START A T-SHIRT BUSINESS CHAPTER 2

Small Business Start-up kit

· Contents
PART I.
Business Overview: A broad overview of business in general and
some ideas about what type of business might be best for you.
1. Business Overview 3
The pros and cons of starting a business
Understanding if you are an entrepreneur
Picking the best business
2. The Home-Based Business Advantage 19
The home-based business revolution
Risks and rewards
Setting up shop at home
3. Buying Franchises and Other Businesses 31
Would you make a good franchisee?
Finding the right franchise
Analyzing the franchisor and the opportunity
How to intelligently buy an existing business
4. Preparation, Production, and Distribution 51
Preparing your product for market
Test marketing your product or service
Producing a winning product
v
PART II. Getting Started: Begin to put the first pieces of the successful
business puzzle together.
5. Planning Your Business 63
Analyzing your idea
Understanding your potential market
Creating a winning business plan
6. Choosing Great Names and Locations 79
Picking a great name
Location, location, location
7. Licenses, Permits, and Business Formation 93
Understanding which form of business is best
Sole proprietorships and partnerships
Incorporation pros and cons
Licenses and permit requirement
8. Outfitting the Office 103
Automating your office
Choosing the right hardware and software
Phone, fax, and mail solutions
9. Show Me the Money 111
Figuring out how much money you need
Business loans made easy
Successfully attracting angels and venture capital
Even more strategies for finding the money
PART III. Opening Up Shop: Everything you need to know to get started—
in plain English.
10. Creating a Great Image 125
The elements of your winning image
Brochures and signs
Business Web sites made easy
11. Let the Numbers Do the Talking 135
Making a profit is the name of the game
Picking the right price point should not be difficult
Taking the risk out of accepting checks and credit cards
vi C o n t e n t s
12. Law, Taxes, and Insurance 145
How to find a good lawyer or accountant
How to hire great employees
Law and taxes made easy
PART IV. Business on a Shoestring: How to start and run a business without
spending a lot of money.
13. Bootstrap Financing 161
The bootstrap rules
Tapping other people’s money
Five more options for financing the dream
14. Setting Up Shop at Bargain Prices 173
Preserving your precious capital
Getting fixtures and equipment for almost nothing
Stocking the shelves for next to nothing
15. Growing Your Business without Big Bucks 183
Inexpensive advertising and marketing secrets
Web sites for less
Motivating without money
PART V. Growing Your Business: Proven advertising and marketing
strategies.
16. Successful Advertising Strategies 197
The importance of advertising
Understanding the options available
Creating a winning ad
17. Successful Marketing Strategies 207
Your successful marketing plan
Marketing tools you can use
How to easily generate publicity for your business
18. Caring for Customers and Employees 219
Customer service made easy
Training your employees the right way
Create a compelling mission
C o n t e n t s vii
PART VI. Success Strategies: Secrets of Success.
19. Business Jujitsu 235
Understanding business jujitsu
Turning problems into opportunities
Mistakes you can avoid
Getting great advice
20. Business Success Secrets 247
Create a winning business recipe
Create multiple profit centers
Seven secrets of the great entrepreneurs
References 259
Index 265
About the Author 00
viii C o n t e n t s
· Preface
Your own successful business can be many things. It can be your meal
ticket, ensuring the economic health of you and your family. It can be your
source of creativity, giving you an outlet for all of those ideas you have. It can
be your security, the comfort that comes from knowing that there is no boss
who can fire you. It can even be your pride and joy, an accomplishment that
you point to with satisfaction, knowing that you alone created it out of whole
cloth.
But more than anything else, I think that owning your own business and
being an entrepreneur is about freedom. Yes, the money that comes from a
successful business is great. And yes, being energized and enthused about
your day is special. Being free is priceless. If you do it right, you are free to
start whatever sort of business you want. You are free to start it where you
want, and free to work the hours you choose. You are free to make as much
money as you are capable of, without yearly limits or performance reviews.
But you will notice that all this only comes about if you do it right. When
you choose to become an entrepreneur, there are no guarantees. In large
part, whether you succeed or fail is up to you. So, how do you do it right?
Read this book. It is dedicated to helping you succeed. And unlike other startyour-
own-business books on the market, what sets this book apart is that it
offers a model of business success, a simple model that is easily duplicated.
It might help to think of your business as having two parts. The first part
is found in Chapters 1, 2, and 3 of this book—choosing and doing something
ix
that you love to do. That is the “technical” aspect of the business. The dentist
fills the cavities, the photographer takes the pictures. Practically every
business is set up to allow the owner to make money doing some sort of
technical work that he or she loves.
The second part of your business is everything else—the actual running
of the business itself. That is found in the rest of this book, Chapters 4
through 20. The dentist must network and bring in new clients, and the photographer
must get referrals, bill customers, and generate leads. There are
myriad things that go into running the actual business, aside from doing the
“thing” that you love to do. When I talk about a model of business success, it
is all of these other things to which I am referring.
The vast majority of this book is dedicated to teaching you this second
part of business. If the dentist and photographer follow the model laid out in
this book, they will be free to spend more time doing what it is they love,
rather than worrying about the business. Do it right and the business will
take care of itself, and you, in turn, will be free. You can plug almost any
“technical” job into this business model and it would work.
The model is neither complicated nor complex. It is simple, easy, and
fun. Learn it and free yourself up to grow, make more money, and do what it
is you love. When you learn how to run your business properly, you get to a
point where the world will be paying you to do what you love most. And that,
as Alan Ginsberg once observed, is the real trick of life.
P A R TI
· Business Overview
This section gives you a broad overview of business in
general and explores some ideas about what sort of business
might be best for you. It’s all here—home-based businesses,
franchises, starting your own business from scratch, buying
an existing business.
This Page Intentionally Left Blank
C H A P T E R
1
· Business Overview
Congratulations! The decision to start your own business can be one of the
best you will ever make in your life. Owning your own business should be an exhilarating,
inspiring, grand adventure; one full of new sights and experiences,
delicious highs and occasional lows, tricky paths and, hopefully, big open skys.
But to ensure that your business journey will be a fruitful one, it is important
to understand all that becoming an entrepreneur entails. Therefore,
in Part I, especially in this chapter, you will get a broad overview of business
and its many forms and possibilities.
Pros and Cons
Many people start their business adventure dreaming of riches and freedom.
And while both are certainly possible, the first thing to understand is
that there are tradeoffs when you decide to start a business. Difficult bosses,
annoying coworkers, peculiar policies, demands upon your time, and limits
on how much money you can make are traded for independence, creativity,
opportunity, and power. But by the same token, you also swap a regular paycheck
and benefits for no paycheck and no benefits. A life of security, comfort,
and regularity is traded for one of uncertainty.
There are definitely pros and cons to starting your own business. To be
more precise, the benefits of starting a business include:
3
• Control. Even if you like your boss and your job, the possibility remains
that you can be laid off at any time. That boss you like so much
can be transferred. Your company can go bankrupt. So one advantage
of starting your own business is that you are more in control of your
work and career. And while that may be comforting, you should also
realize that with that control will come increased responsibility and a
new set of demands. As the boss, the buck must stop with you. You
are the one who has to meet payroll. You are the one who has to make
sure that clients and customers are happy. You are the one who must
hire and fire the employees. It is not always easy, and you can bet that
there will certainly be times when you will look fondly back on your
days as an employee, when you had far less responsibility and control.
• Money. Many people choose to start their own business for the simple
reason that they think that they are worth more money than they
are making or they want the chance to provide a better life for their
family. There is usually a limit to how much money you can make
when you are an employee. The good news is that when you are the
employer, the entrepreneur, the boss, there are far fewer limits. That
can be a good or bad thing; you may make a fortune, or you may go
bust. If this kind of uncertainty appeals to you, good, because it is
what you will be getting if you start your own business.
• Creativity and independence. If you feel stagnant in your current job,
you won’t feel stagnant for long if you start a business. Running your
own business may require you to be the marketing wizard, salesman,
bookkeeper, secretary, and president all rolled into one. It is a hectic
life. But you may not mind that. It’s kind of like the Calvin and Hobbes
cartoon in which Calvin’s mother tells him to make his bed. Calvin decides
to build a robot to make the bed for him. When Hobbes asks,
“Isn’t making the robot more work than making the bed?” Calvin answers,
“It’s only work if someone makes you do it!” The same holds
true when the business is yours—it often doesn’t feel like work because
no one is making you do it.
• Freedom. Working at your own business gives you the flexibility to
decide when and where you will work. You decide your hours and
place of business. The freedom that comes with being your own boss,
where no one can tell you what to do or how to do it, may be the best
thing about being an entrepreneur.
4 T H E B U S I N E SS S T A R T – U P K I T
But there are also downsides to starting your own business:
• Uncertainty. As indicated, the life of an entrepreneur is not necessarily
an easy one. Is it fun? Yes. Is it challenging, exciting, and spontaneous?
You bet. But it is not easy. The hardest part of being in business for
yourself is that there is no steady source of income; a paycheck does
not come every two weeks.
• Risk. What is an entrepreneur? An entrepreneur is someone who is
willing to take a risk with money to make money. Not all entrepreneurial
ventures are successful. The willingness to take a smart, calculated
risk is the hallmark of a smart entrepreneur. But even calculated
risks are still risks. You could make a million or you could go bankrupt.
• Lack of structure. Many people like the structure of working for
someone else. They know what is expected of them and what they
need to accomplish each day. This is not true when you work for
yourself. The work is very unpredictable.
You need to consider carefully both the risks and rewards of entrepreneurship
before deciding to jump in. It is easy to become infatuated with the
idea of owning your own business. But if you are going to do it right, if you
are going to be successful, you need to take emotion out of the equation. You
have to begin to think like a businessman, consider the risks, and make an informed,
intelligent, calculated decision.
Do You Have What It Takes?
Considering the pros and cons of this venture is not enough. Making the
decision to leave your job and start a business is monumental. Even if starting
a business seems like a great idea, despite the drawbacks, the question remains:
How do you know if you are cut out to be an entrepreneur? Do you
have what it takes? In order to assist you, answer the questions in the following
quiz. It will help you evaluate your qualifications.
As you answer the questions, be sure to be perfectly honest. There is no
need to get every question “right.” Businesspeople come in all shapes, sizes,
temperaments, and skill levels. Thus, no test can determine if you are perfectly
suited to be an entrepreneur. But this test will help you realize some of
the skills necessary to start your own business. You will only be hurting yourself
and your business if you pretend to have skills you don’t possess.
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6 T H E B U S I N E S S S T A R T – U P K I T
✎Assessing Yourself
1. Are you a self-starter?
a) Yes, I like to do things on my own.
b) If someone helps me get started, I will definitely follow through.
c) Most of the time, I would rather follow than lead.
2. How do you feel about taking risks?
a) I really like the feeling of being a bit on the edge.
b) Calculated risks are acceptable at times.
c) I like the tried and true.
3. Are you a leader?
a) I usually get people to go along when I initiate something.
b) I can give the orders if I have to.
c) I let someone else get things moving, then I take part if I feel like it.
4. Do you like to assume responsibility?
a) Yes, I enjoy taking charge of things and seeing them through.
b) I’ll take over if I have to, but would rather let someone else be
responsible.
c) There’s always some eager beaver around wanting to show how
smart he is. I say let him.
5. How organized are you?
a) I like to have a plan before I start.
b) Being well organized isn’t my strongest suit, but I can do it when
necessary.
c) I just like to take things as they come.
6. How hard are you willing to work?
a) I can stay motivated as long as necessary.
b) I’ll work hard for a while, but when I’ve had enough, that’s it.
c) I think many other things are more important than work.
7. Are you decisive?
a) I can make up my mind in a hurry if I have to.
b) If I have to make up my mind quickly, I do, but I don’t like it.
c) I don’t like to be the one to decide things.
1 / B u s i n e s s O v e r v i e w 7
8. Can you live with uncertainty?
a) Yes.
b) I can if I have to, but I don’t like it.
c) No, I like knowing what to expect.
9. Can you stick with it?
a) If I make up my mind to do something, I don’t let anything get in
the way.
b) Usually.
c) If things don’t go right, I may just quit.
10. How good is your health?
a) I never run down!
b) I have enough energy for most of the things I want to do.
c) I run out of energy sooner than most of my friends.
11. Are you competitive?
a) You bet.
b) When I need to be, I can be.
c) Not really, my nature is more laid-back.
12. Do you have a lot of willpower and self-discipline?
a) Yes.
b) I am disciplined when I need to be.
c) Not really.
13. Do you plan ahead?
a) In my book, failure to plan is planning to fail.
b) Planning is important, but so is spontaneity.
c) I take one day at a time and let life take me where it will.
14. Are you creative?
a) Yes I am. I am always thinking up new ideas.
b) I have an occasional brainstorm.
c) No, not really.
15. Can you live without structure?
a) Yes.
b) Actually, the idea of living without a regular job or paycheck makes
me nervous.
c) No, I like routine and structure in my life.
If you answered “a” on more than half of the questions, you have the
personality needed to run your own business. If most of your answers were
“b,” you’re likely to encounter more trouble than you may want.
If you have several “c” answers, then you are not quite ready to start
your own business. But that does not mean that you can’t get ready. While
certain aspects of entrepreneurship are innate (the willingness to take a risk,
for example), many are learned (such as knowing how to conduct market research).
If the results of this quiz tell you to slow down, that is good. You can
always take business classes, read more books, or listen to business tapes in
order to learn more. Another option would be to get a partner who has the
skills you lack. There are many ways to start your own business, and if you
are not ready now, it does not mean you will never be ready.
Getting Started
Once you have decided that starting a business is right for you despite
the risks, the question becomes: What’s next? People often love the idea of
8 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
During World War II, a rubber shortage in the United States necessitated
that the U.S. War Productions Board request that American companies try
to create a synthetic rubber. In one of its experiments in support of this request,
General Electric ended up with a pliable goo that, while not rubber,
was interesting. Not knowing what to do with the stuff, GE sent it to academics
all over the world, looking for suggestions. No one could think of a
scientific use for the goo.
A few years after the war, a Harvard professor who had received some
of the stuff earlier brought it out as a conversation piece at a cocktail party
he was having. A guest at the party, a broke entrepreneur named Peter
Hodgson, saw the adults playing with the stuff and had an idea. Despite
being deeply in debt, Hodgson borrowed $150 and bought 21 pounds of
the stuff along with the patent rights from GE. He started his own business
in which he sold the goo packaged in small amounts in little plastic eggs.
He named it Silly Putty.
starting a business but get bogged down in the actual nitty gritty of just how
to do it. It might help to know that no matter what type of business you decide
to start, the essential steps are the same. Different businesses will have
slightly different paths but, generally speaking, most businesses follow a formulaic
path. While this formula will be discussed in much more detail throughout
this book, it will be helpful to have a road map to show you where you
are headed.
Step 1: Personal Evaluation
You need to begin by taking stock of yourself and your situation in order
to figure out which sort of business is best for you. Why do you want to start
a business? Is it money, freedom, creativity, or some other reason? What do
you bring to the table? What skills do you have? What industries do you know
best? Would you want to provide a service or a product? What do you like to
do? How much capital do you have to risk? Will it be a full-time or a part-time
venture? Will you have employees? The answers to these types of questions
will help you narrow your focus and pick a business. The rest of this chapter
will help you do that.
Step 2: Analyze the Industry
Once you decide on a business that fits your goals and lifestyle, you will
need to evaluate your idea. Who will buy your product or service? Who will
be your competitors?
Step 3: Draft a Business Plan
If you will be seeking outside financing, a business plan is a necessity.
But even if you are going to finance the venture yourself, a business plan will
help you figure out how much money you will need to get started, what tasks
need to be done when, and where you are headed.
Step 4: Make It Legal
There are several ways to form your business. It could be a sole proprietorship,
a partnership, or a corporation. Although incorporating can be expensive,
it is usually well worth the money. A corporation becomes a separate
1 / B u s i n e s s O v e r v i e w 9
legal entity that is legally responsible for the business. If something goes wrong,
you cannot be held personally liable. Chapter 7 discusses this in detail.
Once you form your business, you also need to get the proper business
licenses and permits. Depending on the business, you may have to deal with
city, county, or state regulations, permits, and licenses. This would also be the
time to check into any insurance you may need for the business and find a
good accountant.
Step 5: Get Financed
Depending on the size of your venture, you may need to seek financing
from an “angel” or from a venture capital firm. Most small businesses begin
with private financing from credit cards, personal loans, help from the family,
second mortgages, savings, etc. As a rule of thumb, in addition to your
start-up costs, you should have at least six months’ worth of your family’s
budget in the bank.
Step 6: Set Up Shop
Find a location. Negotiate leases. Buy inventory. Get the phones installed.
Have stationery printed. Hire staff. Set your prices. Throw a grand opening
party.
Step 7: Trial and Error
It will take a while to figure out what works and what does not. Follow
your business plan, but be open and creative. Advertise! Don’t be afraid to
make a mistake. And above all, have a ball—running your own business is one
of the great joys in life!
Picking the Right Business
You already may know which type of business you want to start. If so,
you get to pass Go, collect $200, and skip this section. But if you are not yet
sure exactly which sort of business is right for you, then read on.
There are few times in life when the stars align themselves just right to
allow you to go into business for yourself and pick the exact business you
10 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
want. Usually, money is tight, the time is wrong, your wife is pregnant, or
some other reason is preventing you from choosing the right business. Consider
this a rare, golden opportunity and choose your business with care.
How do you go about choosing a business? There are many ways. Some
people do something they know how to do well, and that’s usually a fine idea.
The main consideration for others is that their business has a high profit margin;
again, not a bad idea. Still others want a business that is hot and trendy.
This is not such a great idea.
There are always businesses that you can start on the cusp of a wave. A
few years ago, you might have considered an e-commerce Web site. While
this is still not a bad idea, it is definitely harder to make money in cyberspace
these days. The problem with this idea is that waves crash. Starting a business
based on a trend can be a recipe for disaster.
Instead, you should ask yourself the following five questions. The answers
to these questions will be much more helpful than any list of hot businesses.
1. What is something that I do well that I like to do? As in life, we tend
to succeed and do well when we are engaged in something that we
really enjoy. Your business should be no different. Richard Branson
started Virgin Music, not because he thought music would be hot,
but because he loved music. Bill Gates started Microsoft because he
1 / B u s i n e s s O v e r v i e w 11
✎Checklist for Starting Your Own Business
□ Complete a personal evaluation
□ Analyze the industry
□ Make the business legal
□ Draft a business plan
□ Get financed
□ Set up shop
□ Conduct business by trial and error
loved working with computers. As the title of a book says, do what
you love, the money will follow.
2. Is there a market for this business? Let’s say that the thing you love
doing is gardening.Well, there is no shortage of businesses that revolve
around that concept, such as nurseries and landscaping. But what if
the thing you love most is nineteenth-century Danish architecture?
However interesting it may be to you, you don’t have a business if no
one is willing to pay you for your expertise. So you have to be realistic—
there must be a market willing to buy what you want to offer.
Chapter 5 discusses how to do this in detail.
3. Can I afford to start this business? Some businesses are very inexpensive
to start, most notably, home-based businesses. Others can be
quite expensive. A nursery can easily cost $75,000 to create and stock.
Buying into a well-known franchise can cost over $1 million. In addition
to picking a business that you like for which you have a market,
you also must make sure that it is one you can afford to start. This
is discussed in detail later in this chapter.
4. What will distinguish my business? Your business must offer something
unique if you are to attract customers. After all, they already
shop somewhere else. Why will they choose to buy from you? You
must offer better quality, cheaper prices, a more convenient location,
better service, a unique product—something that makes you stand
out from the crowd.
5. Can I make a profit? Whatever business you start, whatever product
or service you sell, you have to be able to sell it at a price high
enough to make a profit, but low enough that people will buy it. Setting
this price is not always an easy task. Why do so many stores in
expensive malls go out of business? Because often their overhead is
too high, despite having a great concept. So before jumping into a
business, crunch some numbers.
Although all of these issues are important, they should point toward one
direction, namely, your passion. As you know, working with passion is one of
the great joys in life. This is even more true when choosing a business. This business
is going to become your baby. You will love it, care for it, nurse it along,
and obsess over it. You will also be putting an extraordinary number of hours
into it. You will be working at it all day, every day, hopefully for many years.
Unless you love it deeply and are passionate about it, working so hard will be
difficult.
12 T H E B U S I N E S S S T A R T – U P K I T
Making the Decision
Deciding on an area that you love is only the first step when choosing a
business to start. The rest of the required analysis is much more left-brained,
more analytical. It consists of two steps:
1. Looking at how much you have to invest
2. Conducting market research
1 / B u s i n e s s O v e r v i e w 13
✎What Type of Business Shoud You Start?
Completing the following statements should help guide you to choosing an appropriate
business.
I am happiest when I .
I feel excited when I .
If money were not an issue, I would .
The best advice I ever received was .
The best thing I ever did was .
Work is best when .
Life is best when .
My hidden talent is .
My purpose is .
I have the most fun at work when I .
The skills I most like using at work are .
What people admire about me is .
I am best at .
The training I had that can help me is .
Analyzing Your Start-Up Costs
As important as it is to choose a business you will love, the business you
pick must be one you can afford. While Chapter 9 discusses many ways to get
the money you will need to start your business, you probably already have a
fairly good idea how much you will have to get started. Needless to say, the
business you choose must fit within those parameters.
Essentially, there are two types of businesses: service-based businesses
and product-based businesses. Of the two, service businesses are far less expensive
to start. If you open an accounting firm, for example, all you may
need to get started is letterhead, an office, and a computer. On the other
hand, if you want to start a computer store, you need to have inventory, shelving,
fixtures, and display cases, not to mention retail space, a security system,
and a sales staff.
One of the first things you must do is analyze your start-up costs to determine
if you can afford to start the business that you love. Again, Chapter 9
will walk you through the process of determining how much money you will
need to get started, but as you go about deciding what sort of business to
start, keep in mind financial considerations.
Conducting Market Research
The other aspect of choosing the right business is making sure that there
is a need for the business you want to start. There are few things worse in life
than putting a lot of money, time, and effort into creating a new business,
only to find that there is no market for what you are selling. Chapter 5 will
help you understand how to conduct market research.
The important thing is that you choose a business that fits your personality,
is something you love, and can be successfully implemented with the resources
available to you. If that means scaling your idea back a bit in the
beginning, that’s fine. Once you get your baby off the ground, you can grow
as much as you are able.
Overcoming Fear
No one ever said taking the leap was easy. Fun, exciting, inspiring, and
maybe even a little nauseating? Yes. But easy? No. Starting your own business is
a big step worthy of a second look. Whether you succeed or fail, every aspect of
14 T H E B U S I N E S S S T A R T – U P K I T
your life—from bank accounts to friendships—is affected. Although fear can
be debilitating, avoidance is not the answer. Here are seven tips to help you
overcome fear and get started living the dream:
1. Remember that you can start slowly. Quitting a nine-to-five job one
day and starting a business the next would give anyone nightmares.
You don’t have to do it that way if you don’t want to. Making a gradual
transition gives you time to think, plan, and work on potential
problems, which should help lessen your anxiety.
2. Help is available. And much of this help is free. The Small Business Administration,
your friends, Web sites, the local chamber of commerce,
and business associates will be available to help you along the way.
3. Plan. Nothing beats preparation to quell the panicky feelings that
can keep entrepreneurs awake at night. “A well-thought-out business
plan can go a long way toward helping alleviate start-up fears,” says
Mark Sobel, director of Small Business Development at the Stanley
Entrepreneurial Center.
4. Expect the unexpected. Unless you are blessed with unlimited monetary
resources, starting a business means taking a financial risk. Although
you may not be able to keep all problems at bay, you can
accept the reality that being in business brings risks along with the
rewards. That’s the name of the game.
5. Put fear to work. Why view fear as a negative when it can be a powerful
motivator? Fear of forfeiting a home to the bank has launched
more than one laid-off employee on the road to self-employment, and
fear of failure pushes many entrepreneurs to work around the clock
to get their businesses up and running. Remember that most successful
entrepreneurs have been afraid at one time or another.
6. Build a support network. Talking to fellow entrepreneurs who have
walked the same path you’re about to embark on can help assuage
your fears. Attend conferences, join associations, and talk with others
who started as you did but who have moved on to the next step.
7. Remember that you may have more assets than you realize. For example,
you might have money in the bank, friends in the industry, a
supportive family, a good attitude, a great idea, an awesome partner,
chutzpah, or a good education.
1 / B u s i n e s s O v e r v i e w 15
Resources You Can Use
Entrepreneur Magazine
<www.entrepreneur.com>
Inc. Magazine
<www.inc.com>
The National Association of the Self-Employed
800-232-NASE (800-232-6273)
PO Box 612067
DFW Airport
Dallas, TX 75261-2067
<www.nase.org>
The Service Corp of Retired Executives (SCORE)
800-634-0245
<www.score.org>
U.S. Chamber of Commerce
202-659-6000
1615 H Street, NW
Washington, DC 20062
<www.uschamber.com>
16 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
It is easy to get caught up in the romance of starting your own
business. You need to avoid that trap. Before anything, you need to
consider carefully both the pros and cons of entrepreneurship. Above
all, starting a business is a calculated risk. Be sure to pick a business
that you love, but also one you can afford and for which there is a
need.
The United States Small Business Administration
800-UASK-SBA (800-827-5722)
409 3rd Street, SW
Washington, DC 20416
<www.sba.gov>
1 / B u s i n e s s O v e r v i e w 17
This Page Intentionally Left Blank
C H A P T E R
2
· The Home-Based
· Business Advantage
Don’t make the mistake of already deciding that yours is not going to be
a home-based business. The important thing to understand is that there are
two types of home-based businesses, and yours might fall into either category.
The first category includes businesses that start at home and remain
home-based. Many people start their business at home because it is an easy,
convenient, and inexpensive option. And for these reasons, they intend to
keep their business there.
But many people start their business out of their home with the idea of
moving it out as soon as it is feasible. These folks understand that in the early,
critical, start-up phase of their business, money is vital and starting from
home affords them the luxury of spending their capital on needs other than
rent, which is smart thinking.
It may not be surprising then that many businesses you know started out
as a home-based business, such as:
• Disney
• Amazon.com
• Microsoft
• Xerox
• L.L. Bean
• Apple
19
Success leaves clues. These are some of the best businesses of all time.
One thing they share is an understanding that a small, home-based business
can turn into a big business. By saving their money and utilizing resources
already available in their homes, the entrepreneurs who started these businesses
were able to turn their attention, efforts, and capital toward their businesses.
It’s a valuable model to follow.
The Home-Based Business Revolution
If you decide to start a business from home, you are not alone. More
than ever, working from home has become an accepted method of conducting
business. While more “traditional” home businesses such as mail order
remain as strong as ever, professionals such as lawyers and architects are also
moving home as well.
Indeed, working from home is now easier, and far more accepted, than
ever before. It is estimated that roughly one million new home-based businesses
are started every year. The number of home-based businesses in the
20 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
In the 1950s, Bette Naismith was a single mom who worked as a bank secretary.
Although she was not a great typist, she did happen to be a very
good artist. So every year, the bank had her paint the Christmas scene for
the bank’s windows.
One year, she made a mistake while painting the holiday scene and
just painted right over it, as artists are wont to do. She thought to herself, “I
wish I could do that when I was typing.” Her big idea came when she realized
that she could.
She snuck some tempera paint into work and began to paint over her
typos. She soon realized that this was a great product that she could sell to
other secretaries. Working out of her house at night after she got home
from work, Ms. Naismith began to experiment with different permutations
of paint. By setting up her business at home, Bette Naismith was able to
start the Liquid Paper Corporation, and revolutionize the office supply industry
in the process.
TEAMFLY
United States ranges from 15 million to 40 million, depending on who is doing
the counting, and what they are counting.
Whatever the actual number, the fact is that home-based businesses can
be very profitable. Entrepreneur magazine estimates that almost $500 billion
is generated each year by home-based businesses. In a recent survey, the Small
Business Administration (SBA) discovered that almost 25 percent of all homebased
businesses had a yearly gross income between $100,000 and $500,000.
If present trends continue, within ten years, one out of every three households
will have someone working from home.
Whereas working from home used to be kept a secret, today there is a
certain cache to working from home. It’s hip. But there is usually no need to
2 / T h e H o m e – B a s e d B u s i n e s s A d v a n t a g e 21
■ Real Life Example
One day in the spring of 1994, Jeff Bezos was sitting at the computer in his
39th-floor office in midtown Manhattan, looking at something very few
people had even seen—the Internet. Bezos happened upon a Web site
that said that the Internet was growing at a rate of 2,300 percent a year. As
Bezos later told Time magazine, “It was a wake-up call. I started thinking,
OK, what kind of business opportunity might there be here?” Bezos knew
that whatever he created had to be unique; offering something people
couldn’t get elsewhere. “Unless you could create something with a huge
value proposition for the customer, it would be easier for them to do it the
old way,” Bezos told Time in 1999.
That is what finally led Bezos to books. He figured that selling books
online would in fact be unique because online he could offer every book
available. There were no giant mail-order book catalogs because such a
catalog would have to list millions of books to be complete. Only on the Internet
could Bezos offer every book.
So, Jeff Bezos quit his job, and set out with his wife MacKenzie for
Seattle. Why Seattle? Because the city had two huge book distributors and
plenty of computer experts he could hire. As MacKenzie drove them across
the country, Jeff wrote his business plan on his laptop.
When they arrived in Seattle, Jeff and MacKenzie rented a two-bedroom
home in Bellevue, a suburb of Seattle. It was there that they started their
company. Converting the garage into a workspace, Amazon.com was born.
tell anyone that you work from home because the new entrepreneurial economy
and its attendant information age has made it practically impossible to
tell where someone works. Between fax machines, PCs, cell phones, personal
digital assistants (PDAs), e-mail, and call waiting, anyone can be an executive
in his bathrobe if he so chooses, and no one is the wiser.
This is good news for the would-be entrepreneur, because one of the advantages
of setting up shop at home is that it drastically cuts down on overhead.
This in turn makes it much more affordable and possible to start a
business, and increases the potential for success.
Maybe your dream is to be a multimillionaire. That’s fine. But so too is a
dream to create a business that makes enough money to allow you to stay
home, play with the kids when they get home from school, and shoot a round
of golf on Friday afternoons. That’s fine too. That you are the boss and can do
what you want is one of the best things about starting your own home-based
business. Doing what you want—that’s the whole idea.
Risks and Rewards of Working from Home
Working from home, either necessary or by design, is not always an easy
thing to do. There are definite distractions and other issues to contend with
that one doesn’t face when working in an outside office. But by the same
token, there are benefits that other locales do not offer.
First the bad news. Working from home can be challenging. There are
three common problems of which to be wary.
1. It’s Easy to Get Distracted
One of the best things about working outside the house is that it forces
you to give work the attention and rigor it deserves. When you go to work
every day to an office full of people dressed well, who are (theoretically)
committed to achieving the same goal, it forces you to take work seriously.
