If you have ever contemplated starting your own business, then you are probably familiar with the intricate and often perplexing process of incorporating a business. The business incorporation process involves various legal and financial steps that can leave even the most savvy entrepreneur feeling disoriented.
From selecting the appropriate business structure to preparing the necessary documents and filing them with the appropriate government agencies, starting a business requires meticulous attention to detail and a thorough understanding of the legal landscape. In this article, we will delve into the complexities of the business incorporation process and provide you with valuable insights and guidance to navigate this intricate terrain.
So, buckle up and get ready to embark on a journey that will demystify the world of incorporating business entities.
Achieving success in the ever-evolving landscape of modern business requires mastering the art of business incorporation. The process itself can be as perplexing as it is crucial, demanding a deep understanding of legal intricacies, financial acumen, and strategic foresight.
With varying regulatory frameworks across jurisdictions, each with its own set of requirements, the path to a successful business incorporation can feel like navigating a labyrinth. The sea of paperwork and bureaucratic red tape can become overwhelming, leaving even the most seasoned entrepreneurs disoriented and frustrated.
But fear not, for within the labyrinth lies opportunity. By effectively navigating the business incorporation process, entrepreneurs can unlock a multitude of benefits, ranging from limited liability protection to enhanced credibility with customers and potential investors.
However, achieving these benefits requires more than just filling out forms and crossing t’s. It necessitates a comprehensive understanding of the legal and financial implications of different incorporation structures, such as sole proprietorships, partnerships, limited liability companies, and corporations.
Additionally, entrepreneurs must carefully consider the jurisdiction in which they choose to incorporate, as each offers a unique set of advantages and disadvantages. From Delaware’s renowned business-friendly legal framework to Nevada’s favorable tax climate, the choice of jurisdiction can significantly impact a company’s long-term prospects and bottom line.
Moreover, the business incorporation process offers an opportune moment to contemplate key decisions related to ownership structure, equity distribution, and governance. For entrepreneurs, this is a time to lay the groundwork for a strong corporate foundation that will support growth and sustainability.
So, as you embark on your entrepreneurial journey, dare to embrace the labyrinthine nature of the business incorporation process. Arm yourself with knowledge, seek expert advice, and channel your strategic vision to transform this seemingly convoluted process into a powerful stepping stone towards achieving lasting success.
Master the art of business incorporation, and watch your entrepreneurial dreams materialize into reality.
If you have ever contemplated starting your own business, then you are probably familiar with the intricate and often perplexing process of incorporating a business. The business incorporation process involves various legal and financial steps that can leave even the most savvy entrepreneur feeling disoriented.
From selecting the appropriate business structure to preparing the necessary documents and filing them with the appropriate government agencies, starting a business requires meticulous attention to detail and a thorough understanding of the legal landscape. In this article, we will delve into the complexities of the business incorporation process and provide you with valuable insights and guidance to navigate this intricate terrain.
So, buckle up and get ready to embark on a journey that will demystify the world of incorporating business entities.
The process of starting a business can be both exhilarating and daunting. Entrepreneurs often find themselves faced with a myriad of decisions to make, one of the most crucial being whether to incorporate their business.
Business incorporation offers many benefits, including liability protection and potential tax advantages. However, navigating the complexities of incorporation can be a challenge for even the most seasoned business owner.
To avoid common pitfalls and ensure a smooth transition, it is essential to understand the importance of business incorporation and the mistakes to avoid. According to Forbes, one of the most reputable sources for business advice, there are several key mistakes that entrepreneurs should steer clear of in the incorporation process.
By familiarizing themselves with these pitfalls and seeking guidance from experts, entrepreneurs are better equipped to achieve success in their business ventures.
Key Steps: Navigating the Process of Incorporating a Business
Entrepreneurs and small business owners must have the knowledge and skills to navigate the complex process of incorporating their businesses in today’s competitive business landscape. Business incorporation is incredibly important as it provides various benefits, including limited liability protection and tax advantages that can significantly impact a company’s success and sustainability.
However, there are potential pitfalls and challenges along the road to incorporation. It requires a careful and strategic approach, including selecting the appropriate business structure, filing necessary documents with the state, and adhering to ongoing compliance requirements.
