Five Fundamental Mistakes Business Owners Make

H. Len Musgrove, Jr., Esq.
© Musgrove Law Firm, P.C. 2014

Every business owner and budding entrepreneur faces countless challenging decisions each and every day.  Will I make another payroll?   Should I upgrade my infrastructure?  How can I improve sales?  Can I afford to hire that talented potential employee?  Can I afford not to?  At Musgrove Law Firm, P.C., we have the opportunity to work with talented business owners each day, and we have the privilege of assisting them with their legal and strategic business challenges.

After practicing law for nearly three decades, I have formed some opinions about things that intelligent businessmen and businesswomen often overlook in their quests to make their beloved businesses more successful.  I consider each of these potential omissions to be fundamental in nature, meaning that an entrepreneur’s failure to address these issues can be quite detrimental, and in some cases even fatal, to their businesses.  In a nutshell, business owners often feel they are “too busy running the business” to address these key issues.  In no particular order, here are Five Fundamental Mistakes to Avoid:

  • Failing to Have a Clear Exit Strategy;
  • Failing to Properly Insure Your Business;
  • Failing to Address the 4 Terrible D’s;
  • Failing to Address Retirement of a Business Owner; and
  • Failing to Plan for Your Sudden Demise.

Adopting a Clear Exit Strategy for your business should in most cases be addressed on day one or even before in the planning stages of the budding business.  Do you intend for this business to be a multi-generational family business to last for decades?  Are you a “serial entrepreneur” that has a pre-determined shelf life for your business before you plan to package and sell it?  Have you and your business partner or partners come to a clear understanding of the rules of the road if one of you leaves the business for any reason? (see more on this issue under the 4 Terrible D’s below)   Are you the “services partner” who plans to buy out his or her investor partners down the road?  In any of these situations, making a determination of your goals for the business will greatly assist you in making decisions about the business before you actually have to make them.

All businesses need adequate Insurance.   No one ever believes that a catastrophic event will cripple your business or that a trusted employee will steal and commit fraud to your detriment.   Yet these are two simple examples of the “what if’s” of business ownership, and each of them happens to good businesses and smart business owners each day.   You should question your insurance team member as to the amount of business interruption, fraud protection and general comprehensive liability insurance you can afford and integrate into your business plan.  Although the latter can replace damaged or destroyed plan, property and equipment, what about a true business interruption such that you cannot operate for a short (or long) term?   Your employees still need to be paid, and even the owner likes to continue receiving some income.  In the case of a trusted controller of CFO going sour, it is awfully comforting to know that your policies include a healthy amount of fraud and defalcation coverage.

If you have one or more partners, then you simply cannot afford NOT to address the 4 Terrible D’s:   Death, Disability, Divorce and, often overlooked, Disagreement.  It always is simpler and cleaner to address these issues from Day 1, when the enthusiasm and confidence in the new venture are at their absolute peaks, than it is when one of these events occurs or threatens to do so.  Death issues can be addressed with a clear buy-sell agreement between or among partners, typically backed by “key man” (in which the company owns policies on the owners’ lives) or “cross purchase” (in which the partners insure each other) insurance.   Similarly, short term or permanent Disability can be addressed by insurance, especially if the owner is providing valuable services to the company rather than acting as an investor only.  Divorce can be devastating to a business, particularly in a community property state such as Texas when the property laws provide that assets gained during marriage have a community interest for both spouses, regardless of how the business is owned.   A clear buy-sell agreement addressing the what if’s of Divorce of a partner is absolutely fundamental to avoiding having your business hijacked by a skilled family lawyer representing an angry spouse.   Finally, possibly the most fundamental Terrible D of all, Disagreement, must be addressed.   What if one partner wishes to retire and the other does not?  What if one decides they have had enough of the rat race and wants to move to the mountains or, even better, St. Somewhere?   What if the partners come to a fork in the road that doesn’t?   If you have no buy-sell agreement addressing these issues, can you really expect two or more unhappy partners to casually agree?  In my experience, that is asking a lot.

Have you truly planned your retirement?    Do you plan to sell the business?   Gift or sell it to your kids?   Set up on employee stock option plan (“ESOP”) to have the company/the employees buy you out?   Shut the doors?  Hopefully you have a qualified retirement plan such as a 401K, IRA or SEP plan, but is that really enough?   Have you had your business appraised recently to understand what it is really worth?   I will assure you that Uncle Sam has great interest in the value of your business, not only for income tax purposes, but also for estate and gift taxes, which are frequently overlooked by business owners.   Granted, these options may morph a bit with the years moving on, such as the case when suddenly one’s offspring mature into intelligent and, possibly, good business owners themselves.

What about your sudden death through accident or illness?   Have you recently updated your will?   DO YOU HAVE A WILL?  Do you have a power of attorney in case of your incapacity?   If you have partners and have insured your death and backed the same with a solid buy-sell agreement, some of these issues may be addressed.   But what about you solo business owners that also work as a fundamental part of your business?   We have worked with savvy solo owners to set up succession plans for both their businesses and their personal lives.   For that matter, for many entrepreneurs, it becomes challenging if not impossible to separate those two things, and a skilled legal counsel and team of professionals can make a great deal of difference to assure that your business will indeed outlive you.   I can absolutely assure you that your failure to plan in these areas will prevent your goals in these areas from being attained.

If any of these issues are ones that you have not considered or properly nailed down, then I advise that you immediately consult a competent business lawyer.   We at Musgrove Law Firm, P.C. would be pleased to discuss the issues with you to avoid the potential catastrophic consequences of failing to plan.

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