By Ben Hancock
Investors in SMEs have strategies for growth and exit plans to crystalise the return on their investments. It is important for businesses in receipt of investment, or who are preparing for an exit or fundraising event, to be in the best possible shape.
Unfortunately, growth and transactions often fail, even when the business idea and growth strategy are sound. If due diligence exposes issues and areas of risk that have not been dealt with adequately or in time, a business’s value can be significantly impacted, or the deal itself can break down.
So, in this blog, I will explain how a senior in-house lawyer on your team can identify and mitigate these risks and contribute at board level as a trusted advisor, playing a key role in maximising growth and return on investment. And, as many businesses at this stage of growth won’t already have any in-house resource, I will give you some information about what you can expect from a good lawyer and how you can measure their value.
What type of businesses need this support?
Businesses that have received investment from a Private Equity firm, a Venture Capitalist or other private investor, who will be looking to get a return on their investment in three to four years’ time, should consider bringing in a senior in-house lawyer. This resource would also be of value to any business looking for an initial investment, or any SME that is growing quickly but currently has no in-house support.
When is the right time to bring in an in-house lawyer?
Typically, SMEs start with just a CEO. After initial growth, they bring in a CFO or FD, usually in preparation for a first round of funding. The CEO focuses on strategy, growth, stakeholder management and operations; the CFO on financial modelling, MI and IT and, initially, usually picks up responsibility for anything legal and compliance.
As the business grows, so does the workload of the CEO and CFO. Typically, the CFO will then outsource specific legal matters to external legal advisers to do on an ad hoc basis. This is an inefficient and expensive process. The business has no cost certainty on its legal spend and is paying for piecemeal work but getting no contribution to overall strategy. It must often deal with several lawyers, so spends time explaining the business and its goals on multiple occasions, whilst getting different approaches to legal risk that are not necessarily aligned with that of the business.
At this point, the business should start looking at appointing a senior in-house lawyer, to pick up the load, mainly from the CFO, but in a strategic manner that will best support the growing business. The CEO and CFO can then focus on what they do best. Too many businesses leave it too late to engage in-house support as they see lawyers as too expensive. But if you wait until the exit transaction stage, you risk being unprepared for due diligence, and not realising in full the potential return on investment.
Who is the ideal first in-house lawyer appointment?
Though sector experience may be beneficial, the ideal candidate to bring in at this stage should be experienced and a generalist who can cover the wide spectrum of legal issues an SME may face. The work of a growing business is extremely varied, and you want someone on your team who can deal with whatever lands on their desk, whilst laying the framework for sustainable growth and risk management.
As such, it is worth investing in a senior resource with proven experience. Look for someone who is used to dealing with executives and investors, who is commercial and business-focused, a trusted adviser with sound judgment. It is important that your lawyer has a strong relationship with the CEO and CFO and contributes at that level. Too often SMEs make their first appointment a junior lawyer, to save on cost and hope they will grow into the role. This is a risky approach, and their development is unlikely to occur within the investment timeframe. A junior lawyer is typically narrowly focused, not as commercial and does not have the required operational focus, so relying on one as a first appointment in your business is likely to be a false economy.
A senior lawyer will typically be able to cover a wider variety of work and will reach commercial and risked based conclusions in much less time than their junior counterparts. They are faster than external lawyers who do not know the business and therefore tend to be very risk adverse. If budget is an issue, then an SME should look at appointing a senior lawyer on a part-time basis initially, to bring experience and efficiency to the role. In this respect, The Legal Director provides businesses with senior lawyers on a part-time retained basis and allows for this time to be flexed up at a later stage should the need arise. Having this flexibility will mean you always get, in an efficient manner, the amount of legal support that is appropriate for the size and complexity of your business when you need it. There are now more ways to engage legal support, so explore your options before you commit.
What should an in-house lawyer do on joining?
The most important initial step for any lawyer joining you is to understand the business and get to grips with the strategy and the levers within the business to deliver that strategy and plan. The strategy will draw out what is important to the business to achieve growth and return on investment – be that turnover, EBIT, market share, people or technology. It will also expose any immediate issues.
Once your lawyer has that understanding of the business, they also need to identify relevant risks and put in place a mitigation plan, to ensure these are also dealt with and there is supporting documentation for any due diligence process on exit.
How does the lawyer add value?
A good in-house lawyer will identify the elements of your business that are key to income – commercial terms/IPR/people (employment contracts) etc – and ensure they are optimised to maximise turnover, or EBIT or cash.
Horizon scanning is another key skill, and your lawyer should identify risk early and mitigate that risk, so no surprises are unearthed on exit. Alongside this, issues will inevitably arise and an experienced in-house lawyer will be ready to step in, propose business-focused, commercial solutions and sound judgement to deal with these promptly and efficiently, including using ADR should any escalate into disputes.
The work that your lawyer does will have a positive effect on your CEO and CFO, freeing up their time to focus on their roles, and enhance the business and its operations. Collectively, this will improve company performance and achievement of its goals. You should also see a cost benefit in the saving of external legal fees, and minimal disputes distracting the business and costing it money.
How does the in-house lawyer contribute to the exit?
An experienced in-house lawyer will be familiar with what is required for any exit transaction, likely having been involved in transactions throughout their career. Preparation for exit begins in the years running up to it, with ensuring that contracts, compliance and stat books etc are up-to-date and records easily locatable for the due diligence exercise. Having this in order will give confidence to any investor in your business.
A good in-house lawyer will also have identified risks and put in plans to minimise these, and will deal with issues and any disputes promptly and efficiently as they arise. This will make the due diligence process easier and deliver a strong impression of a well-managed, ‘clean’ business to any potential investors.
Finally, as a trusted adviser, your lawyer will also counsel the CEO/CFO on matters relating to the transaction and how these may affect the business and/or its directors.
How The Legal Director can help
Our Client Legal Directors work as key team members in the businesses they support. They deliver for the benefit of the business, contributing to the achievement of strategic goals and minimising risk. Their input is not only transactional – they will ensure delivery of the day-to-day success of the both the business and the stakeholder investment.
And, what’s more, our service model means you can engage lawyers on a flexible, part-time retained basis, giving you total cost certainty and the ability to increase the time as your business grows. If you would like to find out more, please contact us on info@thelegaldirector.co.uk or 020 3056 8538.
