Begin your business with the end in mind, part 2
EDITOR'S NOTE: Last month's column breached the subject of creating an exit plan. This month we focus on corporate entity structure.
Nothing's worse than a business owner waking up one morning, deciding to sell the business and retire, but then later, after talking with some friendly buyers, discovering that it's not that easy — all because the original corporate structure established 20 years ago is not tax-efficient for the buyer.
That's what happened to somebody I know. Turns out, the buyers wanted to purchase not the corporation, but its assets (a pretty common occurrence). Either the seller or the buyer would have to pay so many additional taxes that it blew the deal. That was three years ago, and the seller still hasn't found the right buyer dynamics that make sense to both parties. While corporate structure isn't the only issue in this case, it's a significant one.
Even more common are the buddies, trusted friends for years, who started their business, full of excitement as 50/50 partners. "Till death do us part," they said — that is, until a couple of years later when one of them wasn't taking the business seriously and the other wanted to grow it. Not ever expecting to part, they hadn't built the proper exit plan into their agreements. Two years and a few grand in legal fees later, they're still trying to work it out.
From a strategic point of view, the corporate, partnership or individual structure under which you establish your business matters. If you're thinking of starting your own business soon, your corporate structure is one of the first strategic issues to address because it gets at the core of why you're going into business in the first place.
If ever the phrase "begin with the end in mind" had relevance, it's as you're deciding what business structure to establish. Here's where asking the right questions from the outset is key (see box).
Get an Expert
The answers to these and other questions can be answered by a qualified attorney and/or CPA. Note that I stress qualified. Not all professionals are skilled in these matters. You may have a good business lawyer, but he might not be a tax attorney. You may have a good CPA, but she may specialize in individual taxes, not corporate issues. Neither one may be very familiar or experienced in corporate buy-sells. Pick professionals who are experts in the right field.
Just as important is determining the answers to these questions. You might ask, "How do I know what I'm going to want to do with my business 20 years from now?" Your vision of the future is fuzzy, but it's better than a blank sheet of paper. Anything you can do to assist your chosen professionals with the most likely future scenario will be helpful now and, more importantly, later.
The Internet has many sources to get you started. So does your local bookstore. Here's a good one: Entrepreneur Magazine's Ultimate Book on Forming Corporations, LLC's, Sole Proprietorships and Partnerships by Michael Spadaccini.
Real estate agents tell you to buy your house to sell it. That's also sound advice when starting a business. Buy it, structure it, establish it and build it — to sell it. That way, even if you don't sell, selling will always be a viable option when you're ready to sit back and soak up the rays in Aruba.
Clark Vitulli founded America's PowerSports for which he served as chairman, president and CEO from 1998 to 2006. Send questions and comments to email@example.com.