Don’t Fear Lawyers

We are often brought in to fix a problem that has gotten out of control.  Often, the problem could have been prevented with very little work from an attorney.  When asked about why the client waited so long to retain an attorney, the answer is almost always “I was worried about how much it would cost.”

That fear causes problems to get out of control and makes everything more complicated and expensive in the long run.  Without exaggeration, it can mean the difference between five hours of work and five hundred.

Increase Your Bottom Line–Revenues Part 3

In “Increase Your Bottom Line—Revenues part 1” we explained that, generally speaking, the two ways to increase your revenues (ie. your top line; we are not talking about profit here) are:

1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or

2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).

In “Increase Your Bottom Line – Revenues part 2” we explained the two broad methods of increasing your revenues:

1)  Sell to new customers, or

2)  Sell more to existing customers.

We then touched upon the idea of return on investment.

One thing that we see a lot of businesses miss is an opportunity to easily sell more to existing customers.  To do this, you have to know your customer well and identify their need, but if you keep your vision broad, it is often an easier method of increasing revenues than finding new customers.

Amazon is a perfect example of this.  When they first went online, in 1995, they sold only books.  Now, they sell virtually everything.  The idea is simple – people are already coming to us to buy books, we can give them the option of buying music as well.  This has the additional benefit of bringing in new customers too.  They did it again with the Kindle – people are already buying physical books from us, if we give them a method to buy electronic books, maybe we will sell more (there is a tradeoff though, because for every electronic book sold, that is one less physical book).

Note the return on investment concept coming into play here – to expand into music, an investment must be made, but it is a relatively small investment to sell something that Amazon’s existing customers already buy.

The Great Contract Fairy in the Sky

We write a lot of contracts.  We review a lot of contracts.  There is a common misperception about contracts that should be cleared up.

Often, the misperception appears when a client asks us for “X” type of contract.  Maybe it’s a “Service Agreement,” or a “Writer’s Agreement,” or something else.  We then ask for details.  Invariably, we are asked to produce “just a simple, standard form.” 

The impression most people seem to have is that lawyers have a connection to the Great Contract Fairy in the Sky and just pick up the phone and say “can you send down a Writer’s Agreement?  Thanks.”  Sometimes a person will just do a search for the type of contract, and send us what they found to review.

But there is almost never a standard agreement.  While there is a lot of “boilerplate” that can be copied from past agreements, even that is not standard!  For instance, do you want faxed signatures to be treated as originals?  Do you want the contract to be binding as of the last signature date or some specified date? What do you want your remedies to be in case of breach?

It is not a matter of knowing which form to use or having access to the right one.  It’s a matter of putting on paper the expectations and obligations of each side.  You can certainly use something that you find online, or draft yourself.  But you will then be bound to that.

Securities Law–a primer

Every entrepreneur needs to know a little securities law.  Why?  Because when you form your business and want to sell shares to investors, these laws apply to you.  Also, when you form your business and want to invest money in your own company for your own shares, these laws apply to you.

What do you need to know?

1)  Don’t do anything without knowing what you are doing.  To learn what to do, either read a lot about the subject or speak to a lawyer.

2)  The general rule, stated simply, is that the issuance of any securities (most commonly stock) requires registration unless there is an exemption.  Registration is a big and expensive process.  Luckily, there are quite a few exemptions.

3)  If you want to avoid registration (which you want to do if you’re a new company), you need to fit one or more exemptions, both on a Federal level and on a State level.  Some of these require filing forms (such as Form D if you fit one of the Regulation D exemptions on a Federal level), others don’t.  It is very likely that you will need to file a form either on a Federal or a State level, possibly both.

4)  There are deadlines on when you need to file the forms, and they are not long (e.g. 15 days after becoming required to issue the shares).  It is best not to miss these deadlines.

5)  Your company should follow the correct company procedures (e.g. meetings, voting, resolutions) to issue the shares.

6)  None of the exemptions protect you from fraud and disclosure requirements.  You cannot withhold information that an investor might want to know when deciding whether or not to invest in your company.

