This case study was made as this client started with a concept and then systematically built his company to a thriving operation. However, as any business owner knows, the path to success is not an easy one. This business owner enlisted help to develop his concept and proactively navigated the many issues common that most startups experience throughout their infancy as well as their growth. It is through this development and navigation that this case study provides benefit to the reader and aspiring entrepreneurs. I have attempted to summarize the variety of topics and how those matters were identified, considered and ultimately addressed for a successful client representation.
This client hired me initially to address some matters related to his existing business, three Tai restaurants located Ohio. Soon after, he contacted me regarding the pursuit of a new business opportunity, the import of seafood from his native country of Thailand to the United States.
Section 1. Background, History and Owner
The owner, I will call him James, is from a fishing village in Thailand where his family works with some of the largest and most established fish farms in the region, breeding primarily shrimp, tilapia, catfish, and carp. He came to the United States in 1999 to pursue his education and has remained since. James opened the first of three Thai restaurants in 2005 and two additionally in 2010. While operating the restaurants, he encountered some issues related to his food purveyors and enlisted my help with the matter. It was through working with James on his restaurant issue that he had the comfort and confidence in approaching me to assist him with establishing and growing a new business, importing seafood from Thailand to the United States to be sold wholesale to both big box stores as well as seafood distributors serving 12 states throughout the Midwest. James brought forward three individuals that had invested in his restaurants, one being an accountant and the other two solely financial investors.
Section 2. Legal and Tax Considerations and Compliance
After looking at the legal and financial pros and cons of various forms, it was determined that forming the business as an Ohio limited liability company would be the most beneficial from the standpoint of compliance, cost to form, tax advantage, and personal liability. The business’s principal place of business is in Ohio so is made sense to have all contracts designate Ohio as the jurisdiction and venue for any legal issues. After registering the name of the business with the Ohio Secretary of State, I assisted with filing all necessary forms with the appropriate government agencies for State taxes as well as worker’s compensation. Accounts needed to be established with federal agencies for withholding taxes, social security, and other deductions. One of the most important issues addressed at the formation stage for a business is its structure. It was formed as a limited liability company and upon registration with the IRS it was designated a multi-member limited liability company taxed as an S-corporation. This was chosen for two reasons: 1. a large portion of the owner’s compensation could come in the form of dividends as opposed to salary thereby reducing taxes and 2. Dividends could be paid to the owners in amounts defined in the operating agreement, not according to ownership of shares (like in a C-corporation). James was bringing his relationships for product, his management experience and an investment of $100,000. He would also be working at the business full-time as he sold his restaurants. The accountant member was bringing his experience in accounting and would be working at the business full-time in a CFO capacity as well as making an investment of $100,000. The other two members each made an investment of $150,000 and neither would be working directly for the business. It was agreed that James would be the President and a Director, the accountant would be the Treasurer, CFO and a Director and the other two members would be Directors; each Director would have a single vote as to all matters decided by the Board of Directors with the caveat that James break any ties with his vote. James and the accountant each would receive salaries of $48,000 annually and each of the four members would receive 25% of all dividends. An operating agreement is not required by law, but all businesses should have one; even a business that is owned by a single owner (using a declaration in lieu of an operating agreement to address the same matters) should have a governing document. James opened a commercial bank account with him and the CFO as signatories (the bank required a copy of the Secretary of State registration, a notice from the IRS granting the company its federal tax identification number, a copy of the business’ operating agreement and a corporate resolution authorizing James to do so). As the Company was going to be selling to clients in states other than Ohio, the Company’s name was registered with the Secretary of State in each of those states. James established new emails, letterhead, website and business cards. Upon completion of all the aforementioned materials registrations and set up, James was finally ready to start operations.
Section 3. Logistics of Importing Product
James faced many logistical issues related to his importing seafood from the farms in Thailand into the United States. He was prepared for many of these, but some were a complete surprise to him; he was not prepared for both the cost of the newly realized issues as well as that the issues themselves even existed. The primary issue was James had to work with the sellers to agree on price and quantity of all products, when it would be delivered, how it was going to be transported as well as specifically where it would be delivered. Another consideration was how payment would be made to the seller, when payment was due and who was responsible for the quality of the delivered product. I assisted James with negotiating the quantity and price of the various products and we determined the ideal delivery structure was a first delivery in 90 days with subsequent deliveries to be made every 60 days. It was agreed that products would be delivered via ship and delivered to New York. I arranged for a lawyer specializing in customs representation to assist with a smooth international delivery in New York. Payment for the product is an interesting topic; the seller wanted either to be paid in advance or be assured that he would be paid upon delivery. I contacted three large U.S. banks and initiated the process of getting a bank letter of credit; this is the bank’s promise to pay the seller if the client, James, does not. We needed to put a comprehensive due diligence file together for the banks in order to obtain the letter of credit; The information required for the letter of credit included a credit report, balance sheet of the business and James individually, letters of reference and an indemnification agreement. The seller could now deliver and be confident that he would be paid so long as the product is what was agreed upon. James obtained a business property insurance policy so there would not be any gap in coverage between his receipt of the product and shipment to his customers.
