Documentation

4 POST
LegalKart - Download the app for consumer App

Download LegalKart

  • Trusted
  • Affordable
  • Secure
Download Now!
Don't Wait for Trouble: How Regular Legal Check-Ups Can Save You Money and Headaches
Documentation

Don't Wait for Trouble: How Regular Legal Check-Ups Can Save You Money and Headaches

Introduction

Sun Tzu, the ancient Chinese military strategist, once said, "In the midst of chaos, there is also opportunity." While this quote has been applied to many contexts, it perfectly captures the essence of why regular legal check-ups are essential in today's ever-evolving world. Just as we prioritize our physical health with regular check-ups, the same should apply to our legal health. In this blog post, we'll discuss the importance of periodic legal assessments and how they can save you money, headaches, and potential disasters down the line.

 

  1. The Concept of Legal Check-Ups

 

A legal check-up is a periodic review of your personal or business legal affairs to ensure they are in good order and compliant with current laws and regulations. This process usually involves consulting with a legal professional who can identify potential issues, suggest remedial actions, and provide guidance on best practices. While it may seem like a daunting task, it is important to remember that prevention is better than cure.

 

As Benjamin Franklin aptly put it, "An ounce of prevention is worth a pound of cure." By scheduling regular legal check-ups, you can identify and address potential problems before they escalate into costly disputes or litigation.

 

II. Benefits of Regular Legal Check-Ups

 

  1. Financial Savings: Legal disputes and litigation can be incredibly expensive, not to mention time-consuming. By addressing potential issues early on, you can save a significant amount of money in the long run. For instance, reviewing your business contracts can help you avoid disputes, while updating your estate plan can prevent potential family feuds.

  2. Peace of Mind: Knowing that your legal affairs are in order can provide you with peace of mind. This allows you to focus on other important aspects of your life, such as your family, career, or business.

  3. Compliance: Laws and regulations change frequently. Regular legal check-ups can help ensure that your personal and business affairs are in line with the latest legal requirements. This can protect you from fines, penalties, or legal action that may result from non-compliance.

 

III. Practical Examples of Legal Check-Ups

Let's explore some practical examples of how regular legal check-ups can save you money and headaches:

 

  1. Estate Planning: Regularly reviewing and updating your will, trusts, and other estate planning documents can help you avoid potential inheritance disputes and ensure that your assets are distributed according to your wishes. This can save your loved ones from emotional and financial turmoil.

  2. Business Structure: As your business grows, it's important to periodically assess whether its current structure is still appropriate. Consulting with a legal professional can help you determine if your business should change its structure, such as transitioning from a sole proprietorship to an LLP or Private Limited, to save on taxes and protect your personal assets.

  3. Employment Law: If you are an employer, regular legal check-ups can ensure your employment policies, contracts, and practices are compliant with current labour laws. This can save you from potential legal claims or fines resulting from non-compliant practices.

  4. Intellectual Property: Whether you are an entrepreneur, artist, or inventor, protecting your intellectual property is crucial. Regular legal check-ups can help you identify potential issues, such as trademark or patent infringements, and provide guidance on how to protect your work.

IV. The Legal Check-Up Process

Individuals and businesses alike can greatly benefit from conducting regular legal check-ups to ensure compliance and mitigate potential risks. Here is a checklist to guide you in your legal self-assessment:

  1. For Individuals:

  1. Personal Documentation: Review and update essential personal documents such as passports, identification cards, and driver's licenses.

  2. Estate Planning: Evaluate your will, trusts, and power of attorney documents to ensure they reflect your current wishes and circumstances.

  3. Insurance Coverage: Assess your insurance policies, including health, life, property, and auto insurance, to verify adequate coverage.

  4. Employment Contracts: Review your employment agreements, including terms of compensation, benefits, and non-compete clauses, to protect your rights.

  5. Financial Obligations: Regularly monitor your financial obligations, such as loans, mortgages, and credit card agreements, to ensure compliance and timely payments.

  6. Intellectual Property: Safeguard your creative works, inventions, and trademarks through proper registration and protection measures.

