STARTUP SUCCESS STARTS BY SORTING THROUGH SETS OF THREE.
Starting a business on sound financial footing involves facing three sets of three: three options for the money, three options for the structure and three types of advisers.
Those decisions come after you turn your idea into a business plan built to achieve a quick exit or long-term success, says Thomas Prevatt, who works with entrepreneurs as a partner in the tax practice of Brookhaven-based accounting and advisory firm Aprio. Prevatt says he sees many entrepreneurs who could have thrived “if not for those first couple stumbling blocks that knock out so many business owners.”
For working capital, you can use your own money, borrow or find investors. Self-financing is high risk and high reward, Prevatt says. You lose everything if the business fails but get all the profit if it succeeds. You also set your own timeline, says David Aferiat, co-founder and managing partner of investment intelligence company Trade Ideas and founder and owner of organic wine importer Avid Vines. His two partners couldn’t satisfy the quick-profit pressure of investors in a previous business, Aferiat says, so they launched Trade Ideas in 2003 with their own money.
Aferiat, an Upper Westside resident, went 18 months without a salary, but says the partners could “make the mistakes we needed to make at the timetable that we needed to make them.”
Borrowing can create more risk. Lenders for new businesses usually want a personal guarantee, Prevatt says, so even if the business fails, the loan obligation remains. He advises finding a lender that specializes in your industry to get the best terms.
Investors, whether friends, family or venture capitalists, reduce financial risk in exchange for partial control and potential profits, Prevatt says. “You have different voices, and they all feel like they have a say.”
Control is also a factor in the choice of business structure: C corporation, S corporation, or limited liability corporation or partnership. The wrong choice, Prevatt says, could mean thousands of dollars going to the IRS instead of the business.
Because an S-corp and an LLC/ partnership provide flexibility to use startup losses to offset outside income, they are better than a C-corp to build a new business for the long term, Prevatt says.
For an advisory team, Prevatt says every startup needs a great lawyer, a good accountant and a solid support group.
Accept the upfront cost of a lawyer who creates ironclad documents and agreements, Prevatt says, and trust an accountant to minimize taxes and provide advice ranging from local incentives for job creation to potential advantages from making the wife the majority owner of a family business. Just be sure the lawyer and accountant coordinate their efforts.
Prevatt advises paying yourself something from the start to avoid burnout and setting aside a slice of all revenues to force yourself to minimize expenses and build an emergency fund.
The final advisory element is a support group of like-minded entrepreneurs to provide advice, insight and sympathy.
Aferiat was more than a decade into Trade Ideas before he found such a group in the Atlanta chapter of Entrepreneurs’ Organization. He joined after seeing EO’s impact on a cousin and a friend, and he found that it satisfied his need for continual learning. Now he’s the chapter president. “Other people have tread these waters before,” he says. “Why should you have to suffer when you can learn from someone else’s experience?”
APRIO
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ENTREPRENEURS’ ORGANIZATION: ATLANTA CHAPTER
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