That is simply not true when you work for yourself at home. If you want
to sleep in, you can. There is no one to report to but you. If you want to work
in your pajamas, you can. It’s pretty easy to find yourself watching too much
TV, or wandering into the kitchen too often, or playing one round of golf too
many. It’s very easy to goof off when you work alone at home.
Another problem is that some people find it difficult to distinguish their
personal life from their business life when they work at home. Just as it’s easy
22 T H E B U S I N E S S S T A R T – U P K I T
to get swept up in the novelty of working from home and goof off too much,
it also is easy to work too much. Workaholics need self-discipline too, lest
they find themselves working at all hours of the day and night, letting their
personal lives become nonexistent.
The bottom line is that if you are going to be a successful home-based
businessperson, you need to have or learn some self-discipline.
2. It’s Easy to Feel Alone
If it is easy to get distracted working from home, it is equally easy to feel
isolated. Another good thing about going to a regular office every day is the
social aspect of work. Work is a great place to meet people, exchange ideas,
share a joke, and interact with other people.
You will be giving that up when you open your own home-based business.
While it is certainly true that you may take on employees down the
road, at the beginning of your venture, you are likely to be working alone.
And at the start is when loneliness is most likely to crop up. One way that
some home-based entrepreneurs handle this is by making sure to schedule
meetings and business lunches with associates outside of the home, to maintain
that social aspect of work.
Others experience the opposite feeling. Instead of feeling alone, they
feel as if they lack privacy. Working at home allows your spouse, your kids,
and any visitors to your home access to your workspace and your business.
Having a separate office that everyone respects is a key element to successfully
operating a home-based enterprise.
3. You May Not Be Taken Seriously
It used to be that working from home was a bit of an oddity and the person
who did so was considered an iconoclast at best. Things have certainly
2 / T h e H o m e – B a s e d B u s i n e s s A d v a n t a g e 23
Post your business hours on the door of your home office. People will be
much less inclined to poke in when they know that you take your work
schedule seriously.
changed. With so many people working from home these days, it is far more
acceptable and understood.
Nevertheless, SBA studies indicate that roughly 25 percent of homebased
businesspeople still feel that they are not taken as seriously as their
office-building–bound brethren. That is, customers, clients, business associates,
former coworkers, and even family members may not appreciate that
you are as professional as anyone working from a “normal” office. This perception
is best dealt with by creating a professional image and a professional
workspace, and doing top-notch work.
Despite these three problems, the rewards of working from home are
numerous. From a practical standpoint, succeeding in business is more likely
with a home-based business than an outside business because it is much less
expensive to run. Not only do you save on rent and related overhead, but
there also is less mileage on your car, less need for expensive clothes, and substantial
tax deductions available. Thus, your gross profit margin is greater
than in a “regular” business. This is borne out by a 1999 SBA study that found
that home-based businesses fail at a lower rate than conventional businesses.
Second, on a personal level, people who work at home tend to be a
fairly happy lot. A survey conducted by Prevention magazine found that people
who work at home say that they eat healthier, have more free time, exer-
24 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
Lillian Vernon was born in Leipzig, Germany, and escaped to New York with
her family during World War II. Newly married and pregnant in 1951, Ms.
Vernon used the $2,000 that she received as wedding gift money and
started a mail order business in an effort to help pay household bills.
Her office was the kitchen table in their apartment. Ms. Vernon placed
a sixth-of-a-page ad for personalized handbags and belts in Seventeen
magazine and waited. The ad was a huge hit, bringing in more than $32,000
in orders. With success like that, the Lillian Vernon Company outgrew her
home office in three short years.
Today, Lillian Vernon has sales of over $287.1 million, introduces more
than 3,000 new products, and accepts 4.4 million orders each year.
cise more often, and have a better sex life than when they were employees.
In comparison, 45 percent of regular employees worry about their job, and
49 percent find their job to be very stressful, according to the Prevention
study. People who work at home report that they have more time to spend
with family members, also upping the happiness quotient.
That last point is important. Many people love working from home because
it keeps them closer to the family. That hour or more that you commute
every day is reduced to a 30-second walk, and the time saved can be spent as
you wish, with whom you wish.
Parents of young children also appreciate the chance to create a work
schedule that allows them to be home and free when the kids are home from
school. You can make your own schedule and work when it works for you,
which may not necessarily be nine to five. Indeed, one of the greatest things
about working from home is the ability to work at odd hours. You may decide
that your hours should be from 7:00 AM to noon, and then again from 3:00 PM
to 6:00 PM, or from 6:00 AM to 2:00 PM. Making work work for you is what this
is all about.
Setting Up Shop at Home
To make working from home work for you, it is critical that you set up
your home office properly. Setting it up takes some thought and careful planning.
Sure, choosing where you’ll spend the majority of your day, arranging
furniture and supplies, and decorating your walls should be enjoyable, but there
is a bit more to the logistics of choosing a home office than putting up pictures.
First, you need to pick the right room. It may be that only one room is
available, but if you do have a choice, remember that you can never have too
much space. The number one complaint among home businesspeople is not
having enough space.
2 / T h e H o m e – B a s e d B u s i n e s s A d v a n t a g e 25
“Millions have found their productivity actually increases when they work
nearer the people they are really working for—their families.”
—President George Herbert Walker Bush.
You really need to have a separate room for your business. Not only is
having space to yourself critical, but if you want to claim the home office tax
deduction, you need a specific room for business only (see Chapter 12). By
having a room dedicated to work only, you are sending a signal to yourself
and those around you that even though you are at home this is about work.
It forces everyone to take your venture more seriously. You can cordon off
space in a large room using dividers if you have to, but avoid it if you can.
If you want a special room for your office and do not have one, consider
converting a room for the purpose. An attic, basement, garage, or patio can
be turned into a great workspace, and it need not cost a fortune. Some carpet,
track lighting, and a new window can go a long way to making unused
space very useful.
You also need to consider that you will require a place where you can
work peacefully. Barking dogs, construction, and kids playing in the street
can drive you to distraction. As such, insulating your new office may be worth
the cost. Wall-to-wall carpeting is great for reducing sound, but even an area
rug will help as long as you spring for good padding. Other sound-reduction
tools include weather-stripping, double-glazed windows, and solid doors.
26 T H E B U S I N E S S S T A R T – U P K I T
✎Home Office Space Requirements Checklist
□ Working. At a minimum, you need room for a desk, chair, computer,
phone, other supplies.
□ Storage. You will need a file cabinet and room for boxes and other
storage goods.
□ Books and supplies. You will need space for bookshelves.
□ Grunge work. You will need space for assembling materials, stuffing
envelopes, and the like.
□ Conference space. If you will be meeting with clients, you will need
room for chairs or a couch and a table.
□ Other. Do you need space for employees? What about for specialized
goods, a waiting area for clients, or production facilities?
Design your workspace with you in the center. You should be able to
perform multiple tasks within reasonable reach. If you purchase furniture, you
might want flexible spaces and cubbyholes for various items and equipment.
Here are some other tips on creating a workspace that works:
• Make your bookshelves only as deep as necessary. Unless you store a
lot of three-ring binders or other large books, a depth of eight inches
should work. This will leave more floor space.
• Use the tops of filing cabinets to hold peripherals such as a printer
and scanner.
• If you are buying a new computer and are really squeezed for space,
consider a laptop. They take up far less desk or table space than a full-
2 / T h e H o m e – B a s e d B u s i n e s s A d v a n t a g e 27
✎Home Office Infrastructure Requirements Checklist
□ Electrical wiring. It’s usually worth the money to install extra outlets. If
you do, consider installing them above desk level. If your office is going
to be relatively equipment-heavy, consider placing those electrical outlets
on a separate circuit breaker.
□ Phone lines. You should have at least two phone lines, one for the
phone and one for faxes. Make sure your phone jacks are close to electrical
outlets to support equipment that requires both.
□ Internet. Any home-based business starting today will need to get
wired for high-speed Internet access. DSL lines eliminate the need for
dialing, are up to 50 times faster than dial-up, and can accommodate
multiple users on one connection. DSL is available through many different
providers that can be found in your phone book or on the Net. Similarly,
cable Internet access employs cable technology to provide
high-speed access using your area’s cable TV infrastructure. Your local
cable company usually provides this service.
□ Ventilation. In a forced-air system, there is usually a vent on the floor
and one on the ceiling. Do not put your equipment near them.
□ Lighting. Try to use as much natural light as you can. Add in a mix of
ambient lighting (ceiling fixtures) and task lighting (a desk lamp).
size PC and have the obvious advantage of being portable. The downside
is that typing on a laptop keyboard can be tiring; make sure you
choose one that is big enough for you.
• Shelves, pencil sharpeners, telephones, and lights can all be affixed to
the wall instead of taking up precious floor or desk space.
Equipping a home office is not an inexpensive proposition. A desk,
chair, and computer are, unfortunately, just the beginning.
The important thing to remember is that you will be spending a lot of
time in this space, so make sure it reflects your temperament. The office
items you buy and how you arrange them can make a world of difference in
your productivity.
28 T H E B U S I N E S S S T A R T – U P K I T
It is strongly recommended that you set up a separate phone line for your
new business and that you buy a two-line phone. You may even need three
phone lines in your home—one for personal use, one for business use, and
a dedicated fax/modem line. There are several advantages to having a separate
business line for your business calls.
First, it is more professional. It conveys a message that yours is a legitimate
business. Your answering machine/voice mail won’t be asking your
customers to leave a message for your teenage daughter, as it would if you
shared a phone line with the family. A separate phone line keeps your business
and your personal life separate.
Moreover, a separate phone line may mean that you will get more
business. By having your business phone be an actual business line, the
phone company will be able to list you in the business section of the White
Pages and you will be able to have an ad in the Yellow Pages. It also means
that you will get more done. Having one single line for home, business,
computer, and fax simply makes no sense in this day and age.
2 / T h e H o m e – B a s e d B u s i n e s s A d v a n t a g e 29
✎Home Office Equipment Requirements Checklist
□ Desk. You need a desk large enough for what you will be doing, but
keep in mind that a huge desk can overpower a small room. In fact, a
desk need not be big to be good, and plenty of compact computer desks
are avaialble today. How much will you spend on a desk? It will run you
anywhere from $200 to $2,000, depending upon your needs and budget.
□ Chair. Usually, your chair is more important than your desk. If you will
be sitting a lot, your chair is essential. Get a good one. A good ergonomic
chair should cradle your back, encourage good posture, and
allow for height, back, and arm adjustments. How much will you spend?
Expect to spend at least $200 and easily more than $500 for an excellent
chair.
□ Computer. Don’t skimp here. A cheap computer will be out of date in a
year or two.
□ Copier/printer/scanner/fax machine. These days, it is easy and affordable
to buy one machine that handles all of these duties.
□ Two-line phone. Preferably, you want a phone with a display that tells
you who is calling on the other line.
□ Answering machine or answering service. Answering services are not
inexpensive. They can easily cost several hundred dollars a month, but
may be worth it if yours is a business that requires a professional image.
□ File cabinet. You can skimp here. Buy used.
□ Bookshelves. Again, this is something you can buy used, although an
attractive pressboard bookcase can be found at office supply stores for
around $100.
□ Cell phone or pager. Not everyone needs your cell phone or pager
number.
Resources You Can Use
American Association of Home-Based Businesses
PO Box 10023
Rockville, MD 20849
<www.aahbb.org>
American Home Business Association
800-664-2422
4505 South Wasatch Boulevard, #140
Salt Lake City, UT 84124
<www.homebusiness.com>
HOMEBusiness Journal
315-865-4100
9584 Main Street
Holland Patent, NY 13354
<www.homebizjour.com>
Home Business Magazine
949-462-0224
25211 Longwood Lane
Lake Forest, CA 92630
<www.homebusinessmag.com>
30 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
Starting a business from home can be one of the best decisions you
make. By drastically reducing your overhead, you correspondingly increase
your chances of success. The important thing is to treat a home-business as
you would any other business. When you act like a professional, no matter
where your office is located, you will be treated as one.
TEAMFLY
C H A P T E R
3
· Buying Franchises and
· Other Businesses
One of the best ways to start a new business, if you do it right, is to buy
a franchise or other established business. While people typically think of Mc-
Donald’s, KFC, Dunkin’ Donuts, or Baskin Robbins when they think of franchises,
the fact is that franchises come in almost every industry. The same is
true for an already established business. They can be found for sale in every
industry and take a lot of the risk out of the entrepreneurship equation.
Franchises
Franchising is a method of distributing services or products. With a franchise
system, the franchisor (the company selling the franchise) offers its
trademark and business system to the buyer, or franchisee, who pays a fee for
the right to do business under the franchisor’s name using the franchisor’s
methods. The franchisee is given instructions on how to run the business as
the franchisor does using the franchisor’s name and the franchisor supports
the franchisee with expertise, training, advertising, and a proven system.
Buying into a proven system is important. The franchises that work best
are those where the franchisor has worked out the kinks and translated its
business into a systematic procedure that the franchisee follows. Do what the
franchisor did, and you should get the results that it got; that’s the idea. As
franchisors are wont to say, when you buy a franchise, you are in business for
yourself but not by yourself.
31
The reason that a franchise can be a smart business decision is that in
the right franchise system, the franchisor has already made the mistakes so
you don’t have to. Franchising should reduce your risk. You need not reinvent
the wheel. In exchange for its expertise, training, and help, however, you will
be required to give up some independence and do things the franchisor’s way.
Are You Cut Out to Be a Franchisee?
In 1997, the Franchise Times conducted a survey of the “average franchisee.”
What it discovered was that the typical franchisee is a 48-year-old
man who owns 3.5 franchises, works 52 hours a week, and attended college.
But if that does not describe you, don’t worry.
Franchisees come in all shapes and sizes and from all walks of life. Franchisees
are people who usually want a career change; people who may be fed
up with corporate life and dream of owning their own business. While that’s
a start, there is more to being cut out for the franchise world than a strong
desire. From the franchisor’s point of view, a good franchisee should be:
• Someone with a strong work ethic, motivation, and enthusiasm
• A person who may not have all the necessary entrepreneurial skills;
i.e., someone who needs what a good franchisor has to offer
• Someone who is open and willing to learn new things
• Someone with management experience
• A person with knowledge of the industry (Note: This is not usually
necessary for a fast food franchise.)
• Someone who is a good salesperson (Maybe the most important trait
of all.)
If you think that a franchise is for you, the next step is to thoroughly
check out possible franchisors. Not all franchises are created equal. Some
franchisors give a lot of support and training, others give little. Some are easy
to work with, some are not. The important thing is that you do your homework
and learn about the franchise before buying.
32 T H E B U S I N E S S S T A R T – U P K I T
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 33
✎Quiz: Are You a Potential Franchisee?
To help you decide whether you have the necessary qualities to be a successful franchisee,
take the following quiz. As you do, be totally honest with yourself; a franchise is a
major commitment of time and money. Circle yes or no.
[Yes] [No] I do not have to make all decisions for myself. I am willing to let others make
some too.
[Yes] [No] I could fill in for an absent busboy if needed.
[Yes] [No] I do not need a lot of supervision.
[Yes] [No] I am willing to put long hours into the business.
[Yes] [No] I am willing to do what the franchisor suggests, even if I don’t agree.
[Yes] [No] I am highly organized.
[Yes] [No] I have at least 5 years of management or teaching experience.
[Yes] [No] I have hired and fired employees.
[Yes] [No] I have trained personnel.
[Yes] [No] I am a good salesperson.
[Yes] [No] I have sufficient capital to buy into the franchise of my choice. (This is critical.)
[Yes] [No] I am willing to take a risk with my money to make money.
[Yes] [No] My spouse and family support my choice to start a franchise.
[Yes] [No] I am a self-starter.
[Yes] [No] I am willing to be a follower.
If you answered at least ten of the questions in the affirmative, then it is likely you have
what it takes to make a franchise work. While all of these traits are important, realize that you
must be highly motivated, persistent, willing to listen to the franchisor, and sales-oriented to
be a successful franchisee.
Finding the Right Franchise
With so many franchise systems from which to choose, the options can
be dizzying. It is best to start with a global perspective. In the universe of franchising,
which industries seem to match your interests? Narrow the choices
down to a few industries in which you are most interested, and then analyze
your geographic area to see if there is a market for that type of business.
Once you have decided which industry interests you most and seems to
have growth potential in your area, contact all the franchise companies in
that field and ask them for information. Any reputable company will be happy
to send you information at no cost.
A great place to learn about all of your options is at a franchise trade
show. This is a terrific way to gather a lot of preliminary information and survey
the field in a short period of time, and you can find them in most goodsized
cities. When attending a franchise trade show, keep a few thoughts in
mind. First, remember the companies exhibiting at the show by no means
make up all of the franchise opportunities available. Indeed, these events
showcase only a small selection of the available franchise programs.
34 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
Hector was interested in a restaurant franchise. Given that he had begun
work as a busboy and had moved up the ranks to become a general manager
of a restaurant chain, he decided that owning his own franchise
would be the next step. Hector settled upon one very well-known chain
and began to do his research.
He was surprised to discover that many of the franchisees he talked
to were very displeased with the franchisor. They felt that the franchisor
was hard to work with, didn’t follow through, and seldom listened to their
ideas. Hector was even more surprised when he became attracted to a
much smaller, less famous restaurant franchise.
Both his instincts and homework told him that the smaller franchisor
offered a better opportunity. He was right. Within ten years, the small chain
had grown exponentially, and Hector was there, almost from the beginning.
His advice and expertise were actually welcomed and sought out by
the franchisor. Hector eventually owned 12 stores in the chain.
Second, when you do go, take full advantage of the information available.
Pass by the sellers who are out of your price range or do not meet your
personal goals. Be sure to dress conservatively when you go to the show,
carry a briefcase, leave the kids at home, and take business cards if you have
them. Show the representatives you meet that you are a serious prospect.
Have a short list of questions ready to ask them:
• What is the total investment required?
• What is a franchisee’s typical day like?
• Is financing available from the franchisor?
• What kind of support can you expect from the franchisor?
• What is its advertising plan?
Of course, you cannot rely solely on promotional materials to make your
decision; you also need to do your own research. The most important thing
you can do is talk to current and former franchisees. They can tell you what
it is like to work with the franchisor, how much money you can really expect
to make, and what to be on the lookout for.
It also can be very helpful to visit your library or go online to look up
all the articles you can find about the franchisors you are considering. Is
the company depicted favorably? Is it growing? Check with the consumer or
franchise regulators in your state to see if there are any complaints lodged
against the companies you are considering. Be sure to check with the Federal
Trade Commission, the better business bureau, and your local chamber of
commerce.
Analyzing the Costs
Obviously, one of the most important things you must consider when
choosing a franchise is the cost involved. There are three fees associated w
ith buying a franchise. The first is the franchise fee. This is the amount you
will pay the franchisor for the right to use its system and trademark. In a
well-known food franchise, these fees typically run between $15,000 and
$50,000. The second fee is the royalty payment. This is an ongoing monthly
fee paid to the franchisor. Usually, it runs between 3 and 6 percent of gross
monthly sales.
The final fee is the largest—the cost of buying the actual physical business.
There are many costs associated with this. These include:
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 35
• Real estate fees. You may need to pay for a real estate agent to help
you find a location. You will also have to put down a security deposit
and utility deposits.
• Architecture fees. You may need either an architect or a civil engineer
to create plans to modify (or design) your location. A good franchisor
may have a set of standard architecture plans that you can use.
• Contractor fees. This is a big-ticket item. It can include everything
from landscaping to major construction overhauls.
• Equipment and fixtures. You may need to buy everything from tables,
chairs, telephone systems, kitchen equipment, and display counters
to computer systems, software, and cash registers.
• Décor. This will include things like signs, pictures, lights, and interior
design.
• Inventory. Your opening inventory includes many things, such as ingredients,
raw materials, product, paper goods, office supplies, and
janitorial supplies.
• Insurance. You will need to buy workers’ compensation insurance
(required by law), as well as liability, property, auto, and other insurance.
• Labor costs. You will likely need to hire staff and managers, and may
need to pay for training with the franchisor.
• Professional fees. You may need to hire a lawyer and an accountant
before you open your doors.
• Working capital. This is the amount of money you will need to keep
the business going until it begins to turn a consistent profit. You probably
need to have at least six months’ worth of working capital before
planning your grand opening party.
Needless to say, you shouldn’t underestimate these costs. Nothing is worse
than spending a lot of money to start your new business but not budgeting
enough to keep it going until it becomes a success.
So, how much do you need? Let’s examine some of the costs of various
franchises in order to get an idea:
• McDonald’s. McDonald’s estimates that new restaurant costs range
from $455,000 to $768,500. Many things affect those costs: the size
of the restaurant, the area of the country in which it will be located,
inventory, equipment, signs, décor, and landscaping. In addition, at
the time of opening, a franchise fee of $45,000 is paid to McDonald’s
36 T H E B U S I N E S S S T A R T – U P K I T
Corporation. You must have in liquid cash a minimum of $175,000 for
a conventional purchase or $100,000 for a lease. The rest can be financed,
although McDonald’s itself does not finance franchises.
• Subway. Subway estimates that new restaurant costs range from
$97,000 to $222,800. While the franchise fee is only $10,000, the real
costs are in building the restaurant, which includes leasehold improvements,
signs, equipment, etc. Subway requires that you also have funds
to operate the business for three months, above and beyond any other
capital requirements.
• ServiceMaster. ServiceMaster provides services to homeowners such
as cleaning, janitorial, maintenance, and disaster restoration. The capital
requirements for this franchise range from $10,200 to $52,000.
The franchise fee (between $14,500 and $26,500) as well as the equipment
purchase can be financed up to 80 percent.
• Meineke Discount Mufflers. Meineke’s franchise fee is $25,000, and it
requires that you have a minimum of $50,000 in cash. Financing is possible
to qualified candidates.
• Mail Boxes Etc. MBE’s capital requirements range from $125,862 to
$195,882. The franchise fee is $29,950. MBE offers up to 40 percent
financing for fixtures and equipment.
With thousands of franchise choices available, and costs that vary
greatly, it is incumbent upon you to do your research and find a franchise system
that fits both your personality and your pocketbook. It is out there.
Analyzing the Franchisor
As you go about this research, understand that successful franchisors have
certain traits in common. Following are the traits that are most important. If you
can find a franchisor that has these traits, you are headed in the right direction.
The Franchisor Supports the Franchisees
The best franchises are ones where the franchisor sees its relationship
with the franchisees as a partnership. As Steve Reinemund, the former head
of Pizza Hut, puts it, “Franchisees are only as successful as the parent company
and the parent company is only as successful as the franchisees.”
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 37
Not only do such exceptional franchisors offer plenty of communication,
opportunities for growth within the company, and help during hard times,
they also offer lots of advice and training. A good example of this is Dunkin’
Donuts. To support new franchisees, it created Dunkin’ Donuts University.
There, franchisees and their personnel are invited to attend a six-week success
program that teaches them everything from basic instructions on how to
run the business to how to produce the products, deal with employees, and
use equipment. It even offers advice on inventory control and accounting.
Now that’s support.
The Franchisor Advertises a Lot
Not all franchises are dependent on advertising, but so many are that this
is an important distinction. You want a system that does not skimp on advertising
and promotions because that is where your customers will come from.
Dunkin’ Donuts spends roughly $40 million a year on extensive advertising
campaigns for TV and radio, and in newspapers across the country. Similarly,
Pizza Hut spends about 7 percent of its gross sales on sales and marketing.
That is the kind of advertising support you should be seeking.
The Franchisor Offers Uniformity, Tempered with Flexibility
One of the great strengths of franchising is that customers know what
to expect when they walk into a well-known franchise. For example, that sort
of uniformity is one of the main reasons people choose to eat at McDonald’s.
But by the same token, you want to avoid a franchisor that is so strict
that it does not allow for creativity and some independence. The good franchisors
know that some of the best ideas come from franchisees that try something
new. One reason for buying a franchise is that you want the freedom to
be your own boss. Avoid the paternal franchisor.
38 T H E B U S I N E S S S T A R T – U P K I T
The Big Mac was introduced at McDonald’s in 1968. It was the brainchild of
Jim Delligatti, one of McDonald’s first franchisees.
The Franchisor Is Committed to Customer Service
The great franchisors don’t just give lip service to customer service, they
teach it to everyone in the organization, and live it on a daily basis. That’s critical,
because if people are treated well at other outlets, that, in turn, gives
your individual franchise a good name too. As the Pizza Hut chairman put it,
“We are committed to more than just good service, we are committed to providing
legendary service.”
The Franchisor Changes with the Times
Tastes and values change. The last thing you want is to buy into a system
that is stuck in the past, not realizing that its product or service needs to
adapt to the times. The better franchise systems are constantly test marketing
new ideas and new products in an effort to stay ahead of the competition.
Typically, a good franchisor will provide the following services on an ongoing
basis:
• Local, regional, and national advertising, offering you related programs
and materials
• Field support
• Updates to the operating manual and ongoing related training for you
and your management team
• Some sort of advisory council
• Research and development of new products, services, and system
enhancements
• Communication support—either an intranet, a members-only Web
site, monthly newsletters, or some other method to keep you up to
date
If the franchisor you are considering does not offer these sorts of things,
it would behoove you to think twice.
Meet the Franchisor
After narrowing your choices, it is time to sit down with the franchisor
and get all of your questions answered.
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40 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
What kind of training do various franchisors offer? Here’s a sampling.
Alphagraphics. Alphagraphics provides four weeks new franchisee training,
one week in-store training, and advanced franchisee training; a tollfree
technical support hotline; marketing and advertising programs
including automated direct mail programs and newspaper and radio ads;
ongoing training includes conferences and store visits by field reps.
Martinizing Dry Cleaning. Martinizing Dry Cleaning provides comprehensive
managerial and technical training in the classroom as well as at
franchisee’s store; equipment shakedown and ongoing service hotline; a
grand opening marketing package, and ongoing local store and marketwide
promotional programs; field and operations assistance; ongoing
support staff that is only a toll-free call away.
Fastsigns. Fastsigns provides initial site selection and finance assistance;
four-week new owner training program; two-week on-site support during
store opening; a grand opening marketing campaign; ongoing support includes
marketing, operational, technical, and business management training
as well as a fully integrated Internet system.
Petland. Petland provides a five-week training academy, which includes
three weeks of on-site training prior to and following the grand opening;
video and audio tapes backed up by operations manuals as resources for
ongoing, in-store training; field operations managers to review monthly financial
performance and provide consultations.
Tinderbox. Tinderbox provides complete turnkey, start-up assistance,
which includes location, site selection negotiations, demographics, store
layout, classroom training, on-site support operations manual, proprietary
computerized operating system, and continuing operational support.
TEAMFLY
The important thing is that you get a very clear picture of the cost of
purchasing the franchise—both start-up and ongoing costs. Once you have
gathered all of this information, you will be able to make an informed decision.
Carefully examine everything with your attorney, accountant, or business
advisor. You want to be sure that every item of importance is addressed
in the franchise contract.
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 41
✎Checklist of Franchisor Questions
□ How much will the entire initial costs be, and what do they cover?
□ How much will the franchise and royalty fees be?
□ Will I be required to purchase land or can I lease? If I do lease, do you
help me with the negotiations?
□ What kind of building or construction costs will there be?
□ What kind of equipment is required? What will it cost?
□ What kind of initial training will I receive? What about ongoing
training?
□ Who supplies the starting inventory and what does it cost?
□ What kind of promotional fees will I be expected to pay?
□ Is there a fee for cooperative advertising? If so, how much is it?
□ What kind of insurance will I be required to get?
□ Will I be able to purchase supplies from you? If so, are the prices
competitive with other suppliers?
□ What sort of restrictions will I have with regard to competition with
other franchisees?
□ What are the terms regarding renewal rights and the sale of the
franchise?
Location, Location, Location
Not all franchises need to pick a dynamite location. For example, janitorial
services, direct mail companies, or lawn care services really don’t need
to worry about their location because drop-in business is not their business
model. But a restaurant needs a good location. Typically, if you are looking at
a retail establishment, location usually is a priority.
The first thing to do is speak with the potential franchisor. One of the
best aspects of buying into a good franchise operation is that you should get
plenty of advice and help from the franchisor. Start there and see what it says.
The franchisor will know what you should look for, what works best, and
what locations are available in your area. In fact, in some cases, site location
may not even be up to you; the franchisor may make this decision. You need
to find out who chooses your location. If it is you, you want to make sure that
the franchisor will be helping you in the site selection process.
Additionally, you need to find out about territorial exclusivity. Does the
franchisor offer this and, if so, what is the size of the territory? Territorial
exclusivity has been the subject of many lawsuits between franchisees and
franchisors, so make sure that you really understand this issue and have any
agreements put in writing.
As always, one of the best ways to know what to expect from a franchisor
on this or any subject is to talk to the current franchisees. They will
tell you if the franchisor plays fair, if territorial limits are respected, and if site
location analysis is accurate.
Area Development
A topic related to location is area development. Area development allows
you to open more than one franchise in a certain locale. If, for example,
you want to open eight auto body repair shops, you can go to the franchisor
and buy the rights to your area en masse. This allows you to monopolize the
market and excludes challengers under the same franchise umbrella from
competing with you. The key things to consider regarding area development
are
• picking a franchise system that is not yet developed in the area, and
• getting the franchisor to grant you market exclusivity.
42 T H E B U S I N E S S S T A R T – U P K I T
How Much Money Can You Reasonably Expect to Make?
All of this research begs the question: How much can you really make
buying a franchise? The early days of franchise sales in the United States were
marked with many instances of abuse in which misleading earnings claims
were used to sell franchises. In 1979, in an effort to try to stop these practices,
Congress authorized the Federal Trade Commission (FTC) to regulate
the franchise industry. While the current FTC rules do not forbid a franchise
company from supplying information about earnings, they do have tough
rules on how this information can be given to a prospective franchisee.
Basically, if a franchise does want to provide this information, it must put
it in its disclosure document, called the Uniform Franchise Offering Circular
(UFOC, see sidebar and next section). Most franchisors opt not to disclose
this information. Why? There are three reasons. First, it is not so easy to put
together an accurate, reflective, earnings estimate. Second, the results may
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 43
An important legal protection for the person planning to buy a franchise is
the Federal Trade Commission’s Franchise Rule, put into effect October 21,
1979. The rule requires covered franchisors to supply a full disclosure of the
information a prospective franchisee needs in order to make a rational decision
about whether to invest in that particular franchise.
There are several requirements mandated by the Franchise Rule. First,
the disclosure must take place at the first personal contact where the subject
of buying a franchise is discussed and at least ten business days prior
to signing any contract with the franchisee or accepting any money. This is
designed to allow the potential franchisee a “cooling-off” period. What this
means is that a franchisor, franchise broker, or anyone else representing
franchises for sale must present a disclosure document, called the Uniform
Franchise Offering Circular (UFOC), to the potential franchisee long before
any money is exchanged. The UFOC contains extensive information about
the franchise.
Furthermore, the Franchise Rule mandates that the potential franchisee
must be provided with completed contracts covering all material
points at least five days prior to the actual date of signing the contract.
simply not be attractive enough to entice new franchisees to join. Third, once
it’s in writing, the estimates may be seen as a benchmark, and if a franchisee
fails to hit that mark, they just might sue the franchisor for making false promises.