 

  1. For Businesses:

  1. Business Structure and Compliance: Verify that your business is operating under the correct legal structure and ensure compliance with applicable laws and regulations.

  2. Contracts and Agreements: Review contracts with clients, suppliers, and partners to ensure they are valid, up-to-date, and adequately protect your interests.

  3. Intellectual Property: Assess the status of your trademarks, copyrights, and patents to safeguard your unique creations and inventions.

  4. Employment Matters: Evaluate employment contracts, non-disclosure agreements, and employee policies to ensure legal compliance and protect the rights of both the business and its employees.

  5. Tax and Financial Compliance: Regularly review your tax obligations, financial records, and bookkeeping practices to comply with tax regulations and maintain accurate financial reporting.

  6. Data Privacy and Security: Implement robust data protection measures to safeguard sensitive customer information and ensure compliance with data privacy laws. 

What is Uniform Franchise Offering Circular (UFOC)?
Documentation

What is Uniform Franchise Offering Circular (UFOC)?

Buying a Franchise is often an attractive investment for many people to earn good returns on a regular basis. Franchise, in simple terms, is a license granted by a Company to carry out business under its brand name. Thus, food outlets like Burger King, Subway give out their franchise to potential buyers. 

 

What is UFOC?

 

Uniform Franchise Offering Circular (“UFOC”) is a document that every person who wishes to purchase a Franchise shall go through. The Uniform Franchise Offering Circular is a document that contains all the vital information about the Franchise model. It is regulated by the rules made by the Federal Trade Commission’s Franchise Rule. Several countries in the world have made specific laws to deal with the working of Franchise businesses in their respective countries. The USA has a Federal Trade Commission which regulates the Franchise business. Unfortunately, India doesn’t have separate legislation to regulate the Franchise Business. It is regulated by the Franchise Agreement itself. 

 

Purpose Behind UFOC

The Franchise Rules set out by the Federal Trade Commission mandates full disclosure of information about investing in Franchise Business. The details set out in the circular help the potential buyers to identify the business. This way, a buyer can decide whether to invest the money in the franchise or not. 

 

The term ‘uniform’ plays a vital role as the franchises can’t change the terms and conditions of the UFOC. This helps the buyers to understand the entire business of the franchise (such as the expenses, future plans, Financial Statements, and various other obligations). It is given to the buyer before signing the Franchise Agreement and the payment thereof. Thus, a buyer should carefully read all the terms and conditions set out in the Uniform Franchise Offering Circular and understand it properly. 

The UFOC is monitored and administered by the North American Security Administrator Association (NASAA). To avoid any loss to the prospective buyer, the Federal Trade Commission made it mandatory for the UFOC document to be in plain English rather than complex legal language to be understandable for a layman. 

 

UFOC Guidelines

If we go through the Compliance Guide of Franchise Rule formulated by the Federal Trade Commission of USA, we will find details about the Disclosure Document and all the 23 items which need to be disclosed to the Franchise buyer. 
 

Under the Franchise Rule enforced by the FTC, the buyer must receive the document at least 14 days before the buyer is asked to sign any contract or pay any money to the franchisor. The buyer has the right to ask for a copy of the Franchise Disclosure Document. 

Some of the important items out of those 23 items of the Disclosure Document are as follows: 

 

ITEM 1: Franchises Background

Item 1 tells us about the entire history of the Franchise Business, i.e., How long the franchise has been in the market, who all are the competitors to the franchise. For example: If a person wants to buy a McDonald’s Franchise, item 1 will contain the date on which it was founded [i.e., 1955 (66 years)], its competitors (Burger King, Dominos, etc). 

 

ITEM 2: BUSINESS EXPERIENCE

Item 2 contains business experiences of certain important individuals, which may include Directors, MD, Principal officer, etc. Such experience gives an idea about who is running the business and is the person is capable enough to run it or not. 

 

ITEM 3: LITIGATION HISTORY

Item 3 discloses all the lawsuits to which the franchisor or any of its executive officers are parties. 

