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Venture Capital Risks: As a Business Owner, Don’t Give Them Your First Born

Everyone loves to hear of a business gamble that pans out big time. As a business manager for entertainers, I have worked for some big names. Over 25 years ago, I learned from my mentor that he started as a TV lawyer in the early 1950s. The field was wide open and attorneys not only tested the legal waters, but also their billing practices. My employer started with an unemployed writer who needed some contract negotiations. He didn’t know what to charge the writer, so at this early stage, he took 10% of the writer’s new production company. My mentor charged for his services soon after that, but in the 1980s he cashed in his 10% holding when the writer/producer “went public.” The unemployed writer had evolved into one of the biggest names in television.

The Don Charlton article, The Most Important Word When Raising Money for a Small Business, reminded me of that conversation. What is a start-up willing to bargain with an angel investor for cash or services? Mr. Charlton stated, “The best piece of advice I can provide is one that was given to me recently: change your mindset from ‘give up’ to ‘trade.'”

Now, this is good advice, but how does one wrap their arms around “trading?” I’d like to give his advice some teeth:

Always use a lawyer: This can be costly, so try to negotiate a ceiling to the legal fees.
Exit plan for your angel investor: Set a time limit with some required milestones that would “cash out” the angel investor. For example, if the company’s net worth reaches $10 million by five years, the investor will receive 30% of that amount or more if valued higher.
Create multiple classes of venture capital ownership: If you use an LLC, as oppose to an S-corporation, you can create different levels of ownership along with different rights. Make your class of ownership different than your angel investors with a bigger upside.

We are approached weekly for our expertise in business plans and strategic planning. We see so many new owners who are looking for angel investors. As a new business owner, lay out the possibilities like those I stated above. Your attorney can counsel you as to the application to your situation.

Business Proposals: If You Can’t Stand the Heat, Find a Cooler Kitchen

They sat perched on the kitchen stools like two vultures waiting for the next customer. The problem? The pickings were slim.

My stepfather and his friend, Dan, decided to open their own plumbing business, but they only had one client, a Beverly Hills house designer, who didn’t need them that day, or the next. So, they sat by the phone talking about the employer they just quit. Dan, a Texas plumber, who took one bath a week whether he needed it or not, puffed on his cheap cigar.

That was the last straw for my mother. Out they went. Their business model needed some work, but it wasn’t going to be done in her kitchen.

Mike Periu talks about flawed business plans in his article, 3 Signs That Your Business Model is Flawed. Here is what he has to say:

Accounts Receivables and Accounts Payables are ignored: Mike is correct, but not in every situation. I prepared two recent business plans and ignored the accrual basis because one was a market, and the other a movie studio. Both require payment for goods and services at the time of the sale, or at least every week. To create AR and AP just for the sake of creating it would not add to the business plan value. But with that said, if you are a manufacturer or service company that does not collect cash immediately, then you must stagger your income based on some reasonable collection scheme.
Your income taxes aren’t calculated correctly:This is elementary to most accountants. However, recent business plans we have prepared are for flow-through entities where taxes are paid at the shareholder level. It is very hard to project taxes for the shareholders since each of their tax situations will differ. However, in the case of deferred distributions, we did make an assumption to distribute tax monies for profits recognized.
Sales forecasts are calculated using the top-down approach: This is probably good advice, that we have practiced, but with a different perspective. We don’t look at market share, but compare similar companies in the business plan we created. Then for the first two years, we have discounted the revenue and built it up slowly until the company was earning what a similar company in size would.

Business plans, strategic planning, business models, business proposals, what every you call it, take an objective eye. It is nice to dream, but dreams don’t pay the rent. Usually, clients that come to us require 2-3 times the investment than they projected just to stay afloat before the business becomes sustainable.

Business proposals need a disinterested financial person that can give a candid assessments about your assumptions. Prepare for a worse case scenario is better for the solicitors, and the investors. If your investors object to this assessment, you are working in the wrong kitchen, and have to find another to cook up a business proposal.

IT Strategy, Don’t Buy the Farm

I entered the exciting world of accounting in 1979. Back then, we didn’t have personal computers. No, we prepared our workpapers on green ledger paper. If we wanted to enter a journal entry in a client’s general ledger, we had to fill out a form and submit it to the head of data processing, Norma. Norma was a surly woman who perched a cigarette off her bottom lip like a trapeze artist hanging by her legs. Normally, you would think Norma’s business of entering data into a computer was boring. It was, until she opened the door into an office that revealed a male and female co-workers in…well shall we say, a compromising position. That performance played verbal reruns around the office for a year.

With the advent of the computer network, Norma’s days were numbered. And with cloud computing, some think the office network days are numbered.