Because they don’t want to get sued, many franchisors simply refuse to
divulge this critical information.
When a franchise does not provide an earnings claim in its UFOC, it is
still possible to get this information. The best way to find out how much
money you can make is by asking existing franchisees. Make sure to select
enough franchisees to get a clear picture of the ranges for earnings within the
franchise system.
A good rule of thumb is that you can earn 10 to 15 percent on your
money over time in a passive investment. Because most franchises require
that you invest your time and efforts, as well as your money, you should expect
a significantly higher return in order to justify the investment. You
should look for earnings of at least 30 percent of your total investment on an
annual basis to consider any franchise as having a reasonable return, and you
should expect to reach this level, at the latest, by the third year of operation
of the business.
Analyzing the UFOC
The franchisor is obligated under law to provide you with the UFOC at
your first face-to-face meeting. The UFOC, though often written in legal gobbledygook,
is nevertheless a wealth of information. There are 23 standard items
in the document. The key areas you should concentrate on are as follows:
• Item 2 describes the business background of the officers, directors,
and managers of the franchisor. Scan these summaries to get an idea
of their experience. You definitely want to make sure that they know
what they are doing.
• Item 3 summarizes the litigation background of the franchisor and the
people listed in Item 2. If they have been sued a lot, a red flag should
go up. If there have been actions taken by state or federal enforcement
agencies against the company or its officers, or if private lawsuits
have been filed against the franchisor in the past ten years, they
are summarized in this section. Look especially for cases where franchisees
have sued the company.
• Item 4 lists any bankruptcies in the backgrounds of either the company
or the people listed in Item 2.
44 T H E B U S I N E S S S T A R T – U P K I T
• Items 5 and 6 summarize the initial franchise fees and any ongoing
royalty fees and other charges franchisees must pay. Go over these
numbers with your accountant.
• Item 7 presents the franchisor’s estimate of the typical total investment
by the franchisee. You will need this information when you prepare
your business plan or if you will be seeking financing for the
franchise. Again, go over this with your accountant.
• Item 8 discloses the restrictions placed on your ability as a franchisee
to purchase supplies and products. You need to investigate whether
other franchisees think these products are fairly priced. Because supply
arrangements are a vital aspect of running a business, make sure
their system works well.
• Item 10 discusses financing. Many franchisors either provide their
own financing or make arrangements with banks or other lenders to
assist franchisees. Even if there is no mention of special financing
arrangements in this item, ask the franchisor about them.
• Item 11 is the longest section in the document and it is critical. It discusses
the franchisor’s obligations to the franchisee under the franchise
agreement. It also describes required computer equipment purchases
and initial training programs.
• Item 12 explains your territorial rights. If the franchisor reserves the
right in this item to distribute competing products or services
through other channels of distribution, find out how the company intends
to use that right.
• Item 13 details your ability to use the franchisor’s trademark—the
company’s name and logo.
• Item 19 explains potential profits. This important section shows what
kinds of sales or profits other franchise owners have made. Interestingly,
the franchisor is not legally obliged to supply this information in
this section, and many don’t. If a franchisor does provide this information,
it must also provide data to prove the claims if you so request
it. If the franchisor supplies no profit information here, find out why.
It may be because the franchisees don’t make a lot of money, or it
could simply be that earnings vary widely from one region to another,
or from one franchisee to another. The important thing in this realm
is to go beyond what the UFOC says and ask franchisees about their
sales and profits. Most are happy to share their experiences.
• Item 20 contains statistical information, such as how many new stores
have opened over the past few years and how many franchisees have
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 45
recently left the system. This section also contains a list of the names,
addresses, and telephone numbers of current franchisees and those
who have left the system in the past year. That alone makes the UFOC
worth its weight in gold.
Common Mistakes to Avoid
Once all of your questions have been satisfactorily answered, you have
done your due diligence and have spoken with existing franchisees, and you
understand where your store will be located, it is time to sign on the dotted
line. But before you do, make sure you avoid potential pitfalls. Franchisees
often buy into a franchise without a full understanding of just what it takes to
succeed in their chosen business. That is one of several common mistakes
that are easily avoidable. The following are the mistakes you want to avoid
when buying a franchise.
Not reading, understanding, or asking questions about the UFOC.
The Uniform Franchise Offering Circular is a big document, sometimes 75
pages long, but it is critical that you read and understand each item, 1
through 23. As you read the document, keep notes on those areas that are
confusing. Don’t assume the franchisor is responsible for one thing or another;
if it’s not spelled out in the UFOC, ask! List all of your concerns, and
clarify which duties, obligations, and responsibilities belong to whom. Then,
have your lawyer read the document and do the same thing. Finally, go over
each issue, item by item, with the franchisor. Get everything that the franchisor
promises and agrees to in writing and have it made part of the franchise
agreement.
Not understanding or having an inaccurate understanding of the
franchise agreement and other legal documents. You and your attorney
must carefully review the franchise agreement, lease and real estate
agreements, and all other contracts. Any promises that the franchisor made
earlier must be made part of your contract to be legally binding.
Not analyzing the market properly. While the franchisor may help with
site selection, it is nevertheless your responsibility to decide whether a particular
location is promising. Is there sufficient traffic? What is the competition
like? Are the competitors so strong that their market saturation may be
46 T H E B U S I N E S S S T A R T – U P K I T
hard for you to penetrate? You have to conduct sufficient research to make
sure that there is a market for your service or product in your chosen location.
Not checking out failed franchises. Locate some franchises that closed,
were sold, or have changed ownership to company-owned, and find out the
reasons for the change. Contact the original owners and get their stories. If
there is a common theme, the underlying problem may be something you
want to avoid.
Not contacting enough current franchisees. The section of the UFOC
on “Past, Current, and Future Franchisees” is a great starting point for locating
franchisees to contact. It is very important to speak with them. Only they
really know how the franchisor is to work with, how much money you can
expect to make, what mistakes to avoid, and the like.
Other than the franchisees introduced to you by the franchisor, you
should also survey other franchisees not listed in the disclosure document.
Find out from them if the franchisor has a reputation for honesty and verify
their experience with the accuracy of the UFOC.
Not meeting with the franchisor’s key management personnel at
their headquarters and the representative assigned to your territory.
A sales representative can do such a good job that you may not bother meeting
the other important personnel or traveling to the headquarters before
signing the franchise agreement. Do not make this mistake. Meet everyone
you can and ask all the questions you can. Verify the information provided by
the sales representative. After the franchisor defines your territory, meet the
field representative or district supervisor that will be working with you.
Not having enough working capital. Money is the lifeblood of your business.
Make sure you have enough capital to cover every cost associated with
the business, including all preopening costs, your family budget, and operating
capital for the business to make it through the break-even point.
Buying a Business
As in the case of a franchise, a preexisting business can be a great option,
if you do it right. The fact is, you need not be an innovator to be a successful
entrepreneur. Many entrepreneurs are great turnaround artists. They have far
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 47
more success recognizing an opportunity and capitalizing on an existing venture
than starting their own business. While you really never know what will
happen when you create a business, when you buy an existing business, you
can do enough research to be fairly certain what to expect. As such, buying
an ongoing concern is less risky than starting a brand-new business.
The key to a business purchase is to dig into the business’s records and
history. If the past is prologue, then knowing what has happened in the venture
will tell you where it is headed. The main things to check out include location,
profits and losses, and people.
Location
How long has the business been in that location? It is a good sign if the
store has been operating in the same place for many years. Conversely, if
other businesses have failed in that location, you should be concerned. Some
locations get a bad reputation in the neighborhood, and you should probably
avoid those locations. You also want to be sure that the place is convenient
for customers, has adequate traffic flow, is up to code, has adequate signage,
and does not need a lot of remodeling. Finally, you need to see where your
competition is in relation to the location.
Profits and Losses
You are buying a business presumably because you want an accurate
idea of what your profit will be. To figure this out, you need to get from the
proprietor the past five years’ worth of audited balance sheets, income statements,
and cash flow statements. Your accountant should review these. You
need a copy of the lease and any other contracts for which you will be responsible.
You need to get a list of assets and liabilities, receivables, and obligations.
You need five years’ worth of tax returns. Basically, you need all
records as they relate to the business, and you need to spend time analyzing
these records with your accountant.
People
You will be buying not only the business but also the staff. Review personnel
files and meet with employees individually. Find out whether any have
contracts that could prevent you from letting them go for any reason. You
48 T H E B U S I N E S S S T A R T – U P K I T
also need to speak with some of the business’s customers. Discover what
they think of the business, how they like it, and how long they have patronized
it. That alone will tell you a lot.
Finally, make sure the owner is someone you can work with. He or she
should disclose all financial, legal, personnel, and customer information. If information
is refused, then there’s a problem.
Resources You Can Use
American Franchisee Association
312-431-0545
53 West Jackson Boulevard, Suite 205
Chicago, IL 60604
<www.franchisee.org>
Entrepreneur.com Franchise Zone
<www.entrepreneur.com/Franchise_Zone>
The Franchise Handbook
414-272-9977
c/o Enterprise Magazines, Inc.
1020 North Broadway, Suite 111
Milwaukee, WI 53202
<www.franchisehandbook.com>
3 / B u y i n g F r a n c h i s e s a n d O t h e r B u s i n e s s e s 49
T H E B O T T O M L I N E
Buying into a good franchise or a successful business means
that many of the bugs in the system have been worked out and
many of the mistakes have already been made. Accordingly, buying
a franchise or existing business is smart because, if done correctly, it
can help reduce the risk inherent in entrepreneurship. The secret to
doing so successfully is to do a lot of homework so that you will
know exactly what it is you are getting.
The Franchise Times
651-631-4995
2500 Cleveland Avenue North, Suite D South
Roseville, MN 55113
<www.franchisetimes.com>
The International Franchise Association
202-628-8000
1350 New York Avenue, NW, Suite 900
Washington, DC 20005-4709
<www.franchise.org>
50 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
C H A P T E R
4
· Preparation, Production,
· and Distribution
People go into business to sell products or to provide a service. That’s
it. It follows then that the very heart of your business will be your ability to
produce those goods or services at reasonable prices so that you can make a
profit when you sell them.
Planning for Your Service
Service businesses must provide their service, whatever it is, efficiently,
quickly, affordably, and affably. It’s a tall order. If you are opening a veterinary
clinic, for example, your office has to set appointments that you will be able
to keep on time, provide a bright and cheery atmosphere, offer valuable and
affordable services, and have a staff that is friendly and knowledgeable.
If you think about it, that’s essentially the same prescription for success
for any service business. A carpet cleaning business, a law office, an auto repair
shop, or a health club all must provide affordable and efficient services.
How do you do that? The first step is systemization. You need to set up procedures
and processes that will be followed every time for every customer or
client.
Begin with your computer system. There is a lot of specialty software out
there aimed at different sorts of businesses. You can bet that someone, somewhere,
has created a program for a veterinary office that allows them to take
51
appointments, track animals, and create bills. The vet needs to find that program
just as you need to find the program for your service business. These programs
are the first, critical step toward professionally producing your service.
Beyond computers, training is essential to producing a winning service
business. All employees have to be on the same page, with a common understanding
of what is expected of them and where the business is headed.
Most employees today want to do more than just put in their time and take
home a paycheck. They want to feel they are part of something important;
that their work makes a difference. Your job is to help them feel that way. Let
them know your vision for the business and for them.
You might consider coming up with a mission statement for your business
that you all agree on. Many small businesses have a mission statement
prominently displayed in the office to which the employees often pay lip service.
But great service businesses get their employees to actually buy into that
mission and believe in it. When employees don’t understand what the busi-
52 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
“When I opened my first law office, I wasn’t sure what sort of law would become
my ‘specialty.’ One day, shortly after I began, I received a phone call
from an ad seller at my local newspaper. He had gotten my number from a
listing of new business phone numbers.
The man asked me if I wanted to advertise in the paper’s classified
section, specifically, in the service directory. It sounded like a good idea to
me, so I said yes. He asked me what my specialty was, and I told him that I
wasn’t sure. He then told me something that would change my life. ‘If you
want the phone to ring,’ he said, ‘you will put in an ad for bankruptcies.’ I
had done a few bankruptcies at the time, so I agreed; I wanted the phone
to ring.
And he was right. Soon enough potential bankruptcy clients starting
calling. My first bankruptcy took me 12 hours to prepare as I had to type in
forms found in the back of a book. I soon bought a bankruptcy-preparation
software program, and cut my time down to an hour. After a few years, I
could pop one out in less than half an hour.”
ness is about, or if they are forced to heed some maxim on a plaque that they
neither buy into nor believe is true, morale suffers.
Beyond having a shared mission, the smart entrepreneur will also be,
like Ronald Reagan, a great communicator. Good communication could entail
a quarterly “state of the company” report to employees, encouraging them to
give suggestions or ask questions, or one-on-one meetings with employees
devoted to career goals. This fosters a sense of teamwork, a major factor in
developing a superior service business, according to a Department of Labor
survey.
Take Starbucks, for example. Howard Schultz of Starbucks believes that
teamwork is so critical to the company’s success that employees (called “partners”
in Starbucks-speak) spend several days after being hired learning how
to be part of the Starbucks team and how to provide superior service. Schultz
tells all new employees (about 500 a month), via video, how happy he is to
have them on board. Even part-time workers repeatedly hear how much they
are valued during the 24 hours of training they get in their first 80 hours of
employment. Training is essential if you want your service to stand out.
The final thing you can do to create a great service business is properly
reward your employees for providing superior service. Rewards can take
many forms, but the most obvious are compensation, profit sharing, and benefits.
Less evident rewards can also make a difference. A gift certificate, a
luncheon to honor employees who have made outstanding contributions, or
free T-shirts all help boost morale.
Creating a great place to work, one where people feel motivated, engaged,
and part of a team with a purpose, can do a lot toward making your
service business shine.
Your Product
Certainly not all businesses will be producing their own products. Retail
stores are lined with products produced by others. And yet producing your
own innovative product can also be one of the most lucrative businesses. Creating
a product that speaks to people, fulfills a market need, and becomes a
necessary and useful item is a rare sort of business home run that companies
live for.
And yet there is no shortage of obstacles to creating the magic product.
Whether it is finding the money to produce the product or convincing con-
4 / P r e p a r a t i o n , P r o d u c t i o n , a n d D i s t r i b u t i o n 53
sumers that they need to have the latest cutting-edge gadget, turning innovative
ideas into great products is no easy task. The first step in this process is
determining if there is a market for the product.
Test Marketing
Every year, thousands of entrepreneurs face challenges similar to yours.
Will their product sell? At what price? To whom will they be selling? Researching
your market will answer these key questions for you. Before you invest
a lot of time and money into producing your product, you need to sit
54 T H E B U S I N E S S S T A R T – U P K I T
✎Market Researching Your Product
Step 1: Begin with your potential customers. You need demographic data
about them. The answers to the following sorts of questions will help you
figure out to whom you will be selling your product:
• What is their age, gender, and marital status?
• Do you know their income level and occupation?
• Are they conservative or trendsetters?
• Do they have political, religious, or environmental beliefs that will influence
their buying?
• Do they spend money freely and demand top quality, or do they shop for
bargains?
Step 2: Meet with potential customers. Hire a market research firm or conduct
the research yourself. Find out what they like and don’t like about
products similar to the one you will be producing. Devise a simple survey
and give people a reason to fill it out. Find out what similar products they
buy and what products they would like to see from you.
Step 3: Scope out the competition. Which products are similar to yours?
How can they be improved? How can your product be made less expensive?
Step 4: Analyze the data.
down and look at your market to make certain you will be targeting the right
buyers and offering products they want and can afford.
Market research is what Pete Meyers, founder of Pete’s Beer (name
changed by request) in Sacramento, California, did. When Meyers came up
with a new product idea last year, he didn’t hire big-name consultants to do
market research. Instead, he tapped M.B.A. students at a local university business
school. “My partner and I needed to know if retailers and consumers
would be receptive to the product,” Meyers says. Over four months, they gathered
information, and the deeper the students dug, the better the idea looked.
Meyers paid the school $2,500 for what he estimates was $100,000 worth of
research and the students received an invaluable, real-world education.
Other options for inexpensive product research include:
• Interviewing prospective customers at shopping malls or other busy
retail areas
• Conducting a telephone survey
• Asking your friends, neighbors, and colleagues what they think of
your idea
Once you are convinced that you have a viable product, the final step
before an all-out rollout of your product is to do some test marketing. Get
your product into five or ten stores and see if it sells. Test different prices and
displays to see what works best. After a successful test market run, it is time
to mass-produce your product. The whole idea is to learn as much as you can
about your new product before throwing a ton of money at it. Although all of
this homework will take some time and cost some money, it’s a lot better than
producing on a hunch.
Producing Your Product
There are two ways to produce your product—either you can do it yourself
or you can outsource it and have someone else produce it for you.
Producing Your Product Yourself
Producing your product begins with an analysis of what you will need
to go from A to Z, and how much that will cost you. The first thing to consider
is how many units you need to create every month. Creating 10,000
4 / P r e p a r a t i o n , P r o d u c t i o n , a n d D i s t r i b u t i o n 55
machine-made widgets and 10 handmade chairs are very different tasks. Once
you have a good idea about what your production schedule is going to be,
you can go about procuring the equipment and materials needed to create
your product.
Make a list of what tools and machinery will be needed to produce the
product. Which of these do you already have and which can you afford to
buy? If you can’t afford to buy the necessary equipment, consider leasing
what you need.
As you go about setting up your production facility, make sure that you
have enough room to expand should that (hopefully!) be necessary. Also
keep in mind:
• Your facility needs to be safe for employees, and may have to meet
safety regulations required by your city or state.
• Producing pollutants will require that you be able to dispose of them
properly.
• A testing facility (such as Underwriters Laboratories) may be required
to certify the safety or quality of your products.
• Bar codes may be required to sell your product in various stores.
The key thing to producing your own product for sale is that you can
create it quickly, safely, and inexpensively without sacrificing quality. If you
can’t, then you need to hire someone to create the product for you.
Hiring Someone to Create Your Product
Tool and dye shops, machine shops, wholesale producers, artisans, seamstresses,
plastic molders, and a host of other wholesale manufacturers are
available for hire in most cities and they already have many of the tools necessary
to produce your product.
The important thing is to find a manufacturer who will be able to affordably
produce your product according to your specifications. Shop around.
Prices and quality vary widely. Get samples and references and check up on
the company. Find out how reliable they are and assess the level of quality of
the goods they already produce. In some instances, hiring a production facility
in another country may be the best, most affordable way to produce your
product. An Internet search will produce a variety of manufacturers who may
fit the bill.
56 T H E B U S I N E S S S T A R T – U P K I T
Distribution
Finding a distribution channel for your product is critical. Entrepreneurs
often take all the necessary steps—developing a great product, creating a prototype,
patenting their ideas, and producing an initial batch of products—
without considering the final step—how the product will be sold.
How important is this step? Consider that after Jeff Hawkins invented
the PalmPilot, he had a very hard time getting his new product onto store
shelves. His company finally decided to partner with (and eventually be
bought out by) U.S. Robotics because that company had a distribution channel
that Palm could tap that lead to it becoming a huge success.
But you need not go to such lengths to distribute your product. Here’s
a simple method you can use to get on store shelves. First, find a retailer who
sells products similar to yours and ask from whom they purchase those products.
Once you find out, contact that distributor, sales representative, or
wholesaler and ask them what kind of deal they typically offer product manufacturers
such as yourself. It is important to realize that both the distributor
and the final retailer will want to mark up your product, so you have to price
it accordingly from the outset. After you have spoken with one distributor,
finding others should be easier. There may be dozens of wholesalers or distributors
that distribute products similar to yours. Once you have spoken
with a few, you will have a much clearer idea about which one may be best
for you, as well as how to price your product properly to get it to market and
begin generating some sales.
Product Innovation
Product innovation is one of the most sought after and talked about attributes
in business. But all too often, innovation is more theory than practice
because initiating and implementing an innovative product is rarely easy. It
often takes a genius idea, total commitment, and plenty of money before the
breakthrough product is accepted by consumers.
How then do you create a great product? Here are seven lessons for
product innovators:
1. Think of things that never existed and ask, “Why not?” Bobby Kennedy’s
famous motto is an apt description of the first ingredient nec-
4 / P r e p a r a t i o n , P r o d u c t i o n , a n d D i s t r i b u t i o n 57
essary to create a great new product. Terrific products come from inspired
ideas. When George de Mestral took an annoying burr from
his sock and placed it underneath his microscope, creating a breakthrough
product like Velcro was the last thing on his mind. He spent
the next ten years trying to duplicate artificially what nature made
effortlessly.
2. Tap the power of one. The second lesson in product innovation is
that one person can make a difference. Look at almost any product
and you will invariably find that there was some man or woman behind
it who was steadfastly committed to its success. Ed Lowe was
nothing but a young, ambitious veteran with tons of unsold clay when
he decided that he had an idea for a better cat litter. Crisscrossing the
country in his old car, bartering his way into cat shows, and changing
cat boxes one at a time is what it took for him to make Kitty Litter a
success.
3. Keep it simple, stupid. No, no one is calling you dumb. Rather, the
rule—keep it simple, stupid—and its acronym KISS are great ways to
remember the third lesson of great products. If you are going to offer
something new and improved, make sure that it is simple and does
one or two things very well.
4. First is best. Getting your product to market first can often mean the
difference between having a winner and being a loser. Post-it Notes
were first. Tupperware was first. Pampers were first. Barbie was first.
5. Try, try again. The path of the innovator may not follow a straight
line, grasshopper. Getting a product right often takes trial and error,
followed by a few mistakes, a couple of bonehead moves, and only
then, maybe, a home run. When Dr. Percy Spencer noticed that the
chocolate bar in his pocket melted after standing near a magnetron
tube, he realized that something unique had occurred. Yet it would
take almost 20 years of trial and error before Raytheon could turn
that into a microwave oven that could be used by the public.
6. It’s risky business. Creating a great product and getting it out there
often takes everything an entrepreneur has to offer. The financial
risks involved, not to mention the emotional toll, are considerable indeed.
When two auto designers in California created a secret budget
and dared their German superiors to take a risk on a car their bosses
associated with Hitler, they were risking their careers. And when
Volkswagen agreed to produce the New Beetle, it risked being per-
58 T H E B U S I N E S S S T A R T – U P K I T
ceived as a backward-looking company. Great new products require
risk; it is as simple as that.
7. Synergy is necessary. Synergy is a concept in which the whole is
thought to be greater than the sum of its parts. For a product to succeed
wildly, synergy is usually necessary. Take the PalmPilot, for
instance. Although Jeff Hawkins is a brilliant engineer, he needed
someone who could steer his genius toward business success. That
person was Donna Dubinsky. Together, these two made a formidable
team. Dubinsky needed Hawkins’s mind, and Hawkins needed Dubinsky’s
business acumen. It was their yin and yang, forming a better
whole, that allowed them to make the PalmPilot what it is.
If you are interested in learning more about product innovation, be sure
to check out my book The Big Idea: How Business Innovators Get Great
Ideas to Market (Dearborn Trade, 2001).
Resources You Can Use
Center for Innovation in Product Development
Building E60-275
Massachusetts Institute of Technology
617-253-3645
77 Massachusetts Avenue
Cambridge, MA 02139
<http://web.mit.edu/cipd/>
4 / P r e p a r a t i o n , P r o d u c t i o n , a n d D i s t r i b u t i o n 59
T H E B O T T O M L I N E
The ability to produce your product or service consistently and
efficiently will determine to a great extent how successful your venture
will be. It is critical that you test-market your idea before rolling
it out, and remember that innovation is what really sets your business
apart.
Product Development & Management Association
800-232-5241
17000 Commerce Parkway, Suite C
Mount Laurel, NJ 08054
<www.pdma.org>
60 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
P A R T
II
· Getting Started
In this section, you begin to put the first pieces of the
successful business puzzle together. You learn how to plan
properly and choose a great name and location. You also find
out where the money to fund the business may be located.
This Page Intentionally Left Blank
C H A P T E R
5
· Planning Your Business
The first four chapters of this book were intended to help you pick a
business that you will love. That is, and will be, the “technical” part of your
business: The florist will create bouquets, the interior designer will decorate
homes.
For our purposes, it does not matter what the technical part of your
business will be. The remainder of this book is a model of business success
for any business of any kind; plop any technical job into this model, and the
result will be business success.
So, for example, the florist, the interior designer, and you too will all
need to pick a great name, find funding, create a great image, advertise, and
grow. Those are the sorts of things that you will learn from here on out—a
model for business success.
However, the biggest mistake you can make right now is to actually start
that business. What you need to do instead is sit back, take a breath, and
think. Your idea for that new business may be a winner, but it may not. What
you need to do now is analyze your idea, analyze the industry, make sure others
think you have a great idea, and make sure there is a market for your product
or service. That is the first step in the business success model. A hunch
will simply not do. You need facts to back up your plan.
Of course, the thought of quitting your job, taking a risk, and making
some big bucks is pretty darn exciting; that’s the whole idea. Starting a business
is a grand adventure. But just like any adventure, before you ship off you
63
want to have a pretty good idea of where you are going, how you will get
there, and what you will do once you are there. So beginning in this chapter
and continuing for the next few chapters, I want to help you put together a
solid foundation for your business (ad)venture. This foundation consists of
conducting market research, drafting a business plan, structuring the business,
and, finally, securing your financing. Once you have done all this, then
you can start your business.
Slow Down There, Cowboy!
There are many businesses that begin and fly by the seat of their pants,
but yours shouldn’t be one of them. It is easy to get so excited about a new
business that you want to jump in without putting the foundation in place.
But if you do get started without thinking through what you are going to do,
how you are going to do it, how you will finance it, and how you will make
money doing it, your chances of success are much lower than if you had considered
these things.
Market research is critical. Before you put your hard-earned money and
precious time into an untried business concept, a little effort up front will tell
you if your idea makes sense. And you need to be prepared to go in a different
direction if your research indicates that it is necessary. Facts trump hunches.
Is Your Idea Feasible?
Before you jump in, indeed before you do anything, you first must figure
out if there is a market for your proposed business. The first law of business
is (or at least should be): You must fulfill a market need. If there is no one
around who wants or is willing to pay for your proposed product or service,
your business will fail; it is as simple as that. So before you name the business,
or get a business license, or take out an advance on your credit card, you need
to do some market research.
Is there a market for a woman-oriented bookstore in your neighborhood?
Market research will help you find out. Analyzing the market and industry
is a way to gather facts about potential customers and determine the
demand for your product or service. The more information you gather, the
greater your chances of capturing a segment of the market. That is why you
64 T H E B U S I N E S S S T A R T – U P K I T
need to know your potential market before investing your time and money in
any business venture. You don’t want to waste time or money on a bad idea.
In essence, you must ask yourself whether anyone wants or needs your
proposed business. In addition, it is equally important to research your potential
competition, and the industry in general, so you can have a good idea
about what you are getting into. By figuring out your potential market, your
likely competition, and how you will stand out from the crowd, you greatly
increase your chances of success.
5 / P l a n n i n g Yo u r B u s i n e s s 65
■ Real Life Example
In the late 1970s, board games were old news. Monopoly was 50 years old,
and Scrabble was even older. So, when Chris Haney and Scott Abbot got
together to play a board game one night, they chose one of the very few
available—Scrabble. As they pulled out Chris’s Scrabble game, the two
friends discovered that some of the tiles were missing. As they went out to
buy another Scrabble game, Chris thought: This was the sixth game of
Scrabble he’d bought in his life. The two friends decided then and there to
start a business and invent a board game.
To say they were novices would be generous; they knew next to
nothing about business or toys. They were journalists. Yet in their case, ignorance
was not such a bad thing because they were aware of what they
didn’t know. They did what you are being coached to do—they began to
research and analyze their industry. In January 1980, armed with an expired
press pass and a camera without any film, the two buddies visited the
Canadian Toy and Decoration Fair in Montreal posing as reporter and photographer.
There, they pumped toy manufacturers for information about
the strategies of marketing a game and, according to Scott, collected
about $10,000 worth of information in one afternoon.
Their research convinced them that they were on to something—
even though there had been few new board games invented over the previous
half century, there was nevertheless a market for their new product
and business. And they were right. After almost going broke in the process,
the two friends sold more than 20 million copies of Trivial Pursuit within
three years.
There are several methods you can use to gather the market information
you need. The following descriptions of some of these direct and secondary
methods will help you decide which methods may be best for you.
Direct Research
These methods are the most expensive, but they will give you the best
results. Conducting direct research, either yourself or through a firm you hire,
surveys the public regarding your proposed business.
There are basically three ways to conduct this research: on the phone,
through direct mail, or in personal interviews.
Telemarketing and phone research. Telephone research is the least expensive
of these methods, costing about one-third less than personal interviews.
They also allow you to cover a broad geographic area.
66 T H E B U S I N E S S S T A R T – U P K I T
✎Understanding Your Market
These questions will help you collect your thoughts and begin to flesh out your idea.
1. Whom are your customers going to be?
2. Are there enough customers to support your business?
3. What is it that they need?
4. How are these needs not being serviced by existing businesses?
5. How is it that you will service those needs?
6. Who is the competition?
7. What are they doing right and wrong?
8. How will your business be different than your competitors’?
9. Why would customers leave your competitor and come to you?
10. What are the trends in your industry?
Here are some tips to follow when using this technique:
• Tell the interviewee up front how important his or her response is
and that the interview will be short (between five and ten minutes).
• Avoid pauses as respondent interest drops.
• Keep the questions short and interesting.
• Make the survey answer options consistent.
Good interviewers can survey up to seven people an hour (however,
speed for speed’s sake is not the goal of any of these surveys), but five to six
per hour is more typical. You would like to get over 250 interviews to have a
good sample.
The costs associated with this method include the fee for the telemarketer,
phone charges, preparation of the questionnaire, and the analysis of the
results. Costs can be lowered by calling during certain hours.
Direct mail. Direct mail questionnaires can be inexpensive if you send out
enough to take advantage of bulk mail prices, but the response rates are usually
less than 5 percent. To increase your response rate, try these ideas:
• Include a nice letter that explains what you are looking for and why.
• Keep your questions short.
• Limit the length of the questionnaire to two pages.
• Address the letter to a person, not “occupant.”
• Address the letters by hand (tiring yes, but also effective).
• Include a self-addressed, stamped return envelope.
The main costs of this method relate to printing the cover letter and
questionnaire, envelopes, postage, and the ensuing analysis.
Personal interviews. There are two main types of personal interviews, individual
and group. Group interviews are good because you get many responses
at once. They give insight into buying preferences and purchasing
decisions. But they also are expensive because participants usually want to be
paid for their time. One-on-one interviews either use a script to get responses
to specific inquiries or are more open-ended, allowing for any response.
Costs for personal interviews include the fees paid to participants and
interviewers, renting the facility, the printing of any questionnaires, and
analysis.
