Expansion of a Start-Up Business – Revisiting All the Initial Assumptions
A business owner is an entrepreneur with all the risk tolerance and reward that the French word implies. As an entrepreneur, you in particular are a national and international job creator. Your efforts alone will pull the young and old, experienced and inexperienced, good and the "bad" off the unemployment rolls and thrust them into the tax paying workforce. You are building a new "family" and you are the leader, parent, confessor, and employee bank of last resort.
In the United States, you are everything the politicians claim to love. In Europe and Sub-Saharan Africa you are similarly lauded, but at times regulated into despair. The role you play is so important that as a national leader you should hire a, "just as needed” team of professionals to address legal and accounting issues with business expansion. It is just too important an undertaking to omit a good team of advisors.
The advisors, in particular legal and tax, will provide conservative advice which can be summed up as "separate operations from assets, pay as few taxes as possible, and avoid all but the most necessary entanglement with government, banks, and partners/shareholders." In the advisors version of the doctors' Hippocratic Oath, they will uniformly advise you in a manner to "cause no harm" to you. Understanding the thinking behind advisors' advice (some of whom also don't wish to have responsibility for possible failures), it remains important to retain your vision, hope, and enthusiasm for the enterprise. So, hire them - but remember that you are the, "risk taker," which is why you create wealth.
A good tax or legal advisor will tell you that the expansion of the business will mean more invested capital and more risk of loss. If there are assets at risk, personal or enterprise, then it is standard practice in most countries to form two distinct entities or companies - one to operate the business and a separate one to hold any items of value. There are many permutations of the concept, depending upon where the income is earned, tax considerations for the owners or participants, and even considerations of where the entity is controlled. The legal analysis for the United States owner is presented in summary on a useful onlinetool - FindLaw - where articles discuss different business forms. The commercial web based legal source - LegalZoom - offers a summary in more general terms. A more user friendly discussion of the form of business is found in the publication Entrepreneur.
The form or structure of business is really driven by how you plan to manage the business (alone, partners, or with employees), and how you plan to raise the capital needed to fulfill the dream of a successful larger enterprise. In sum, the basic rule is that an entrepreneur wants to keep separate the "goodies" from the risk of loss, and keep the governance of the enterprise as simple as possible.
A tax professional can also provide a reasonable prediction of the "tax optimization" structures which you also want to consider in order to maximize the return on your investment. As with all commercial transactions, the fewer taxes you pay, the harder it is to raise capital based upon your earnings. So, your professionals should advise you on structure based upon how much capital you wish to raise and how you intend to raise it. Thus, using a local attorney or tax preparer who can form these businesses, obtain tax identification numbers (from relevant taxing authorities), and help you with local regulations is the best way to safeguard your investment of time and money.
There are readily available online forms if you don’t want to do use professionals. However, among other examples, bank accounts will require some particular documents after they are formed which these professionals can obtain easily with practice. Consider hiring professionals to help the formation process, accounting methods, and to set up the regulatory compliant operational procedures needed for success.
The Big Four consulting firms offer comprehensive services. These are expensive as a general matter. Less expensive though possibly requiring more coordination by you as the entrepreneur, would be to use several local service providers for legal, tax, and other regulatory services. Consider getting an estimate from the Big Four first, then look at local alternatives. Some savings are available with the Big Four for comprehensive services (i.e., Anderson offers a Platinum Membership which includes a menu of inclusive services without limitations). Shop the price of advisors and find the best fit - not the cheapest.
Increasing the scale of business when you as entrepreneur, move from the less formal sector to the more formal and regulated one, presents more than mere formation and structure challenges. You already know the risks associated with your business and the like. Advisors can explain the risks of various structures. However, you may not have a completely informed understanding of the capital requirements for regulatory compliance, meeting industry best practices, and the cash to have on hand for operating funds. Running a "bigger" business takes a surprisingly greater amount of cash on hand than running the "start-up" version. Forbes provides a good discussion of this situation.
The operation of a larger enterprise necessarily requires different personal skills than opening the "start-up" phase. If the entrepreneur is not familiar with running a larger operation with multiple employees, different taxing authorities, and increased regulatory scrutiny, then consider buying into a "franchise" of a larger operation that does something like what you want to do with your expanded enterprise. Not that I or anyone I work with "know" anything about what your business specifically requires, but through years of experience and similar with the published views of some knowledgeable opinion leaders, there is a direct positive relationship between the entrepreneur's successful investment of time & money and the participation in a reputable national or international franchise. Business.com has an April 2015 study of 28,000 USA based franchises and the report is encouraging.
