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30 Days to ETA | Day #15 – The ETA Business Team

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #14 post I discussed how to achieve ETA Engagement amongst your future employees. Why? It’s awfully difficult — Impossible! — to achieve happy customers if you have unhappy team members, and happy team members are engaged team members in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). But what if there was a way to build the company of your dreams with an ETA Business Team? An awesome ETA Business Team that pulls just as hard as you do towards the business goal of not only acquiring, but building a company in order to sell it for maximum profit. In today’s 30 Days to ETA post, we’re going to explore how we can assemble our dream ETA Business Team of employees and executives, and in doing so how we can cultivate company culture and add employee incentive programs to ensure our ETA Engagement adds to company success… Enjoy!

The ETA Business Team

I shared a career opportunity post on my LInkedIn feed a few months back, searching for a team member to fill an executive position in my company. Sure enough, I had a few candidates present themselves who seemed to fit the position profile. During one of their interviews, I asked the candidate, “Where do you see yourself in a couple of years?” I’ll never forget his reply. With no shame, the young man said, “You know, I’ve always wanted to start my own private equity business. I thought working with you would give me enough information to go out and start my own business one day.”

What? Was I being punked here?? If you’re an ETA business owner, you might consider that answer to lead to an instant “no-hire!” However, I’m curious by nature so I asked the candidate, “Tell me about that answer. What about working here with me will allow you to start your own business?” He said, “I view what you’re doing here Mr. Palazzolo to be best-in-class, and if I was going to go out and attempt to start my own business I know I’d learn the ins/outs of running a business the right way from you.” Flattery will get you far, but not that far with me…

Why is the Grass Greener?

We all know that Entrepreneurship Through Acquisition (ETA) is a tough business model. Perhaps you can look at it and say that it’s not as tough as a Startup Entrepreneur might have it, but it’s tough nonetheless. So in your search for a business and in screening the ETA Business Team, why should you invest all of your time, energy, and money training and equipping what will inevitably be another company’s future employee? The short-answer, we shouldn’t. The long-answer, we should! If we train our ETA Business Team members and they leave to be part of a competitor’s workforce, or even worse, become our competition, we are doing what you probably did to get to the point where you’re exploring Acquisition Entrepreneurship. 

Know that even with the best incentives in place, competing companies will attempt to lure your ETA Business Team members with promises of greener grass. Sometimes, you’ll have to gently prod your employees back in the right direction — Although it’s my best practice to let an employee leave if they’ve made up their mind and they’ve approached me on the topic. By the time your ETA Business Team member gets to you, they’ve probably thought long and hard about their search for/attainment of another opportunity. In other words, they’re already one foot out the door, so let them leave. They will quickly learn that the reason the grass is greener on the other side is because of the enhanced fertilizer being deployed!

Can You Encourage ETA Business Team Loyalty?

If your competitors do happen to catch employees’ eyes with those green pastures a plenty, what can you do to guide your ETA Business Team members gently back to the company? Is a healthy fear of ramifications possible to lead ETA Business Team members in the right direction to back?

While as I previously stated, one foot out the door should be followed by two. However, you may want to consider agreements or restrictions that you can put in place to help keep your ETA Business Team employees from becoming the competitions employees?

  • A Non-Compete Agreement may help keep your employees from working with — or as — your competition.
  • Non-Solicit Agreements prevent your employees from soliciting customers away from you — They also prevent vendors from soliciting your employees.
  • A Confidentiality Agreement keeps ETA Business Team employees from revealing company secrets if they leave or talk to other business owners.
  • Intellectual Property Agreements keep work employees did for a company within that company if the ETA Business Team employee leaves.

We all want to build a strong team of ETA Business Team employees who have our best interests at heart. There’s a fine line between making ETA Business Team employees fearful and establishing healthy protections against employee retribution or employee turnover. Before enforcing any employee agreements, consult with your attorney to protect yourself from any known or unknown business risks — In one instance I can recall, our attorney partner recommended that a noncompete would be worthless and not to initiate. It’s important to keep in mind that not all court jurisdictions honor employer-employee agreements, so check with a legal professional before you implement any of them to be sure they actually protect you.