Although the process can be overwhelming, entrepreneurs can successfully master the art of business incorporation and unlock their ventures’ full potential with the right guidance and resources. Are you ready to take the first step towards building a solid foundation for your business’s future success?
Benefits: Exploring the Advantages of Incorporation for Success
Success in modern entrepreneurship requires more than just a great idea. It necessitates a strategic approach that can only be fully realized through business incorporation.
Incorporating your business provides numerous benefits, including a strong foundation for growth and long-term stability. When you incorporate your business, it receives legal recognition as a separate entity, safeguarding your personal assets from any liabilities.
This not only protects you from financial ruin but also enhances the credibility and professionalism of your brand. Additionally, incorporation opens up new avenues for financing, making it easier to secure loans and attract investors.
However, it is important to carefully consider the financial implications before making this decision. The fees and costs associated with business incorporation can vary depending on the jurisdiction and complexity of your organization.
Therefore, conducting extensive research and seeking professional advice is crucial. But for those who are willing to take the leap, the rewards are unlimited.
Incorporation unlocks endless possibilities and propels your business towards unprecedented success.
The Bottom Line
Overall, incorporating business can be a complex and dynamic process, one that requires careful consideration and strategic planning. In an increasingly globalized economy, it is essential for companies to explore the benefits of incorporating, such as limited liability and potential tax advantages. However, navigating the legal and financial aspects of incorporation can be challenging, necessitating the expertise of professionals well-versed in corporate law. Furthermore, incorporating may also entail adjusting existing business structures and reevaluating long-term goals. Nonetheless, the potential rewards, including accessing capital markets and enhancing credibility, make the incorporation journey well worth the effort. As companies embark on this path, they must address the varied needs and interests of stakeholders, ensuring transparency and clear communication throughout the process. Ultimately, incorporating business is not just a legal procedure, but also a transformative endeavor that can shape the trajectory of an organization.
Relocating your business to a different state is a significant undertaking that requires careful planning and preparation. As an accountant, I understand the financial implications involved in such a move and the importance of making informed decisions. In this blog post, we’ll delve into the essential financial considerations you need to address when moving your business out of state.
Financial Considerations and Impact when Moving
The first step is to evaluate the financial impact of relocating your business to a different state. Consider the costs associated with the move, such as leasing or purchasing new office space, moving equipment and inventory, and updating licenses and permits. Create a detailed budget that includes both one-time expenses and ongoing costs in the new state.
Understanding Tax Implications
Moving to a new state means navigating different tax laws and regulations. Familiarize yourself with the tax requirements specific to your new state, including sales tax, income tax, and payroll tax. Consider consulting with a tax professional who specializes in multi-state taxation to ensure compliance and optimize your tax strategy.
Complying with Legal and Regulatory Requirements
Moving your business out of state involves complying with a new set of legal and regulatory obligations. Research the business laws, permits, licenses, and compliance requirements specific to your new state. Engage legal professionals to guide you through the process and ensure a smooth transition.
Evaluating Financial Infrastructure Needs
Moving to a new state presents an opportunity to assess and enhance your financial infrastructure. Review your existing accounting systems, banking relationships, and financial processes. Consider whether an upgrade or transition is necessary to accommodate the requirements of your new state.
Managing Payroll and Employee Benefits
Financial considerations and moving your business out of state can have implications for payroll and employee benefits. Review the requirements for payroll tax withholding, unemployment insurance, and state-specific labor regulations. Ensure that your payroll system is updated to comply with the new state’s requirements.
Evaluate any changes needed in employee benefits programs. Review state regulations regarding health insurance, workers’ compensation, and retirement plans. Communicate changes to your employees and provide them with the necessary resources to navigate the transition smoothly.
Our conclusion on Financial Considerations When Moving
Financial considerations and moving your business out of state presents both challenges and opportunities. By carefully considering the financial implications and addressing key areas such as assessing the financial impact, understanding tax implications, complying with legal requirements, evaluating financial infrastructure needs, and managing payroll and employee benefits, you can ensure a successful transition.
As an accountant, I strongly recommend seeking professional advice from experienced professionals who specialize in multi-state taxation and business relocation. Their expertise will help you navigate the complex financial landscape and make well-informed decisions.
Remember, thorough planning and preparation are essential for a smooth transition. By proactively addressing the financial considerations when moving out of state involved, you can position your business for continued success in your new state. Good luck with your move, and may your business thrive in its new location!