5 / P l a n n i n g Yo u r B u s i n e s s 67
If primary research is too expensive for you, then you need to turn to
the secondary research methods discussed below. But before you do, it doesn’t
hurt to simply go out and speak with some business owners on your own. Go
to a town other than your own (so that you aren’t viewed as the competition),
find a business similar to the one you want to start, and ask the owner about
the business. Find out who his customers are, what they like and dislike, and
what the competition is doing. By doing this several times, you will learn
much about your potential business.
Secondary Research
There are many organizations and sources out there from which you can
gather plenty of information that will help you make some informed decisions
about your potential business. Government departments, public libraries, your
local chamber of commerce, business departments at universities, and the
Small Business Administration all have information that could help you.
Particularly helpful tools are trade organizations and associations. Almost
every industry has a trade association and a trade publication associated
with it. If anyone will know your potential industry, it is them. Most trade associations
have regional chapters that usually are very helpful.
You can’t overlook the greatest research tool invented in the past 100
years—the Internet. The Net is loaded with almost more information than
you need regarding every business imaginable.
The following details how you can conduct market research over the
Internet.
Pick your industry. Let’s say you wanted to open a florist shop. Begin by
typing “florist” into the best search engine there is, Google <www.google.com>.
Doing this will yield many hyperlinks from which to choose. You can begin
by exploring various links that look good. For example, the Ohio Florists Association
link might look interesting. At this Web site, you will find an area of
industry links that will open up the world of flowers to you—associations,
government, colleges and universities, floriculture magazines. Everything you
need to know about the florist business is but a few clicks away.
Make it more specific. You will likely need information more specific and
germane to your geographic area. You can find this on the Net too. Here are
several sites that can give you industry-specific market research:
68 T H E B U S I N E S S S T A R T – U P K I T
• <www.inside.com> The home of American Demographics, a monthly
magazine that offers accurate information on emerging consumer
trends, analysis of those trends, and issues and events that relate to
consumer markets. The site and the magazine contain detailed insights
into spending, growth, and demographics. You have to pay a minimal
fee for the content.
• <www.hoovers.com> Hoover’s offers company, industry, and market
intelligence, as well as sales, marketing, business development, and
other intelligence on public and private companies worldwide. It is a
great business information resource. This is also a fee-for-content site.
• <www.marketresearch.com> This great site offers a search of the largest
database of market research publications. Over 50,000 titles from
more than 350 leading publishers. The site is organized into 21 different
industry categories, and offers a slew of market research information.
• <www.marketresearch.org.uk> The Market Research Society is one
of the largest international organizations for those interested in market,
social, and opinion research. This site can help you head in the
right direction.
• <www.marketingpower.com> This is the site of the American Marketing
Association. A great site for an overview of marketing in general,
and for specific market research.
Combined, all of these sources should enable you to decide if there is really
a market for the business you want to create. When you have firmly concluded
that you have a good idea and are convinced that there is a market for
your business, the next step is to draft a business plan that will explain exactly
how you plan to tap this market and make money.
The Business Plan
I bet you don’t want to draft a business plan. Maybe you are thinking
that you know what you are going to do and consider it as a waste of time.
Possibly you have your funding in place so you figure that no one is ever
going to read it, so why bother. I don’t blame you. Business plans are a lot of
work and you may, in fact, be the only person who ever reads it. But it is still
an important exercise nonetheless.
Think of it this way: An experienced pilot would not fly anywhere without
a detailed, well-researched flight plan. The plan helps him understand
5 / P l a n n i n g Yo u r B u s i n e s s 69
where he is going and how he will get there. Just as you wouldn’t trust a new
pilot to fly you and your family to an unknown destination without some assurances
that he planned the trip, knew where he was going, and knew how
to get there, you shouldn’t trust that you can start a business without a plan.
A business plan is your flight plan, your game plan. It is your blueprint.
Creating one forces you to carefully think through the entire enterprise—
from products, prices, and income projections to advertising, marketing, and
sales forecasts. By analyzing some things that you are probably unfamiliar and
uncomfortable with, you are forced to really understand what you are getting
into and how much money you can realistically expect to make. If you don’t
create a plan, your entire enterprise will be a shot in the dark and you are
going to be investing too much of your time, money, reputation, and ego to
wander around in the dark, hoping your business will work. That is why you
need a plan.
Business Plan Overview
A business plan is a written summary of what you hope to accomplish
by being in business and how you intend to organize your resources to meet
your goals. In it, you define your basic product, your income objectives, your
management team, your competition, and your specific operating procedures.
It details the what, when, where, why, and how of your business. It explains
what your objectives are, why your business will be unique, and the steps you
will take to achieve those objectives. In essence, it is the road map for operating
your business and measuring progress along the way.
There are many practical advantages of a business plan:
• It identifies the amount of financing or outside investment required,
when it is needed, and how it will be used.
• It enables a lender or investor to assess your financing proposal and
assess you as a business manager.
• By committing your plans to paper, your overall ability to manage the
business will improve. You will know your business better. You will
be able to look ahead and hopefully avoid problems before they arise.
• A business plan forces you to be realistic and avoid pie-in-the-sky
projections.
• It helps you to identify your customers, your market, your pricing
strategy, and your competition.
70 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
Elements of a Business Plan
While every business plan is different because every business is different,
they are all generally alike. Your business plan should include the following
elements.
Executive Summary
The document starts with an executive summary describing the highlights
of the business plan. Even though your entire business is well described
later on, a crisp, three- or four-page introduction helps to capture the immediate
attention of the potential investor or lender. The executive summary is
just that—a compact summary of the whole plan. In it, you should explain
• what sort of company it is,
• what your product or service will be,
• why your business will be unique,
• whom the management team is comprised of, and
• how much money you need, in what stages, and how you will use it.
It is important that this summary be your best. Remember, this may be
the only chance you have to attract attention. Some people say that busy
lenders read only the executive summary; if it doesn’t grab them by the lapels,
they move on to the next plan. Make sure your executive summary sells your
idea so the reader will retain interest and continue reading. Because the executive
summary is so important, you might want to write it last, after you
have thought through the entire plan.
5 / P l a n n i n g Yo u r B u s i n e s s 71
You don’t want your business plan to be so short that it doesn’t include the
necessary information or so long that you have to spend a lot of time
rewriting it. A normal business plan should be between 30 and 50 pages.
Not more, not less.
Table of Contents
Right after the executive summary will be a table of contents that lists
the section titles and page numbers for easy reference.
Description of Business Venture
This is the heart of your plan. In it, you will describe exactly what your
business is going to be and how you envision it proceeding. This section will
contain:
• A description of your product or service. What is it? How is it different?
Why will people want it? Why isn’t someone else doing it? What
kind of equipment will you need? Do you have or can you get a
patent? The thing you must do is put yourself in a potential investor’s
place and ask yourself what he or she would need to know before investing
in your business.
• A description of your business. Is this a wholesale business, retail,
professional, or what?
Market Analysis
This is where all of that research comes in handy. Here you will identify
your target market—your typical customers. You will also explain present
buying patterns and offer trends, projected growth, customer behavior, complementary
products or services, barriers to entry into the marketplace, and
so on. Tell the reader what the total market is for your industry. For example:
The computer repair market in the United States grew to more than $1 billion
last year.
Next define your target market. If your business is going to be confined
to your specific locale, then you need to explain what the market is like in
your area. After this, you must narrow your market down even more and analyze
what your total feasible market is. Finally, you must determine what
your share of that feasible market will be. This is called your market share.
How will you capture that market share? That is what you need to know
and what you need to convey. How will you position your goods or services
in the market? What will your pricing strategy be? How will you promote
yourself and your business? You should include in this section your sales strategy
(sales objectives, target customers, sales tools, and sales support), distri-
72 T H E B U S I N E S S S T A R T – U P K I T
bution plan (direct to public, wholesale, or retail), pricing structure (markups,
margins, and break-even), and promotion plan (media, advertising, promotions,
and publicity).
Description of the Industry
This section will include statistics and information about your chosen industry.
You want to include the following in this section:
• Industry outlook and growth potential, such as industry trends, new
products and developments, etc.
• Markets and customers, including the size of the total market and
market trends
• National and economic trends, such as population shifts, consumer
trends, and relevant economic indicators
Researching and writing this section will enable you to understand the
industry you are getting involved in much better.
Business Goals
Explain in this section where you see your company in one year, in two
years, and so on up until the fifth year. Explain specifically how you will reach
these goals and what will happen in different economic environments.
Competition
This section of your business plan should include all pertinent information
about your competition, including the length of time they have been in
business, where they are located, and what their average annual sales are. You
will want to analyze the following:
5 / P l a n n i n g Yo u r B u s i n e s s 73
Do you want your business to get funded? Then write your business plan in
plain English. Nothing turns off a reader more than lots of technical jargon
that he or she cannot understand.
• The reasons behind their success
• What they do right and wrong
• What customers are looking for
• How those needs are being met by your competitors
• How those needs are not being met
The Internet sites listed in the Secondary Research section can help you
fill in this information. Getting some good, solid data about your competitors
will impress investors and teach you plenty in the process.
In addition, you should explain how you perceive your business will
compete in terms of strengths and weaknesses compared to the strengths and
weaknesses of these competitors. Explain how you intend to overcome your
competition and your expectations of the impact your company will have on
their business. Consider how well your competition satisfies the needs of potential
customers. Determine how you fit into this picture and what niche
you plan to fill. Will you offer a better location, convenience, a better price,
later hours, better quality, or better service?
Management Team
What are your qualifications and those of your team? Do not underestimate
the importance an investor puts in the management team. Banks, angels,
and venture capital firms will want to see that you have a board of directors
or officers with a record of entrepreneurial success—proven business leaders,
people with legal and finance skills, marketing experts, and the like.
Those types of people will help prove the viability of your business and can
make all the difference between funding and no funding. The resumes of all
key personnel should be included in this section as well.
Sales Forecast
The next part of the business plan covers sales, operations, and finances.
This section deals with hard numbers and forecasts of sales, operating expenses,
profits, and the like. This section should include:
• A monthly forecast for coming year (sales volume in units and dollars)
• An annual forecast for the following two to four years (sales volume
in dollars)
• Assumptions on which you base these forecasts
74 T H E B U S I N E S S S T A R T – U P K I T
By this point, your research on the competition is vital. Analyze their location,
customer volumes, traffic patterns, hours of operation, busy periods,
prices, quality of their goods and services, product lines carried, promotional
techniques, positioning, and product catalogues and other handouts. If feasible,
talk to customers and sales staff.
Use this research to estimate your sales on a monthly basis for your first
year. The basis for your sales forecast can be the average monthly sales of a
similar-sized competitor’s business that is operating in a similar market.
Financial Analysis
A business plan is not just words; it is words and numbers. You need to
understand and explain how much it will cost to get your business up and
running, and how much it will cost to keep it going on a monthly basis. The
financial needs of the plan depend greatly on your marketing and sales strategies.
They all must fit together. Remember, though, that while projections are
projections, they must show an understanding of how all of the variables of
the business plan fit together. In the end, you must really understand the
numbers because investors will grill you on them.
In this section, you are also going to explain how much money you are
asking for and how you will be spending it. This section will include a spreadsheet
that analyzes income and expenses for the next few years, including:
• Profit and loss statement (P&L). This is a summary of your projected
business transactions over a period of time. It explains the difference
between your income and expenses. An income statement is the
same as the profit and loss statement. Your P&L will include analyses
of sales by month, gross profit and profit margin, overhead, depreciation,
interest payable on any loans, and net profit.
• Cash flow statement. This statement shows how much cash your
business will need, when it will be needed, and where it will come
from. Do you need to buy inventory? How much will that cost every
month? What are your receipts, bills, wages paid, etc.? That is what
you will be discussing here. The cash flow statement is important because
it forces you to realistically look at the bottom line and see if
you are making (or are going to make) enough money to service your
debts. A cash flow statement is a great tool that you should use
throughout your business career as it is a mirror of where things are.
5 / P l a n n i n g Yo u r B u s i n e s s 75
• Balance sheet. The balance sheet forecasts your assets and liabilities.
It shows your financial position at a fixed point in time, usually at the
end of the year. It helps you understand where all the money coming
into the business has come from and where it has gone. Balance sheet
information is extracted mostly from the P&L and cash flow statement.
This section is often the most difficult part of a business plan for many
entrepreneurs. It’s easy to wax poetic about your fantastic business idea and
how it will make everyone rich. Actually putting hard numbers to those projections
is not always easy, but you have to do it. You have to crunch some realistic
numbers to go along with your realistic (and hopefully enthusiastic) plan.
Where do you get this information? There are many sources of information
to assist you. Some key sources are competitors, trade suppliers, business
associations, trade associations, trade publications, and trade directories.
Once you have this information, you will need to provide it in your financial
statement.
76 T H E B U S I N E S S S T A R T – U P K I T
■ Ray’s Computer Repair
Projected Profit & Loss Statement
Projected Income (1/1/03—12/31/03) $74,590
Projected Expenses
Auto $ 1,500
Bank fees 250
Conference 490
Equipment 1,020
Insurance 2,800
Marketing 6,200
Phone 1,900
Postage 400
Printing 900
Supplies 14,900
Taxes 6,800
Projected Total Expenses 37,160
Projected Net Profit $37,430
The financial section of your business plan will also analyze the use of
any loan proceeds you are seeking, including the amount of the loan, the
term, and when it is required. Finally, you need to disclose your financial situation
and how much you will personally be contributing to the venture. The
appendix of your plan should include the past three years’ income tax returns.
Also include a current credit report.
Critical Risks
This section will analyze what you consider to be the biggest risks and
obstacles to the success of the business and how you plan to overcome them.
Action Plan
This section will contain specific steps you will take to accomplish this
year’s goals and checkpoints for measuring results. Identify significant dates,
sales levels, and production levels as decision points.
Appendix
This section will contain:
• Substantiation documentation, articles of interest, etc.
• References
• Name of present lending institution
• Names of your lawyer and accountant
• Personal net worth statement
• Tax returns
• Resumes
• Letters of intent (potential orders, customer commitments, letters of
support)
Mistakes to Avoid
Preparing a business plan will generate a lot of thought and a lot of paper.
You will need to write it and rewrite it. But the process should do you a lot of
good. In the end, you will have a much better idea about how your business will
run, what it will take to succeed, and what risks will be involved in the process.
5 / P l a n n i n g Yo u r B u s i n e s s 77
As you write it, try to avoid making common mistakes, such as off-themark
projections for net profit and other economic numbers. You cannot simply
pull numbers out of thin air. You have to do your homework and locate
numbers that realistically project your expenses and profits. Another common
mistake is using income projections that are inconsistent with the industry
norm or that don’t generate enough cash flow to service the debt.
Resources You Can Use
BusinessPlans.org
2013 Wells Branch Parkway, #305
Austin, TX 78728
<www.businessplans.org>
Small Business Development Centers (SBDC)
<www.sba.gov/gopher/Local-Information/Small-Business-Development-Centers/>
<www.bizplanit.com>
<www.paloalto.com>
78 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
In the end, all this work will all be worth it. Either you will be
able to get a loan because you clearly know what you are doing as
demonstrated in the plan, or you will have learned a great deal
about how to make your business fly. Either way, you are a winner.
C H A P T E R
6
· Choosing Great Names
· and Locations
Now that you have a good idea about what your business is going to be
and where you are headed with it, it is time to begin to put your foundation
in place. You will need to structure the business legally, get the necessary licenses
and permits, and get funding. But before you can do any of those
things, it is time to have some fun. You need to name your business and, in
all likelihood, find a location for it.
What’s in a Name?
Naming your business should be enjoyable, but for some people, it is
stressful. What if you pick the wrong name? What if the name you pick has
already been taken? While it is smart to be cautious, it is nothing to get overly
concerned about. The important thing to realize is that your business name
will become your alter ego, so be sure to pick a name that reflects on you and
your business well.
How do you pick a name? You have three options. The first is to pick a
name that says exactly what your business is. Begin with what your business
is going to do and the image you want to express. Include both in the actual
name of the business or reflect those ideas in the name, so that when people
hear your business name, they know what you are offering. Using this
method, you want a name that says what you do and is easy to remember, for
79
example, Mr. Plumber, Borders Bookstore and Café, or CompUSA. By the same
token, you might want the business name to express the benefits that people
will get by patronizing the business, such as Jiffy Lube or Quickee Mart.
Here’s a great one that utilizes both image and benefits—Baja Fresh.
Be sure the name is not already in local use and that it is not too similar
to that of a competitor. Try to pick one that is catchy and memorable; alliteration
often works well. Also, be sure to pick a name that is not difficult to pronounce
or spell. When people call directory assistance, you want them to be
able to find you. When Nolan Bushnell invented the first popular video
game—Pong—he wanted to name his company Syzygy. Luckily for him, that
name was already taken, so he settled on Atari instead (a word used in the
Japanese game GO to warn opponents that they are about to be conquered).
80 T H E B U S I N E S S S T A R T – U P K I T
✎Picking a Name
What sort of business is it?
What will be the distinguishing characteristics of the business?
What benefits will people get by coming to the business?
List five adjectives that will describe the business:
How will it be different than similar businesses?
What are the names of similar businesses?
What are the good and bad things about those names?
Based on the above, come up with five possible names for your business:
1.
2.
3.
4.
5.
TEAMFLY
After you come up with five names that you really like, get some feedback
from people you trust; they may not think your name is as good as you
think it is. Remember, your business has to serve a market need, so finding
out what the market thinks about your proposed business name, even in a
small and informal way, is smart.
The second method of business-name creation is to pick a name that is
totally unique and has nothing to do with your business at all, such as Amazon
.com or Xerox. These names are great because they are so unique that they
are memorable. The risk here is that while your name may be unique, it may
be too odd and obscure for people to remember it. One reason Amazon.com
and Xerox are memorable names is because those companies had the
wherewithal to get people to remember them and, in the process, brand their
name. If you do not have a sizable marketing budget, picking an obscure
name can be more of a curse than a blessing.
The last method for creating a winning business name is to hire someone
to name it for you. There are companies whose business is to come up
with company and product names, and they are often fond of coining new
words for names. They usually do a great job of coming up with a unique,
memorable name, and get paid handsomely for their efforts—$50,000 is not
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 81
■ Real Life Example
Walt Disney’s first business was an animation studio called Laugh-O-Grams,
a company that would go bankrupt after only one year, in 1923. After the
bankruptcy of Laugh-O-Grams, Walt moved to California to be closer to his
brother Roy, who was recuperating from tuberculosis. Undeterred by Walt’s
recent failure, Roy and Walt formed Disney Brothers Studios and set up
their first animation studio in their garage. Although they quickly got a
contract to create an animated character called Oswald the Lucky Rabbit,
this business too was soon in trouble after Walt unknowingly sold the
rights to Oswald to the distributor. Walt Disney was on the verge of bankruptcy
again.
Desperate, on a train trip from New York back to Los Angeles, Walt
decided to create a new character, one he would own, one with a more
memorable name than Oswald, a character he hoped would save his troubled
studio. That character was, of course, Mickey Mouse.
uncommon. For the right business, it may be a smart marketing move and a
worthwhile investment. For others, the cost is not worth whatever results
you get. It’s a balancing act between budgetary restraints and need.
Trademark Concerns
While making your final decision regarding your name, it is important to
do a trademark search to see if the name already has been trademarked. If it
has, you may not be able to use it. Different names are given different degrees
of trademark protection. A trademark is a distinctive word, phrase, or logo
that is used to identify a business. Nike and its unique swoosh symbol are protected
under trademark law because they are distinctive.
Other words are given far less protection. Common or ordinary words
that are not inherently distinctive get much less, or no, trademark protection,
even if someone tries to trademark them. Examples of such common, nondistinctive
business names include:
• Sam’s Auto
• Western Dairy
• Quick Computers
If you think there is a chance someone may usurp your company name,
catch phrase, symbol, or design, then you need a trademark. Trademarks are
used to identify and protect your product or brand.
Don’t make the mistake of thinking you don’t need trademark protection.
Any growing business usually does. Consider the case of Spencer, who
opened a furniture store in 1960. His sons joined him in the business in the
82 T H E B U S I N E S S S T A R T – U P K I T
Branding is not the same thing as a business name. A brand incorporates
much more than that. In essence, a brand is a company’s image, logo, products,
and name all rolled into one. What do you think of when you think of
Nike? Probably athletic shoes, the swoosh, athletes, exercise, and “Just do
it.” Your brand is what customers think of when they think of your business.
Branding is a process that builds awareness of your name via advertising
and marketing.
early 1980s. By 1990, their enterprise, Spencer’s Furniture Galleria, had grown
to 14 stores in three states. In 1997, Spencer and his sons tried to register a
trademark on the name only to find that the name Spencer’s Furniture Galleria
had been trademarked nine years earlier by someone else. When asked
what that meant, Spencer’s lawyer explained that Spencer actually had no
right to use the name Spencer’s Furniture Galleria because it constituted
trademark infringement.
The name was valuable enough to Spencer and his sons that they asked
their lawyer to straighten out the mess. After doing some research, the lawyer
found out that the owner of the trademark never used the mark and was willing
to sell it for $5,000. It was an expensive lesson.
Federal registration provides a number of significant benefits, including:
• Nationwide notice of trademark ownership
• Evidence of and a presumption of ownership of the name or symbol
So yes, you do want to register your name and logo. The good news is
that doing so shouldn’t be difficult or expensive. It is now easier than ever to
register a trademark without an attorney—the whole process can be done online.
Most of the information you need can be obtained at the U.S. Patent and
Trademark Office (USPTO) Web site, <www.uspto.gov>. The USPTO site answers
your basic questions and enables you to do an online trademark search.
You also can access forms and submit the application online.
In the end, the lesson for any entrepreneur naming a business is to be
smart, pick well, and do your homework.
Location
As mentioned in Chapter 3, not all businesses need a great location. Retail
businesses need to be in an area where there is a lot of walk-by or driveby
traffic, but not all businesses have such requirements. The Old Spaghetti
Factory always seems to have its locations near a railroad, and you can bet
one reason is because they pay much less for those properties. So there are
many things to consider.
When selecting a location, you must first determine how important foot
and car traffic will be to your business. A high-profile location is important
when impulse buying is part of your plan. Thus, a gas station needs a great location
with a lot of traffic; a dentist does not.
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 83
84 T H E B U S I N E S S S T A R T – U P K I T
✎Retail Business Checklist
The things you want to consider when looking at a location are:
□ Population and demographics. Will there be enough people to support
the business? What has been the reaction and fate of similar businesses
in the area?
□ Traffic. You want the site to be near some centers of activity. My father
owned a chain of carpet stores when I was growing up, and he loved to
be across the street from malls. He figured that he got the benefit of
the mall’s advertising and traffic, but without the high rent of actually
being in the mall. Is there public transportation nearby?
□ Competition. Where is your competition located? Fast-food restaurants
often like being bunched together, but a print shop usually likes to be the
only one in the neighborhood. Are there too many competitors nearby?
□ Visibility. Make sure your potential location is visible from major roads.
□ Signs. You need to be sure that there are no restrictions in the lease or
the law that will limit your ability to post adequate signs for your new
business.
□ Zoning. The spot, obviously, needs to be zoned for your type of business
(see explanation later in this chapter).
□ Appearance. Is there adequate parking? Is there a bathroom for the
public? Make sure the place is landscaped well, has adequate outdoor
lighting, and has appropriate businesses nearby.
□ Interior design. A well-designed display of merchandise can make
shopping easier for the customer and boost sales. Be sure to review the
flow of customer traffic. A free-flowing pattern has better visual appeal
and allows customers to move around, while aisles offer better merchandise
presentation.
□ History. Some locations seem to be jinxed. You know the ones. No
matter what business moves into that location, it seems to last for six
months before closing up shop. Avoid these locations because no matter
what you do, the local clientele will already have preconceived notions
about your business.
Indeed, an out-of-the-way location can be a great choice for certain businesses.
Opening in a redeveloping urban area, for example, may allow you to
benefit from tax breaks or a grateful consumer base. Generally, if you are selling
commonplace items (food, groceries, clothes, etc.), location is probably
more important to you. If you are selling services or specialized products, location
should be less of a concern.
There are many different sorts of locations that may have all of these
questions already answered, such as shopping centers. While a shopping center
or mall can be a great spot for many businesses, you must weigh the benefits
against the high cost of doing business in that location. Make sure you
will be able to make a profit.
An entrepreneur who is starting a manufacturing or wholesale business
will have different considerations. While such a business may be set up in a
more remote location, you want to be sure that you are close enough to town
that transportation hubs and services are within fairly easy access. Be sure
that the place is zoned for your type of business. Also make sure there is adequate
cell phone coverage in the area and that you have access to other necessary
services. Other things you might want to consider include:
• Does the building have restroom facilities and break rooms?
• Can employees and suppliers get there easily?
• Is there a shipping and receiving area?
• Are there enough phone jacks and electrical outlets?
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 85
□ Rent. Leases will be discussed in detail later in the chapter, but suffice it
to say, you want to be sure that you can afford the location you want.
This is where your business plan will become invaluable. If you avoided
pie-in-the-sky projections, then you know exactly how much rent you
can afford. Avoid picking a location simply because the rent is cheap;
that should not be your main consideration. While keeping your overhead
low is indeed a key to success in business (see Chapter 20), a
cheap, bad location is similarly a key to failure.
□ Image. Your storefront is your window to the world. Make sure yours
represents the image you want people to have, the brand you are trying
to create.
• Are there any environmental issues to consider?
• Does the facility comply with the Americans with Disabilities Act?
• Is there room to expand?
Is yours going to be a professional office? You can rent space in a professional
office building or go to an executive suite. Executive suites are small
office spaces in office buildings that individuals or small companies can rent.
Typically, each tenant has an individual office and shares the services of the
executive suite’s receptionist and use of the suite’s joint conference room,
copier, postage machine, and other office equipment. All you do is move in
and everything you need to conduct business is already in place. Your company
is guaranteed a professional image from the start because executive
suites are usually located in high-profile office buildings. You also will have a
receptionist to answer your company’s phone professionally. All in all, it’s a
pretty good deal.
Locations and Legal Considerations
Whatever location you choose, you must never sign the lease or purchase
the property without being absolutely certain that it will be legal for
you to operate the business you want in that location. There are several different
things to consider:
• Zoning. Cities usually zone buildings and areas into residential, commercial,
industrial, and mixed-use areas. You must be sure that the location
you want is zoned appropriately for the business you want to
start. Check with your city before signing any contract. Luckily, even
86 T H E B U S I N E S S S T A R T – U P K I T
■ Understanding Square Feet
Most commercial office or retail space is quoted by square foot per year. A
1,000-square-foot retail space with an asking price of $15 per square foot
would cost $15,000 per year, or $1,250 per month. This price may or may
not include taxes, insurance, utilities, water, and other related expenses, so
be sure to find out what the quote includes.
if it’s not zoned as you want, it is possible to get a variance from the
city. A variance is as the name suggests, a change in the normal rules.
Your lawyer can help with this.
• Other legal issues. Find out if there are other legal restrictions that
may affect your business. For example, some municipalities limit the
number of certain types of business, such as cafes or fast food franchises,
to certain areas. Other restrictions may require that your business
provide off-street parking, close at a certain time, or limit the size
and type of signs you may have. Your city should have a business development
office that can answer these sorts of questions.
• Contract restrictions. In malls and other retail complexes, the lease
or CC&R (covenants, conditions, and restrictions) may limit what you
can do. For example, in certain shopping centers, there may be a limit
of no more than one news kiosk or two burger joints.
• Home office restrictions. If you are starting a home-based business,
contact your city to find out what sort of occupational license and
other licenses you may need. Zoning regulations may limit the number
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 87
✎Location Worksheet
1. For population information on this area, I contacted:
□ Real estate agents □ Local planning and zoning boards
□ Census data □ Chamber of commerce
2. The population is:
a. Steady
b. Growing
c. Declining
3. The residents in the area are (check all that apply):
□ College aged / Young adults □ Middle-aged
□ Young families □ Elderly
(Continued)
88 T H E B U S I N E S S S T A R T – U P K I T
✎Location Worksheet (Continued)
4. The income levels in this area are:
a. Lower
b. Middle
c. Upper
5. The three major types of businesses in the area are:
6. The number of new businesses opened during the past year is:
7. “Anchor” tenants and other major draws to the area are:
8. Name, address, and proximity of each competitor:
a.
b.
c.
9. For each potential location, answer the following:
Traffic area: □ High □ Low
Easy access to: □ Transportation hubs and freeways □ Bus lines □ Pedestrians
Adequate signage? □ Yes □ No
Safe from crime and other hazards? □ Yes □ No
Condition of the building: □ Poor □ Fair □ Good □ Excellent
Is there sufficient: □ Display areas □ Fixtures □ Infrastructure □ Work areas
□ Office space □ Storage □ Restrooms □ Break areas
□ Shipping and receiving □ Parking □ Room to grow
Other features that make this location attractive:
The length of the lease is:
The total cost per month (including utilities, security, insurance, etc.) is:
of customers you can have, the signs you can erect, or even the type
of business you can start.
Negotiating the Lease
Negotiating a lease with a landlord is not all that different than negotiating
the purchase of a car. The important thing to know is what price you
want going into the deal and remember the rule: Everything is negotiable.
The lease you are given is simply a starting point.
If you are at the stage where you are negotiating over lease terms, then
you have become a valuable commodity to the landlord. Finding qualified
businesses that are willing and able to take on a commercial lease payment is
not simple. Accordingly, you may be in the power position when negotiating
a lease and you can ask the landlord for concessions and changes to the lease,
as necessary.
You do so by doing your homework first. Find out how much the rent
is in similar spaces. Is the vacancy rate high or low in this area? If it’s high,
you can negotiate a great deal because the landlord needs you. If the space is
vacant, find out how long it has been vacant (the longer the better for you).
The more you know, the better equipped you will be to negotiate a good deal.
Once you are presented with the lease, read it carefully and then give it
to your lawyers for review. If you find some part of the lease that you or your
lawyers don’t like, negotiate that point. Remember that the lease was drawn
up by your potential landlord’s lawyer and will certainly favor your landlord.
Remember too that although you might be presented with a preprinted lease
that may seem difficult to change, it is nothing more than a contract, and the
essence of contract law is that both sides must agree to all conditions. That,
in fact, is why a contract is also called an agreement. If you don’t agree, it can
be changed.
Above all, try to cultivate a good working relationship with your landlord.
That will go further toward working out problems than a dozen letters
from your lawyer.
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 89
Resources You Can Use
International Institute of Site Planning
202-546-2322
715 G Street, SE
Washington, DC 20002
<www.arcat.com/index.cfm>
90 T H E B U S I N E S S S T A R T – U P K I T
✎Lease Negotiating Checklist
Make sure you understand and agree to the following:
□ The length of the lease. You want it long enough to establish your
business, but not so long that you are locked in if your venture doesn’t
work out. A year or two with an option for a renewal is a good idea.
□ The lease payments. Getting one or more months free is not unheard
of when signing a long-term lease.
□ Gross or net lease. Determine whether the lease will be gross or net. A
gross lease is one where the landlord pays for taxes, insurance, janitors,
and utilities.
□ Cap increases. Be sure that your lease limits the amount your landlord
can increase your rent. Five percent a year is typical. What are the terms
of the renewal?
