Secure your business’s future using the right SBA loan, bank loan or Quick Start Quick Start equity financing for you. YOUR BUSINESS YOUR BUSINESS FINANCING SMALL BUSINESS Financing When it comes to your chances of receiving financing and doing it right, Financing Your Small Business provides you with all the answers you need. It helps you find ways to combine various types of financing and shows you how to get the money you need. Learn— Your Small g How to get a bank loan g How to value your business g How to make a better g How to determine your presentation investors’ status g How to get attention with g How to avoid securities law YOUR Business your business plan problems g How to choose professionals g How to find investors From SBA loans to venture capital sources, Financing Your Small Business shows you all the ways to get the money you need.
From SBA Loans & Credit Cards to A Successful Business Raising Money Just Got Easier Common Stock & starts with solid Partnership Interests financing James E. Burk has been helping emerging companies in their initial stages of organization and growth for over thirty years. Burk is a graduate of the University of Texas at Austin Law g Bank Loans g SBIC Financing School, and is a member of the bars of the District of Business/ $16. Columbia and Texas.95 CAN g SBA Loans g Stock Offerings g Retirement Funds g Warrants UPC Richard P.
Lehmann assists clients with a variety of business matters, including corporate issues and securities law. Lehmann is admitted to practice in the District of Columbia, g Factoring g LLC and LP Interests Virginia and Minnesota. ISBN 13: 978-1-57248-553-2 ISBN 10: 1-57248-553-1 g Revenue Participation g Venture Capital Sources EAN BURK LEHMANN JAMES E. BURK AND RICHARD P.
LEHMANN Financing Your Small Business James E. Lehmann Attorneys at Law SPHINX PUBLISHING ® AN IMPRINT OF SOURCEBOOKS, INC.® NAPERVILLE, ILLINOIS www.com Copyright © 2006 by James E. Burk and Richard P. Lehmann Cover and internal design © 2006 by Sourcebooks, Inc.
All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems—except in the case of brief quotations embodied in critical articles or reviews—without permission in writing from its publisher, Sourcebooks, Inc. Sourcebooks and the colophon are registered trademarks of Sourcebooks, Inc. All brand names and product names used in this book are trademarks, reg- istered trademarks, or trade names of their respective holders., is not associ- ated with any product or vendor in this book.
Portions of this book were previously published under the title Financing Your Small Business. First Edition: 2006 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
—From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations Published by Sourcebooks, Inc. Box 4410, Naperville, Illinois 60567-4410 (630) 961-3900 Fax: (630) 961-2168 www.com Library of Congress Cataloging-in-Publication Data Burk, James E. Financing your small business : from SBA loans and credit cards to common stock and partnership interests / by James E. Burk and Richard P.
Includes bibliographical references and index. paper) ISBN-10: 1-4022-2025-1 1-57248-553-1 (pbk. Small business--Finance.15'224--dc22 2006030168 Printed and bound in the United States of America VHG 10 9 8 7 6 5 4 3 2 1 Acknowledgment We are grateful for the collaborative support we have received from our professional colleagues, clients, and students, past and present, in writing this book. Specifically, we would like to thank IBI Global for providing a teaching laboratory that enhances human potential and accelerates student learning capacity, and our wives, Katherine and Karen, for providing an environment in which we both can flourish.
With further specificity, we thank Tarby Bryant, Eric Delisle, Burke Franklin, Ike Gadsden, Herb Rubenstein, and Robert Johnson for their con- tributions. We are especially grateful for the contribution of Jay Winokur in Chapter 2 and Katherine Burk and James Harper III for their editorial work on all of the chapters. We also thank our law partner, Alan Reedy, for his suggestions and revisions that always enhance our work. ix CHAPTER 1: Choosing the Form of Your Business.
1 Sole Proprietorship Partnership Corporation Limited Liability Company Nonprofit Entities Joint Ventures and Corporate Partnerships Registered Agents Choosing the State in which to Form Your Business Qualifications for Starting a Business CHAPTER 2: Business Strategy, Planning, and Feasibility Analysis. 25 Strategy Developing Strategy Business Plan Feasibility Analysis Structuring Your Business Plan Consultants vs. Do-It-Yourself What the Experts Say Summary CHAPTER 3: Equity Financing. 49 Ownership Corporation Equity Warrants Limited Liability Company and Limited Partnership Equity Raising Capital in Stages vi Financing Your Small Business CHAPTER 4: Debt Financing.
71 Bank Loans Small Business Administration (SBA) Credit Cards Home Equity Lines Retirement Funds Life Insurance Borrowing Financial Brokers Reverse Mergers Factoring Revenue Participation/Royalty Financing Merchant Banking SBIC Financing Private Debt Combining Equity and Debt Financing CHAPTER 5: Securities Law. 83 Understanding Securities Laws Brief History of Securities Laws The Rise of Rule 506 of Regulation D Disclosure Requirements The Sale of Securities and the Issuer Exemption Integration of Offerings State Securities (Blue Sky) Laws Notice Filings of Securities Rule 504 and 505 Offerings Regulation A Offerings Follow-up and Closing an Offering CHAPTER 6: Licensing and Franchising. 117 Licensing Franchising Business Opportunities Contents vii CHAPTER 7: Friends, Angels, and Venture Capital Sources. 123 Friends and Family Angels Venture Capital What They Look For Valuation Angel Networks and Entrepreneurial Forums CHAPTER 8: Presentations and the Language of Capital.
