There are two professionals every business will need early on: an accountant and a lawyer. The reasons for hiring an accountant are pretty obvious, you need someone to help you set up your “chart of accounts,” review your numbers periodically, and prepare all of your necessary federal, state and local tax returns.

The reason for hiring a business attorney may not, however, be so apparent. A good business attorney will provide vital assistance in almost every aspect of your business, from basic zoning compliance and copyright and trademark advice to formal business incorporation and lawsuits and liability. First, some general rules about dealing with lawyers:

If you are being sued, it’s too late. Most small businesses put off hiring a lawyer until the sheriff is standing at the door serving them with a summons.

The time to hook up with a good business lawyer is before you are sued. Once you have been served with a summons and complaint, it’s too late–the problem has already occurred, and it’s just a question of how much you will have to pay (in court costs, attorneys’ fees, settlements and other expenses) to get the problem resolved.

America’s judicial system is a lot like a Roach Motel — it’s easy to get into court, but very difficult to get out once you’ve been “trapped.” Most lawyers agree that while nobody likes to pay attorneys’ fees for anything (heck, let’s let our hair down–nobody likes paying or dealing with lawyers, period), but the fee a lawyer will charge to keep you out of trouble is only a small fraction of the fee a lawyer will charge to get you out of trouble once it’s happened.

Royalty financing is an advance against future product or service sales. The advance is paid back by diverting a percentage of the product or service sales to the investor who issued the advance.

Royalty Financing is appropriate for established companies that have a product or service, or emerging companies about to launch a product with high gross and net margins. Also for companies with elastic pricing–i.e., the ability to raise prices without impacting sales. Appropriate for companies that experience a quick cause and effect between marketing activity and sales increases.

Royalty financing may appeal to investors who typically do not make investments in private companies. In addition, angel investors; venture capitalists, and even state, city or regional economic-development agencies can be talked into the concept of royalty financing.

Royalty financing is inexpensive for companies with high-margin products or services. It is relatively easy to find because the technique appeals to a wide variety of investors. In addition, because royalty financing is essentially a loan, it generally does not provoke state and federal securities laws.

Many companies still in their formative stages face a difficult dilemma when looking for equity capital. Equity investors, whether they are angels or venture capitalists, often demand a big piece of the company because of all the risk they incur. The problem is compounded by the fear that, if the organization gives up 30 percent, 40 percent or even 50 percent of its equity on the first round of outside financing, nothing but a grubstake is left by the time the company goes public.

Enter royalty financing, which eliminates the dilemmas of equity financing by removing them from the picture, explains Peter Moore, founder of Rockwater Capital Management, a consulting firm in Portland, Maine, that helps companies raise capital, and a proponent of the royalty financing technique. “Instead of selling equity,” Moore says, “a company simply pledges a piece of its future sales against an advance provided by the investors.”

Here’s how Moore structured a financing transaction to help a software company turbocharge its sales. Rather than go after angel investors, Moore approached the Greater Portland Building Fund, and Coastal Enterprises Inc., quasi-public economic-development organizations charged with developing business in the state.

But instead of a loan or equity, Moore sought for his client an “advance” of $200,000 against its future sales. If the advance were made, each investor would get 3 percent of the software company’s sales for 10 years, or until they received payments totaling $600,000. This $600,000 would represent the original $200,000 investment, plus $400,000.

At the broadest level, for the investors to earn the agreed-upon $600,000 within the maximum allowable time frame, the software company would have to generate total sales of $20 million over 10 years. Although the software company had less than $1 million in sales at the time, it had over the course of its three-year life doubled sales each year.

“This was a big selling point,” Moore says. Moreover, investors were comforted by the fact that the firm’s software program, which helps companies manage hazardous-waste streams, meant there were 300,000 potential customers.

The deal was structured so that the time frame was flexible-up to 10 years to make repayment-but the return, $600,000, was not. Because of this, the return the investors could earn was variable as well and ranged from pretty good to exceptional. Specifically, if the software company repaid the advance in 10 years, the investors would earn a compound annual return of 11.6 percent on their investment.

