Taking a business from the start-up phase to the growth period, and finally to the transition or selling point requires careful structuring considerations. While new business owners are often simply trying to get their company moving and profitable as soon as possible, it is important for the health of a business to consider what the end game might be.
“If you are thinking ahead to the day when you will sell your business, start now by considering whom the buyer might be in the future,” says Manning Elliott partner Rick Gendemann. “Ultimately, who buys your business will depend on what you have to sell.”
In order to ensure that a company reaches its maximum value, structuring a business appropriately in its earliest stages through to the transition period is key.
Rick Gendemann | Supplied
Structuring a new business
Basics like acquiring business licenses, getting a tax number and sorting the payroll need to be taken care of immediately for a new business to have the proper framework.
New businesses also need to understand how soon they will become profitable, and therefore taxable.
“They can start as a proprietorship and convert to a corporation if they don’t need liability protection,” says Manning Elliott partner Peter K. Rogers. “But eventually they are going to want to be in a corporate structure for the most part because of the tax advantages there.”
Initially, a new business is all about survival, getting to a point where there is some cash flow and keeping costs down.
“In my experience, the people that make this work are amazingly committed,” says Rogers.
Peter K. Rogers | Supplied
The growth stage
Getting a company to the growth stage is about sales, generating revenue and delivering quality services, says Rogers. Growth will typically come from the reputation a business establishes in the marketplace.
Owners should structure a business with as much flexibility as possible. Depending on the size, they should consider what kinds of shares they want to issue, and ensure there is a strong shareholder agreement where more than one shareholder is involved.
“Business owners need to grow the top line while keeping costs down,” says Rogers. “That can go on for a few years before they see good profits and can start paying themselves decent salaries.”
Acquiring high-value assets like real-estate or expensive equipment might mean setting up a separate company. This will help with a smooth transition or sale of the business if the acquirer doesn't want or cannot afford to purchase the real estate and prefers to rent.
“Most of the problems with a business, if it’s not well-structured, are on the vendor’s side,” says Rogers. “The purchaser can always buy the assets and make a fairly clean acquisition that way. If you want the purchaser to buy the company’s shares, then you’re going to need to make sure that your company is fairly clean.”
To transition, or to sell
The earlier an owner starts to think about the end in mind, the better financial result they will see, says Gendemann.
Business owners should consider if the buyer will be a partner, management within the business or an outside party. The key here is to make the business as attractive to the buyer as possible. Owners need to make sure they are not too intricately involved with a business before a sale in order to ensure it can carry on without them.
“It is vital that you plan the business transition process with precision, right from your first thoughts of selling through to moving toward the sale event,” says Gendemann. “After planning the process, you must then meticulously execute it to ensure that the financial benefits and rewards are ultimately maximized.”
Transitioning a business with family members involved is quite different. With partners or outside buyers, it's often a clean sale with proceeds received at time of closing. When an owner plans to transition the business to family members, funding for the purchase will likely be structured over a number of years. During this period the owner will have their value funded by the business and they will often maintain a position in the business structure during this buy out period.
Whether transitioning or selling, business owners should develop a time frame for their exit. Once they figure out the current value of their business, they can determine the value they desire come exit time.