135 Content The Presenter Learning to Close and When Declining Money CHAPTER 9: Corporate Governance. 143 Registered Agents Initial Reports Annual Reports Money and Accounting Signing Documents Bank Accounts Corporate Governance for Corporations Corporate Records Corporate Governance for Limited Liability Companies CHAPTER 10: How to Choose Professionals. 167 Attorneys and Accountants Other Consultants Sequence CONCLUSION. 175 viii Financing Your Small Business FOR FURTHER REFERENCE.
189 APPENDIX A: Business Plan. 197 APPENDIX B: Corporation Formation Documents. 221 APPENDIX C: Limited Liability Company Formation Documents. 283 Introduction The idea for Financing Your Small Business came, in part, from the entre- preneurial seminars we have done in the past several years for IBI Global.
While serving as faculty instructors, we have encountered literally thou- sands of students seeking to finance their small business. There have been successes and failures along the way. Many of the so-called failures learned from their mistakes and reinvented themselves, becoming stronger and wiser than before. There are many reasons a small business may seek financing.
If you are one of those people with an idea on a napkin, ready to seek fame and for- tune, you may need to raise capital before you simply quit your day job and launch your business from ground zero. Among the things you may need at this point are: • a feasibility analysis to determine the viability of your idea; • corporate organizational documents (articles, bylaws, minutes); • a summary business plan (or at least an executive summary); • federal (and perhaps state) tax identification numbers; • a corporate bank account; and, • local licenses (if required). If you have already started a business by using your own cash (sometimes called bootstrapping), you may need to raise additional capital to: • lease office space; • purchase office equipment; • develop a prototype of your product; • hire a president, chief operating officer (CEO), or chief financial officer (CFO); • design a logo to establish a branding and marketing program; • file for trademark or patent protection on intellectual property (IP); and, • pay yourself a salary. The list could go on.
We have noticed that some of the books on financing a business focus on the narrower sense of the word—financing through debt. In this book, we x Financing Your Small Business address a broader sense of the term to cover both debt and equity. You can finance your business by borrowing, selling a part of the company, or a com- bination of both. Our goal in writing this book is twofold.
First, we want to provide you with a variety of simple techniques and resources to increase your chances of obtaining financing. Second, we want to provide you with the benefit of our experience in this field to help you avoid some of the pitfalls that can derail your business and steal your time. At various points in the text, we have inserted “How To…” boxes to pro- vide a quick reference to the topics discussed. After all, this book is a prac- tical guide to financing your small business.
The chapters that follow suggest resources, as well as a sequence for raising capital for your small business. The rules are not cast in stone, but are instead merely suggested guidelines. The first topic discussed is what type of company or organization you should form in order to raise capital and the various attributes of those enti- ties. The choices include C corporations, S corporations, limited liability companies (LLCs), limited partnerships (LPs), and sole proprietorships.
While you can operate your business as a sole proprietor (that is, no legal entity formed around your business), it may be more difficult for you to attract capital and your personal liability is greater. Once you have determined the legal entity to use, how and when to draft a business plan for the company is explained, as well as the various parts of a business plan—including the part most investors always read. Then, some of the mistakes that occur in start-up businesses are discussed. Equity financing is the topic of the next section.
Most entrepreneurs rec- ognize the equity categories—common stock, preferred stock, and LLC membership units. There is also a discussion of some hybrid variations on the traditional equity forms of investments. Following the discussion of equity, the book explores the various types of debt instruments of your company that can be offered to investors. There are pros and cons for a young company to take on debt financing, and Chapter 4 explores some of those circumstances.
Information on com- binations of debt and equity that have shown some popularity in the cur- rent market is provided. Introduction xi Once you decide on the type of company and the form of the invest- ment, your next step may involve selling securities. In a private placement to qualified investors, federal and state securities laws come in to play. The elements of legal compliance in private securities offerings is discussed in Chapter 5.
Most emerging companies raise their initial capital through pri- vate placements—not publicly registered offerings. In this book, there are only passing references to public offerings, sometimes called IPOs, since they are rarely available to small companies as a financing alternative. Once the private placement market has been explored, the book touches on some later stage financing alternatives, including franchising and licens- ing, combinations of debt and equity, and loans with equity kickers. The current market is seeking more and more investments that combine some degree of liquidity with an equity upside.
The next section introduces the types of investors that look at early stage companies, such as friends, angels, and venture capitalists, how they are dif- ferent, and what they look for in investments. When you are pitching your company before potential investors, you need certain skills to effectively present your case and obtain the funding. The mechanics of a good presentation, the use of presentation software, and tips for speakers are explained in Chapter 8. Next, we discuss the elements of corporate record keeping and selected issues of corporate governance.