The Life Cycle of a Business
In this episode, Janathan Allen discusses the broad range of valuable integrated services provided by Allen Barron, Inc. at every phase of a company’s life: startup, business planning, the selection of an entity, as well as the importance of business succession planning. Jan discusses the importance of careful planning and execution and how Allen Barron helps our clients to avoid the potholes which have challenged other businesses, as well as how to manage employees and the challenges of being an employer in California.
Jan
Welcome to AB cast, integrating legal tax accounting and business solutions. I’m Jonathan Allen. In this episode, we’re going to discuss the life cycle of a business.
Neil
Jan, here at a Allen Barron we often talk about what we call the life cycle of a business. What do you consider to be the life cycle of a business?
Jan
Well, that’s fairly easy. It’s the formation or startup of a business. It’s the growth. And then it’s the sale or disposition and everything that occurs in between
Neil
Jan. You often tell us it’s important to know how things are going to wind up when you’re at the outset, the start of a company. Why is it so important to know what you intend to happen at the end when you’re starting a business?
Jan
I know it sounds a bit backwards, but you always begin with the end in mind. And the reason is, is if you’re putting together a business and you’re going to contemplate beginning a business, it’s important to have a plan. And in order to have a plan, you have to know what it is you’re going to do, what it is that you want to do. How does you’re going to achieve it and how it’s going to end. In other words, are you starting this business simply because you need extra income? Are you going to utilize it because you need a full time position and there is no other form of being able to obtain money? Is it something for fun? Is it a sideline? You always start a business with the end in mind.
Neil
And then how important is understanding that when you’re considering the selection of entities?
Jan
Entity selection is probably the most important point that a business will undertake as it is beginning it’s journey. There are lots of cocktail party exchanges of information, where people will comment about what their CPAs or attorneys have done. But the selection of an entity is really more complex than just choosing an LLC or an S Corp. And most people take out of consideration the utilization of a corporation because they’ve heard or they’ve read online that it’s too complex. Nothing could be further from the truth, the creation of the entities and the difficulty and the degree of difficulty is approximately the same. But there is this misnomer misinformation that a corporation is more complex to run than other entities. So if you’re going to start a company and you want to be able to utilize it in order to create a product, for example, there may be one type of entity that would be better than if you were creating for example, intellectual property. And the reason for that is because of the types of income that can be generated from intellectual property, as opposed to the sale of product.
Neil
So Jan, at the beginning of the life cycle of a business, and perhaps even before you’re selecting an entity, there should be a substantial amount of planning. What types of business planning do you think are important at the beginning in the formation stage?
Jan
Well, frankly, if I saw business plans, I would be probably dumbfounded. Most businesses are started and they’re a thought in someone’s mind and they start to do things before they really put down on paper. What it is that they want to do. And a business plan is, is really nothing more than a roadmap. And it’s certainly not anything that’s written in stone, but it gives you a guideline and it allows you to take and formulate what it is that needs to be done in order to achieve what it is that you’re trying to do when you start a business. So for me, when I talk to clients and, and they want to start a business and I asked them if they’ve developed a business plan, the conversation generally stops and goes to, well, I don’t know how to do that. And yet really, it’s nothing more than thinking about what it is that you’re doing, what it is you’re trying to do.
Why are you trying to do it? How are you going to do it? And then how’s that going to be impacted by decisions that could be made further on? So for me, when I look at a business plan, it’s really critically important that you put together the numbers, the accounting, that underlie what it is that you’re trying to do. If you’re going to try and generate sales of X amount in some certain period, then put that on paper. And then what are the backup tasks that will have to be done in order to achieve that sales goal? Same token. You can utilize the same prognosis with an expense. If you’re looking at expenses, how do you go back and control those expenses? What is it that’s going to take? Are you producing product? Are there price points that can be hit that will create lower costs or expenses for the entity? It’s the planning of virtually everything it is that you’re going to do and how it is that you’re going to record that. And it’s generally in the form of some sort of accounting or financial statement that needs to be honed in as you start and begin this creation of a business.
Neil
So Jan, we’ve talked about selecting an entity. We’ve talked about a sound business plan. Another step I think a lot of business people miss is a succession plan. What is a business succession plan? And why should they be thinking about it at the outset of the company?
Jan
One of the things that happens in life are things are going to occur that you don’t plan on and you can plan on what’s going to occur if something were to happen to you and how would the business continue or not continue. So when we assist companies and clients in the development or the creation of a company, we always build in the succession plan in the organizational documents that we create, whether I’m creating a limited liability company, a corporation, or some other type of entity, the succession plan is built into those corporate governance docs. It’s also built into the underlying accounting and the financial statement information that will be required in the event that something happens that a succession plan needs to be executed because the business owner is no longer able or willing to run the business
Neil
Or make decisions.
Jan
Yes.
