Emerging brands have weathered the lockdowns and are right sized. They survived because they embraced technology and were able to pass pricing increases to their customers and clients. They are mobile ready and loving it. Now that we are entering a challenging interest rate, inflation and possibly recessionary environment, emerging brands are likely to survive these challenges because they have not been overly debt dependent. In comparison, more mature companies have more infrastructure and may not be as nimble. Let’s review the differences and how to avoid missteps.

Selecting the Right Legal Structure

Formation of a limited liability company (an LLC) is the best practice for formation of an emerging brand. It provides the most corporate and tax flexibility and eliminates the shortcomings of the alternative entity formations. An LLC can choose to be taxed like a partnership, but provide shelter from personal liability that a partnership cannot. An LLC can choose to be taxed as a traditional C corp, where losses are at the entity level and not at the individual level like a partnership. Keeping losses in the entity might make capital raising much easier in the future if investors know that there are losses that can provide tax advantages when the investors want to invest. An LLC can provide for different classes of membership, while a corporation taking a Subchapter S election cannot. The different membership classes for an LLC need not be publicly available, but the secretary of state in most states require that different classes of business corporations listed in the public filing of the articles of incorporation. The LLC is the most flexible and practical entity for emerging companies because of its flexibility in capital rights, structures and in tax treatment.

Selecting the Right Capital and Loan Structure

Mature companies have long-term debt. Emerging brands typically do not. Emerging brands have been forged by the pandemic and run lean and mean. Their capital needs are different and their growth trajectories are different.

Emerging brands often start with seed funding from private investors, friends and neighbors, rather than with traditional bank debt. The emerging brands may have SBA financing, which has favorable terms. These capital sources are not particularly interest rate sensitive and often involve cash equity injections. The legal structure needs to address investors’ needs for returns and a voice in the company. At the same time, the legal structure needs to allow growth. Avoid structures that prevent additional funding, financing or growth without full payoff of these investors. Recapitalization or refinancing during challenging times will be more difficult, so legal structures must take into account that winter is coming.

Shop for money very carefully. The metrics that investors say they want for restaurants, for example, $1,000 per square foot of floor space, 40% cash-on-cash returns, and unit margins of 20%. If you have these metrics, private investors are probably knocking at your door now. If not, these are the metrics that they are seeking, but most will take something more modest if the potential is there.

Consider crowdfunding very carefully. The benefits cited are low risk for high reward, increased exposure, avoids giving up much equity in your company, allows individual contributions and validates your concept. The negatives are that it has a relatively low success rate for full funding, the preparation time and start-up/upfront costs are longer and higher than anticipated, competitive marketplace full of scammers, high fees with strict rules and a crowded capital raising environment that makes it difficult to get noticed and funded.

Small business administration financing is simple and conventional bank financing that is cheaper because the SBA provides banks a guarantee of the loan. The borrower must encumber its assets and provide personal guarantees. For loans that do not fit within the SBA guarantee mold, there is traditional bank financing, which can take various forms.

If you are leasing real estate, your landlord may be in a position to help you not only with the buildout of the lease, but incentives to increase operating capital. Some landlords will pay up to the entire cost of buildout. Some go further and offer joint venture equity, preferred equity, mezzanine debt or help in recapitalization or sale of partnership interests. Using their financial strength, a landlord can sometimes arrange credit facilities, permanent and term loans, as well as construction loans.

If your company leases equipment, many leasing companies offer credit facilities that are structured as equipment leases to provide operational funds. Also, several finance companies will finance franchised concepts based solely on the brand name without full credit and collateral requirements. These companies charge interest of 18% or higher, and origination commissions may also need to be paid. These companies nevertheless are utilized by franchise networks to provide what is essentially “no doc” financing.

Avoiding and Solving Legal Disputes

Lawyers should look at key customer, vendor, employment and client agreements, especially if they are recurrent. Having these agreements in plain English with friendly dispute resolution provisions, such as mediation, and arbitration of certain matters, will avoid escalating lawyer charges if the parties can de-escalate disputes through respectful dispute resolution. Where possible, right agreements in plain language with fair and balanced provisions, and treat the counterparty with respect at all times, and especially during dispute resolution. Avoid threats at all costs, including threats of litigation. If you intend to litigate, just do it before negotiations harden. This is the key to eliminating escalation.

Some disputes should allow you to go right to litigation. Violations of your intellectual property licenses, theft of confidential information and conduct that impairs your brand equity may be issues that should be carved out of any agreements that otherwise require arbitration or mediation. These issues may be beyond compromise because they impact your reputation.

Document Everything You Can

Truisms are often true. “If you cannot measure it, you cannot manage it.” “If it is not written down, it never happened.” Money can be saved by measuring tasks, performances and people, so you can compare best practices. Litigation can be avoided if a file is kept of all the broken promises and busted dreams committed by business partners or employees, and if these are followed up constructively in writing. Get in the habit in having robust business files and be a leader in documenting and following up on work and most importantly, complaints. Address them before the complaint festers. Use commonsense and respect when addressing solutions.

Learn to Love Your Professionals

The old butcher shop had a sign, “Cheap meat ain’t good. Good meat ain’t cheap.” So it is sometimes with the right professionals. Get and keep the good ones. Accountants will save you money if you utilize them properly. Lawyers will save you money and your sanity if you listen to them. Communicate with your professionals regularly as laws, and strategies, may change. Business is about relationships. It is the promise of the brand that keeps business flowing. Fostering better relationships, whether it is with customers, vendors, franchisees, clients or your professionals, will serve you well in the long run, and will pay dividends in the interim.