May 30, 2023
Emerging brands that weathered the lockdowns survived because they embraced technology, became mobile-ready and passed pricing increases onto their customers and clients. Now that we are entering a challenging interest rate, inflation and possibly recessionary environment, emerging brands are likely to survive if they are not overly debt-dependent. In comparison, more mature companies may not be as nimble. Let’s review the differences and how to avoid missteps.
Selecting Legal Structure
Forming an LLC provides the most corporate and tax flexibility and eliminates the shortcomings of alternative entities. An LLC can choose to be taxed like a partnership or traditional C-corp and provides shelter from personal liability. Keeping losses in the entity might make capital-raising easier in the future if investors know there are losses that can provide tax advantages. An LLC also provides for different classes of membership. It is the most practical entity for emerging companies because of its flexibility in capital rights, structure, and tax treatment.
Selecting Capital and Loan Structure
Mature companies have long-term debt. Emerging brands typically do not. Their capital needs and growth trajectories are different.
Emerging brands often start with seed funding from private investors, friends, and neighbors. Emerging brands may also have Small Business Administration financing, which has favorable terms. These capital sources are not particularly interest rate-sensitive and often involve cash equity injections. The legal structure needs to address investors’ needs for returns and a voice in the company. At the same time, the legal structure needs to allow for growth. Avoid structures that prevent additional funding, financing, or growth without full investor payoff.
Shop for money carefully. Consider the metrics investors say they want for restaurants, for example: $1,000 per square foot of floor space, 40% cash-on-cash returns, and unit margins of 20%. If you have these metrics, investors are probably already knocking at your door. If not, most will still take something more modest if the potential is there.
Consider crowdfunding carefully, too. The benefits: low risk for high reward, increased exposure, avoids giving up much equity, allows individual contributions, and validates your concept. The negatives: a relatively low success rate for full funding, preparation time and upfront costs, a competitive marketplace full of scammers, high fees with strict rules, and an already crowded capital raising environment.
Small business administration financing is simple and conventional bank financing that is cheaper because the SBA provides banks a loan guarantee. The borrower must encumber its assets and provide personal guarantees. For loans that do not fit the SBA guarantee mold, there is traditional bank financing, which can take various forms.
Avoiding Legal Disputes
Lawyers should look at key customer, vendor, employment, and client agreements. Having these agreements in plain English with friendly dispute resolution provisions, such as mediation, may avoid escalating lawyer charges. Write agreements with balanced provisions and always treat the counterparty with respect, especially during disputes. Avoid threats. If you intend to litigate, just do it before negotiations harden. This eliminates escalation.
Some disputes allow you to go right to litigation—violations of intellectual property, theft of confidential information, conduct that impairs brand equity. These issues, which impact your reputation, should be carved out of any agreements that otherwise require arbitration.
Document Everything
Truisms are often true. “If it’s not written down, it never happened.” Money can be saved by measuring tasks, performance, and people to compare best practices. Litigation can be avoided if a file is kept of all broken promises committed by business partners/employees and followed up constructively in writing. Address complaints before they fester and use common sense when addressing solutions.
Love Your Professionals
An old butcher shop had a sign: “Cheap meat ain’t good. Good meat ain’t cheap.” So it is with professionals. Get and keep good ones. Accountants will save you money if you utilize them properly. Lawyers will save you money (and sanity) if you heed them. Communicate with your professionals regularly as laws, and strategies, change. Business is about relationships. Fostering better relationships, whether with customers, vendors, franchisees, clients, or professionals, will serve you in the long run.
The full article in its original form can be found here.
Craig R. Tractenberg (’81), a partner at Fox Rothschild, focuses on domestic and international dispute resolution and the development of infrastructure, licensing, distribution and franchise programs. He has been a guest on national television, presented lectures at bar associations on two continents, and published more than 500 articles, papers, and presentations. For over a decade, he has contributed to the Legal Intelligencer and New York Law Journal and has taught as an adjunct professor at Temple University School of Law.