Neil
So if you’re going to have a successful business in California, you’re probably going to have employees. California is a challenging place for employers. How can Allen Barron help our clients with the management of issues related to employment,
Jan
Human resources, as it relates to employees and companies, particularly in the state of California are very important. And that’s because the HR and employment laws are very complex and they’re pretty unforgiving. So it’s important if you’re going to have employees that you understand what the employee’s rights are, what it is that you’re required to do as an employer and what it is that you need to be able to do in order to ensure that you have a happy workforce that is not going to turn into a revolving door because they’re not happy with what it is they’re doing or how the business is being run HR. And the staff within an organization are your bread and butter. And they are very important elements that need to be taken care of with special care.
Neil
So Jan, are there primary areas or key areas regarding employment that business people should really be giving their attention and focus to?
Jan
Yes, I would say probably first and foremost would be the issue of payroll and accounting for payroll itself. Payroll is a very important component as you’re looking at the employment issues that can face a company policies and procedures, as they’re outlined in an employee handbook are critical when hiring an individual to fulfill a certain position within a company, it’s important that they know the rules of the road and the rules of the road are memorialized within employee handbooks. So it’s important that an employer have an UpToDate handbook with all of the myriad of changes that occur on a yearly basis under employment law and ensure that the employees understand what’s expected of them as well as what’s expected of the employer. Non-disclosure agreements and trade secrets are important components within an organization when hiring, because what you don’t want is you don’t want to hire an employee, find out that they’ve learned all of the intellectual property or trade secrets of an organization, and then walk down the street and go to work for a competitor. And then finally going back and managing disciplinary issues within an organization. And of course the unfortunate element of having to terminate an employee are all critical in terms of being able to know how it is that these types of issues are best affected and executed based on the current laws in California.
Neil
And so from the perspective of what Allen Barron could do for our clients, when you’re considering the risks associated with trust fund penalties, EDD audits, relating to payroll and the classification of employees down to issues with the labor board and disciplinary procedures and employee issues, Allen Barron can really provide sound counsel across all of those areas as well as the business itself.
Jan
Yes, that’s true because of the legal component that we have with located within our office as well. A lot of the compliance issues that occur in the employment component of a business are more legally related and we are able to assist in those matters relating to employment issues.
Neil
So now we’ve gotten into business and we’re off and running and actually we’re making some money. And the next step is maybe a little growth, and acquisitions are a key way that businesses expand and grow. And there’s two ways to do that in asset purchase or a stock purchase. Jan, what are the risks and benefits associated with an asset purchase and then a stock purchase?
Jan
Well, if you listen to most attorneys, they would tell you that if you’re going to do an acquisition, you want to have it be an asset acquisition. And quite frankly, that’s really for the ease of the attorneys, because the reps and warranties that are required in a purchase sale agreement under an asset purchase are far easier than they are if the purchase were to be that of the stock or membership of a corporation or LLC. But quite frankly, from a tax perspective, when you go back and you look at an acquisition, oftentimes for the seller, it’s far more practical and cost effective to sell the membership or the stock of a corporation than it is to sell the assets. There are pros and cons under both methodologies, but again, it depends on what side you’re representing as well because the pros and cons will deploy against the seller and the buyer. So what’s good for the buyer may not be so good for the seller and vice versa.
Neil
And then one of the key elements of any acquisition is due diligence. What due diligence services do we provide and why is due diligence so important?
Jan
Due diligence is the review of a company or a company’s assets from top to bottom in order to ensure that you are obtaining what it is that you are paying for. So when you go through a due diligence process, it will review legal records, accounting records, tax records, contracts, leases, virtually everything that an organization does in order to ensure that the financial statement and the representations made by management are accurate.
Neil
And as we continue through the life cycle of a business, obviously there comes a point in time where company might be sold. You often talk about the shock and often surprise that people experience when they learn what’s necessary to prepare a company for sale. Jan, how hard is it to get a company ready to be put on the market and sold?
Jan
The answer to that question is really dependent on how effective and efficient the processes are within an organization. But generally I find that most companies are not ready because they really don’t understand the rigors of the due diligence process and what it is that they’re going to be asked to do. So, for example, if you had to go back and provide a contract for every contract that a company entered into and was current at the time, what sort of system is in place to do that readily and easily, the financial statement information, how is it that you go back and prove the vendor amounts in an AP listing, for example, and the underlying vendors that make up that amount from the legal information that’s required, the corporate governance documents and whether or not they’re up to date, whether or not the Secretary of State records have been executed, whether the financial statements are an alignment with the tax returns and whether or not the tax regulatory requirements have been met to is the business profitable and the HR people that are involved in it, it is an incredibly grueling process. So I think the thing that most people don’t recognize is if they’ve ever gone through a due diligence checklist is the degree and the complexity of the amount of information they’re going to be asked to provide. And in order to get a company ready for sale, it’s important that those elements be met prior to putting the company up for sale.
Neil
And that leads back to the integration of our services. So if we’ve been working with them and we’ve helped them to structure a really sound accounting system and monitored along the way, getting that company ready to turn and to be sold is a much quicker, less expensive and easier process. Is it not?
Jan
It is. And again, it all depends on the preparation that’s gone beforehand. So it’s either a lifelong process within the business, or it’s one that, that you have to stop and go back and fix in order to get the company prepared for sale.
Neil
So Jan, a great story that we have from our own experiences. we had a client that was approached by a major player in the technology business. Tell us a little bit about how that went.
