Dressing Your e-Business Up for Success

Asking an e-commerce entrepreneur whether he or she knows what the business looks like may seem silly. After all ' doesn't it seem a given that no one can run a business, whether an e-commerce venture or a traditional bricks-and-mortar storefront operation, without knowing its basic financial information, especially cash flows, receivables and payables, and the balance sheet?

But if the entrepreneur examined this concept and assumption critically in a mirror, and ' give me the benefit of engaging in some creative fantasy here ' the business could 'talk freely' to the entrepreneur, to paraphrase the 1980s group, The English Beat, what would it say?

The answer, of course, would depend largely on the potential backers: how a business 'looks' ' the state it's in, how it's 'tricked out,' and how healthy it is. It also depends on who is looking, and on what he or she is looking for; is it for the upside possibilities that the dewy-eyed entrepreneur sees just beyond every past-due notice, or is it the impending cash-flow implosion that the chief financial officer fears?

Different Points of View

It's a matter of levels of perspective, really. A manager may see only the problems, and some managers may see only the problems at a basic level:

• Covering the next week's bills;
• Taxes and payroll; and
• Earning an income.

Principals of an established firm, on the other hand, may see:

• The groundwork for longer-term measures of profitability;
• The feasibility, once that groundwork looks likely to be in place, of financial success; and
• The ability to reinvest in the business for expansion.

A potential business partner may be more interested in:

• Stability;
• The staying power of himself or herself, or of the business, to make the effort required for developing a relationship worthwhile; and
• Specific growth potential, expressed in some reasonably hard numbers.

A vendor, of course, wants to see:

• Evidence that the risk of extending credit to a new business will pay off, literally ' in getting its receivables paid ' and in generating profitable sales to justify the use of its available financing and capital to sell on credit.

A possible investor wants to see all these same attributes, as well as:

• Growth possibilities;
• Return-on-investment estimates or likelihoods;
• An exit strategy to recoup its equity infusion at a healthy profit when the time comes; and
• A way to cut losses, when necessary.

Of course, a lender, whether a bank or less traditional financing source, wants to see not only a plan for how it will be repaid, with interest, but also:

• The business assets that it can seize to be repaid if even the proverbial best-laid plans go the way of the countless long-forgotten dot-coms.

Peekin' in the Keekin' Glass

With these factors in mind, let's consider what an e-entrepreneur should look for in her own business mirror, rather than just what she wished she could see. Just as we all 'dress up' to impress people we meet, whether in romance or in business, preparing an e-commerce firm's balance sheet and business records in advance can more than repay the effort spent in doing so. From a practical perspective, the better a business presents itself to its target audience from any of the groups mentioned above, the more likely it is that it will make the desired impression and accomplish its goal. As a 'bonus,' the more easily the recipient of that information can find what it needs, the less the business should have to incur legal and other fees, and divert the entrepreneur's time and energy, to assemble that data.

Certainly, any discussion of 'dressing up the balance sheet' must begin where a banker will start ' with a firm's financials and, of course, the business performance that generates the numbers. But before even looking at the numbers, consider how the presentation will appear. You know that first impressions last and, with that in mind, consider that a professionally prepared statement by an independent, accredited firm provides much greater credibility than a printout from a desktop software package. While retaining professional advisers early in a firm's existence can be expensive, it can be much more costly to hire them later to fix an improperly laid groundwork, so do it right the first time. There is no 'Control Y' (redo) button in finance or 'Control Z' to undo a mistake that an inexperienced accountant made when thinking about only today rather than about the firm's financing needs in the future. Moreover, the benefits of such an expenditure go beyond simply the cosmetic. An audited or even just a 'reviewed' statement by an accounting firm with professional liability insurance won't stop a careful lender from looking behind the numbers of a deal it is willing to consider seriously, but it may prevent it from being rejected out-of-hand because of a lack of credible data. You wouldn't go to court unprepared, so you would be seriously remiss not advising
e-commerce clients to gather all the data they can and to present it to any interested pertinent party in the best possible fashion.

