Tee it up for success Featured

4:52am EDT November 29, 2005
Golf instructors and PGA pros will tell you that the key factor in a consistent and repeatable golf swing is the set up. The alignment of the ball, the club and and the player is the basis for everything that follows.

If the ball is too far forward, too far back, too far away, too close or if the club head and shaft are not properly aligned, then the player will have a very difficult time making a consistent and repeatable golf swing that will enable him or her to achieve the desired success.

As in golf, the set up is also the key to any successful business organization. More than half of new businesses fail within the first five years because most were not adequately structured or capitalized. Even the sharpest business person cannot succeed, or at least will not maximize his or her business potential, if they don’t begin with the right structure and adequate capitalization.

Having the correct type of business structure, whether it be a partnership, a limited liability company, a C corporation or an S corporation is critical in determining whether or not a business owner will be able to maximize his or her success. Unless the appropriate business structure is selected, the business owner may have difficulty in extracting revenue from the business, may not be able to obtain the revenues necessary to fund growth or may have difficulty securing bank financing for equity contributions.

At the same time, if a business venture has the appropriate structure but inadequate financing (whether debt or equity), that business will struggle to succeed. In capitalizing a new business, the hierarchy typically resembles the following.

  • Owner equity or capital

  • Equity or capital from friends and family of the owner

  • Senior bank debt

  • Subordinated debt

  • Angel investors

  • Venture capital investment

  • Public investment

While there is almost an endless variety of other financing sources and alternatives (including, without limitation, factoring, government loan programs and grants, bonds, etc.), the vast majority of businesses are capitalized and financed with some combination of the above. While most businesses never receive financing beyond the first three items, it is nevertheless important to attempt to structure the business organization to maximize the potential availability of the other sources of financing.

As stated above, more than half of all businesses fail within the first five years. The vast majority of those failures occur because of not having the proper structure or capitalization. Like the golf analogy used above, businesses often fail because the business owners and operators focus almost exclusively on their swing (the business plan and operations) rather than on their setup (the business structure, capitalization and financing).

The golfer who focuses exclusively on the swing and neglects the set up may hit an occasional winning shot but, more often than not, that golfer will not hit the ball as strongly or accurately as he or she could. Like the golfer, the business owner who focuses on the business plan and operations, while neglecting the business structure and capitalization, may still succeed, but he or she is more likely to fail or fall short of his or her full potential.

Many business attorneys have the knowledge and experience to consult business owners at a variety of stages, from startups to established family companies and public corporations. They can help you to structure or restructure your business. They can also help you to locate financing sources and develop the programs needed for accessing those sources.

The bottom line is, with a 50 percent chance for failure, having your business structured correctly, with the right capital and resources in place, can only increase your odds for success.

Michael Smith concentrates his practice with Carlile, Patchen and Murphy LLP in the business, banking, mergers and acquisitions, and securities areas. He is currently chairman of the firm’s business law practice group. Reach Smith at (614) 628-0788 or MAS@cpmlaw.com