Jan
That was an interesting acquisition. And fortunately for us, that was really not an asset acquisition. It was a stock acquisition. And so the due diligence process that we went through and, and this was in terms of, of dollars relating to the acquirer and the seller was like David and Goliath. So the acquirer of course, was using a very large law firm, national law firm. And the due diligence process that it took to accomplish this sale was almost 14 months. And it was 14 months of information being gathered, reviewed, revised, reviewed, and then accepted. So it was, it was a fascinating look into a large complex company and their legal processes and procedures in order to acquire which to that company, would’ve been just a blip on the radar and nothing particularly major, but it was insightful for the individuals that went through that process, the amount of work that it actually takes with which to get a company sold.
Neil
And that was in a situation where you have a major name that all of us know, they come in, “we want to buy your company,” they offer an amount, that’s fine, everybody’s excited. They want get it done, but it took 14 months to get it completed?
Jan
Yes, it was fairly long and drawn out. But that’s the nature of the beast because there are eyes that need to be dotted and Ts that needed to be crossed and the level of detail with which to go down and ensure the regulatory compliance within the processes of the major company that was the acquirer are quite complex.
Neil
And Jan, unfortunately, sometimes things don’t go as we plan and it’s necessary to close a business or bring business to an end, what is a business dissolution? And what are some of the steps that it takes to close a business?
Jan
I think in terms of closing a business, it depends on the reason for closing the business. Sometimes death or disability steps in, and people just walk away and what they don’t recognize is if they’ve created an entity. There is a proper procedure with which to actually dissolve a company and it’s necessary to go back and go through the formal execution of the dissolution. Otherwise the FTB can come back and continue to request the franchise tax payments on a yearly basis because the entity is still alive. So in order to close the business, you need to dissolve the entity and go through the protocols with which to dissolve the entity itself. The other thing that I would suggest too, is that when a business closes, it’s really important that things be wound up properly. The wind up of the end of an organization, the picking up of the loose ends, the termination of employees, if necessary are all going to have legal requirements that I don’t think most people think about. So it’s important if you’re thinking about closing your business, that you contact a professional to assist you with the proper closure of a business so that you are assured that two or three years down the road, the FTB will not come knocking at your door, looking for additional tax funds
Neil
Or some unsatisfied creditor.
Jan
Yes.
Neil
So here at Allen Barron, we integrate business formation, legal, tax and accounting services. How do you think the integration of those services really impacts the life cycle of a company for our clients?
Jan
I think the ability for the team at a AB Inc, to complete the integration of a business, whether it’s the formation, it’s the growth, it’s the accounting, it’s the tax, or even the dissolution and closure of a business gives people confidence that because we have handled from the three substantive areas of legal accounting and tax, all of those types of issues that what’s being done is proper. We’ve been through the potholes and we know where the potholes are and we know how to avoid the potholes. So for us and for our clients, it’s really putting together a team that’s dynamic that understands how to complete these, all of these areas under one roof, without having to deploy multiple firms and multiple professionals, when it can all be done under one roof.
Neil
And let’s take that a little bit further, Jan. So let’s say they had a separate corporate attorney and a separate CPA firm, financial advisor and a separate employment lawyer. Every one of them is going to have a different take on a given problem or issue. And they could be absolutely right in what their perspective is. And yet the real solution, the problem is going to involve, give and take from all of those.
Jan
Yes, the issue of having several professionals is that most of the time, those professionals will not be in agreement because what the professions do and do well is that they look at their verticals, but there is really no integration by and among and between the verticals. So oftentimes a business owner is being asked to make decisions based on a conflict within his own professionals when they really don’t have the expertise or experience with which to resolve those issues. So at Allen Barron, Inc, we have the capability of explaining to you, you, the client varying solutions and what solutions may be appropriate for you, and why
Neil
Another idea that you often suggest to our clients is we’re here to handle the fire at hand, but the fire is really a symptom of something else.
Jan
Well, that comes to be when clients can come in and say that they have an issue when the issue really is merely a symptom of something else that’s going on within the organization. And that’s a whole another discussion relating to when someone comes in and says, I’ve got an accounting problem. They may or may not have an accounting problem. To them, it presents as an accounting problem or a tax problem, or perhaps even a legal problem. But the underlying issues may be far more buried and will take longer to discern and to fix than just the element that presenting at any particular time.
Neil
And the ability to look at a problem from all of those perspectives gives us the ability to get to the answer in a more rapid and efficient manner and to provide a solution that can be implemented and work
Jan
That’s right.
Neil
So, Jan, you built Allen Barron for the exact purpose of serving clients at any point and throughout the life cycle of a business.
Jan
Yes. The premise of Allen Barron Inc really evolved into what it is that we’re doing now, because we saw a need that wasn’t being addressed throughout my various professions. So Allen Barron has evolved to the point where we provide the integrative services for our clients so that we can provide the most effective solutions for whatever it is that our clients and the issues that they’re facing may be.
Neil
And that can be a challenge or an opportunity
Jan
Generally it’s both.
Neil
Thanks, Jan.
Jan
You’re welcome.
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