The Perils of Small Business

“I believe in America.”

Just take that in. I mean, wow. For all the non-cinephiles out there, that’s the opening line of the Godfather. From this quite memorable opening monologue, we take a journey with the Corleone family through highs, lows, twists, turns, cannolis and the perils of running a small business – wait, what? Well, sort of. I don’t mean that if you form a company and get some capital that you inherently run the risk of sleeping with the fishes. Through a particular lens, Amerigo Bonasera’s opening line of the film illustrates the pride our country collectively takes in small business. Over 99% of companies in the Untied States are small businesses, and roughly half of the country’s GDP comes from Main Street.[1] On top of the hard data, we, as people, tend to just like the idea of small business and applaud those who take the plunge to work for themselves and risk it all in the quest to find self-made fulfillment.

Okay, I have to stop there. Small business is great, it’s fantastic. Its sheer scale in the United States makes our country kind of unique and mirrors our country’s independent, free-thinking spirit.

But you better know what the hell you’re doing.

Fact: 20% of small businesses fail within the first year of formation.[2]

Fact: nearly half fail within five years.[3]

For these purposes, “fail” means gone, closed, history, non-existent, no longer with us. And those that do survive typically aren’t run by the superyacht kind of folks or those in the market for the “I wonder who lives there” kind of homes. You get my drift. Let’s keep the lights on and see where things go.

This information and the tone I’m adopting aren’t meant to discourage anyone from starting or participating in a small business. The purpose of this article is to demonstrate the respect that’s commanded when considering whether to start a small business. These decisions shouldn’t be made lightly, and I’m hopeful this article will prepare you to make an informed decision by balancing the risks and rewards against the inescapable realities that will come with your small business.

• BE PREPARED TO FAIL. Take another quick glance at those numbers above. Understand that in most situations the deck is stacked against you from the word “go”. Think about it – you’re creating something that wasn’t there before and are intending to generate revenues in an already-existing marketplace. That generally sounds like a tall task, and it is. Being prepared to fail doesn’t mean you’re resigned to failure – it means you need to be contemplating various outcomes and preparing exit strategies at multiple junctures.

• KNOW THE MARKETPLACE.  If you can’t intimately discuss at least five prospective competitors in your industry, you’re not ready. This is called research[4]. Scour every inch of your prospective competitors’ websites. Get ahold of their financials and study them like crazy (insofar as you can). What works? What doesn’t work? Poll your friends and family on consumer preferences related to your industry. Start to understand how you fit into the market and where you can find successes.

• HOW ARE YOU DIFFERENT? This is obviously tied to knowing the market. What differentiates you and your product or service from those already in the market? If the market is saturated, then you’ll have to stand out even more. How are you going to do that?

• HIRE AN ATTORNEY.  Please. With ten cherries on top, please! Look, I swear I’m not biased or engaging in any sort of self-serving soapboxing here[5]. I get it – while seemingly bloated legal fees are the bane of many a business owner’s existence, I chalk this up to the cost of doing business. Hear me out. Here is a parallel I like to use for this. If you own a car, there are some sunken costs associated with owning that car – annual registration, auto insurance and fuel costs, to name a few. If you own a car, you just pay these things because that’s the cost of owning a car. You’re probably miffed, but you shrug it off because that’s just what comes with owning a car. If you own a business, you need legal counsel to advise on risks, best practices and charting particular paths toward achieving your business goals. You know why? Because that’s just the cost of doing business.

• TELL YOUR ATTORNEY WHAT YOU WANT. In those initial conversations with your attorney, provide a detailed narrative of your business goals and the path you’ve charted in your head. A good attorney will listen, process what you’re saying and then translate your narrative vision into available business structuring options to achieve some or all of your business goals. At this early stage, this includes choice of entity, acquisition of capital, navigating regulatory schemes, tax considerations and pertinent timing and filings as it relates to all of the foregoing.

• WHERE IS YOUR MONEY COMING FROM?  Okay, the rubber’s hitting the road. The cash you need to get the wheels turning and ultimately launch is going to come from three places, and three places only: the bank, investors or your own pocket. Which one, or combination of sources of capital, is best for you is totally dependent on your business goals. Below is a 30,000-foot look at these options.

• WHO ARE YOU PARTNERING WITH? Don’t think you can do everything alone, and don’t be too proud to ask for help. If you’ve never started a business or don’t know the industry, launch this thing with someone who does.[9] Give yourself a fighting chance by getting some industry know-how on your side or bringing consultants in to help. The downside is obviously that you give up equity or create early cost centers, but the exponential opportunity to succeed will hopefully payoff in spades. Everyone is different, but at least explore these possibilities and see if there is a good fit out there for you and your goals.