Section 4. Logistics of Holding and Maintaining Inventory and Shipment to Buyers
James decided that he would operate his venture from offices in Columbus, Ohio. I assisted James with locating and negotiating with a landlord for warehouse and office space at a cold storage facility. I worked with several trucking companies that could bring his products from New York to Columbus for storage and distribution. Regarding distribution of his products to retail locations, I facilitated getting leases on 20 box trucks and started the human capital development process to get potential drivers. We collectively worked on transportation schedules to meet client demand in the various markets throughout the targeted sales area. Hiring drivers required a whole new level of compliance and attention. To start, I prepared an employee handbook with supporting forms and disclosures. Additionally, James had to establish accounts with the IRS and other agencies to remit withholding amounts as well as to obtain insurance for both the new drivers and vehicles.
Section 5. Accounting and Cash Management
I advised James that the business was well capitalized for day-to-day operations but did not have any extra capital for growth (additional drivers and trucks, sales and marketing, cashflow, slow paying customers, etc.); he responded by communicating this to the other members and each contributed an additional $100,000 of capital. This did not change any of the structures described in Section 2. The other member that was an accountant acted as the day-to-day CFO. He managed the payroll, cashflow, the reporting, prepared and filed the taxes and developed the relationship with the bank. Effective cash management is critical to businesses new and old, but especially those in the active process of growing. I provided the accountant with several tools to evaluate the business’s overall finances and cash management such as deriving the cash conversion cycle and establishing kpi’s for production using best practices. Accurate forecasting of sale and cash flow (minimizing receivables, etc.) are of paramount importance to managing the overall health of the organization. Additionally, we evaluated more specific issues such as buying versus leasing of the capital equipment and the box trucks. In the chart of accounts, we formed a category of assets turned receivables, but I communicated how important it is to not allow receivables to remain uncollected for long periods of time. I advised that anything over 90 days needed to be recategorized as uncollectable and the accounts suspended, while people may see that as overly aggressive, I believe it is very important when a business in new to strictly manage cashflow so as to avoid loss of customers when supply is slow or\even non-existent
Section 6. Sales and Marketing
James decided to focus on making two broad targets his customers, 1. Wholesale distributors; and 2. Big box retail stores. I made sure that he understood that he would need significantly more inventory to supply his customers and more cash to carry the business because of both slow receivables from distributors and big boxes that routinely paid 60-90 days. These two types of customers presented a unique challenge, anticipating tremendous growth, how could the company increase its inventory while simultaneously shortening its cash cycle. I assisted James with the sales and marketing effort. We contacted distributors that weren’t the largest in their region, but ones that had been in business the longest and had deep relationships; this stability would help ensure that our customer would be able to pay our bill much quicker. As far as the big box customers, I had relationships with buyers of two large retailers, Anderson and Whole Foods; these relationships allowed James to get his foot in the door and present his products. After a few months of nurturing those relationships, both organizations gave James a chance to provide products to be sold in their stores. James understood that he would only have one opportunity; he needed to maintain his available inventory, his agreed price structure (each company drove down his profit margin significantly based on volume purchasing) and the quality of his products. It took a full year of cultivating relationships with the right distributors to solidify that line of business as well as to manage the big box store model. At the end of year one James was in a position to bring on sales professionals that could maintain the business he had worked so hard to develop; making the decision to bring on a sales force allowed James to focus on the big picture and manage the business’ daily operations to meet long term objectives.
Section 7. Succession Planning and Buy/Sell Structure
I worked with James and the other members to put a succession plan in place. Some people may wonder why we would address this issue so early in an organization’s formation/development; that is precisely the time to think about the short-term as well as long-term plans for the business as events may occur which require an immediate solution as opposed to a more methodical, protracted approach. There are four members with both a collaborative position for the business as well as a personal one, so it is imperative that a plan be put into place that allows for the continuation of the business as well as protects the investment of each member. To formulate short and long-term plans require assessment of factors such as cash investment (debt or equity), work performed (paid market wages, relationships), time investment, personal guarantees for letters of credit, members’ being married and/or having families, tax implications and age of members among others. Short term plans contemplated events such as the death, incapacitation and/or divorce of a member. We put in place key man insurance policies for the two members working in the business to provide funds for the hiring of suitable replacements and whole life insurance policies insuring the life of each member with the company as the beneficiary to allow for the company to purchase the interest of the deceased based on a predetermined calculation of his respective interest. We contemplated both sides of someone wanting to buy an interest in the business as well as a member wanting to sell his respective interest; I suggested that an offer to buy an interest be brought to the members and each member have the opportunity to sell a prorated share and should someone want to sell all or a portion of his interest, the interest for sale first be brought to the other members with any new member being required to sign and agree to all terms of the company’s operating agreement. The aforementioned terms would be in in the operating agreement while anything related to a particular scenario be memorialized in a minute of action and corporate resolution; this includes all substantive company business as well as director-level decisions. I suggested that in the long-term, the members collectively determine an exit strategy such as selling the business to a larger competitor and/or evaluate whether any family members desire to be involved in or purchase the business. Understanding these issues early will only help to make any decision later smoother and more beneficial to the members.
Section 8. Conclusion
This case study has outlined the various issues common to a new business startup. A newly formed organization must focus its development on best practices for both compliance as well as for its short and long-term growth goals. This case study also demonstrates the breadth of expertise required to achieve success by many of our clients at any stage of their growth. It also highlights the need to reach out to experts and obtain professional counsel to help ensure your success.