There are different types of debt financing for businesses. Financing for small businesses can become a challenging process as many startups lack cash flow, credit history, or don’t have assets. Luckily there are lenders out there that can help startups bridge the gap to meet customer purchase orders or pay their employees. In this blog, we will discuss the different types of debt financing.
Cash Flow-Based Loans
Cash Flow Based Loans allow businesses to receive financing based on the historical cash flow and the projected future cash flow analysis. So, companies use generated cash flow to pay their loan. Cash flow-based loans suit companies with positive margins that generate high month-over-month sales but do not have assets to use as collateral. For example, this type of loan is suitable for service companies.
One of the cash-flow-based financings is Merchant Cash Advances. This loan suits businesses that could not qualify for other business loans. The payback is bounded to the revenues, which secure the company when it suffers from low incomes. However, the disadvantage of this loan is that sometimes APR for this loan can reach even 100%, which makes it one of the most expensive loan types.
SBA is another type of loan for small businesses that may meet specific qualifications like solid financials and good credit history. Certain SBA loans are best suited for companies that have been doing business for a few years. SBA loan amounts can reach up to $5 million and usually have an APR from 7% to 25%.
Asset-based lending is a prevalent way of receiving financing for startups at an early stage. An early-stage startup cannot provide sufficient cash flow or assets to approve the loan. In this case, the company can use land, building, equipment, accounts receivable, customer purchase orders, inventory, or other assets for financing.
The main difference between asset-based and cash-flow-based loans is that the risk for the lender is high due to the little liquidity of the assets. The loan is riskier than others; therefore, the amount to be received will be less than what the assets are worth. The interest rate still depends on the asset and the asset’s generating cash flow. Also, other variables, such as credit history and business operation period, affect the interest rate. The most common asset-based borrowers are early-stage startups to more mature small businesses with physical assets to use as collateral with poor cash flow.
One of the options for this form of loan is Equipment financing. Business owners receive enough money to purchase the equipment and pay the loan at a 4% to 40% interest rate. It typically does not require a high credit score.
Another popular asset-based loan type is Invoice Financing. Businesses use it to cover payroll, rent, and other operating expenses. For the lender, the unpaid invoices act as collateral for the advance. It can cover up to 100% of the invoice value charging around a 3% processing fee.
Some lenders will be able to finance against a percentage of customer purchase orders and a percentage of open accounts receivable. The formula to calculate this availability includes many factors: how fast you can collect the accounts receivable and the number of open POs.
Types of loans that are offered to small businesses.
Different types of startup loans vary by industry, loan purpose, and loan structure. Let’s explore some of the financing options that are the most suitable for startups and that we have worked with before:
PayPal Working Capital is a loan with a flexible payment system bound to sales settled with PayPal. It is a good finance option for e-commerce businesses.
PayPal Working Capital charges one affordable fixed fee and the payout is deducted as a percentage of PayPal sales. For example, the business can select the payment of 30% from the sales. This is a form of finance against your cash flow or revenue stream mentioned above.
Shopify Capital is another financing offered for e-commerce companies. It works similarly to PayPal financing. The remittance rate is charged daily as a percentage of the daily sales until the loan amount is remitted. Total owed amounts consist of two numbers: fixed borrowing cost (the fee) and the loan amount. The loan term has 60 days.
Other types of loans
Flexport capital allows access to cash to cover supply chain or inventory purchase costs. This loan has extended payment terms for up to 120 days and can advance up to 80% of commercial invoices. You can use 100% of the loan pay for customs duties. Flexport Capital pays suppliers directly with no additional fees to the borrower.
Clearco offers to fund marketing and inventory spending for e-commerce businesses. Loans varies from $10,000 up to $20 million. Clearco offers revenue-based financing, and the payments are made when the business generates sales.
Circle-up is a lending option that provides flexible capital for CPG businesses. Companies can use them to purchase inventory or increase marketing dollars. Circle Up offers both cash-flow-based loans and asset-based loans. They use open customer purchase orders and/or accounts receivable to determine the availability of funding. This type of loan is an asset based.
The main criteria while choosing the loans typically are:
The purpose of borrowing money.
Qualifications for the loan.
Financing form.
Payment terms.
