Category Archives: Start Ups

The Importance of Running Your Business in a Business-like Way

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I have been practicing law for over 25 years and the attitude I have seen that most disturbs me is that running your business is a chore that the business owner should not have to do. I have seen this attitude gaining ground over the last few years among a group of young entrepreneurs calling themselves ‘digital nomads’.

This is one of the biggest mistakes you can make!

When you start a business you are going to have to do a lot of things that may have nothing to do with what you consider is your business. You are going to need to keep a good set of books so that you know how much money you are making, what are your costs, who owes you money, who do you owe money to, how much do you have to pay in taxes, etc. You should sit down and understand what is the best type of business entity for you to use to operate your business. You should try to understand the risks you are going to face. Can someone sue you? For what? Who might that be? Will it be your clients, yours suppliers, your partners, your family, total strangers? Will you have to sue them? What type of contracts are you going to need? How can you manage all that risk so that you do not lose everything you are working for?

If these are questions you do not want to think about, I advise you to do one of two things:

1. Do not start a business and instead go to work for someone who is willing to do all that stuff, or

2. Find a partner who will handle all that dreary ‘non-sense’ for you. (And if you choose to pursue this option be prepared to have your partner remove you at some point from the business since you will most likely be expendable.)

You see all that annoying stuff is your job as a business owner. It is what you are supposed to do. If you do not do it who will?

Take for example a plumber. You may think that the job of a plumber is to fix people’s plumbing. Hopefully the plumber knows better. If he is working for himself, that is if he is operating a business, his job is to do all that annoying stuff to make sure he does not get into trouble while fixing people’s plumbing, and so that he can make the most money he can.

If all he does is fixes people’s plumbing, no matter how good a plumber he may be, it is just a matter of time before he goes out of business. The real money to be made in operating a plumbing business is not in doing the plumbing. The real money is in managing the business. That is why successful business people make more money than employees!

If you do not want to manage your business, then go work for someone else who does. Do not begrudge them the profit they make managing the business. You do not deserve the money that is made by the business person who is doing all the crap that you do not want to do. Not only do you not deserve the profits from the business, you might very well be happier not having to deal with the problems that come with owning and operating a business.

Let us go back to our plumber. Obviously he became a plumber because he liked that trade, and he thought he would make money doing it. But the truth of the matter is that the hardest part of operating a plumbing business is not the plumbing work… it is everything else. If he is running everything else and does not have the time to do all the plumbing work he can hire another plumber to help him out from time to time. In fact as the business grows he may end up doing no plumbing at all and hiring plumbers to do the work as employees. Who is going to make the most money? The plumbers he hires or him – the guy who owns and operates the business? If he is doing a good job operating his business it is going to be him.

So when I talk to potential clients who resist doing simple things like setting up a proper accounting system, I am forced to ask them, “Why are you going into business?”

To make money? Obviously not. If you do not want to operate your business with a basic accounting system you have no interest in money. That is what accounting is all about; managing the money of the business. If you do not want to do that, then go work for someone else. I suspect you will make more money working for a competent business owner than trying to operate your own business.

The same thing goes for setting up the proper business entity, preparing the proper contracts between you and your partners, clients, suppliers, etc. If this is all too much of a bother for you then being in business is too much of a bother for you. That is what operating a business is all about!

I know there are some people who for one reason or another cannot work for other people, and cannot do all the tedious work of operating a business. What should such people do? I advise them to look hard in the mirror and accept the two problems they have:

1. You cannot work for other people.

2. You cannot operate a business on your own.

In both of these cases I would advise seeking psychological counseling of some kind, especially for problem number 1. Perhaps you can find out why you cannot work for other people, identify the cause and find a solution. Although psychologists are the usual go-to profession for solving such problems, perhaps there are other people you can turn to: family, friends, business associates, business mentors, business consultants and coaches, etc. Just understand these later people may not have the training or the interest in helping you solve your problem. If and when you are able to solve this problem you may find it much easier to resolve other business related issues.