• BECOME A TAX EXPERT. You know what I mean. Hire a CPA or other tax professional if your budget allows.[10] Even if it doesn’t allow, try to find a way to bring a tax professional on board. At minimum, you need to understand your tax burden and the pile of forms that need to be filed throughout the year. Your attorney will be able to help, especially if he or she has a tax background, but at the end of the day, a tax professional is probably going to save you time, energy and money.

• UNDERSTAND YOUR LEASE. Commercial leasing is one of the most unnecessarily complex evils that exists in our world.[11] Okay, I’m exaggerating a bit, but the point is that you need to understand your lease – with an initial ten or so year term, whereby you pay so many thousands of dollars and are responsible for “x” items, and landlord is responsible for “y” items, and your rent just went up, and landlord is requiring a personal guaranty, and what if I want to find a new space and landlord isn’t letting me assign or sublet? Whew, it can be kind of a mess, and you need to know it all. A good leasing attorney can help you understand the big picture, the specific items you really need to know and the applicable market and industry standards.

• HIRE WISELY. We all know that building the right team is paramount to achieving one’s business goals. This starts with getting the right folks behind the scenes, which really begins with an accountant and an attorney. Depending on your business and situation, this could also include design professionals, software gurus and regulatory experts. Once you have that ironed out, you can turn to building out your staff and working your way toward dollars coming in the door. While this kind of goes without saying, keep in mind that hiring employees may mean a pay cut for you, as the business owner. This is especially jarring for that business owner who has bootstrapped the whole thing by his or herself and hires that very first employee. It should also be noted that hiring wisely really requires you to take the time to get to know basic employment practices and legal requirements. Your attorney can help you with this and navigate potential pitfalls along the way.

• ARE YOU MARKETING YOUR BRAND? Start to vet website developers and branding groups to see if and how you can deploy their services. Most importantly though, get to know your potential consumer base. Look, I’m just the attorney, but even I know that you have to create messaging and branding that connects with and excites consumers. A lot like some of the other items on this list, this may feel like a sunken cost, but alas, you have to spend money to make money, am I right?

• DO YOU OR WILL YOU OWN ANY INTELLECTUAL PROPERTY? This is copyrights, trademarks, patents and few other things. Depending on your line of prospective work, some, all or none of these may be in play. The most widely applicable of the three is trademarks. This is a protection of words, phrases, symbols or any other uniquely distinguishing design.[12] These can be registered with the U.S. Patent and Trademark Office. Generally speaking, copyrights are for original works of some kind – books, music, etc., and they are registered with the U.S. Copyright Office.[13] For those of you who will be inventing things, including asexually reproducing plants,[14] patents will be your ticket, which also are registered with the U.S. Patent and Trademark Office.[15] Your intellectual property represents exponential value to you and your brand, so take the time to properly handle these matters sooner rather than later. Talk to your attorney about which of your assets may need protection.

• REGULARTORY CONSIDERATIONS. There are three biggies here. First, get your basic business licenses and permits taken care of at all required levels (local, state, etc.).[16] Next, understand how important data security and privacy is.[17] If you have a website or collect information from potential clients or customers, it’s likely you’re going to need to comply with an array of applicable data security and privacy laws. Be informed. Third, it goes back to that employment thing we touched on earlier – compliance, both federal[18] and state-level.[19] Hiring practices, handbooks and managing sexual harassment scenarios are just a few of the items you’re going to be responsible for on the employment front. Also, depending on the industry you’re breaking into, there may be other particular regulatory requirements that have to be considered (think financial institutions,[20] healthcare providers[21] and environmental compliance[22]).

• WHAT INSURANCE IS REQUIRED? At a minimum, your new company will definitely be picking up a general liability policy. If your company operates in particular industries, you may need professional liability insurance. Other things to consider are business interruption insurance, property and auto insurance, an umbrella policy and, of course, worker’s comp if your company will be having employees.[23] Run all of this by your favorite insurance broker, and he or she will be able to pick and choose exactly what your company will need.

Okay, great work, you’re now prepared to prepare to get your small business off the ground. I hope this thirty-thousand-foot discussion is helpful to you and that your expectations are grounded deeply in reality. This article shouldn’t temper your vigor or belief in yourself and what you’re offering. This article is just letting you know there are a handful of items that require that vigorous attention that you may not necessarily have at the top of your checklist. I wish you good fortune. Press on, kick butt and remember, if push comes to shove, go ahead and make them an offer they can’t refuse.