At some point in the lifecycle of most businesses, it will either be sold or new owners will buy in. Therefore, it makes sense to structure your business from the very beginning so as to maximize its future sale value. In a previous post we discussed some key steps that a business owner should take to maximize the value of a business when preparing for an imminent sale.
This post digs deeper into steps you can take when starting up a new business that will maximize the value of your business in the future. Taking these actions consistently will make it easier to value the business and transfer assets or shares at the time of sale.
- The shareholder agreement or LLC operating agreement should not unnecessarily limit transferability of membership or shares.
- Generate regular financial reports from the beginning of the business’s life.
- Use a reputable business accountant. Document what advice the accountant gave you and that the advice was taken (or if not, why not).
- Get in the habit of generating the meeting minutes or resolutions approving all significant decisions within one month of the action and maintain and organize the minutes and resolutions in the corporate files.
- Obtain all necessary licenses and permits, and calendar to keep them continuously updated.
- Vigorously protect your intellectual property: register all trade names, logos and trade dress your business uses or plans to use, then monitor for any infringement of these rights.
- Ensure all business assets (leased equipment, real estate, personal property, contracts) are titled in the correct name of the business. Clearly document transfer or leases of any assets from shareholders/members to the business.
- Limit and document the business necessity of fringe benefits.
- Establish and document processes early and often – this demonstrates good management, which is a key indicator of business value in addition to financial indicators.
Business valuation starts with examination of financial reports. But it also requires due diligence: examination of the fundamentals underlying the financial reports, an understanding of management, customers, and liabilities of the business.
By taking the above steps consistently from the start-up of a new business, you will position your business to hold up well in the meat-grinder of a business valuation process, and maximize its value.
If you are starting up a business, and have questions about how to set up and structure your business to maximize its value, please contact David Closson, attorney and head of our Business Law Group, at [email protected].