As for problem number 2, in additional to resolving your psychological issues you may be able to find someone who is both trustworthy and competent enough to manage the business while allowing you to do whatever it is that you believe you are doing that adds value to the business. Most of the time this is done by bringing the person in as a partner, or it might also work if you hire someone to manage your business and pay them enough to make it in their interest to do so honestly.

Beware! As I mentioned above the person who manages the business is the real business owner. If you delegate all the responsibilities of operating the business without fully understanding what those responsibilities are then eventually you will become redundant. It is always easier to find someone to do the work than it is to find someone to manage the business. If you are ‘in business’ that is YOUR JOB! If you completely abandon that part of your responsibility whoever is doing it will end up being the owner.

Owning and operating a business is one of the hardest things anyone can do. The idea that you can be successful at that without training, experience or even interest in learning how to do so is ridiculous. Don’t do it!

Royalty Financing – Misunderstood or Mysterious?

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There are three ways that a business can finance its operations and development:

  • Debt
  • Equity
  • Royalty

The first two are the most common and the easiest to understand.

Debt financing simply means borrowing money without giving up actual ownership of any assets. Often lenders will require some kind of security interest or lien against those assets, but as long as you pay your debt properly you do not give up any of your business, your assets, or your revenue.

Equity financing is the process of raising capital by selling shares or ownership interest in your business. How this actually takes place will vary according to the size and strength of the company brand and finances. An established company finds it much easier to issue shares than a start up venture. Start up ventures often have to give up majority control of their company in order to receive funding from Venture Capitalists.

So what is Royalty Financing?

Royalty Financing is often referred to as a “new concept” in investing, however, this is not really true. Royalties have been around for quite a long time. Royalties are what someone receives in exchange for allowing a business to use some kind of valuable asset, or in some cases just money. The most traditional form of royalties usually involve some form of intellectual property such as music, books, or other artistic endeavors which the artist licenses to the company in exchange for a fixed percentage of the sales. Royalties are also very common in regards to licensing of scientific properties such as patents and designs. The royalty can be compared to a sales commission, only the receiver of the royalty does not have to perform any additional tasks to receive the payment.

What is somewhat novel is the idea that investors can receive royalties from the sale of a product or service in exchange for a fixed investment that is often used to further develop the business opportunity. The most common means of royalty financing is to give the investor a fixed percentage of the revenue of the business or the revenue from the sales of a specific line of products or services.

There are many advantages to a royalty financing arrangement:

  • The most obvious advantage for the business is the fact that the company remains in control of its own destiny while facing fewer risks associated with borrowing money.
  • Easier regulatory environment. Since no shares in the company are being sold securities regulations should not apply.
  • It can also be easier to obtain royalty financing when future revenues are predictable and consistent even if other factors may be more risky.
  • Royalty financing is more flexible than equity or debt financing since the royalty payments will vary according to the revenue rather than upon some preset fixed amount. In good years royalty holders will receive higher payments, and in bad years lower payments. This gives the company the ability to better withstand the possibility of future downturns while giving the investors greater opportunities to participate in the upturns that may occur.
  • Royalty payments are usually tax deductible from the company’s gross income thus lowering the company’s tax liabilities, and also avoiding the double taxation that often occurs with dividend or profit sharing payments.
  • Because the company does not have to give up equity in order to obtain financing, the company can often focus more on operations, and less upon exit strategies of the founders and initial investors.
  • Finally, royalty payments are more secure for the investors since the payments are based upon a percentage of the gross sales or revenue rather than profits. Even if the company is unprofitable, if it makes any sales the investors will receive the benefit. It is also much more difficult to use obscure accounting methods to conceal, reduce, or eliminate a company’s gross revenues than profits.

Royalty financing is not ideal for every business. Businesses that lack predictable and consistent future revenues will find it very difficult to successfully obtain such financing. Also, royalty financing may turn out to be more expensive than equity or debt financing, even if it is more flexible for the company and more secure for the investors.

Sometimes royalty financing is misunderstood, but it is never a mystery. It is just a very convenient way for some businesses to attract financing that would otherwise be difficult or impossible to obtain otherwise.