So, you have a business idea that you’ve successfully piloted and want to expand your market. One of the first issues you’ll want to consider when starting to grow your small business or startup is your exit strategy. How long do you want to own the growth maintenance of your idea?
Because time is relative in any business, we’ll use the business life cycle to identify your desired exit strategy. As you can see on the diagram below a business ownership lifecycle has several phases. These phases can be viewed in the entirety of a business lifecycle or iteratively over the course of ownership. The emphasis is on which approach is most desirable for you.
If you have visions of taking a profit early in a business lifecycle, then you may want to consider optimizing your company as a startup. If your vision includes passing along your business (small, medium, or large) to a descendant then you may consider growth strategies that rely more on proven longer-term investments.
Here’s why it matters. Startups require intensive (and sometimes costly) legal set up. They require advisors that can move as quickly and they do and know how to speak the language of venture capitalists and investment banks. Startups grow like bamboo — three feet a day — and need to anticipate issues and adjust to changes with speed and alacrity. Startups are necessarily designed with other people in mind — investors mainly, but also banks, employees, and other business people.
Small businesses, however, reflect the values and personality of their owner/operators. They can be designed around the owner’s preferred lifestyle and values. Legal set up and administration is generally less expensive and is not subject to the same intensive needs as startups. They grow more like oaks, slow and steady.
There are pros and cons to each approach but regardless of which strategy you employ when starting a small business or startup, you will want to ensure you’ve legally structured your business according to plan. Going into a business with an investor or business partner without proper documentation spelling out the partnership, responsibilities, equity, and exit process in the event of a sale, transaction, or retirement can raise issues for a business before it’s even started.
You can, however, steer clear of the issues most small businesses and startups eventually face by working with legal counsel to define the rules of your business. It’s easier than you think when you work with an attorney that specializes in transactional law and business law.
Understanding whether you are a small business or a startup will influence your exit strategy and how you plan for growth. Managing your own expectations will help you manage your customers’, clients’, investors’, and partners’ expectations as you grow your business.
Though there is some crossover between these two archetypes of new businesses, you need to know what it is that you’re building. That way, your attorney can know how to guide you.