SUMMARY

ETA Business Team turnover and ETA Engagement (i.e., Employee unhappiness or dissatisfaction) can hurt a company’s operations and value from the future buyer’s perspective. If as a buyer you notice that the organization you’re conducting due diligence on has current employees that don’t want to be at work or have already left via turnover data, why would you want to buy that business? If you decide to buy it, you’ll probably refuse to offer top dollar or valuation multiple for that business. On the other hand, if you discover a business that is treating employees the way you would want to be treated — An ETA Business that offered clearly defined long-term and short-term incentives — you’re willing to pay top dollar.

Sam Palazzolo

30 Days to ETA | Day #14 – ETA Engagement

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #13 post I discussed how your ETA Risk Mitigation — if done properly — will allow you to avoid big and costly mistakes in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). I know that you know the saying, “No risk, no reward!” I also know that strategic risks take into account lead to your motivation. Some of us are motivated by fame, others by money, etc. In today’s 30 Days to ETA post, we’re going to explore what drives ETA Engagement, or the motivations associated with owning/running a business with a team… Enjoy!

30 Days to ETA - ETA Engagement

ETA Engagement

I spent a few years in my late-twenties working for a large Change Management consulting firm. One of the change initiatives I worked on was with a Fortune 500 organization focused on improving their customer satisfaction. To say that their customer satisfaction to that time was bad would be an understatement! JD Power, the true voice of customer data coordination company, reported that this manufacturer was one of the worst not only in their industry, but in business. I was eager to get on this project as I had been a customer of this organization several years back and had the experience of a lifetime, and not the good kind!

As a college student I put my way through school by working and going to night school. I’m not saying this with shame or to brag, just to say that every dollar I made went to my college education. I was able to graduate both undergrad and grad studies with zero debt. I look back on those days and wouldn’t change a thing, except my first big purchase after graduate school left me feeling like I gave away the farm. I overpaid significantly for a product, and on top of it felt like I’d gotten taken advantage of. Life has a funny way of teaching you lessons sometimes. This was one of them where I wasn’t laughing. The company, you’ve probably guessed by now was the same client years later I’d be assigned to in an engagement to raise their customer satisfaction. I was dissatisfied with their product/service and even in this engagement that was four years later, still had a bad taste in my mouth.

As part of the consulting engagement launch, we conducted assessments of customers — both those external the organization as well as those internal. Here’s what the results concluded:

  • Nearly 80% of external customers hated their experience with the organization
  • Nearly 90% of the internal customers hated working for the organization

It’s awfully difficult to have great external customer satisfaction if you have bad internal customer satisfaction. The saying, “Happy employees equal happy customers” rang true loud and clear. The Entrepreneurship Through Acquisition journey is not a road typically traveled alone. As part of your Acquisition Entrepreneur skills you will have to lead others to get to where you want to go. In order to get to that goal destination in the most efficient manner (time and approach), you will need to have ETA Engagement in place, meaning your team will have to be 100% engaged in what you are doing. With everyone pushing/pulling in the same direction, traction can be achieved.

Happy Customers can’t occur if you have Unhappy Employees!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Building ETA Engagement

As you approach the acquisition of your future business, you will be faced with questions from your team members about their role in your company’s future. Regardless of how effective you believe you are in sharing your ETA Mission, Vision, & Values (See Day #9’s post by CLICKING HERE), this can cause major concerns. Team members will worry about their future job security. On the other hand, some team members will worry about losing seniority or respect. Emotions run amuck whenever we business owners where they are at and where they are going, and ETA Engagement success/failure lies in the balance.

Entrepreneurship Through Acquisition individuals I work with often pull-up and ask, “How can we build a team dedicated to helping us reach our goals in the business?” If you have a stable bench of team players who help you realize profit in your business, more than likely, you’ll want to be philanthropic. You’ll want to show benevolence towards those individuals who are in the dirt and the grime, pulling towards the goal with you.

ETA Engagement Strategy Goals

Before you “give away the farm,” so to speak like I did in the opening of this post, let’s look at strategies you can implement to incentivize employees and still have your desired pay-out while running your business. Keep these concepts in the back of your mind while you decide what incentives to offer:

  1. Give all team members a way to piggy-back on your company’s financial success
  2. Have contingencies in place to ensure the commitment of your executive team
  3. Reward the team members for actions you want to encourage

Long-term ETA Engagement Incentive Plans

So what kind of rewards can you offer employees? If you don’t plan to give away stock shares, but you want to be benevolent and fair what exactly can you do to encourage ETA Engagement? One way to incentivize team members over the long-term course of their employment is to offer them a stock-option. While I could spend multiple blog posts on the topic of stock-options, my goal of this article is just to introduce you to the idea at its highest level.

