Considerations for business owners: How planning your exit can help you organize and grow your business

Authored by John Norling & Guillaume Aimé
Published by In Business Magazine

Considerations for business owners: How planning your exit can help you organize and grow your business

Starting and growing a successful business is the dream of any entrepreneur. Just like any journey, you need a plan or a map if you are going to reach your desired destination efficiently. If you start your business without any thought or consideration of how that business will be structured or your end goal, you will likely face unnecessary hurdles and be far too focused on putting out fires instead of growing the business.

Start with the end in mind

Nothing inhibits or prevents growth like a lack of planning. Entrepreneurs and new business owners generally do not consider their exit strategy when starting or entering into a new business venture. To measure success (i.e., growth), you need to answer a few questions. What are your goals? Is this a long-term family business? Is it a career for the owners to pass down to family? Or is the objective to build a successful business with the ultimate goal of going public or being acquired by a strategic buyer?

There is no single best structure for a new business, but your answer to each of these questions will assist you in determining how to best structure your new entity, so you can avoid unnecessary challenges in the future. So, it’s important to consider these questions and organize wisely from the start. Be proactive.

Organize wisely and document everything – prepare for the “what-ifs”

Choosing a business structure is a significant step in eventually growing your business. There are many legal and tax considerations which will factor into how you structure your business, and it is crucial to seek competent legal and tax advice when structuring your business.

There are four common ways to structure a business:

  1. Sole proprietorship, which is the easiest type to form and leaves you in sole control (and also solely liable for any debts or obligations of the business).
  2. Partnership, which is the default structure when two or more people establish a business.
  3. Limited liability company (LLC), which combines some of the benefits of the corporation and partnership structures (such as providing liability protection for the owners while avoiding some of the formalities which corporations need to follow).
  4. Corporation, the two main forms of which are a C corporation (typically for larger businesses or businesses with a goal of going public or being acquired) and an S corporation (which provides certain tax benefits but is limited as to the number and nature of shareholders.

Many businesses start out with a shared idea or among a group of like-minded people. But sometimes, those shared ideas differ, and if you do not begin with organizational documents that define how the business will be governed, your business could face unnecessary disruptions that undermine the growth and development of the business.

Your organizational documents should consider and address issues such as how the business will be managed, who will make the decisions, how new owners will be admitted, what rights the current owners have to transfer their interests, and, perhaps most important, dispute resolution mechanisms in the event disputes ever arise between the owners.

When developing your business’ organizational documents, some relevant questions to ask are:

  • Will all owners be actively involved in the business? If not, will the owners have different rights and responsibilities?
  • Who will make the day-to-day decisions regarding the operations of the business? What important decisions should all owners have a vote on?
  • What happens if there is a disagreement between the owners? If you have two owners and one wants to go right and the other wants to go left, who decides?
  • What happens if an owner dies, becomes disabled, files bankruptcy, becomes a party to a divorce proceeding or has a creditor attach his or her ownership interests? What happens to the ownership interests? How does the business protect itself?
  • What happens if an owner commits an act which causes material harm to the business? Or commits a criminal act, employment discrimination, or harassment? How does the business react? What can it do?
  • What if one of the owners just wants out? How are the ownership interests valued? What are the business rights/obligations to reacquire the ownership interests? Can the departing owner transfer the interests to anyone?

There are myriad provisions available to include in your governing documents to help you avoid and resolve the above issues. For example, if the owners are evenly split on a decision, a deadlock provision is a mechanism to resolve that deadlock. In the event of a divorce, death, or disability of one of the owners, your governing documents can include provisions to decide ownership and/or provide for a succession process. If a business owner wants to sell his or her equity interests, a right of first refusal (“ROFR”) can grant other owners the right to purchase such interests first, either for the same terms as the third-party purchaser offered or at a discount.

The above are just a sampling of the issues which need to be considered and documented in a business’s organizational and operational documents. Failure to do so could result in significant uncertainty and disruption which could materially distract the business and its owners from the ultimate goal of any entrepreneur – growing and operating a successful business.

Seek competent advice

Perhaps the most important advice to business owners is to seek out competent legal and tax advice and do not be afraid to listen. You are an expert in your business. This may not make you an expert in every aspect pertaining to your business. A good business lawyer and a good tax advisor are valuable members of a business owner’s team.

The legal, tax and regulatory environment for businesses is in a constant state of change. It is virtually impossible for a business owner to stay informed of these changes and still have time to focus on his or her business. Business owners need trusted advisors to help keep them on the right track.

From the requirements under the new Corporate Transparency Act enforced by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to recent actions of the Federal Trade Commission and the Department of Labor unveiling final rules banning non-compete agreements and increasing overtime pay eligibility, respectively, the rules of the game are ever-changing. When added to the normal, ordinary course issues faced by businesses, such as corporate and securities issues, employment and labor issues, employee benefits, tax structuring, landlord/tenant relations, real estate financing, regulatory compliance, intellectual property protection, and various other transactions and disputes that can arise and impact your company’s growth, can become overwhelming to a business owner.

Develop a roadmap for your business, seek competent advisors, and put yourself in a position to focus on the growth and development of your business.  

About the authors

John Norling is a shareholder at Gallagher & Kennedy in Phoenix, Arizona. For over three decades, he has advised businesses, business owners, and individuals on all aspects of their operations, from day-to-day operations to strategic planning. His substantive practice includes commercial transactions, real estate, business organizations, corporate law, mergers and acquisitions, federal and administrative compliance, business contract negotiations, and advertising compliance.

Guillaume Aimé is a senior associate at Gallagher & Kennedy in Phoenix, Arizona. He advises companies of all sizes across diverse industries in securities and business transactions, including public and private offerings, SEC reporting, and mergers and acquisitions. Guillaume also advises companies and venture capital firms in VC funding and helps companies with their corporate governance, entity formation, and commercial contracts.

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