 

ITEM 4: BANKRUPTCY

Item 4 discloses whether the franchise, its affiliate, or any of its executives have been subjected to Bankruptcy. If yes, the buyer must carefully look at the Financial Statements of the Company of the last few years and check whether the business is in stable condition or not.  

 

ITEM 5 & 7: INITIAL AND OTHER COSTS: 

This item discloses some pre-commencement franchise costs. Generally there is no Initial cost to the buyer before starting a business but if some franchise wishes to charge cost, they must disclose it in item no 5. It also explains other fees like royalties and advertising fees., training fee etc. The franchise shall also disclose the estimated initial franchise investment to the buyer. 

 

ITEM 8,12 & 16: SUPPLIER, TERRITORY & CUSTOMER RESTRICTION: 

This item contains all the restrictions imposed on the franchisor. The limits include suppliers from whom one may purchase goods or the goods or services one may offer for sale etc. Such restrictions may limit your ability to carry out the Franchise Business. 

 

ITEM 11: ADVERTISEMENT AND TRAINING

Franchisees are often required to contribute a percentage of their sales to ads and the training of their employees to run a business. Such costs have to be disclosed under this head. 

 

ITEM 13 & 14: TRADEMARKS AND PATENTS

The franchise must disclose all kinds of Intellectual Properties they owe. 

 

ITEM 17: RENEWAL, TERMINATION AND DISPUTE RESOLUTION 

The item will tell you about the terms of renewal, conditions for termination, and if there is a dispute between the Franchise owner and franchisor, how the dispute can be resolved. 

 

ITEM 19: FINANCIAL PERFORMANCE

You can track the financial performance of the company under this item head. It is really important for any potential buyer to go through this item in order to make future decisions about investing in the Franchise Business. Poor Financial performance should be a big cross, and buyers shall not invest in such companies.  

 

ITEM 20: OUTLETS AND FRANCHISE INFORMATION

Item 20 requires the disclosure of statistical information on the number of franchised outlets and company-owned outlets for the preceding three-year period. If the charts show more than a few franchised outlets in your area have closed, transferred to new owners, or transferred to the franchisor, it could be due to problems with the franchisor’s support or because franchises aren’t profitable.

 

UFOC Template
The Template of UFOC can be found on: https://franchiseprep.com/docs/fdd/Sample%20Franchise%20Disclosure%20Document%20FDD.pdf 

Decoding Term Sheets
Documentation

Decoding Term Sheets

What Is The Meaning Of A Term Sheet?

A term sheet is a non-binding agreement outlining the essential investing requirements. It can be a starting point for creating more extensive, legally binding papers. An agreement or contract that complies with the term sheet's provisions will be drawn out once the parties concerned have reached an agreement on the details set out in the term sheet. In general, a term sheet should describe the most significant components of a contract without getting into small details or contingencies that would be handled by a formal contract.

It simply lays the framework for ensuring that the parties engaged in a business transaction agree on the most critical parts, reducing the risk of misunderstanding and unnecessary litigation. It also guarantees that significant legal fees for drafting a formal agreement or contract are not incurred prematurely.

People Also Read This: Joint Venture Agreement Format & Required Documents in India