Annual Percentage Rate (APR).
APR gives the actual costs bound to the loan, which considers fees and payments. There are many loan payment calculators that businesses can use to estimate loan APR, but the general calculating formula for APR is:
APR = ((Fees+Interest/ Principal/ N) x 365 ) x 100
Where interest is the total interest paid over the loan life, the principal is the loan amount, and N is the number of days in the loan term.
Startup Tandem CFO helps startup owners understand their working capital needs and creates an analysis of possible solutions to choose the best suitable option. We will look at your current cash burn, develop a plan to help you meet your customer demands, scale the business or even pay your employees. We work with many debt lenders that can help you obtain necessary cash for your business plans. contact us to know more or make an appointment to see us at our Los Angeles CFO location.
Business valuation is essential when a company wants to sell a portion or all of the business, merge with another company, or acquire another. It is a process of determining all aspects of the business, from its current worth to projected growth, revenue, debt, and other crucial areas, by applying objective measures. Usually, an investor or a potential buyer evaluates the company’s value by looking at its business valuation outcome.
Why is it important?
A proper valuation is crucial to ensure the company is headed in the right direction. It can also help mitigate the risk of underselling a business. It gives a detailed overview of the business’s health and sustainability in the long run. Choosing the suitable valuation method is vital as each entity has a unique business model, which will help precisely interpret the business value.
The valuation methods
A valuation usually includes the company’s capital structure and a thorough analysis of the management. Future earnings prospects and the current value of its assets are of course also of interest. The method used in valuation could vary among analysts, evaluators, industries, and even the size of a company. The primary or common approach is to firstly review the financial statements. This is often done by using the discounted cash flow method, or making a similar business comparison. Below are six standard forms of business valuation which widely used across industries:
Market Capitalization: This method is the most straightforward and fastest. It derives by multiplying the company’s per-share price by the outstanding number of shares. The result will show the current market cap size of the company. Most of the time, this number is compared with previous years to analyze how much the company has grown in its value. It might give a rough projection of future growth potential.
Times Revenue: Under times revenue, a series of revenue that you generate over a certain period is applied to the associated industry multiplier. This will also depend on the current economic situation. The industry multiplier plays a significant role in determining the value of the business within the same industry.
Earnings Multiplier: This method will create better value for a company than the time’s revenue model. It is because the profits your company earns are more reliable as it is based on the financial success of the company. A company that decides to acquire another entity usually prefers to use this method because it closely reflects the financial soundness of the business.
Other commonly used valuation methods
Discounted Cash Flows: DCF use projected cash flows in the future, which you need to adjust to calculate the company’s present value. The current inflation rate is an important factor when using this valuation option. Usually, a company presently low on cash flows but expecting more business activities in the future might benefit from this method.
Book Value This is one of the quickest techniques to evaluate a company. It is done by simply subtracting the total liabilities from the total assets. You can find these numbers on the balance sheet of a company.
Liquidation Value This means how much a company is worth if it liquidates its business and pays off its current liabilities. Getting a positive net asset value is favorable, especially if the company wishes to sell the business in its entirety.
How could a startup company benefit from having one in place? And what is the best valuation method?
A startup entity is almost always low in cash flows and probably has little to no revenue during the initial stage of the business. So, if a startup wishes to sell its business or participate in M&A, it has to show a reasonable business valuation to attract investors and partnerships. Out of the six methods above, I think the best way to evaluate the company is by using DCF. This model creates fictitious future cash flow values based on the business projection, which is done using the basis of current plans and patterns of operations. A comparison with a similar company will give a better picture of the company’s growth and sustainability in the future. Analyzing the expected future cash flows will provide a clearer picture of the company’s present value.
Having a valuation in place will also help the business owner navigate the business better while considering the factors leading to its value
How can a startup increase its valuation?
When you create a valuation by using any of the methods best suits the nature of the business, it is more likely to effectively address the areas of a financial statement that need to boost. Identifying these elements will hugely impact the business processes. It can also enable the company to run efficiently for better valuation in the future. Some of the common ways a company could increase its value are as follows:
To have a thorough and defensive growth plan: A business especially in the early stage will benefit from creating a vigorous and defensive growth plan for the next couple of years or more. You can do this by stating monthly projected growth and support with facts and figures. Usually, this information will pique investors’ interest and help the business move in the desired direction.
