Donald Paris, CPA

A client of mine called me the other day to set up a lunch appointment to discuss an idea he had. We will call the client Bobby, since I am reading one of Bobby Flay’s cookbooks right now. While at lunch, we talked about his life, the wife, kids, boat and all of that. I was patient. I knew something was coming. Then, while we were in the middle of our burgers at The Daily Grill, he told me he wanted to start a business lending money to companies who provided service and product to the U.S. Government. He told me that many of these companies were simply not credit worthy at the banks, since the banks now were under tighter lending restrictions. He told me that since the government made the purchase, the paper/receivable was as good as gold. Though there were other companies providing these loans, his company would be different by providing a higher level of service, combined with the ability for internet access by all involved. He was very excited about the possibilities. He needed my help getting this business started.

We talked about all the steps it would take just to open his doors. He knew about the ones that everyone knows about, i.e. hiring the right folks and finding office space. What he had no idea about was the process and time it took to do this right.

Capitalization. One of the first things we talked about was how much capital he would need. I suggested that we build a set of projections and come up with the amount of capital he conservatively thought he would need. Then, I suggested he double it. The average business fails simply because they do not have the capital to sustain. Also, if you have too much capital, you can lean on that capital in the bad times. The worst that can happen in that case is that you have too much money in the bank (not a bad problem to have). But, on the other side, if you don’t have enough capital and run into a dry patch, it can be hard to go back to the bank or the investor and ask for more money. So, always get as much capital together as you can from the beginning.

Business Plan. This is not a document you simply slap together. It is used by investors as well as a lender to decide whether the business is well thought out, and whether they should invest in it. It includes well thought out descriptions of the business from angles such as who is the management, who are the customers, the marketing plan to get the customers, the market in general, the value proposition/what you are doing that sets you apart from others in this field, and financial projections. It always should start with an Executive Summary, so that the investor can decide if they want to read further, or just say no right away. The document is never less than 25 pages, but should not be more than 40. Too little and people get the impression that you haven’t told all, and too many pages and people get tired reading it. Spend the time to get this right.

Private Placement Memorandum (PPM). This is a long document prepared by attorneys skilled in this process. It includes information about the business, why an investor should invest in it and what risks they are taking by making the investment. I told Bobby to check with his lawyer about the need for this document. If he needed a PPM, or if he and his lawyer thought it a good idea to have one, this adds serious time (and cost) to the launch of the company. This is not a cheap proposition. But, it could be a good idea to have, since it provides a much higher level of information to the investor, which protects Bobby in case of a lawsuit by the investor down the road. The chance is lessened that the investor can say "You never told me that", since the PPM tries to include just about everything that deals with the business.

Organization. What type of organizational structure is right for this business? He needs to set up a meeting with his attorney and me, so that the 3 of us can discuss this business from all points of view, so that he can decide on the right form. Those forms can be a corporation, an Limited Liability Company (LLC) or a partnership. Once we do that, we also have to discuss the right format for taxes. Then, once that is done, the lawyer needs to prepare the organizational documents to support that, then we all review and recommend changes and finalize. Let’s not forget that we have to register the company with the IRS and with the state. Lest we forget, we need to figure out if there is another entity with the same name as the one that we have chosen.

This is part one of a two part series. Check in on how this story ends in our column next month.

Continue to Part II