20 Point Legal Health Checklist For Small Businesses

Everything that you do today in working through this list and starting to create a game plan for how you can improve these areas will pay off tenfold, 20 fold, maybe a hundredfold when it comes to the point of creating an asset that has value at the end of the day.

Hello and welcome. The fact is, most small business owners, they typically don't think about the legal side of business until it's too late. It's very much like insurance. Deciding that you need it after your house is burnt down is a little bit too late. You need to be thinking about these things up front and getting the right structure, the right systems and policies and the right protections in place. And that's why I've got our guest joining us today, Joanna Okey. She's a commercial lawyer, been in the game for over 20 years. She's also the author of Buy, Grow, Sell, a podcast host as well. Most importantly, she's a systems thinker. Now I've already done some, some work with Joanna on a few different projects and recently she shared with me this 20 point legal health checklist. And I thought, hey, I would love to share it with you. So that's exactly what we're going to be doing today. We'll give you a simple checklist to ensure that you've got yourself covered from a legal risk perspective, just to make sure that your business keeps going as smooth operations. So, but first things first, I would just like to welcome you to the call, Joanna.

Wonderful. Thank you so much. Thanks for having me. I love to talk all things legal. Obviously I know it doesn't seem like a very interesting topic, but and do you know what's not very interesting sometimes for number one, because business owners haven't actually had that first experience where something's gone wrong. As soon as business owners start getting that those first experiences, something go wrong from a legal perspective. Actually it becomes far more interesting to talk about this stuff, work out how things don't go, you know, how to prevent these issues from occurring. But I think the one other thing is quite often businesses see legal stuff as a cost center without, you know, we not exciting and sexy like how do you grow your business, how to get more leads, how to get more revenue, you know what I mean? But, but all of this is just so critical for actually that end goal. What do you want to do in the end? You building to ultimately sell your business? You know, you building, what are you building for? What do you want in the future? How do you use the, this concept of legal infrastructure cleverly to ensure you are Building something that you can sell at the end of the day. So it should be more interesting than people think it actually is.

I'm curious when I think of lawyers, like, you get to see pretty much the worst of business and sometimes the worst of people. So I'm curious if that makes you cynical when it comes to business and how this has shaped you. Like you said, a lot of business owners, it's not until they're in the thick of it that they start to think about it. But you see this all the time.

So, like, absolutely 100%. And, and like, I've seen some, like, really, really sad stories of businesses, you know, when I'm like a real empath. Right. So when, you know, when, when I see people with these struggles in businesses, particularly if I feel like there's a way it could have been prevented, you know, I get quite impacted by it. But I, I feel like that's where the opportunity is. And, and I tell you something else. That said, it's not just when something happens and creates this sort of like, you know, massive issue in the business, a fire that takes a business owner's eyes away from the business, or worst case, they blow themselves up. It's also these businesses that get to the point of exit, you know, and they just don't have an asset that anyone wants to buy, you know, and, and they've spent all this time, you know, seeing their business as their superannuation. They, they, they've invested all this time and effort and money into this, this business and they see the benefit of it, but they're building it in a way that, you know, isn't based on systems that isn't built with a protected legal infrastructure and they've just got nothing to sell at the end of the day. That's sad as well. So am I jaded? No, I'm just, you know, motivated and energized to help get the message out about the small things that you can do along the way that will make a massive difference at the end for a business owner.

Well, this checklist, I feel like that's right on point for what it's here to do. I'll make sure to pop a link over at the Show Notes, but they can get it at systemology.com legalhealth and I'll pop a link through to that so they can download it. It's got all of your details in it. But I. Yeah, how did the checklist come about? And, yeah, perhaps you can tell us a little bit about its purpose. Yeah.

So the, the the basis of this is actually something like it's bas that I created for myself. Maybe, I RECKON it was 20 years ago. So 20 years ago, like maybe 15 or 20 years ago, something like that. And I'd sit down and my whole thing was I love to do legal health checks for clients or for prospects and sort of I want to go through the business. I don't want to be reactive. I want to know where the problems might be before they turn into problems. Because we all know prevention is a lot cheaper and easier than the cure. And so I just had this list of things and I, I built it over time and I refined it and, and then, and I'd go over it again and again and again. So it was a checklist for me. And then there was a point where I was like, oh, I just need to be able to communicate this easier for people to be able to run through it in a bit of a DIY way. And so that's when this sort of self check thing came up. So I sort of took what I was already doing as a checklist but turned it into something a bit simpler that people could use and reflect on themselves and assess themselves and their own business.

