South Africa is a challenging environment in which to succeed as a small business. Our government regulations can be prohibitive, and the recent COVID-19 pandemic followed on the heels of an economy not performing well and a slow recovery rate.According to Stats SA, there was a 68% failure rate for SMMEs not succeeding in their first year before the pandemic. Since the COVID-19 outbreak, this hasincreased to 75%. Small businesses have also reported a 1,000% increase in debt collection problems as they struggle with clients who do not pay on time or at all.

Reasons that small businesses fail

There could be many reasons a small business fails in its first year: lack of funding opportunities, problems entering the supply chain, legal disputes and complaints from unhappy clients, but legal issues underpin all of them. Whether it be partnership disputes, labour matters, debt collection and poor administration of accounts – all have a legal foundation. So meeting all your legal requirements will increase a business’s chances of success and ease the regulatory pressure on SMMEs. But, unfortunately, you can only do something about the former.

Do I need Legal cover

While many SMMEs recognise the need for a formal legal caretaker in the business plan, many think they do not have the time, money or access to lawyers or legal services. Lawyers are associated with long waits in their reception, travel, and money. It is not an unfounded concern. The drafting of a whole complement of contracts a business might need (service level agreements, employment contracts, partnership contracts, rental agreements and others) could cost up to R100,000. Spending a few hours with a private lawyer to cover fundamental start-up issues could cost up to R10,000.

Thus, many SMMEs don’t invest in that business area, with disastrous consequences down the line. They shake hands on deals instead of drawing up formal contracts with a service provider, for instance, and then have no legal recourse when their invoices are unpaid or the work has not been done correctly. The reputational risk in one highly publicised false accusation on social media could wipe out profits and bad debt that can sink you. In the US and Europe, the concept of legal services in the form of a more affordable monthly insurance premium is well-established. However, in South Africa, it is a relatively new concept. If SMMEs do not neglect this part of the business, it will serve them well.

Many small businesses also do not invest enough into taking care of legal or labour issues. The perception is that because the company is small, the employee’s legal rights are not equal to those in a large business, but they are. It can be difficult for an entrepreneur to understand that people joining them are not cheerleaders for their success but individuals whose main interest is in looking after themselves and their families. Employers often overestimate ‘loyalty’ and does not take into account that employees compare their benefits of those with a big corporation and might feel they are lacking in comparison. People are complicated, fickle and demanding, whether employees, customers or service providers. The best way to protect yourself in this environment is to rely on the law and its structure. Take emotion and ambition out of any arrangement by having a contract drawn up properly. The time and money you spend now will save you in the future, and both parties feel safer that way.

Formalising your business in terms of registration should also be considered, even with the red tape and associated costs. You have opportunities to get exposure to government incentives and benefits for employees like the Unemployment Insurance Fund (UIF). You might also attract a better calibre of employees if you behave like a ‘proper’ business and not an informal trader, and clients might have more trust in you.

Start-up businesses dive into the deep end when setting out in South Africa. And most of them will sink instead of swim in the first year. While there is much admiration to be shown to anyone possessing the courage to attempt to be an entrepreneur in these tricky waters, it is better to ensure that the business makesmoney first. Ideas don’t make money – companies do. And successful businessesmake access to legal services part of their running costs and operations. Make sure you know what all your options are.