Donald Paris, CPA
Last month we talked about some of the steps needed for you to start a business. Let’s continue where we left off.
Investors. In a recession, investors are not going to line up to invest in your business. They have been burned too many times before, and their own capital is less as a result of it. So, I told Bobby that he needed to pull together a list of people he thought might be interested in investing, and that the list should be a long one. I told him it was unlikely that most of these people would invest.
He laughed at me and told me that he knew a lot of these folks for a long time, and that this should be easy. I bet him lunch that he would eat his words. I also told him that this process would take longer than he thought. Since I am writing this article a couple of months after that discussion, you should know that he will be buying me lunch (in this case, I wish I was wrong).
Bank/Lender. You have to find the right bank/lender for your business. The old days of just going to the local bank branch and opening up an account are gone. You have to talk with a host of lenders just to find the one who is right for you. Start with the entire list of banks and lenders out there. Make some calls to the ones you know and ask them if they provide financing to companies such as the one you are about the start. My history is that at least half (and maybe more) will say no. Okay, you just cut the list down by a half. Next thing you do is send the interested half the business plans and projections, in order that they do their number crunching and truly decide whether they want to move forward. At least half of that group will also decline. Now you are down to a few banks/lenders who will give you a "term sheet", which is a non-binding letter telling you the conditions they would provide the financing, and just what that financing would look like. You have a few of these term sheets. Some look good and some don’t. Now you start negotiating with the ones you liked, exchange some more paper, and after some back and forth you have a "commitment letter" from the most interested bank. The commitment letter is the binding document telling you exactly what the bank will do for you, and what you have to do for them. You sign it and they call their attorney to draw up documents. You and your attorney and CPA review them, negotiate terms some more, and finally sign.
Projections. Here is one area that some folks set themselves apart. First, I had to advise Bobby that the final set of projections should be on my stationery and not his. The reason is simple, i.e. believability, reliability and independence. If a CPA is not affiliated with the projections, the projections are perceived as having a lower level of each by both the investor and the bank. The CPA has to beat the numbers down simply because Bobby is so excited about the new company. He thinks that it will be a huge success, immediately embraced by the market, and be wildly successful. We all know that, though it might be wildly successful, the chances of this happening overnight are remote. If the projections show immediate huge numbers, the investors and lenders will throw them in the trash.
Management. This is also of huge importance, since the success of the business will be riding on these people. Also, don’t forget that the banker/lender and investor will be looking at this list of people to see whether everyone has the skill set to get this done. No investor or lender wants to be involved with a management team that does not have the previous experience in this field. They just don’t want to take the risk that the team doesn’t know what they are doing. The closest thing to a sure thing is what everyone is looking for. So, surround yourself with experience. Or, as Jack Welch of GE used to say "Hire people who are smarter than you".
Back office. Since this company wants to lend to government contractors, he needed to establish methods to figure out which contractors he actually wanted to do business with. He had to have some "underwriting" standards so he could make sure that he didn’t end up upside down, and staring at a bunch of bad loans. He had to find ways to ensure that his money was used properly, and that the government paid him (and not the contractor), and paid him timely.
Time. Obviously, all of these items take time. To think that you can get them done while at lunch with your CPA and attorney is naive. Estimate that the Business Plan, including the projections, will take 3 weeks if you devote the time to getting it just right. Private Placement Memorandum adds a month. Finding the investors and getting a bank on board takes a minimum of 3 months. Hiring the right people, another month. Some folks run many of these items in tandem in order to bring down the timeline. But, never figure that the total timeline is less than 4 months. I know you want to get it done faster, but it will likely be hard to do.
Better that you go into the process understanding all the steps, then skipping steps and getting frustrated.