□ Bail-out clause. Especially in a retail lease, make sure that the agreement
allows you to get out of it if your sales do not reach a predetermined
level. Similarly, a cotenancy clause allows you out of the contract
if an anchor tenant nearby leaves.
□ Other obligations. Make sure you understand all of your obligations
under the lease.
Do not sign any commercial lease without having an attorney review it,
period.
TEAMFLY
SBA Business Names and Licenses
<www.sba.gov/hotlist/businessnames.html>
The United States Patent and Trademark Office
Crystal Plaza 3, Room 2C02
Washington, DC 20231
<www.uspto.gov>
6 / C h o o s i n g G r e a t N a m e s a n d L o c a t i o n s 91
T H E B O T T O M L I N E
Both choosing a name and picking a location are doubleedged
swords. Sure it’s fun, but a mistake in either area can doom
your business. Your name should reflect your business and be memorable.
Your location must be chosen with care, be affordable, be
zoned properly, and be accessible to your customers.
This Page Intentionally Left Blank
C H A P T E R
7
· Licenses, Permits, and
· Business Formation
Deciding what legal form your business should take is not the most scintillating
of topics, but it may be one of the most important decisions you will
make. The form your business takes can determine how big it may grow, who
can invest in it, and who is responsible should it get in trouble. It is a critical
decision. Once decided, it is then important to handle some other legal issues,
namely getting the requisite licenses and permits required by your city,
county, or state.
Business Formation
There are three forms your business can take. It can be a sole proprietorship,
a partnership, or a corporation, and each of the last two have subsets.
When deciding which of these is best for you, it would behoove you to
speak with both your lawyer and your account, because each choice has different
legal and financial considerations to weigh. Below is an overview that
you can use as a launching pad for discussions with your own advisors.
Sole Proprietorships and General Partnerships
A sole proprietorship is the cheapest and easiest form of business you
can start. Simply decide on a name for your business, get a business license,
93
file and publish a fictitious business name statement, hang your shingle, and
voilà! You are in business. Creating a sole proprietorship shouldn’t cost more
than $100.
The downside to sole proprietorship is significant: You and the business
are legally the same thing. If something goes wrong, say as a chiropractor you
accidentally injure someone, not only is your business at risk, but so are your
personal assets. Your home, cars, bank accounts, everything is at risk when
you are a sole proprietor. Another problem with this form of business is that
you have no partners to work with or bounce ideas off of. It is a dangerous
way to do business.
Therefore, having a teammate is why operating a business as a partnership
is attractive. Essentially, a business partnership is a lot like a marriage.
You need to pick a good partner because you will be spending a lot of time
together and trusting each other. And, as with a sole proprietorship, in a general
partnership, both you and your partner are personally liable for the debts
of the business. The danger is that your partner can make some dumb decisions
and get the partnership into debt, and you will be personally responsible
for that debt.
So, as you can see, while there are many good aspects to having a partner,
partnerships are fraught with danger. You have to weigh the benefits
against the burdens and decide if bringing in a partner is right for you.
Another thing to be wary of is the emotional aspect of having a partner.
One advantage to being a sole proprietor, and thus the only boss, is you have
no one to answer to except yourself. That’s one of the definite perks of being
a solo entrepreneur. Bringing in a partner means you will have to consider another
point of view before any major decision is made. Also, when partnerships
do not work out, best friends who become partners do not always stay
best friends.
On the other side of the ledger, there are many things to be said for having
a business partner. One is that it enables you to have someone with whom
to brainstorm. That great idea you have may not be such a great idea after all,
and a partner you trust can tell you why. A partner also gives you another pair
of hands to do the work. It is difficult to be the one who has to do everything
when you are solo. Partners alleviate that. Last, and certainly not least, having
a business partner gives you someone to share the financial responsibilities of
the business. That is not insignificant.
Having considered the pros and cons, having concluded that a partner
can help more than it might hurt, and maybe even knowing someone you
94 T H E B U S I N E S S S T A R T – U P K I T
would like to partner with, it is still a good idea that you “date” first before
jumping in. Find a project or two and work together. See how you get along,
how your styles mesh (or don’t), how you deal with deadlines, and whether
the union enhances your work. Remember, you will be spending a lot of time
with your partner, so you need to be sure that you work well together, have
a good time, and have skills that complement one another.
Finally, get some work references and make some phone calls. Deciding
to partner with someone is one of the most important decisions you can
make in your small business, so don’t skimp on the homework. As far as the
costs go, the licensing and permits are fairly insignificant. The main cost is
hiring a business lawyer to draft the partnership agreement. That can run anywhere
from $1,000 to $2,500.
Limited Partnerships
There are two classes of partnerships: general partnerships (discussed
above) and limited partnerships. In a general partnership, all partners are
equal. Each partner has equal power to incur obligations on behalf of the
partnership, and each partner has unlimited liability for the debts of that partnership.
Because not all partnerships require that the partners have equal
power and liabilities, some partnerships decide to form as a limited partnership
instead.
In a limited partnership, there is usually only one general partner (although
there could be more). The other partners are called limited partners,
hence the name limited partnership. In a limited partnership, the general
partner or partners have full management responsibility and control of the
partnership business on a day-to-day basis. The general partner runs the show
and makes the decisions. A limited partner cannot incur obligations on behalf
of the partnership and does not participate in the daily operations and management
of the partnership. In fact, the participation of a limited partner in
the partnership is usually nothing more than initially contributing capital and
hopefully later receiving a proportionate share of the profits. A limited partner
is essentially a passive investor.
While the general partner has all of the power, he or she also has the
lion’s share of the liability. A limited partner’s liability is capped at the amount
of his or her financial contribution to the partnership. Should the truck of a
limited partnership kill someone accidentally, the damaged party could go
7 / L i c e n s e s , P e r m i t s , a n d B u s i n e s s F o r m a t i o n 95
after the general partner’s personal assets, but would be limited to the limited
partner’s capital contribution.
Thus, the main advantage to this business entity is that it allows the general
partner the freedom to run the business without interference, and gives
the limited partners diminished liability if things go wrong. Although a limited
partner may seek to be more involved in the day-to-day operations of the
partnership, he or she does so at some risk. If he or she does participate
more, it is altogether possible that he or she may be viewed as a general partner
in the eyes of the law, with its attendant liability risks.
Another key benefit of the limited partnership is that it pays no income
tax. Income and losses are attributed proportionally to each partner and accounted
for on their respective tax returns. Because of this flow-through tax
treatment, a limited partnership is often the structure of choice for real estate
ventures and investment securities groups.
If you do decide to start your business as a limited partnership, have
your partnership agreement drafted by an attorney. Again, the costs will likely
run between $1,000 and $2,500. You might also want to read Let’s Go Into
Business Together: 8 Secrets to Successful Business Partnering by Azriela
Jaffe.
Incorporating
The best thing about forming your business as a corporation is that it
limits your personal liability, which is not true for partnerships and sole proprietorships.
For example, say that you owned a tire shop and one of your
employees negligently installed a tire that fell off a car and caused a three-car
accident with several personal injuries. If your tire store was not a corporation,
the injured parties could come after you personally for monetary damages.
This means that you could lose your business, your house—everything.
That would not be true if you incorporated. Creditors are limited to the assets
of the corporation only for payment and may not collect directly from the
shareholders.
There are several types of corporations including limited liability companies,
closely held corporations, professional corporations, and S and C
corporations.
96 T H E B U S I N E S S S T A R T – U P K I T
7 / L i c e n s e s , P e r m i t s , a n d B u s i n e s s F o r m a t i o n 97
■ Pros and Cons of Incorporating
Pros
• The corporation limits one’s personal liability.
• The corporation is a separate legal entity. It has its own tax identification number
and is its own legal entity, separate and apart from the owners.
• Sole proprietorships and partnerships normally end upon death, disability, bankruptcy,
or retirement of the proprietor or a partner. Corporations, being a separate
legal entity, do not cease to exist when one of the founding members leaves.
• As the corporation grows, management and ownership can be separated so that the
business can continue and the owners can still reap benefits. However, they may
choose not to run the corporation.
• An important corporate characteristic is the ability to consolidate, merge, or buy
other corporations.
• You may be taken more seriously by others if you have a corporation.
• Corporate stock may be freely transferred by sale or gift.
• A corporation can buy and sell property in the corporate name.
• A corporation can contract with the government, whereas most other business entities
cannot.
• A corporation has numerous tax advantages, including pension and profit-sharing
options, and the election of S corporation status (see the following section).
Cons
• It is expensive to create and, depending on the situation, to maintain. Incorporating
may cost $1,000 to $10,000, depending on the type and complexity.
• Majority shareholders can overpower minority shareholders.
• The shareholders, as owners, have little say in day-to-day operations.
• A corporation is subject to greater governmental regulation and control than other
types of business entities.
Limited Liability Companies
Limited liability companies (or LLCs) combine many of the advantages
of a corporation and a partnership without the disadvantages. The LLC is a
fairly recent business entity that may offer greater business and tax advantages
than a regular corporation, while also offering better business and structuring
advantages than a partnership.
Like a corporation, an LLC provides the limited personal liability that is
so attractive in corporations, along with being a separate legal entity that can
sue and be sued as well as buy and own property. Similar to a corporation, articles
of incorporation must be filed with the state, and a registered agent
must be named for service of process. Like a partnership, shares in the LLC
cannot be transferred without the approval of all other members of the LLC.
The death, retirement, expulsion, or bankruptcy of one member does
not end the LLC. If all of the remaining members agree, the LLC can continue
and, in a few states, the law allows the business to continue with the consent
of fewer than all the remaining members.
Closely Held Corporations
Allowed in some states, a close corporation is one whose shares are
owned by only a few shareholders. Although there is no specific number,
Delaware corporate law states that a close corporation cannot have more
than 30 shareholders. Less than 15 is more typical. The purpose of a close
corporation is to keep ownership and control within a small group of shareholders
who have the same goals.
In a close corporation, distinctions between directors, officers, and
shareholders are normally absent as the few owners own and operate the corporation
without formalities. Unlike publicly held corporations, a closely held
corporation’s shares are not traded on the open market.
The advantages to doing business this way are that
• shareholders can be restricted, and
• all shareholders can participate in the business.
The downside is that a few shareholders who disagree with the majority
are generally out of luck as they cannot freely sell their shares.
98 T H E B U S I N E S S S T A R T – U P K I T
Professional Corporations
This is a certain type of corporation that is designed for professionally licensed
entrepreneurs only, and that professional can be the only shareholder.
The type of professional that can take part in this plan varies by state, but usually
includes doctors, lawyers, dentists, psychologists, and accountants. Note
though that a corporation cannot normally shield you from a malpractice
award.
S and C Corporations
S corporations are intended for smaller enterprises. Like an LLC, S corporations
are informal enough to allow you to run your business like a sole
proprietorship or partnership, while giving you the protection of the corporate
shield; that is, limited personal liability.
A big disadvantage of regular corporations (or C corporations as they are
legally known) is that they are taxed twice—once when profits are realized,
and a second time when those profits are passed on to the shareholders. The
advantage of the S corporation is that it avoids this double taxation and profits
are only taxed once. In fact, S corporations do not pay a corporate tax at
all. Instead, their shareholders report profits and losses on their personal tax
returns. The advantages of S corporations are obvious, but be aware that
there are restrictions:
• An S corporation can have no more than 75 shareholders.
• All shareholders must be citizens or residents of the United States.
• The corporation’s tax year must end on December 31.
• It can only have common stock outstanding (as opposed to preferred
stock).
• The corporation cannot earn more than 25 percent of its gross income
from passive investments such as interest, dividends, royalties,
and rents.
To create an S corporation, you must first file the necessary articles of
incorporation with your secretary of state’s office. You then need to file a
Form 2553 with the IRS. This is a fairly complicated matter so it is best to hire
qualified legal counsel.
7 / L i c e n s e s , P e r m i t s , a n d B u s i n e s s F o r m a t i o n 99
A C corporation is your basic, standard variety, large corporation. GM
and Exxon are C corporations. The distinguishing characteristic, and the reason
you might want to pick this entity, is that its shares are easily transferable.
Which is best for you? If you plan on creating a large company (one that
is publicly traded), you should choose a C corporation because shares of
stock are most easily bought or sold. While you might want an S corporation
for tax reasons, it is limited to no more than 75 shareholders, all of whom
must be individuals, and that is sometimes a problem. LLC’s trump S corporations
because they have no limit on the number of shareholders, and those
shareholders can be corporations and partnerships. Generally speaking, LLC’s
are best for smaller start-ups and C corporations are best for larger ones.
Licenses and Permits
There are some bureaucratic hoops still to jump through before you
open your business. If you are going to operate a sole proprietorship or partnership
using a name different from your personal name, you are probably
required by your city, county, or state to register your fictitious business
100 T H E B U S I N E S S S T A R T – U P K I T
■ Comparing Business Entities
Easy
Limited Perpetual Transferability Separate
Liability Existence of Ownership Legal Entity Cost
Sole Proprietorship No No No No Low
General Partnership No No No No Low
Limited Partnership (Limited
partners
only) No No No Medium
LLC Yes Yes Yes Yes High
Close Corporation Yes Yes No Yes High
S Corporation Yes Yes Yes Yes High
Professional Corporation Yes No No Yes High
C Corporation Yes Yes Yes Yes High
TEAMFLY
name, also known as a dba (doing business as). Registering your dba with the
proper authorities puts the public on notice that you are the owner of the
business. Corporations are not normally required to file a fictitious business
name statement, unless they too are operating under a different name. Also,
know that some banks require such a statement before opening a business
bank account.
Requirements for filing the fictitious business name statement vary according
to locale. Some places require that you file a form and pay a fee to
the county, others require that you do so with the city. The process usually
just requires that you go to the proper office, fill out a fictitious business
name statement, and pay a registration fee (usually less than $100). Some
places also require that the statement be published in a local newspaper.
You will also need to get a business license from your city or county.
Other permits and requirements you may need include:
• A health department permit, if you will be selling food somehow
• Beer, wine, and hard liquor licenses
• Environmental regulations, if you will be using paints or other chemicals,
or if you will be burning anything (in a kiln for instance)
• A fire department permit, if your business is going to use flammable
materials
• A water pollution control permit, if you will be discharging materials
into waterways or sewers
• A permit or permission of a landlord, if you plan on posting a sign of
some sort
• A license or bond for certain professions including barbers, lawyers,
doctors, nurses, cosmetologists, real estate brokers and agents, mechanics,
plumbers, electricians, contractors, and insurance agents
You can begin your journey down the permit path by visiting your city’s
business planning office. It should have a packet that explains exactly what
licenses and permits you need, where to get them, and what they cost.
Resources You Can Use
Findlaw for Business
<www.businesslaw.gov>
7 / L i c e n s e s , P e r m i t s , a n d B u s i n e s s F o r m a t i o n 101
MrAllBiz.com
<www.mrallbiz.com>
Nolo.com
Legal books and software
Phone: 800-728-3555
Fax: 800-645-0895
950 Parker Street
Berkeley, CA 94710-2524
<www.nolo.com>
SBA
Legal and regulatory information
<www.businesslaw.gov>
102 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
Dealing with the legalities of your business is not much fun,
but you can’t overlook it. Working with your lawyer and accountant
will help you make the right decisions. In most cases, forming some
sort of corporation is in your best interests.
C H A P T E R
8
· Outfitting the Office
The actual process of setting up your business will involve dealing with
plenty of details—details that must be understood and organized before you
open the doors; details that must be handled and forgotten so that you can
go onto other, more important matters; details that can sink or swim your
business.
Aside from creating a winning image (as discussed in Chapter 6), you
also need to set up efficient office operations, computer systems, and phone
and mail systems. Nailing these details down now will enable you to concentrate
on growing your business—a far better use of your time than getting lost
in myriad minutiae down the road.
Automating Your Office
Whatever your business, you must computerize it. Whether it involves
tracking sales, writing letters, or inventory control, starting out with a good
computer system is vital. Although it may seem less expensive to do certain
office tasks by hand rather than investing in a good computer system or related
software, that is fuzzy logic for two reasons. First, you eventually will automate
whatever tasks you begin by hand. Changing over later will take
longer and cost more. Second, computer hardware and software will allow
you to be more effective and, thus, more productive from the get-go.
103
Computers represent a solid investment of your start-up capital. Don’t
skimp in this area. Throughout this book you have been, and will be, cautioned
to keep your overhead low. High overhead will eat up your profits and your
precious cash flow quickly. But this is not one of those times. The rapid pace
of technological change means that computers usually become obsolete within
three or four years. If you buy a used one, or an older or a slower model, you
are simply speeding up the moment when you will have to buy a new one.
Be smart and buy a good computer and the necessary software now.
You have likely learned a thing or two about purchasing computers since
you bought your first one. You are more knowledgeable about your computer
needs, and you probably know what areas you would like to improve. It may
be that your monitor is too small and you want a larger one, or that you want
a newer operating system. Probably what you want is speed and more speed.
104 T H E B U S I N E S S S T A R T – U P K I T
✎Checklist of Important Business Computer Features
Features that you should look for include:
□ The processor speed. These days, processor speeds are measured in
gigahertz (GHz). The higher the processor number, the faster your computer
will run. Many computers today run in excess of 1.5 GHz, but the
time of computers running at 2 GHz is not far off.
□ RAM capacity. At a minimum, you need 128 megabytes (MB) of RAM.
□ Disk drives. Again, the more, the better. A CD-ROM drive is essential,
and a DVD drive will probably be included in most new models.
□ Internet speed. This may be the most important part of your purchase.
If you plan on using the Web a lot, you should consider getting a cable
or DSL line, and thus an Ethernet port is a necessary component of your
computer.
□ Software. The software package is important because it creates what
you see on the screen. You will want the latest version of Windows.
□ Monitor size. Your monitor is one of the most important parts of your
computer. A 17-inch screen seems about right for most people.
The next question is, where do you buy it? One option is an office superstore.
Because of volume buying, superstores can often sell products at 30 percent
or more below manufacturers’ list prices. An even better option is to buy
directly from the manufacturer online. Buying from the manufacturer allows
you to design the exact system you want. While Gateway <www.gateway
.com> and Dell <www.dell.com> began the BTO (built to order) trend, custom
computers have caught on with almost every computer maker, and all
8 / O u t f i t t i n g t h e O f f i c e 105
■ Leasing Equipment
You can lease not just computers but much of your business equipment. Leasing offers a
number of distinct business advantages:
• Leases are easier to finance than purchases. Banks will usually want to see two or three
years of financial records—records unavailable to a new company—before they will
make a loan for equipment. However, leasing companies are not so picky.
• Leasing improves your cash flow. It frees up cash. Equipment leases cost less monthly
and rarely require down payments (though you may have to pay a security deposit).
Conversely, equipment purchase loans usually require down payments of up to
25 percent.
• Leasing allows you to get more. Although you might not be able to afford to buy
those pricey new tool and dye machines, you might be able to lease them. Even better:
Top-notch equipment can help your people be more productive, create better
products, and boost morale.
• Leasing makes it easier to keep up to date. If your business relies on new technology,
leasing makes a lot of sense. Instead of buying new equipment every two or three
years, a series of short-term leases will cost you less and let you upgrade more often.
• Leasing helps the bottom line. Some leased assets can be eliminated from your balance
sheet, which can improve financial indicators such as your business’s debt-toequity
ratio or earnings-to-fixed-assets ratio. Check with your accountant.
If you do decide to lease equipment, keep the term short. A two-year lease is a good
idea. You also should try to negotiate a modern equipment substitution clause, which lets
you update or exchange your equipment so you do not end up paying for old technology.
the leading PC manufacturers offer their models in just about every configuration
imaginable at their online stores.
If your business will require several computer workstations, keep these
points in mind:
• Don’t fall in love with the technology. If you do, you are liable to
make a choice for the wrong reasons. Instead, first decide what your
business needs are and then look for the computers and other information
technology solutions that can fill those needs.
• Once the system is up and running, your people will need to be
trained to use it. According to Inc., businesses in the United States
spend more than $6 billion on information technology training every
year. Seventy-six percent of that training comes from using a traditional
instructor, while 17 percent of businesses use videos, satellite
TV, or computers. In fact, high-tech training is growing at the rate of
31 percent a year. Interactive training software can also be rented at
a cost of between $5,000 and $10,000 for two years. A Web search of
“information technology training” will reveal many options.
• You will also need to create a local area network (LAN). By networking
all of your computers, you increase productivity and communication
within your business. For example, one printer can be shared by
five workstations. Everyone can share the same Internet connection.
LANs are important.
• You will also need a backup system in case of a calamity, such as a fire
or theft. Losing your files could cost you your business.
Software
Many of the routine tasks that entrepreneurs often hate—budgeting,
bookkeeping, and billing—can be handled quickly and painlessly with the right
software. Software packages exist that can make even the most mundane office
tasks tolerable for such jobs as:
• Creating spreadsheets
• Doing payroll
• Invoicing
• Tracking customers
• Tracking sales
106 T H E B U S I N E S S S T A R T – U P K I T
• Creating mailers
• Creating form letters
• Calculating taxes
These need not be demanding, time-consuming chores. By automating
all of these tasks and scheduling them for a certain time each week or month,
you free yourself up to think bigger. Go to your local office supply store and
speak with a salesperson about the various suites of software packages available
for business owners.
If your business is bigger and requires more than an off-the-shelf solution,
the secret is in defining your needs and then educating yourself about
your options. Sophisticated (and expensive) IT software is available to solve
almost any business problem—inventory control, increasing response rates,
securing computer systems, data management, etc. This is what IBM and Microsoft
specialize in, as do a host of others. If your needs are along this avenue,
contact the company, call your local sales rep, and tell him or her what you
need. By being clear up front about what you are looking for, you can avoid
buying expensive “solutions” to problems you don’t have.
Another option is to hire a software programmer yourself. They can create
custom software to suit your exact needs. The downside is that it is usually
an expensive proposition and the software often has a few bugs in it that
you won’t find in commercial software.
Phones and Faxes
It is impossible to generalize about what sort of phone system you may
need. A sole proprietor and a corporation will have vastly different needs. As
you consider a phone system, ask yourself these questions:
• How much time do I anticipate spending on the phone every day?
• How many people will be using the phone system?
• Will the system need to take messages and forward phone calls?
• Will I need call waiting? Keep in mind many people find it rude.
• Do I want to be able to screen my calls?
If you choose to handle phone duties yourself, you can have a voice mail
system or an answering machine pick up you messages when you are not
available. The advantage an answering machine has over voice mail is that you
can screen your calls when necessary. The advantage of voice mail is that it
8 / O u t f i t t i n g t h e O f f i c e 107
allows you to have different “mailboxes” if needed, and people are used to
using it. Voice mail is offered through your local phone company as well as
through private voice mail service bureaus. It is also possible today to set up
voice mail on your computer, using specialized software.
If yours is going to be a larger, phone-intensive business, you should definitely
consider buying a voice mail system, rather than renting one though
your telephone carrier. Personalized voice mail systems can set appointments,
take orders, check on deliveries, forward phone calls, and record and
retrieve private messages in many mailboxes. Not surprisingly, prices for
voice mail systems can run upward of $25,000, although some start as little
as $1,000. It is important to make sure that the system you get will neither be
obsolete nor inadequate in a year or two.
Finally, a fax machine is essential, whatever your business. Fax machines
today are not expensive and usually combine a number of very useful functions
such as copying and scanning. While Internet faxing services are available,
they are not always reliable.
Mail
If you will be running a business that will entail a lot of mail, you should
get a postage meter. Available only though rental contracts, postal meters are
U.S. Postal Service approved and will mark your envelopes or packages with
proper postage. The USPS estimates using a scale along with a postage meter
108 T H E B U S I N E S S S T A R T – U P K I T
One way to get more business is to get a toll-free phone number for your
business. Toll free numbers—800, 888, and 877—are not just for the big
boys today; almost every sort of business can afford and find uses for a tollfree
number. And the easier you make it for people to get a hold of your
business, the more business you can generate. There are many options and
carriers around today, so prices are competitive. Carriers can be found in
your Yellow Pages.
can save businesses up to 20 percent a year in postage costs. And best of all,
you can reload your meter over the phone or via the Internet from sites like
Stamps.com.
Resources You Can Use
Dell
<www.dell.com>
Gateway
<www.gateway.com>
Office Depot
<www.officedepot.com>
Office Max
<www.officemax.com>
Staples
<www.staples.com>
8 / O u t f i t t i n g t h e O f f i c e 109
T H E B O T T O M L I N E
It will make your life much easier, and your business more successful,
if you start out by creating efficient office operations, computer
systems, and phone and mail systems. These details are things
that can bog you down and waste precious time if not handled
properly from the beginning.
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TEAMFLY
C H A P T E R
9
· Show Me the Money
Finding the funds to start your business is usually one of the most challenging
things the budding entrepreneur will face. Whether yours is a small,
home-based business or a large venture that requires six- or seven-figure funding,
the good news is that money is available. The bad news is that it is sometimes
harder to secure than you may anticipate.
But look around. Every one of those businesses that you see as you drive
down the street began as someone’s dream and, somehow, those entrepreneurs
found the money to open their doors. If they did, so can you.
New businesses normally have a difficult time securing money for a variety
of reasons. Conventional financing may be difficult because a new business
is a risk to banks—there is no track record or assets to go on. For this
reason, almost 75 percent of all start-up businesses are funded through other
means. In this chapter, those other options are examined.
Money and the New Business
The very first thing required of you is to accurately estimate the amount
of money you need. Taking a cold, hard look at your money requirements will
help you know your business better and help ensure your success. Once you
know how much capital your business will require, it will be incumbent on
you to get it. Having a cash crunch from the start is a sure way to go out of
business fast.
111
Moreover, a realistic budget will help convince a lender or investor that
you understand your business and are worth the risk. The first thing any investor
will want to know is how much money you will need and how you
plan to spend it. They will want specific details on how the money will be
spent and how you plan to repay the money.
How Much Money Do You Need?
If you have created a business plan, you should have a pretty good idea
how much money you will need to get started. If you haven’t figured it out
yet, this section will help you. The money you will need can be divided into
three categories: one-time costs, working capital, and ongoing costs.
One-time costs are things that you will need to spend money on to start
your business but will unlikely see again, such as:
• Legal and accounting costs. You may need to hire a lawyer to help you
negotiate contracts, incorporate, or perform other legal services. An
accountant may be needed to set up your books.
• Licenses and permits
• Furniture and fixtures
• Decorating and remodeling costs
• Initial inventory
• Security deposits
• Equipment purchases
• Supplies
• Payroll and owner’s draw until cash flow is positive
Working capital is the money you will need to keep your business going
until you start to make a profit. The old adage “it takes money to make
money” is true and real. It is critical to have enough working capital on hand
to cover the following costs:
• Debt payments. If you will be borrowing money to get started, you
will want to begin repaying it right away.
• Inventory and replacement inventory. Service businesses have little, if
any, inventory, but retail and wholesale companies often spend large
sums in this area.
• Bills (utilities, suppliers, etc.)
• Advertising and marketing costs (e.g., flyers, sales letters, radio buys,
signs, brochures)
112 T H E B U S I N E S S S T A R T – U P K I T
• Office supplies, other supplies, cleaning service, etc.
• Ongoing payroll
So how much working capital do you actually need? A rule of thumb is
that you have enough money in the bank when you get started to get things
going and to feed, clothe, and house you and your family for six months. But a
rule of thumb is only that. You can come up with some actual numbers by answering
the following three questions and doing the accompanying exercises:
1. How much money do you have?
2. How much money will you need to start your business?
3. How much money will you need to stay in business?
As you calculate these numbers, remember that one of the smartest
things you can do is to keep your overhead low. Don’t by brand-new office
furniture if you do not need to. If you have a computer that works, use that.
9 / S h o w M e t h e M o n e y 113
✎How Much Money Do You Have?
Assets Liabilities
Cash on hand ________ Accounts payable ________
Savings accounts ________ Notes payable ________
Stocks and bonds ________ Contracts ________
Securities ________ Taxes ________
Accounts receivable ________ Student loans ________
Real estate ________ Real estate loans ________
Life insurance (cash value) ________ Credit cards ________
Automobiles ________ Auto loans ________
Other assets ________ Other liabilities ________
Total Assets ________ Total Liabilities ________
Net Worth (Assets minus Liabilities) _____________________
When you start to turn a profit, then you can indulge a bit. But right now, be
conservative. You will be glad you did.
What do you do with all of this information? Begin by multiplying the
last number on the expenses worksheet by six. This is the amount of cash you
114 T H E B U S I N E S S S T A R T – U P K I T
✎How Much Money Will You Need to Start Your Business?
Furniture $______________________
Computer hardware and software ______________________
Services and supplies ______________________
Equipment ______________________
Beginning inventory costs ______________________
Real estate improvements ______________________
Legal and accounting fees ______________________
Other professional services ______________________
Licenses and permits ______________________
Telephone and utility deposits ______________________
Insurance ______________________
Signs ______________________
Marketing ______________________
Advertising ______________________
Labor ______________________
Internet ______________________
Emergency fund ______________________
Other ______________________
Total Start-Up Costs: $______________________
9 / S h o w M e t h e M o n e y 115
✎How Much Money Will You Need to Stay in Business?
Expenses, per month
Your personal living expenses $______________________
Advertising ______________________
Marketing ______________________
Inventory ______________________
Supplies ______________________
Utilities ______________________
Telephone and Internet ______________________
Insurance ______________________
Taxes ______________________
Maintenance and upkeep ______________________
Delivery/transportation ______________________
Lease payments ______________________
Dues and subscriptions ______________________
Debt repayment ______________________
Payroll, other than owner ______________________
Your salary ______________________
Sales tax ______________________
Rent or mortgage ______________________
Storage and shipping ______________________
Transportation and delivery ______________________
Miscellaneous ______________________
Total Expenses $______________________
will need to cover operating expenses for six months, and six months is the
minimum amount you will need to get started. You absolutely must have this
amount available before opening your business. This money will ensure that
you will be able to continue in business during the crucial early stages.
Next, you must add this number to the total in the start-up costs worksheet.
By adding the total start-up costs to the total expenses for six months,
you can learn what the estimated costs will be to start and operate your business
for six months. By subtracting this total from your cash available (the
amount in the first worksheet), you can determine the amount of additional
financing you will need.
Business Loans
As indicated, because the new business presents a risk to banks, conventional
loans are not always easy to get. The U.S. government knows this,
yet it wants to encourage entrepreneurship. As a result, the U.S. Small Business
Administration (SBA) can be one of the best friends your new business
can have.
Although the SBA does not make loans, it guarantees them. A bank
might be far more inclined to loan your new business money if the SBA guarantees
the loan. The SBA works with about 150 approved lenders nationwide
that actually make the loans. The SBA’s intermediary lenders have experience
making and servicing loans and providing technical assistance to the borrowers.
That means that not only can a new business get a loan, but the
lenders also can offer business guidance in the process.
The SBA has created many different types of loans that it offers through
its member banks. For example, the SBA Microloan Program lends a maximum
of $35,000 to entrepreneurs in any stage of business. Other loans go up to $1
million. To learn more about SBA loans and to find a list of intermediary lenders
in your area, go to <www.sba.gov>, or call 800-U-ASK-SBA (800-827-5722).
