Legal and Financial Analysis of ACME Fireworks
Business growth and expansion are often necessitated by an increase in the organization’s market share and consequential expansion in production (Hess & Liedtka, 2012). Marketing campaigns and other strategic measures are always aimed at generating more future revenue for the organization. In such cases, the management and board members are always committed to programs that manufacture the future with respect to increasing customers and shareholders’ value. Small successful businesses eventually face other side issues (aside from expansion in market share and production capacity) such as the need to increase the workforce and the level of compensation. Others include legal requirements in the external environment, new partnerships (in some cases, franchises), need to change the type of entity, and a new business model to meet the changed demands in the internal and external environment of the organization. According to Pearson (2008), growth and expansion policies are usually characterized with both fortunes and perils. The analysis will argue alongside the statement “Growth is associated with a variety of changes, all of which present various legal, managerial, and financial challenges.”
Form of Business
In the United States, the Uniform Commercial Code (UCC) and the Common law guide contract regulations. The Uniform Commercial Code will govern the contracts with the businesses. It governs and regulates contractual transactions with tangible objects and goods, for instance, the purchase of an automobile. In this light, the partnership agreement required between the two is the Uniform Commercial Code (Spadaccini, 2007). Common law is applied in contractual transactions, such as services, real estate, intangible assets, insurance, and employment contracts (Hess & Liedtka, 2012). It automatically renders the agreement null and void if any party changes their level of participation. It follows the “Mirror Image” rule that requires that full acceptance occurs when the terms of the offer completely reflect the image of the actual deal. If there are any changes made, then no acceptance is realized. As such, it is not recommended. It is imperative to choose the right contract agreement because they determine the outcome of disputes. Under the UCC guideline, only significant changes (that introduce material impact) are considered for there to be no acceptance. There is room for additional terms/ changes in quantity (they do not create a conflict).
ACME and its organizational client have not yet entered into a business contract according to the five essential elements of an enforceable contract. A contract becomes valid when an offer initiated by one party is met by the other (acceptance). It is not a mere negotiation, but a real deal that leads to a business transaction. ACME Fireworks commits to supply a variety of fireworks to its inquirers who have not offered tangible disclosures concerning their demands. At this point, it is irrational to embark on an expansion initiative because the inquirers have not placed formal demands. In addition, ACME Fireworks lacks other information, such as for how long they will be required to supply the fireworks, the exact amount of supply per period, and sundry. The second element of a contract is the intention to establish legal relations (Spadaccini, 2007). Legal provisions should govern the agreement if the contract has to attain full validity. The Uniform Commercial Code will govern the proposed engagement between ACME Fireworks and its inquirers. It explicitly highlights the nature and terms of their commercially oriented agreement. What is more, the legal relation offers mechanisms to guide their day-to-day operations and solve disputes amicably.
The third provision of a contract is the consideration of the costs and payments that both parties receive from their engagement. This is the value of the promise realized through monetary payments. Other possible forms of payment include the responsibility given, interest or benefit, right, and others.
The fourth element of a valid contract include a legal capacity, insinuating that both parties ought be of sound mind, free from judicial convictions, and free from bankruptcy (Thakor, 2011). Such a capacity comprises having a general knowledge of the contract. ACME is an un-corporated sole proprietorship business and most of its inquirers are large organizations with lengthy years of experience. They require a regular supply of fireworks but no additional information to seal the agreement. Consequently, both parties are of a sound mind with a clean legal and financial record. Unless ACME Fireworks change its entity from sole proprietorship to any other form, the management will be entitled to unlimited liability.
The fifth element of a contract is that is favors a free will that is reinforced by proper comprehension of the needs and aims of each party (Spadaccini, 2007). In other words, the consent by each party must be free and genuine. Such conditions are the essential elements for the agreement to bind both of them. ACME Fireworks, therefore, considers the specific expenses of the new inquiries in order to inform their genuine and transparent consent (which is informed by their capacity to deliver).
