VOL. 1.2 – Small Business Series – Stories of Small Business Speed Bumps – The Start Up

Small Business,  Guardianship and Elder Law Resource

Author: Claudia Raessler, Esq.

Recently, I read an article highlighting the 7 reasons lawyers are “hated”.[1] The reasons ranged from those unexplained high fees to the “long-winded narrative ensuring every risk is covered” so the client cannot say – “you didn’t tell me”.  A discussion involving (1) choice of legal entity; (2) why do I need to form an “entity”; and (3) how do I navigate the governance and operational issues is likely one of the very first experiences a client faces in dealing with their lawyer and will “trigger” the hate emotion – especially in a small business setting. 

For the next few weeks we are going to tell the story of the speed bumps encountered by a small business starting with a “closure”  in a series called “Stories of Small Business Speed Bumps”. .We hope the series provides value and yet avoids the need for a reader to check off one of the 7 boxes supporting Shakespeare’s conclusion – “let’s kill all the lawyers”.

The caveat, the objective of this Blog is not to provide a small treatise discussion as to every nuance of a specific area of law.  Rather the goal is to highlight a story or event that requires the coordination of legal and operational thinking to survive the “speed bump”.   The stories are “fictional’ and should not be assumed to provide legal advice involving a specific matter.

The Story:  “We are going to run out of cash and an obituary for a small manufacturing operation – CLOSED – April, 2019 

It’s an old story – Lack of Financial Runway Results in the Closure of yet another small U.S. Manufacturer !

From the beginning the founders of a wool and synthetic yarn dyeing operation knew the path to profitability would be challenging. It would take time, commitment and learning the ins and outs of a business that had essentially disappeared from the U.S. 25 years ago – textile manufacturing. And yet consistent  with a recent quote in a local newspaper, at the beginning the business saw itself as having an “ambitious agenda” to revive what had been a major industrial sector in the region.  Business plans were completed, financial support obtained, a variety of management/leadership strategies considered, consultants talked with.  Throughout the process two co-founders with a committed vision remained willing to invest, were working 60-80 hour weeks and understood the importance of continually looking for ways to address the challenges.

So where were the pitfalls? Again, the well-read and/or experienced entrepreneur will not be surprised by the list that follows:

  • It took longer than planned to reach full production after investing heavily in new technology;
  • Lack of an organized process to implement major changes in operations;
  • Undue reliance on key staff;
  • Then there was – of course – the “in hind sight” view – if management had “only done …”the outcome could have been different.

And then, of course, when the end of the runway was on the horizon and the business was ready for “liftoff’ there was no safety net. The landlord for the business, a real estate developer was tired of dealing with the challenges of a start-up tenant and said “we have had enough” and the lease went away. After all – “we just want to be your landlord – not an investor” with a perfectly reasonable expectation – “pay us on time”. And then, of course, there were the secured lenders who grew tired of the start-up chaos and hearing “next month we will make it to break even”. Just “look at our sales trajectory and what great potential there is.” Then there were also a couple of brave outside investors who said -yes “I can support this because “I care about local  businesses” or “I run a business that desperately needs your services”, but in the end the challenges of doing more was just too risky or the actual cost of providing “high touch” value added services was too much.

Yet, the vision was always a good story and was sincere – “we are a textile business and not building bombs”; the business cared about the environment as the business of textile manufacturing is one of the remaining “evils” of pollution, and finally the success of business was measured in part by creating local jobs.  community oriented. 

 Then there were the customers and extending from the East to  the West coast and into Canada. 

The customers listened, tried hard and, like the business they cared  about U.S. sourcing and the success of  local communities.

Yet in spite of all of this – if one is running a service based business and inadequately capitalized to make it to lift off- a good vision is not enough and the story simply repeats. Lack of access to working capital starts a downward spiral that one can’t seem to pull out of absent a true angel and, angels are hard to come by and in the long run find it difficult to support a vision without seeing a quicker return on capital.  And although banks and other secured lenders may  understand, they are forced to work in the world of “fully collateralized”. Similarly, state and federal programs – wonderful resources – but funds are designed to be short term, expensive and the paperwork intense.

 So where does what should have been a success story for U.S. manufacturing end up? Closed, a loss of 14  jobs and a local business, and dealing with the impact of an  economic loss of a sizable personal investment  and public dollars. Should there be a better ending? Of course, but the answer as to how to successfully travel this pathway seems to be elusive based on what are more than the % of U.S. small businesses closing every year leaving the owners that started with a “vision” answering the question – “why did this happen to us”

NEXT CHAPTER – CASH FLOW STRATEGIES – THE STORY OF WHAT WORKED & WHAT DIDN’T & THE LEGAL CONSEQUENCES

 Additional Resources of Interest

  • Why do Start-Ups Fail After Raising Substantial Funding? Quora Question, 12-16-2016, Paul Cohen, Managing Director – Private Equity and the Story of Webvan.com
  • Medium Article – Legal Resources for Start Ups – “Spaces” – The Start Up Legal Guide, by Howie Liu
  • Unbundled Legal Services – https://www.americanbar.org/groups/delivery_legal_services/resources/

[1] 7 reasons why the legal profession often gets no sympathy, by Marcel Strigberger, the American Bar Association, The Voice, July 25, 2019

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