branding, manufacturing or market entry, SMEs should conduct freedom-to-operate (FTO) searches across all relevant IP rights, not just trade marks. These searches help ensure that the relevant activity will not infringe third-party rights and can significantly reduce the risk of disputes, enforced rebranding, product withdrawal or costly redesigns.
Final thoughts
As Lancashire’s Growth Plan opens new opportunities for SMEs, those best placed to scale successfully will be the ones that take proactive steps to strengthen their legal foundations.
Reviewing corporate structures, implementing clear commercial agreements and managing IP strategically can help SMEs reduce risk, attract investment and protect the value they are working hard to build.
