Keeping Good Records – An Often Overlooked Element of the Business Exit Plan

With all of the long nights and frantic days that can come with starting and running a business, the practice of keeping paperwork neatly organized can easily fall to the bottom of a to-do list. It is certainly understandable that you might consider time spent networking with potential customers and funding sources to be far more important than making sure your company’s contracts are organized in a logical order; however, having a good handle on your paperwork can be more important than you may think.

If you suddenly find yourself awash with customer demand, you may also soon find yourself across the table from a sophisticated investor that is offering either to invest a large sum of money or, hopefully, to acquire your business for an even more tidy sum. That investor is going to want to conduct its due diligence on your business to ensure it is worth the money. The diligence process can be lengthy and expensive for both the investor and you.

Tom Hanks, The Making of Another Major Motion Picture Masterpiece (Albert A. Knopf, 2023)

Until I read this book, while I’m a fan of movies, I hadn’t thought about the movie business much. On a regular basis, new movies appear fully formed and ready for consumption at our local theater or through our favorite streaming service. Two hours (give or take) of entertainment emerge from a black box called the “industry” in, for better or worse, final form. I’d heard the dark allusions to funky accounting relating to measuring the profitability of the product, but had no real idea as to how it is manufactured.

Turns out that each film is the product of entrepreneurism on steroids. Conceiving the idea for the story, evaluating the market for the product, arranging financing, and assembling a team to realize the filmmaker’s vision are steps any entrepreneur will readily recognize and can likely translate to their own business opportunities.

Woodstock for Capitalists

Each May, thousands of people flock to Omaha for this event, more prosaically known as the Berkshire Hathaway annual shareholders meeting. All it takes to attend the party is to be considered a stockholder. A share of the company’s Class A shares (currently trading at about $525,000) might be a little bit beyond the reach of many, but a share of its Class B stock (about $350) will also do the trick.

The event is a true spectacle, offering a 5K run, comedy skits, disco balls, music, celebrities, and even visits by characters from the Berkshire Hathaway portfolio of companies (such as the GEICO gecko).

Bring Hersh Home Now

My apologies for not writing about interesting developments in data privacy or intellectual property. My heart is full of sadness and my mind aches for answers to the horrors inflicted by Hamas on innocent civilians.

Young people enjoying a music festival. Babies murdered. Elderly holocaust survivors taken hostage. Parents murdered in front of their children. There is no moral equivalence or justification for these brutal evil acts.

Just a few weeks ago I was discussing the upcoming NBA season with Jon Polin. We are in a fantasy basketball league and love to talk about the Minnesota Timberwolves. We both agree that the Rudy Gobert trade was horrible, but Anthony Edwards is a star.

What's the Catch?

As fall starts, so does collegiate sports. I recently sat down to watch one of the numerous Saturday college football games and heard the announcers discussing all the money this year’s collegiates were making through their recently sanctioned ability to use their name, image, and likeness (NIL).

This led me to thinking about how these young entrepreneurs are rapidly building their brands and generating income, but at what cost?

A recent article published by ESPN discussed an NIL deal involving current Chicago Bears rookie Gervon Dexter. Dexter signed an NIL deal with Big League Advance Fund in 2022 while attending the University of Florida. Dexter’s deal provided for Dexter to receive a one-time payment from BLA of $436,485 in 2022 in exchange for 15% of Dexter’s pre-tax NFL earnings for 25 years. For Dexter, this means paying BLA an estimated $1.008 million based on his present NFL contract terms ($6.72M over four years).

Can You Use Someone Who Isn’t a Registered Broker to Help Me Raise Capital?

Tackling a question that so often entices entrepreneurs – can I pay someone to help me find investors? When funding a new enterprise, how can a scrappy small business owner break into those upper echelons and c-suites where high-dollar investors are presumably just looking for the right start-up to fund – folks who would recognize the brilliance of your vision and gladly sink capital into your enterprise…if only they were aware of it!

It’s about at this point that many an entrepreneur remembers they have a rich relative, or a deep pocketed friend or business connection, or maybe just know a high roller that knows a bunch of other high rollers that can be convinced to invest. And this high roller – let’s call him Rich Uncle Pennybags – not only knows all the Sharks (see this post and this post by fellow entreVIEW authors if you’re interested in more about the “Tank”), he will be happy to find investors for you in exchange a fee that’s based on the amount of capital he successfully raises for you, so you’re not out of pocket one dollar! Brilliant, right?

And now we’re reached the point where the buzzkilling entrepreneur’s attorney weighs in – in most cases you can’t do this (well, at least legally anyway…). Unfortunately, Uncle Pennybags’ efforts would likely be deemed “broker-dealer activity”, which is subject to regulation and requires licensure.

Both federal (SEC) and state rules prohibit a person from acting as a “broker” unless that person is registered with the SEC and the state in which the person conducts business. A “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others.” Unfortunately, the rules do not define what constitutes “effecting transactions in securities for the account of others,” but the SEC has identified certain activities that will generally be deemed to “effect” securities transactions, including:

• assisting in structuring a transaction,
• identifying potential purchasers,
• soliciting transactions,
• participating in taking orders for purchase of the subject securities,
• advising investors on the merits of the investment, or
• receiving commission or other transaction-based compensation in exchange for their services.

Well, so what if Uncle Pennybags just introduces you to potential investors? Unlike a broker, someone just acting as a “finder” does not need to be registered, although the line between “broker” activities and “finder” activities is at least a little blurry. In general, a “finder” is someone who merely provides a prospective investor’s contact information to the company that’s raising capital. But remember, by far the biggest red flag for securities regulators is the payment of commission-based compensation; that is, paying a fee based on the number of investors or a percentage of the amount of money invested. We here at entreVIEW urge caution if you want to go down the “finder” road – there’s a possibility it can be done, but only if you really pay close attention to the structure and compensatory arrangements.

Why should you care? You, the entrepreneur, are not the one engaging in unlicensed activity – isn’t that just a problem for Rich Uncle Pennybags? Unfortunately, no – the entrepreneur’s association with an unregistered broker in prohibited by state and federal law, violation of which can lead to fines, penalties, and sanctions. Worse, an investor whose investment was solicited by an unregistered broker may be able to force you to return any money invested. In addition, it could negatively impact your ability to raise future capital and or sell your Company in the future!!

If you still believe Uncle Pennybags and his rolodex can be really helpful, the safest thing to do is to try and work out a compensation arrangement that is not commission-based, such as a flat fee, and limiting his activities to only providing introductory information. And don’t forget other sources of funding that may be available to you—family, friends, and your own connections, small business loans or grants, angel investors, and crowdfunding platforms as discussed in this post.

One Toke Over the Line?

One Toke Over the Line?[1]

As the hazy post-legalization world of cannabis in Minnesota comes into focus—after it became legal to possess, use, and grow the plant on August 1, 2023—challenges and opportunities abound for business owners to take advantage of a new market worth potentially millions.

The trick will be figuring out how to turn the excitement into profits. Cultivators may learn that marijuana—like any cash crop—is subject to the same constraints and external variables that make agriculture an inherently difficult industry to master in general.