The secret to successful business planning lies in sticking to the Boy Scout motto: Be Prepared. Owning and running a business involves the interplay of numerous forces, some of which can be prepared for while others cannot. The key to combating these forces while maintaining your sanity and—hopefully—a positive bank account, is to develop and implement a plan of attack that will grow and adapt to the changing needs and issues facing your business.
While each business is different, taking the following 10 steps, broken down according to the age and maturity of your business, will provide your business with a solid foundation upon which to grow and keep you from losing your cool when business takes an unexpected detour.
The Start-Up Phase
1. A Business Plan
As cliché as it sounds, the first step in starting your business is to draft your business plan. The process forces you to identify and examine the numerous legal steps, permits, costs, materials, equipment, personnel and marketing needs your business will face in order to open and remain in operation. By creating a blueprint, you will be able to more effectively marshal assets and time while also decreasing the likelihood of costly surprises. To that end, you must be brutally honest about the costs and resources associated with your proposed business. Deluding yourself about the financial costs and time commitment associated with starting and running your business will not help you in the long run.
2. The Proper Legal Structure
The next step in starting the business is to choose the proper entity structure. Luckily, you have several options to choose from. You can operate as a sole proprietorship, partnership, C corporation, S corporation, limited liability company (LLC), and several other variations of the above listed entities. Each type of entity offers its own set of pros and cons with respect to creditor/asset protection, income taxes and individual levels, fees and formalities. Choose wisely, as this decision can have lasting consequences throughout the life of your business.
3. Operating Agreements
When going into business with another person, it is essential that you have some form of operating agreement or bylaws that spell out the relationship between owners and the manner in which decisions will be made. For example, an operating agreement can provide you with a right of first refusal in the event a co-owner decides to sell his or her stake in the company or when company stock is transferred to another owner’s ex-spouse as the result of a divorce. Remember, it is much easier to reach agreement in these matters at the outset of your business, when everyone still gets along, than it is when money gets tight and tempers flare.
4. A Sounding Board
At some point in the life of your business, you will encounter a problem or issue that falls firmly outside your comfort area. Whether it is selecting the best choice of entity, picking a font for your company’s letterhead, figuring out QuickBooks or payroll, or identifying missing elements in your business plan, having another person to provide guidance or simply validate the scenery can be invaluable (even if you have to pay them for their advice). Business attorneys, accountants, spouses, trusted friends and mentors are all excellent choices so long as you remember to pair your problem with the appropriate advisor.
The Growth Phase
5. Non-Competition or Non-Disclosure Agreements
Hopefully, by this point in your business’s life, you will have begun to see the fruits of your labors in the form of increased revenues and customer loyalty. Unfortunately, the loss of a key employee or business partner can quickly dissipate the goodwill and momentum you’ve created. Thankfully, there is no reason to panic. Non-competition and non-disclosure agreements can prevent this situation from arising by: (1) restricting the ability of employees or partners to join or start competitors; and (2) protecting against the unauthorized use of confidential information such as customer lists, marketing plans, know-how and trade secrets. In short, you do not want to give your best ideas or employees away for free.
6. Protection Against the Loss of Key Individuals
Unfortunately, losing an employee to a competitor is not the only loss your business needs to prepare for. Your business should also have a plan for what would happen if you suddenly weren’t there to run the show. For example, where would you get the money needed to buy back shares from a deceased partner’s estate? Who could make decisions in the event you became incapacitated? Key-person insurance can alleviate some of these problems by providing much-needed funds to facilitate the buy-out of a deceased co-owner, offset decreased revenue stemming from the loss of a valued employee or help bridge the gap created by the extended incapacity of a vital employee. Similarly, a Durable Power of Attorney can empower another person or group of people to make legal or financial decisions on your behalf; thus, avoiding many of the problems caused by incapacity or incompetence.
7. A Willingness to Re-evaluate the Plan
As your business grows, it is imperative that you continually re-examine the plan to see what worked and what did not work. Think of your business like a garden. Over time, different areas will come into bloom while others should be left to lie fallow. The trick is to recognize those areas that prospered, eliminate or modify those that did not, and commit to moving forward. Don’t panic if it feels like you are doing more pruning than planting. Your business will be better off in the long run.
8. Work/Life Balance
When tending your business garden, it is important to remember to set aside some time for life outside of the office. Running your own business can be a wonderful experience, but it can also be incredibly stressful and time consuming. Creating the proper balance between work and the rest of your life will pay dividends both personally and professionally. Get some exercise, spend quality time with family and friends, and then work like hell. Don’t be bashful about writing personal time into your schedule. If nothing else, this will provide you with some needed perspective and stress relief.
The Exit Phase
9. Succession planning documents
If you’re lucky, you will eventually have to decide what to do with your business after your retirement or death. Perhaps, you’ve found a willing buyer or a partner who would like to take on an increased role in the company. The sale of your business is an area fraught with legal and financial dangers and should be approached with care. The array of contracts, negotiations, valuations, buy-sell agreements, asset allocation agreements, and promissory notes involved in selling a business can be staggering. The key is to structure the sale to ensure that you receive full value for the company while minimizing negative income tax consequences. The value of a good attorney or accountant in this process cannot be overstated.
10. An Estate Plan
Similarly, if your exit plan involves leaving the business to your children or another person after your death — or as a gift rather than selling it outright — then you will need an additional set of estate-planning documents. Wills and Trusts can prescribe the time and manner in which certain beneficiaries will inherit the business. This can be useful in avoiding situations where a beneficiary may be a minor, prone to poor decision-making due to mental competency, immature, or have external influences; or, the person may be subject to other estate- or income tax-planning considerations. Additionally, pre-nuptial or post-nuptial agreements can even protect the business in the event of a divorce. You’ve worked hard to build the business and should not feel guilty about wanting to leave it on solid ground.
Regardless of the age or maturity of your business, there will always be forces beyond your control. However, if you maintain the “Be Prepared” philosophy, follow the preceding steps, build your plan of attack, and readjust when necessary, you will have placed your business in as good a position as possible to weather these storms with both your sanity and business intact.
Adam Roark is the owner of the Roark Law Firm, P.A., specializing in estate planning, probate and business development. He has been practicing since 2007. For more information, visit adamroarklaw.com.