Build a robust management team: For the sustainability of a company. A new entity must form a strong management team who can drive the company’s profitability and activities while holding on to the principal foundations of the company. This will add value and create a positive perception of the outlook of the overall management
Other important aspects of a valuation
Lead sources and revenue diversification A company should diversify its revenue and business lead sources to stay competitive. It should also create barriers for competitors to take over the market. You can do this by having multiple market segments targeted. The business lead resources rather than heavily relying on a single avenue. Product and service diversification could open doors to a broader network of trade.
Create patents on intellectual properties This is common for a company with unique and distinctive products or services. Patenting the brand, image, or technology will reward the company in the long run and automatically increase its valuation. Investing in the upkeep and advancement of these intellectual properties will benefit the company and enable it to grow with the market progression. For example, Apple’s technology is unique and stands distinctive amongst its competitors, thus making them strong and nearly impossible to copy due to its patented properties.
To better understand the value of a business, choosing a suitable valuation model is essential. A company can have one in place to reference and compare with previous performance. The underlying information should be precise and thorough to achieve the best result, especially from the financial statement. Potential investors will first want to know the company’s worth and projected growth before deciding on investing or acquiring it. Besides that, it also helps when filing business taxes, as the IRS requires a company to show its current fair-to-market value.
Here at Startup Tandem Advisory, we will be able to assist you in advising and choosing the right way to perform a valuation. Firstly, we will study the industry and create appropriate benchmarks to compare a company with its competitors. Our advisory process includes research, analysis, and recommendations for what needs to be done and how. Secondly, we will be able to identify the areas to improve the financial statement. We will gather enough information to execute a business valuation accordingly. If you want to, we will provide ongoing advisory services on growing and sustaining the current business operation. This can help create higher sustainability, especially during market uncertainty like we are experiencing now. If you are remote contact us for a free consultation, if you are in California, contact us to make an appointment to one of our LA locations!
Mortgage Lenders are Going Out of Business! How Does This Affect the Real Estate Industry?
This year we have seen rising interest rates and possibly another hike by the end of the year. How does the fall of mortgage lenders affect customers? The inflation rate has also been increasing rapidly, which leads the Fed to increase the interest rate to curb the rising inflation. As of August 2022, the 30 years US mortgage rate is above 6%, and the inflation rate as of June 2022 is 9.1%. This spike poorly affects the consumer’s spending power. Many businesses close and directly increase the unemployment rates.
Why are mortgage lenders going out of business?
Recently there was news on some lenders who choose to file for bankruptcy and made margin calls. Most of these lenders are non-banks. They are independent lenders who offer risky loans, which a bank will frequently decline. The mortgage they provide is not government-backed, thus making it impossible for them to stay afloat in the current economic condition.
Due to high-interest rates, many lenders fail to gather new loans, thus making it nearly impossible to acquire new investors. Usually, lenders will constantly collect new loans and bundle them with bonds to make them attractive to investors, so when there are no new loan activities, lenders need to obtain a line of credit to pay the interest due to existing investors. Lenders who actively collaborate with government-backed agencies like Fannie Mae and Freddie Mac are less likely to suffer. Usually, the lenders who work with these agencies offer less risky home mortgages. Major banks are also seeing some shrinkage in the mortgage business, leading to many layoffs to cut down expenses.
According to Bloomberg News, Wells Fargo is reducing their home loan business, and this trend will also be seen in other major banks. Unlike banks, independent lenders don’t have emergency funds to sustain their business. They usually rely on short-term credit lines, which depend on mortgage prices. So, when they are stuck with bad assets, they need to make the margin call and potentially fold their business.
When a lender goes bankrupt, as a part of the bankruptcy proceedings, existing customers will continue to make mortgage payments to a new lender to which the business has been sold. The terms and interest rates might vary according to the new entity’s mortgage program.
How does this affect customers who are seeking a mortgage loan?
Individuals seeking a mortgage loan now face many issues in securing the loan amount at an affordable price. Due to decreasing lenders in the market, options are very limited, thus making it a seller’s market. It simply means that customers are left with choices that might not be favorable. A little under three years ago, a 30-year mortgage loan rate was below 3%, which doubled in the current years.
