The Business Life Cycle:–Ten Questions to Answer at the Start

Most start up businesses never think that there is anything more to business then building the business.  Most mature businesses never think about anything more than keeping profits up and costs down.  Most business owners believe that the future will take care of itself and that someday (not soon) they will have to deal with selling or passing the business on to the next generation.  That is all well and good, but not enough.

A very wise person once said to me that “all businesses are always dying”.  Whether it is a business segment disappearing or contracting (buggy whips), a change in demographics (neighborhood change), loss of source of product or  just a desire to retire, every business owner has to face the reality of their particular business life cycle.

Most business owners will consult their accountant and their lawyer when they form their business.  Both types of professionals will advise on forming an entity, issuing equity, capitalizing the business and setting up the myriad of licenses and tax reports necessary.  Many business owners skip the step of consulting with an accountant or a lawyer and use a self help site to form their business.

Most start up businesses are rather simple in structure.  Maybe one or two owners, maybe a virtual or physical location and very few if any employees.  For many start-ups the businesses life cycle begins and ends in this stage as the “great idea” does not catch on or financing does not materialize.  Shutting down after a few months and a false start is common and not very complicated, if done properly.  The problem is that most business owners expect to succeed and run a successful business.  That brings on various decisions, that are hard and may be destructive if not dealt with up front.

The rule of thumb for most lawyers who represent start ups and small businesses is “think about the end at the beginning”.  I would add, also thinking about what could go wrong in between.

Before a client forms the business, I always suggest that the client create an outline addressing the following issues:

  • Does the business  have a business plan?  Take the time to put one together before launching the business.  Such a plan will cover a number of issues, but should include a realistic analysis of the money needed to start the business and the sources of such funds.
  • Who will own the equity in the business?  Will it be one person, a number of people and how much is each putting up in the way of cash or valuable property for that equity. How important is it to the founders to keep control of the company by owning a majority of the equity?
  • Who will run the business?  If there are more than one person involved, what is the role of each person?  Has each person agreed to provide sufficient time to fulfill the role they have taken on?
  • Have the founders agreed to the amount of debt and cash they are willing to put into the business and the amount of time they are willing to give the venture to determine if the business is successful?
  • Does the business plan provide for a metric to measure success? Have the founders agreed what two do if the metrics for success are not met?
  • What is the ultimate goal of starting the business?  Developing a product, service or method that the business will sell as to others or is it a life commitment to a profession or a trade?
  • What is the strategy for raising additional money for the business?  Debt?  Equity? What will the founders absolutely not be willing to do to raise cash, i.e. give up control, personally guaranty debt, issued preferred equity etc.
  • How soon will the business have to hire employees and how will employees be compensated?  Can the business run without employees for a while?  Does the business require skilled employees to just open its doors?
  • Have the founders prepared a six month budget?  Even though speculative, it is important that the business have some idea before opening of the cost of opening and running the new venture.
  • Finally, are the founders committed to the trauma involved in starting a business?  This involves time commitment, using savings to live on, giving up vacations and security.  Enthusiasm is great but reality will set in quickly. Are each of founders ready to make a moral commitment for a period of time to get the business up, running and successful.

After answering all of the above, it is time to put the answers into writing.  This so-called founders agreement will outline the substance of the first nine questions, but the 10th is the hardest and never makes it into a document.

Even with a solid business plan and a founders agreement , the only thing a business owner can count on is the unexpected.  Sometimes, even after making a commitment, a founder decides that a new job offer is more appealing.   A good buy-sell agreement among the founders and subsequent equity holders is crucial to make such a situation not a fatal blow to the new business.

Maybe a key employee will only join if the employee gets equity in the business.  Not only is this a business decision, but the proper stock option plan or agreement is vital to make sure that this request can be dealt with without harming the future of the business.

Each of these early business decisions will require specific legal and accounting advice in order to be implemented properly.  Your business attorney has to be part of your team if you are seriously pursuing a business.  I will discuss other aspects of the business life cycle in future posts,  Also please take a look at my prior posts on business divorce and related subjects.

 

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