I’ll tell you, too, that if you’re going to entertain the idea of a stock-option plan or stock options for your company, you’ll want to have a competent attorney and a power-house accountant on your professional advisory team. There are plenty of red-tape barriers and legal risks surrounding stock-options, so you’re going to need a good consulting team (See Day #6 – The ETA Team by CLICKING HERE).

Create A Stock-Option Employee Incentive Plan

So at its simplest, a stock-option plan is when you provide your employees with an option to buy stock in your company. Notice, I didn’t say that you’re giving your employees stock in your company. No, you’re providing them with the option to purchase stock in the company. At the same time, you’re controlling most aspects of the stocks in this stock-option. You are:

  • Setting the number of shares or units employees can purchase
  • Fixing a purchase price for each available share
  • Creating a vesting timeline

If you can get an employee to invest the money he earns into the very company for which he works, then you have a dedicated employee. You have someone who sees value in your business and puts his dollars to work within it.

Phantom Stock Options

Now the stock-option method eventually has you give up stock in your company. But what happens if you don’t want to give up stock? There’s another way to offer long-term employee incentives. Some people call this incentive strategy “phantom stock” or stock appreciation rights. Basically, in this method, you’re providing money to the employee without ceding ownership or control.

Within a phantom stock-option, you can create a bonus structure for key employees that pays them based on a “phantom,” or figurative ownership, share in your company. So while you own 100% of the stock in your corporation (member units is an LLC), you can pay your employees an ownership percentage when your company does well. That way, your employees don’t get all up in your business from an equity perspective, but they stay motivated and dedicated to your end goals by receiving a financial performance amount.

Short-term ETA Engagement Incentive Plans

Not all employees see a long-term reward as a reason to stay at a place of employment. Therefore, business owners should probably offer incentives along the way to encourage ETA Engagement. Short-term employee incentive plans can keep your team members happy and motivated so they don’t look for positions at your competing companies. You don’t want to train your employees to work for or to become your competition, but know that sometimes this happens if you don’t establish the right promote from within strategy. Positive reinforcement and instant gratification can work like a carrot held out on a stick does for a donkey. Short-term employee incentives can also foster team member harmony and cohesion.

The following approaches will motivate employees for short-term ETA Engagement:

  1. Recognition – If an employee does a good job, reward him openly with verbal praise. A simple “Thank you” or “Great job” can make most anyone feel appreciated, wanted, and needed.
  2. Fringe benefits – Healthcare benefits, 401K matches, and the like can set your company above your competitor’s in the eyes of employees.
  3. Paid time off – The opportunity for earned and compensated time-off adds value to your employee workplace.
  4. Annual bonuses – Merited or unmerited, a Holiday bonus or a work anniversary bonus can add to employee happiness and commitment to your company.
  5. Production based rewards – Employees can become extremely motivated to work hard if they know they can earn trips to desirable locations, monetary bonuses, redeemable merchant gift cards, or many other types of gifts.
  6. Peace and happiness – Incentives don’t always come in time, gifts, or money. Simply creating a respectful and happy work environment can create employee loyalty for years to come.

SUMMARY

Whichever way you decide to incentivize employees for ETA Engagement, make sure you have a good lawyer, an amazing accountant guide you, and a Human Resources professional. You’ll need help wading through the rights, warrants, risks, and taxes that come with stock ownership, stock options, fringe benefits, paid time off, bonuses, and gifts. Let me give you a word of caution: Don’t go to your next team meeting and mention to your employees that you’re considering ETA Engagement incentives until you’ve talked to your professional team. You shouldn’t blindly offer something your ETA Team may ultimately find too risky. Additionally, you don’t want to offer your employees incentive programs without educating them about the guidelines and requirements involved.

Sam Palazzolo

30 Days to ETA | Day #13 – ETA Risk Mitigation

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #12 post I discussed how your ETA Metrics/KPIs allow you to establish a scoreboard for your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, a wise person once told me, “Somebody else’s experience is a far better teacher than your own.” I wish I had listened to that advice. If I had understood the vital role of a business risk assessment in the purchase of a business, I might have avoided making the single biggest mistake of my business career… Enjoy!

