By: Barry E. Haimo, Esq.
December 8, 2017
Your 20 Question Business Planning Stress Test
If you watch the television show, the Profit, and are a fan of Marcus Lemonis, then you know that “people, process, product” are the keys to creating a successful business. In addition to the operation of the enterprise, it’s important to understand that behind the scenes, Marcus ensures his i’s are dotted and his t’s are crossed. Essentially, it’s critical to solidify the foundation on which you’re building with proper advice, planning and documentation. It’s not about forcing commitments; it’s about thinking things through ahead of time so everyone’s on the same page at the beginning. Partners are happier when things are good than when there’s conflict. Below, you will find a list of 20 important questions that will stess-test your business planning.
1. what will the allocation of equity be among the partners? if not equal, how will you deal with voting?
2. what are each of your partner’s contributions? money, property, relationship capital?
3. what will each of your defined roles be? how will you measure performance and nonperformance?
4. what documentation do you have to ensure that each of you performs as promised? the honor system only works while everyone’s happy.
5. how will you address if one of you decides not to work any longer? without proper documentation, it’s difficult, if not impossible, to remove a nonperforming partner who is otherwise hijacking the equity and preventing you from replacing him or her with someone productive.
6. who will be the managers (to directors of a corporation)? Managers appoint officers who carry out day to day operations.
7. if you have multiple managers, how will you handle disagreement? i.e. deadlock.
8. who will be the officers?
9. what powers will the officers have?
10. what documentation do you have reflecting the allocation of ownership in #1?
11. how is the entity going to be taxed? Corporations can be c-corps or s-corps. LLCs can be disregarded, partnerships, c-corps and s-corps.
12. how will profits and losses be allocated among owners? pro rata? Often the money partner gets paid back first plus a preferred return. Certain types of entities offer more flexibility than others.
13. how will distributions to partners be allocated other than pro rata (if taxed as a partnership)?
14. do you realize that without proper documentation, each of you sell your shares to a third party rendering you partners with a stranger, who may or may not have any expertise in your business?
15. are you aware that you can end up being partners with your partner’s spouse if they get divorced?
16. same as #14/15 but with a partner’s creditors if they file for bankruptcy.
17. how are you going to handle if one of you becomes permanently disabled? Business has to continue and you’re a man (or woman) short who is occupying potentially a lot of equity. If you don’t have sufficient cash flow to hire a suitable replacement (i.e. can’t give equity), you are in trouble. You’re in a bad spot even if you do have sufficient cash flow because your equity is tied up by someone who is not working the business.
18. same as #16/17 but if a partner dies. You have an estate asset which requires probate. Probate is a long, expensive process with judicial oversight at nearly every step. Creditors and beneficiaries will have rights and you will have to navigate those rights in the court proceeding that will not be quick and painless. Moreover, you likely will end up being partners with their beneficiaries (usually a spouse) or even creditors. We highly advise avoiding this unpleasant surprise.
19. if a partner or other representative of the company parts ways, do you want them competing w/ you? We see this often.
20. if a partner or other representative of the company parts ways, do you want them soliciting your customers, personnel, partners, or representatives away from you? We see this often.
THE INFORMATION CONTAINED HEREIN IS INTENDED FOR INFORMATIONAL PURPOSES ONLY. EACH SITUATION IS HIGHLY FACT SPECIFIC AND REQUIRES A CONSULTATION TO UNDERSTAND SUCH FACTS AND THE CLIENT’S NEEDS AND GOALS. ACCORDINGLY, NOTHING CONTAINED HEREIN CONSTITUTES LEGAL ADVICE.
Barry E. Haimo, Esq.
Strategic Planning With Purpose