By Stephanie Doughty
Though I am lured into writing yet another article expounding on the effects of COVID on business in the modern world, I believe it’s time to renew discussions about things we can control. Emerging companies can’t continue to ignore the fundamentals of business when there are still so many outcomes we can govern.
Choosing to put the disruption of COVID aside, let’s discuss a couple of the most common entrepreneurial challenges. I’ve learned through my two decades of working closely with business owners as a financial consultant and having been a small business owner myself; the standout challenges facing entrepreneurs are cash and resources. Admittedly, this is not a groundbreaking discovery. But maybe the difference between successful companies and their less successful counterparts is having a full understanding of what cash and resources mean and when to ask for help.
Successful entrepreneurs know cash isn’t just raising capital. Fiscal challenges include tax planning, valuation, transactions, cash-flow, and a host of other equally critical financial matters. Resources include talent retention, compensation, benefit plans, compliance, and all things related to human capital. Though the list is daunting, and some areas may be outside of your expertise, these are all areas you can control. Let’s look at a few examples of their impact and importance.
Have you heard of Qualified Small Business (QSB) Stock? Recent tax reform has renewed interest in this long available tax planning tool. QSB Stock can be eligible for a capital gains exclusion of up to 100%. The exclusion is capped at the greater of $10 million or ten times the adjusted basis of the stock. Obviously, you’re not going to offset tax on $10M without a few restrictions, but the potential savings can easily be worth the extra hurdles to qualify. Though it is never too late, to maximize your benefit, this should be planned for in the early stages of the business life-cycle.
Are you taking advantage of the R&D tax credit? If claimed correctly, early-stage companies can get up to $250,000 in cash refunds per year. Profitable companies can reduce tax liability, and companies preparing for a sale can use them to increase valuation or offset capital gains. Most of these benefits are still applicable if you are in a net operating loss. All businesses should investigate this credit. This is open to companies of all sizes and a very broad group of industries.
Do you know the value of your intellectual property? Valuation is a critical component throughout a company’s lifecycle. In a company’s early stages, the question of value can arise as you look to raise capital and ensure the equity transferred to investors is reflective of fair market value. As you grow, your fair market value will play a vital data point in issuing stock options to employees. For companies with valuable trade secrets, there are even insurance products to protect these specific intangible assets.
Do you have a plan in place to recruit and maintain high caliber talent? A key component to disrupting the market is having the best and brightest talent available. Being successful at hiring and maintaining this level of skill is offering a competitive benefits package and knowing how to navigate the complex tax issues. Most emerging companies are positioning themselves for an eventual transaction. A component of a successful transaction is thorough compensation and benefits due diligence, as well as change control planning.
The items listed above are just a few examples of how knowledge and planning can have a significant impact on the success of your business. The timely utilization of just these benefits could ensure the retention of expert staff, immediate increases to cash flow, and potentially save millions of dollars in taxes on future capital gains.
I am often surprised by how few companies take advantage of these essential planning tools during the early stages when proper planning is so crucial. How many businesses failed because the owners didn’t ask for help? Most successful entrepreneurs engage consultants. Please don’t wait until it’s too late to qualify for early-stage incentives, or the restructuring required to qualify is too significant to surmount.
Success requires a holistic approach to business management and planning. It’s never too early in a company’s lifecycle to plan for success. Recognize the importance of sound advice and never settle for anything less. Especially in these challenging times, your emerging company deserves every opportunity available.
Additional information regarding these and a multitude of other planning opportunities that may be right for your business can be found on Alvarez & Marsal Taxand – Emerging Companies, or you can email the author directly.