An Expensive Education

Many years ago, I had the opportunity to purchase a business. It appeared, by all standards, to be a very good opportunity for me. So like any prudent business person, I began gathering intelligence on the business and conducting due diligence. I looked at everything in the company — From interviewing employees and customers to looking at the financial statements. I went through this business with a fine-tooth comb attempting to leave no stone unturned. I also thought I was being prudent by seeking counsel from my ETA Professional Team of attorneys, CPAs, and other professional advisers.

It was during this due diligence phase that I can remember asking myself, “Do I really need to buy this business? Should I really add this much stress to my life?” Like an angel sitting on my shoulder, my conscience warned me over and over against purchasing the company. I began to focus on the pros of buying the business. To my detriment, I ignored the red flags I saw in the list of cons.

Long story short, I came really close to purchasing the company. What seemed like minor discrepancies in the business assessment at the beginning, ended up becoming MAJOR problems at the end. These problems caused lots of harm, lots of grief, and lots of brain damage. Ultimately, I was glad that I had listened to my gut and the risks that appeared in the assessment I conducted. If I hadn’t, I would have bought the company. The excitement for the potential of making more money, though, almost got the better of me, and it nearly cost me years of my business life.

30 Days to ETA - ETA Risk Mitigation

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ETA Risk Mitigation

In 30 Days to ETA, we Entrepreneurs Through Acquisition face risks in many different shapes and sizes. Depending on the industry, harm could befall us in unusual ways. For instance, you could face environmental or weather-related risks. National or global-economic crashes could take the legs out from under the business you’re considering. Changes in employment, political parties, market competition, or the like could also pose risks to businesses.

No matter what business you’re in, each will face risks. And dealing with the risks is what a successful Acquisition Entrepreneur does. More often than not, you’ll deal with the legal implications or ramifications of the risks. Some must comply with OSHA, HIPAA, or the Patriot Act. What about the Equal Opportunity Act or the Labor Standard Act? Regardless, all business owners have to deal with national or state laws that create risks in their companies, so preparation is the best plan for Entrepreneurship Through Acquisition.

Before we can manage risk, you must identify the risks and comply with the laws that govern them. The biggest mistake most make is not looking at all of the potential risks involved with buying a company, and the risks you ignore have to do with legal risks. Most of see the upside, but rarely see the full potential of the devastation of the downside. You must be aware of all of the various types of potential risks, and you must follow the laws that govern the risks. As an attorney friend of mine says over and over, “Ignorance is not an excuse not to obey the law.” We definitely have our hands full.

The great ETA Alfred E. Neuman said it best…

‘What, Me Worry?’

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Risks Monitoring

So what are we Entrepreneurs Through Acquisition to do with the ETA Risk Mitigation we discover? Whether you’re preparing for a business merger or acquisition, you should sit down with every business you’re considering placing under Letter of Intent (LOI) and do a new risk assessment of the company. The reason I recommend looking early and often is because risks change. The state the business operates in may have issued new employment laws, or a competitor may have opened their doors since the last risk assessment. What if interest rates have changed or new tax laws been issued? With so many different types of risks, where do you start?

Business Risk Assessment – 6 Steps

  1. Consult outside counsel – Start with a good insurance agent who works to protect you from risk on a daily basis. Then, talk to your attorney, CPA, and a CERTIFIED FINANCIAL PLANNER™ to identify and forecast potential risks.
  2. Seek internal advice – Rally your family and your team, and perform a S.W.O.T. analysis. Identify Strengths, look for Weaknesses, find Opportunities, and guard against Threats.
  3. Weigh probability – Rank your identified risks in order of how likely they are to occur. Start with the most likely. Finish with the least likely.
  4. Predict harm – If your greatest risk is not harmful to the company, don’t devote countless time and energy to it. Instead, manage the risks most likely to cause harm.
  5. Address the risk – Don’t ignore any of the risks. Use your rankings and predictions to decide which ones need immediate attention, but don’t turn a blind eye to any risks.
  6. Monitor for changes – Shoot for yearly risk reviews to keep up with legal, economic, or political changes.

