Articles for Employers, Businesses, People

The Top 3 Legal Traps for Gym Owners

scott-mckenzie

I’m very excited to have our first guest post from one of the Directors at Velocity Legal, Mr Scott McKenzie. Not only our first from Scott but our first legal based article EVER! 

Take it away Scott…

The following three legal issues are among the most common for club owners while also being among the easiest to avoid.

1. Poor Contracts of Sale

You can’t unscramble an egg. If you enter into a sub-standard contract of sale when purchasing or selling a health club, then you can very quickly find yourself bleeding money down the track.

For a purchaser, you want to make sure you are protected if there are any skeletons in the closet. Some examples include:

  • Discovering that equipment has not been appropriately serviced or maintained;
  • Working out that the membership contracts are not compliant with legislation, which creates potential historical risk; and
  • Realising that the intellectual property (e.g. trademarks) of the business is not protected.

For a seller, you need to make sure that your liability to the purchaser is limited as much as possible. For example, if the purchaser runs the business into the ground then you do not want them suing for the underperformance by claiming you misrepresented the nature of the business.

2. Not Having a Shareholders Agreement:

This is one of the most critical legal foundations of a co-owned business and something that can produce an absolutely Armageddon situation if it is not done properly.

A Shareholders Agreement creates rights and obligations in relation to the essential aspects of the business, including:

  1. What happens if there is a falling out? Will one of the shareholders be forced to sell their shares to the other shareholders? Or will the business be sold to a third party purchaser and both parties walk their separate ways? Or something else?
  2. Who gets the final say on big decisions? If an irresistible offer is made to buy the health club, can the majority shareholder choose to force the other shareholders to sell as well? Can the minority shareholders block a sale?
  3. When are dividends paid and how are they calculated? There may be tension between shareholders about re-investing profits into the business versus paying a dividend.
  4. What happens if there is a disagreement? Without a Shareholders Agreement in place, you can very quickly find yourself burning money in Australia’s wonderful courts. However, if you get one prepared properly then you can force any annoyed shareholder to come to the bargaining table and engage in good faith negotiations. Even if these negotiations fail, you can require mediation (far cheaper than the court) before any legal action is commenced.

3. Not Getting Tax Advice

No one likes paying more money than they need to the tax office. Getting proper tax advice is the only way of getting comfort that you are not missing out on any opportunities. For example:

  1. When selling a health club – you may want to get advice on whether you can claim small business Capital Gains Tax concessions; and
  2. When buying a health club – you should ensure that your business structuring is optimal.

For example, buying the business in a company or a trust and the different tax outcome for each should be considered. Also, structuring for asset protection is also worth knocking on the head at the same time (e.g. separating business from land assets and plant and equipment).

Closing Thought

Legal compliance is the equivalent of leg day for gym owners.

Everyone hopes for the best in the beginning. The important thing is to ensure you’re prepared for the worst. Legal compliance is often overlooked but is a necessary ingredient for any business owner who wants to minimise the high cost of resolving issues down the line.

If you’d like a complimentary discussion about any legal issues that you may have, please contact Scott at Velocity Legal on 03 8612 7291 or by email to scott@velocitylegal.com.au.

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