How to behave in a crisis: 7 advice to businessmen from a lawyer

It seems that the expected crisis has nevertheless begun, and now we will have to forget at least six months about the increase in profits and the development of the company. To survive! Vladimir Fokin, a lawyer with 15 years of experience and founder of the law firm Fokin and Partners, gives entrepreneurs some advice on maintaining their business position and ensuring financial security.

Vladimir Fokin, Founder and Managing Partner, Law Firm Fokin & Partners. A lawyer with over 15 years of experience. PhD in Law. Expert in tax planning, legal security of business and other legal aspects of entrepreneurship.

Fokin & Partners Law Firm has been operating in Russia since 2003 and provides services in corporate, tax, real estate, and intellectual property law.

www.fokinlaw.ru

Advice number one: review your obligations for weaknesses. Any crisis tests partnerships, agreements, and business models, and trade and procurement activities are particularly at risk. The main problem during an economic downturn is a payment crisis: owners are increasingly tempted to default on payments to their partners, from tenants to suppliers. The temptation is strong, but the consequences will be dire, so if an entrepreneur is at risk of defaulting on their obligations, they should choose the most prudent tactic: negotiation. It's much easier to reach agreements with suppliers, tenants, and vendors before the money runs out than to pay penalties, late fees, or even go bankrupt. So, it's best to put aside pride and any false sense of independence and resolve payment issues before they arrive.

Tip two: review existing and new contracts. This step is crucial, as the stability of your business depends on the strength and thoroughness of the contract. There's a comprehensive due diligence process that examines the wording, structure, number, types, and method of execution of all company contracts. The goal of this review is to identify pain points and weaknesses in agreements that a counterparty could exploit. During a crisis, it becomes especially clear that if there's a legal opportunity to default on obligations, only the most conscientious or foolish partner will fail to take advantage of it. But such partners are few and far between, so litigation springs up like mushrooms after rain. To avoid ending up among those companies exhausted by court proceedings and drained of their strength, it's best to review your contracts and amend them in advance. This, incidentally, will also help uncover the unfriendly intentions of individual partners. For example, if after reviewing a contract, you suggest your counterparty impose late payment penalties, and they refuse, it's clear they were counting on late payment. Negotiate, seek compromises, and find ways to protect yourself from such risks.

As for the contracts not yet concluded, they also need to be concluded taking into account the increase in guarantees. If you work on a post-pay basis, and a bank guarantee is too expensive for you, try to protect yourself with the personal guarantee of the business owner to whom you ship the goods. One of my clients did this, and it really helped to remove the risk of non-payment: even as the director of the LLC, the counterparty risked all his personal property, so there was simply no question of non-payment of the debt. If partners refuse to give such guarantees, let them pay in advance. Being a debtor in a crisis is not so scary - it is unlikely that they will reach you at all. But the lender has a hard time, so it’s better not to be at all, but to pay the client according to the scheme “in the morning - money, in the evening - chairs”.

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Tip three: pay attention to your loans. During a crisis, it's advisable to get rid of unprofitable or risky loans. These include loans for large amounts that can't be repaid all at once, as well as those secured by collateral, such as business assets. Remember that a late payment can lead to foreclosure, which is a surefire way to bankruptcy. Therefore, if you haven't accumulated any deposits in the face of a difficult economic situation, at least keep track of your loans and plan for their repayment without delay.

Tip four: Review your relationship with staff. The goal of this step is to create a kind of legal autopilot that will allow you to get rid of ineffective staff and make the remaining employees dependent on actual profits. It may not sound kind, but a crisis is a crisis. Business owners should review employment contracts, job descriptions, and compensation terms. A difficult economic situation is the perfect time to convert a percentage of actual profits into a larger portion of earnings and begin setting specific sales targets for staff. Sales targets can be approved monthly, and a clause in the employment contract stipulating that the bonus percentage is set on the first of each month. These are strict conditions, but they will allow you to identify strong and weak employees and get rid of the latter completely legally. Incidentally, given the threat of staff turnover, don't be lazy in protecting your client base and stipulating liability for its theft. Don't rely on the labor code: it poorly regulates the process of parting with employees. Write everything down in your employment contract, and formalize every agreement with your staff on paper according to all the rules.

Tip #5: Calculate the risks in your relationships with your business co-owners. Do your partnership agreements provide for any negative scenarios? Most likely not, as verbal or written agreements with co-owners typically only cover profit sharing, leaving operating losses uncovered during lean years. A lean year is the best time to remember the risks and amicably divide them between you and your business partner. Failure to do so effectively will likely doom the business, as the reluctance of one partner to share responsibility for losses incurred by the joint venture often leads to conflict and the collapse of the entire enterprise.

Tip six: Review the relationship between owner and manager. As with lower-level staff, relationships with senior managers require defining performance principles and formalizing them. In other words, you should review the business plan and tie the manager's performance metrics to it. This is necessary so that if the company declines, you can justifiably fire the top manager based on objective metrics rather than subjective perceptions. At the same time, incorporate proposals for cost reduction and profit improvement into the business plan, and reconsider your expansion plans. A crisis is the time to preserve everything you've accumulated.

If you are a hired CEO, then you need to know how to protect yourself from corporate, tax, and even criminal risks that are silently following you. Vladimir Fokin spoke about how a top manager can protect himself in the article “Fundamentals of Occupational Safety of the General Director” published in Shoes Report No. 113.

Tip seven: Prepare for audits. There will be even more of them than before. The treasury has been depleted by major events, and the overall economic situation leaves much to be desired. Now is the time to replenish the budget at taxpayers' expense! Prepare yourself and your employees for the fact that the inspector will inevitably find a reason to assess additional taxes and penalties against your company, so all you can do is minimize these reasons. Don't keep unnecessary documents in the office, protect your computers, and learn to maintain a strong legal position during an inspection. Check your business for weaknesses. Many entrepreneurs conduct their business as usual, and only turn to lawyers when things get tough. Reviewing such cases, I often see ridiculously childish and offensive mistakes, although there are also cases that only lawyers would understand. For example, recently, auditors have begun penalizing those who overpay VAT for things that aren't subject to it: this applies to payments for import and export services, which legally qualify for VAT exemption, but in reality, no one takes advantage of this exemption because they don't want the hassle. Now, inspectors have come up with the idea of ​​fining companies that still pay VAT in such cases, even though this is completely contrary to both the law and common sense. All possible oversights can be prevented legally and painlessly during a legally prepared audit, but once they are discovered during a real tax investigation, in 90% of cases these errors can no longer be corrected, and the company incurs losses and even risks criminal liability. Incidentally, the relaxations in the process of initiating criminal cases were recently revoked: whereas previously, they were initiated only after an audit and additional taxes were assessed, now cases are initiated immediately during the audit, depriving businesses of the opportunity to take their last breath before paying colossal fines. This was done to please the tax authorities, proving once again that simply being law-abiding is no longer enough in our country. You need to be prudent and extremely cautious, even if you're not doing anything illegal.