Stop me if you’ve heard this one. Frank is a great employee in one of the trades – let’s say he is a HVAC guy. After years of working in several companies, Frank finally decides to open his own business, so he cashes out some savings, gets his business license, and goes to work as his own man.
Frank does a great job, makes a solid income, and, as the months and years go by, he decides to expand his company – so he takes out an SBA loan, outfits a couple of trucks, hires some help, and is bankrupt or out of business a year later.
There are a lot of Franks in the world they own everything from hot dog stands to web design businesses and they are the folks that we read about in the statistics that show 80% of small businesses fail in the first five years.
Now, America needs a lot of Franks, but we need Frank to be successful. How could he have saved his company and prospered? Chances are, Frank failed due to management structure. He is a great repair guy, but he doesn’t do repair work as an owner. Owners grow business, employees work in the business. That first year, what Frank basically did was to buy himself a job. As his company grew, Frank had to evolve out of daily operations and he couldn’t, so his business folded.
Now, here’s where Frank could have prospered – Frank could have issued stock certificates for his business to a partner in exchange for that partner’s management skills. That partner would have provided capital in exchange for ownership and, if Frank choose wisely, his partner would have handled the management component of the business while Frank did what he was good at – repair work. The best thing (and the worst) is that Frank could easily and inexpensively do this regardless of the corporate structure of his business (S-, C-, or LLC) and the results very well could have allowed him to grow himself right out of fieldwork and into a more comfortable position.
Giving up equity for many business owners is uncomfortable – they’ve built this entity with their own sweat equity, and putting a price on it is hard – and deciding to sell part of it is even harder. Inevitably, though, just as hard is realizing that you aren’t good at handling the accounting means that you should hire an accountant, realizing what your small business needs to do to grow and succeed usually means that you need to hire those skills. Ultimately, though, it can also mean that institutional structure needs to be built, and that means bringing in investors. Why not bring in investors that can add value to your business through their experience and resources?
Going back to Frank, in his line of work, he inevitably would have met and interfaced with people who had management experience – these are exactly the partners that he needed to engage to grow. Instead, he relied on capitalization without organization and failed. Don’t do that! For small businesses, shares of equity can bring big rewards by using the investor’s experience to help grow the company. A simple issue of stock certificates and a trip to a local business attorney’s may be all that you need to bring on the investor that can take you to the next level.