How ETA Risk Mitigation Effects M&A?

So how does ETA Risk Mitigation assessment and resulting management apply to our Entrepreneurship Through Acquisition journey? It’s not rocket science. Any potential buyer will be looking closely at the business you’re investing’s risk management process to see if they understand the risks in their business and to see if they’re prepared to handle the effects of those risks. Acquisition Entrepreneurs will want to look at the company’s risk management track record to see if they’ve prepared for and battled the risks successfully.

Put yourself in the seller’s perspective. The last thing their buyers want to do is come and purchase a business with holes in their risk management shield. If a buyer realizes they haven’t paid their workers’ compensation insurance or employee payroll taxes, they might (will?) walk away from the company. Entrepreneurs Through Acquisition haven’t spent all of their time and effort looking to acquire a business in hopes of selling it for millions only to see holes in its foundation before they actually purchase it. If you ignore parts of the business’s risk assessment, you will most likely lose significant interest in the future of the business (you will have exposed vulnerability).

So friends, now is the time to conduct ETA Risk Mitigation via an assessment of the business. Prepare yourself. Compare the company. Buy it and make millions!

Sam Palazzolo

30 Days to ETA | Day #12 – ETA Metrics/KPIs

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If you’ve been reading this 30 Days to ETA series, you know that in the Day #11 post I discussed how your ETA Entity Formation is an important structural item on your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, as an Accountant I want to look at two of my favorite things in the business world – facts and figures in the form of ETA Metrics/KPIs. We’re going to deal with the financial reports your future business needs to provide to not only lead the organization successfully, but allow interested buyers to see how great a business you have. Remember our end-game when it comes to Acquisition Entrepreneurship, that in order to make a business sellable we have to provide buyers with accurate financial reports that show our historical growth, our current financial status, and our business’s potential growth in the future…. Enjoy!

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Fact and Figures Drive Success

In our Mergers & Acquisitions business at Tip of the Spear Ventures, we’re often asked how ETA Metrics/KPIs can allow you to identify/acquire the perfect business. While perfection might be elusive, finding a nice business shouldn’t be if you stick to our ETA Metrics/KPIs formula. At Tip of the Spear Ventures, this method has yielded unbelievable success. The ETA Metrics/KPIs method will also not turn away potential buyers when it comes time to sell your business because a buyer can’t take figures scribbled on a napkin to the bank. Key Performance Indicators (KPIs) should tell a story of the business, regardless of formal system utilized and say, “Is this a viable business for me to buy? Is this business going to be profitable for me a couple of years from now?” Ironic right? These are the same questions you’ll ask when looking to conduct your mergers & acquisitions search for the right business to purchase!

Liars might figure, but figures never lie!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Show Growth + Current Status with ETA Metrics/KPIs

So what types of financial reports show buyers and banks the health and wealth of your business? Or how do you personally figure out how well your company is doing at any given time?

This is where our business management systems come into play. You’ll need to have a basic financial management system in place that allows you to compile facts and figures on a daily basis. Whether you use QuickBooks, Quicken, Sage, Microsoft Excel Spreadsheets, or an outsourced bookkeeper/accounting firm, the accounting system you use needs to be able to compile at least two different financial reports – The Balance Sheet and Operating Statement

1. The Balance Sheet

Your CPA has most likely asked you to print your company’s balance sheet at the end of each year so that they can begin preparing your taxes. But what does it show? Very simply, the balance sheet tracks your company’s assets and liabilities. It provides banks, buyers, or tax advisers a picture of what you own and what you owe.

In detail, the balance sheet provides the following information about your company:

  1. Net worth – Accomplished by subtracting your liabilities from your assets.
  2. Debt to income ratio – Calculated by looking at the amount of money you’ve borrowed compared to the assets that can be used to pay off that debt.
  3. Cash equivalency – A quick ratio test can show how much cash your company has coming in to offset its upcoming expenses.
  4. Collection periods – A collection test can calculate how long it takes your company’s accounts receivables to turn into cash collections.

2. The Operating Statement

Inevitably, your company will have to produce an operating statement for lenders, buyers, and CPAs in addition to a balance sheet upon the sale of your company. You may recognize this financial report by its more common name, the Profit and Loss statement, or the P&L. While the balance sheet details your company’s assets and liabilities, the operating statement details your company’s income and expenses. Think long-term figures for the balance sheet versus short-term figures for the P&L.