If a spectator is injured by a stray firework from a fireworks display, ACME Fireworks will have to cover the financial expenses accrued by the medical treatment. In addition, the firm may accrue other expenses, such as legal charges, the cost of the suit, fines from the regulators, and sundry. Under the agency law, if a third party is injured through an employee’s initiative, the employer (ACME Fireworks) is liable for the injury caused.
Employment Types and Agency Law
Agency law spells out the terms of engagement between the employee and the employer. It specifically applies when a principal, in this case ACME Fireworks, authorizes an agent (legal officer) to act on their behalf, in the creation of a legal relationship with third parties (employees). There are two types of employment contract in the case study. ACME Fireworks has employed Full-time employees who saw the company grow from humble beginnings. They work full time per week, on a regular basis, and receive a salary at the end of every month. Due to rapid increased demand, the management may hire Casual employees. They include staff members who are employed when there is need. They work for a stipulated number of hours, and it means that they receive only a load fee which is short of sick, personal, or annual benefits.
Sole Proprietorship Versus Limited Company
ACME Fireworks is currently operated as a sole proprietorship. This is the most common and simplest business structure that entrepreneurs chose to implement their business ideas. It is unincorporated and operated by one person, thereby does not offer any distinction between the owner and the business entity.
Considering that the transactions will invoke the Uniform Commercial Code, it is important to change the business entity form sole proprietorship to limited company. It is because of the different liability issues presented by the two. A Limited company will protect the owner’s private life, including their property from liability in case the business falls into bankruptcy (Hess & Liedtka, 2012).
There are financial fortunes for both the employees and the owners for businesses that are interested in expanding their production. Moreover, the shareholders link the perception of business growth with validation of the initial business framework, and represent a successful implementation of the initial vision or startup idea. In contrast, as Pearson (2008) observed, the expansion of a business presents a sole proprietor with myriad issues that require urgent address. For instance, there is need to hire more members of staff to oversee the implantation of new standards and policies.
Secondly, the management should reflect high levels of flexibility by becoming less centralized. In addition, internal politics are inevitable, some executives may adopt protectionist approaches in trying to control and manage risk. There is need for new strategies to handle external competition, and others. This paper aims to explore the growth prospects of ACME Fireworks Company located in the United States. The management recently received inquiries to supply fireworks on a regular basis, but there is no definite time duration for the project. There is need to institute the right steps that will ensure that the business does not incur losses if the new customers halt their inquiries.
ACME Fireworks is a modern company that is on a constant growth pattern. It was started in 1997, and specializes in exporting and manufacturing fireworks and firecrackers. In addition, the organization also supplies professional and consumer fireworks, which are exported to Europe, Mid and South America, United States, Africa, and Asia, aside from 35 other countries (Hess & Liedtka, 2012). The high quality and cheap products explain the good comments that clients reserve for the organization. According to credible sources, it received the ISO9001: 2000
Reduction of Risks
ACME Fireworks started more than 2 years ago at a private garage (Pearson, 2008). It sold ground display and large aerial fireworks, to its retailers. The employee base has grown to 15 members of staff, but the company is a sole proprietorship entity. The management has received inquiries about supplying more ground and aerial fireworks on a regular basis. This calls for the adoption of certain strategies and policies to ensure that the growth of the organization corresponds with regulatory and customer requirements (Spadaccini, 2007). There is also the need to consider the financial costs of the expansion, for instance, expenses for purchasing the raw materials to manufacture the fireworks, as well as compensation for the human resource (Spadaccini, 2007).
The firm will either increase its employee base to meet the expanded production capacity or increase the labor hours per each employee. It means securing more financial resources to meet the increased salary expenditure (Piper, 2007). The most rational move is to higher new members of staff in order to guarantee and safeguard the effectiveness and efficiency of the current staff members. The dilemma occurs because the management does not have sufficient information to determine the length of days that the firm will be expected to supply the fireworks to the new clients. The management is uncertain whether to adopt permanent, long-term expansion policies, or to focus on short-term initiatives, such as hiring the new employees on a contract basis and lay them off as soon as production level goes down. It is vital to consider how long the increased demand will last, because its discontinuation means that the company might not have the funds to pay the new employees.
