By Joshua D. Freeman
My children’s school has adopted the 7 Habits of Highly Effective People as mantras for instilling leadership principles in the students. While visiting the school for a parent-teacher night recently, one poster hanging on the school's wall grabbed my attention. It was the 2nd of the 7 Habits of Highly Effective People: "Begin with the End in Mind." Although it may not seem significant to the legal implication of starting a business, beginning with the end in mind, is crucial. Understanding where we want to end up, and when, should determine what legal structure to choose for the business.
When a client is exploring with me what kind of business entity is best for them, I ask how and when they plan on getting out of their business. Then, I ask about what kind of business experience are they seeking. Are they looking for a business that will provide an excellent quality of life, or do they want to launch their business like a rocket into the sun?
Starting a business is similar to attending an event. When we attend an event, we expect a particular experience; we plan what to wear, who to go with, how long we'll stay, and what we want out of the event. Do we want to have a good time, make new friends, leave a lasting impression on that connection you’ve been trying to make, eat great food, or something else? The list goes on. Once at the event venue, there are always signs to show us to the nearest exit. These signs make leaving quick and easy when we decide it’s time to go.
We should take the same approach as we would attending an event when starting or running a business. First, we need to plan the business experience we want. Then we need to plan the path to a successful exit. Too many businesses fail because they fail to plan the experience and the exit.
Depending on these plans, the type of business, how it should be taxed, and how to design the capital structure, can be drastically different. Here are some questions that you should ask yourself as you start a business that will inform your planning of the experience and the exit:
- Is it more important to maintain control and autonomy or grow and sell quickly?
- Do I want to have a large team or a small team?
- Do I want to bring in outside investors or keep the ownership of the company to co-founders and family?
- Who do you want to buy your business?
- When do you want them to buy your business?
- How much do you want your business to sell for?
The first three questions all focus on the experience you want to have with the business you are starting. The last three all have to do with mapping the avenues by which you can exit the business. Understanding both your desired experience and exit will allow you to make the best decisions about what kind of entity you form, what kind of contracts you need, and what kind of contacts you will need to successfully execute on the experience and exit you want.