Yeah, perfect. Well, I'm going to go ahead and share it and I'd love to be able to run through it with you. I'll just make sure that you can see that. Okay. Yeah, yeah, perfect.

Okay. So like, should be pretty obvious how you fill this in. It's meant to be on that kiss principle, you know, keep it simple. So I'll tell you a bit about what I actually mean by each of these areas. Throw in some notes, you know, maybe print this out, take some notes yourself and then you circle. Like how well do you think you're actually doing? You don't have to share this with anyone. So be brutally honest with yourself. You know, I reckon it's pretty crap at the moment. Or five bulletproof. You know, we've really got this sorted or somewhere in the middle, so pretty easy. And, and these are, these areas that we cover are really, from a legal perspective, the main area that you should be thinking about in your business and doing annual reviews of it. Like, pull this back, come back to it in a year's time, you know, and just do a quick review and work out, you know, have I improved from last year? Have I built on some of these things that were clearly sort of holes or issues that were sitting that, that are sitting in the business when you've done it the first time?

Perfect. So the way that it's structured and you'll see these little blue headings here, like the first one being clients and prospects. And it's just breaks up the business, various categories and then there's points underneath. And then as you said, you just write yourself over here and what you need to do and if you need to investigate it. So the first one under the clients and prospects, when it comes to the terms of service, your agreement with the customers, what. What does that cover?

Yeah, so, so first of all, general concept disputes with customers generally come from a ambiguity. You know, they think that you're going to do something that you haven't done, or you didn't think that you were going to do it in the way that the customer thought it needed to be done. So the way you deal with that is clarity in your terms of service. Usually when businesses start, their terms of service is something like all of the other legal documents in their business, if they even have them that have been, you know, begged, borrowed or stolen. I like to say usually stolen. So they have, like they have seen something good, someone else has gone, got them, they've downloaded a legal template, whatever, but it's something that doesn't actually reflect the business the way it is today. And so what you've got to do is you've got to go, well, do the terms of service. Like, are they just this, this standard vanilla thing that actually doesn't describe the way we work and the things that it is important for our customers to understand and to agree with with us in advance or not. And, and if you're being, you know, frank about your business, if you've started with a document that is some sort of random template or that you've pulled off line somewhere online, somewhere off online somewhere, it will probably not reflect your business and the way that you operate. So terms of service, you need to be clear about, you know, what, when the, when payment should be made and why, what the, what your obligations are, what your customers obligations are, all of those sorts of things. Is that set out clearly in the terms of service? Do you think it reflects you right now? Pretty easy, like either yes, no, or somewhere in the middle.

Yep. And is that something like there's terms of service, you might see it in the footer on a website. Sometimes it's in an agreement that someone might send to the client prior to them starting work or engaging with them. Would that cover all of those?

Yeah, absolutely. Absolutely. That's it. So, so it, and it can be called things like terms and conditions, terms of sale, terms of Trade Terms of service might have anything with that heading. That's what we're talking about here. And sometimes in front of it sits a proposal document as well. So you might. You might have different sort of terms in relation to a proposal, if things like intellectual property are important to you in terms of ownership of intellectual property. So this is a document that deals with all of that sort of stuff.

Yeah, perfect. Would this next one like. It feels like it could also be related with the legislation relating to the customer relationships. Is that the same saying or similar?

Absolutely. And there's, I think, for one, one of the most relevant concepts of legislation relating to customer relationships, it relates to the Australian consumer law, which sits in the. Another bigger legislation. But the whole idea is that you. You and we're talking about your relationship with your clients right here, but there's also, later on, we'll talk about your relationship with your suppliers, because we flip in that sense in terms of rights and obligations. But the Australian consumer law contains a number of provisions which actually have been going through a bit of change recently as well. And that relates to consumer guarantees. So guarantees that essentially are implied in this relationship between you and your customer, whether or not you provide services or goods. And so it's really important that you understand all of this sort of legislation that relates to your relationship with your customers or your clients, whatever you're calling them, to ensure that, number one, you're not. You've not got something in your terms of service that is completely contrary to the legal position and many businesses do. If you've got a terms of service that you've pulled from somewhere, particularly if that terms of service or terms of trade or whatever it's called, was developed many years ago before this, this new legislation. The changes to this new legislation, so super important that you understand that otherwise you're going to have tricky customers come back at different points to, you know, sort of suggesting that you're not compliant with the law. Particularly where you use standard form contracts, and almost all of us do. Standard form contracts are those sort of contracts that sit on your website. So say you've got a. You talked before, Dave, about, you know, terms of service might be that thing where you've got a link at the bottom of your invoice or whatever it is, to your. A website page, have got your terms of service, that's called a standard form contract. And there's a whole heap of things you can and can't do in something like that. So you just need to be aware of that and you need to make sure your terms are in alliance with that, but your systems and processes are as well.

