In part I of a two part series, we speak to a WISP investor and veteran small business finance professional about how an ISP's accounts make the company more presentable to buyers, sellers, and potential investors. Do it right now, and it'll be easy to do it right later when you're a larger, busier company.

by Alex Goldman ISP-Planet Managing Editor [January 6, 2005]

Hal Hayden is the financial expert for Prescott, Ariz.-based WISP investment firm Agility Solutions. He has not always worked on financing WISPs, but he has worked on financing small businesses. "The problems of many WISPs are the problems of all small businesses," he says.

The first rule for a small business, on the financial side, is to actually have an accounting system, and that's not an Excel spreadsheet and a folder for all the receipts. "Many small businesses don't set up a formal bookkeeping system early on. They set it up only when they need it, and it's harder to do then," Hayden warns.

The system need not be very complex. "I'm comfortable nowadays recommending QuickBooks Pro," Hayden says. "In the accounting profession, we used not to feel that QuickBooks was adequate. But nowadays, it's become sort of a de facto standard for small businesses. The advantage is that a layperson who's not a trained accountant can use QuickBooks fairly easily."

That doesn't mean anyone should set up such a system without advice. "Whatever system is set up should be set up with an accountant's advice and help," Hayden warns. "The company should have a working relationship with an accountant who can review the books monthly and make sure that corrections, adjustments, journal entries, expenses, and income are booked properly."

"For example, people will buy things, like a desk or CPE, and they don't know how to book that purchase. They don't understand whether it should be capitalized and depreciated or expensed." We'll have more advice on this in part II.

Simply having accounts and an accounting system will be a good thing if you do business with a potential investor like Hayden. "The ability to provide financial information on demand shows that the business is keeping up a regular financial routine. It's the same thing with the business plan." As in, every WISP should have one.

Business plan
A company should understand its market. "Even if it's not the formal research that you'd expect with a larger company," says Hayden, "you expect to see something that the owner of the business can put together with local knowledge. For a WISP, that means having some sense of what the local market demographics are."

The market research can be very basic. "It's things like how many households are there total in the market, how many currently have Internet access, is the education level high or low, is the income level high or low," he says.

It's about addressing one fundamental question. "What's my potential to develop this market?"

To answer that question, a WISP also has to know the competition. "Who's offering service, what the service offerings are, the pricing, customer satisfaction level, and so on. I ran across a fellow who had just bought some equipment and I asked him what he was going to do with it. He told me how great it would be to have access all over downtown. He's a real estate developer. I asked him how he would differentiate his service from the local wireless incumbent, and he did not know."

A pet peeve of Hayden's is unreadable financial statements. That's, surely, not asking too much, but, he notes, "the form of financial statements can vary all over the place, but the form is very important to a potential lender. If it's hard to read 'back of the napkin' material, or a third generation fax, it's really frustrating. It gives you a bad impression right away. At least people should be able to put together clear, legible information."

Work with professionals
A WISP startup will need to know more than just a professional accountant. "You may not want an in house accountant for a while, but do contract with a local professional for a few hours per month from the get go. The same would hold true for market research. There's a great opportunity nowadays to start at a much smaller level with accountants and marketers. You can scale the level of work they do to fit your budget. In the WISP business, you might never bring in a research person full time (unless you're doing a rollup or are about to roll out a huge new market). The same is true of an accountant. You might not bring one in house until your annual revenues are a few million."

WISPs should also have a relationship with a lawyer. "If you're tech savvy but not financial savvy, you may find you need to consider your legal structure more carefully," warn Hayden. "Some WISPs form an LLC or some form of corporation immediately, but some run as a sole proprietorship for a while, which is a really bad idea. You should get advice from a business attorney on your legal structure."

But a lawyer is useful in other areas as well. "Business attorneys are not litigation attorneys. A good business attorney will have experience with other small businesses that have the same issues and needs as a WISP, and will be more focused on things such as contracts and employment law and perhaps a little understanding of tax matters."

Taxes are an important issue, no matter how small the business is. "Most business attorneys understand the tax code and can work with you to be in the right legal structure. You'll be talking to your accountant about details, but you'll be talking about the bigger tax picture with your attorney."

The best system depends on the status of the person running the business. "If somebody is very young, they've probably started up the business using money borrowed from family members, and they may not need a complex corporate structure. One the other hand, if a retired couple is starting up the WISP, they'll have a lot of assets. I know of one LLC where a member of the LLC was the family trust."

In summary, even if you're a company that has only one employee—yourself—you should not do this without professional advice.

—End

Go to Part II >