Our big break can come upon us like a wave, and if we are not prepared, we will never get to ride it out to success. At worst, we could slip and fall – total wipe-out. Preparation must be done before the swell comes, as there is no time to prepare when the wave is upon us.
Effective entity structure is paramount to facilitate growth and ensure the desired equity outcomes are achieved.
Many factors will determine the approach taken to structuring the businesses affairs, of which some have been listed below:
Exposure to foreseen and unforeseen liabilities: Does the structure provide some protection against exposure of the participants and assets to claims by third parties?
Control over assets and income: Will the structure provide appropriate persons with control over the assets or business, both now and in the future?
General wealth creation: Is the structure appropriate to build long-term wealth?
The ability to obtain finance: Will banks and other capital providers be comfortable dealing with the structure?
Disclosure of results: Will the progress of the investment or business need to be disclosed to the public or competitors?
Compliance costs associated with the structure: How much will it cost to maintain the structure on an on-going basis?
Exposure to family disharmony: Will internal conflict within a family group disrupt the investment or the business in a detrimental way?
Succession planning: How does the structure accommodate an orderly passing of the capital value to the next generation?
Ability to restructure: Will the structure adequately accommodate change in the future?
Ownership structures need to be set up considering the long-term achievements and objectives of the venture, e.g. Are you planning to sell part or all of the business in the future?
The various stakeholders should understand each stakeholders’ personal objectives before forming the alliance.
Exit strategies and periodic review times should be in place before the venture begins for a shareholder to exit in an orderly manner and to keep disharmony to a minimum.
Share of profit/dividend payout policies need to be agreed on and documented at the start of the venture.
Adapted from CCH 10-060: General considerations in choosing a business structure