David Rosenbaum tries to let the air out of the clouds with his article, Can Cloud Computing Clear the Air? . He talks about the hidden costs of this strategy that you must be aware of. His article reminds me of Mr. Haney of the tv sitcom, Green Acres. Mr. Douglas bought a broken down farm from Mr. Haney and every time Mr. Douglas realized that he needed something, Mr. Haney would change hats and be an expert of selling that item which Mr. Haney just happened to have in his truck. Of course, Mr. Douglas would be swindled into buying something he really didn’t need.

A cloud computing strategy could generate the same result. Your strategy should be to find the best fit for your company. To accomplish this, you should check out all of the leading vendors. Go online and read the comments from technology magazines. You don’t want to save IT expenses, at the cost of losing customers because the cloud computing system did not perform as seamless as you thought. Make a list of every major function you need and tell the vendor you want a free demo to play with for thirty days. During that thirty days, try to load some data and test, test, test.

Don’t want to reinact a scene in Green Acres:

Mr. Douglas (after being ripped off again by Mr. Haney) : “I should’ve known!”
Mr. Haney: “You sure shoulda.”

How to Create a Successful Small Business in this New Economy, or How Old Shep Let Me Down

“Teach something to the 5th graders?” She said. “Like what?” I replied.

Thus the conversation between me and my son’s 5th grade music teacher began. It was true, my father was a Rockabilly recording artist in the 1950s, and even though I had played guitar since I was five (unprofessionally), I worked in the entertainment industry for years. But talk to an elementry school’s music class?

I bit my nails, and agreed.

The next week, I taught the kids to follow their hearts when choosing their careers. Of course, that was a long way off for fifth graders, but they dreamed, too. My method was to start out by singing an old Elvis ballad, Old Shep. The song spoke of a boy who had to put his sick dog “down.” The dog had saved the boy’s life when he was younger.

The song Old Shep was a tear jerker. I thought it would get the kid’s interest before I told them how to be happy, and successful in what they do for a living.

I was wrong.

As it turned out, I was the only one tearing up. Still, I got the message across: Follow your passion.

Mike Michalowicz’s article 5 Ways to Find Your Hidden Talents reminded me of my little talk. In the article he set forth five suggestions to find you hidden talents: Listen to Others, Determine what is easy, do what you enjoy, do what you like to talk about, and ask your friends.

I didn’t quite agree with all of his points. You may be better at something than your friends, but that doesn’t mean that you are passionate about it, or that it will help you start a great business.

Small business is a risk, but it should be one that you are passionate about. Nobody knows better than you, as to what gets your creative business juices flowing.

So, don’t ask people, ask yourself. What do you dream about as a small business? This was the third point that Mike suggested, but I would restate it as doing a small business what you most enjoy.

His second point was to determine what was easy. Sometimes that works, but usually if it is easy, then someone else has already tried it. The better advice is to find the Blue Ocean where competition becomes irrelevant. It may be easy, or it may be more challenging in your small business, but it will certainly set your small business apart.

What Mike was missing in becoming a great small business were two things: Do something that is economically feasible, and do something that will make your small business the best in the world. These two addional suggestions are stated in a book by Jim Collins in Good to Great. They were two of the three wheels in the secret to greatness. The third was already mentioned, passion.

As I have stated before, there is not a better time in the last 100 years to start a small business. But, the odds of a small business becoming great, are large. A business owner, or an employee must start with the three pillars if they are to be successful as a small business. Then have someone help you with a professional looking business plan whether you are looking for investors or not for your small business. The business plan will refine your strategy by showing your strengths, weaknesses, opportunities, and threats. Any new small business owner must look carefully at themselves before taking the greater risk.

Serving as a Volunteer? You Don’t Have To Wait for Heaven to Collect Your Reward

Every weekend, my wife and I drive to Malibu and saddle up our horses. If you are passing by, you may do a double-take. Looking closer, you would realize that we are dressed in park ranger uniforms equipped with a first aid kit, GPS, and police radio. Our mission: to patrol the National and State Parks assisting hikers, equestrians, and mountain bikers. In other words, we are the eyes and ears of the licensed rangers and are allowed to write off the costs of doing these patrols as an unreimbursed volunteer charitable deduction. Our tax proof is not only the receipts and expenditures, but a report by the National Park Service that logs every minute of our volunteering. So, if the federal government (IRS) wants to pester us about the deduction, they can argue with the federal government (NPS).

Are you volunteering for schools? Houses of worship? Boy Scouts? Your good deeds will not go unrewarded. Here are some tips:

You can deduct 14 cents a mile for the endless driving you do for an organization
Did you donate baked cookies? Save the receipt, you can deduct the cost of the cookies.
What about the washing of your scout uniform? Deduct it.
Manditory conventions for the organization (my grandfather went to them for the Masons).

To deduct any of these, you must have proof that you paid for them and a letter from the organization authenticating them as performed for the organization.

