This is part four of a series on steps a small business owner can take now that will increase the value of the business later when the business is ready for sale. I have previously written about showing a profit, keeping a positive trend in revenue growth, and creating, protecting and managing IP. The fourth thing a small business owner can do now to create value later is to keep good company records.
- Keep Good Company Records. Every company, whether a corporation or a limited liability company or even a limited partnership, is required to keep certain company records. Forming a company generally requires the filing or articles of organization or incorporation, the company needs governing rules like bylaws or an operating agreement, the company needs ownership records like a stock book, if there is more than one owner, the company may have a management agreement or a buy-sell agreement. And during its operational life the company should have meetings – both of its owners (shareholders, partners, members) and of its managers or directors. Many small businesses begin their lives being formed by an online assistant, and never get around to holding meetings or creating minutes except for the form minutes the bank makes you sign when you open an account. This is not good governance, and it will show in due diligence when you are ready to sell. If you formed your company without the help of a competent business attorney, it is money well spent to hire one to look at your organizational documents and fix them.
As a small business owner, you should also know how your company works. Unless you are a sole proprietor, there are rules to the way your company must be operated, and those rules are found in your state statute for your business type and in your company’s bylaws or operating agreement and other documents. Read them. If you don’t understand them, hire a business lawyer to explain them to you – then follow them and create a paper trail to show you have done so – these are called Minutes. Keep them. Make them detailed. They are your company’s life history, and are useful in many ways over time. They will show you how you reacted to a problem the last time it came up, and what was successful and what was not. They will remind you where you were going and how you planned to get there. Believe me, you think today you will remember but 6 years from now you won’t. Finally, a potential buyer doing due diligence will see the past of your company, its struggles and triumphs, laid out. The potential buyer will come away with the impression of a well run company, and whether the transaction is an asset sale or an equity purchase, the buyer is purchasing some risk – the impression of a well run company will reduce the perceived risk in the buyer’s mind and increase the potential value of your business.
Therefore, I suggest at a minimum one meeting of owners and four meetings of managers or directors per year. At the meetings, take time to record in the minutes a report from the President or Manager on the operations of the business – what has happened and what is planned, and a report from the Treasurer on the financial state of the business. Include reports on any key plans or challenges ahead, or crises and responses. Finally, include directions on future operations, plans, etc. as are appropriate, and report back on those at the next meeting. The meeting does not need to be long or formal, but the minutes should be sufficiently detailed to keep a clear record. Attach relevant documents to the approved minutes and keep them in your record book. Build value.
Tomorrow: Replace Yourself