The Four Cs
Whether you work with an SBA lender or not, you will still need to qualify
for the loan. While it is basically true that a loan is a loan, lenders have different
criteria for making a small business loan. You must understand what
the bank is looking for so that you can meet those conditions.
116 T H E B U S I N E S S S T A R T – U P K I T
Because an element of risk is involved in every loan a bank makes, your
job is to make your bank feel that your loan’s risk is low. You can do this if
you understand the Four Cs of business banking. A banker that considers a
business loan will analyze your loan application through the filter of these
Four Cs:
1. Character. What is the character and integrity of the borrower? To
smaller, independent banks, character means a lot, whereas credit
scoring dominates the approval process in many larger banks. If you
work with a smaller bank, character can be the critical factor between
approval and denial. Because your character is so important in
the loan approval process, it cannot be underestimated. Character is
determined by your past credit history, payment history, letters of
reference, and so on.
2. Capacity. What is the ability of your business to repay the loan?
When it comes to lending, banks are most concerned with cash flow.
Many bankers feel that a small business’s cash flow statement is the
single most important financial document to consider in a loan request,
because in it the bank can see if the borrower has the capacity
to repay the loan. Make sure you can show your banker that your
cash flow picture will work, even with the principal and interest payments
included.
3. Capital. How much money are you asking for and is the dollar
amount requested justified by your supporting documentation? The
more money you ask for, the more people will review your loan and
the more scrutiny your request will get. Smaller loans are easier to
get. If you are unsure how your capital requirement fits with your
proposal and with your banker, then it is a good idea to have a preliminary
meeting to talk about this to make sure that your request fits
all requirements.
4. Collateral. Do you have something to pledge to the bank as a security?
A small business can offer many different types of collateral—a
mortgage on real estate or inventory and accounts receivable, for example.
Collateral makes bankers’ jobs easier, helps them sleep, and
allows them to say yes to loan requests.
If you need capital, think like a banker and understand these four concepts
before you apply.
9 / S h o w M e t h e M o n e y 117
Other Loan Options
If a conventional loan is out of the question, it might help to know that
banks make other sorts of loans as well. This is especially true if your business
is already generating some money or if you already have clients or assets.
Other loans include:
• Accounts receivable financing. This revolving line of credit is based
on your accounts receivable. A typical program enables you to borrow
a predetermined percentage of accounts receivable, usually 80 percent.
• Purchase order financing. Say that you have a purchase order for
$50,000 worth of widgets, or you sign a $50,000 contract. Using this
method of financing, you can obtain advances on contracts that can
be repaid directly by your customer.
• Fixed asset loans. These loans are based on fixed assets (such as machinery
you own).
Angels
If a bank loan is simply not possible, then consider the angel option. An
angel, as the name implies, is someone who has extra money and who is willing
to take a risk on a new venture. But they do so for a price. What price,
you ask? Ah, well that’s the rub. You will be asked, in all likelihood, not only
to give up a big piece of the pie, but also some control. It is not uncommon
to give up 30 percent of your business to an angel, as well as a say in how
118 T H E B U S I N E S S S T A R T – U P K I T
■ Where to Find Angel Investors Online
• <www.thecapitalnetwork.com>
• <www.garage.com>
• <www.angellegacy.com>
• <www.angelinvestorsonline.com>
• <www.capital-connection.com>
things are run. Angels want to make a big profit on their investments and understand
the high risk of a start-up business. Accordingly, they will ask to see
tight budgets and realistic sales goals.
Angels are out there, but you have to look for them. Ask around. Meet
with some stockbrokers, real estate firms, and the like to get some names of
possible investors. If you are willing to give up some power, equity, and decision
making, angels can provide an excellent funding source for the new business.
If finding an angel investor is part of your plan, you will need to prepare
your pitch, do your research, contact the angel, and research the deal.
Prepare Your Pitch
An “elevator pitch” is business lingo for a proposal that can be explained
in the length of time you might be in an elevator with the investor. Let’s say you
found your angel and, for whatever reason, you both got in an elevator on the
29th floor of a building. You would have about 30 seconds of uninterrupted
time to pitch yourself, the business, and the idea. So your elevator pitch must
be intriguing, make sense, be short and powerful, and motivate someone into
wanting to schedule a meeting or learn more. Even if you are never in an elevator
with a potential investor, a quick pitch will still be necessary when the
time comes.
The “pitch” aspect also requires two written components:
1. The executive summary from your business plan. As you know, it
is a compelling overview of your business venture. This may be the
first thing the angel will read about your business and why he or she
should invest in it. The executive summary should state clearly how
much seed capital you need.
2. The business plan itself. If the angel likes the executive summary, he
or she will want to see the whole plan.
Do Your Research
By using the online resources listed at the left, you can come up with a
list of potential angels and then narrow it down to a few of the most likely.
Once you do that, you need to learn about each person.
• Where did they make their money?
• What are their business interests?
9 / S h o w M e t h e M o n e y 119
• What motivates them?
• What else have they funded?
Contact the Angel
This is when you will need both an oral and written pitch. The important
thing is to pique his or her interest and find some common ground.
If you were referred to him by someone you both know, tell him. If you
are starting a business like the one she started, let her know. Do you like
the same ballclub? By creating a sense of common ground with a prospective
angel, you increase the chances that your funding proposal will be taken
seriously.
Research the Deal
If you are offered money, have your lawyer review all agreements. Also,
get some references from the angel for other deals he or she has done. Check
the references and make sure the angel is good to work with and legitimate.
Venture Capital
Venture capital (VC) is money tapped for large business start-ups—those
that need millions of dollars to get going. Venture capitalists pool their money
into a joint fund to make these investments. Typically, a venture capitalist will
provide early financing to new businesses that show the potential for rapid
and profitable growth. In exchange, the venture capital firm will get stock, a
say in business matters, and probably a few seats on the board.
120 T H E B U S I N E S S S T A R T – U P K I T
Remember that many angels like being advisors and mentors and may be
willing to use their own contacts to help you find additional funding or
other assistance. All you have to do is ask.
TEAMFLY
The Old-Fashioned Way
For many new businesses, loans, angels, and VC money are simply not
an option. What then? Here are some other options that are used often to fund
the dream:
• Use your savings. It is not uncommon for entrepreneurs to have to
put dreams off for a while until they have saved enough to get started.
Even if you plan on getting an outside investor, he or she will still
likely want to see that you have your own money on the line too. You
can always cash out your life insurance; whole life policies have a
cash value that you can either cash out or borrow against. You also
can sell your stocks and bonds.
• Tap your retirement. You may have a 401(k) plan or an IRA. Either
way, these funds are possible sources of start-up capital. Before you
decide to tap these funds, make sure it is legal to do so where you live
as each state is different.
• Use your credit cards. A common place people get start-up funds
from is their credit cards. Although entrepreneurs do this all of the
time, be cautious. Interest rates of 18 percent can foster unmanageable
debt very quickly.
• Borrow. Other people’s money has been a source for new businesses
for as long as there have been businesses. The first place to look is
your friends and family. Maybe your dad would be willing to give you
a loan against a future inheritance or you might have a good friend
who believes in you.
9 / S h o w M e t h e M o n e y 121
■ Where to Find Venture Capital Online
• <www.usinvestor.com>
• <www.vfinance.com>
• <www.herring.com>
• <www.vcmarketplace.com/vcdirectory.htm>
• Find a cosigner. You can always ask another person to sign on a loan
in order to augment your credit. But remember that a cosigner also is
liable for the note. If you fail to pay it, the bank will go after your
cosigner.
• Use home equity. Banks are more than happy to lend you money
against the equity in your house. Beware, though, because a new business
is a risky venture. If it doesn’t work and you are unable to repay the
loan, not only will you lose your business but you also could lose your
home. For this reason, home equity loans are an option of last resort.
Resources You Can Use
Business Finance.com
<www.businessfinance.com>
Chamberbiz
888-948-1429
1615 H Street, NW, Suite 457
Washington, DC 20062
<www.chamberbiz.com>
The Small Business Administration
409 Third Street, SW
Washington, DC 20416
<www.sba.gov/financing/>
122 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
To get the money you want, you first need to know how much
you will need. After that, you can target various sources, including
friends and family, banks, angels, and VCs. No matter who you look
to tap to fund your venture, they will want to see that you have a
plan for making a profit and paying them back in a timely fashion.
P A R T
III
· Opening Up Shop
In this section, you will discover how to create a great
business image. Furthermore, vital elements such as business
accounting and law are explained in plain English.
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C H A P T E R
10
· Creating a Great Image
At the height of the e-commerce boom, an executive from a wellestablished
“old-economy” company was hired to be the new CEO of a
young, brash, well-financed Internet start-up. For his first day at his new company,
the CEO decided to look his best. He dressed in an expensive suit and
his favorite tie. That day, he was to address the company’s 100-plus employees.
As he tells the story, he felt sharp, and looked great. The new CEO gave
an enthusiastic, short introductory speech and then opened the floor to questions.
The room was utterly and completely silent. Seconds seemed like hours
as people refused to participate. “Come on,” he implored, “ask me a question.”
Finally, someone yelled out, “Why are you wearing a tie?”
As in life, first impressions are awfully important in business too. After
someone encounters you and your business for the first time, they will leave
with an impression. It may be positive, it may be negative. They may think
yours is a well-run, professional enterprise that will provide them with a great
service, or not. One thing you can bank on though is that the first impression
will very likely be the lens that they use to view your company forever.
Think about it in your own life. If you meet someone for the first time
and he acts like a real jerk, don’t you label him a jerk? It doesn’t matter that
he might have been having a bad day. He becomes “the jerk.” When you go
to a business for the first time and get bad service, don’t you usually conclude
that their business doesn’t deserve your continued patronage? That is why
they say that you only have one chance to make a great first impression.
125
The Importance of a Great Image
Although image isn’t everything, it is not insignificant. Your signs, business
cards, letterhead, logo, and store/office say much about who you are.
Combined, these things constitute your business identity. A professional business
identity says that, even though you are new, you are to be taken seriously.
Of course, you will have to back up that great image with great products
or services and customer service. But to get people to understand that yours
is a business worth patronizing, you have to open the door by having a sharper
image. That is the task before you.
Your Logo
A logo is one of the first things you need to create because it will be
used on your letterhead, business cards, and other documents. It will distinguish
your company, set a tone, and foster your desired image. A logo can be
a symbol (the Nike swoosh), a graphic interpretation of your business name
(Yahoo!), or both. Either way, it needs to convey the tone of your business.
In that sense, it is not unlike naming your business. You want a logo that exemplifies
who you are and what it is you do.
When creating a logo, you have two options: you can do it yourself or
hire someone to do it for you. If you decide to design your own logo, you will
need a software program that offers graphics, clip art, and photographs that
can be incorporated into your logo. It is important that you not use any material
that is copyrighted in your logo design.
If you can afford to hire someone to create a logo for you, do it. Prices
vary widely; you can expect to pay anywhere from $100 for a graphics student
to $10,000 for a seasoned pro. While such high fees can be scary, remember
that a good logo can last for 20 years (or more, if you are lucky),
which makes a good logo a bargain.
126 T H E B U S I N E S S S T A R T – U P K I T
You can find a great, free logo generator at <www.cooltext.com>.
Also consider making a slogan part of your logo. A good business motto
should quickly and memorably convey the essence of your business. And like
your logo, your business slogan should be simple and should embody your
business. For example:
• Avis: We Try Harder
• Burger King: Have It Your Way
• BMW: The Ultimate Driving Machine
Once you have your logo (or logo and motto), it is time to start putting
it on your marketing items—your brochures, business cards, and stationery.
Letterhead and Stationery
For many new businesses, their stationery becomes the most important
marketing tool they have. Your stationery is one of your basic links to the outside
world (along with your Web site). It is how people will perceive your
business. Thus, if you fail to have professional stationery printed and instead
1 0 / C r e a t i n g a G r e a t I m a g e 127
✎Creating a Business Motto
1. What are the three most distinguishing features of your business?
2. What are the three best benefits customers get by patronizing your
business?
3. Make a master list of your best features and benefits.
4. Narrow that list down to the top three features or benefits of your
business.
5. Incorporate those into different short, quippy sayings. Be creative. Be
wild. Come up with ten different possible mottos based on your features
and benefits.
6. Pick the best one.
simply copy your letterhead and logo onto the top of every document, you
will look like an amateur. And a new business can ill afford that.
Begin with your letterhead. It is as integral to your business identity as
your logo and name. What you are looking for is an overall theme for your
business that conveys the image you are hoping to create in the mind of consumers.
This is done by creating graphic materials that are simpatico with
one another, that reinforce each other and your corporate identity. Your letterhead
may be the first thing people ever see when looking at your business,
so be sure that it is professional. It needs to include the following:
• Name
• Logo
• Address
• Phone number
• Fax number
• E-mail address / Web address
The card stock, font, and color of your stationery are equally important.
An off-white linen paper gives a professional image, whereas a fluorescent
yellow one gives a festive one. It all depends on what you are looking for and
what theme you are trying to create. The graphic artist who helps with a logo
can certainly give some good advice here as well.
128 T H E B U S I N E S S S T A R T – U P K I T
Stationery need not be boring or expensive. You can get some great ideas
about your options, and even order it online at a discount, by visiting these
Web sites:
• <www.printglobe.com>
• <www.printingforless.com>
• <http://dir.yahoo.com/Business_and_Economy/Business_to_
Business/Printing/>
Business Cards
The same font and stock that you used for your stationery should be
used for your business cards as well. In some places in the world, Asia, for example,
a business card is given out at almost every meeting and is the single
1 0 / C r e a t i n g a G r e a t I m a g e 129
■ Elements of Your Image
These items need to be coordinated and thematic in order to create a dynamic
business identity and image:
• Logo
• Stationery
• Business cards
• Brochure
• Signs
• Web site
You can get an idea of what some great, original business cards look like or
you can design your own card by visiting these Web sites:
• <www.color-business-cards.com>
• <www.ebusiness-cards.com>
• <www.businesscardsworld.com>
• <www.iprint.com>
most important marketing tool people use. Although you certainly cannot expect
to say a lot on that little piece of card stock, how you say it says a lot.
The key to creating a successful card is to have it reinforce your image
without being too busy. Keep it simple, use your logo, make sure it is legible,
and include only the most important, relevant information. If you want your
card to stand out from the crowd, consider the following:
• Use a nontraditional size or shape.
• Use a cartoon, if appropriate.
• Use colored paper.
• Emboss your cards.
Your Brochure
Not every business will need or use a brochure. Even if a brochure is not
traditionally part of businesses like yours, it still might be a great way to create
a professional image and bring in business. The thing to be wary of is
spending money on a brochure if it really does nothing to add to your business.
A brochure can be an expensive item and thus not worth the money if
you really don’t need it.
When creating a brochure, avoid the following:
• Making it too busy. Creating a brochure that is so jam-packed with information
that it is unpleasing to the eye and difficult to read is a sure
way to waste money. It is much better to keep paragraphs short, use
white space, use bullets, and keep it simple.
• Making the cover boring. Too many businesses think that headlining
their brochure with their business name is a sure way to entice people
to read more. If you want people to read your brochure, you must
catch their attention (usually with some benefit they could get by
reading more) and draw them in.
Ask yourself: What is the purpose of this brochure? Is it an introduction
to your business, a selling tool, both, or more? Whatever your answer, your
brochure needs to reflect the same values, tone, and theme that will be found
in your other image-creating materials. Use your logo. Use your colors. Reinforce
your desired image with text and graphics that reflect your business
image.
130 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
Signs
A big, bold, visible sign in the right location(s) can be one of the best
tools for creating an image, as well as generating new business. Signs are obviously
most used for retail businesses, especially when drop-in traffic is a key
element to your business model.
Signs come in many forms, from cheap wood ones to expensive electrical
and glass models. The same considerations that are used in your other
materials apply here. If you can get the image of each of your materials to reinforce
an overall theme, busy people who don’t yet know of your business
will easily understand what it is you are about if they are met with consistency.
Choosing the right sign especially is an area where professional expertise
is useful. How big should the sign be? What should it say? How big should
the letters be? Are there zoning restrictions for the type of sign you want? A
sign company will help you figure this all out.
Your Web Site
Even if your business has nothing to do with the Internet, you cannot
pass up the chance to create an online image. Indeed, a Web site has become
a business necessity. Not only is it an inexpensive way to buttress your image
and tell people who you are, but it is also an opportunity to sell more, get
more customers, make more money, and impress strangers.
And you need not be Amazon.com to be successful. In fact, you probably
don’t want to be. Your business Web site should, in all likelihood, be a clean, simple,
elegant place that does a few things very well. Your home page should explain
what your business is and what the Web site is about. It should be simple
and easy to load. Inside, your business address and contact information should
be easy to find. Features and benefits of working with you should be prominent.
Beyond that, what you do with your site is up to you. You may want to
consider having some features that keep people coming back, because the
more they come back to your site, the more likely it is they will buy from you.
You can offer such things as:
• Interactivity. E-commerce interactivity means providing interactive
tools that enable potential customers to learn more about your products.
It could also mean offering chat rooms, message boards, or newsletters.
Streaming video is a possibility.
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• Members only areas. Some businesses offer members only domains
on their Web sites, where they offer access to premium information,
tools, and services. Think about AOL for a moment. It is nothing but
a huge members only Web site; not a bad model.
• Content. On the Internet, content is king. A site without good, arresting,
useful, timely content is a site that is probably going nowhere.
Think about the sites you like. What is it that draws you there? In all
likelihood, good content is near the top of your list.
Where do you get your content? You can write it yourself or hire someone
to create content for you. Another option is to buy syndicated content.
Syndicated columns, news, horoscopes, weather, sports, and comics can be
an economical way to go. Consider the following options:
• <www.isyndicate.com>
• <www.alternet.org>
• <www.clarinet.com>
How do you get a good, clean professional site without spending a fortune?
You can hire a Web designer, you can do it yourself, or you can go to a
one-stop shop. Web designers are expensive for most businesses ($2,500 and
up). If you can afford one, great, because they can give you a great look. Web
designers can be found in the Yellow Pages or online by looking for one on a
search engine.
132 T H E B U S I N E S S S T A R T – U P K I T
Even sites that are product oriented can use good content. Dan Harrison is
the owner of <www.poolandspa.com>. For Harrison, content makes the
difference. When he started his Web site back in 1994, visitors could purchase
thousands of spa and pool products and, at the same time, learn
what to do if their pool turned cold or their hot tub got moldy.
Articles are written by Harrison and his staff and include “Ask the Pool
Guy” and “Ask the Spa Guy” features. Chat rooms and message boards are
also available. Harrison must be doing something right; he saw revenues
double to more than $2 million in the first half of 2001.
Unless you are familiar with a Web design program, designing your site
yourself is not easy. Not only is it time-consuming, but it can be frustrating
and ultimately end with a poor result.
The most cost-effective solution may be to find a one-stop shop that
hosts your site and designs it too. Many e-commerce solutions providers make
it very easy for you to find a one-stop solution for doing business on the Internet.
These new partnerships often combine site hosting, store setup, and
credit card processing into a single package specifically designed for small
businesses. Many local Internet service providers offer these services, such as:
• <www.bizland.com>
• Yahoo! Store
• <www.webyourbusiness.com>
• <www.earthlink.net>
• <www.valueweb.net>
• <www.e-builders.net>
However you choose to go, it is essential that your business find its way
onto the Web.
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An excellent source for inexpensive Web site design for small businesses is
<www.ahwebdesign.com>.
T H E B O T T O M L I N E
Creating an image that people remember is a matter of consistently
applying a thematic design to your front-line marketing materials.
Everything from your stationery to your business cards and
your Web site needs to reinforce the image you want to create.
Resources You Can Use
Guerrilla Marketing: Secrets for Making Big Profits from Your Small Business
by Jay Conrad Levinson (Mariner Books, 1998)
<www.gmarketing.com>
Business Marketing Association
800-664-4BMA
400 North Michigan Avenue, 15th Floor
Chicago, IL 60611 USA
<www.marketing.org>
<www.marketingsource.com>
<www.ahwebdesign.com>
134 T H E B U S I N E S S S T A R T – U P K I T
C H A P T E R
11
· Let the Numbers
· Do the Talking
Business and money are practically one in the same. How much should
you charge for your goods or services? Should you extend credit? How do you
go about accepting credit cards? Whatever the issue, understanding the financial
aspect of business is vital.
Making a Profit
Just how important is selecting the right price? It could mean the difference
between success and failure. One of the most important financial
concepts you will need to learn in your new business is the computation of
profit and how it relates to your pricing structure. The gross profit on a product
sold or service rendered is computed as the money you brought in from
the sale, less the cost of the goods sold. The key is to compute accurately the
cost of goods sold, which can be deceptive.
Let’s say you are going to run a childcare center. To compute your gross
profit, you have to be able to figure out what it costs you to take care of each
child. The way you do that is by computing all of your costs and then dividing
by the number of kids you have. Costs in this sort of business might include:
• Rent
• Food for the kids
• Utilities
135
• Office expenses
• Salaries and wages for you and any staff
• Payroll taxes and employee benefits
• Advertising, promotional, and other sales expenses
• Insurance and bonding
• Auto expenses
• Other expenses
Let’s say that it costs you $5,000 a month to run the show, and you bring
in $8,000 a month. If you have 10 children, then your expenses would be
$5,000 divided 10, or $500 per child. Now you know the minimum amount
you must charge to make a profit. Because you are charging $800 per child
($800 × 10 children = $8,000), your gross profit per child is $300. Your total
gross profit is $3,000.
While your gross profit is a dollar amount, your gross profit margin is
expressed as a percentage. It is an equally important number to track because
it allows you to keep an eye on profitability trends. The gross profit margin is
computed as the gross profit divided by sales. In the example above, your gross
profit would be $3,000 divided by $8,000, or 38 percent. That’s pretty darn
good. Any business that makes 38 percent profit is doing something right.
Pricing Your Goods or Service
It should be clear by now that the wrong price can put you out of business
fast. Finding that magic number requires careful thought and planning.
In the example above, we know that you must charge at least $500 per child
to break even. The trick is to come up with a price that gives you a good
profit while still attracting customers.
When first opening their doors, many businesspeople have a hard time
knowing what to charge for their product or service. But actually, it’s not that
hard to figure out. If you sell a product, you base your retail price on your
wholesale cost. If your base cost for a widget is $5, start there, then account
for your overhead, and you are off.
The real trick is figuring out what to charge when you have a service
business. One reason it is hard to determine is that new businesspeople mistakenly
assume that their value is the same as it was when they were an employee
getting paid for 40 hours of work a week. If your boss paid you $20
an hour, maybe that is what you should charge. But that’s not right.
136 T H E B U S I N E S S S T A R T – U P K I T
First, you simply cannot bill eight hours for your services every day because,
even if your business is going well, you still have to hunt for business,
handle administrative issues, plan, and so on. This is why you should probably
charge your clients more than your last employer paid you.
For example, if you earned $25 an hour as an employee, you probably
should charge $50 an hour once you are self-employed. When I worked for a
big law firm, they routinely charged the client double what they paid me.
That is how they made a profit, and that is how you can too. This might seem
hard to do at first, but you can’t let your lack of confidence cause you to
underprice your services. If the client could do what you do, he wouldn’t
need you.
Think of it this way: A rental car may cost $50 a day, which works out
to $1,500 a month. It is much more than you would pay per month for a car
you owned, yet at times you still rent one because you have a need, and the
rental company fulfills that need. It is the same when someone hires you.
1 1 / L e t t h e N u m b e r s D o t h e T a l k i n g 137
■ Real Life Example
Jeff Hawkins is the inventor of the PalmPilot, his second effort at creating a
handheld personal digital assistant (PDA). His first attempt was something
called the Zoomer. Priced at $700, the device was far too expensive for a
mass-market consumer product. Moreover, the Zoomer had a tiny keyboard,
and its handwriting-recognition software didn’t work right. To make
matters even worse, the Zoomer had drivers for printers and fax machines,
making it both big and slow. Says Hawkins, “It was the slowest computer
ever made by man. It was too big and too expensive.” The Zoomer
bombed.
Knowing that he had to have a more reasonably priced product to
succeed, Hawkins went back to the proverbial drawing board. His new
product had to be small, simple, quick, and cheap. Tinkering again and
again, Hawkins kept refining his ideas and, with each revision, the new PDA
kept getting smaller and less expensive to produce. Finally, less than three
months after Hawkins began rethinking the PDA, Palm had a mockup of its
new device that would fit in a shirt pocket and run on AAA batteries. Its
four core functions were a calendar, an address book, a to-do list, and a
memo pad. The PalmPilot would come to market costing less than $300.
When you price your personal services, think like a rental car company and
charge for the real value of your services.
Cheaper Isn’t Always Better
It is equally important to understand that being the cheapest isn’t always
smart. When you use price as the only barometer for your services, then other
more important things get left out of the equation—like quality, personal service,
and promptness. McDonald’s can emphasize low prices because that is
one of its trademarks. But if you are not a McDonald’s-type outfit, constantly
discounting fees and prices may be a mistake.
The price of a product tells consumers what kind of value and quality to
expect before they buy it. A person who can afford a Mercedes or Jaguar
doesn’t mind the high price because they associate quality and value with the
prices of these cars. Often, in a consumer’s mind, a higher price connotes
high quality, and a low price means poor quality.
You need to ask yourself whether you are trying to increase profit margins
or market share. If you are mostly interested in boosting profits rapidly,
138 T H E B U S I N E S S S T A R T – U P K I T
✎Pricing Your Product or Service
1. Identify your customers. Are they upscale or middle class? Are they
looking for a bargain or is quality more important than price?
2. Determine your gross profit threshold. Use the formula in this chapter
to calculate how much money you need to charge per item to break
even, and go up from there.
3. Be flexible. Trial and error is the key. Maybe you want to offer a volume
discount to a potentially lucrative customer. See what works.
4. What is your service worth? Value is critical. If a customer thinks your
product delivers benefits worth $15, you can’t sell it for $25.
5. Look at the competition. What you charge also must be measured in
comparison to the product the customer is already buying. Thus, what
your competition charges is vitally important to consider as well.
then you need to go with a higher price. However, if your goal is to build a
big company and capture market share, a lower price will help you sell more,
longer. Volkswagen sells far more cars than Mercedes, but Mercedes makes
more money per car. If you are going for a broad customer base, then you
need to figure out, often by trial and error, what price people will consider a
bargain, and what price still allows you to make a profit.
Increasing Your Profit Margin
There are two ways for you to improve your profit margin. First, you can
increase your prices. Second, you can lower your overhead. Price increases
require a careful reading of the competition, your business model, and sup-
1 1 / L e t t h e N u m b e r s D o t h e T a l k i n g 139
■ Let the Numbers Do the Talking
If you don’t understand the finances of business, and many entrepreneurs
actually do not, you are in trouble. Business decisions that are not based, at
least in part, on a cold and hard financial analysis are decisions that can
easily go wrong.
For example, assume that your business is looking to add a new
product line. How do you know if it will work? Such an important decision
should not be based on guesswork or hunches. Instead, you have to let the
numbers do the talking. Knowing how to crunch the numbers—figuring out
what it will cost you to launch the new line, how much you can expect to
make, and how quickly you can reasonably expect to make it—will make
the decision easy for you. Can you afford a new product line? Will your cash
flow allow you to afford it? What kind of return on this investment of capital
and time can you expect? Let the numbers do the talking.
That’s what Starbucks does. How does Starbucks know when to open
up another store in a neighborhood? They look at existing stores and notice
how long customers have to wait to have their order taken and filled
and then open another in that area when the wait gets too long. They let
the numbers do the talking.
That is what you must do. Can you afford that new product line? Well,
what do the numbers say? If the numbers are not there, your brainstorm
could be a huge mistake. And if you don’t know what the numbers are saying,
it is time to learn.
ply and demand for the product you are producing. It has to be done with
testing and care.
The second way to increase your gross profit margin is to lower your
costs. Decreasing the costs of materials or producing the product more efficiently
can accomplish this. Look for a less costly supplier. Maybe our childcare
center could shop for food and supplies at a discount warehouse market
instead of the grocery store. Keeping your overhead low will help keep you
in business.
Whether you are starting a service business, a manufacturing outfit, a
wholesaling venture, or a retail store, you should always strive to deliver your
product or service more efficiently, with less cost, and at a price that gives
you the best profit. The name of the game is, after all, making a profit.
Your Customers’ Payment Options
The final financial aspect you need to deal with at this point has to do
with what forms of payment to accept. This includes the creation of a credit
policy and the decision of whether to accept checks and credit cards.
Extending Credit
If you do decide to extend credit to customers, be picky. There are two
important aspects to a successful customer credit policy:
1. Limit you risk.
2. Investigate each customer’s creditworthiness.
Once a potential customer has completed the application, you need to
verify the facts and assess the company’s creditworthiness. You do so by calling
references and by using a credit reporting agency or a business consulting
firm such as Dun & Bradstreet. Also, most industries have associations
that trade credit information. Finally, even if the client seems worthy, and
even if he or she checks out, trust your gut.
Accepting Credit Cards
Recent research conducted by the Small Business Administration (SBA)
shows that accepting credit cards increases the probability that someone will
140 T H E B U S I N E S S S T A R T – U P K I T
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✎Credit Application
Your credit application might look like this:
Business name_____________________________________________ Date______________
Other names of the business ____________________________________________________
Name of owner _______________________________________________________________
Type of business ______________________________________________________________
Legal structure of the business ___________________________________________________
Business address ______________________City_______________ State_________ Zip_____
Phone no. _____________________________ Fax no. _______________________________
E-mail ______________________________ Social Security No. ________________________
How long in business ________________________ Dun & Bradstreet rated _____________
Trade references:
Name _________________________ Address __________________________ Ph _________
Name _________________________ Address __________________________ Ph _________
Name _________________________ Address __________________________ Ph _________
Name _________________________ Address __________________________ Ph _________
Bank references:
Name _________________________ Address __________________________ Ph _________
Name _________________________ Address __________________________ Ph _________
Credit line requested $_________________________________
The undersigned authorizes inquiry as to credit information. We further acknowledge
that credit privileges, if granted, may be withdrawn at any time.
(Your credit application might also specify the credit terms, consequences of failing to
meet them, late fees, and that the customer is responsible for any attorney fees or collection
costs incurred at any time.)
buy, as well as increasing how quickly and how much they purchase. Accepting
credit cards then is smart business. It gives you the chance to increase
sales by enabling customers to make impulse buys even when they
don’t have cash in their wallets or sufficient funds in their checking accounts.
Accepting credit cards can improve your cash flow because, in most cases,
you receive the money within a few days instead of when an invoice comes
due. Credit cards also provide a guarantee that you will be paid, without the
risks involved in accepting personal checks.
While that is the good news, the bad news is that accepting credit cards
is not cheap. Some fees you can expect to pay include:
• The discount rate, which is the actual percentage you are charged per
transaction. The percentage ranges from 1.5 percent to 3 percent; the
higher your sales, the lower your rate.
