As entrepreneurs, we often keep things close to the vest. While there are many advantages to this, there are also disadvantages. Receiving input from unaffiliated experts is an excellent way to create a competitive advantage and move your business forward. One way to achieve this objective without feeling too vulnerable is through the use of an advisory board.
An advisory board plays a critical role in helping you move your business to the next levels. Assembling the right group of advisers allows you to glean from others both their success and horror stories. Having a group of financial, legal, industry, marketing and operational people to provide you with strategic guidance and feedback helps you make better decisions based on their input and experiences.
The advisory board does not serve merely as a sounding board. It allows you a trusted audience to discuss your thoughts and ideas regarding your business, and also provides you with insight and perspective of professionals with vast experience from different backgrounds. Since you will share sensitive information with these people, pick advisers you trust, and whose experience and background you value, and be willing to listen to their ideas and suggestions. The relationships between you and your advisers, as well as amongst the advisers, will grow and strengthen over time, allowing you additional comfort in sharing the details of your business. The better your advisers know your business, the better their suggestions will be.
Remember, it is still your business and you are still the decision maker. Having a group of trusted advisers should enable you to make better decisions faster.
Before signing any documents for a business loan, pay attention to the covenants. Loan covenants can be affirmative, things the lender requires you to do, or negative (restrictive), things you can not do without the lender’s prior approval. It is critical that you understand the covenants set forth in your loan documents; violating a loan covenant is a default under the agreement and the lender can choose to call the loan or take other remedial action.
Affirmative covenants include providing financial statements to your lender on a regular basis and carrying certain insurance policies, while negative covenants include restrictions against borrowing from another source, making management changes and selling collateral (other than inventory). There are any number of covenants that may be included in your loan documents, these are just a few possibilities.
Financial covenants require your company to maintain certain financial ratios, such as those pertaining to working capital, net worth, debt, profitability and cash flow, which are calculated based on your financial statements.
In addition to the more traditional business loans, there is also the business line of credit. The LOC typically includes a borrowing formula based on a certain percentage of current accounts receivable.
Loan covenants are the lender’s way of attempting to limit its risk, and are therefore not to be taken lightly.
“You have to get comfortable being uncomfortable.”
One of the biggest advantages of running your business as a corporation, limited liability company or other corporate entity is that it provides limited liability to the owners. Stated differently, the owners are shielded from personal liability. However, you must be diligent in maintaining the corporate existence in order to enjoy such protection.
One of the first things I tell business owners is not to treat the company as an extension of themselves. At the top of my list is to avoid paying personal expenses from corporate accounts. Do not write a corporate check to pay a personal expense, do not use a corporate credit card to buy your family’s groceries, do not use your corporate credit card to take your wife to the theater. In addition, if the business owner has multiple businesses, I remind her to keep each corporate entity separate from the others. Do not use one company’s check to pay another company’s expense and so on. Comingling of assets can present similar problems as well.
Courts have regularly noted that if the business owner does not respect the corporate existence, an adversary will not be required to either. In these instances, the adversary argues that the company is nothing more than the alter ego of its owners, and courts allow the adversarial party to “pierce the corporate veil” and seek to hold the business owners personally liable.
Respecting the corporate existence also includes keeping proper books and records, minutes of director and shareholder meetings, and having proper agreements in place, to name a
few. Agreements should include those with outside companies, and especially those with the owners or related companies, if applicable.
The law goes far to protect business owners, but it has its limits. It is incumbent upon you to protect yourself and your business.
BauerGriffith and Independence Leads Group
Happy Hour Event
Where Doing Good is Good for Business
The principals of BauerGriffth, and the members of the Independence Leads Group, invite our non-profit and for-profit clients, associates and colleagues for spirits and libations, and good networking opportunities.
When: May 8, 2014, 5:30 – 7:30
Where: Winking Lizard Tavern, 25200 Miles Road, Bedford Heights, Ohio
Cash bar, hors d’oevres provided
According to Dun & Bradstreet statistics, poor planning is the number one cause for the failure of a small business. A business plan is both your company’s resume as well as its growth strategy. Your business plan, especially for a start-up or early stage company, should outline the plans, strategies and goals for your business.
When writing your business plan, remember that you cannot foresee everything that will happen to your company, so be prepared to revise it as conditions change. In addition, be realistic with your assumptions, take into consideration the difficulties in growing your business, take your competitors into consideration, and discuss the risks to your business.
Your business plan should be concise and easy to read and comprehend. It should express the market opportunities for your business, and the strength and depth of your management team.
Keep in mind that your business plan serves three key functions, namely a planning tool for the growth of your business, a document to convey information to prospective investors, and a base to measure and monitor your company’s performance over time.
A general partnership consists of two or more partners. There are no statutory formalities, however it is prudent to have a partnership agreement that sets forth the partners’ rights and obligtations. A general partnership is thus easy to establish and can be more informal than other business entities.
There is a huge downside to a general partneship; each partner may be liable for all of the partnership’s debts and liabilities. This personal liability is the rationale behind a detailed partnership agreement.
A limited partnership, on the other hand, consists of one or more general partners and one or more limited partners. The general partners typically make all of the business decisions, while the limited partners are typically passive investors.
Unlike a general partnership, a limited partnership requires an organizational document to be filed with the Secretary of State. In addition, a limited partnership agreement should be drafted setting forth the rights and obligations of the general partner and the limited partners. Typically only the general partners bear the liability for the partnership’s debts and liabilities, while the limited partners have limited exposure.
Limited partnerships have their place, and can be a good structure for certain enterprises, such as real estate holdings, venture capital funds and so on, but limited liability companies and corporations are typically better for operating a business.
Determining the correct structure for your enterprise is a critical first step and should not be decided lightly.
BauerGriffith wishes our clients, colleagues and friends a happy, health and prosperous New Year!
Consider this scenario: Your daughter is a freshman in college three states away, is involved in an accident, but the doctors won’t give you any information.
It is important to remember that once your child turned 18, she became an adult for health care purposes. Her doctors are no longer permitted to discuss her needs with you, including in the unfortunate case of an accident.
One way to eliminate this problem is to have your child execute a medical power of attorney, naming you as his or her agent. In this way, should anything happen to your son or daughter, not only will the doctors be authorized to speak directly to you, you will also be empowered to make medical decisions for him or her.
Corporate shareholders are the owners of the company, their most important function being to elect the board of directors. The board has overall responsibility for the company’s business, and elects the company’s officers. Officers manage the day to day business of the company.
Directors must act in the best interests of the company and its shareholders. They are fiduciaries, a relationship based on trust and confidence. The board should not be so large as to be unwieldy, and should preferably be an odd number to avoid deadlocks. The board meets annually, but should meet more frequently to provide advice and guidance to the company.
Certain corporate actions require shareholder approval. The corporation generally holds an annual shareholder meeting, but can hold special meetings as needed. In addition, shareholders can approve corporate actions by their unanimous consent without a meeting.
A corporation’s minute book holds important corporate records, and should be kept current. For instance, the minute book holds the company’s articles of incorporation, bylaws, and minutes and written consents of meetings or other actions of the company’s directors and shareholders.