To P or not to P?

It happened again last night. Twice, no less.

Entrepreneurs filled with enthusiasm, confident in their ways, with images of success filling their minds, made mistakes right out of the box. Because these mistakes were made and caught early, they only cost the entrepreneurs money and did not damage the structuring of their businesses or their upcoming funding efforts.

Yet few entrepreneurs have money or time to waste.

Each of these entrepreneurs erred in asking their attorneys to prepare a Private Placement Memorandum ( PPM) concurrently with their business plans. While I’m not an attorney, and I’m not offering legal advice, I do know the function of a PPM, and that it isn’t always necessary to have one.

The PPM is a disclosure document required under certain circumstances when soliciting funding. Even if your company’s securities are exempt from registration requirements (generally Reg. “D” exemptions), the offering is not exempt from full disclosure.

While your business plan tells potential investors all of your plans, forecasts and methods for the company to make money, the PPM clearly points out the risks, dangers, illiquidity and other pitfalls of making that investment.

In essence, the PPM warns of the dangers of investing in your company. If people decide to invest anyway, they are doing so with full knowledge of the risks involved.

Why even consider a PPM if it tells about the negatives that can result from investing in your company?

First, in many cases, the law requires it. Second, it can protect you from lawsuits if the investment sours in spite of all of your efforts. To vastly oversimplify, the PPM warns against making the investment that the business plan encourages people to make.

You don’t always need a PPM, so determine with your attorney if do. Generally, if you are presenting your plan to a professional investment company or fund, both of which are expected to perform their own due diligence, you don’t need a PPM. If you start to circulate your plan as an offering, at some point you cross the line into needing a PPM.

If you need a PPM, get one prepared by your attorney or a firm specializing in PPM preparation. Don’t even think of preparing it yourself. While the consequence of a poorly prepared business plan is that you simply don’t get funding, a poorly prepared PPM is a violation of securities laws and could lead to charges of fraud and the risk of lawsuits. This is no arena for do-it-yourself.

Most business plans go through several revisions, at times, quite significant ones. If you need a PPM, and if it is prepared simultaneously with your business plan, each material change in the business plan requires a material change in the PPM. If you wait until your business plan is finalized, you will need only one iteration of the PPM.

Put your time and effort into structuring your business to be very profitable. Have it well presented in your business plan, executive summary and summary of key financial data. Perfect it, and don’t hesitate to revise it as necessary.

When the business plan is done, and before you accept any money, consult with counsel to see if a PPM is required in your circumstance. If it is, it can be prepared in a very short period of time, and you won’t have wasted valuable time and money you and your business don’t have. Erwin Bruder ([email protected]) is president of The Gordian Organization, which provides business planning and structuring services to start-up and growing companies. Bruder can be reached at (216) 292-2271.