Financing your small business : from SBA loans & credit cards to common stock & partnership interests

306 Pages·3.75 MB·English

by  James E Burk, Richard P Lehmann

Secure your business’s future
Quick Start
using the right SBA loan, bank loan or
Quick Start
equity financing for you. YOUR YOUR BUSINESS
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right,Financing Your Small Businessprovides you with all the answers
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you need. It helps you find ways to combine various types of financing and
shows you how to get the money you need.Learn— AA
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g How to get a bank loan g How to value your business
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g How to make a better g How to determine your NN
presentation investors’ status
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g How to get attention with g How to avoid securities law
YOUR BBuussiinneessss
your business plan problems
g How to choose professionals g How to find investors SS
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From SBA loans to venture capital sources,
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Financing Your Small Business shows you all the
From SBA Loans
ways to get the money you need. LL
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LL & Credit Cards to
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Common Stock &
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James E.Burk has been helping emerging companies in their SS
initial stages of organization and growth for over thirty years. II g Bank Loans g SBIC Financing
Mr.Burk is a graduate of the University of Texas at Austin Law
Business/ $16.95 U.S. NN
School, and is a member of the bars of the District of Small Business $23.95 CAN g SBA Loans g Stock Offerings
Columbia and Texas.
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Richard P.Lehmann assists clients with a variety of business C g Retirement Funds g Warrants
matters, including corporate issues and securities law. Mr. UP SS
Lehmann is admitted to practice in the District of Columbia, g Factoring g LLC and LP Interests
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Virginia and Minnesota.
ISBN 13: 978-1-57248-553-2
ISBN 10: 1-57248-553-1 g Revenue Participation g Venture Capital Sources
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A BURK
E LEHMANN
JAMES E. BURK RICHARD P. LEHMANN
AND
Financing
Your
Small
Business
James E. Burk
Richard P. Lehmann
Attorneys at Law
S P
PHINX® UBLISHING
ANIMPRINTOFSOURCEBOOKS,INC.®
NAPERVILLE,ILLINOIS
www.SphinxLegal.com
Copyright © 2006 by James E.Burk and Richard P.Lehmann
Cover and internal design © 2006 by Sourcebooks,Inc.
All rights reserved.No part of this book may be reproduced in any form or by any electronic
or mechanical means including information storage and retrieval systems—except in the case
of brief quotations embodied in critical articles or reviews—without permission in writing
from its publisher,Sourcebooks,Inc.Sourcebooks and the colophon are registered trademarks
of Sourcebooks,Inc.All brand names and product names used in this book are trademarks,reg-
istered trademarks,or trade names of their respective holders.Sourcebooks,Inc.,is not associ-
ated with any product or vendor in this book.Portions of this book were previously published
under the title Financing Your Small Business.
First Edition:2006
This publication is designed to provide accurate and authoritative information in regard
to the subject matter covered.It is sold with the understanding that the publisher is not
engaged in rendering legal, accounting, or other professional service. If legal advice or
other expert assistance is required, the services of a competent professional person
should be sought.
—From a Declaration of Principles Jointly Adopted by a Committee of the American
Bar Association and a Committee of Publishers and Associations
Published by Sourcebooks,Inc.
P.O.Box 4410,Naperville,Illinois 60567-4410
[phone]
Fax:[phone]
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Library of Congress Cataloging-in-Publication Data
Burk,James E.
Financing your small business :from SBAloans and credit cards to common stock and
partnership interests / by James E.Burk and Richard P.Lehmann.
p.cm.
Includes bibliographical references and index.
ISBN-13:978-1-4022-2025-8 978-1-57248-553-2 (pbk.:alk.paper)
ISBN-10:1-4022-2025-1 1-57248-553-1 (pbk.:alk.paper)
1. Small business--Finance. I.Lehmann,Richard P.,1966- II.Title.
HG4027.7.B8554 2006
658.15'224--dc22
2006030168
Printed and bound in the United States of America
VHG 10 9 8 7 6 5 4 3 2 1
Acknowledgment
We are grateful for the collaborative support we have received from our
professional colleagues, clients, and students, past and present, in writing
this book. Specifically, we would like to thank IBI Global for providing a
teaching laboratory that enhances human potential and accelerates student
learning capacity, and our wives, Katherine and Karen, for providing an
environment in which we both can flourish.
With further specificity, we thank Tarby Bryant, Eric Delisle, Burke
Franklin,Ike Gadsden,Herb Rubenstein,and Robert Johnson for their con-
tributions.We are especially grateful for the contribution of Jay Winokur in
Chapter 2 and Katherine Burk and James Harper III for their editorial work
on all of the chapters.We also thank our law partner,Alan Reedy, for his
suggestions and revisions that always enhance our work.
James E.Burk
Richard P.Lehmann
Washington,D.C.

