Welcome back to another week of the Small Business Legal Playbook! Play 11 is titled “The Escape Strategy.” No one likes to start thinking about leaving a business when they’re just starting one.
We’ve spoken in weeks past, in previous Plays about several different topics. This week, we’ll discuss an issue with creating an exit strategy for your stake in a business.
So how do you make sure which exit strategy is best? Why do you even need an exit strategy? It’s important to know why you want an exit strategy in place even before your business takes off.
The purpose of this week’s Play is to talk about your options for an escape strategy.
First, it depends on what your corporate formation is, and this might be a bit of a chicken and the egg situation. I say that because your corporate formation will determine what your exit strategy will be. The strategies are different if you own an LLC, or an S-Corporation, or a C-Corporation, or if you’re in a partnership. Each has its pros and cons.
There are both offensive and defensive strategies for creating and implementing an exit strategy.
Offensive strategies: If there isn’t a problem yet, you can take your time discussing the exit strategies with your partners and co-owners. It’s much easier when things are going swimmingly rather than after tensions have arisen. You can discuss how someone can leave the business, either willingly, or be forced out. You can also discuss whether you or your business partners would first have to offer their share of the company to the remaining partners or have the option of selling to a third party. These are difficult conversations to have, but they’re better to have before problems arise rather than after problems come into the light. The best way to run a small business is with transparency – because when everyone knows what they can gain or lose, things are less complicated. Less complicated means less litigation, which means less money spent unnecessarily. That’s why these conversations must be put into writing, and added to your Operating Agreement, corporate By-Laws, or Shareholders’ Agreement.
Defensive strategies: If the company has already been formed and your Operating Agreement, By-Laws, or Shareholders’ Agreement don’t have language in place to cover situations involving an exit for you or one of your small business co-owners, the best thing to do is to discuss it with your co-owners in a frank discussion. The next best thing is to look into the situation with an attorney to determine whether there are other options, involving statutes – especially with the LLC laws that went into effect in 2014. Some of these statutes lay the groundwork for an exit strategy, with or without the appropriate language in your Operating Agreement.
That’s all for this week. I hope you enjoyed this week’s Play, and stay tuned for next week’s play from the Small Business Legal Playbook! Remember to subscribe and get each play sent to you directly! Until then, may your businesses continue to thrive and your football teams be victorious. Keep playing to win!