Business Law and Mitigating Risk

Business Law and Mitigating Risk

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Part 1: Risk Audit

Introduction

Risk audit refers to examining and documenting the efficiency of responding to how people deal with the risks that have been identified and addressing the issues that have caused them and the effectiveness of the process of risk management. Carrying out an audit of risk is an essential part of developing a management plan for an event. Risk audit entails identifying and evaluating all risks. A program can be implemented to address any event that is not anticipated that leads to a detriment to an organization or harm to individuals. Conducting a risk audit of a project can aid in ensuring that the project is on track and the expected budget. Risk audits of a project are often carried out throughout the project in the quest to ensure that the plan is healthy all along. The review is aimed at ensuring that each procedure is being carried out in the desired manner. The audits have to be objective since their wellbeing may be at stake.

Business owners and project managers have to ensure that audit risks are carried out appropriately, in a manner that is well-defined in the project’s risk management plan. Risk audits might be carried out when the involved parties are conducting routine review meetings of the project. Alternatively, the team might settle on holding separate meetings. In the essay at hand, I will examine the process of risk audit to ascertain the legal process that should be implemented by a family business for the entire procedure to be successful.

Background of business-family business expansion

Companies might have to go through a lifecycle with different stages where the development is linked to the external adaptation of the surroundings. On the other hand, the evolution of a family business may be understood grounded on the external impact on internal changes and in which the maturity factors influence perspectives the internal pressures of the organization. Nonetheless, irrespective of where changes sets in, work settings and social structure might have to align with the settlement (Parada & Dawson, 2017). The expansion of family business has certain unusual features and has to be analyzed concerning the lifecycle differently. Additionally, it is a theme that rises necessarily because of the family business’s wealth and economic impact. Research has revealed that family businesses stand for more than 80 percent of firms across the globe, representing more than half of the world’s GDP. Research has shown that members of one family own most of the companies that we have around. On the other hand, only 15 percent of those businesses manage to celebrate at least the fifth birthday.

The life span of a family business can be understood as grounded on business, the structure of ownership, and the family’s evolution. Generally, family business begins with entrepreneurs. On top of that, according to the development of a family business, it ends up with another family (grandchild, daughter-in-law, son-in-law, descendants, spouse) and changing the structure of ownership (Diaz-Moriana et al., 2019). The family’s evolution may imply that the values of the founder do not proceed with time and that there are not being consistent over time and are not aligned to the connections. As a result, the company is less restricted from the disarrangement of the family. Another circumstance is linked to the sudden scenarios that might result in speeding the movements of succession, with unconditionally no preparation for the management of the organization, ownership, and family at the end of the day.

On the other hand, research has revealed that family businesses are growing faster and solving unemployment issues across the globe. Family businesses not only pose advantages but also disadvantages as far as making an excellent growth decision is concerned. The benefits refer to the family’s ability to sacrifice the company-putting more duration of time without necessarily taking pay, making the organization access affordable loans with little or no interest. On top of that, it involves giving the company a very lenient schedule of paying back and generally employing all the available opportunities to make the company successful at the end of the day. There is not much of being in an enterprise that is self-assured to develop. On top of that, members of the family offer emotional support that often comes along in plenty when one is being faced with wit the risk and turbulence of growth.  It is worth to note that a family business can quicken the process f decision making as compared to non-family companies since there is a high-trust surrounding that can be a real advantage when one is willing to grow.

On the other hand, various obstacles face organizations when they are trying to take development measures. Older firms have a problem with legacy. In other words, a family business turns out to be stuck in tradition and is unwilling to change its culture of doing things since they believe that it will be disloyal to the founder’s vision. On top of that, family businesses, particularly the small ones, tend to rely on the informality. Studies have shown that family businesses are reluctant to employ non-family workers since they feel that the move will change the functionality and the culture of the organization. Additionally, family businesses have a fear of losing the grip on the interior tasks of the organization itself. Families tend to wish to call all of the shots, such that if the growth means they will require employing more staff and choose to rely on non-family employees, they might not be able to continue growing as a company.

In family businesses, there is a severe problem when the original entrepreneur is there watching as other people take control of his business. At the same time, simultaneously, his successors feel frustrated and overshadowed. In parallel to the family’s power, there arise stages of company stagnation or growth, and the evenness with which a certain kind of transition is made available has a direct impact on the success of others.