Someone who could afford a $500k worth of loan three years prior could only qualify for $250k or less now with the same level of income. The real estate market has been negatively affected and it has been a seller’s market due to low inventories. Property prices have skyrocketed in the last few years. A single-family home which used to be in the lower 300k price has now increased to the high of 500k, thus making it impossible for most home buyers to own a house. Even building a house is not an option because the materials, such as umber to concrete are so expensive.
Construction and homeownership
Many small-time home builders or contractors are losing their business or finding it hard to make it thru the current condition. So there is also a decrease in the manpower available in the home construction field. Many potential home buyers are left with the choice of waiting until everything simmers down shortly, possibly extending or opting for rental homes.
Based on my experience, selling and owning a home in the current inflated economy has been lengthy. Finding an affordable rental has been like a race whereby you must act fast before it goes off the market in a matter of minutes. Many experts are projecting a slow recovery in the real estate market and expect it to stabilize by the end of 2023.
The right decision is to wait till the market stabilizes. You can consider the next option as an affordable way to construct a home, like a barn dominium home. Building these types of dwellings costs way less than a stick build home. As we can see in the market, many are taking advantage of the soaring property prices and liquidating their homes for a higher value. They then purchase a motor home, move into a rental property, and sit on the excess equity until it is right to buy the ideal house. Whoever purchases a home with high-interest rates or planning to do might look into refinancing the mortgage when the rates go down to lock in a lower monthly payment with possible equity on the property.
To wrap it up, the rising interest rates and inflation affect both, people and businesses. It is a chain reaction that impacts everyone. Small-time lenders are going out of business, and people are losing their affordability to own a home. This scenario is negatively affecting the real estate industry. It is a waiting game for the market to slow down and anticipate the Fed to reduce the interest rate, which is going to happen sometime next year. Several events influenced the economy over the past years, starting with the pandemic and geo-political issue. It has been proven in the past years that the market will anticipate positive changes right after the mid-term election. Being up-to-date about current events is essential to weigh all the possible decisions for a better outcome.
How can Startup Tandem help you?
At Startup Tandem will be able to provide you with informative advice and recommendations that suit your personal and business goals. We have a Finra-licensed professional who could provide consultations on the capital markets. We can also look at other financial areas of a business that need expansion, such as growth, or merely structuring the investment plan to achieve the ideal business goals. Please visit Finance and Business Advisory | Startup Tandem.
How to choose the best exit strategy for your business?
Every entrepreneur has one target in mind when starting their business, to grow and to be profitable in the long run. Many entrepreneurs start a business to multiply its and other stakeholders’ investment. It has been more common lately to see a company go thru an IPO or acquisition as an exit strategy. This blog will discuss how to choose the best exit strategy for your business.
As discussed in our blog, starting a successful business in an inflated economy, you have the opportunity to create innovative products or services to solve a problem that arises during hardship times. As an entrepreneur, you have the power to influence and change the current ecosystem by building a great startup. So why think about an exit?
Reasons why an exit strategy is needed
Many factors can contribute to an exit:
The business has been running at a loss for a while now
Legal reasons such as massive lawsuits
The demise of the owner (usually sole proprietorship)
Merger & Acquisition looks appealing
IPO to multiply investors’ money
What makes an exit a bad strategy?
A lousy exit usually involves poor strategy adaption. When a business owner decides to halt the business, choosing the right exit strategy is vital. Poor strategy management may cause financial losses and even steer the business brand away from its values. Business owners can choose the suitable method based on the business needs; every element of the strategy implementation is essential for a smooth exit process and optimizing business outcomes.
Most common exit strategies
There are a few exit strategies that we will discuss here. The most common ones are:
Transferring the business to another family member or a neutral person
Merger and Acquisition
Business liquidation
Bankruptcy filing
Selling the company to a partner or an interested investor
IPO (Initial Public Offering)
Exit Strategy 1: Transfer the business to a family member
Why choose this exit strategy?
As a business owner if you decide to retire, one of the most common ways to exit the business is by transferring to a family member. Business owners like this exit strategy as they are able to keep the business with family and pass it on from generation to generations to come.
Factors to consider when exiting this way.