Contents
INTRODUCTION ...........................................ix
CHAPTER 1: Choosing the Form of Your Business.................1
Sole Proprietorship
Partnership
Corporation
Limited Liability Company
Nonprofit Entities
Joint Ventures and Corporate Partnerships
Registered Agents
Choosing the State in which to Form Your Business
Qualifications for Starting a Business
CHAPTER 2: Business Strategy, Planning, and
Feasibility Analysis..............................25
Strategy
Developing Strategy
Business Plan
Feasibility Analysis
Structuring Your Business Plan
Consultants vs.Do-It-Yourself
What the Experts Say
Summary
CHAPTER 3: Equity Financing ................................49
Ownership
Corporation Equity
Warrants
Limited Liability Company and Limited Partnership Equity
Raising Capital in Stages
vi Financing Your Small Business
CHAPTER 4: Debt Financing..................................71
Bank Loans
Small Business Administration (SBA)
Credit Cards
Home Equity Lines
Retirement Funds
Life Insurance Borrowing
Financial Brokers
Reverse Mergers
Factoring
Revenue Participation/Royalty Financing
Merchant Banking
SBIC Financing
Private Debt
Combining Equity and Debt Financing
CHAPTER 5: Securities Law ..................................83
Understanding Securities Laws
Brief History of Securities Laws
The Rise of Rule 506 of Regulation D
Disclosure Requirements
The Sale of Securities and the Issuer Exemption
Integration of Offerings
State Securities (Blue Sky) Laws
Notice Filings of Securities
Rule 504 and 505 Offerings
Regulation A Offerings
Follow-up and Closing an Offering
CHAPTER 6: Licensing and Franchising .......................117
Licensing
Franchising
Business Opportunities
Contents vii
CHAPTER 7: Friends, Angels, and Venture Capital Sources.......123
Friends and Family
Angels
Venture Capital
What They Look For
Valuation
Angel Networks and Entrepreneurial Forums
CHAPTER 8: Presentations and the Language of Capital.........135
Content
The Presenter
Learning to Close and When
Declining Money
CHAPTER 9: Corporate Governance..........................143
Registered Agents
Initial Reports
Annual Reports
Money and Accounting
Signing Documents
Bank Accounts
Corporate Governance for Corporations
Corporate Records
Corporate Governance for Limited Liability Companies
CHAPTER 10: How to Choose Professionals................... 167
Attorneys and Accountants
Other Consultants
Sequence
CONCLUSION ............................................173
ENDNOTES ..............................................175
viii Financing Your Small Business
FOR FURTHER REFERENCE ..................................177
GLOSSARY ..............................................189
APPENDIX A: Business Plan ................................197
APPENDIX B: Corporation Formation Documents...............221
APPENDIX C: Limited Liability Company
Formation Documents .........................243
INDEX ..................................................283
Introduction
The idea for Financing Your Small Business came, in part, from the entre-
preneurial seminars we have done in the past several years for IBI Global.
While serving as faculty instructors, we have encountered literally thou-
sands of students seeking to finance their small business.There have been
successes and failures along the way.Many of the so-called failureslearned
from their mistakes and reinvented themselves, becoming stronger and
wiser than before.
There are many reasons a small business may seek financing. If you are
one of those people with an idea on a napkin, ready to seek fame and for-
tune,you may need to raise capital before you simply quit your day job and
launch your business from ground zero.Among the things you may need at
this point are:
• a feasibility analysis to determine the viability of your idea;
• corporate organizational documents (articles,bylaws,minutes);
• a summary business plan (or at least an executive summary);
• federal (and perhaps state) tax identification numbers;
• a corporate bank account;and,
• local licenses (if required).
If you have already started a business by using your own cash (sometimes
called bootstrapping),you may need to raise additional capital to:
• lease office space;
• purchase office equipment;
• develop a prototype of your product;
• hire a president, chief operating officer (CEO), or chief financial
officer (CFO);
• design a logo to establish a branding and marketing program;
•file for trademark or patent protection on intellectual property (IP);and,
• pay yourself a salary.
The list could go on.
We have noticed that some of the books on financing a business focus on
the narrower sense of the word—financing through debt. In this book, we