96% of businesses fail within ten years of formation. Why is this? It is not so much that there is a magic formula. But rather, while it is easy to form the basics of a business, there are main variables and pieces you need to put into place correctly the first time. Doing so will greatly increase your chance of success.
Most people form a business around a passion. This passion usually stems from the desire to survive, create something, and/or establish financial security. However, it is because of this passion, small business overs often overlook, or miss many key variables. Missing these variables sometimes lead to quick failure, but sometimes despite overlooking these variables an amount of success is achieved. In fact, more often than not this is the case.
But what is most concerning is what happens if you succeed? Improper company formation choices, poor tax elections, building renovations without construction permits, paying workers cash under the table, unprotectable business names, no co-owner agreement or investors with no investment documentation. L7 has encountered all of these issues and more.
The errors of passion in construction or commission create a company that has fragilities. A fragility is a weakness making the business extremely vulnerable to business shocks. All businesses are exposed to shocks. The gamble taken is that you are going to survive long enough to cure all of the problems later. After all, you know the business, and that will not happen to you, right? That thinking makes you a part of the 96% failures.
Case Study – Pool Company
A new pool refinishing company licensed and bonded was doing well. To save money they paid workers cash under the table. In their 7th month, a worker misstepped and fell, thankfully, in the shallow end of the pool. He broke his right arm. There was no worker’s compensation because he was not an employee. The worker retained a lawyer. The injured worker sued the homeowner and contractor for damages, pain, and suffering. The homeowner’s insurance company settled. Then the insurance company went after not just the contractors but every owner of the company. The contracting company was formed as an LLC but was not properly constructed. The insurance company successfully argued that the contractor was running such a sloppily formed company that it, the LLC, defaulted to a general partnership. All owners were held jointly and severally liable. Don’t worry it got worse as the IRS came after the contractor for the taxes not withheld or paid by the employees plus a 100% penalty.
Case Study Aero Space Company
An aerospace company was formed 15 years ago by three partners. They grew quickly and were very profitable. On a late autumn afternoon, one of the founders died in a car accident. A company founded by smart people, run by smart people, found itself torn apart by the dispute of the deceased’s share ownership. Who owned the shares? Did the deceased founder’s ex-wife of some years ago have a claim on the shares as the deceased was buying her out of her half of his third as part of the divorce settlement? Did the children, the sole heirs have a claim that superseded the ex-wife’s claim? Could the company stop the shares from being sold to a competitor so the deceased’s estate could pay the estate taxes?
So how do you avoid these mistakes? We have compiled a general thought list for both new and existing businesses. These lists cover items that you should have in place and properly constructed. And like all things, if you don’t know whether you have done it correctly, assume you have not, verify, and get with an expert to ensure it’s fit and proper.
These fragilities, these errors of passion, are understandable. However, if you never made those errors in the first place or corrected them in time think how much more time you can spend growing a business not fixing the business.
Before you even start on launching a new business, you should have conducted exhaustive marketing and brand strategy research and testing as well as undertaken a full branding and marketing exercise to ensure that the business is even a viable concept. To learn more click here.
Business Thought List:
- Have you selected the proper structure(s), for your business such as an LLC, Corporation, Trust, Partnership or combinations thereof
- Do you have co-owner agreements
- Has an attorney reviewed all agreements such as transactional agreements, supplier agreements, lease agreements
- Were you tax elections optimal at both state and federal level
- Have your financial records been setup
- Are your banking, and payment processing setup and the banks understands your business
- Have you explored credit facilities
- Have your employees been properly hired
- Have employees, team, subcontractors, and leadership been professional vetted
- Are you compliant with all government and regulatory requirements
- What are the risks to business and what are the choices to avoid, assume, or insure those risks
- Business interruptions (short-term) and disaster recovery (longer term).
- Location advantages and disadvantages carefully examined.
- Have you properly identified, valuation protection of, and processes for your Intellectual Property and Critical Information
- Have you planned out your revenue and financial projections
- Have you reconciled the growth plans with the resources to achieve the goals
- Have you discussed family matters and pressures on your time, talent, and treasury