Yeah, perfect. The next section you've got is this house in order structure and structure with the first one being optimized business structure.

This one is critical, so super critical. Because the thing is, if you haven't got this right, often you will not realize that it's not right until right at the end point when there's nothing you can do about it. So it's sort of like this sleeper risk in a business and it can be a massive risk. So there's sort of two concepts, one that's legal and one that's less legal. The business structure concept that is particularly related to the legal approach is how have you protected your assets in relation to your business and how have you arranged the sharing of the business and the decision making and all of those things with your shareholders, which sort of comes into appropriate structured documentation. So I'll talk about that more in a moment. But the first one, asset protection. There's so many different ways to use business structure to protect an organization. And as you grow it can become really important to understand the, the benefits of simple layering in a business. So moving apart assets from liabilities. So that's, that's sort of just one example of the sorts of things we might look at from a legal perspective for a business structure. Another thing that we look at from a legal perspective for a business structure is how flexible is this structure into the future? If you're looking at bringing on board other people into the business now, there's lots of business struct structures that might be appropriate for you when you're small, when you started a business, but that don't have flexibility built into them. And I'll tell you what happens. You get to the point where you've, you've reached this particular size, you decide that you want to do something that requires a bit more flexibility of structure. You decide to bring a business partner in, you decide to give employees a bit of equity or sell a bit of equity to them or whatever the case may be. You suddenly realise you can't do it in the structure that you're in. You're going to have to entirely restructure entire business, which can I share with you can be a pain in the ass the bigger you are. So, so the earlier you get to this, the better. Build yourself a flexible and sensible structure from a protection perspective. The one other thing that we can help point to red flags on and then we really sort of want to involve your finance Your accounting team is in is tax. Do you understand what your structure is creating in relation to tax for your ultimate exit or whatever your ultimate plan is for the business? So all of those things combined is what we refer to as optimized business structure. Do you understand how good your current business structure is for asset protection, for flexibility for the future and for tax in the future, depending on what you want to do with the business.

You mentioned? And all of these are interrelated here because there's the direct asset protection, like, from like an individual perspective to make sure that if the company's getting sued, the business owner's not on the hook. That's another.

Yeah, 100%. And any sort of director asset protection is about exposure of the director to something that might be to. To a risk that might be happening in the business itself. Even on the flip side, other exposures to the director that might have an in potentially have an impact on the business. So it's about sort of separating any areas of risk. Part of director asset protection as well, is not just business structure, it's sitting behind the business structure. What is the ownership within that business structure and what does that look like? What are the. What is the ownership of all of your assets in the background and what is your strategy in relation to the protection of those assets and indeed, who holds the assets? Who is the director in your family, sort of in your family and where you potentially may have multiple people that can be directors, we don't want them all to be directors. So it's about minimizing risk, maximising sort of diversification as well. And appropriate structured documentation just sort of comes back to essentially things like shareholder agreements. So I saw a recent statistic I thought was really interesting. 80% of businesses where there's, you know, more than one person involved in the ownership still don't have shareholders agreement or shareholders agreement that are updated and reflect the businesses they are today. And. And the problem with that is, once again, it's a sleeper issue. You may not even realise until you get to the point where you and your business partners aren't on the same page, what you've created for yourself in terms of risk there. So structured documentation is about, you know, just making sure shareholders agreements. It might also be things like, you know, we might need loan agreements in the background to deal with certain things that have happened in the company. We might need financing agreements to make sure we've got the right security in place. We might need IP agreements if there's IP being used by various entities. So it's all of that. How clean? How are we sure we've got all of the documents that will protect us and, you know, optimise the business for us from a legal perspective?

Yep. And like any good checklist here, if you go through it, it's a matter of rating yourself if you do know. And then if you don't know, then it just becomes something that you might want to investigate and learn more about. So the next section we've got is this employee and contractors. Now, I know we've had some different discussions around systems and processes and policies and the role that it plays with de risking a business. And I'm only appreciating that more and more with some of the discuss I've got with you. But maybe if we run through. I know that's. I've jumped ahead there to the internal processes, but if we start off with thinking about the classification between employees and contractors.

Yeah. So classification of employees and contractors and then within employees that. Correct. Classification or dealing with, you know, casuals versus part timers versus full timers. The. And I. Bill, as I said to you before, like the genesis of this is.