Building A Business Is Like Building A House: You Need A Foundation

Forbes

6 days ago

Tom Burgess, President, Snipp.
Starting a business is like building a house. The first step is to build the foundation—do that wrong and the roof won't fit. Many entrepreneurs jump headfirst into launching a new venture with little consideration for the foundational structure, and failure to execute simple pre-planning and preparation can cost them and their shareholders millions of dollars down the road.
I've started four companies over the past 30 years, and I've learned the hard way that if the foundation is not based on the end goal, failure, at some level, is inevitable.
A Concrete Base
The corporate structure of your business is the concrete base of your house. If the blocks are not laid straight, the walls will be crooked—and it only gets worse as you build. The way in which you set up the corporate layer of your business will differ depending on your reason for starting your company. Maybe it's to support your lifestyle, or go public or even sell to a larger company. No matter the reason or end goal, it is essential for founders to consider how this initial layer will impact the company when you reach that point.
First, you must consider your entity type. If the end goal is to raise capital and eventually sell the business or go public, forming a C corporation is the smartest move, as it offers the best tax advantages for founders and early investors. A C-Corp is the only structure to benefit from the qualified small business stock (QSBS).
On the other hand, an LLC, or limited liability company, may be the right move if you are starting a lifestyle business that you intend to run as a closely-held cash flow machine. LLCs offer less corporate overhead, lowering your business expenses while retaining a high level of personal liability protection. Each entity type has its own long-term benefits, but the planning must be done early or the benefits will be lost.
Another key consideration is structuring and monetizing your equity. Cash flow is king, and equity is the holy grail at the end of your quest. The capitalization structure maps out who owns equity in your company and what terms are defined for each class of stock ownership. Once again, this planning needs to be done at the foundation level. It is nearly impossible to correct ownership structure in arrears. Voting rights, stock restrictions, vesting schedules, preferred terms and more must be carefully considered before they are issued. Similar to corporate structure, a bad equity structure can cost founders and shareholders millions in lost profit.
Framing A Distinct Culture
Culture is an essential part of your company, acting as the framing holding your business together. Built with poor materials, no amount of patchwork will fix it. A company with the best product on the market can be destroyed by a bad culture.
The perfect culture varies for different companies, but I have found that one prioritizing communication works best. Although disappointing news or significant changes can be challenging to manage when companies are in their early stage of growth, you can never go wrong with honesty and transparency.
However, company culture can't be forced. It is a derivative of great leadership. Sometimes culture is driven by a founder, and other times it is driven by natural team leaders. If that natural leader emerges, you should tap into their ability to be the voice of their colleagues and empower them to set the cultural tone.
Leveraging Customer Feedback
At this point, you have built enough to hold up your house, but nobody will want to live there if the heat or plumbing does not work. This is the customer feedback layer. A strong foundation is only valuable if it supports a product or service that meets customer needs.
If your customers are not satisfied, even the best internal operations can't ensure success. In fact, companies that put customers' needs first "reported 41% faster revenue growth, 49% faster profit growth, and 51% better customer retention," according to Forrester.
It is necessary for key performance indicators, or KPIs, to be decided upon at the beginning of your entrepreneurial journey and tracked throughout. Each company will have its own unique performance indicators. Marketing conversion rates, client service backlogs and product development cycles are a few common KPIs that can be tracked and shared within the company to help inform progress, adjust in a timely manner and celebrate successes.
Critical analysis of these KPIs will allow you to keep up with market demands and continuously improve your business.
Building With Intention
As an aspiring entrepreneur and business leader, the best way to start your journey is by being intentional with your choices, carefully considering how every decision made will impact your end goal. Not all houses are built the same—but when built with intention, you can ensure you have a foundation that can support it.
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