If, however, the company’s sales mushroomed, and $600,000 was paid to the investors in five years, their compound annual return also mushroomed to 24.5 percent-a rate that even an institutional venture capitalist would have to admire.

It took Moore and his client about four months to hammer out all the details of the deal. One of the key terms he negotiated was for a delay in the commencement of royalty payments. Specifically, royalties did not accrue until 90 days after the deal closed. In addition, the actual royalty payments did not have to be paid until 60 days after the revenues were recognized.

“All in all, it was five months from the time the company received the financing until the first payment was due,” Moore says. “This gave the owners the time they needed to put the capital to work and start producing sales.”

It doesn’t make good business sense to spend large amounts of capital to store and maintain hard copy information. As with all aspects of a company’s business, using technologies that will increase productivity and reduce costs is vital to your profitability and success.

Because of the cost-savings available, many companies are changing their attitudes toward data storage and are looking at innovative ways to handle the flow of data. Today, there are several inventive and cost-effective technologies available that can streamline the processing and storing of hard-copy data, which, in turn, will save you money. Money that you can use to improve systems and invest in the future of your business. Let’s take a look at one of these new systems.

Defining the Solution

Digital archiving, also known as scan-to-file, is one of the best methods around for processing and storing documents. Simply put, digital archiving is the process of converting paper information to a digital representation of the original document.

These highly cost-effective conversions allow information to be stored and accessed easily, enabling companies to save time, storage space, money and resources, and increase their productivity and security.

Over time, digitally storing information will reduce the costs of document storage. It will reduce employee workload associated with filing, retrieving and re-filing paper documents. Additionally, it provides easy access to search, retrieve, read, print and e-mail imaged files.

Digital archiving also allows for expedient file transmission over the internet or an internal network. And it creates a flexible, electronic database of corporate documents, such as financial statements, required regulatory documentation, client and patient files, tax and legal documents–all of which can be password-protected to restrict printing and content extraction.

And there’s more good news: The process is simple. Information is scanned and stored on one of a number of forms of media, most often on CD-ROMs, but also on hard disks or other file formats. You then store the digital data in a secure location, either onsite or away from your business.

The digitally stored information can easily be retrieved by simply loading a CD-ROM or disk onto any computer. The document appears just as it did in its original hard copy form and can be saved to the computer, e-mailed or printed.

Digital archiving enables companies to put unlimited amounts of information onto CDs. Imagine taking 35,000 pages of paper and converting it to three CDs.

If you think digital archiving may be right for your company, here are a few questions to ask your visual communications partner:

1. How is information scanned? Who does it and how long does it take? Information can either be hand-scanned or fed into a scanner based on the type of data being scanned. Scanning should be done by a team of professionally trained and certified digital specialists, who know how to scan and archive your important documents. Scanning times will vary based on the amount of information being converted. For example, 1,200 pages can take up to four hours to complete.
2. Is the information secure while it’s being scanned for digital archiving? Most likely it is, but you need to ensure that the vendor has a dedicated and secure digital archiving imaging area designed with your sensitive documents in mind. Additionally, you need to verify that the information won’t be shared with any outside source, and your vendor should return all documents upon completion. In some cases, you and the vendor may determine that the scanning should be done at your location.
3. Where is the information stored? Typically, your vendor should store the information on CDs that will be returned to you for storage.
4. What format will the digitized documents be in? At a minimum, documents should be converted to PDF because that’s the widely accepted format for digitized information. Additionally, PDF formatting is approved and in use by a host of local, state and federal agencies. However, based on your needs, files can also be created in Word and other industry-specific software.

Too often, overnight success can quickly become a company’s worst nightmare. A small business that lacks the capital, staff or infrastructure to handle a big order or nationwide publicity can promptly get crushed when its product or service becomes a hit.

Even though every company should have a strategic plan in place before the big day arrives, most small business owners are so busy just trying to survive that planning usually gets put on the back burner. That’s why we’ve have put together this 10-step survival guide to help you think fast and react quickly when you wake up one morning to find the world beating a path to your door.