Respected franchises provide operational guidance, business training, and logistical support that they include in the fees and costs of the franchise privilege. The kind of support that a good franchise offers includes software for tracking the consumers on all levels, integrated with invoicing for funds owed and accounts to be paid, and frequently updated operational advice for changes in regulations (such as such as health, safety, and financial reporting). Reputable franchises usually provide facilities and equipment support in the form of technical guidance on design and purchasing, as well as established relationships with lenders and investors for financing the franchise program. A good first look by an entrepreneur at a franchise opportunity will usually identify both the positive opportunities and possible weakness in the entrepreneur's own business model. So, consider taking a first look at a franchise as a part of increasing your scale.
Changing your "scale" presents you with predictable challenges. Every entrepreneur encounters the same type of problems - tracking personnel (human resources), building and maintaining client relationships (customer satisfaction), government regulatory compliance (at many levels often not previously experienced by the start-up), and the changing volumes of money needed to address all of these challenges at the same time. Frequently, the entrepreneur becomes much more "management" than ever conceived at first. The passion that lights the flame for growth, is frequently overwhelmed by the flames of business "brush fires" as the entrepreneur becomes a full time manager of others.
There is a direct relationship between your happiness as a business leader on the one hand and the recruitment and retention of one or more good managers on the other. You may wish to consider "hiring" a manager whose job is to handle all of the administrative challenges so you may focus on growing the business. If can recruit an existing manager of a similar larger operation you respect, then you could budget in the business plan to hire and assign to this person all of the administrative and management duties which will otherwise fall to you as owner if you do not. Combining the hiring of a good "manager" with a good "franchise" opportunity would also greatly increase your likelihood of financial success and happiness in the business (some better franchises will require hiring an experienced manager for just this reason). A good management program is a predictor of success. Harvard Business Review reported in 2012 that excellent management rather than financial maneuvers resulted in a 1.5 times greater earnings for the companies which focused on improving market performance through better management. Consider the important value of excellent management when expanding your enterprise.
The challenge presented by both "money issues" and "management issues" is often addressed (whether solved or not) by entrepreneurs through either a (1) a rapid growth expansion plan - using large investment capital of borrowed or raised equity (for the expenses of hiring talent and securing proper materials and infrastructure) or (2) a slow growth expansion plan - using non-institutional capital and opportunistic acquisitions of talent and resources. How you, as the entrepreneur, select between these two traditional approaches (if not any of several more creative pathways) should be influenced by criteria - (i) thorough detailed study, planning, and preparation of the expansion, and (ii) consideration of your personal level of risk tolerance, and (iii) often consideration of the quality of the opportunities presented by circumstances. The criteria seldom all arise at once.
There is never "enough" study or planning because the contingencies and variables are too many for even a blockbuster screen writer. Risk is always present. You do your best to plan from the known facts and predictable variables as illuminated by your experience and the professional advisors. You do your best to account for your prejudices and bias either for or against risk-taking. Nature usually prevails whether you want it to or not. You are who you are in business. Opportunities do not appear on command.
However, if you are considering business expansion, then some circumstances presented themselves and you see a "golden opportunity" either in the form of some circumstance that is just too tempting to look past or ignore. It could be someone offering capital, or a facility or equipment becoming available for "cheap," or the appearance of the "right" person upon whose performance an ambitious business expansion can be based. Seldom do all three conditions present themselves simultaneously. If they do, go out and buy a lotto ticket that same day.
More often, the opportunity will present itself and the entrepreneur will need to go out and "build" the other two criteria. The first alternative (rapid growth) requires fundamental compromises (usually manifest in a loss of ownership, an increase in expenses, or both). The second alternative (slow growth) requires patience and loss of affordable potential business growth (either passing up the "cheap" opportunities or losing the dominant first in the market field position). Only you can decide which pathway to success to follow - though you should consider when following either - whether you can structure the expansion in a manner that reduces the "risk of loss" should one of the opportunities fail.
Regardless of alternatives chosen (rapid or slow) you will need to consider your enterprise structure in great detail. The structure of a business expansion, in particular of a start-up or small "cap" enterprise should focus on limiting the time the entrepreneur spends away from the core business being delivered. It doesn't matter what the enterprise delivers, it will suffer, should the entrepreneur be focused away from the service delivery. One readily adopted risk management structure is to "out-source" the expansion employees. Using a recruitment and employment agency to place employees with the enterprise for specific contractual periods will reduce the risk of loss from human resources regulation. The agency takes the front line position for the entrepreneur in all matters relating to the temporary employee (including payroll, discipline, collective bargaining). Agencies are present in all North American, European, and Sub-Saharan Africa economic communities. In the United States each state governs what services agencies are allowed to provide on behalf of the entrepreneur.