It is prevalent to inherit a business from a family member. Usually, this type of business is more mature and established in the economy. The transferee should evaluate some factors before beginning the transfer. First of all, the soundness of the acquiring party. It is crucial to ensure the new owner has the mental and financial ability to take over the business and sustain its values and profitability. It can often become a challenge for both parties to have the same business practices mindset. Both parties should try to reach a common ground where the transfer can be done smoothly while ensuring the legal aspect of the transfer has been taken care of.
Exit strategy 2: Mergers & Acquisitions (M&A)
Why choose this exit strategy?
This M&A strategy is most common among startups and business owners. It can be a preferred strategy as the owner can set their terms, continue to hold control, and influence the price of the acquisition.
Factors to consider when exiting this way.
There are two outcomes from this type of transaction: either businesses merge and maintain equal interestand holdings, or the acquiring party becomes the major stakeholder of the merged entities. When the latter happens, the appointed CEO will be from the acquiring side, and significant changes can be made to the structure and processes of the other company. This strategy requires internal and external expertise to complete each transaction area and weigh the outcome of such activity. Some of the crucial part that will decide whether to continue with the strategy is the projected profitability, the size of the debt, and any ongoing legal issues that might fail the purpose of the M&A transaction. More on this topic soon!
Exit strategy 3: Business Liquidation
Why choose this exit strategy?
Business owners are ready to liquidate their business and move to the next venture. This may sound very appealing to a business owner if the passion for the business is lost. If the entrepreneur does not have any family members or partners to sell the business to, then liquidating the business is the preferred stategy to exit.
Factors to consider with this exit strategy.
It may sound simple and easy, but it is critical to inspect and ensure you create a proper checklist for each business area. Liquidating a business translates to permanently shutting down the business, so it is essential to ensure the business values and brands stay positive in the market and that such a decision will be profitable. Business owners often seek external services to help analyze and compile the necessary data to adapt the exit strategy successfully.
Exit Strategy 4: Bankruptcy Filing
Why choose this exit strategy?
Almost all business owner tries to avoid this type of exit. Filing for bankruptcy often relates to the inability to sustain the business profitably while the level of unpaid debt is snowballing. To avoid being sued or the possibility of losing not only business but personal assets, many owners’ resorts to this avenue. It takes a thorough process to qualify for the filing.
Factors to consider with this exit strategy.
Business owners should weigh the outcome and the consequences so that it will appear beneficial for choosing this exit strategy. We recommend seeking professional services to advise and assist in consolidating the business for filing purposes.
Exit Strategy 5: Selling the business to a partner or investor.
Why choose this exit strategy?
The exit strategy above is pervasive, especially among startups and small businesses. For example, many small entrepreneurs create business pages on social media such as Facebook to market their products and services. In time, the pages might have gathered a large number of followers, which might pique others’ interest in buying over the page with the acquired followers. It is easy for an interested investor to market their business with an established page with more significant followers by just changing the page’s name and other details while maintaining visitors’ traffic.
Factors to consider with this exit strategy.
Suppose business owners wish to sell their business, especially the ones with established brands. In that case, they should carefully review the circumstances and potential loss of future profit by analyzing the company’s value at the time of the sale.
Sometimes, it will include a royalty income in the sale agreement. There are many angles to be looked into before effecting any deal to achieve the best outcome.
Exit Strategy 6: Initial Public Offering (IPO)
Why choose this exit strategy?
An Initial Public Offering (IPO) is also a desirable exit strategy for entrepreneurs and investors. This exit strategy can substantially multiply the investment of private investors and business owners, making it very desirable.
Factors to consider with this exit strategy
Many factors can affect an IPO, such as market conditions can influence how profitable this exit strategy can be. Other reasons companies go for IPO include brand strength, liquidity, company success, and improved market valuation. We will write more on this strategy next week.
How can Startup Tandem help you?
As a business owner, you should partner up with a team that can help you choose the best exit strategy for your business and support you in the process that comes with it. All of these exit strategies need finance advisory and legal support.
The advisory team at Startup Tandem is available to help you prepare your company to achieve the desired exit. Startup Tandem advisory can help you value your company by using the discounted cash flow or LBO model and provide advice on any transaction to achieve the best exit possible for you and your investors.
Startup Tandem has developed a network of businesses and individuals that come together to help startups and small businesses. Reach out if you need referrals or if you need to discuss any of these exit strategies more in depth.