Most people assume that the growth of the family business is always right. On the other hand, that notion is not necessarily true. When family businesses decide to grow, they have to pursue profitable and sustainable healthy growth. It is essential to keep in mind that growth has its shortcomings. Some family business entrepreneurs go for growth with wrong reasons in mind (Neubauer & Lank, 2016). Research has shown that most of them do not carry out the necessary research before investing in it. As a result, they always find their respective businesses out of control at the end of the day (Ward, 2016). Healthy growth has to incorporate finding a balance between maintaining a high level of profitability, service, and quality, in addition to growth, (this helps the firm to address the issues of competition).  Research has revealed that family businesses tend to concentrate on short-term growth, while many of them are unable to maintain that growth at the end (Cater & Young, 2016). Family businesses might end up getting ahead of themselves to discover that as much as they are trying to attract a large number of clients, they might not be able to meet those customers’ standards at the end of the day.

Additionally, the organizations might not be able to produce goods that will ultimately meet the demands of those clients. Consequently, problems of cash flow might arise. Family business owners claim that more clients need their products and services than they initially realized. This trend in demand leads to financial, personnel, production, marketing, and sales issues, which can put the continuation of the business legacy of the family into jeopardy.

The transition problem is another more significant issue as far as family businesses are concerned. Potential stock investors, competitors, friends, wives, outside directors, employees, professional managers, and financiers all have more than passing interest concerning changing of hands in the management of a family business. Some of the above transitions appear to be in order. On the other hand, most of the developments are not orderly. Most of the involved parties resign in protest of the process of transition.

Legal and Commercial Risk Factors

All businesses are faced with various risk factors-family businesses are not exempted from the above fact. At most times, family businesses are considered to averse risk, mostly in comparison to non-family companies (Zellweger, 2017). Recent research has revealed that family businesses often forego the available excess returns to raise their odds of surviving when business is not good. As far as managing risk is concerned, owners of family businesses have to strategize on managing tolerance of managing risk among their family members. Most importantly, the word risk raises the feeling of loss’s probability, uncertainty, and danger without considering the potential upside, which is inherently present in the process of making decisions.

A structure for engaging in a dialogue on risk is a groundwork for aligning the involved parties on the possible dangers and including the management of uncertainty in the family business decisions. The structure begins with articulating and uncovering the “risk appetite” of the family business. The risk appetite has probably progressed with the life of the family business and has played a significant role in making decisions (De Massis et al., 2018). Identifying the risk appetite of the family business formally aids in aligning stakeholders with the possible risks and, more importantly, embedding the management of uncertainty in the process of making decisions for the company. Risk appetite can be referred to as the type and amount of business risk and family risk the family business is planning to assume in the quest to achieve its strategic non-financial and financial goals. What makes the statements of risk appetite unique for the family business is the impact of the family’s vision and values on how they look at risk and manage it. The board and team of management can come up with a statement of risk appetite that outlines its boundaries appropriately.

To make the question of ascertaining risk appetite robust and alive, we have to include it into strategic qualitative and quantitative criteria for the ultimate measurement of risk. The above data helps the board and management make decisions on the allocation of resources and where to deploy capital and talent. On top of that, it enables the involved parties to make more rapid decisions and more focus on managing risks with the set boundaries. Quantitative criteria refer to the measurements presented by binary numbers, which are valid and objective, like satisfaction survey points of clients and financial ratios. As you contemplate coming up with quantitative criteria, you have to consider utilizing a threshold-target method for their evaluation. This offers a variety of approaches, with the minimum achievement recognized as the threshold being or the preferred performance. Once the target relationships and threshold are set, it is now appropriate to model the strategic decision.

On the other hand, qualitative criteria are not only tricky but subjective to verify. In terms of certainty, they do not help so much since they make up for in respect to the context of risk’s perceptions of the stakeholders. They play an essential role in identifying constraints regarding the feasibility of an exclusive strategic decision, which might not be readily apparent from quantitative parameters. Ultimately, managing risk in a family business can be a tricky affair. It provides diverse personalities among other nuances that might come along as far as the unique surrounding is concerned. Continuing talks with the main stakeholders of a family enterprise is essential to manage the possible risks effectively. Nurturing placement around risks begins with having an agreement concerning the decision-making process on strategic issues before. It goes on with a good set of dialogue and discussion questions linked to the future of the family business to come up with a consensus on integrating decisions related to the business’s requirements, the general objectives of the family, and wants and needs of an individual.

