Your Dream or Your Nightmare: Successful Small Business Development

This is supposed to be your dream come true. Finally, your business is up and running. You’re breathing life into your big idea. You no longer have to answer to the boss because you are the boss. You’re working your business plan. You’re finding your path to financial freedom. You know your target market and you’re finding new clients. You have positive feedback on your products and services. You’re developing new technology. You’re finding additional funding. You’ve finally found the right team to work with. You have the right workspace. You can feel the exciting energy when you walk into your business each morning.

Yes, there are bumps in the road, but you’re learning to be resourceful and to move through, over or around them. Each day is long and brings surprising new challenges, but you’re gaining momentum along with new customers and increased revenue. You learn to balance the ups and downs of the market and business challenges. You learn to pace yourself. But as time passes and you analyze your business growth, you see that the trend line isn’t moving upward, it’s declining. Your plans aren’t working out as you expected. At this rate, you’re not sure how long you can continue operating. You realize that as passionate as you are about the business, the problems are overwhelming you. Your dream is turning into a nightmare.

Why Small Businesses Fail

In spite of your best efforts, your business is succumbing to one of the top ten reasons that businesses fail. (Non-prioritized list according to Jay Goltz, The New York Times, January 5, 2011).

1. Owners who cannot get out of their own way.

2. Operational inefficiencies.

3. Dysfunctional management.

4. The lack of a succession plan.

5. The math just doesn’t work.

6. Out-of-control growth.

7. Poor accounting.

8. Lack of a cash cushion.

9. Operational mediocrity.

10. A declining market.

In particular, the first four reasons are linked to how you develop and structure your business. Small business owners who seek expert advice in running their business have a better shot at overcoming these pitfalls. To address them, here are eight tips for successful small business development that are critical components for you as a small business owner.

Tips for Success

1. Be The Leader – Be purposeful about leading and designing your company for success. If you think you know everything necessary for success, and close your mind to new and different ideas, you AND your business will stop growing. Instead, find a business mentor, seek customer feedback, attend workshops, read books, keep a bias for learning and set the example for your team to learn.

2. Manage Your Passion – Don’t let your passion manage you. Just because you love shoes, doesn’t mean you should open a shoe store. Make sure you’ve identified the void in the marketplace that your business can fill; or the need that you’re satisfying. Make sure you know your target market, and understand what they’re willing to pay and do for your product or service. Most importantly, assess your financial resources. There are too many stories of entrepreneurs who had what seemed to be a great idea, but got over their heads into debt, and tumbled into bankruptcy.

3. Increase Business Value – Your greatest business value resides in your people, processes, products/services, technology and customer relationships. It’s important to understand the right combination and how you best provide it to others. Then preserve and improve on that. For instance, the fact that you guarantee same-day service, and thorough clean up by your service technicians could be your greatest value. But to provide that, you must have a sufficient number of trained technicians on call at all times; and a reliable 24/7 contact and communication process.

4. Build Your Culture – This is the DNA of your business. Whenever a client comes in contact with your business, whether face-to-face, by phone, by email, or by social media, they gain nuances and impressions that determine whether they want to continue to engage with you again. Set the tone by treating your employees the way that you want them to treat your customers. Make customer service a priority. Create an environment that is welcoming and comfortable. Ensure that the style or d├ęcor will appeal to your target market, and effectively represent your product or service.

5. Position Your Family – Do you have a family business or a business family? Does your business exist as a place to employ your family or a place to serve your clients? The wonderful family members who helped you to get started may need to evolve to different supporting roles as the business grows, to ensure that you have the most qualified people in the positions where they can perform well.

6. Develop Your Successor – Your role in founding your business is important, but none of us are irreplaceable. Constantly develop others to learn the business, and make leadership decisions based on who and what will add value to the business. When the business has greater value to your clients, you will benefit from that.

7. Understand Business Roles – Roles and responsibilities must shift as the business grows and/or the market shifts. Be flexible, clarify responsibilities, and hold the right people accountable.

8. Document Business Processes – Continually review and update your operating processes to ensure maximum efficiencies. Involve the employees who actually perform the work, and find ways to eliminate waste, rework and scrap because they all result in lost money.

So take time now to plan for your business. Becoming a small business owner is a lot like falling in love. Once you fall madly in love with a seemingly fantastic person, it’s more difficult to recognize your areas of incompatibility. Similarly, once you have a seemingly fantastic business idea that you’re passionate about, it’s more difficult to see the potential pitfalls to your success. Plan with a clear head, and a focus on how you can serve others.

Business Entities: Which One Is Right for You and Your Business?

