From a company’s inception, its business longevity, stability and growth potential often depends upon how strong its corporate building blocks are.
These considerations warrant time, attention and investment in the early stages to ensure small to medium sized businesses (SMEs) and startups don’t waste money down the line fixing problems that could have been easily avoided.
We provide some tips to minimise legal issues that may arise for startups and SMEs and maximise success in 2018.
Companies should continually review their corporate structure to ensure it is serving current and future business objectives. A key legal component of which would be to ensure the business operating licence adequately covers the scope of business activities, particularly if operating in a disruptive sector where existing licensing categories and policy may not yet have fully developed.
A sound corporate structure can provide flexibility when it comes to raising finance, ring fencing liability, structuring tax and taking on equity investment or seeking a full or partial exit from the business. All of these structuring considerations affect the perceived value of the business.
If the business is structured correctly from the beginning, it will support future expansion without the need for costly restructurings. We often advise successful SMEs that have outgrown their original corporate structure and licence activities, and find the earlier an SME seeks advice on these matters, the less likely they are to encounter obstacles and unexpected restructuring costs as their business grows.
While ensuring a sound corporate structure can assist in raising finance through traditional channels, raising bank loans can be challenging for startups and SMEs in the UAE. For example, the default rate on debt repayments for Mashreq Bank stands at around 20 per cent. We anticipate startups and SMEs will continue to face challenges in acquiring bank loans and, therefore, alternative funding sources will become more prevalent. In recent years, alternative options have presented themselves to startups and SMEs, including peer-to-peer lending options and a number of business incubator and accelerator platforms that can assist in accessing equity investment. To benefit from these alternative funding sources, startups and SMEs must ensure they have a sound corporate and legal structure as well as a managed cash flow.
Startups and SMEs that require a UAE national sponsor or service agent should consider whether these arrangements are adequately documented to protect both their own and the investor’s interests. The type of sponsorship you opt for is also an important factor to consider, whether it be an individual versus a corporate entity. In addition to mitigating the potential risks of such arrangements, the way these engagements are structured can impact on the perceived value of the business. Our Cohesion portfolio of companies offers a robust solution to this requirement.
The ever-increasing importance and value of data means SMEs must be continually vigilant and ensure data is protected and used in the way it needs to be, this usually means ensuring appropriate consent has been obtained in respect of the intended use of the data.
The legal landscape in this area continues to develop in today’s global marketplace. A significant update for 2018 will be the EU General Data Protection Regulation (GDPR) due to come into effect across EU member states on May 25, 2018. This wide ranging regulation could affect UAE SMEs that are offering goods and services in the EU or are engaged in the monitoring or profiling of activities of individuals in the EU (e.g. through the use of behavioural advertising).
A related issue is cyber security – cyber hackers continue to become more sophisticated and SMEs need to ensure their IT systems have up to date security to prevent hackers from disrupting their business, in addition to taking out adequate insurance policies to further mitigate risk.
Cash is the lifeblood of any startup or SME and credit control is particularly important. In the UAE, late payment continues to be prevalent and can be particularly severe on businesses operating at the bottom of the payment waterfall. Ensuring terms of business are robust and provide effective recourse to legal recovery is critical. The continued development of small claims forums such as the DIFC Small Claims Tribunal can be particularly effective for SMEs in respect to claims that are otherwise uncommercial to pursue in other forums. A review of credit control procedures and terms of business can have a significant positive effect on cash flow, and should be continually reviewed.
Startups and SMEs need to ensure they are sufficiently protecting the intellectual property they create in the course of their business operations. Protecting trademarks, inventions, copyright and trade names is critical to preserving value in the business. While the costs of doing so can often appear prohibitive, identifying and protecting critical intellectual property is a worthwhile capital investment for any startup or SME operating in the UAE.
Many startups and SMEs will be aware of the sorts of issues mentioned in this article, but it can still be a challenge to allocate sufficient working capital to obtain the necessary legal support to address these matters. One of the solutions is to deal with law firms who offer alternative fee structures. These can include fixed fee arrangements, success-based fee structures or in some cases can involve a firm taking a small equity stake in the business in lieu of charging legal fees – this particular structure ensures the firm has a vested interested in assisting the business to succeed and allows the startup or SME to avoid incurring significant upfront legal costs. Other options include, flexible fee structure packages like Banks Legal & Corporate Services’ brand Lexflex, which offers experienced in-house legal counsel to suit your business requirements and budget, eliminating excessive hourly rates, providing cost certainty and reducing your legal costs. The legal industry in the UAE is evolving and this is providing a range of choice for clients, which is particularly positive news for startups and SMEs.
Our team have a wealth of experience from leading international law firms and a number of in-house environments. More than just experts in their practice areas, our people are dedicated, engaged professionals who take the time to understand our clients' businesses.
Founder & Managing Partner
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