Legal Vehicle

Conflicts form a standard part of operations of a family business, and small startups are concerned. As a result, managers and business owners should develop an effective strategy of ensuring that their companies follow a formal arrangement framework that incorporates standard practices and policies (Rimmer, 2017). Business experts assert that most businesses have an informal style of management that ends up hurting their operations at the end of the day. Additionally, having an informal method of control ultimately inhibits the profitability and the growth of the business-a type of glass ceiling that prevents family enterprises from reaching their potential. It also hinders finding resolutions for the arising conflicts. Businesses should thus come up with a legal vehicle that will eventually help solve various issues that may face the family business. The right car should be in a position of ensuring that the operations of the family enterprise are being carried out as expected.

Legal Agreements

A family business can be a thrilling exertion to most individuals. On the other hand, it can bring significant danger if mismanaged (Aronof & Ward, 2016). It is a fact that not every family enterprise turns out properly. In certain circumstances, disagreements and disputes can tear the family members apart and result in irreconcilable differences. It is essential to take the required legal requirements when one is willing to start a family business.

Family Enterprise Agreement: This agreement outlines what can and cannot be done by family members regarding the business (Sarasvathy et al., 2016). On top of that, the agreement provides the roles and responsibilities of each member of the family and the procedures that have to be followed when vital decisions are made. Having this agreement on board helps avoid many obstacles and issues that have derailed the operations of other business enterprises.

Buy-Sell Agreement of the Family Business: This is an essential document that one has to acquire before starting a family business. It determines what should happen to the business when one or more founding members of the family die or are involved in an accident that will render them unable to continue with the family enterprise (Caudill, 2018). In other words, the document acts as a type of insurance that protects the family members and makes sure that their rights are protected both as key players and as founders of the business. The kind of things protected by this document involves the shares owned by every founder of the business, and the amount of cash one can receive if he or she decides to sell his or her shares one day. On top of that, the agreement helps in preventing the members from the interference of third parties.

Prenuptial Agreement: From time to time, marriages fail to work out in the family. This can have a significant influence on what will happen next to a family enterprise. Before starting a family enterprise, one has to get this document, which outlines what will happen to the business when a divorce occurs (Haag et al., 2016). This is true for any family enterprise and marriage, particularly for cases where a person gets married, and the partner becomes part and parcel of the family enterprise. The last thing that one would wish to happen in this scenario is losing an enterprise you founded to your marriage partner when divorce occurs. Researchers and scholars assert that couples should come up with a family enterprise if they can create a firm groundwork of trust and communication. On top of that, their strengths and talents should also supplement one another.

Starting a family enterprise can be a good move. On the other hand, it should not be started without having the above three documents. Failure to have them poses a potential risk to the family’s destruction that could easily be rectified by having the right documentation in place in the time of a dispute in the family.

Intellectual Property

Intellectual property is one of the essential assets that can be owned by a family enterprise—ensuring that the family enterprise owns and can protect the rights in intellectual property. On the other hand, it needs an understanding of the diverse types of intellectual property as well as how they are acquired and transferred (Dratler Jr& McJohn, 2020). Failure to understand the above concept can leave the family enterprise at the sympathy of third parties or in a position that they will be unable to defend themselves when competitors enter in the industry. In other words, the protection of intellectual property prevents competitors from duplicating, and copying the company’s products. Some of the intellectual property includes trademark law, patent law, copyright law, and trade secrets.

In summing up, staying on the right side of the law is essential as far as the business’s success and existence are concerned. For that reason, it is necessary to have a legal department in a family enterprise. Corporate legal teams have the responsibility of handling compliance, constitutional governance, and risk management issues. Risk management strategy should be the priority of family businesses that would want to remain in operation. In other words, family businesses have to develop strategies for managing risks both for the profitability and longevity of their respective enterprises. Managers and owners of family enterprises should focus on ensuring their businesses’ survival at the end of the day. As a result, they have to know the rules and regulations that apply to their firms’ day-to-day activities. Unsurprisingly, most companies do not understand the legal structure of the business they operate in, thus making the process to be ultimately expensive and might end up risking the entire enterprise.

Part 2: Commercial Scenario

1. I Key commercial and legal term

• Employee agreements and confidentiality for the new workers, as the cooperation with the White Noise, the business has to hire more workers.
• Agreement of distribution if the enterprise is willing to work with a distribution firm

For International market:

• Proper labeling, currency, delivery, etc.

For White Noise

• Payment’s method-clients want to be with Good Bake at a specific date
• Specification-White noise should reimburse Good Bake against any infringement of intellectual property since White House used the logo and branding.
• Resale only to the White House’s guest
• White noise is using Packing-disallowed to amend the packaging since the logo and branding of Good Bake.
• Payment’s time we preferred to be paid by installment

II Changes to the Proposal Terms of White Noise

Since White Noise requires a minimum order of thirty units per day and no minimum orders from the Good Bake, if White House decides not to take orders from Good Bake for one day, this will make Good Bake produce 30 extra units having anybody to buy them. It is risky to get into the agreement; therefore, the counteroffer will be thirty units minimum order from the White Noise daily. Additionally, the second option would be to allow White Noise to make pre-orders delivered the following day with no minimum order from the two entities.