Risk reduction is the main goal of the top executive organ of ACME Fireworks, especially during the growth and development period. The firm has received new inquiries that are likely to lead to large and consistent supplies of fireworks to relatively big corporations. There are certain types of risks associated with the current prospect that the firm seeks to embark on (Spadaccini, 2007). The level of uncertainty associated with the new venture works to make the initiative more delicate, and it calls for a strategic management paradigm to offer the right approach. As discussed earlier, ACME Fireworks is an ISO9001: 2000 accredited, meaning that is has the right management tool to convert its entity from sole proprietorship to a limited company (Hess & Liedtka, 2012).
Some of the possible risks identified from the case study include financial, legal, and image risks (Hess & Liedtka, 2012). In order to meet the demands of the new inquirers, ACME Fireworks is required to secure more capital to finance its labor and raw material costs. The financial department has already provided the exact estimates , but they are not sure about the exact level of demand. It insinuates that an over production of fireworks above the level demanded by the inquirers would lead to wastage of resources and owner’s value. Prices of individual fireworks are also likely to fall because of too many supplies (Spadaccini, 2007). Such an occurrence is also risky to the firm’s image, as no shareholder would want to invest in a company that indulges in surplus production. Another possible financial risk is in the unclear communication offered by the inquirers. They have not yet made an exact placement, yet the management considered the terms of the contract and arrived at the possible estimates. The proactiveness is commendable but care should be taken to ensure that losses are not incurred when the inquirers change their minds and fail to pursue their interests.
Legal risks are inevitable when partners enter into binding agreements (Hess & Liedtka, 2012). The purpose of binding commercial contracts with the law is to provide a legal guidance and direction during engagement. Another possible reason is to provide an amicable and rational way to solve disputes that arise when one/both parties go against a certain provision. It is crucial to hire a competent legal officer who will manage the contractual and human resource agreements in order to protect ACME Fireworks from legal suits.
Display and Performance of the Business
Forming a limited liability company is the best initiative that ACME could adopt while interacting with its inquirers who reflect high volumes of trade. A sole proprietorship involves a small degree of legal requirements. As such, it is associated with a relatively small fraction of legal cover that may expose the entity to judicial suits. The owner is not required to take any formal action in its formation (Hess & Liedtka, 2012). In other words, as long as a person attains ownership, the legality of the business is derived from its routine activities. There are also financial constraints under this arrangement. The lack of legal backings and documentation inhibit loans from banks and financial institutions because of the poor credit worthiness rating. Forming a limited company would help the future existence of ACME Fireworks because of the increased options of raising money. Such companies are able to raise finances through selling bonds, shares, and other financial instruments. What is more, other external investors is available to offer support during peak periods.
If the best structures will be set up for the AMCE Fireworks Company, it will fetch many benefits for this venture. In addition to that, the business will gain high profits on its due investments, and enjoy maximum protection, if merits and demerits are considered before coming up with the business structure. Businesses that embark on growth and development strategies face a myriad of risk factors that require a strategic approach to control and manage the associated risks. ACME Fireworks has received high intensity supply inquiries, but the management is not certain about the duration of the transaction. The dilemma arises as to whether to adopt long-term measures or short-term, temporary initiatives that align with the periodic demand. According to this analysis, the most important step for the Chief Executive Officer is to consider the legal requirements before entering into a binding contract with the new inquirers.
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Hess, E. D., & Liedtka, J. (2012). The Physics of Business Growth: Mindsets, System, And Processes. Irvine, CA: Entrepreneur Press.
Pearson, J. W. (2008). Mastering The Management Buckets: 20 Critical Competencies For Leading Your Business or Nonprofit. Ventura, Calif: Regal.
Piper, M. (2007). Surprisingly Simple: Independent Contractor, Sole Proprietor, And LLC Taxes Explained In 100 Pages or Less. Chicago, Ill: Piper Tax Group.
Spadaccini, M. (2007). Business Structures. Irvine, CA: Entrepreneur Press.
Thakor, A. V. (2011). The Four Colors of Business Growth. Burlington: Elsevier Science.
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