The entrepreneur should embrace this risk management approach since the agency is paid a fee for providing the worker, paying the taxes, and to assume all the risks of workplace injury (where comprehensive injury insurance is offered). Some risks are never delegable, of course, such as an unsafe workplace, but commonly underwritten employer risk is shifted to the agency exclusively through the employment contracts. Consider using outsourced labor as you expand the business in order to avoid front end loading personnel onto the financial burdens matrix of the expansion.
Capital formation is another distraction of the entrepreneur away from the core business. In particular, when debt service is due or when equity demands changes in operations the entrepreneur is very often forced to make "bad" business decisions. The list of reasons and the companion list of "bad" decisions is as lengthy as the imagination. There are several methods of capital formation which reduce the risk of distraction and may be worthy of consideration along both the rapid growth and the slow growth pathways.
Crowdfunding is a very popular method of capital formation for small businesses. There are regulatory guidelines for which professional advice can be essential - though the concept and practice is present in all North American, European, and Sub-Saharan Africa economic communities. The World Bank as of 2013 predicted that it will surpass other forms of private capital formation. Forbes reported on the trend in June 2015. The upward trajectory in use has not dipped. There are multiple entities offering the services as facilitators matching private capital to entrepreneurs, holding the funds raised pending the entrepreneur reaching the target goals, and disbursing funds to the entrepreneur under a contract with the contributors. Businesses as diverse as a baseball bat maker in rural Oregon and a documentary film in South Africa use the crowdfunding model to raise capital.
The United States of America is the leader of crowdfunding both in terms of capital raised and in terms of modern regulation of old institutions (such as the Securities and Exchange Commission ("SEC") which regulates securities and investment vehicles). The type of investor which may participate and the amount to be raised without regulatory supervision are much more open as a result of The Jumpstart Our Business Startups Act (JOBS Act), signed into law by President Obama on April 5, 2012. The SEC has allowed broad solicitation of funding. More details are available on the SEC web site, and the fact sheet can help you decide if this is the type of funding you wish to seek. The crowdfunding facilitators undertake to insure that the funding is done in compliance with the relevant regulations and laws in the countries where they seek funds.
The European Union has its own version of permitted regulation and facilitators who undertake to comply with those regulations. Review the Commission's fact sheets if you would like to access those capital markets. In Sub-Saharan Africa crowdfunding as an international funding facility is a variation on an old theme of localized "credit associations" (think in terms of cooperatives, business associations, and religious charities) which are allowed by a variety of regulations and agencies. However, until more substantive regulatory coordination occurs most crowdfunding can only avoid complications if it is funding for "goods and services" (i.e., authorizing receipt of funds by a company regulated by the South African "Banks Act").
Several countries are revising tax regulation to allow for donations of capital for future stock in "for profit" businesses in the form of crowd sourced equity capital. (i.e., South African companies which register with the Revenue Service as Venture Capital Funds as defined by Section 12J of the Income Tax Act qualify for non-tax treatment of funds received for investment purposes). However, other agencies still labor under laws and regulations which have not yet been modernized to allow smooth crowdfunding (i.e., South African Companies Act No. 71 of 2008 at Section 100 requires all unregistered securities to have a compliant "prospectus" circulated to all potential investors). Rwanda and Tanzania suffer similar regulatory obsolescence despite being among the World Bank rated best places and the fastest growing economies in Africa. Crowdfunding also provides an engine to test the market acceptance of the business model and provides some version of "viral" advertising in advance of the roll out of a larger business. Thus, for the expansion from start up to larger business crowdfunding should be considered in the both growth alternatives and favored in the slow growth version over commercial (bank) credit.
Take into consideration the factors discussed and then revise your expansion business plan in response to what you learn through this process. The business plan will be the governing document in your effort to focus your entrepreneurial energy, and the attention of the existing enterprise as you grow it. Investors, lenders, partners, and your professional advisors too will need to be directed by the vision you set out in the business plan. One of the best interactive business plan tools, regardless of country within which you want to work, is the one hosted by the United States Department of Commerce. The Small Business Administration template is a great user friendly document that guides as well as challenges the entrepreneur to think through the big and little details. Consider this template when preparing the plan and know that it will take a reasonable commitment of time to complete it.
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