July 28, 2015 Category: Business Formation & Planning
This blog is a part of the “Cleaning House” series on preparing your business for fundraising. Follow our blog and Hertz Schram on Facebook and Twitter to stay up to date.
No start-up business can survive very long without capital. Most new businesses fail because they are undercapitalized. It is very common to raise money among close friends and family and then, once these avenues are exhausted, to seek funding from others. But before doing so it is very important to make sure that the business is in a position to make efficient and effective use of the additional capital and, more importantly, to make sure that a third party potential investor(s) believes it, all while making complete and accurate material disclosures.
This process of getting ready for funding is very similar to the process of getting ready to sell a business. Buyers/investors/funding sources ask many of the same questions as their interests are similar. The outline that follows is intended to assist both the entrepreneur and legal counsel representing the entrepreneur prepare the business for the difficult task of seeking funding.
Getting ready for funding involves three overriding tasks;
The lawyer can and should play critical roles in all of these tasks.
No business can succeed without a viable business model. This is quite different than a business plan. The business plan explains the business the model and how it is intended to be executed. But an unfocused business model will result in an unfocused and unviable business plan. The most brilliant idea is worthless unless there is some means of turning that idea into revenue. Even if there is a viable revenue model, is it focused? A new business must walk before it runs. A common error is trying to do too much at once. A company with a strong focus around a core business is much more appealing than a company going in many different directions at once.
Common initial questions to ask to help the entrepreneur keenly focus the revenue model:
Preparation of a good business plan will help any entrepreneur focus on the business model, will explain the means of generating revenue, the size of the market, marketing strategies, key participants and reasonable (as in “based in reason”) projections (read “upside”).
The business lawyer should carefully review the business plan to insure that claims are supported with research, that all major assumptions are identified and that it presents the business in a cogent and easy to understand fashion.
Read more of our “Cleaning House” series:
Have questions on preparing your business for funding and other legal transactions? Join us at our office in Bloomfield Hills at 4 p.m. the first Tuesday of every month for the Hertz Schram Deal Incubator where we discuss issues on funding like this one in a casual environment. RSVP for this free event today by emailing: Ksilver@hertzschram.com.