10 Ways to Future-Proof Your Business
Whether an owner intends to hold onto a security systems business long-term, pass it down through generations or sell it, a solid plan is critical to build the value necessary to accomplish those goals. Getting down and dirty to implement and execute today can have you smelling like a rose tomorrow.
6. Benefit From Legal Status
Which legal business designation is best for you: S corporation, C corporation, limited liability company (LLC) or sole proprietorship? All of them have tax ramifications. Although there may be benefits in being a C corp. while operating your company, when selling it is a definite burden.
S and C corp. status is exactly the same with respect to liability protection. The difference is how you are taxed. The C corp. has what is referred to as double taxation. First the corporation itself is taxed on the profits it makes. Then when these profits are distributed to the shareholders as a dividend, they report it as income on their individual tax returns. So essentially you are paying taxes twice on the same money your corporation makes.
As an alternative, an S corp. is a tax election a C corp. can make in order to eliminate the corporate tax level. This allows the earnings to pass through the corporation to the shareholders. You only pay once on the earnings. This is a great tax advantage, especially when selling, possibly cutting the taxes on a corporation’s profits in half. Talk with your accountant and attorney to ensure you qualify to elect to be taxed as an S corp.
A C corp. wishing to switch to an S status should, again, talk with an accountant and attorney. While it can be a viable change, there is a required five-year waiting period for it to become effective. C corps. are definitely sellable; however, the buyer must be willing to buy the stock of the corporation. This means taking on the seller’s liabilities, which, in turn, usually results in a lower priced offer than if it were a S corp.
An LLC is treated the same as an S corp. but with more flexibility. The downside is that the LLC is more costly to set up and maintain. The filing and annual fees are greater than an S corp. Another disadvantage is that a sole owner of an LLC is taxed as if they are self-employed (sole proprietor). That is usually not the best tax position for a business owner. Again, consult your accountant and attorney for the best advice.
7. Retain Monitored Accounts
If you’re not big enough to profitably operate your own central station, you may not want to start one. There’s a tremendous cost in building and maintaining it properly. Yes, it will give you a sense of satisfaction that if you control it, it will be done right. However, at what cost? Research this thoroughly before jumping in as it could literally drain you.
If you are using a
third-party central station, make sure you own the phone lines so you control the accounts. If for whatever reason you need to move those accounts (bad service, selling your company, better pricing), if you own the lines it’s very easy to do. It may cost more per month, but then you, not your central station, own the lifeblood of your business – your customers. If the central station owns the lines, it controls your customers. And for those who have done this in the past, you know that reprogramming the accounts is a nightmare.
If you are using a third-party central station, be very careful about the terms of your contract with the provider. Try to avoid a “Right of First Refusal” term because it will impede your ability to move quickly if you decide to sell your accounts and/or your company. Buyers are hesitant to expend the time and money to gather enough information to make an official offer if the central station has the opportunity to simply match the buyer’s offer in order to make the purchase. Yet the third-party provider does not have to make an offer until another offer exists.
A second precaution regarding third-party centrals is not to get into a contract that has a long initial term (e.g. three years) and automatic renewals for the same term. These typically have a 60-day advance notice to terminate requirement. If you decide to sell your company shortly after this deadline passes, you are faced with three years of monitoring fees even though you have sold the accounts and they are being monitored elsewhere.
8. Financial Management
Pay close attention to your financials. Your business is all about fiscal responsibility. Produce good financial statements monthly. Read and understand every line item. Everything has a cause and effect, and should be clearly illustrated in these statements. Adjustments never have to be drastic as long as you conduct monthly internal audits.
The buyers, when they conduct their due diligence on your company, will pore over your financials. After all, they’re about to pay you hundreds of thousands, possibly millions of dollars for your company. They and their bank have to be comfortable that you have been fiscally responsible. Incidentally, raising monitoring rates periodically without overpricing (5% or so every two years) creates more value with some buyers.
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