Once you look at the numbers, strong revenues, low costs, and steady and growing profitability are better than their alternatives ' but a business that has them probably won't have problems getting financial support, or need to work on its presentation. e-Commerce businesses, in contrast, may not always be able to present the same cheery model. While putting up a basic Web site can be relatively easy, fast and inexpensive, the battle to obtain market share and stand out to customers is not. Startup expenses of an e-commerce firm may be out of proportion compared with some businesses' costs, especially in the eyes of a lender used to examining traditional lending criteria, such as expense ratios. Costs will also be skewed by the heavy upfront capital investment to buy the 'right' technology, whether hardware or software, to handle the security and privacy concerns critical to any business today, as well as that can scale or be scaled to meet the expected expanding volume of shoppers and buyers.

As a result of these elements, an e-commerce firm's leaders must think about metrics that will show the strengths of the business ' or consider delaying their funding search until they have the more traditionally appealing financial results to present. In the dot-com days, hits on a Web site, page views and customer registrations were the keys to opening the vault of investment dollars. Today, however, everyone in the e-sector is more wary than even less than a decade ago of ephemeral data. Think about it: Who hasn't created a Web-based e-mail address just to register at an unknown or little-known site? For example, click-throughs from an online-advertising campaign, or signed agreements with existing e-commerce firms for advertising links may be a more reliable predictor of future success. The track record of the entrepreneur/founder and the management team are also a critical operator in the equation. The movers of each e-business must consider what it and its key personnel have done that can be used to present its best face to those who have the money it needs.

Bundling Up the Paperwork

Next, let's turn to a paradoxical topic ' the firm's paperwork, especially its legal underpinning. While technology and electronic data have long been touted as the first step to the paperless office, much significant data has to start out the old-fashioned way ' black and white, ink on paper. (For everyone's convenience, all records that a lender will request should be scanned, indexed and stored in a common format, such as a .PDF file, in a searchable database for easy retrieval.) In contrast, if a firm cannot readily produce its organizational documents, the lender may have concerns not only about the legal risks it could face, but also about the quality of the firm's management. While only the lawyers may read them, a firm will always be asked to produce its:

• Articles of Incorporation and bylaws (or the LLC equivalent, the 'Operating Agreement' or 'Regulations');
• Records of corporate minutes (even an LLC needs them for significant events); and
• Register of equity owners.

Good-standing certificates will have to be ordered ' and typically cannot be obtained if all taxes are not filed and paid up-to-date. (It's another aspect of business of which perhaps startup venturers flush with the gee-whiz of enthusiasm to start an e-commerce firm should be reminded: Good standings are not automatic, and do cost money, especially if you have to pay expediting fees because you waited until the last minute. In one case, a firm whose accountants failed to properly file a routine tax election when it opened an office in a new state could not get a good-standing certificate several years later until it had ' at great expense ' fixed the paperwork error. The delay did not stop a major refinancing, but it did cost the company thousands of dollars in legal fees to satisfy the lender's concerns, and report back on its progress, and hurt its cash flow when the lender would not consent to the release of the landlord's substantial fit-out payments.)

Scrutiny and Security

From a more narrowly focused e-commerce perspective, the following components should be examined and secured:

• Copies of contracts with key supply-chain partners should be prepared, such as with warehouse facilities, distributors or retail partners;
• The firm should also be prepared to demonstrate that it has all legal rights to its Web site, and would not be at risk of having to start over after a change of developer, or after having a falling out with the Web site developer;
• Ownership of all copyrights and software code should be assigned to the company, because work created by 'for hire' contractors may remain their property;
• If the business depends on key personnel, then it should be able to show that they, too, are locked up. Employment agreements are a start, but confidentiality, non-competition and non-solicitation agreements should be part of the 'new hire' package for any e-commerce firm;
• Today, many firms add a 'non-blogging' clause, to prevent unintended ' or intentional ' harm from 'loose fingertips' of staffers accustomed to revealing all online in chat rooms and on blogs; and
• Contracts for online ads may also be helpful, because they have become so critically important to generating revenue.

