Lawyers and Your Small Business

What is a Small Business?

Small businesses are easy to conceive but hard to define. If we think of the corner store, most people would agree that the owner/operator runs a small business. But what is it about the corner store that makes it a small business? Is it because it is a family-owned business? Olympia & York has been controlled by the Reichmann family for many years, but nobody would consider that to be a small business. Is it because sales are below a certain level? Well, then what would be the difference then between a small business with booming sales and a big business, with the same sales figures, facing bankruptcy?

Suffice it to say, there really is no definitive answer to what makes a business a "small business". Certain factors will be present in small businesses, such as:

• the business is run by a limited number of managers and there is little delegation of authority (ie. there are few, such as two or less, levels of management and decision making often lies in the hands of only one person)
• the number employees of the business is less than 200
• the company has sales less than $2,000,000 annually
• the focus of the company is on the short-term, rather than the long term
• shares in the company are not sold on a stock exchange
• investment in the company is provided by individuals, family members or friends
• the business operates on a local or regional basis
• the business is not dominant in its industry

Growth Levels of a Small Business

Normally, businesses will move through three levels as they progress from idea to successful reality: (1) incubation; (2) development; and (3) consolidation and comfort. We will examine each of these levels and also the role which the lawyer can play in each level. Suffice it to say, the role of the lawyer will be limited only by combined imagination of the lawyer and of the business person.

Incubation

The business person will take this time to think of the idea around which the business will be based. The new product, service, method of manufacturing, etc. will be devised at this time. As well, the business person will examine the feasibility of marketing this product. This will include making preliminary arrangements for financing, distribution, etc.

In theory, this period should be the height of the use of lawyers by the business person. Many facets of the operation would be better served with the initial consultation of a lawyer. For example, suppose that Mr. Jenner wishes to open a factory to make toys. Naturally, he wants his product line to be known as "Jenner Toys". Unfortunately, Mr. Jenner may not be aware of the toy line "Kenner Toys". By consulting a lawyer, and through a simple trademark search, Mr. Jenner can be made aware of this problem instead of finding out that he cannot use the name for his product line after he has already invested a lot of time and energy. Another example would be in the area of employment law. Suppose Mr. Jenner wants to employ four assistants and his plans call for paying each of them an amount less than the minimum wage prescribed by law. If his lawyer informs him that there will be problems before he hires four people then the problems can be avoided and an alternative solution can be created.

At this stage the business person implements all of the plans which were formed during the incubation level. The administrative systems which will be used by the business are also implemented to ensure that the goal remains on course.

If the theory is that lawyers should be consulted during the incubation stage, the reality is that it is often not until the development level that lawyers are brought in to address problems. This is understandable since it is human nature to want to move forward quickly rather than starting, stopping, consulting the lawyer/accountant/etc., starting, moving ahead a bit, stopping, more consultations, etc. Therefore, at the development stage the business has started to move forward and lawyers are consulted both when problems arise, but also for assistance in establishing business systems.

For example, let us assume that Mr. Jenner's toy factory has started production and the business has been approached by a distributor. Either Mr. Jenner will be presented with the distributor's standard form contract, or Mr. Jenner will want to create a standard form contract of his own. By working with his lawyer, he will help to create a contract which meets his business' needs. As another example, suppose Mr. Jenner wants to ensure some stability in his workforce, so he decides to have the employees sign written employment contracts. Once again, his lawyer can help him create the document he wants.

If Mr. Jenner is buying his business from another person, or substantial assets from another business, the potential traps awaiting him require the guidance and help of his lawyer.
Another aspect will be the implementation of financing for the business. Few people in Ontario have enough money at hand, either personally or through family or friends, to be able to start up their businesses without loans from financial institutions. In almost all cases, the financial institutions will loan money on the condition that they be given security for their loans. The security is similar in nature to a mortgage on one's house. A common form of security is the "General Security Agreement". This document gives the financial institution the ability to seize and sell the business' products, equipment, etc., or to receive payments directly from those who owe money to the business, in the event that the business fails to make its loan payments when they are due. Other security which the financial institution may require include assignments of book debts, assignments of insurance proceeds, personal guarantees, debentures, pledge agreements and promissory notes. Your lawyer will be able to help you to understand exactly what the risks are in providing one form of security as opposed to another. Moreover, most financial institutions have standard forms and refuse to change those forms to suit the needs of individual borrowers. Your lawyer can help you to find creative solutions to allow you to satisfy the business' needs in spite of the inflexibility of standard forms.

Your lawyer will also be available to consult with you on other initial start-up requirements such as the negotiation of a commercial lease or the purchase of property for your business.

Consolidation and Comfort

The business has now established its roots and the focus is upon reinforcement of its position. For example, the business has a market share of 10% and wishes to ensure that this market share does not erode due to either internal problems (eg. distribution problems) or due to increased competition.

At this point the business is at a somewhat happy cross-road: it can either maintain the status quo or it can expand.

In the consolidation and comfort stage, your lawyer, as part of a team of professionals such as marketing consultants and accountants, helps the business through both day to day matters and major problems, either internal or external, which can arise. For example, what if your method of manufacturing is copied without your permission and used by a competitor? Your lawyer can help protect your intellectual property rights before problems arise and can help you enforce them to protect you from such a rogue competitor.

As we see from the various levels, the business is trying to move from Point A to Point B. When it reaches Point B the question becomes whether it wants to stay there or carry on to Point C. Your lawyer, as part of your professional team, will not only help your business reach Point B, but also help to ensure it does not slip back to Point A. However, the lawyer's role will not end with a decision that Point B is satisfactory. Eventually, questions of succession in the business will arise. Using Mr. Jenner's example again, suppose thirty years later his business is successful and he has decided to retire. Who will purchase his interest in his business? At what price and on what terms? If it is a family business, can he leave it to his sons and daughters? What is the best way to make these arrangements? Mr. Jenner's lawyer will have answers to the legal aspects of his questions.

Summary

The rewards of business can be high indeed. However, governmental regulation is not "user-friendly" and the business world can hold traps for the unwary. Your lawyer, as part of your professional team, can help you to navigate your way through what seems like endless red tape and hassles to assist you in the journey towards success. We would be pleased to speak with you about the current state of your business and your present and future business needs.
 
* Portions of this page have relied upon Small Business Management, Third edition, by Raymond Kao (Dryden Canada Publishing)