Five Legal Considerations To Recession-Proof Your Business

In mid-December 2022, Jeremy Lawson, Chief Economist and Head of the abrdn Research Institute told Warwickshire businesspeople attending the Annual Insolvency Conference to expect 12 months of “difficult markets” as the economy shrinks. He added that things will get worse before they improve but warned businesses to “avoid any foolish short-term decisions”.

The latest report by KPMG, forecasting the economic situation over the next 12 months predicts that although the downturn will be a long one, the drop in economic activity will be relatively modest when compared to previous recessions. Unemployment is expected to remain low, and inflation is set to fall next year. For businesses in Coventry and Warwickshire, already experiencing a fall in customer spending on top of ongoing recruitment challenges the news of an inevitable recession is deeply worrying. However, several legal factors can protect your commercial interests and even encourage growth in unfavourable economic times.

One – Negotiate one or two break clauses in your commercial lease

A break clause in a commercial property lease allows either the landlord or tenant to terminate the lease before its official end date. Most commercial leases are granted for a period of five to seven years. If your business suffers a downturn and your existing premises become too expensive, being able to break your lease early can save your company. On the flip side, if your organisation grows and your current property is no longer fit for purpose, exercising a break clause will allow you to move to larger, more suitable premises.

Two – Have your commercial contracts drawn up by a solicitor to avoid contract disputes

Contractual disputes increase in a recession as circumstances that prevent one or both parties from performing their obligations under their commercial agreements occur more readily. For example, suppliers who are waiting on payments from other customers may struggle to deliver goods to your business within a contractually agreed timeframe. And if the performance of a contract becomes unprofitable due to a downturn in demand, one party may want to terminate the agreement early or at least vary its terms.

A well-drafted contract will contain provisions to protect your best interests, regardless of the economic environment. For example, you can insert a comprehensive dispute resolution clause that sets out a process for dealing with disputes through negotiation or mediation, leaving formal litigation as a solution of last resort.

Three – If you have to make redundancies, ensure you understand your statutory duties

Making people redundant is the last thing any employer wants to do but sometimes the choice is either layoffs or insolvency. The duties and responsibilities of an employer when conducting the redundancy process are set out in various pieces of legislation, including the Employment Rights Act 1996 and the Trade Union and Labour Relations (Consolidation) Act 1992. They include the duty to inform and collectively consult those affected if 20 or more employees are being made redundant over 90 days or less and pay statutory redundancy pay to employees with at least two years of continuous employment.

It is extremely risky to make employees redundant without taking legal advice. Although an Employment Law Solicitor will charge a fee, this amount normally pales in comparison to the cost and stress of having an unfair dismissal claim brought against you.

Four – Streamline your debt recovery processes and procedures

The most essential element of any business during a recession is healthy cashflow. Without this, you cannot pay your invoices, hire new employees, or invest in innovative products or alternative revenue streams/markets.

Chasing unpaid invoices is draining and time-consuming. Using a debt recovery portal backed by a law firm takes the stress out of sending a Letter Before Action and/or bringing legal proceedings to recover your debts. It also frees up your time to work on projects that will drive your business forward and encourage growth.

Five – Think about civil litigation claims as an asset

Although we said in point one that litigation should be a last resort, sometimes going to court proves inevitable. If you have a professional negligence, contractual, or any other type of commercial claim, you could be entitled to thousands of pounds in compensation. Yes, commercial litigation is incredibly risky, which is why most SMEs choose to forgo their rights to bring a claim, even if they have a compelling case. However, there are ways to mitigate your risk, for example using a third-party litigation funder, entering into a Conditional Fee Agreement, and taking out legal expenses insurance (such as After The Event insurance). Your Civil Litigation Solicitor can advise you on all the options available to you and let you know if you have a claim worth pursuing.

Wrapping up

Economic downturns provide an opportunity to think creatively and ensure the policies and procedures designed to protect your commercial activities are in place. An experienced Solicitor can provide the advice you need to survive and thrive over the next 12 months.

To talk to us about any points made in this article, please call us on 02476 231000 or email enquiries@askewslegal.co

Please note that this article does not constitute legal advice.