Increase Your Bottom Line–Revenues part 2

In “Increase Your Bottom Line—Revenues part 1” we explained that, generally speaking, the two ways to increase your revenues are:

1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or

2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).

There are important caveats attached to those two, and a good example.  So please read the first post if you haven’t already.

Let’s look at how to increase the number of sales.  Instead of outlining all options, we can simplify this into two broad concepts:

1)  Sell to new customers, or

2)  Sell more to existing customers.

Keeping these two ideas in mind is very important, especially when you are trying to expand.  Let’s look at the same basic scenario as last time to see why:

In any given month, you sell 100 widgets at $2, for revenues of $200/month.  Now, you want to sell more widgets.  We will assume these are the same exact widgets, and you are not introducing a new product.  How do you sell more?

Sell to New Customers

There are people out there that don’t know that your widgets exist and they don’t know that they need the widgets.  So some sort of marketing campaign could work great.

Sell more to existing customers

These are people that know about your product, but aren’t convinced that they need to buy more than they already are buying.  Increase the value that they are getting from the purchase.  You can do this by providing an easier customer experience (maybe do a survey to learn what might be keeping people away or if there is something that can make the purchase of your product more convenient… something as small as where you sell can make a huge difference), a rewards program, or lowering the price (but see “Increase Your Bottom Line—Revenues part 1” for how this may backfire).  Another great way to expand is by expanding your product line, which we will talk about in a future post.

Getting the Most Return on your Investment (ROI)

Before you choose one of those options and a method for implementing that goal, you need to learn what will give you the most ROI.  Read “How to Solve a Problem” for a brief overview.  In short, work from the ground up with research.  For instance, don’t just implement a rewards program because someone else got a great return from a rewards program.  It might not work for your business.  Learn about why rewards programs work.  A marketing campaign will also remind existing customers that you exist.  So you may get a better ROI there.  Look at what your competition does and how long they have been doing it.  Chances are, if they have been doing something for a long time, it works.

How to Solve a Problem

Too many people try to force their idea of a solution as the only solution to a problem they are facing.  In other words, when faced with a problem, they come up with one solution and try to make that work.  This inevitably fails.  The first step when facing a problem, whether it is in litigation, business, or otherwise, is to explore all possible solutions.  Choose the solution that is most likely to work and bring the best result, not just the solution that you hope will be the best.  Do not blind yourself to other avenues that may work, and may work better.

In other words, when presented with a square hole, do not try to force a round peg into it.

There’s no such thing as a “Missed Opportunity.”

Many entrepreneurs and investors are approached with business deals which are pitched as a great opportunity.  This is no different than high-pressure sales tactics when shopping for a car, or when sitting through a timeshare presentation.  In all of these, the person doing the pitching (the salesman) is playing off of the other person’s FOMO… Fear Of Missing Out.

FOMO is a mixture of many basic human emotions.  But a sales technique utilizing this can always be spotted with the basic message of “act now or you will regret missing this opportunity.”  As a result, you will be given a tight deadline with consequences if you don’t act.  For instance, if you are running a business distributing widgets and a vendor says “the price is $X if you sign up for a year contract today, otherwise it rises to $Y,” you will not have the time necessary to shop for other widgets and compare price and quality.  If they really have a good product at a good price, they don’t mind you shopping around!

Making matters worse is that once the deal is closed and the money is invested, it is human nature to be blinded to a bad decision, and thus, make similar bad decisions in the future.

Increase Your Bottom Line–Revenues part 1

A couple of weeks ago, we wrote a primer into increasing your bottom line.  As a reminder, there are two basic items of focus:

(1) Increase your revenue,

(2) Decrease your costs.

As the title above implies (not so subtly), this post is part 1 in answering the question: How do you increase revenue?

First, it is important to understand the question.  The question focuses on revenue and revenue only.  That is, the total amount (the “gross”) of money flowing into the business. This is not your “profit margin,” or your profit, or your bottom line.  In fact, many businesses suffer the problem of increasing revenue, but decreasing their bottom line.  This can even lead to a loss!

