Local regulation as a key issue in business strategy

May 2018  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2018 Issue

A business strategy fails for several reasons. Some of these reasons can be controlled, while others cannot. One of those factors that can be managed is the applicable legal framework. Regardless of whether the business is an SME or a multinational company, an accurate business strategy should not be only about how much money companies need to invest or how to offer goods or services. A suitable business strategy must take into account the applicable and enforceable law, particularly the local regulations where the business operates. There are many businesses that fail because their strategy did not seriously assess the local legal issues.

When starting a business (an activity that requires money and time) a major problem to overcome is one that appears very basic and obvious but can be very serious: whether the commercial or industrial activity that the entrepreneur intends to carry out is legal in the jurisdictions it will operate in. Some businesspeople, particularly those who run startups or who might have little experience, often underestimate the importance of this concept.

Conducting legal due diligence before the company begins to operate is not only desirable but should be mandatory. Due diligence should consist of detailed and focused legal research about the specific industry in order to check which regulations are applicable, the legal risks the entrepreneur faces when starting and developing the business and how to deal with local authorities. Legal due diligence allows companies to not only understand the challenges the business will face, but more significantly it will allow the company to make a more informed decision over whether to actually start the business, or which modifications must be made at the outset of the business to allay any legal concerns. Going deeper, and for practical purposes, legal due diligence may require one or more legal experts, depending on the complexity of the business, and must take into account not only the written regulations that seem applicable to the case but how the law is being enforced regarding the specific business. This includes the experience of other entrepreneurs in the same or similar fields, the approach of the administrative authorities and how judges have decided substantial cases related to the specific kind of business. All of this is expensive and time consuming, but is surely cheaper and less time consuming than solving legal problems when they emerge. Prevention is better in all cases.

A legal risk assessment is a must. Sometimes entrepreneurs prefer to think that those risks do not exist or that focusing on them is wrong. Clearly establishing the company’s existing risks is advantageous as it allows companies to put in place the strategies and tools required to mitigate those risks, thus reducing the likelihood of the company failing or filing for bankruptcy. Successful companies are able to remain operational in the face of legal scandals or lawsuits, not because they have good luck but because they have advanced strategies in place to deal with undesirable legal situations. The only way to put such measures in place is to accurately assess the specific legal risks a business has and receive proper preventive legal advice before the business begins trading.

Something to bear in mind from the outset is structuring an accurate organisational chart to divide responsibilities. Doubtless, it is an issue which must be addressed, not only from an economic and engineering process perspective, but also from a legal one. Some companies forget that the scope of corporate positions and roles must be clear, not only inside the organisation but also outside it. When creating the company, to know who is in charge of what allows management to identify individuals’ responsibilities when issues emerge. It also allows individuals to gain a clearer idea of the role they have accepted. In other words, when people know the legal terms and possible accountability they have, they take their role more seriously and work more carefully. Companies must take local rules and regulations into consideration when they consider the scope of each position when creating the organisational chart.

While companies must utilise business strategies at the outset, they must continue to consider them going forward. Laws change over time, so the conclusions achieved from a legal assessment made during the planning phase of a new venture may be not valid later.

There are some companies, ranging from SMEs to multinationals, that believe lawyers should not be a part of their organisation, either in-house or external counsel. They believe that legal help should only be called for when problems arise. This method of receiving legal advice is not only very expensive for companies, as legal fees increase when litigation is needed or troubles have already come to light, but it is also inconvenient. In the current tightly-regulated environment, making daily business decisions without even the minimum amount of legal advice is worse than doing business without knowledge of market conditions regarding the product or service a company offers. In any event, as legal due diligence is the best tool to assess legal subjects at the outset of a business, a useful instrument to keep a company safe legally is a proper compliance system. If a compliance system is introduced and the right people are charged with putting it into practice, legal issues are less likely to emerge. Regardless of the size of a company, every organisation must have an internal compliance system in accordance with its necessities and complexity.

In summary, legal advice should be a key consideration in any business strategy. A good business strategy always considers local regulations from the start of the business moving forward, as it considerably reduces the possibility of failure.

 

Carlos Fernando Guerrero Osorio is a partner at Guerrero Consultoria & Litigio. He can be contacted on +57 (1) 747 40 96 or by email: carlosfernando@guerrero-cl.com.

© Financier Worldwide

BY

Carlos Fernando Guerrero Osorio

Guerrero Consultoria & Litigio

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