As I get rolling on a new startup with my
partners at Startup.SC, a startup incubator in South Carolina, I am reminded of
a few painful mistakes many entrepreneurs, myself included, make when starting
a business.
Now, if you are starting a business, you probably
have not put too much thought into how you are going to exit. There are, after
all, countless considerations to make as you get started, from applying for
business licenses, developing working prototypes to setting up your website. If
you ever plan to sell your business or bring on investors to grow, how you run
your business from the start is just as important.
Fortunately, it is not difficult to get started
properly. Simply consider these four tips, often overlooked by most
startup entrepreneurs.
1. Prepare
your general ledger.
Setting up your accounting books may seem bland
and tedious, especially for entrepreneurs without experience. Many rely on
off-the-shelf accounting software, which provides general guidelines and
templates to get you started. These are fine and completely acceptable for most
startups, but to fully understand the financials of your company and, in the
future, provide the evidence of the value you have built, you should give your
set up careful consideration. Although a little pricey, it would benefit you to
hire a professional when getting started.
2. Keep
business business.
It is completely acceptable for entrepreneurs to
pay for a variety of expenses with company funds, so long as those expenses
meet the generally acceptable accounting standards (GAAP) for business
expenses. Too many entrepreneurs, however, use company funds for personal use,
trying to justify it with very liberal interpretations of GAAP or simply
improperly reporting.
Not only could this get you in hot water with
the IRS and open you up to a great deal of liability, it will be difficult in
the future to separate these expenses when valuing your company. From the
onset, it is best to just keep all personal expenses out of the business.
3. Report
all revenues.
It is not difficult, and definitely enticing, to
skim money from the business at the start, especially if you do most of your
business in cash. Again, not only could this ultimately get you in trouble with
the IRS, but it undervalues your business in the long run. It is going to be
difficult to prove value and growth if you are not reporting real numbers from
your business.
4. Keep
careful records and receipts.
OK, excluding personal expenses and reporting
all of your revenue just means giving more of your hard-earned money to Uncle
Sam in terms of taxes. Not necessarily true. If you understand the extent of
what you can expense and, more importantly, you keep copious records of your
activity (both for audits and due diligence of potential buyers and investors),
you can ultimately work down your taxable income without hurting the value of
your company.
Grab yourself a good book or, better yet, find
yourself a trusted professional advisor
to learn how to best run your business this way.
I was part of a business team that looked at
investing in businesses a number of years ago. It was not uncommon to meet an
entrepreneur of a small business whose only proof of success and value was a
shoebox full of cash. A few would emphasize that the company was paying for
personal utilities, auto expenses and even groceries and that we should
consider these expenses as part of the value.
The problem was that they often could not prove
these claims satisfactorily because they had not accounted for them properly.
In the end, it hurt the valuation of their company and gave us tremendous
leverage during the negotiations.
Most entrepreneurs are not thinking about an
exit when they are in the startup stages of a business. If you ever have a goal
to divest or grow through investment, how you run your business before you
start is just as important as after.
For
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