How to Make Sure the Business is Built Around the Idea

“I can’t believe no one has thought of this!” “It’s the greatest idea ever!” “Moon, here we come!”

What could possibly go wrong? Well, quite a lot actually. An idea is not a business. It is an idea.

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Do investors invest in ideas? Conceptually, yes. In reality, no. Investors invest in businesses. And there are so very many things that go into a business to ensure that idea survives and thrives.

Insure The Investment

Thus from an investor’s perspective, it is prudent to consider ways to insure the investment. And while we’re not talking about literal “insurance,” that’s a great place to start. Insurance in the traditional sense of the word, along with numerous other core functions, is critical to the “survive and thrive” goal of every business endeavor. The value of these functions goes deeper than many people contemplate.

Are we stating the obvious—that a business needs business fundamentals? The answer is yes. Yet countless businesses succumb or lose dramatic amounts of value because of failures in these apparently obvious areas of business operation and administration.

Think of it this way: If a legal issue that was deemed minor at the outset costs the business $10,000, what is the real cost of that issue? The answer could depend on how that business is valued. For example, a business valued at ten times EBITDA has a $100,000 issue, not a $10,000 issue. Ouch.

While not a comprehensive list, there are certain fundamentals that every business should have on their radar, as well as investors should consider as a checklist to help sustain their portfolio firms.

Legal Plan

Having a legal plan is not the same as using your parent’s neighbor who happens to be a lawyer when a problem arises. Having a real legal plan means addressing, at the very minimum, the following areas:

  • Formation of the enterprise
  • Capitalization
  • Owner agreements
  • Intellectual property protection
  • Employment contracts
  • Non-compete agreements
  • Establishment of plan to establish and regularly renew all required licenses, etc.
  • Until a dedicated human resources plan is in place, the key risk areas associated with human capital, such as requirements around labor laws and benefits.

Accounting

Hiring your otherwise out-of-work bookkeeper cousin is not the same as addressing the accounting needs of a growing organization. A robust accounting plan should include at least the following points:

  • System for tracking sales
  • Payment processing
  • Process for documenting and recording expenses
  • Development of an appropriate chart of accounts
  • Setting an appropriate interval for preparing financial statements
  • Actually preparing those financial statements, including a regular cash flow statement
  • Process to produce the documents necessary for a third-party financial statement review or audit
    Development of an appropriate and regular communication plan for accounting function stakeholders

Finance

Finance and accounting are not the same thing. The role of the CFO should include all of the following items, at a minimum:

  • Balance sheet management, including regular monitoring of cash flow, collections and payables
  • Production of appropriate models and projections for stakeholders and potential investors
  • Selection of a suitable payroll processor and continuous review of the payroll process
  • Regular review of the capitalization of the organization, including benchmark of cost of capital, and evaluation of potentially more favorable alternatives
  • Development of appropriate relationships in the financial services industry (e.g. banking or investment banking)

Tax

Accounting and tax work in tandem; but again, are not quite the same thing. The tax function should consider all the following and review these systems on a regular basis:

  • Development and maintenance of an operating structure that minimizes the overall tax burden for the majority of the business owners
  • Plans for tracking and compliance for key domestic taxes:
  • Income taxes (federal, state, local)
  • Sales taxes
  • Payroll taxes
  • Franchise taxes
  • Plans for tracking and compliance for key international taxes:
  • Income taxes
  • Franchise taxes
  • Value-added taxes
  • Other taxes

Insurance

No one likes paying for insurance but when needed, it’s invaluable. The insurance needs for a startup need not be overwhelming, though it should include some basics:

  • General liability
  • Cybersecurity
  • Errors and omissions
  • Key person

Marketing

No matter what the business, it requires a marketing plan. It is an absolute necessity. It bears mention that marketing may not encompass traditional ideas of what constitutes marketing. For example, a business with known and loyal customers may be considering a public relations campaign and building out its digital content footprint to build interest for a future sale of that brand, rather than an incremental sale today.

Does all this sound too daunting? Need not worry. You don’t have to call on your brother-in-law for help putting this all together. There are advisors out there who specialize in startups and in helping to get your business off of the ground floor

Trusted advisors will help build and refine your business plan to put the company on appropriate footing to stay in front of the types of issues that often confound startups and hurt long-term valuations.

Whatever you and your business decide, make a checklist and keep updating it. Your business is dynamic. So should be its structure.

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Mike joins BX3 after more than 20 years as an international tax attorney and entrepreneur. He has seen virtually every aspect of international taxation, having worked for the Internal Revenue Service, in private industry, and for Big Four public accounting and tax consultancies KPMG and PwC. Mike was a founding partner of WTP Advisors, a boutique international tax consulting firm that specialized in assisting the world’s largest companies with the thorniest of tax structuring and compliance issues. Over the years, Mike has also founded or co-founded several other tax focused start-up ventures. After the successful sale of WTP in 2014, Mike joined the international income tax practice of Ryan, LLC, a specialized tax service firm, where he stayed until his early retirement, at the age of 47. Mike exited retirement earlier than anticipated to work with promising startups seeking to grow and secure capital. Utilizing his experience as an entrepreneur, attorney, and taxation expert, he is helping guide BX3’s clients through highly nuanced legal, financial and tax issues. Mike holds both a BBA (Finance) and a JD from Pace University, and an LLM in Taxation from New York University. He is admitted to practice law in New York and Connecticut, with admission pending in the District of Columbia. His entrepreneurial feats were chronicled in Fortune’s “David vs. Goliath” segment, and he has been a frequently used source by the Wall Street Journal on matters related to international taxation. He has written numerous articles and lectured copiously on taxation issues, and has also served as a visiting professor at Fairfield University’s Dolan School of Business.