As with any infusion of capital, whether by loan or equity, the funder will want to protect against downside risk, by examining the assets that could be sold to recover its investment if the business fails. An e-commerce firm will often have inventory, so it should be prepared to show management systems to track it (to avoid having too little inventory readily at hand and not being able to satisfy orders, and against having too much inventory and tying up working capital with storage and maintenance and, possibly, transportation, costs).

The parties who can make a difference should ask whether excess or any expendable inventory is saleable, or even whether it's a warehouse full of last year's model and grist for a pennies-on-the dollar closeout sale (and that is unlikely to generate cash to repay loans). Even inventory that is still 'good' will typically have low value; asset-based lenders often mark it down to 50% or less because of normal shrinkage (lost inventory), the carrying cost of aging the inventory if not sold immediately and, most important, the costs of handling and selling it. The other typical short-term asset that lenders analyze, accounts receivable, while often valued more highly in a loan to a going business ' typically a 75% to 80% loan value ' may be less valuable for an e-commerce business. The receivables of an e-commerce firm with a widely dispersed customer base, especially if purchases are for relatively low amounts, for instance, may cost far more to collect than will ever be realized from doing so to sell it.

Although an e-commerce business's current assets may not impress a lender, its intangibles may be its crown jewels. Patents, trademarks, copyrights and trade secrets all can be regarded not only as assets worth recovering in a collection action, but also as proof that an e-commerce business has an edge that will make it stand out from other firms. And just as with organizational and legal documents, the intellectual-property portfolio should also be prepared for inspection.

When Not Revealing All Can Help

However, a true 'public view' may not be truly desirable, especially to a lender that typically won't need to use that information to make a loan. If, for example, the key assets could be rendered worthless by improper disclosure, then be sure clients have a strong-as-possible confidentiality agreement with anyone who will come into contact with these key assets. Even matters that may not traditionally have been considered unable to fall under legal protection may still warrant restriction by agreement. If keeping the knowledge secret really matters, then e-commerce entrepreneurs should consider simply not disclosing it because, as in all walks of life and commerce, once revealed, a secret cannot be 'put away.' Apart from legal obligations, such as in connection with patents or disclosure of trade secrets like competitive business intelligence, purchasing information and trade contacts can be the most important information to any business, especially an e-business venture where profit margins have already been cut thin. Often, a competitor can rationalize a non-confidential way to have obtained that information, if necessary to defend its use in court; for example, reconstructing a confidential customer list from a phone directory ' so reliance on traditional legal tools, such as an injunction, may not stop the damage that the disclosure could cause.

The types of intellectual-property assets that may appeal to a lender or investor were discussed at some length in 'e-Commerce for Credit Managers,' in the July 2007 edition of e-Commerce Law and Strategy. That article looked in depth at the collateral value of many typical e-commerce assets, such as domain names, contract rights, other intellectual property such as trademarks, and trade secrets. From the perspective of promoting the value of the e-commerce business to a lender or investor, however, it is just as difficult to demonstrate the value of these assets prospectively as it is to realize value on their sale after a default (as explained in the July 2007 article), because they are not typically bought or sold, much less in established markets with published prices. Of course, third-party purchase offers will demonstrate value, but few e-commerce firms seeking financing will yet have had the good fortune of being pursued. A commissioned appraisal will also demonstrate value ' at an additional cost.

Not Just Smoke and Mirrors

More broadly, the firm seeking money must demonstrate that a going-concern business exists, and can continue after the current contracts run out, or if today's leadership were no longer present. Can it survive ' and repay the funding ' if the founders died or left for different jobs, or the current contracts were not renewed? In other words, is the e-business fundamentally a business, or is it simply riding the wave of a current online trend? Put another way that e-commerce counsel and their clients know and appreciate: 'Is there a there there (especially in e-commerce, when there is no physical 'there')? Part of this answer will come from the basic contracts mentioned above ' established relationships with business partners, and key employees and contractors, which provide continuity. But a more important part of the answer will come from less-traditional measures, such as evidence of brand equity or industry recognition. Performance, quality, and insider and public confidence can be enhanced another way, too: Assembling a portfolio of publicity in trade journals, as well as in online and traditional media, can help in this effort.