1. Cover Mail

Dear White Noise,

Thank you for emailing us,

We are contented to work with White Noise. The following are my heads of agreements:

• Payment’s method-precise payment, cheque or bank
• Specification-White noise ought to reimburse Good Bake against any infringement of intellectual property since White House used the logo and branding.
• Resale only to the White House’s guest
• White noise is using Packing-disallowed to amend the packaging since the logo and branding of Good Bake.
• Payment’s time we preferred to be paid by installment

However, I will not accept some of your proposals. For instance, I would like thirty units from you daily as Good Bake is expected by White Noise to produce thirty units daily. If White Noise fails to make an order one day, we will produce thirty extra units, which will be a waste at the end of the day since nobody is willing to buy them. I cannot guarantee that Good Bake will deliver the products at precisely 6.30 in the morning due to weather and traffic factors. However, Good Bake will try all the best to provide the products on time. White noise reserves the right to terminate the contract though they have to notify Good Bake 3 months before. However, I am proposing that the two parties should reserve the right to termination.

I am waiting to hear from you soon.

Kind regards

1. The contract of employees has to be considered as Good Bake hire new workers. Contract law asserts that this kind of engagement should be present between the employer and the employee (De Cuyper et al., 2017). Additionally, employees have to sign a confidentiality agreement declaring that they will ultimately protect their employer’s intellectual property.

References

Aronoff, C., & Ward, J. (2016). Family business governance: Maximizing family and business potential. Springer.

Bozer, G., Levin, L., & Santora, J. C. (2017). Succession in the family business: multi-source perspectives. Journal of Small Business and Enterprise Development.

Cater, J., & Young, M. (2016). Family factors in small family business growth. Journal of Applied Management and Entrepreneurship, 21(4), 56.

Caudill, A. (2018). Best Practices in Buy-Sell Agreement Planning. Journal of Financial Service Professionals, 72(6).

De Cuyper, N., & Isaksson, K. (2017). Employment contracts and wellbeing among European workers. Routledge.

De Massis, A., Wang, H., & Chua, J. H. (2019). Counterpoint: How heterogeneity among family firms influences organizational change. Journal of Change Management, 19(1), 37-44.

Diaz-Moriana, V., Hogan, T., Clinton, E., & Brophy, M. (2019). Defining family business: A closer look at definitional heterogeneity. In The Palgrave handbook of heterogeneity among family firms (pp. 333-374). Palgrave Macmillan, Cham.

Dratler, Jr, J., & McJohn, S. M. (2020). Intellectual Property Law: Commercial, Creative and Industrial Property. Law Journal Press.

Haag, K., & Sund, L. G. (2016). Divorce in the family business: unfolding the legal problems by learning from practice. Journal of Family Business Management, 6(1), 81-96.

Howorth, Carole, and Nick Robinson. Family Business. Routledge, 2020.

Michiels, A., & Molly, V. (2017). Financing decisions in family businesses: a review and suggestions for developing the field. Family Business Review, 30(4), 369-399.

Mokhber, M., Gi, T. G., Rasid, S. Z. A., Vakilbashi, A., Zamil, N. M., & Seng, Y. W. (2017). Succession planning and family business performance in SMEs. Journal of Management Development.

Neubauer, F., & Lank, A. G. (2016). The family business: Its governance for sustainability. Springer.

Parada, M. J., & Dawson, A. (2017). Building family business identity through transgenerational narratives. Journal of Organizational Change Management.

Rimmer, J. (2017). The perfect holding vehicle for family business entities?. Trusts & Trustees, 23(6), 678-683.

Sarasvathy, S. D., Ali, I., Block, J., & Lutz, E. (2016). Partitioning socioemotional wealth to stitch together the effectual family enterprise. Family Entrepreneurship: Rethinking the Research Agenda, 14-46.

Thrassou, A., Vrontis, D., & Bresciani, S. (2018). The agile innovation pendulum: family business innovation and human, social, and marketing capitals. International Studies of Management & Organization, 48(1), 88-104.

Ward, J. (2016). Perpetuating the family business: 50 lessons learned from extended-lasting, successful families in business. Springer.

Zellweger, T. (2017). Managing the family business: Theory and practice. Edward Elgar Publishing.