WITH increasing regulatory
oversight and harsh market forces,
practices must make time to
examine themselves for failings and
areas for improvement. But how?
One answer
is to
undertake a
legal audit, a
full-body
corporate
health-check.
In simple
terms, a legal audit gives the
management an overview of everything
that is critical to the survival and success
of the business – and it goes much
deeper than just the finances.
Rather like a business plan, a legal
audit looks at the threats and
weaknesses of the practice and puts
them into sharp relief so that they can
be tackled before they become an issue.
Sole traders and multi-site practices alike
have weak-points and a legal audit will
help find them while developing
strategies to keep them in check.
More importantly, a legal audit can
forewarn of a potentially catastrophic
situation before it arises. As a result,
audits are particularly useful to practices
looking to be sold or in need of
financing; it’s better to find the
problems first before due diligence does.
Of course every business will have
its own take on what should be
examined, but nevertheless, there are
common themes to every legal audit.
Finances
While the annual audit and accounts
present a snapshot of how well a
business is doing, a detailed legal audit
can consider if there are new financing
opportunities or savings that can be
made.
Many firms take the day-to-day
funding of the business for granted, not
necessarily thinking that an overdraft, if
used, is repayable on demand. So
businesses should be thinking about “what-ifs” – what would happen if the
bank unexpectedly withdrew the
overdraft? Could they refinance? How
long would it take?
Despite what the government is
saying, finance is still hard to come by,
especially for a business that is
desperate.
Key employees
It’s surprising just how few businesses
really understand and appreciate how
staff can make and break them. Indeed,
some very large businesses can be very
dependent on a small coterie of people
at the top with their importance
growing exponentially when the
business is in trouble.
In this situation, a legal audit will
help establish the key staff and the risks
surrounding their departure (or untimely
demise). It will examine their
employment contracts to make sure
they exist in writing while ensuring that
all understand their obligations.
It is worth remembering that it’s
often easier to poach a good employee
from a rival than to bring someone up
through the ranks. An audit will check
that employment contracts not only
ensure that staff are rewarded properly
but also that they are harder to poach
through the operation of restrictive
covenants.
Management
It’s also important to examine the management of the practice and the
chain of command. It’s not often
thought about, but how is information,
especially that which is critical,
communicated throughout the practice?
Without good, reliable and timely
information, management cannot make
informed decisions. A well-run legal
audit will establish the lines of
communication and ideally find that
they are flat – that there isn’t layer
upon layer diluting information and
response times.
Directors
Being a director, both in name and in
actions has responsibilities (remember,
the law can give someone not called a
director, but who acts as one, the legal
obligations and penalties associated with
directorship).
The Companies Act 2006 puts
directors on notice of the obligations
which, not unsurprisingly, become more
important when a business is in trouble.
When a business is trading properly
and is doing well, the legislation says that the first duty of a director is to
act in a way which would be most
likely to promote the success of the
company, considering the interests of
its shareholders as a whole.
However, as soon as financial
problems appear directors have to
also consider their potential liability
for wrongful trading. This means
understanding the risks of granting
preferences to another (person or
company) or approving transactions
at below their true value.
Companies, through a legal audit,
can make sure that all directors
understand what the law expects of
them and should set up a process of
monitoring directors and their actions.
Corporate structure
Another key role for a legal audit is to
look at the structure of the practice.
Often, because of pressure of
business, or through the comfort of
good times, once a practice is
established the structure,
shareholders/partnership agreements
and articles of association, etc., are
then ignored.
But when a business needs to
react to a situation quickly it can find
that swift changes are impossible,
exacerbating any crises that may have
arisen. A legal audit will help pre-empt what would happen if, for
example, a partner is expelled, a
shareholder should suddenly die or if
a board meeting is tied.
All businesses, no matter their
form, size or sector, should regularly
examine corporate documentation
and set up pre-agreed mechanisms for
dealing with such situations. Also, if
control of the business is split
between two or more shareholders, a
suitable shareholders’ agreement
should be put in place to govern any
potential disputes.
Premises
Some practices are lucky enough to
own the freehold of their premises,
others occupy under leasehold. Either
way, premises can be the single
biggest fixed cost for a business.
Running through a legal audit may
identify space that is surplus to
requirements, that landlord costs are
rising too quickly or that a better deal
can be had elsewhere. No matter what
the news is reporting, veterinary
practices are under pressure from
increased costs and competition and
that means that any opportunities to
renegotiate with a landlord should be
seized upon.
Practices should look to fix rents
for a longer period or sublet where space isn’t needed. At the same time,
a legal audit may identify ways to
make savings on any commercial
mortgages that may be held.
Compliance
While the veterinary profession is
heavily regulated, that doesn’t
necessarily stop scandals occurring –
some would say the Godolphin doping
episode of 2013 is a case
in point. Sadly,
compliance can often be
overlooked until it’s too
late when a business is
focused on staying afloat.
A legal audit will
check that a practice is
up to date with all the
relevant health and safety
regulations, as well as its
corporate and regulatory
submissions, and will also
identify what policies or
procedures should be
implemented. The last
thing a practice needs,
when focused on keeping
financial problems at bay,
a hefty fine or business-destroying
negative publicity.
Suppliers and clients
Having access to good and reliable
suppliers is fundamental – a practice
needs to know where, for example,
drugs have come from and how they
were stored.
At the same time, having contracts
in place to protect any confidential
information such as pricing etc., is
important. A legal audit may highlight
weaknesses here as well as any
potential for renegotiating contracts.
Considering succession
issues
According to an RCVS survey of
almost 9,000 members in 2010, the
average age was 45.5, suggesting that
retirement planning needs to be high
on the agenda for a substantial
proportion of vets.
Planning for succession is probably the toughest challenge that
many family businesses ever face.
Sometimes the problem is that
nobody in the next generation has the
ability or desire to take up the reins.
However, avoiding this is risky for the
simple reason that without a
succession plan in place, a practice is
unlikely to survive to the next generation
A legal audit should be able to
bring to the table
the need to think
about what will
happen to the
practice when the
current management
want to retire or
move on. At the
same time, it could
deal with sudden
death in the
workplace – the
survivors could end
up having to work
with a widow they
don’t get on with or
an inexperienced
18-year-old who inherit shares in the practice.
The audit process may identify a member of staff who would want to
take the business over. Alternatively,
there may be a rival that may want to
buy out the practice. Procrastination
will only make matters worse.
Whatever happens, discussions
and the outcomes need to be
documented and suitable tax planning
advice taken; it’s quite possible to
arrange affairs so that minimal tax is
legitimately paid.
Summary
So while the annual accounts will give
management an idea of how the
business performed in the previous
year, they will not provide a roadmap
to a secure future.
It can be very easy for practices
to not realise the potential danger
their day-to-day activities and
management styles can pose until it is
too late.