But perhaps equally important will be a demonstration of the steps that the firm has taken to protect those assets, and safeguard its exclusive use of them, which, after all, speaks to the firm's actual and potential market position. Certainly, the full range of confidentiality and other restrictive agreements with employees and trade relationships is essential, as are efforts to obtain exclusive rights to use those intangible assets. Equally important, too, are legally enforceable non-competition and non-solicitation agreements with key personnel who control business. Also, ask whether each agreement with key employees or business partners is assignable so that the lender or a buyer of the business could get the benefit of these agreements. In many states, if a restrictive agreement does not by its terms expressly permit assignment, the consent of the employee or other party will be required, which at that point probably can be purchased only at a hefty price. The firm should also highlight practical barriers to competition that support the intellectual-property assets, such as long-term exclusivity agreements or licenses that establish roadblocks to anyone else entering the market, that could harm the company seeking funding.

Of course, all involved, and e-commerce counsel, must monitor and then check that everyone's desire to 'sell' the financials and collateral strength of the business do not turn into perpetration of fraud. While puffing about the company's expectations and goals is legal, the line between that and misrepresentation, and even outright fraud (especially when used to induce others to part with money) is thin, but the legal fees that a firm will rack up defending a civil-fraud lawsuit or criminal prosecution that may result from a perceived or actual fraud will run many thousands of dollars wide. So ' present a business and its value to prospective investors or lenders clearly and convincingly, but guard against that brouhaha crossing over into outright falsehood.

The End of Our Cautionary Tale

An entrepreneur examining her business in the proverbial mirror can't wish for magic like the Queen in the Disney classic Snow White and the Seven Dwarfs: 'Mirror, mirror on the wall, who is the fairest one of all?' Because business is not a fairy tale in which everyone lives happily ever after, that entrepreneur should instead look carefully at her business's image to find every wart and blemish ' and fix them before they discourage a lender or potential investor who may see them just as easily as she does (and probably more quickly and clearly). In real life, unlike in a fairy tale, wishing alone won't make a business look better, but with careful preparation, perhaps it can look good enough to get funded.

Asking an e-commerce entrepreneur whether he or she knows what the business looks like may seem silly. After all ' doesn't it seem a given that no one can run a business, whether an e-commerce venture or a traditional bricks-and-mortar storefront operation, without knowing its basic financial information, especially cash flows, receivables and payables, and the balance sheet?

But if the entrepreneur examined this concept and assumption critically in a mirror, and ' give me the benefit of engaging in some creative fantasy here ' the business could 'talk freely' to the entrepreneur, to paraphrase the 1980s group, The English Beat, what would it say?

The answer, of course, would depend largely on the potential backers: how a business 'looks' ' the state it's in, how it's 'tricked out,' and how healthy it is. It also depends on who is looking, and on what he or she is looking for; is it for the upside possibilities that the dewy-eyed entrepreneur sees just beyond every past-due notice, or is it the impending cash-flow implosion that the chief financial officer fears?

Different Points of View

It's a matter of levels of perspective, really. A manager may see only the problems, and some managers may see only the problems at a basic level:

• Covering the next week's bills;
• Taxes and payroll; and
• Earning an income.

Principals of an established firm, on the other hand, may see:

• The groundwork for longer-term measures of profitability;
• The feasibility, once that groundwork looks likely to be in place, of financial success; and
• The ability to reinvest in the business for expansion.

A potential business partner may be more interested in:

• Stability;
• The staying power of himself or herself, or of the business, to make the effort required for developing a relationship worthwhile; and
• Specific growth potential, expressed in some reasonably hard numbers.

A vendor, of course, wants to see:

• Evidence that the risk of extending credit to a new business will pay off, literally ' in getting its receivables paid ' and in generating profitable sales to justify the use of its available financing and capital to sell on credit.

A possible investor wants to see all these same attributes, as well as:

• Growth possibilities;
• Return-on-investment estimates or likelihoods;
• An exit strategy to recoup its equity infusion at a healthy profit when the time comes; and
• A way to cut losses, when necessary.

