Growth and expansion are natural parts of a business lifecycle, and how these play out is unique to each entrepreneur. One commonality, however, is the need to handle expanding ownership strategically and thoughtfully. Below are four areas that business owners should think through and plan for when preparing to bring on new shareholders.
- Share the risks and benefits of business ownership. It’s important to make sure the individuals being considered for a shareholder position understand what it means to become an owner. They need to recognize the investment possibility (potential for appreciation, stock ownership, etc.) as well as the impact on compensation. However, there are risks associated with becoming a business owner, such as the need to guarantee debt with the bank you use, and these risks should not be diminished or downplayed to potential shareholders. Be open and honest about the full entrepreneurial landscape that awaits them as a new owner.
- Be clear about tax responsibilities. Most small businesses operate as pass-through business entities, which means the individuals who own the company participate in paying the income taxes levied on the business profits. Individuals preparing to take an ownership stake in your company must be informed as to what their role in this process will be, so they can be prepared financially. It’s also a good idea to inform them as to what extent cash flow would be provided to them to help cover the corporate-level taxes.
- Focus on administrative onboarding. Bringing in new owners changes the structure of a business, and as such it also changes behind-the-scenes paperwork. Don’t neglect the administrative tasks your business must complete to support a new owner. This includes legal documents that need to be updated or adjusted, like shareholder agreements, buy-sell agreements or corporate stock records. You should also review your company’s compensation policy and benefit structure at the owner-level.
- Create clarity around owner’s new role. The impact of new owners on the day-to-day operations of your business must be clearly outlined and communicated to everyone involved. Many business owners wear many hats and play many roles in a company, and if this is the case at your company, it is important to inform new owners what will be expected of them. Conversely, the rest of the team should know what they can expect from the new owners. Will they have an impact on daily functions or will this new owner take a big picture, strategic role? A promotion may be involved in the inclusion of a new member in the ownership group, so internal and external communications will be needed to disseminate this information to interested or affected parties.
If you are thinking of bringing new shareholders into your business, it’s never too early to start planning to make onboarding as smooth as possible. Leveraging an external resource, like a business consultant or accountant, can help you start planning and cover all your bases. Interested finding the right partner? Contact RKL’s Business Consulting Services Group to learn how we can help you achieve your goals.