Many entrepreneurs are concerned about liability when starting their business. However, many of those same entrepreneurs fail to follow through on those concerns. Those concerns usually start with what type of business entity they should form. From a sole proprietorship to a corporation, entrepreneurs need to understand what each of these entities will mean for them and their business.

A sole proprietorship is the most used and inexpensive type of business entity. Most businesses start in this form because of the low cost and ease of formation. All it takes is a trip to the county clerk’s office and less than twenty bucks and you are in business. A sole proprietorship is a business that is owned and operated by one person. Typically identified as an “assumed name,” it is a way of operating a business under a different name other than the business owner. If you have a low risk business or intend to keep the business as small or part time operation, this could be a viable option.

The best thing about a sole proprietorship is the ability to have control and make decisions by yourself. You are the business and the business is you. There is no separation between the two. There are no requirements to maintain minutes or other formalities. You may file your personal tax return form 1040 and simply add a schedule C. Depending on the amount of income you make by running the business this can be simple and inexpensive option.

The same benefits of operating as a sole proprietorship also act as serious liability traps. Because there are no distinctions between the owner and the business, the owner’s personal assets are at risk along with the business’ assets. This means that if there is ever any liability that is associated with the business, it will be associated with you as well. Moreover, you will be taxed on your individual tax level, which means that if you have a lot of personal income (i.e. salary from other employment) and are in a higher income bracket, you will have to pay taxes in that higher bracket.

If you are operating a business with high risk you should not operate as a sole proprietorship. Furthermore, you have a lot of personal assets or your business acquires a lot of income a sole proprietorship should not be your entity of choice.

Ideally, if you are going to enter into a partnership, you should have a written agreement which is drafted to accurately reflect the agreement. Sadly, many perspective partners fail to focus on this issue. Sometimes the partners are friends and/or family and believe that there will never be any disagreement. However, it is my experience (as well as most business attorneys) that this belief often leads to disaster. It is always prudent to spend the time and money on a proper partnership agreement that will guide the partners through the good and bad times. A properly drawn partnership agreement will prevent disagreements from getting out of hand and will cut down (if not prevent) costly litigation costs in the end. The time and money that you are willing to spend properly drafting an agreement will well worth it.

General Partnerships are formed by either an oral or written agreement. Based on the foregoing paragraph you already know which I think is best. This entity is relatively inexpensive to form because there is no requirement to file documents on the state level. The partners will have to file an assumed name certificate with the county clerk’s office in the county which it operates business. Much like the sole proprietorship, there is generally no distinction between the partners and the business. Unless there is a written agreement to the contrary, each partner has equal management rights and equal opportunity to run the business. Partners are accountable to each other and to the business. General Partners are equally and severally liable for the debts of the business. This means that there is no distinction between the partners, their personal assets and the business. Everyone is accountable for the business.

Limited Liability Partnerships (LLP) require written agreements. LLPs are filed on the state level and require annual filings with the state. LLPs are good entities for professionals such as lawyers, accountants, and financial advisors. An LLP will limit liability for each individual partner to the extent that he/she is not personally liable. This means that if one partner commits malpractice, the other individual partners will not be held liable. Furthermore, if the partnership is sued and does not have sufficient assets, the individual partners (in most circumstances) will not be held liable. LLPs are expensive to create and require insurance before the filing can take place.

Limited Partnerships (LP) are good entities to bring in investors. Most commonly identified by laymen as “silent partnerships,” a LP will allow a partner to invest money without incurring liability for the company debts. The LP must have at least one general partner that will assume the liability for the partnership. This partner will be responsible for the day to day operations of the company and are solely responsible for the decision making. By contrast, the limited partner cannot be involved in the day to day operations of the company if it seeks to protect its limited liability. The limited partner will be entitled to profits and to be informed regarding the financial position of the LP. The LP is also required to file documents on the state level and requires a written agreement.

The most common and well known business entity is the corporation. Usually most entrepreneurs choose this entity because this is all they know. While it is not a bad choice making this choice comes with much responsibility. Incorporating your business requires a filing with the Secretary of State. Articles of Incorporation, Bylaws, Employer Identification Number, and meeting Minutes are all mandatory documents. A corporation usually has what I would like to call a “three tiered management system.” Shareholders are the owners of the corporation and elect the Board of Directors; the Board of Directors oversee the overall direction of the company and elect the officers; the Officers run the day to day operations of the business.

In a traditional corporation, the shareholders do not run the business but only receive income from it. Shareholders are shielded from the liability of the corporation. A Corporation has its own legal identity, separate from its owners. It exists separate and apart from the people, who own, manage, control and operate it. The Corporation issues stock of its own as evidence of ownership. The persons who own the stock are the owners of the Corporation, and are entitled to any dividends the Corporation may pay and to receive all the Corporation’s asses after all creditors have been paid if the Corporation is liquidated.