You might be skeptical about this last point.  If a business is bringing in more money, how can it be losing money?  You will just have to trust us.  It happens more often than you think.  This is because there are hidden costs to increasing sales – you might spend more on advertising, shipping, employees, etc.  Each of these expenses might decrease your per item profit margin until some, or all, of your items are actually selling at a negative profit margin and you don’t even realize it!  But that will have to wait for a different post.

So, how do you increase revenues?  Like our last post, it may seem obvious, but it’s more complicated than it sounds.  Here are your two options, stated a little inaccurately (you will understand why a little later):

1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or

2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).

Here is a basic idea of how these two interplay with each other.  But since this is just an overview, we are not going to touch upon the intricacies such as marketing (which targets (1)) and how that might lead you to change your price (either up or down).

In the second example above, note that this would double your revenues, all things being equal. This is an important caveat – if we double the price, we would expect the number of sales to fall.  That is, it would directly affect number 1 (how much depends on the elasticity of demand.  Different items have different rates of change).  If sales fall, then revenues decrease.  At some point, the sales will fall so much that your revenues actually decrease.  So, it is absolutely critical to know whether your price increase will lead to lower revenue.

This works in the inverse as well – decreasing price per sale can increase revenue by increasing sales.  The increase in sales may (or may not) offset the decrease in price.

For example:

In any given month, you sell 100 widgets at $2, for revenues of $200/month.  Let’s say you raise your price to $3.  Now you find that you only sell 20 widgets/month, for revenues of $60/month, a big decrease.

So, you decide to lower your price to $1.50 and find that you now sell 200 widgets, for revenues of $300/month, a big increase.

It can work the other way as well: maybe when you lower your price to $1.50, you only increase to 125/month, for revenues of $187.50 per month, a DECREASE in revenues from your original price.  Now, lets say you increase your price to $3 and find that sales only drop to 75/month, for revenues of $225/month.

So you can see that an increase in revenues don’t always come from an “increase” of sales or price, rather it is a “change” in sales, price, or (usually) both.

Forming a New Business: California vs. Delaware/Nevada

Business clients often come to us after forming their Corporations or Limited Liability Companies in other states. Often, the client made this decision because someone told them that another state (usually Delaware or Nevada), is more business friendly than California. Although we agree with this statement, incorporating in a business friendly state rarely gives our clients, who hire us because they do business in California, any advantage.

If your corporation enters into repeated and successive transactions of business in California, it must qualify to do business in California no matter where it is incorporated. If the owners/managers of your business are located in California and do business form California, you must qualify to do business in California. You will be subject to California’s franchise tax on net income for business done in California which requires a yearly minimum payment of $800, whether or not your business makes any money. You may also be subject to jurisdiction in California courts, if your business satisfies the “minimum contacts test” in its dealings within California. This negates many of the benefits you get from out-of-state organization (low taxes, or, in the case of Delaware, specialized business courts).

There are some situations in which out of state incorporation could be beneficial for a California business. If you intend to go public at some point, you may have to reincorporate in Delaware at that time, and initial incorporation in Delaware will save you some time and expense. If your CA business will be one of a number of subsidiaries of a parent corporation located somewhere else, or if you plan to locate your corporation’s principal place of business outside CA, you may be able to gain an advantage through out-of-state incorporation.

If your business will have a substantial connection to California, you should consult a California attorney before choosing to organize your business in another state.

Increase Your Bottom Line–a primer

Everyone wants to increase their bottom line; that is, their profits or the “net.”  But too many people do not have a strategy to do so.  It is important to have at least a basic understanding of how to increase your profit.  For instance, you can spend money on advertising, but before doing so, you should at least have a basic understanding of what you hope to get out of that – brand expansion, direct sales, etc.

The first thing to know is that to increase your bottom line, you have two basic options:

(1) Increase your revenue,

(2) Decrease your costs.

These seem obvious, but we often break it down that simply for people and it turns on a light bulb.  Another realization that seems obvious is that these two things are not mutually exclusive and can happen at the same time.  More importantly, the best business decisions will meet those two goals at the same time.