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What is scaling-up?
Simply put, scaling-up means achieving growth in a business, and moving up to the next level. Scaling-up can apply to businesses of any size, but the terminology commonly refers to a company moving from the start-up phase to the next stage in its evolution and development.
For example, the company may have already achieved significant success in its formative years, but is now ready to step up to the next level by entering a new period of expansion and growth.
Scaling-up can bring many challenges, and in this article we summarise some of the key considerations from a legal perspective.
Achieving a successful scale-up involves a significant amount of preparation and planning, much of which may involve the receipt of appropriate professional advice.
Amongst other things, this requires dealing with core legal issues early, so that when the time is right to scale-up, the business will have the right legal foundations to expand and grow.
Some of the principal legal considerations are summarised below.
The vast majority of trading companies are owned by shareholders. In such cases, it is essential that the contractual arrangements between the shareholders are properly documented.
This requires the implementation of a formal shareholders’ agreement setting out the respective rights and obligations of the shareholders. Such an agreement will also typically address matters including business growth and exit strategies, decision-making processes, dispute resolution procedures, and controls over the transfer of shares.
In addition to a shareholders’ agreement, it is often appropriate for the company to adopt bespoke articles of association as its default constitutional governing document.
It is also important to ensure that corporate records are kept properly up to date. Such records include the company’s legally required statutory books and registers, board minutes, shareholder resolutions, and records of dividend declarations for example.
Good practice dictates that the commercial trading arrangements between the company and its customers and suppliers are properly regularised.
As a minimum, formal terms and conditions of supply or purchase should be implemented, together with robust back-office procedures to ensure that such terms and conditions are expressly agreed by the applicable customer or supplier to the exclusion of any other terms and conditions.
In more complex supply or purchase arrangements, detailed bespoke contracts may be required in place of standard, more generic terms and conditions.
In either case, it is important that such contractual arrangements are properly documented to give certainty to the parties over their respective rights and obligations, and to mitigate against potential disputes.
Depending on the nature of the company and the products or services that it supplies, consideration could also be given to appointing sales agents or distributors in geographic territories which would not otherwise be reached by the company. Again, any such appointments should be formally documented in writing.
In any business, the most valuable asset is often its employees. It is therefore important to ensure that all employees are issued with legally compliant written contracts of employment. The use of a properly structured staff handbook setting out all of the employment-related policies of the company is also good practice.
For certain key employees, incentive arrangements could be considered as a means of retaining such employees within the business to provide their continuing support as the business scales-up.
There are various incentive arrangements which could be considered, including bonus schemes, profit share arrangements, or tax-advantaged employee share option schemes such as Enterprise Management Incentive (EMI) schemes or Company Share Option Plans (CSOP) for example.
Each business is different and will have its own unique trading style and brand, and the goodwill in a brand name or logo for example can represent a significant and valuable asset of the business. Although certain legal protections exist as a default right, it is sensible to consider formally registering appropriate trademarks.
Such registrations can apply to the UK only, throughout the UK and the EU, or across a range of other international territories, and provide additional statutory protections against unlawful use.
Depending on the nature of the business concerned and its degree of innovation, it is also possible that certain designs may be registrable, and that any unique ideas or formulations may be patentable. Again, such protections can be limited to the UK only, or can span multiple international territories.
There may also be circumstances where the company wishes to allow others to use its intellectual property. In such cases, it is important that the arrangement is properly documented by a formal licence agreement. Amongst other things, such a licence would include provisions limiting how the licensee can use the intellectual property concerned, and setting out the commercial terms of the arrangement.
One example of the use of such a licence is where the company has decided to franchise its business model, and grants a franchisee the right to use that business model, together with associated intellectual property.
Many companies and businesses trade from either owned or leased properties. In the latter case, it is important that the lease is correctly structured and contains appropriate rights in favour of the tenant, including break rights for example.
It is also important for a tenant that the lease is not excluded from the security of tenure protections of the Landlord and Tenant Act 1954. These protections provide that, subject to limited exceptions, the tenant cannot be forced to give up occupation of the leased premises at the end of the lease, and has a legal right to be granted a new lease on substantially the same terms to ensure continuity in the business.
General compliance good practices include the following:
- Placing appropriate insurances.
- Ensuring compliance with any laws, regulations and binding codes of practice which apply to the business.
- Carrying out any required risk assessments.
- Keeping a register of intellectual property registrations to ensure that expiry or renewal dates are not overlooked.
Scaling-up by acquisition
One approach for achieving a relatively rapid scale-up is to consider acquiring another company or business operating in the same or in a different market sector.
Such acquisitions can operate to increase an existing market share, or to allow expansion into alternative, perhaps complementary, market sectors.
However, it would be necessary to seek legal and accountancy advice in respect of any acquisition, including in relation to the conduct of a due diligence exercise to investigate the legal and financial state of affairs of the target company or business.
Consider the ultimate objective
The end-goal for many owners of a company or business will be to exit from the business in the future and realise value for business that they have created. There are various exit mechanisms available, including an outright sale to a third party buyer, or a sale to an existing management team (a management buyout or MBO) for example.
In either case, the value of the company may well have been increased by achieving a successful scale-up. In addition, implementing matters such as those summarised above will not only evidence the existence of a well-managed business, but will also increase the confidence of a potential future buyer.
How can we help?
The Company and Commercial, Employment, and Commercial Property teams at Wilson Browne Solicitors are ideally placed to advise and assist with any legal matters which may be required to facilitate a smooth and orderly scale-up, an acquisition, or an ultimate exit.