Of course, a lender, whether a bank or less traditional financing source, wants to see not only a plan for how it will be repaid, with interest, but also:

• The business assets that it can seize to be repaid if even the proverbial best-laid plans go the way of the countless long-forgotten dot-coms.

Peekin' in the Keekin' Glass

With these factors in mind, let's consider what an e-entrepreneur should look for in her own business mirror, rather than just what she wished she could see. Just as we all 'dress up' to impress people we meet, whether in romance or in business, preparing an e-commerce firm's balance sheet and business records in advance can more than repay the effort spent in doing so. From a practical perspective, the better a business presents itself to its target audience from any of the groups mentioned above, the more likely it is that it will make the desired impression and accomplish its goal. As a 'bonus,' the more easily the recipient of that information can find what it needs, the less the business should have to incur legal and other fees, and divert the entrepreneur's time and energy, to assemble that data.

Certainly, any discussion of 'dressing up the balance sheet' must begin where a banker will start ' with a firm's financials and, of course, the business performance that generates the numbers. But before even looking at the numbers, consider how the presentation will appear. You know that first impressions last and, with that in mind, consider that a professionally prepared statement by an independent, accredited firm provides much greater credibility than a printout from a desktop software package. While retaining professional advisers early in a firm's existence can be expensive, it can be much more costly to hire them later to fix an improperly laid groundwork, so do it right the first time. There is no 'Control Y' (redo) button in finance or 'Control Z' to undo a mistake that an inexperienced accountant made when thinking about only today rather than about the firm's financing needs in the future. Moreover, the benefits of such an expenditure go beyond simply the cosmetic. An audited or even just a 'reviewed' statement by an accounting firm with professional liability insurance won't stop a careful lender from looking behind the numbers of a deal it is willing to consider seriously, but it may prevent it from being rejected out-of-hand because of a lack of credible data. You wouldn't go to court unprepared, so you would be seriously remiss not advising
e-commerce clients to gather all the data they can and to present it to any interested pertinent party in the best possible fashion.

Once you look at the numbers, strong revenues, low costs, and steady and growing profitability are better than their alternatives ' but a business that has them probably won't have problems getting financial support, or need to work on its presentation. e-Commerce businesses, in contrast, may not always be able to present the same cheery model. While putting up a basic Web site can be relatively easy, fast and inexpensive, the battle to obtain market share and stand out to customers is not. Startup expenses of an e-commerce firm may be out of proportion compared with some businesses' costs, especially in the eyes of a lender used to examining traditional lending criteria, such as expense ratios. Costs will also be skewed by the heavy upfront capital investment to buy the 'right' technology, whether hardware or software, to handle the security and privacy concerns critical to any business today, as well as that can scale or be scaled to meet the expected expanding volume of shoppers and buyers.

As a result of these elements, an e-commerce firm's leaders must think about metrics that will show the strengths of the business ' or consider delaying their funding search until they have the more traditionally appealing financial results to present. In the dot-com days, hits on a Web site, page views and customer registrations were the keys to opening the vault of investment dollars. Today, however, everyone in the e-sector is more wary than even less than a decade ago of ephemeral data. Think about it: Who hasn't created a Web-based e-mail address just to register at an unknown or little-known site? For example, click-throughs from an online-advertising campaign, or signed agreements with existing e-commerce firms for advertising links may be a more reliable predictor of future success. The track record of the entrepreneur/founder and the management team are also a critical operator in the equation. The movers of each e-business must consider what it and its key personnel have done that can be used to present its best face to those who have the money it needs.

Bundling Up the Paperwork

Next, let's turn to a paradoxical topic ' the firm's paperwork, especially its legal underpinning. While technology and electronic data have long been touted as the first step to the paperless office, much significant data has to start out the old-fashioned way ' black and white, ink on paper. (For everyone's convenience, all records that a lender will request should be scanned, indexed and stored in a common format, such as a .PDF file, in a searchable database for easy retrieval.) In contrast, if a firm cannot readily produce its organizational documents, the lender may have concerns not only about the legal risks it could face, but also about the quality of the firm's management. While only the lawyers may read them, a firm will always be asked to produce its:

• Articles of Incorporation and bylaws (or the LLC equivalent, the 'Operating Agreement' or 'Regulations');
• Records of corporate minutes (even an LLC needs them for significant events); and
• Register of equity owners.