• Start-up fees
• Equipment costs, depending on whether you decide to lease or purchase
a handheld terminal or go electronic
• Monthly fees
• Miscellaneous fees, including a per-transaction communication cost
for connection to the processor, a postage fee for sending statements,
and a supply fee for charge slips
To accept major credit cards from customers, your business must establish
merchant status with each of the credit card companies whose cards you
want to accept. The best place to get merchant status is the bank that already
has your business. If your bank turns you down (because of poor credit or
lack of credit history), ask around for recommendations from other business
owners who accept plastic. Look in the Yellow Pages for other businesses in
the same category as yours, and call them and ask where they have their merchant
accounts.
If banks turn you down, a second option is to consider independent
credit card processing companies, which can be found in the Yellow Pages.
Independent accounts take longer to set up and start-up fees are usually higher.
Once your business has been approved for credit, you will receive a
start-up kit and instructions on how to use the system. You can start with a
phone and a simple imprinter that costs less than $30, but you will get a better
discount rate (and get your money credited to your account faster) if you
process credit card sales electronically. Although it is more expensive initially,
purchasing or leasing a terminal that permits you to swipe the customer’s
142 T H E B U S I N E S S S T A R T – U P K I T
card for instant authorization (and immediate crediting of your merchant account)
saves you money in the long run.
Accepting Checks
Bounced checks can cut heavily into your profit and yet you need to accept
checks to conduct business. How can you avoid bad checks? Following
these five rules can make bad checks a very rare occurrence:
1. Get identification. Always ask to see the customer’s driver’s license
or a photo identification card.
2. Be aware. Evaluate the check carefully. Smudge marks are a red flag
of a forged check, as are smooth edges; real checks are perforated either
on the top or on the left side of the check.
3. Do not accept new checks. A large majority of bad checks are written
on new accounts. Do not accept a check that does not have the
customer’s name preprinted on it.
4. Wait before refunding money. Require a five-business-day waiting
period to allow checks to clear before cash refunds are paid.
5. Call in the pros. You might benefit from the services of a checkverification
company. By paying a monthly fee, you can tap into a
database of individuals who write bad, stolen, or forged checks.
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T H E B O T T O M L I N E
By setting up some policies with regard to credit cards and
checks and by buying the equipment and tools needed to run your
business properly, you will free yourself up to concentrate on sales
and growth, rather than issues and problems.
Resources You Can Use
Business Finance Magazine
<www.businessfinancemag.com>
Entrepreneur Magazine
<www.entrepreneur.com>
Forbes Magazine
<www.forbes.com>
Inc. Magazine
<www.inc.com>
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C H A P T E R
12
· Law, Taxes, and Insurance
By setting up your business properly from the outset, you are putting in
place a foundation that will help ensure your success. Finding a good lawyer
and accountant whose opinions you can trust, learning how to hire and fire
employees, and getting properly insured are all part of that solid foundation.
Finding Attorneys and Accountants
Lawyers and accountants are critical business advisors for your new
business. They can help steer you away from trouble, and get you out of trouble
if need be. Lawyers can help with contracts, leases, hiring and firing employees,
and a host of other issues. Accountants will help prepare your taxes
and can give other helpful financial advice. Combined, these two professionals
can become vital advisors.
But this begs the question: Where do you find a good accountant who
knows his or her stuff, or a lawyer you can trust? The best way is through a
satisfied customer. A referral will tell you far more about a professional than
a dozen television ads. So, if you know someone (or know someone who
knows someone) who has a business similar to yours, find out how they like
their lawyer or CPA. You need to ask the following questions:
• Did the professional get good results? Did the case settle successfully,
was the contract beneficial, were taxes reduced? Results are what count.
145
• Was the lawyer or accountant accessible? Far too many attorneys are
hard to reach and don’t return phone calls quickly. A call should be
returned within 24 hours. That is what you should insist upon.
• Were the fees reasonable? While you need to be conscious of fees
when hiring a professional, they are not the most important thing to
be concerned about. As in life, you often get what you pay for; the
cheapest attorneys and accountants are probably not the best.
• Who does the work? Many lawyers and accountants (especially at big
firms) pawn your work off to underpaid, overworked associates.
While this helps keep their fees down, you want to make sure that the
person you hire is the one doing the work when it counts.
If you can get a referral for a professional who meets these criteria, call
him or her and schedule a meeting. As you are looking to start an important
long-term relationship, expect to spend a few hours with the lawyer and accountant.
Get a feel for his or her personality. Make sure he or she understands
your needs. Find out about his or her background. Get some referrals.
Certainly, you should not expect to be billed for this meeting, and if you are,
it’s a bad omen.
146 T H E B U S I N E S S S T A R T – U P K I T
✎How to Find Exceptional Professional Advice
Barring a referral from a friend or business associate, here are some ways to
find good advisors:
• Call your local bar association. Almost all cities have an association
of local lawyers called a bar association. The lawyers are listed by
their areas of specialty and the bar can usually give you the names
of some of its members who have a good reputation. As bar associations
are nonpartisan, you can rest assured that the recommendation
will be trustworthy.
• Contact the AICPA. The American Institute of Certified Public Accountants
is the premier national association for CPAs in the United
States. Visit their site online at <www.aicpa.org>.
You want to find a professional whose judgment you trust, who is smart
and sharp, who seems more concerned about helping you than billing you,
and with whom you get along. A tall order for sure, but doable.
Hiring Employees
Hiring employees is an art form that gets easier over time. After a while,
you will get a sense about who is real and who is show, about which credentials
are important and which are not. While good references are important,
they shouldn’t be dispositive. Most people have positive references.
It is a good policy to have at least two interviews with a potential employee
before hiring him or her. By the second interview, you will be able to
get a better read of the candidate; they are often more relaxed and themselves
during a second interview.
One thing that helps is a list of questions you want to ask every candidate.
This will help you compare responses. What sorts of questions should
you ask? Steer clear of personal habits and issues that have no bearing on
work. The candidate’s private life is private and looking into it when it does
not relate to employment is illegal. Discovering his or her work habits, punctuality,
and eagerness to please is fine. Asking about sexual orientation is not.
If you stick to hard facts and employment qualifications you will be fine.
The New Employee
As you go about making your hire, it is important to understand that in
almost every situation employees are considered at will. This means they
work at the will of the employer and can be let go for any reason, or no reason.
The thing business owners must be wary of is creating a situation where
1 2 / L a w , T a x e s , a n d I n s u r a n c e 147
It is also important to remember that one cannot discriminate in employment
for reasons of race, religion, gender, national origin, age, and the like.
So questions relating to such issues would not only be irrelevant, they
would be asking for trouble.
an employee’s status changes from at will to just cause. An employee whose
status is “just cause” is an employee who can only be let go when there is a
valid cause to let him or her go; for instance, because the employee has stolen
something.
What is the difference? An at-will employee is an employee who does
not have a written employment contract or who has not been guaranteed employment
for a specific period of time. The important thing for the business
owner is to be sure you do not make any promises, either expressly (in an employment
contract or employee handbook, for example) or implied (telling
the employee, “Don’t worry, your job here is safe.”).
Review all your application forms, offer letters, employment contracts,
handbooks, and manuals to ensure they do not contain any promises of job
security or employment for a specific or definite period of time. All such documents
should contain an at-will employment statement.
In this litigious society, even when you have valid reasons for firing an
at-will employee, plenty of workers are willing to file frivolous suits, claiming
discrimination even where none has occurred. To avoid such claims of
wrongful termination, you need to develop clear performance standards and
148 T H E B U S I N E S S S T A R T – U P K I T
■ When Employees Cannot Be Fired
Even when an employee is clearly at will, there are still times when he or
she cannot be fired.
• An employee may not be terminated on the basis of his or her status
in a protected legal class. That is, you cannot fire employees because
you don’t like their color, their sex, their ethnic background,
or because they are disabled.
• You cannot fire someone in retaliation against an exercise of statutory
rights, such as filing a workers’ compensation claim.
• You can’t terminate someone in retaliation for an exercise of his or
her legal duty, such as jury service.
communicate them to your employees. Enforce the standards consistently
and uniformly.
Many businesses have a performance evaluation policy or a disciplinary
policy. These help document problems and prove you have been fair and
forthright. Meet with employees regularly and let them know how they are
doing. Most important, document everything, both good and bad, in writing.
A paper trail can help avoid litigation. The importance of documentation cannot
be overstated.
Keep careful records of all events and actions leading to a discharge, including
the dates and circumstances behind each action. Include what policies
have been violated and what disciplinary action has been taken. Preserve
these records, especially regarding termination. By setting clear standards, enforcing
them, and documenting problems, terminations can be much less
painful.
Your Business and the Law
You don’t have to be a lawyer to write a contract. If you can afford to
have a lawyer write yours, you should. But if you can’t, then you are going
to write your own contracts anyway. If you are going to play lawyer, do so
correctly.
How do you write your own contract? There are several ways.
• Draft it yourself. Although not the best idea, it can be done. The key
is to avoid fancy language and just be as clear and concise as you can.
For example: ABC Corp. will sell 5,000 widgets to Bob’s Home Business.
Bob’s will pay $1 per widget and the widgets will be delivered
no later than May 1.
• Buy a software program. There are several software programs that
you can buy that will draft contracts for you.
• Buy preprinted forms. These are not as easily customized to your needs
as software packages. But remember that printed forms can be changed.
If there is a clause that you don’t like, cross it out and initial it. Have
the other party do the same and you now have a custom contract.
When in business, you also need to be concerned about being accused
of negligence (in the legal sense). All businesspeople are obliged to perform
their duties as would another reasonable, prudent person doing the same job.
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This is called the standard of care. If a plumber did a repair poorly, that is,
below the standard of care, and if that mistake caused someone harm, then
that plumber would be legally negligent.
This is true for any business—you must do your job competently. If you
don’t, and it causes harm, you can be held liable for all resulting injuries. Another
example: An accounting firm is hired to do an audit, but mistakenly fails
to see that a VP has been embezzling funds, which the VP continues to do.
The accounting firm probably would be liable for all embezzlements after the
audit because their mistake (not catching the embezzlement) caused further
harm (more money embezzled). And if an electrician improperly puts in a new
electrical box that causes a fire that burns down the house, it’s his or her fault.
The rule is that you must do your job in the same manner as a reasonable
and prudent person in the same position. If you don’t and it causes
harm, you are liable.
Legal Mistakes to Avoid
Businesses make legal mistakes all the time, and while most are fairly benign,
others can be disastrous. Knowing which pitfalls to watch out for can
make all the difference between business success and business failure. Following
are the five most common legal mistakes small businesses make.
1. Not documenting rights and responsibilities. With the excitement
and all of the tasks to perform when starting a business, it is easy to not
clearly delineate who will do what. Yet that can be a big mistake. Imagine
what can happen when you think that you are in charge of day-to-day operations
and your partner thinks the same thing. Therefore, founding shareholders
or partners should have a written agreement that addresses the following
questions:
• How much time and effort is each person expected to contribute?
• Who will do what?
• How much capital will each person contribute?
• What happens if the business needs more capital?
• What happens if one person leaves the business?
• What happens if one person dies?
150 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
2. Ignorance of the law. An old legal maxim is “Ignorance of the law is no
excuse,” and it’s true. Not knowing your legal rights and responsibilities can
get you deep into hot water. Here is what you need to learn:
• Basic contract rules
• How to avoid being considered negligent
• How to protect your ideas and inventions via copyright, patent, and
trademark law
• Basic employer-employee regulations
• The governmental regulation of your industry
3. Not having written agreements. All of your important business agreements
should be in writing for several reasons. First, oral agreements are difficult
to enforce and sometimes are not enforceable at all. More important,
memories fade over time, people change their stories, and people “remember”
the agreement differently. Putting it in writing avoids these problems.
4. Starting the business as a sole proprietorship or partnership instead
of a limited liability entity. Partners are jointly liable for all debts
and obligations in general partnerships, as are sole proprietors. If you start
the business as one of those two kinds of entities and the business encounters
a legal problem, your personal assets will be at risk. If instead of a sole
proprietorship or partnership, you start the business as a corporation, LLC,
or limited partnership, you avoid that possibility and thereby greatly reduce
your risk.
5. Getting involved in litigation. Litigation fees can actually bankrupt
you. Beware the lawsuit!
Taxes
The following are four tax rules all small businesses should know.
1. Deductions. You can deduct all “ordinary and necessary” business expenses
from your revenues to reduce your taxable income. Some deductions
such as business travel, equipment, salaries, and rent are obvious. Others are
not. Don’t overlook these potential deductions:
1 2 / L a w , T a x e s , a n d I n s u r a n c e 151
• Trips that combine business and pleasure. If more than half your trip
is devoted to business, you can deduct the cost of travel, as well as
other business-related expenses.
• Business losses. Business losses can be deducted against your personal
income to reduce your taxes.
• Purchases financed by business loans or credit cards. You can deduct
such costs this year even if you won’t pay off the loans until next
year. You can also deduct the interest on the loans themselves.
2. Employee taxes. If you hire employees, you need to pay, or withhold
from their salaries, a variety of taxes, including:
• Unemployment tax. Federal and state unemployment taxes must be
paid.
• Withholding. Social Security (FICA), Medicare, and federal and state
income taxes must be withheld from employees pay.
• Employer matching. You must match the FICA and Medicare taxes
and pay them along with your employees.
3. Quarterly estimated taxes. This area trips up many an entrepreneur.
Failure to keep up with your estimated tax bill can create a slew of IRS penalties.
You should pay quarterly estimated taxes if you expect your total tax bill
in a given year to exceed $500. How much should you pay? By the end of the
year, you must pay either 90 percent of the tax you will owe or 100 percent
of last year’s tax.
152 T H E B U S I N E S S S T A R T – U P K I T
“The IRS spends God knows how much of your tax money on these tollfree
information hot lines staffed by IRS employees, whose idea of a dynamite
tax tip is that you should print neatly. If you ask them a real tax
question, such as how you can cheat, they’re useless.”
—Dave Barry
4. Sales taxes. Most services are exempt from sales tax, but most products
are not. If you do sell a product or service that is subject to sales tax, you must
register with your state’s tax department. Then you must track your taxable
and nontaxable sales and include that information on your sales tax return.
1 2 / L a w , T a x e s , a n d I n s u r a n c e 153
■ Important Tax Consideration
As you begin to create some procedures for dealing with money and taxes,
keep these tips in mind:
• You need a separate business checking account, and you need to
deposit all money from the business into that account. Money can
then be transferred to your personal account. This helps maintain
an accurate record of business income for tax purposes.
• Designate one credit card as a business card and use it only for this
purpose. The card does not need to be in the business’s name. Business
credit card interest is 100 percent deductible. Keep all receipts.
• Keep your appointment book or calendar. Notations can provide
back-up information for things like business mileage, telephone
expenses, and business trips.
• Keep every receipt related to your business.
• Keep all cancelled checks. In the event of an audit, you will be
asked to provide them.
• If you have inventory, you need to physically count what is left at
least once a year. Inventory removed for personal use cannot be
deducted as a business expense.
• Each year by December 31 you need to issue a Form 1099 to anyone
to whom you paid $600 or more for business services during
the year. But don’t wait until then to get their address and Social
Security number, both of which must be included on the 1099
form. It is best to get that information when you hire the person.
Audits
Small businesses are audited more often than individuals, and the results
are not usually good. In most cases after an audit, the audited business has to
pay additional taxes. Although the IRS audits the same number of people as
ten years ago, they are recovering more than four times as much money now
thanks to superior software.
How then do you avoid an audit? First of all, don’t overdeduct. Be careful
of listing every single receipt you have, no matter how tangential, as a deduction.
Studies have shown that taxpayers who deduct expenses of more
than 65 percent of their gross income are often audited. Taxpayers who deduct
50 percent and less of their income as expenses are audited far less often.
Also, be sure to prepare a proper return. Have it typed and filled out in
full. A messy return, or one full of cross outs or Wite-Out is suspicious. Moreover,
you should try to avoid showing a loss. Losses do happen and they must
be reported, but a business that shows a loss several years in a row is a business
that should be out of business. If it’s not, something’s fishy. Finally, be
154 T H E B U S I N E S S S T A R T – U P K I T
■ The Home Office Deduction
Before you can deduct expenses for using part of your home in a business,
you must meet three stringent requirements:
1. You must regularly use part of your home exclusively for a trade or
business. As long as you are using part of your home for business
on a continuing, rather than haphazard, basis, you qualify.
2. The use must be exclusive. Exclusive means just that—exclusive. If
you use the room for any other purpose, as a spare bedroom, for
example, you would not qualify for the home office deduction.
Any personal, nonbusiness use would disqualify you.
3. Your home must be the principal place for your business, or you
must meet patients, clients, or customers there, or you must use
a separate structure on your property exclusively for business
purposes.
prepared to back up anything you put in your tax return just in case you are
audited. Keep every receipt. They can go a long way to getting you out of a
jam should an audit arise.
Insurance
Instead of assuming that you know what sort of insurance you need, you
should meet with an insurance broker to evaluate your newfound business
needs. Brokers represent more than one insurance company, so they can
check various policies and companies to find what is right for you.
Here are the major types of coverage that you should consider and discuss
with your broker:
• Health. One of the big eye-openers when you start your own business
is just how expensive personal health insurance is. There are several
ways around this. One is by utilizing a federal law called the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA). This law
allows you to personally continue your employer-sponsored group
medical insurance, dental, and prescription drug coverage on an individual
basis after you leave. Another way to lower your health care costs
is simply by shopping around. Try <www.ehealthinsurance.com>.
• Business property. You should seriously consider obtaining business
insurance that covers damage or loss to business equipment. You can
also obtain more extensive coverage for damage or loss to business inventory
and equipment, including loss of earnings, and errors and
omissions.
• Comprehensive general liability (CGL). CGL insurance can be critical
to your financial health. It does two things. First, it covers you for
personal injury damage suffered by visitors to your property for business
purposes; for example, a customer trips and breaks her leg going
up the stairs to your business. CGL insurance can also provide special
liability coverage to protect against claims and damages that result
from the rendering of services or sale of products. And, should you
get sued, CGL is supposed to cover the cost of your legal defense. If
you have ever been sued, you do not need to be told that this could
save you tens of thousands of dollars.
• Business interruption. This covers losses from an inability to conduct
business due to fire, flood, or disaster. It also covers reductions in
1 2 / L a w , T a x e s , a n d I n s u r a n c e 155
business revenue while you recover from the disaster by providing funding
to meet cash flow obligations such as payroll and loan payments.
• Malpractice. This is used by such professionals as doctors and lawyers
to cover damages resulting from substandard work. This can also include
errors and omissions and product liability insurance.
• Workers’ compensation. If you are going to have employees, you will
be required by your state to carry workers’ compensation insurance
for work-related injuries to employees.
• Disability. Disability insurance covers you when you can’t work because
you are disabled due to injury.
• Life. Why are you going into business for yourself? One reason is because
you want to provide a better life for your spouse and children.
Well, what happens to that dream if you die? The dream will likely die
too. Life insurance keeps the dream alive.
You need not get all of this insurance all at once. In the start-up phase,
it is probably impracticable. Instead, you can phase your insurance needs in
as your business grows. Here is how you might want to proceed:
• Business start-up. As capital is needed to get things going and cash
flow is minimal, this is a good time to maximize the use of existing
policies. Riders to existing policies may cover equipment. Floaters
and endorsements to homeowner and auto policies can provide limited
protection for business activities in the home or vehicle. You
should also consider declaring one of your vehicles as a business car
and adjust its policy to cover business activities. You will have to get
health insurance right now, and the sooner you buy life insurance the
better. You can always increase the amount of coverage as your business
grows.
• Growth phase. This is when your business begins to expand and cash
flow starts to increase. This might occur in six months, a year, or later.
When it does happen, you may want to consider obtaining separate
policies for business property and general liability.
• Long-term stability. This is when your business is established and successful
and you have a pretty good idea what comes in every month
and what goes out. Future growth will be more predictable. This is
the time to make a long-term assessment of your insurance needs.
156 T H E B U S I N E S S S T A R T – U P K I T
Resources You Can Use
Findlaw
<www.findlaw.com>
IRS
<www.irs.gov>
Nolo Press
Do-It-Yourself Law
Phone: 800-728-3555
Fax: 800-645-0895
950 Parker Street
Berkeley, CA 94710-2524
<www.nolo.com>
1 2 / L a w , T a x e s , a n d I n s u r a n c e 157
T H E B O T T O M L I N E
Few entrepreneurs like to think about the boring aspects of
business such as law, taxes, and insurance. However, failure to address
these things may make your life much more difficult down the
road. Insurance, good accountants and lawyers, and knowing a
thing or two about the law and taxes can sometimes save you from
a heap of trouble.
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P A R T
IV
· Business on a Shoestring
In this section, you learn how to start and run a business
without spending a lot of money. Bootstrap financing techniques
are examined, as are ways to outfit and grow the business
on a shoestring.
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TEAMFLY
C H A P T E R
13
· Bootstrap Financing
You may want to start a business but do not have enough money to do
so. Are you out of luck? Nope. Actually, it is safe to say that most businesses start
with less than optimum funding. According to the Small Business Administration
(SBA), 60 percent of all new businesses begin as undercapitalized
start-ups. So you are in good company.
But what it will take is hard work, pluck, and a tad of luck. Creating a
shoestring business begins with finding the necessary funding (discussed in
this chapter), setting up shop and stocking the store for less (Chapter 14),
and then getting people in the door without spending a fortune (Chapter 15).
Ten Rules for Bootstrapping a Business
If you are going to bootstrap a business, there are some rules of the road
you should know. As you go about getting the money you need to get started,
it will help enormously to keep these ten tips in mind.
Rule 1: You don’t need a fortune to get started. It would be great if you
had enough money, but just because you don’t, it doesn’t mean that you can’t
start a business. Real estate is a great example of this principle. By using a
3 percent FHA loan, you could buy a $100,000 duplex apartment house with
a $3,000 down payment. That is pretty darn close to nothing. Even without
97 percent of the money needed, you could start a real estate business.
161
Rule 2: Not all debt is bad debt. This is an adjunct to Rule 1. If you don’t
have enough money, then it is possible that you may have to incur debt to get
going. But not all debt is bad debt. Some debt is good debt when it enables
you to get ahead in life—to start a business, buy a home, finance college, etc.
Most millionaires start out deeply in debt to finance their dream. Is it ideal?
Of course not. But if you can take on some debt and see a way to pay it back
through your business, it’s not a bad option.
Rule 3: Be frugal. As an employee, you can waste supplies, make longdistance
calls, use FedEx, make too many copies, and spend your management
budget without a second thought. But as a businessperson on a budget,
you will have to learn to be lean and mean.
Rule 4: Invest only in your best ideas. Remember that no business survives
unless it is serving a market need. You may have many ideas, but faced
with less money than ideal, you cannot afford to make mistakes. You must invest
your time, money, and energy in only your best, most profitable ideas.
Rule 5: Do what it takes. If you only are going to have 25 percent of the
money that you need to start, then you must be willing to put in the other 75
percent in the form of time and effort. You will have to work harder and
smarter than your competitors. You have to be willing to go the extra mile as
a bootstrapper.
Rule 6: Look big. You may be starting a business out of your garage with
no funds, but no one needs to know that. It is critical to your success that you
project the image of a big, professional business. Until the business does get
big and have some money, remember these two important words: Fake it!
162 T H E B U S I N E S S S T A R T – U P K I T
Arnold Goldstein, author of Starting on a Shoestring (John Wiley and Sons)
started his first business, Discount City, with $120,000 of merchandise,
$20,000 of fixtures, and three months of deferred rent, using only $2,600 of
his own money.
1 3 / B o o t s t r a p F i n a n c i n g 163
■ Beware the Credit Card Trap
While you can take out cash advances from your credit cards to start your
business, be careful. The credit card trap is easy to fall into but very hard to
get out of. You know the trap, don’t you? It follows this pattern:
• You charge for things you otherwise cannot afford or take out cash
you have no way of paying back.
• You run up balances on cards that charge you 18 percent interest
(and up!).
• You pay only the minimum due each month, covering only the interest
and service charge each month.
• You get stuck with a debt that never seems to go down.
Here’s how to get out of the trap:
• After you have run up your cards, transfer all balances to the card
with the lowest interest rate. This can save you a lot of money
every month.
• Better yet, apply for a new card with a really low introductory “teaser”
rate (e.g., 4.9%) and transfer all of your balances to that card.
• Once the teaser rate is set to expire, call that company and tell
them that you will cancel the card unless they extend the rate for
another six months. If they don’t agree to do so, cancel the card,
apply for another new card with a great rate, and transfer the balance
again. This balance transfer dance can save you a ton of
money.
• Pay off the total balance as soon as possible and always pay more
than the minimum.
Rule 7: Be creative. No money to hire that great Web designer? You better
buy a book and learn a Web design program. Another option: barter. Another
option: hire a student. As a bootstrapper, you have to constantly be on guard
for new ideas and new ways to bring in a buck.
Rule 8: You gotta believe! Northwestern University conducted a study of
successful shoestring entrepreneurs and discovered that they typically never
owned a business before, had no business education, and, of course, didn’t
have enough money to start but did anyway. In short, they didn’t know enough
to be afraid.
Rule 9: Have a passion. Wayne Huzienga started very small and eventually
created Blockbuster Video, among many other businesses. Says Huzienga, “I
don’t think we are unique, we’re certainly not smarter than the next guy. So
the only thing I can think of that we might do a little differently than some
people is we work harder and when we focus in on something we are consumed
by it. It becomes a passion.”
Rule 10: If you take care of your customers, your customers will take
care of you. You may not have as much money as the next guy. You may not
have ads as big or a fleet of salesmen, but that does not mean you cannot be
the best. One of the best ways to be the best is to offer personal, superior service
to your customers.
OPM
While it is difficult to start without enough money, it can be done. A far
better solution when you don’t have enough money to start a business is to
get enough money using OPM—other people’s money.
Finding people who will be willing to invest in you will take determination;
it usually isn’t easy. Without collateral, perseverance will be essential.
Why? Because lenders and investors are skeptics, and they should be. Too
many start-ups fail, so, accordingly, investors would rather put their capital
into successful businesses that want to expand or start-ups that have already
been partially funded. The unfunded start-up is the riskiest investment of all.
But it is also, potentially, the most lucrative, and you can use that fact to
your advantage. If you are willing to share your pie, have a plan that makes
economic sense, and are willing to look long and hard, the right investor can
be found. It is the possibility of a big return on their investment, coupled with
164 T H E B U S I N E S S S T A R T – U P K I T
the ability to write off a loss on their taxes, that makes the rich investor a
viable alternative for the cash-strapped entrepreneur.
The key will be your ability to entice the right person with the right
deal. Investors want a high return. Ask them what they want, and give them
what they want. Most investors will want to know what you are putting into
the venture, aside from your sweat equity. Be honest. If you are donating
equipment or material, say so. If you are tapping credit cards, fess up. Your
commitment can only help your cause.
The key to winning over an investor or other lender is to look like a pro.
Talking big without back-up facts will make you look a fool. Instead, come in
looking like a businessman who understands business. You need facts, data,
and hard figures that back up your rosy rhetoric. You must know:
• How much you really need
• Why you need that much
• How much you can afford to pay back every month
• How you will make that amount
If you can answer these questions confidently, then it is time to go over your
options because there are many ways to finance your business using OPM.
1 3 / B o o t s t r a p F i n a n c i n g 165
✎Providing Great Customer Service
• Ask your customers what they want and then give it to them. Survey your clients and customers.
Find out what you are doing right and wrong. Change what needs to be changed.
• Train your employees. Your employees will not know what is expected of them until you
teach them.
• Empower your employees. Give employees the room to solve problems on their own. For instance,
at Outback Steakhouse the wait staff can offer patrons free drinks, appetizers, or
meals when something goes wrong, without asking a manager.
• Reward your employees. Employees who make customers happy are making you money. If
they are rewarded for a job well done, that behavior will be reinforced.
• Do more than expected. Going above and beyond the call of duty endears you to clients. Do
so consistently and your business will take off.
166 T H E B U S I N E S S S T A R T – U P K I T
■ Structuring the Deal
When structuring a loan or investment deal, keep these points in mind:
• How much money do you need? Ask for more than you need. Either
you will be able to negotiate down to the right amount or you will
have more than enough to get started. Either way, you win.
• Who is taking out the loan? Make sure that it is your company and
not you personally. While you may have to give a personal guarantee
for the loan, avoid doing so if at all possible.
• How much interest will you have to pay? Remember, everything is
negotiable.
• How long is the term? You need to run some numbers that tell you
how much you can afford to repay every month and how long it
will take to pay back the loan. The longer the term, the better for
you. If you can pay it back sooner, great, if not, you won’t default.
• Is this your only option? Be picky. If you can get one lender/investor
hooked, you can probably get others.
■ Bootstrapping Your Product
Here are three ways to bootstrap your way into new product development:
1. Work on your product at night and over the weekend while keeping
your “day job.”
2. Get current customers to fund research and development.
3. Get customers who will be using the product to prepay for licenses
or royalties.
Option 1: Find a Partner
Often, the best businesses are those that are started by two people of
different backgrounds with different skills sets. You may be a marketing genius
but know nothing about finances, and you may have a friend who is financially
literate but knows nothing about business. Together, you may make
a great team. Martha Stewart has a woman she works with named Sharon
Patrick, a steady woman who helps run the empire. Martha likes to compare
Ms. Patrick to Jeep—solid and dependable. Many entrepreneurs need their
own Jeep, yours just happens to be one who has money, that’s all.
1 3 / B o o t s t r a p F i n a n c i n g 167
■ Real Life Example
In 1930, Chester Carlson landed a job in the New York City patent offices of
a small electronics company, where he assembled patent applications.
Patent applications are extremely long documents, and Carlson’s job of duplicating
the drawings and specifications was boring and tedious. Frustrated
by his day job, and already prone to inventing, Carlson decided that
there must be a better way.
He began to study photography, the physics of light, paper treatment,
and printing. His research paid off when he stumbled upon photoconductivity—
the method in which light affects the electrical conductivity
of materials, thereby allowing him to reproduce documents electronically.
Hoping to find a corporate sponsor for his invention, or even someone to
whom he could sell it, Carlson spent the next few years meeting with and
getting turned down by the likes of GE, RCA, and IBM. He had no luck; he
was a genius, but not a marketer.
The break Carlson had been hoping for came in 1947 when Joe Wilson,
the president of a small photographic company called Haloid and a
marketing wiz, came to see the electronphotograhy machine he had read
about. After seeing a demonstration, Wilson exclaimed, “Of course, it’s got
a million miles to go before it will be marketable. But when it does become
marketable, we’ve got to be in the picture!” Wilson and his company eventually
pumped $100 million and ten years into the invention before finally
turning Carlson’s idea into a workable machine. Deciding that “electron
photography” and Haloid weren’t snazzy enough names, the marketing
wizard decided to rename the process and the company Xerox.
Business partners can take many forms. You may be able to find a “silent”
partner who merely wants to invest in return for a share of the company, or
you may find someone who is interested in becoming an active participant.
