RICHMOND, Va. — Most business problems don’t start with bad people. They start with bad planning.
That’s the central premise of a recent National Federation of Independent Business (NFIB) webinar titled “Buying, Selling, or Expanding Your Business,” presented by Jim Wilson, an attorney with Wilson Law Group, PLC, who has spent more than 30 years working on startups, acquisitions and business transactions.
His message was direct: The legal decisions you make — or fail to make — early in the life of a business will shape everything that comes later, including what the business is worth when the time comes to sell.
“Problems don’t usually come from people not being good people,” Wilson says. “It comes from people not being prepared and not thinking things through.”
Think Like a Franchisor
One of Wilson’s recurring themes is that every business owner — regardless of whether they ever plan to franchise — should build their operation the way a franchisor would. That means documented systems, written procedures for each role and a business capable of running without its owner making every call.
The practical payoff isn’t just operational. Business brokers, Wilson says, can spot the difference immediately when they walk through a door.
“There are manuals around the business,” he says. “They can just tell it’s going to sell for more money. There’s not much to sell if everything’s in Joe’s head.”
He’s equally blunt about the questions that would reveal the absence of those systems.
“Can you ever take vacations? Can it operate if you take a long weekend? If it can’t operate, it can’t work on remote control without your input on every issue, then you don’t have a business. You have a job.”
The goal is to push responsibilities down, get people in charge of specific areas and document things thoroughly enough that a replacement hire can get up to speed without calling the owner for every step. When that documentation is in place, Wilson says, it pays dividends not just at sale time but in day-to-day operations and when seeking financing.
Form the Entity First
On the fundamentals of starting a business, Wilson stresses one point above all others: Form the entity before you do anything else.
Too many business owners make deals and decisions in their personal name before an LLC or corporation even exists, he says. When they do so, they expose themselves to unnecessary personal liability.
“I cannot tell you how many clients have come to me to form an LLC because they want to start a business, and they’ve signed a lease, they’ve put an application in for a loan and all kinds of things in their personal name,” Wilson says. “You’ve just created an avenue to personal liability you could have avoided.”
His standard advice: Form the business where you operate. He believes the appeal of incorporating in Delaware, for instance, is frequently overstated for small businesses. Operating in one state as an entity formed in another requires a Certificate of Authority, also known as foreign qualification, from the state where you’re actually doing business. That means duplicate annual fees and registered agents in two places. Keep it simple early on, Wilson says. You can always restructure later if circumstances call for it.
Wilson also makes the case from personal experience for planning ahead for disruption. In 1999 he had a cardiac arrest at 41. He was out of practice for six months. Owners don’t have to dwell on worst cases but they should make sure ownership agreements and operating procedures are documented well enough that someone else can figure out what’s going on if they’re suddenly not there.
The Real Estate Opportunity
Wilson’s has advice for small- to mid-size business owners, such as most dry cleaners, who lease their space: if you ever have the opportunity to own the building your operation is in, take it seriously.
The structure he recommends uses two entities: an operating company (OpCo) that runs the business and a property company (PropCo) that owns the real estate and acts as the landlord. The OpCo pays monthly rent to the PropCo, which covers the mortgage, insurance and taxes.
“That’s usually a 20-year mortgage,” Wilson says. “Twenty years from now, the real estate company owns an asset.”
When it’s time to sell the business, the owner has the option to sell the operating company and keep the property company, continuing to collect rent from whoever takes over the plant.
“Monthly rent equals retirement checks,” Wilson says.
Come back Tuesday for Part 2 of this series, where we’ll look at what to watch for when buying an existing operation — and why things aren’t always what they appear to be before closing.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