Typical Clauses Included In a Term Sheet

  1. Is the Term Sheet Legally Binding?: No, save in the case of legal liability for confidentiality, exclusivity, and costs. The goal is to specify the terms and see if the agreement has enough legs to close between the parties.
  2. Assessing the Worth of Your Company: Calculate the value of your firm realistically using comparable companies as a baseline. A high value may look good on paper, but it will also raise the bar for future fundraising if you want to acquire another round.
  3. Due Diligence: It's critical for the founder to conduct full due diligence on everybody they'll be doing business with. One of the major concerns raised by venture capital and private equity firms is that the entrepreneur does not conduct their due diligence on their long-term partner. Be specific about how your investors will assist your company in ways other than finance.
  4. Financial Instrument: Stocks, which include preferred and ordinary stocks, are the most popular equity. Convertible debt notes are becoming more popular.
  5. Partner Participation Rights: There are three categories of partner participation rights, each with a different level of economic upside potential for investors.
    • Non-Participating — The choice that is most owner-friendly. The investor must select between a straight preference for liquidation or a pro-rata share of all proceeds.
    • Capped Participation – Similar to the Full (see below), but the total return from liquidation and participation rights is limited to a certain multiple.
    • Full Participation - This is the most investor-friendly option. The investor gets their liquidation preference first, followed by a pro-rata share of any residual funds. Determine the voting rights of each of the three different sorts of investors.
    • Determine the voting rights of each of the three different sorts of investors.
  6. Pro-rata Rights: Pro-rata rights give initial investors the choice (but not the obligation) to invest in subsequent rounds to keep their ownership, which would otherwise be eroded.
  7. Liquidation Preference: Liquidation preferences define the payout hierarchy in the case of a corporate liquidation, such as a sale or merger. Liquidation preferences allow investors to specify the initial payout amount and breadth that they will receive.
  8. Anti-dilution Provisions: This right protects an investor from equity dilution caused by future stock issues if the stock is sold for less than the original investment price. This also changes relative ownership percentages to prevent new stock investors' stakes from being lowered.
  9. Protective Provisions: Protective Provisions give investors veto power that they would otherwise be unable to wield on the board of directors since their percentage share does not equal a majority vote. Examples are forcible discussions, such as a company sale, stock issuing to costs, or hiring sign-offs.
  10. Drag Along Rights: This provision permits investors to persuade other stock classes to comply to their voting requests in the event of a liquidation event such as a sale, merger, or dissolution.
  11. Right of First Refusal/Right of Co-Sale: Notifies all investors about stocks available for acquisition by other investors and requires board approval of all stock transfers to prevent stock transfers that are done in secret.
  12. Guarantees: If the founder is needed to be a guarantee, specify how and when the guarantor will be removed from the note.
  13. Vesting Schedule: Vesting is the method through which a company's shares/equity are earned over time (typically four years or fewer.) When a founder with vested stock leaves unexpectedly, the cap table is left with dead-equity. This event may have significant ramifications for the remaining founders and funders.
  14. Liquidation Preference: Liquidation preferences allow investors to specify the initial payout amount they will receive.
  15. Confidentiality and non-competition protect investors from conflicts of interest that develop when they try to leverage their portfolio by sharing information or investing in competitor enterprises. The duration of this insurance spans from two to twenty years (as seen in oil and gas deals.) In addition, the founder wants the investor to be entirely focused on guaranteeing the success of their company.
  16. Mediation/Arbitration/Governing Law and Jurisdiction: Disputes arise that necessitate the intervention of a third party. If this action is required, ensure it is handled in the most convenient jurisdiction for you.

People Also Read This: The Startup India Scheme

How Can VCs Protect Their Interests In A Term Sheet?

Four provisions must be included in the term sheet to protect the interests of VCs:

  1. Voting Rights: Preferred stock frequently includes Board seats and voting rights. Venture investors have a greater say in the company's operations, management, and direction due to this.
  2. Dividends: Dividends are features that distinguish preferred stock from common stock. Dividends boost the overall return for preferred investors while lowering the total return for common stockholders. Dividends are sometimes expressed as a percentage of the preferred stock's initial issuance price.
  3. Participation and Liquidation Preferences: Participation and liquidity preferences ensure that the investment is compensated before a liquidity event occurs (when a company is sold, goes public or declares bankruptcy). These considerations are critical if the company is liquidated for less than the amount invested.
  4. Anti-Dilution: In the event of a down round, a firm issues equity at a lower valuation than in earlier rounds, the anti-dilution provision protects investors.

The majority of term sheet protections are paid for by common shareholders, who include founders and workers, so it's critical that they're reasonable and equitable. If a VC is overly shielded, it can stifle a company's growth and success by reducing its ability to attract talent and attract new investors in the future.

Download Legalkart app now

Get 5 mins of talk time Free !
LegalKart Apps

LegalKart- Your Legal Advisor App is for general users who need to avail services like consulting a Lawyer on phone, document drafting, getting property verified by lawyers.