1. Take a deep breath. Don’t max out your credit cards, splurge on a big bottle of champagne or do anything crazy. While it’s only natural to want to celebrate the good news, remember that a big contract or great press doesn’t mean dollars in your bank account–at least, not today. So hold off on that Ferrari or tropical vacation.
2. Map out a strategy. Make a to-do list, crunch the numbers and marshal your human and production resources. It’s always easier to fight a battle on paper (or a computer spreadsheet) than to shoot first and ask questions later. No matter how much pressure you’re getting from your customers to deliver the goods right now, you need to take the time to sit down with your partner or staff to map out a plan of attack.
3. Get the money. Before you go on a hiring binge or start placing orders overseas, it’s important to figure out how much working capital you’re going to need to meet the market demand. Because employees and manufacturers generally won’t wait until you’ve sold the products and collected the money before you pay them, you’ll need a source of capital that you can tap immediately.
4. Reach out for help. Call on suppliers, personal contacts and the Internet to find extra hands to help you. If you think you can do it alone, think again. No matter how hard you work, there are only 24 hours in a day and you’ve got to sleep during seven or eight of them. That’s why it’s important to reach out to people who can help you.
5. Forge production partnerships. A small business making handcrafted soaps is going to be hard-pressed to fill a million-unit order from a large national chain completely on its own. That’s why it’s important to partner with manufacturers in the United States and overseas who can take your samples or prototypes and produce them in large quantities.
6. Create a distribution network. As news of your product or service spreads, you may start getting orders from consumers and retailers all over the country. If you’re like most businesses, you’re going to need help selling and servicing those accounts. Rather than hiring a national sales manager and opening offices in major cities, a more cost-effective option may be to sell your product through manufacturers’ reps.
7. Communicate with your customers. Communication is the lifeblood of any business relationship, but it’s even more important when your product or service suddenly takes off. The biggest mistake a business owner can make is failing to warn customers of shipping or production delays until it’s too late. This is especially critical in the apparel and toy industries where seasonality is important.
8. Leverage your success. The hardest thing about achieving overnight success is keeping it going. The last thing you want is to get stuck with a warehouse full of pet rocks. Creating line extensions like the Chicken Soup books or the For Dummies series is one way to keep your brand alive. Another is to find new markets for your products and services or new ways to publicize them.
9. Invest for the future. While it may be tempting to reap the profits from your hit product right away, it’s important to re-invest some of those profits to help your business grow. Whether this means paying down debt, buying new equipment, hiring another employee or opening another location, don’t pass up this opportunity to make your money work for you. It’s always cheaper to put your own cash to work in your business than to borrow money from a bank or give up equity to an investor.
10. Learn from your mistakes. After the excitement of the initial sales rush has died down, take a few hours to sit down with your staff to figure out what went right, what went wrong and what you think you could do better in the future. This will help you put a strategy in place for the next time you come out with a hit product–which could be sooner than you think!

More Resources

Got a hit on your hands and don’t know where to turn? Check out the Web links below to get the help you need today.

• craigslist: This is a great place to find freelancers and independent contractors, and it’s free to search and–in most cities–post.
• VendorSeek: This online marketplace helps match companies with vendors of products, services, equipment and staffing.
• Net-Temps: Here you’ll find employment listings for employers and seekers of full-time, part-time and temporary jobs.
• Manufacturers’ Agents National Association: This website offers a searchable directory of manufacturers’ reps and agents in the United States and worldwide.
• Credit-Card-Source.com: Go here to find help navigating your way through the maze of credit card offers so you can pick the best card for you and your business.

Venture capital is garnered from professionally managed funds that have between $25 million and $1 billion to invest in emerging growth companies. It is appropriate for high-growth companies that are capable of reaching at least $25 million in sales in five years.

The supply of venture capital is limited. According to recent surveys from the National Venture Capital Association, U.S. venture capital firms annually invest between $5 billion and $10 billion. Many of these investment dollars go to companies already in the institutional venture capitalist’s portfolio.

