You’ve had a ‘lightbulb’ moment, but where do you go from here? We speak to Jonathan Sparks, who offers creative legal ideas to keep the fuel burning in every entrepreneurs’ truckload of thoughts and ideas; we ask him: how does a simple idea become a successful business venture?
Q: So, an entrepreneur has approached you with their business idea: what should be their first course of action?
A: Start by determining if that particular idea is worth taking all the way through to implementation. A good entrepreneur will be flooded with “good ideas” for businesses — based on my experience and that of my clients, we receive at least one good idea from the “cosmos” a week; but only about one quarter of them are worth further discussion. Then, commit to sticking with your business idea for the long haul. If the business owner’s idea is not near-guaranteed to turn a profit within the first two years of implementation, entrepreneurs will usually run out of steam before they get to profitability. Stress test the idea. Generate hypotheticals and contingencies and find solutions to meet those challenges on the front end. Be prepared! Finally, if it all checks out, it’s time to move towards formally setting up the new entity in a way that will protect your assets and reduce risk.
Q: From this, which [legal] area is more important to deal with firsthand, (i.e., should entrepreneurs consider IP, Contract, Financial Agreements, Commercial Leases etc., first?)
A: Usually, the first legal issue to tackle is your limited liability. It’s a simple formality to set up a new company — but if it’s not done correctly, all of your personal assets could be taken from you in a lawsuit. Once your limited liability is in place, we then move to the next best forms of protection, with things like customer contracts, IP protection, and employment contracts.
Q: After all that’s established, how does their initial business idea become a small business? Can you share the important ‘behind the scenes’ new businesspeople often are unaware about?
A: The exciting thing about being an entrepreneur is that in the beginning you are starting fresh with positions for a receptionist type person, a sales person, an HR person, an accountant, a manager, a board of directors, a compliance person, someone managing marketing and operations, and it goes on. The bad part is that in the initial stage the business typically can’t afford to hire anyone yet. So, the business owner ends up wearing all of those “hats”. It’s manageable at first, but it can become difficult to hold yourself accountable to doing all of the things that must get done for each “job” in order to meet your goals. In addition, it can be difficult at the least, to hire and then delegate these jobs to new people that, normally, will not be as good at those jobs as you were. In my experience, the difference between successful entrepreneurs and very unsuccessful ones is simply whether they’re disciplined enough to do what needs to be done on the front end, and delegate it out as soon as they have the income to support a new hire. Like I said, the new ideas are not the issue for entrepreneurial business owners; it’s whether or not they actually implement.
Q: Going from a small business to medium: can you share the key steps towards a strong partnership or merge?
A: Partnerships are always hard. I’ve known many successful partnerships, but it’s usually a relationship between very different individuals — and entrepreneurs can add in a layer of “eccentricity”. Growth through mergers and acquisitions, where the prior leadership team stays on are just as challenging, because you are merging cultures and qualities of multiple people. The key to a successful partnership is guaranteeing that no single partner can take advantage of another. This is best done contractually, and as early as possible; because in the “honeymoon stage”, when there’s no money coming in the door, partners are very reasonable. If they’re unreasonable in this stage, well, then you know not to enter into the partnership, and you’ve prevented a nightmare. A good partnership agreement handles a great amount of contingencies, gets everyone on the same page, removes perverse incentives, and fairly captures the intention of the business owners before they actually do business together. It pre-determines the path forward in cases where a partner’s family situation changes drastically, such as the need to leave to take care of family in another state, or a marriage or divorce. A bad partnership agreement could allow one partner with zero investment capital or expertise to stop working entirely, but still take a huge member draw from the company just like the other workers that are actually breaking their backs. Or it might neglect to implement the intellectual property protection or restrictive covenants that are necessary to prevent jettisoned partners from becoming the business’s worst competitor. Partnerships live and die by their partnership agreement. Mergers, separately, have just as many options as a partnership agreement, with the added disadvantage that business owners have not been together from the start. You have to deal with many of the same contingencies that have to be taken care of, but often the “sellers” in a merger plan to gradually step out of the company. This relationship must be outlined specifically—ideally in a contract, so that everyone is on the same page ahead of the merger. One of the saddest calls I’ve received was from a person who purchased a company, only to find that the seller, after taking all of her money, was “stealing” her clients and becoming her biggest competitor.
Q: Finally, in order for businesses to grow and progress successfully, a lot of protection against external factors is needed, such as strong relations, to sound contracts. What do you think is an ever-present issue with today’s economic landscape, and how can new businesses protect themselves from falling under?
A: The biggest issue by far is a general lack of quality legal advice. Business owners are faced with a choice: hire a big law firm that is less likely to work efficiently, or make use of one of the online robotic “fill-in-the-blank” services that often misses crucial details about your unique company. In order to be successful, a business must have quality legal support from attorneys that understand the many stages of business. It’s even better if the firm knows what it’s like in real life— sometimes, you have to roll up your sleeves and troubleshoot a printer, or call on some accounts receivable! A good business attorney can spot the land mines along the way for you, so your business’s growth is not hindered by unnecessary liabilities.
Read More about Jonathan’s interview with Lawyer Monthly.
Notice: This website consists of attorney advertising and opinions and does not establish any attorney-client relationship. Attorney-client relationships are only formed upon signing an engagement agreement. Sparks Law cannot guarantee results; past results do not guarantee future results.