In detail, the operating statement can provide the following information about your company:

  1. Profitability – Derived from the profit margin ratio comparing the net profits (income earned after expenses but before taxes) to your gross sales income. E.g. – If you sell $1,000 in a month with a net income of $100, your profitability is 10%.
  2. Return on Investment – Calculated ratio that compares the net profit of your company to your company’s net worth. E.g. – If your company’s net worth is $1,000,000, and it’s earning $100,000, your return on investment is 10%.
  3. Inventory Valuation – Technically, the value of your inventory is how much you paid for it. To determine if you have too little or too much inventory at any given time, you need to figure up an end-inventory value ratio. E.g. – If you paid $100,000 for your current inventory, and your monthly sales are $50,000, you have a 2:1 ratio. In other words, your inventory is two times greater than your sales.

The Importance of KPIs

While a financial management software or company can easily compile a Balance Sheet or an Operating Statement from your company’s bank ledgers and bills, you, as a business owner, will have to compile the last type of financial reports a potential buyer will need.

You will have to identify the Key Performance Indicators, or KPIs, that show how successful your business is currently and how successful it can be in the future. Once identified, you will then use the indicators to analyze and predict future income and expenses in a quantifiable financial report.

The difficult part of KPIs is that every business has different performance indicators. For example, dentists can predict income by pointing to the number of patients scheduled each week or the number of patients pre-scheduled for the upcoming year. KPIs aren’t just important for tracking income. They identify upcoming expenses, growth pains, risks, rewards, and opportunities. Essentially, KPIs paint a picture of the strengths and weaknesses of your business.

KPI Financial Reports – Now What?

Once you predict your future income and expenses, your company’s strengths and weaknesses will show up. Obviously, you’re going to know what you like about your company and what you don’t like about your company. That’s what your buyer is looking for, too. He’s going to hire attorneys, CPAs, and people like me to tear your business apart to find its strengths and weaknesses. So you might as well use your KPIs to analyze your business before they do. Here’s what you can do:

  • Consult with your advisers to identify what data a buyer needs to see.
  • Create a system that produces, compiles, arranges, and presents that data in financial reports.
  • Analyze the financial reports from a buyer’s perspective.
  • Make the necessary changes to your business.

SUMMARY

So we’ve identified the compilations of ETA Metrics/KPIs and financial reports you will want to see when you’re interested in purchasing a company. By having quantifiable, printable financial reports that show your company’s historical growth, current success, and future potential, you’re probably going to have increased confidence as you pursue your Entrepreneurship Through Acquisition strategy.

Before buying your company, though, you can use their Balance Sheet, Profit and Loss Statement, and KPIs to get a better grasp on the business. You can use those financial reports to compare the company’s strengths and to identify their weaknesses. If you start doing that now, your ETA business’s value is going to shoot through the roof. You might be able to sell your company earlier than you expected, or you could sit back and reap the rewards of your hard work before you reach sale time (You may also save yourself significant time with a business that you shouldn’t purchase in the first place!)

Sam Palazzolo

30 Days to ETA | Day #11 – ETA Entity Formation

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If you’ve been reading this 30 Days to ETA series, you know that in the Day #10 post I stressed the importance of creating an ETA Culture (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, we’re going to discuss how choosing the right type of business entity at a company’s creation can effect its liability and its ability to sell when it comes time (i.e., ETA Entity Formation). Many people believe that in business exit planning, the idea of preparing a business to sell, occurs just prior to the owner’s desired exit time. This couldn’t be further from the reality of what should happen. Acquisition Entrepreneurs know that in their Entrepreneurship Through Acquisition journey that the time to prepare their future company for sale is at the onset, not as you’re contemplating your exit. Some of the planning we business owners need to do should be done five to ten years before the sale ever occurs, so starting at the beginning with the end in mind should make sense… Enjoy!

30 Days to ETA - ETA Entity Formation

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ETA Entity Formation – 4 Types of Business Entities

If you’re starting up a business now or if you’re already in business, choosing the right type of business entity matters a great deal. I’ll provide you with a list of the types of business entities you can create. To know which entity is best for your company, though, you’ll want to consult your own professional team that includes a good attorney, a seasoned financial planner, and a strong CPA.