Charitable and governmental organizations are in a financial crunch, and need your services to help meet the needs of the public. In our case, the volunteers of the Santa Monica Mountains federal and state parks, saved the parks over $1.3 million in 2009. However, when serving the organization, don’t forget to claim your just reward by deducting it on your tax return.

Discuss you personal situation with a tax professional before making any decisions.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Internet Ad Revenue Breaks Record. Are You a Spectator or a Player?

When I was 13 (1970), my stepfather took me and a friend to the Olympic Auditorium to see one of my favorite wrestling heroes, Rocky Johnson. I thought this guy was so cool, and I thoroughly enjoyed his coolness in wrestling. My stepfather on the other hand, laughed at me when I got upset because Rocky’s nemesis, Freddie Blassie, would bite him on the forehead when the ref turned his back. It pissed me off to see my hero lose the match through unfairness. So, my stepfather took me to the live match in downtown Los Angeles to show me that it was all fake.

He was right, but I was still entertained. Not by the wrestlers, but by the adult people in the audience. Even though they could see the fake punches and kicks, they were into it as if they were in the ring. What a hoot! But as history was being made in the ring, the audience did not (and probably could not) become a part of it.

Such is the case of the Internet which is changing the way we do business every day. In the AP article, US Internet Ad Revenue Hits Record in 2010 by Barbara Ortutay, the author reports another record set by those who advertise on the Internet. Now, remember, these are Internet companies who are paying hard dollars to get to you through your computer. It does not count those of us who do not advertise but, reach our target audience by serving them, and contributing to the dissemination of knowledge.

The question is, are you participating in Internet history, or are you watching it pass you by? Just think of how much you rely on Google and Opentable, not to mention apps like Yelp and Groupon. What are you doing in your business life to contribute to history? Just like when George C Scott said to the West Point graduates. “Thirty years from now, when you’re sitting around your fireside with your grandson on your knee and he asks you, ‘What did you do in the great World War II,’ you won’t have to say, ‘Well… I shoveled shit in Louisiana.'”

It doesn’t cost anything to start a blog. It doesn’t cost anything to feed the machine. I tell my clients (even those in the entertainment industry), today is the best time to promote yourself in the history of the United States. It takes three things:

Creativity
Persistence
Ignorance of the fear of failing

Check out some of our other articles that may help you. Life is too short to sit back when you can make a difference in your business and personal life, and the lives of others. Don’t be one of those who dwell on the days of shovelling shit, when you could be one who contributed to feeding the masses.

Can You Grow your Business Social Footprint, without Putting it in Your Mouth?

You walk into a party and a sharply-dressed grey-haired guy (not me, I’m in my boxers right now) shakes your hand. Sporting a toothpaste commercial grin, he says,” Let me tell you about the value of owning a silver-plated casket!” You respectively try to talk your way out of it, but before you do, a slim red-haired woman, sporting a noticeable over-bite grabs your arm. “Hi. I’ve been feeling your energy from across the room, and there are past lives that want to surface in you…Make an appointment with me, and I will work them out for you at a discounted rate.”

Twitter is a cocktail party. When I scroll down on Twitter, I am always annoyed by those that just say, “Buy mine! Buy Mine!” They offer nothing that can inform me and help me. Why would I buy anything from them?

Others post words of wisdom (or at least they think they are), like “Is forever longer than always?–Dolly Parton.” How pathetic.

So, I welcomed the article How to Spread Your Business Social Footprint Around the Web by Josh Catone. Josh, who obviously has a social networking background graces us with a few good points on how to increase your social footprint, or profile.

Be Everywhere: Josh points out a good fact, but as business people, we only have so much time to spend hitting many of the social networks. I would suggest that a business person choose where they have the most impact and traffic. Then, you can use your employees, in a limited way, to social bookmark your site in various other networks. One hour per employee a week can make a big difference in your exposure.
Participate in the Conversation: This is my point above. Participate by being constructive and helpful. You will not find any of my blogs pitching the reader. The author should write to help and to display the author’s knowledge.
Share your expertise: As I said, show what you know. There is too much knowledge for any of us to know everything, so we are in this together building each other up to create a better society, and smarter business persons.

The points above are tactics to the strategy of growing your business. Don’t be stuck in the 20th century and ignore the web. I bet your competitors aren’t.

Small Business People Need is a Strategist, Not a Marketer and That Person is You.

About five years ago, a partner and I were interviewing a tech guy for a position in our business intelligence software firm. The prospect was pretty low key, and was not really very personable. At the fifteen minute point, he asked, “So, what role do you see me playing in the company?” I glanced to my partner, who allowed me to take the lead. Scooting up in my chair, I peered into his eyes. “Jim,” I said, “I think you would be a good fit dressed as a giant taco, twirling an arrow on Lincoln Blvd.”