Board of Directors and Officers generally manage the Corporation. The shareholders, Board of Directors, and Officers must hold annual meetings and keep records of each. This can become relatively expensive if there are a large number of shareholders who do not live in the same area. The Bylaws govern the rules and regulations of a particular corporation. Board of Directors makes decisions, officers carry them out.

Another popular choice is a Limited Liability Company (LLC). A LLC is an unincorporated business entity that shares some aspects of the “s” corporation. The LLC provides its members with limited liability and pass-through tax advantages without the restrictions imposed on “s” corporations and limited partnerships. The LLC is owned by member and may elect managers to run the company. The management and operation of the LLC is governed by its regulations, which are similar to corporate bylaws. Members of an LLC are agents of the LLC to the extent the articles reserve management in the members. If management is vested in managers, then they are the agents of the LLC to the extent the articles vest management in them. An agent of the LLC has power to bind the LLC by an action apparently for carrying on in the usual way the business of the LLC.

Members of an LLC are not liable for the debts of the LLC except with respect to make the contributions to the LLC that they agree to make and with respect to the distributions received by the members when they knew the distribution caused the LLC’s liabilities to exceed the fair market value of its assets.

Nothing in this article is intended as legal advice and you shouldconsult an attorney before making any decisions.

Why Get a Business Loan?

While the US economy continues to pick up steam from the Great Recession, businesses are looking for growth capital and as a result, commercial banks are beginning to be IN STYLE once again. If anything we can be sure of both as consumers and producers in the US, business cycles are a given reality that requires wisdom and discipline to foresee and adequately prepare for… but more on this in another article. The focus of this article is on having legitimate and profitable reasons for obtaining a business loan.

In my experience as both a commercial banker and business financing consultant, the “purposes” for obtaining a business loan have been for both ‘good’ and ‘bad’ reasons. First things first, debt capital if not leveraged properly becomes a quick and fast way for any business to go bad. The use of a bank loan for business purposes is not bad; it’s the reason as to why a business owner needs it. In one’s preparation to obtain a business loan, the number one question that deserves a reasonable response is, ” is it an absolute necessity for the business to have this loan?” In other words, in the event the business does not obtain the loan, will this cause any material adverse consequences to the business?

Let’s deal with the first observation: what are the good and bad reasons for obtaining a loan? As stated before, business owners look to get a loan for any and every reason under the sun. Primary reasons I noticed were for lack of positive cash flow and / or refinancing of existing debt which in more situations than not were personal loans used to finance business expenses (notice here that I did not say EXPANSION). Here’s an ironclad rule for having a good reason for obtaining a loan for any business: Ensure that cash flow is positive, stable, and healthy for the foreseeable future. Debt capital is meant to supplement and grow cash flow, not to replace it. If the business is experiencing cash flow problems then the business owners and/or principals need to dig deep and analyze operations and the market… not make the problem WORSE by getting into debt. Next. let’s look at one or two metrics that can help create the right mentality for obtaining a business loan.

The first metric we’ll disclose is the return on equity. For the sake of not getting into any CNBC finance technical jargon, let’s keep it simple: the return on equity metric lets you know whether you are making any money to keep as your own in the business. To calculate, take the profit (if any) remaining after accounting for expenses, and divide this into the amount of money you invested in the business. Expressed as a percentage, the higher the number, the better because it states that the business is a money maker. Also, the ROI metric is a great indicator as to whether the business is cash flowing positively. Remember, profit is nice, but a healthy, positive cash flow IS KING!

The last metric we’ll point out is the debt to equity ratio. Again for sake of simplicity, the debt to equity ratio lets you know how ‘leveraged’ or indebted the business is. To calculate, divide total debt by total equity. The underlying reason this ratio is so powerful is that it ‘forces’ the business owner and/or principals to truly ‘know’ and ‘understand’ the debt and equity that makes up the business capital structure. A fair share of businesses with high debt to equity levels experience marginal cash flow levels due to interest and other mandatory debt payments that are by nature fixed (predetermined repayment schedule). As a take away here, do not incur any unnecessary debt just for the sake of incurring it; have a plan that discloses how the business will not only pay off the debt, but be in a better position financially and operationally after repayment.

In closing, we talked about the importance of having a solid and good reason for obtaining business debt which is to make sure that it’s for legit business purposes and that the business ALREADY has a positive cash flow. Also, we highlighted two powerful metrics to give you added peace in your quest to getting a loan: the return on equity and debt to equity ratio. Aside from the computations that these metrics require, they also ‘force’ one to intuitively ‘know’ and ‘understand’ the risk and stability of the business capital structure in lieu of obtaining debt capital.