Fast-track to trouble: the problems with growing too big, too soon

Commercial | Print Article

March 2024

So, you recently started a business. That business is now booming, growth has been exponential, and it has become bigger than you ever imagined. So, what’s the problem?

While rapid expansion can be a measure of success, it’s essential to navigate this growth carefully. There are several pitfalls you could fall victim to if your business grows too fast. Heading into a year end and a new year full of resolutions, it’s a good time to take stock and consider whether you have the foundations in place.

Get the structure right

Ensuring your business structure is appropriate can be the difference between smooth sailing and treacherous waters. Different legal structures have different tax/accounting considerations, so it’s important to involve both your lawyer and your accountant early in the process. An incorrect structure could mean you are dealing with adverse tax or accounting consequences. Things to consider:

  • Will you establish a separate legal entity, or will you operate as a sole trader?
  • Do you own personal assets that need protection from business risk?
  • What entity would suit your business needs/goals now but also allow for growth and expansion in the future?

It is almost always easier to make structuring decisions at the outset, rather than when your business is already established – needing to unwind some decisions to fix problems can be a costly and lengthy process. It’s best to do it once and do it right.

Good governance is also key. If proceeding with a legal structure, for example a limited liability company, take the time to ensure you understand the roles, responsibilities, and duties of directors and shareholders to ensure you comply with applicable laws. At this point, it may also be appropriate to put in place a shareholders’ agreement and constitution for your new venture.

Protect your brand

When a company expands quickly, it might overlook protecting its most important intellectual property (IP) – its brand. Neglecting to protect relevant IP can expose a business to risks of infringement, unauthorised use, loss of competitive advantage, and potentially even legal disputes if you end up inadvertently copying someone else’s brand. Things to consider:

  • Is all of the relevant business IP owned by the right entity; i.e., if the founders own the business IP, should this be assigned to the entity?
  • Is your brand one that can easily be copied?
  • Can a competitor ride on the coattails of your success and try to pass your brand off as their own?
  • Does the IP meet all of the legal tests to be successfully registered; i.e., is the trademark distinctive enough?

Robust, written contracts/terms are key

Whether you buy product from a supplier or supply your own goods/services directly to customers or on-sell to a distributor, you need to have a written contract or terms of trade. The best position to be in is to buy and sell on your own terms rather than have unreasonable terms imposed on you – this depends on the circumstances and who you are contracting with. So, do what you can to be in this position, and invest money and time early to make sure that you have appropriate contracts or terms of trade to contract with. Things to consider:

  • How will your business sell its goods and/or services?
  • Will you sell to retail consumers or wholesalers, or perhaps both?
  • What level of credit are you comfortable giving to customers?
  • Do you have adequate insurance in place, including the right type and amount of insurance cover?

Failing to have comprehensive and legally sound contracts/terms of trade in place can lead to issues down the track: how to ensure you are paid, when can you terminate an arrangement that is not working, how can you get your money back if the supply isn’t what you expected. Many problems can be avoided by both parties being on the same page.

Employ or engage on proper terms

With rapid growth comes an increased need for employees or contractors within your business. New Zealand has strict employment laws governing aspects such as minimum wages, working hours, employment agreements, and health and safety. Ensuring that any employees or contractors you engage are on appropriate terms for their role will save you time and money in the long run. Things to consider:

  • When is the right time to employ employees and what terms will you offer?
  • Do you intend to offer employees/contractors ownership in the business?
  • Are you aware of your legal obligations as an employer (i.e., minimum wage, notice periods, minimum leave entitlements, disciplinary and termination processes)?

Next steps

Like building your dream house, rapid business growth can be exciting, but it can also go wrong if the foundations aren’t strong or if you build in the wrong place. If you are thinking of setting up a business, or have recently set up a business, get your lawyer and accountant on board early – and together. This gives you the opportunity to focus on the ‘business’ bit (which you are good at) while we, along with your accountants, focus on the legal and accounting bits (which we are good at).

Let’s not forget the reputational advantages of legal protection and having sound written documentation in place. If you feel like this article has raised a question for you, contact your lawyer.