Jim’s mouth dropped open as silence saturated the walls. Then, my partner couldn’t hold it back any longer and burst into laughter. The prospect had no sense of humor, we certainly couldn’t work together. We couldn’t afford a marketer, but we needed our employees to fill that gap with some positive communication skills.

Ivana Taylor touches on communication from a quantitative, as opposed to a qualitative point of view in 6 Reasons You Don’t Need a Full Time Marketing Person in AMEX’s Open Forum . She pushes the concept of hiring an outside marketing person, (obviously promoting her skill set).

However, resist chastising her for self-promotion, and try to pull some pearls of wisdom from the article.

You see, I agree with her, but only to a point. Frankly, there are so many resources on the web, that you can (as a small business owner on a budget) do your own marketing. You don’t need an inside or outside marketer, you just need to hire an outside consultant to teach you for a limited time.

This consultant should be well-versed in SEO and social networking. Once you understand these concepts, you should adjust your web page to leverage them. Such things as blog articles and news releases are just two of the tools that should mastered.

But every one is doing that, right? No. The field is wide open. Your marketing strategy should be to bring prospects to you. How are you doing that now? Word of mouth? Well, you better hope people are doing a lot of yacking.

This is not to say that you can carry it alone. There will be a day where you will grow so fast, and so big, that you may have to re-evaluate whether to bring in your outside web marketer back in. In fact, an annual meeting would be a nice “tune-up” once you bring your marketing plan.

In any event, as a small business owner, your strategy must always evolve with tactics that can be measured by some sort of metrics. Don’t throw money at your SEO/ SE education without determining what you want to accomplish. Then build the tactics to get there.

Congress Gives Small Businesses a 1099 Reporting Break

Congress is sending a tax bill to the President that will ease up the 1099 reporting requirements created by the Health Bill. The 1099 provision required businesses, charities and state and local governments to file a 1099 form with the Internal Revenue Service to report annual purchases from contractors above $600. The bill also would repeal the following:

Business payments of $600 or more made to a corporation;
Amounts paid in consideration for property and other gross proceeds for both property and services; and
Payments of $600 or more made to a service provider by recipients of income from rental real estate.

For more information see the Senate bill under Accounting today. The President is expected to sign it into law.

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Whether an Artist, or a Business, You can Write Your Own Story

When I was 15, I wrote a song for my girlfriend. She said the music was alright, but the lyrics (the inspiring, personal lyrics that revealed my love for her) sucked. Well, never the one to go down in flames, I got back at her….I married her seven years later(serves her right, and she’s still stuck with me 32 years later).

I enjoyed reading Mark Winkler’s article, You can Write Better Lyrics published in the April 2011 online edition of Music Connection Magazine. He laid out a laundry list for song writers that I adapted for business and strategic plans.

Come up with a great title: Like in a song, you need something short and sweet that can interest people. Some think the Executive Summary of a business plan fits the mold, but there is more. You should be able to recite an “elevator speech” in less than thirty words that spells out the proposition.
Be Specific: Winkler advises that lyrics should be specific to tell a story in a song. The same goes for a business plan, however, a lot of the specifics can be relegated in the accompanying financial statements and notes. You don’t have to tell every detail in the body of the plan.
It’s the Music Stupid: Just like a great set of lyrics will not save a bad melody, a great business plan will not save a bad business idea. Research the masses to see if your business idea will be accepted.
Writing is re-writing: One thing our business plans have done every time, if forced our clients to re-write some of their assumptions. Like in a song, when the dog starts to howl, or your friends struggle not to laugh, its time to rewrite.
What you say counts: Winkler advises your words to be golden droplets in the minds of those who experience them.
Step away from your piano and guitar: Just as the tune can stand on its own, so the business plan must pass the smell test. All the fancy footwork will not sway a savvy investor. Oh sure, there are those who can stomach any heavy metal song with a lot of distortion and Marshall amps, but the songs that live in the hearts and minds of the hearer need more. In your business plan, make sure you transfer your passion to the investor.
A song is not a poem: A business plan is not an MBA thesis. You are trying to convince people to part with their money. Dazzle them with brilliance, but don’t baffle them with bullshit.
Your lyrics must sing: So should your business plan, and it must not be a requiem.
Need I repeat–repetition of words: What message are you trying to convey about your new business? Is it the same thing that others have done? Are you creating your own blue ocean where competition becomes irrelevant?
Know your genre: There are many diverse rules in business. Are you a manufacturer? An e-tailer? What about a record company? You must know what is NOT working in these industries. As I said in a previous article, you must know the industry, and more importantly, know the target market. What are they clamoring for that the industry is not providing? What expensive service or good, is the industry providing that the target audience does not need?

Business plans and song writing require a set of skills. Most times you only have one chance to sell what you are offering. Make it count.