Here are the four basic types of business entities:

  • C Corporations
  • S Corporations, a.k.a. Sub-Chapter S Corporations
  • Partnerships
  • Limited Liability Companies, a.k.a. LLCs

There’s actually a fifth type of business, but it’s not an official business entity, so I didn’t include it in my list. If you don’t form your company as a C Corp, an S Corp, a Partnership, or an LLC, then you’re operating a sole proprietorship by default. While it’s a business, it’s not a type of business entity for our purposes here in your Entrepreneurship Through Acquisition roadmap.

With so many ETA Entity Formation options available, identifying the proper formation at the beginning of your Mergers & Acquisitions strategy is the best decision you can make!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Which ETA Entity Formation is Right?

Each type of business entity has advantages and disadvantages. Ultimately, business owners choose to operate as an entity for one, or several, of the following reasons:

  • Personal Liability Protection – Operating your business under a corporate veil will protect your personal assets should your business run into problems. Additionally, running a company as an entity can reduce personal exposure to risk and act as a hedge of protection over and above what business insurance can provide.
  • Transference of Stock or Membership Interest – Within C Corps or S Corps, you can divide stock, move stock or transfer stock among owners or investors with some limitations. You can even give certain types of stock to employees. In an LLC, members (the owners) can re-arrange, divide, re-allocate, or transfer membership interests.
  • Flexibility – Vital to entrepreneurs, business entities allow owners to manage their companies as they see fit. They have flexibility over the ownership structure that allows the company to move and flow as individual owners’ circumstances do.
  • Tax Reduction Strategies – With the help of a professional CPA, business owners can take advantage of tax-free fringe benefits available to business entities. They can also prevent double taxation issues or plan how much they’ll pay in taxes by operating as an entity and by getting help from an accountant.

Documents Business Entities Should Have

Let’s say you’ve talked to your team of professionals. With everyone’s help, you’ve decided that you’re operating under the right type of business entity. Well, you’re not off the hook yet. No. You’ll need some documents for added personal and business protection. Here’s where a good attorney can help you.

A popular document within partnerships and corporations with multiple owners is a Partnership Agreement or an Operating Agreement. This document addresses how your company will deal with owner disagreements. It specifies who will fill which role and how the company will be managed. Additionally, it outlines how and where the company will handle lawsuits. Written with vast detail or in relatively simple terms, the agreement protects business owners should crisis ensue.

Additionally, many lawyers will recommend that their business owner clients draw-up a Buy-Sell Agreement. Whether you have multiple owners or majority and minority shareholders, you’re all working toward the eventual sale of the company. With this type of document, you can dictate how the company will be sold, for what minimum price it will sell, and under what arrangement it will sell. This agreement can also address what happens to the company in the event of an owner’s death or disability. While not required by law, if you’re building a company to sell it, the very title of the Buy-Sell Agreement seems to recommend its use.

ETA Entity Formation Records

So you’ve settled on an ETA Entity Formation type, now what types of records should you keep? In my experience, the following is the short-list of ETA Entity Formation Records you should keep:

  • Selling stock shares
  • Issuing stock shares
  • Loaning the company money
  • Borrowing money from the company
  • Placing the company in debt

From legal issues to meeting minutes, you might want to write down anything that happens as it relates to the company’s operations. Consult books, CPA’s, lawyers, and other advisors out there to figure out what types of records your business needs to keep.

The last thing you want as a business owner is to find yourself destitute, trying to win a legal battle without protection and without documentation. Like I’ve mentioned in other posts, I’ve gone through legal battles in business. One of the things I’ve learned is that “he-said-she-said” doesn’t cut it a courtroom. Documents that everyone signed before turmoil arose will be what the attorneys and the judge peruse and use. Hearsay doesn’t win cases; evidence does.

SUMMARY

The type of business entity you choose matters. The way you operate the entity and maintain records for the company will also matter. If you are as a part of your ETA in 30 Days journey looking to acquire a business on the road to getting your business ready to sell, you want to make sure that the business entity you ultimately choose is positioned to help you minimize your personal risks and tax liabilities. Not only that, but you want to know which documents you can put in place to make the business’s transition go smoother between you and the buyer or between company owners themselves and the buyer.

Sam Palazzolo