Good-standing certificates will have to be ordered ' and typically cannot be obtained if all taxes are not filed and paid up-to-date. (It's another aspect of business of which perhaps startup venturers flush with the gee-whiz of enthusiasm to start an e-commerce firm should be reminded: Good standings are not automatic, and do cost money, especially if you have to pay expediting fees because you waited until the last minute. In one case, a firm whose accountants failed to properly file a routine tax election when it opened an office in a new state could not get a good-standing certificate several years later until it had ' at great expense ' fixed the paperwork error. The delay did not stop a major refinancing, but it did cost the company thousands of dollars in legal fees to satisfy the lender's concerns, and report back on its progress, and hurt its cash flow when the lender would not consent to the release of the landlord's substantial fit-out payments.)

Scrutiny and Security

From a more narrowly focused e-commerce perspective, the following components should be examined and secured:

• Copies of contracts with key supply-chain partners should be prepared, such as with warehouse facilities, distributors or retail partners;
• The firm should also be prepared to demonstrate that it has all legal rights to its Web site, and would not be at risk of having to start over after a change of developer, or after having a falling out with the Web site developer;
• Ownership of all copyrights and software code should be assigned to the company, because work created by 'for hire' contractors may remain their property;
• If the business depends on key personnel, then it should be able to show that they, too, are locked up. Employment agreements are a start, but confidentiality, non-competition and non-solicitation agreements should be part of the 'new hire' package for any e-commerce firm;
• Today, many firms add a 'non-blogging' clause, to prevent unintended ' or intentional ' harm from 'loose fingertips' of staffers accustomed to revealing all online in chat rooms and on blogs; and
• Contracts for online ads may also be helpful, because they have become so critically important to generating revenue.

As with any infusion of capital, whether by loan or equity, the funder will want to protect against downside risk, by examining the assets that could be sold to recover its investment if the business fails. An e-commerce firm will often have inventory, so it should be prepared to show management systems to track it (to avoid having too little inventory readily at hand and not being able to satisfy orders, and against having too much inventory and tying up working capital with storage and maintenance and, possibly, transportation, costs).

The parties who can make a difference should ask whether excess or any expendable inventory is saleable, or even whether it's a warehouse full of last year's model and grist for a pennies-on-the dollar closeout sale (and that is unlikely to generate cash to repay loans). Even inventory that is still 'good' will typically have low value; asset-based lenders often mark it down to 50% or less because of normal shrinkage (lost inventory), the carrying cost of aging the inventory if not sold immediately and, most important, the costs of handling and selling it. The other typical short-term asset that lenders analyze, accounts receivable, while often valued more highly in a loan to a going business ' typically a 75% to 80% loan value ' may be less valuable for an e-commerce business. The receivables of an e-commerce firm with a widely dispersed customer base, especially if purchases are for relatively low amounts, for instance, may cost far more to collect than will ever be realized from doing so to sell it.

Although an e-commerce business's current assets may not impress a lender, its intangibles may be its crown jewels. Patents, trademarks, copyrights and trade secrets all can be regarded not only as assets worth recovering in a collection action, but also as proof that an e-commerce business has an edge that will make it stand out from other firms. And just as with organizational and legal documents, the intellectual-property portfolio should also be prepared for inspection.

When Not Revealing All Can Help

However, a true 'public view' may not be truly desirable, especially to a lender that typically won't need to use that information to make a loan. If, for example, the key assets could be rendered worthless by improper disclosure, then be sure clients have a strong-as-possible confidentiality agreement with anyone who will come into contact with these key assets. Even matters that may not traditionally have been considered unable to fall under legal protection may still warrant restriction by agreement. If keeping the knowledge secret really matters, then e-commerce entrepreneurs should consider simply not disclosing it because, as in all walks of life and commerce, once revealed, a secret cannot be 'put away.' Apart from legal obligations, such as in connection with patents or disclosure of trade secrets like competitive business intelligence, purchasing information and trade contacts can be the most important information to any business, especially an e-business venture where profit margins have already been cut thin. Often, a competitor can rationalize a non-confidential way to have obtained that information, if necessary to defend its use in court; for example, reconstructing a confidential customer list from a phone directory ' so reliance on traditional legal tools, such as an injunction, may not stop the damage that the disclosure could cause.

