Secure your business’s future using the right SBA loan, bank loan or equity financing for you Quick Start YOUR BUSINESS Ł How to get a bank loan Ł How to value your business Ł How Ł How to determine your to make a better presentation Ł How to get attention with investors’ status Ł How to avoid securities law problems Ł How to find investors your business plan Ł How to choose professionals YOUR From SBA loans to venture capital sources, Financing Your Small Business shows you all the ways to get the money you need Raising Money Just Got Easier $16.95 U.S $23.95 CAN ISBN 13: 978-1-57248-553-2 ISBN 10: 1-57248-553-1 EAN Richard P Lehmann assists clients with a variety of business matters, including corporate issues and securities law Mr Lehmann is admitted to practice in the District of Columbia, Virginia and Minnesota Business/ Small Business UPC James E Burk has been helping emerging companies in their initial stages of organization and growth for over thirty years Mr Burk is a graduate of the University of Texas at Austin Law School, and is a member of the bars of the District of Columbia and Texas FINANCING SMALL BUSINESS When it comes to your chances of receiving financing and doing it right, Financing Your Small Business provides you with all the answers you need It helps you find ways to combine various types of financing and shows you how to get the money you need Learn— Start Quick YOUR BUSINESS Financing Your Small Business From SBA Loans & Credit Cards to Common Stock & Partnership Interests Ł Bank Loans Ł SBA Loans Ł Retirement Funds Ł Factoring Ł Revenue Participation A Successful Business starts with solid financing Ł Ł Ł Ł Ł SBIC Financing Stock Offerings Warrants LLC and LP Interests Venture Capital Sources BURK LEHMANN JAMES E BURK AND RICHARD P LEHMANN Financing Your Small Business James E Burk Richard P Lehmann Attorneys at Law SPHINX PUBLISHING ® AN IMPRINT OF SOURCEBOOKS, INC.đ NAPERVILLE, ILLINOIS www.SphinxLegal.com Copyright â 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, registered trademarks, or trade names of their respective holders Sourcebooks, Inc., is not associated 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 (630) 961-3900 Fax: (630) 961-2168 www.sourcebooks.com Library of Congress Cataloging-in-Publication Data Burk, James E Financing your small business : from SBA loans 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) 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 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 contributions We are especially grateful for the contribution of Jay Winokur in Chapter 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 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 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 vii 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 entrepreneurial seminars we have done in the past several years for IBI Global While serving as faculty instructors, we have encountered literally thousands of students seeking to finance their small business There have been successes and failures along the way Many of the so-called failures learned 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 fortune, 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 ... which to Form Your Business Ł Qualifications for Starting a Business Financing Your Small Business Choosing the correct form of business entity is an important decision when starting a business Not... understand and define your market, the demographics and psychographics of your target customers, your competitor’s products or services, and your business risks 35 36 Financing Your Small Business Describe... Do-It-Yourself Ł What the Experts Say Ł Summary 26 Financing Your Small Business This chapter addresses the need to develop a business strategy—and eventually a business plan—to enhance your chances