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“Begin at the beginning,” to quote the King of Hearts from Alice in Wonderland. That’s how most people approach business ownership, and on its face, it seems like a smart strategy.
We all know the sobering statistics on entrepreneurship: According to the U.S. Bureau of Labor Statistics, about 21% of businesses fail in the first year, nearly 50% fail by year five, and about 65% fail within 10 years.
So to avoid becoming a statistic, most entrepreneurs focus primarily on the first five years (launching their business, securing funding, building operationally and scaling). But it would be a mistake not to also think about preparing for a potential exit.
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What is your exit? Do you plan to sell the business, pass it to a family member, partner or employee or dissolve it?
While you might not readily know the answers to these questions, by following the five best practices below, you can both build your business and put yourself on stronger footing when the time comes to begin your next act.
1. Keep your financials clean and transparent
Often, business owners are good at what they do but need help on the financial side of running a company. If you want to eventually sell or transition your business, you will want to make sure everything is above board.
It is important to have a trusted executive — whether that’s a CEO, CFO, outside accounting firm or even a fractional CFO — who can guide you in the day-to-day bookkeeping of your business, making sure you have proper cash flow and the right people in place.
Clean and transparent financials are critical to maximizing valuations. Unfortunately, I have worked with business owners who were not focused enough on the operations and finance side of their businesses and eventually found that employees were embezzling funds.
If you do not have a strong background in business accounting, make sure you bring on trusted, experienced people early who can set you up for success and keep it running smoothly as you grow.
2. Make sure the legal structure is aligned with your goals
When setting up a company, you can structure it as an LLC, C corp or S corp. There are different tax advantages to how you structure your business.
For example, if you are registered as an S corp through an LLC, you can give yourself a salary through the company and set up a solo 401(k) to maximize tax advantaged retirement savings.
You can also structure the company to support your retirement goals in additional ways.
For example, if you set your business up as an LLC, you can take out a private-placement life insurance policy through the business, which will allow you to protect and grow your assets tax-free.
3. Know when to scale your business
A business cannot rely solely on the person who founded it. Make sure you are creating a repeatable business model, which will add value to your eventual selling price.
For obvious reasons, very few buyers are interested in purchasing a business that will stop functioning if you no longer work there (unless they are buying your clients or buying you to stop you competing with them).
Therefore, to maximize valuation, you need to put in place the team and processes that allow the business to effectively function without you.
4. Protect yourself
Where applicable, legally controlling and protecting the intellectual property of your business may also directly increase the value of the company.
5. Begin thinking of your long-term plans
Beyond your five-year growth plan, think about 10, 20 or 30 years down the road. Do you want to cash out completely or make a partial sale? Do you envision yourself working part-time in retirement or being fully retired?
Of course, your answers may change over time, and that is okay. Financial planning provides a road map and should never be set in stone.
By working with a financial adviser, you can create a strategy while also adjusting if your goals change over time.
Entrepreneurship is about being in control of your own life. When you are building a business, think about the full lifecycle — launch, scaling and eventual exit.
If you “begin at the beginning” but also think about where you want to land, you will be creating a road map to achieve not just your business goals but your vision for your life.