Venture Capital may be used for everything from financing product development to expansion of a proven and profitable product or service. It is also extremely expensive. Institutional venture capitalists demand significant equity in a business. The earlier the investment stage, the more equity is required to convince an institutional venture capitalist to invest.

Venture Capital is extremely difficult to acquire. Institutional venture capitalists are choosy. Compounding the degree of difficulty is the fact that institutional venture capital is an appropriate source of funding for a limited number of companies.

First Steps

Using a shotgun approach means you send your business plan or some derivative thereof to as many venture capitalists as possible and hope that the numbers alone will strike one that has been looking for a deal such as yours.

The shotgun approach has its proponents and its critics. For instance, Gordon Baty, a partner with Cambridge, Massachusetts-based venture outfit Zero Stage Capital, says, “Of every 100 plans that we get, 90 are completely irrelevant because they do not match our investment criteria regarding the industry, stage of development, geographic location, or the amount of capital we typically invest.” Of this misguided bunch, Baty says, “our receptionist can weed out their business plans.”

Fair comment. But the shotgun approach has one significant advantage over the rifle method. The latter relies on intensive research that is based on a venture fund’s past investment patterns. What your research will fail to turn up is all the available venture capital funds that have now decided to focus their energies on restaurant deals, business service companies, publishing companies or Internet-content businesses.

In many cases, your mail will be well off the mark, and your letter will be weeded out by the receptionist-or the college intern sorting the mail. For instance, some venture capital firms might specialize in wireless communications companies from the so-called first stage on, while your company, which makes disposable medical devices, is in the development stage.

A more reasonable approach might be to take at least one pass through your institutional venture capital sources and weed out the obvious misses for your particular line of business. Even a quick screen prevents many obvious misses. Of course, such an effort, while seemingly logical, undermines one of the chief benefits of the shotgun approach to begin with. That is, it lets you reach investors who may have changed their historical investment criteria and are now looking for companies like yours.

If you can mail your letter, business plan summary and business reply card for 50 cents each, it’s worth going after the 1,200 to 1,800 traditional sources of institutional venture capital.

The rifle approach, which favors limiting your search to 15 to 20 well-researched targets, is the one favored by most attorneys, accountants, consultants and other assorted experts. Venture capitalists seem to favor it because a highly targeted approach by entrepreneurs replaces an abundance of irrelevant opportunities with a manageable number of interesting ones.

The rifle approach is simple but time consuming. Basically, you search by five variables and then rank your candidates by how well they meet these criteria. The five key search variables are:

• Searching by line of business: Most venture capitalists specialize in one or more industries. It’s the focus on a particular technology, industry or business that supposedly lets them pick winners in their formative stages. This specialization is good news because it allows you to easily identify venture capitalists who should be interested and those who probably won’t be.
• Searching by geographic preference: The very hands-on approach of institutional venture capital investing makes distance a factor. That is, to be a board member, and perhaps be intimately involved in a company’s development, a venture capitalist would find it difficult to invest in companies that are 2,000 or 3,000 miles away.
• Searching by stage of development: In the same way that venture capital investors specialize in one industry or another, they also specialize in different stages of development. That is, some companies invest in early-stage companies, while others invest in more mature companies.
• Searching by leadership status: In the world of venture capital investing there are leaders and there are followers. The leaders, also known as “lead” firms, are those that have recognized expertise and who conduct extensive due diligence on their prospective portfolio companies. The followers, known as “follow-on” investors, are more passive. They simply invest alongside the lead firms.
• Searching by deal size: Institutional venture capitalists generally place upper and lower limits on the sizes of their investments. These limits are closely related to the overall size of the fund the venture capitalist is managing. VCs with $250 million to invest typically don’t want to look at your $500,000 deal. Why? Because to invest the entire fund in $500,000 increments means the firm would have to invest in 1,000 deals.

If you follow the above methodology, your list of prospective venture capitalists should be short-perhaps 15 or fewer.