Business growth in emerging markets presents a host of challenges to entrepreneurs and business managers alike. The key is to be aware of the changing risks in a growing business and to know and understand what legal tools are available to enable you to better deal with emerging threats to your business.
It is important to have a good understanding of the concepts of “growth” and “risk”. In essence, growth means expanding or scaling. This may mean different things to different businesses therefore it is critical to be clear on what aspect of your business you wish to grow. Business growth can occur internally, such as an increasing number of staff or capacity, and/or externally such as increasing customers or geographic presence. Once clarity is reached on where the business is headed, set specific and ascertainable goals and targets.
Risk can be defined as events, situations or circumstances which create future uncertainty and may lead to negative consequences or loss for a business. Different types of risks can be identified upfront such as financial, strategic, operation and reputational risks, to manage the probability of loss. Considering the compliance implications of each of these risks can be a useful mechanism to avoid or mitigate the risk. If, for example, a business is set on increasing its capacity, compliance with Health and Safety regulations and labour laws will become critical to avoid future losses.
When assessing risk, be realistic and acknowledge the constraints of your environment, industry and business. Analysis and assessment tools can be utilised to identify and assess your local and other environment, industry players and internal business. Accept assumed risk or exposure to the potential loss or damage and plan accordingly. This includes accepting that not all risk may be avoided but the reward outweighs the probable loss; or you are able to reduce the extent of loss.
To avoid or mitigate the impact of possible loss from a legal perspective, be sure to know the law. Consider applicable legislation, regulations and common law, which include some case law and precedents. If any uncertainty exists, consult a specialist who will provide professional legal advice. Thereafter, ensure you have a sound legal risk management plan in place and incorporate it into your business framework.
Familiarise yourself with legislation that applies to your business, for instance the Labour Relations Act, the Consumer Protection Act, the National Credit Act, the Broad-Based Black Economic Empowerment Act, the Protection of Personal Information Act, industry specific regulations and other relevant legislation.
If, for example, you are transacting with consumers as defined by the Consumer Protection Act, know what protections are afforded to the consumer and what your obligations are in this regard. Once this has been established, apply to implementation in business strategies, processes and systems.
When growing globally, know the basic requirements to enter and trade in different markets and ensure consistent compliance. It is imperative to understand and prepare for legislative and cultural requirements of the market you wish to enter. It will be helpful to look at, inter alia, international law, common law, international best practices, treaties and embargos.
When, for instance, considering expanding to African economies, consider legal factors which may impact your business such as work permits, visas, employment and tax laws. Other factors to consider include quality and level of infrastructure, power, political stability, financial and economic environment to establish the ease on entering and doing business as a new market entrant.
Develop internal policies to regulate relationships and avoid disputes and penalties, for example grievances policies and refund-return policies. In today’s technologically advancing world, social media risk management policies also bear great importance. Businesses are exposed to potential loss form legal action as result of employees and customers actively participating on on-line platforms.
In particular social media risk management policies are required to manage on-line complaints by customers or misconduct by employees or manage employees’ productivity. Be cautious of potential vicarious liability for discrimination, harassment or defamation on social media platforms. In the UK case Otomewo v Carphone Warehouse Ltd employees posted the following status update on the claimant’s Facebook page, without his permission: “finally came out of the closet. I am gay and proud of it”. It was posted during work hours and during the course of employment and involved an interaction between staff and management. The employer was found vicariously liable for the conduct which amounted to harassment on the grounds of sexual orientation. This risk of vicarious liability equally exists in South Africa, hence the importance of social media and internet policies.
Ensure legally binding written agreements are in place with all parties. This ensures the rights and obligations of each party are recorded as well as the consequences of failure to perform. A written contract outlines the terms of the agreement, subsequently avoiding any misunderstanding or confusion. A supply contract will, for example, regulate penalties for late delivery or early termination as a result of regressive behaviour. If you are in the business of transiting goods across national borders, a contract will help establish consensus on exactly when risk and ownership in the goods will pass from one party to the other. This is a critical component to managing risk.
As a business grows more working capital is consumed to fund growth. Capital is obtained by borrowing funds or attracting investors. It is important to consider the pros and cons of each option and make an informed decision. When borrowing funds, one of the risks include exposure to variable interest rates or other repayment terms. It is therefore necessary to have a legally binding loan agreement in place to protect both parties.
If you are willing to share ownership of your business, consider equity investors to finance your business growth. In this instance, the structure of ownership in the business will change and you will require a shareholder’s agreement to encapsulate the terms of ownership and capital structure.
When contemplating the purchase and sale of goods between countries establish the economics, legislative requirements and costs of exporting and importing. Consider factors such as labour consequences, economic growth, identify optimal goods to export or import, determine which countries to import to or export from, permits, excise duties, ad valorem tax or custom duties, penalties, VAT, and limitations or prohibitions on exporting or importing.
All importers and exporters in South Africa are required to register with customs at the South African Revenue Service (SARS). Permits are also required to import certain goods (controlled goods for example radioactive chemical elements, fossil fuels or arms and ammunition) as well as to export certain goods from South Africa (for Tiger’s Eye and Sugulite). Application for permits must be made to the International Trade Administration Commission (ITAC). Important legislation to take note of when importing or exporting goods includes the International Trade Administration Act, Customs and Excise Act, Promotion to Administrative Justice Act, and the Promotion to Access to Information Act.
As an exporter or importer of goods or services be aware of risks like loss of or damage to goods in transit, supplier problems, non-payment, transport delays, political or economic instability of other countries, currency fluctuations, legal risks (legislation of foreign countries), natural disaster, and import duties, just to name a few.
In managing these risks do market research about the foreign country’s politics, economy, culture and business environment; identify all the risks you are likely to encounter and assess the seriousness of each risk; plan on how to minimize or avoid the risks and obtain insurance to cover the risk.; and plan legal risk management strategy.
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