The types of intellectual-property assets that may appeal to a lender or investor were discussed at some length in 'e-Commerce for Credit Managers,' in the July 2007 edition of e-Commerce Law and Strategy. That article looked in depth at the collateral value of many typical e-commerce assets, such as domain names, contract rights, other intellectual property such as trademarks, and trade secrets. From the perspective of promoting the value of the e-commerce business to a lender or investor, however, it is just as difficult to demonstrate the value of these assets prospectively as it is to realize value on their sale after a default (as explained in the July 2007 article), because they are not typically bought or sold, much less in established markets with published prices. Of course, third-party purchase offers will demonstrate value, but few e-commerce firms seeking financing will yet have had the good fortune of being pursued. A commissioned appraisal will also demonstrate value ' at an additional cost.

Not Just Smoke and Mirrors

More broadly, the firm seeking money must demonstrate that a going-concern business exists, and can continue after the current contracts run out, or if today's leadership were no longer present. Can it survive ' and repay the funding ' if the founders died or left for different jobs, or the current contracts were not renewed? In other words, is the e-business fundamentally a business, or is it simply riding the wave of a current online trend? Put another way that e-commerce counsel and their clients know and appreciate: 'Is there a there there (especially in e-commerce, when there is no physical 'there')? Part of this answer will come from the basic contracts mentioned above ' established relationships with business partners, and key employees and contractors, which provide continuity. But a more important part of the answer will come from less-traditional measures, such as evidence of brand equity or industry recognition. Performance, quality, and insider and public confidence can be enhanced another way, too: Assembling a portfolio of publicity in trade journals, as well as in online and traditional media, can help in this effort.

But perhaps equally important will be a demonstration of the steps that the firm has taken to protect those assets, and safeguard its exclusive use of them, which, after all, speaks to the firm's actual and potential market position. Certainly, the full range of confidentiality and other restrictive agreements with employees and trade relationships is essential, as are efforts to obtain exclusive rights to use those intangible assets. Equally important, too, are legally enforceable non-competition and non-solicitation agreements with key personnel who control business. Also, ask whether each agreement with key employees or business partners is assignable so that the lender or a buyer of the business could get the benefit of these agreements. In many states, if a restrictive agreement does not by its terms expressly permit assignment, the consent of the employee or other party will be required, which at that point probably can be purchased only at a hefty price. The firm should also highlight practical barriers to competition that support the intellectual-property assets, such as long-term exclusivity agreements or licenses that establish roadblocks to anyone else entering the market, that could harm the company seeking funding.

Of course, all involved, and e-commerce counsel, must monitor and then check that everyone's desire to 'sell' the financials and collateral strength of the business do not turn into perpetration of fraud. While puffing about the company's expectations and goals is legal, the line between that and misrepresentation, and even outright fraud (especially when used to induce others to part with money) is thin, but the legal fees that a firm will rack up defending a civil-fraud lawsuit or criminal prosecution that may result from a perceived or actual fraud will run many thousands of dollars wide. So ' present a business and its value to prospective investors or lenders clearly and convincingly, but guard against that brouhaha crossing over into outright falsehood.

The End of Our Cautionary Tale

An entrepreneur examining her business in the proverbial mirror can't wish for magic like the Queen in the Disney classic Snow White and the Seven Dwarfs: 'Mirror, mirror on the wall, who is the fairest one of all?' Because business is not a fairy tale in which everyone lives happily ever after, that entrepreneur should instead look carefully at her business's image to find every wart and blemish ' and fix them before they discourage a lender or potential investor who may see them just as easily as she does (and probably more quickly and clearly). In real life, unlike in a fairy tale, wishing alone won't make a business look better, but with careful preparation, perhaps it can look good enough to get funded.