I am often asked “Is it pessimistic to plan for the end of my business when it is just starting?” The simple answer is No.
The failure to plan for the future generally leads to a more costly termination or a lower sales price when the time comes to end the business. A new business owner cannot know where the business will eventually end up, but planning for basic contingencies can prevent later problems. Additionally, while discussing and planning is important, those conversations are lost without committing those plans in writing and having them signed by the relevant participants.
Some of the basic contingencies to consider discussing and including in company documents include, but are not limited to, the following:
- Sale: Because most small business are sold in an asset sale, a business should be formed with a tax-efficient asset sale in mind. With some exceptions, this means forming a pass-through entity of some type (S-corporation, partnership, or disregarded entity). It may also mean splitting various assets into separate entities, which allows for more sales options.
- Liquidation: In a typical liquidation, the equity owners only receive the balance after all creditors have been paid. Because most liquidated businesses are failures and not successes, the equity owner may want to be a creditor instead of making a large capital contribution to the new business. Additionally, if an owner lease expensive equipment to the company, instead of the company buying the asset, that equipment will not be available for a creditor.
- Business Divorce: If there is more than one owner of the business, there is a reasonable likelihood the owners may need to go their separate ways, and planning for such eventuality is important. There are a number of different solutions that can be created, but the most important part is having them negotiated and agreed to in writing.
Planning ahead is good business and allows decisions to be transparent. The more information that is contained in company documents, the better the owners will be prepared for contingencies both anticipated and not.