However, as discussed in Chapter 7, partnerships are fraught with danger, so
be careful.
When looking at potential partners, keep in mind that entrepreneurship
is a risk. Your venture may not succeed, so be extra careful about partnering
with friends and family members. Owing money to a close friend or family
member after a business goes south is not a pleasant experience.
The important thing to remember when looking for a partner is that you
will get the money you desire only if the partner gets what he or she wants.
Does he want to be involved in day-to-day operations? If so, you better be sure
that this is someone with whom you can work. Does she just want a return
on her investment? Then you better have a solid financial plan. Ask them
what they want and then give them what they want.
168 T H E B U S I N E S S S T A R T – U P K I T
■ How to Find a Partner with Money
• Networking is essential. Put the word out to your lawyer, accountant,
and banker that you are looking for a business partner.
• Speak with friends, family, colleagues, and people where you worship.
Word of mouth has found many partners.
• Speak also with suppliers and distributors for possible leads.
• People in your line of work who have retired may be interested in
being either a working or silent partner.
• Look online. Try <www.businesspartners.net>.
• Advertise. Most classifieds sections of most newspapers have a Capital
Needed section. Also look under the Capital Available section.
Option 2: Distributor and Supplier Financing
Distributors and suppliers want your business. They want you to become
a lucrative, repeat customer. As such, they know that one way to do
that is to help you get started. If you seem solid and creditworthy, getting a
start-up loan from a distributor or supplier is not out of the question.
Given that most industries are very competitive and have numerous suppliers,
it may even be possible to negotiate one against the other to see who
will offer you the best deal. Your best bet is to focus on the largest suppliers
in your field and make a sophisticated, professional pitch to them. Yet, who
knows? It may be that a newer, smaller distributor may be more anxious to
earn your business and will be more amenable to the pitch. When you are a
bootstrapper, you have to be willing to fall down to succeed.
Option 3: Franchisor Financing
Finding a franchisor that will finance 50 percent or more of a franchise
is very possible. According to the International Franchising Association,
roughly 33 percent of all franchisors offer some type of financing. That means
the franchisor will finance at least part (and sometimes all) of the franchisee’s
investment requirements.
Franchisor loans can be structured a variety of ways. Some offer interest
only loans with a balloon payment due in five years. Others offer loans that
1 3 / B o o t s t r a p F i n a n c i n g 169
■ How Supplier Financing Works
Before a supplier helps finance your business, it usually will visit your site,
research your reputation, contact your bank, and call your references. It will
want to be sure you are someone of honesty and integrity.
Again, the key to success is preparation. An idea is not enough. Have
a solid presentation ready that explains how your great business plan can
benefit the supplier’s bottom line. Show the need for your service or product.
One of the best things you can do is get some preorders and go back
to the supplier and explain that you need financing to fill those orders.
require no payment at all for the first year. Some franchisors finance everything,
while others offer loans for the franchise fee only. It all depends upon you
and the franchisor, so you have to ask. Another option is that most franchisors
work with banks and other lenders with whom they have long-established
relations. These preferred lenders may also be able to help. Other franchisor
alternatives, aside from direct financing, include loan guarantees or working
capital.
Finally, in addition to helping with the start-up costs, many franchisors
usually have arrangements with leasing companies for the equipment needed
to run the franchise. This can be a major expense, so don’t overlook this
possibility.
Option 4: Venture Capital Firms and Angel Investors
As discussed in Chapter 9, individuals who have made a lot of money often
want to invest it. Venture capital firm investments usually start at $500,000
and go up from there. Angels are hard to generalize, but investments of $50,000
and up is not far off.
The main thing that these sorts of investors look at is the management
team of the enterprise. They know that their investment is only as good as the
people running the business.
Other things they will look at include:
• The ability to become highly profitable and dominate an industry
• Strong leadership
• Experience, tenacity, commitment, and integrity
• Innovation
• A great product
The Web is the best place to find these sorts of investors. Some sites you
might try are:
• <www.1000ventures.com>
• <www.garage.com>
• <www.vcapital.com>
• <www.findingmoney.com>
• <www.capital-connection.com>
• <www.investorguide.com>
• <www.business.com/directory/financial_services/venture_capital/>
170 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
Option 5: Seller Financing
A final option for starting a business on a shoestring is to buy an established
business and have the seller finance all or part of the purchase. Seller
financing is actually quite common in the sale of small businesses. While
there are many reasons for this, including lack of bank financing, seller financing
is an option because it offers benefits for both the buyer and the seller.
For the buyer, seller financing reduces the risk that the business is successful
only because of the present owner’s contacts or specialized knowledge.
If you wanted to buy a music store for example, there is a possibility
some customers may not remain loyal without the long-established owner on
the premises. But seller financing alleviates this fear. By having the seller finance
part of the purchase price, it tells you that he believes the business can
thrive on its own.
From a buyer’s perspective, seller financing not only indicates that the
seller believes in the business, but it also allows him or her to make a better
offer for the business, which is good for the seller.
It is likely that a seller will want the buyer to secure the purchase with
some collateral. Just as a bank has the right to foreclose on a home if you default
on the mortgage, business owners usually want to be able to “foreclose”
on the business if you default. That is a small price to pay though for the
chance to buy into an established business.
Seller financing may cost you a bit more, but, overall, it can help both
sides and should work out fine as long as both parties do their homework and
deliver what is promised.
1 3 / B o o t s t r a p F i n a n c i n g 171
T H E B O T T O M L I N E
Reread “Ten Rules for Bootstrapping a Business.” The bootstrapping
entrepreneur will likely have to work harder, longer, and
more creatively if he or she is to get funded. But it can happen. By
tapping into OPM, you can start a business, even if you have little in
the way of capital to contribute.
Resources You Can Use
Light One Candle: A Handbook for Bootstrapping Entrepreneurs
by Michael Richards. (Innovation Press, 1998).
The Shoestring Entrepreneur’s Guide to the Best Home-Based Franchises
by Robert Spiegel. (Griffin Trade Paperback, 2000).
Starting on a Shoestring
by Arnold S. Goldstein. (Wiley, 1995).
<www.1000ventures.com>
172 T H E B U S I N E S S S T A R T – U P K I T
C H A P T E R
14
· Setting Up Shop
· at Bargain Prices
There is much to buy when starting a business: fixtures, equipment, supplies,
and inventory to name just a few. All of these things cost money; money
that you may not have. Even so, using some creative tricks, you too can set
up a business on a shoestring.
The Story of Johnny’s Antiques
It might help to know the story of John, an antiques lover who started
what would become a very successful antiques and collectibles shop without
a lot of money in Sacramento, California. From the start, John’s motto was
“It’s all in the buying.” John knew that the trick to a successful bootstrapping
business was to pay as little as possible for what he needed. Here’s how John
succeeded:
• His first “store” (if you could call it that), was merely some space that
he sublet above a friend’s established antique dealership. When people
would come into the main store, a large sign would encourage
them to continue browsing upstairs at Johnny’s Antiques.
• He scowered flea markets and garage sales every weekend, looking
for bargains. “It’s all in the buying,” he would always tell me. If he
could buy a good piece at a bargain, he knew he would be able to sell
it for a profit.
173
• He bartered for fixtures and shelving.
• He took almost anything he could on consignment, thereby stocking
his shelves almost instantly.
• He advertised in inexpensive, offbeat publications.
Most of all, John had the right attitude: he refused to pay too much, was
frugal with his money, and always shopped for better bargains. If you are
going to bootstrap your business, you must do the same. Be stingy, don’t blow
your money on high rent and fixtures, and, overall, keep your overhead low.
Adopt the attitude.
Don’t Blow Your Dough on Rent
In order to start your business on a budget, every dollar you have must
be preserved and spent on only the most necessary items. As rent is often one
of the biggest expenses a business has, it follows that you will be better able
to start your business if you don’t spend a lot of money on rent. If you do not
need a high-profile location, don’t get one. Start small, pick an inexpensive location,
and move on to better digs after you are established. An even better
option, as discussed in Chapter 2, is to start your business out of your home,
if at all possible.
Another low-cost option is to start your business in a business incubator.
The purpose of a business incubator, as the name suggests, is to foster and
launch new business ventures and increase chances of success by providing
low-cost space, overhead, administrative services, equipment, and expertise.
Run as nonprofit organizations, business incubators are usually started and
funded by governments, universities, or other groups that are interested in
job creation and community economic development. Business incubators
began in the 1970s and there now are more than 700 in the United States.
The difference between an incubator and shared space is that those who
run incubators are dedicated to helping the businesses housed there succeed
through in-house management, as well as financial and business consulting. If
you are lucky enough to get your venture housed in a business incubator, be
ready to get an informal MBA in the process. You will likely learn more about
business than you thought possible.
While all business incubators have the same goal in mind—helping to
launch successful businesses—each is unique in its own way because many
174 T H E B U S I N E S S S T A R T – U P K I T
incubators specialize. In the Silicon Valley, for example, you might find a business
incubator that fosters high-tech businesses; in Iowa, the incubator may
be farming oriented. It all depends upon the nature of the region and the mission
of the particular incubator.
The bad news about business incubators is twofold. First, not all incubators
are created equal. Some are more successful at accomplishing their
goals than others. Second, even if you are not in the best of incubators, you
will nevertheless get spoiled. Subsidized rent, camaraderie, and free help are
hard to beat. But because the point of a business incubator is to launch new
businesses, you will have to move sooner rather than later in order to make
room for the next bootstrapping entrepreneur.
1 4 / S e t t i n g U p S h o p a t B a r g a i n P r i c e s 175
■ Real Life Example
Berry Gordy was born in 1929 in a Detroit ghetto, one of eight children. His
first business venture was a jazz record shop that went bust before too
long. Although music was his love, his need to eat found him working on
the assembly line at the Ford Motor Company when he was in his early 20s.
In his spare time, Gordy made music. Although he was able to move to
New York, and wrote a gold record song (“Lonely Teardrops”), Berry Gordy
again found himself in Detroit by the late 1950s.
Gordy had learned that if he was going to succeed in the music business,
he would need to produce his own records. He borrowed $700 from
his sister and set up a ramshackle recording stuio in downtown Detroit. He
named his company Motown Records (for the Motor Town of Detroit), and
set about looking for talent.
From the beginning, Gordy knew that he had to watch every penny,
but his trick was that he used that to his advantage. He decided to make
Motown a “family.” The singers, artists, songwriters, and producers all lived
together and worked together in that studio, creating a special bond (and
saving a lot of money). Before long, Berry Gordy had discovered and signed
Smokey Robinson, and soon after that, Diana Ross and the Supremes, Marvin
Gaye, and Stevie Wonder.
Fixtures and Equipment
You do not need new fixtures or new equipment. Your business may
look a bit nicer and cleaner, but when you are on a budget (and often, even
when you are not), it simply is not worth the extra expense. Buying used can
save you a lot of money, and it’s even possible to get these things without paying
anything up front by searching in the following places:
• The Yellow Pages. You will find several businesses that sell used fixtures
and equipment. When companies remodel or go out of business,
used equipment stores buy fixtures and equipment and, as they
say, pass the savings on to you. These places usually have tons of used
furniture, fixtures, display cabinets, and other items that you may
need to set up your business.
• The Internet. One place to start is eBay, but there are also many other
online auction houses, used business furnishings sites, and wholesale
distributors that can help you equip your store for a bargain.
176 T H E B U S I N E S S S T A R T – U P K I T
■ Business Incubator Benefits
• Reduced rent (on average, business incubators charge 25 to 50 percent
less than normal rents)
• Shared services and equipment
• Access to financial and business acumen
• Great contacts
• Legitimacy (which can go a long way when looking to lure
investors)
• Low overhead
You can learn more and find out what types of incubators are in your area
by contacting the National Business Incubation Association at 614-593-
4331, or by going to <www.nbia.org>.
• The classified ads. Used business equipment is a staple of the classifieds.
You may even want to place your own ad under “Equipment Needed.”
Similarly, the back of trade magazines often have used equipment for
sale.
• Auctions. Out-of-business companies furnish much of the merchandise
commercial auction houses offer. Find some auctions in your area
and see if you don’t find equipment similar to what you need for less
than half of what you would pay for it new.
Beyond bargain prices, it should also help to know that much of this
equipment can be financed, thus preserving your precious start-up capital for
other needs. Banks can sometimes finance 100 percent of used equipment,
using the equipment as the collateral.
Moreover, even if you can’t find what you need used, many new fixture
manufacturers will finance up to 90 percent of your purchase, which again
preserves your capital. The problem with this option, though, is that, like a
car, new equipment loses its value quickly, and the finance charges manufacturers
offer are sometimes significant.
Another option is to see if your suppliers or manufacturers would be
willing to help you purchase the equipment necessary to supply their goods,
or at least finance part of the purchase. You can sweeten the pot by offering
to let the manufacturer or distributor hold title to the equipment, thus giving
them a security interest that protects them financially.
Consider, too, the option of leasing any fixtures or equipment you might
need. Chapter 13 can give you some ideas about how to do that.
Stocking the Shelves
If you are starting a retail store on a shoestring, you need to understand
two things. First, your shelves must be full of enough inventory to turn a
profit from the moment you open your doors; nothing looks worse, or is a
better recipe for disaster, than a store without enough merchandise. Second,
it is possible to stock those shelves with plenty of products without paying
for it all up front.
How much merchandise is enough? Well, it depends on how much
product you need to move every day to turn a profit. Your business plan
should be the place to turn to find this critical number.
1 4 / S e t t i n g U p S h o p a t B a r g a i n P r i c e s 177
Let’s say that you have decided to open a convenience store. For the
sake of this example, assume that your rent is $1,000 a month and all other
expenses total $4,000 a month. How much merchandise do you need? At the
bare minimum, the answer is enough to sell $167 of product every day ($167
× 30 days = $5,010). Let the numbers do the talking!
Here’s another example. In his great book, Starting on a Shoestring (from
which several of the ideas in this section come), author Arnold Goldstein explains
how he opened his first store, Discount City, with $120,000 worth of
merchandise. Goldstein writes that that number did not come out of thin air.
He let the numbers do the talking. Here’s how he came to that conclusion:
• He wanted to make 25 percent profit, so adding that into what he
needed to pay his creditors and other bills, Goldstein concluded that
he would need $900,000 in sales the first year.
• He determined that the cost for products that would sell for $900,000
was $675,000, so he knew how much it would cost him to buy his inventory
for the whole year.
• He also realized that he would likely turn over his stock 5.5 times in
the first year, which meant that his opening day inventory would have
to be $120,000.
Thus, he learned that $120,000 worth of product turned over 5.5 times would
mean that his inventory costs for the first year would be $675,000; this amount
would bring in retail sales of $900,000, with which he could pay everybody
what he promised and make 25 percent profit. It’s all in the numbers.
So where do you get this merchandise when you don’t have a big budget?
You have to be willing to look, often long and hard, for suppliers who will
give you their products on credit. There are tens of thousands of wholesale
product suppliers and distributors vying for a chance to sell their wares in
your store. Your mission is to find those that will stock your shelves without
requiring an up-front payment for the goods. You do so by having them extend
you the goods on credit.
Here’s how: When speaking with the different salespeople who will be
selling you their company’s goods, you must make a great impression. If you
are not incorporated, you should be. Have a great business plan, a lawyer,
business cards, purchase orders printed with your business name, stationery,
a location (this is especially important as the supplier will want to see what
you have in mind and how good the location is), a banker, and so on. Anything
that gives you legitimacy helps your cause.
178 T H E B U S I N E S S S T A R T – U P K I T
The salesperson in turn will try to sell you to the company’s credit manager.
If you have a decent credit rating and some credit references, the chances
that the company may say yes increase dramatically. It might take many suppliers
who are willing to give you a small amount of credit to fill the store,
but who cares? The idea is to get the shelves stocked, and when you are balancing
on a shoestring, you have to do whatever it takes.
It also is not impossible to get one large supplier to supply a great percentage
of your initial stock—sometimes even 100 percent of your initial inventory.
Hardware suppliers do it for hardware stores, liquor wholesalers do
it, as do food wholesalers and clothing manufacturers.
1 4 / S e t t i n g U p S h o p a t B a r g a i n P r i c e s 179
■ Finding a Supplier
• Begin by speaking with people already in the line of business you
want to start and find out who their suppliers are. Also, look in
trade publications to get additional names. Make a list of every
possible prospect.
• Put together a great package that will woo suppliers. It should include
your business plan, a picture of the location, letters of reference,
contact names of your professional advisors, even tax
returns. Explain in your proposal exactly what it is you need, how
much credit you are asking for, the terms you want, and how you
will be paying it back. You need a package that will make a reasonable
supplier conclude that you are likely to become a potential
new client who will be buying their goods for many years to come.
• Call up suppliers and make appointments with the salespeople in
your area. Present the package to them. Ask them to set up an appointment
with their company’s credit manager or regional sales
manager.
• To sweeten the pot, explain that you will agree to continue to buy
from them for the term of the loan (but do not agree to use them
exclusively), and agree that the supplier will have a “security interest”
in the merchandise. This means that if you default or go bankrupt,
they will have first dibs on the property.
The credit terms will vary widely. Some suppliers may offer a five-year
term at 20 percent interest, while others may demand that you begin to pay
them back within 30 days of receipt (“net 30”). Remember that everything is
negotiable. If you are at a place where you are haggling over terms, the supplier
wants you and sees you as a new profit center. That means that you can
negotiate and try to get better terms. Extended credit terms are difficult but
not impossible to get. Know, however, that once you get them, you will still
have to pay cash (COD) for all replacement inventory.
This entire process—from getting initial suppliers to agree to extend you
credit to getting additional inventory and paying back the original inventory—
will definitely be a balancing act for a few years, but it does work.
Other Options
Aside from supplier-financed inventory, there are other ways to stock
your shelves for less:
• Reread the section on finding discounted fixtures. Classified ads, auctions,
and the Internet are all viable options for finding discounted
merchandise.
• Another attractive option is the use of consignments. Locate a supplier
with too much inventory and offer to take it off his or her hands
and sell it in your store on consignment.
• Be creative. Once you adopt the can-do attitude that discounted stock
is avaialble for those who go looking for it, countless ideas will arise.
180 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
If you have the nerve to start a business on a shoestring, you
also have enough to stock it without paying retail. Buying used, buying
in bulk, buying out of the classifieds, buying at garage sales—
whatever works is what you have to do. It’s all in the buying.
TEAMFLY
Resources You Can Use
Discount Shelving
<www.discountshelving.com/dshelv/>
eBay
<www.ebay.com>
Enterweb
<www.enterweb.org/incubtor.htm>
National Business Incubation Association
740-593-4331
20 East Circle Drive, Suite 190
Athens, OH 45701
<www.nbia.org>
Store Fixtures
<www.storefixtures-online.com>
1 4 / S e t t i n g U p S h o p a t B a r g a i n P r i c e s 181
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C H A P T E R
15
· Growing Your Business
· without Big Bucks
If you are going to succeed in your small business, you must get people
in the door, and that usually requires an advertising and marketing budget.
The bootstrap start-up thus has a doubly daunting challenge: growing the
business and doing so without a lot of money. Tough, yes, but it can be done.
Advertising on a Budget
Advertising is the lifeblood for many businesses, but to be effective, it
must be done correctly. This is even more true when yours is a bootstrap
business. There is no room for error. Accordingly, the first thing you must do
is analyze who your customers are, or who they are likely to be. If you don’t
know to whom you are selling, you won’t know where to advertise in order
to reach them. How old are they? Where do they come from? What are they
looking for?
Once you have a good idea of whom you are looking to attract with your
advertising, you can earmark your ad money much more wisely and specifically.
The trick is to find the right media source; that is, the one most frequented
by your potential customers.
Chapter 16 delves into this subject more fully and explains all of your
various media options. Suffice it to say at this juncture that the important thing
to know is that there are many ways to advertise for next to nothing.
183
Buy unused time or space. If you call a magazine, newspaper, radio, or television
outlet near their ad deadline, you may find that they have space they
have not yet sold. This is called remnant space (for print media) or time (for
the electronic media). Remnant buys are often available at a great discount.
Advertise in less traditional media outlets or at odd times. If your
business will cater to teens, for example, buying an ad in a local alternative
newspaper is much cheaper than your local daily. This is also true for electronic
media. Buying an ad on television or radio is much less expensive if
you advertise on smaller stations or in the middle of the night. A radio ad that
may cost $250 per minute during peak drive times can be had for $25 late at
night, and that just may be when your audience is listening. Similarly, your television
dollar can go much further if you advertise on cable stations.
And no matter which media outlet you choose, the trick to getting your
ad heard for less is to never agree to buy their going “rate card.” Find out what
they are asking and offer less. Remember the rule: Everything is negotiable.
It is quite possible to pay less than the going rate if you walk in with cash and
a commitment to pay less.
Get your ad produced more cheaply. You do not need to hire an expensive
ad agency to create your ad. Be creative. Find a graphic artist who moonlights
or approach a student at an art school to create an ad for you. Be willing
to barter.
Use flyers. Flyers can advertise specials, offer discounts, grab attention,
and, best of all, be created very inexpensively on your computer.
Use door hangers. Hiring some local kids to distribute door hangers can
be an inexpensive yet very effective way to bring in business.
Take out a classified ad. Daily and weekly newspapers, as well as local and
national magazines, carry inexpensive classified ads, and the people who
read them are often in the mood to buy something. Classified ads need to be
clear and simple. It is best to offer only one product or service per ad.
Tap into regional papers. Newspapers and other publications often have
regional editions that cost much less to advertise in than the regular edition.
184 T H E B U S I N E S S S T A R T – U P K I T
Barter. It is sometimes possible to barter your services for ads in various
small media outlets.
Have visitors to your Web site “subscribe.” Ask visitors to give you their
e-mail address in order to get your content and make sure that you explain
that their e-mail addresses will be completely private. After that, send them
to a special page on your site to sign up, and be sure to have an ad there for
your product.
Place an ad in an e-zine. E-zines, or electronic magazines, allow you to
reach hundreds or thousands of targeted readers for free or for a very small
fee. E-zines are categorized by subject, almost all are free, and many offer free
ads for their subscribers. Inexpensive spots are also usually available at the
top of each issue.
Use co-op advertising. Here is a great option that you may not know
about. It’s called cooperative (co-op) advertising. Co-op advertising is a costsharing
arrangement between a manufacturer and a retailer wherein the retailer
places an ad that is partially paid for by the manufacturer in exchange
for the manufacturer’s product being mentioned in the ad.
For example, when a convenience store advertises a certain beer, you
can bet that the beer company helped pay for the ad. That is co-op advertising.
Co-op opportunities are available in every medium, from Yellow Page listings
to print ads and radio and TV spots. Collectively, manufacturers earmark
approximately $25 billion dollars annually to help small businesses stretch
their advertising dollars. However, according to the Yellow Pages Publishers
Association (YPPA), much of the money goes unused.
To start using co-op advertising, ask your suppliers what co-op programs
they offer. Follow their rules carefully to be sure you get reimbursed. Some
suppliers require that ads feature only their products, not those of any other
supplier; others ask that no competing products be included.
Normally, you will need to pay for the ad and then present proof to the
supplier that you mentioned their products. For print ads, just a copy of the
ad exactly as it was printed will work. If you buy TV or radio ads, you’ll need
a copy of the script with station affidavits of dates and times aired. You also
will need to document the cost of the advertising, usually with copies of applicable
invoices from the publication or station where you ran the ad. Finally,
you will need to submit a claim and your documentation.
1 5 / G r o w i n g Yo u r B u s i n e s s w i t h o u t B i g B u c k s 185
Yellow Pages Advertising
Advertising in the Yellow Pages is a proven way to get customers and
make money. Almost every home has a copy of the Yellow Pages, and when
it is opened, the users are in the mood to buy. Many businesses sincerely believe
that they would be unable to keep their doors open without being able
to advertise in the Yellow Pages. The downside is that buying an ad in the
book can be quite expensive, unless you know what you are doing.
If you decide to take out an ad in the Yellow Pages, there are ways to get
a discount. First, a Yellow Pages book not sponsored by the local phone company
will offer a substantial discount over the well-established leader. And,
even if you decide to go with the leader, you should find that it gives first-time
advertisers as much as a 50 percent discount.
Also, a business-to-business phone book is certainly cheaper, as are specialty
Yellow Pages geared toward a certain ethnicity or group, such as seniors.
Also, do not forget that using a manufacturer’s name or product in the
ad can allow you to tap into some co-op assistance to help pay for your ad.
186 T H E B U S I N E S S S T A R T – U P K I T
■ Get the Most from Co-op Advertising
• If you’re preparing your own ads, work with the free advertising
professionals available at the media outlet you are using to prepare
an ad you think will appeal to the manufacturer. Keep in mind the
image the manufacturer presents in its own ads.
• Make sure your company’s name stands out in the ad. Your goal is
not so much to sell the supplier’s product but to get customers
into your store.
• If there’s no established co-op program, pitch your ad campaign to
the vendor anyway.
• Expect vendors to help out. After all, you’re bringing them business.
• For more information about co-op opportunities, pick up a copy
of the Co-op Source Directory (National Register Publishing, 800-
521-8110).
Tracking Your Ads
When you are on a tight budget, there is no room for error. There are
many things that can affect the outcome of an ad campaign—the weather, the
economy, even the news. Ads get stale. Neighborhoods change. Customers’
tastes and buying habits change. Given all of that volatility, it is important to
keep a close eye on the effectiveness of your advertising. When you do advertise,
follow these tips to see if your ads are working:
• Track sales a week before an ad runs, the week it runs, and then the
week after to see how the ad is pulling.
• When customers call, ask them where they heard about your business.
• Offer customers a small discount (say, 10 percent) to fill out a simple
survey on their attitudes about your advertising.
• Run the same ad in two or three different publications, each with an
identifying mark. Have customers bring the ads in for a discount and
see which ones do best.
Marketing on a Budget
Less than 50 percent of all businesses in the United States rely on advertising
to bring in customers. What do they use instead? Marketing. Marketing
is a strategy to get your name known by the public so that when they
need a product or service, they think of your business. The great thing about
marketing is that there are plenty of cheap ways of getting business without
spending a lot of money.
The following cost-effective ideas can definitely increase sales and they
need not cost a fortune. The key is to choose the methods that are appropriate
for your business, marketplace, and style.
Gift certificates. Gift certificates allow present customers to introduce you
to new customers. Even better: Because you get paid up front, they help your
cash flow.
Brochures. A good brochure is a great selling tool that allows you to provide
plenty of information about your business quickly and inexpensively.
Packaging. The plastic bags that customers leave your store with can be
great, cost-effective signs. With your name, address, phone number, and logo
1 5 / G r o w i n g Yo u r B u s i n e s s w i t h o u t B i g B u c k s 187
on the side, bags can be a valuable marketing tool. The same goes for your
mailing labels.
Coupons. This is one of the least expensive ways to develop new business.
Offering a discount via a coupon is historically a great way to grab attention
and get business. Coupons can be put in invoices or church bulletins, sent
using direct mail, or simply handed out or placed on windshields.
Giveaways. A free gift reminds your customer of you and your service. Just
about anything can be engraved, imprinted, silk-screened, or embroidered
with your company name and phone number—pens, key chains, coffee mugs,
refrigerator magnets, baseball caps, paperweights, etc.
Speeches. Depending on your topic and your market, you might want to
speak before chambers of commerce, trade associations, parent groups, senior
citizens, or other local organizations.
Articles. Write an article for a newspaper or magazine, reprint it, and mail
it to your customers and prospects. This positions you as an expert, and is a
particularly good way to promote a consulting business.
Word-of-mouth advertising. The best source of repeat business is through
happy customers. Make sure that your current customers know how valuable
they are to you. Send them a flyer or brochure offering a discount for sending
in new business. Give something for free to a loyal customer as a way to
say thank you.
Seminars. Free seminars also give you an air of authority and allow you to
sell without seeming to be a huckster. If you do hold a seminar, be sure to:
• Schedule the event at a time convenient to most attendees
• Be specific in the ad or invitation about when the event begins and
ends, who will be there, and what people will get/learn by attending
• Offer great information
Donations. Donating your product or service to a charitable cause often results
in positive exposure.
188 T H E B U S I N E S S S T A R T – U P K I T
Samples. Giving potential customers a free sample is an excellent way to attract
attention and make a positive impression. And, if your product is too expensive
to give away outright, offer a free trial to qualified customers.
Press releases. A well-written press release sent to the right media outlet
can generate a free story about you and your business that can be used for
sales and be reproduced and used again and again to create credibility.
Trade shows. Specialized trade shows allow small business owners to promote,
sell, network, and check out the competition in one location. Trade
shows come in all shapes and sizes. Would-be entrepreneurs can go to franchise
expos, gun enthusiasts to guns shows, antiques collectors to antiques
shows, and so on. Almost every industry has trade shows. Trade shows are
great for the bootstrap entrepreneur because they pack a lot of potential into
a short time and need not cost a lot.
And consider the people who attend trade shows: They are so motivated
that they use their time to attend an exposition about a certain topic. Like
people who open the Yellow Pages, people who go to trade shows usually are
looking to buy something. What’s even better is that you get to personally
meet hundreds of qualified leads.
To be successful at a trade show, you need a booth that attracts some attention
because there are so many booths. That means you need to be creative
and put some time in planning your booth before the show.
1 5 / G r o w i n g Yo u r B u s i n e s s w i t h o u t B i g B u c k s 189
To learn more about cheap marketing, pick up Guerrilla Marketing by Jay
Conrad Levinson (Houghton Mifflin), High-Impact Marketing on a Low-
Impact Budget by John Kremer (Prima Publishing), or Start-Up Marketing: An
Entrepreneur’s Guide by Philip Nulman (Career Press).
190 T H E B U S I N E S S S T A R T – U P K I T
■ Successful Trade Show Tips
• Early-bird registration deals can reduce exhibition fees by 30 percent.
Coexhibiting with others whose target audience is the same
as yours can cut costs in half.
• You can create an impressive display with used exhibit materials.
Look in the telephone directory under “Display Systems.”
• Have a drawing for some free services, offer a small gift to the kids,
hold a giveaway, or offer special show prices—something to draw
attention to your booth.
• Remember that a trade show is a numbers game. You want to meet
as many people as you can. The more you meet, the more potential
qualified leads you get. One effective tool is to have a short list of
questions to quickly separate serious buyers from the lookers. In
any case, get contact information from as many people as you can.
• When you do find a buyer, make sure to have a quiet spot in the
back of the booth where you can close a sale.
• Because trade shows pack a lot of opportunity into a few days, the
pressure can be intense and the hours long. Be sure you have
enough people working the booth and rotate your staff to keep
them fresh. You want to bring in upbeat people with stamina.
• Use the show to scout new suppliers, scope out the competition,
find new strategic partners, and even shop for other trade show
venues.
• Remember that not every sale occurs at the show, so follow-up is
important. Find a way to stay in touch with your prospects. Send
them a newsletter, brochure, or free estimate.
• After the show, bring your team together and see if you can learn
some lessons so you can make the next show even better. Review
your marketing strategies and brush up your booth selling skills.
TEAMFLY
Web Sites on a Budget
One of the greatest things about a Web-based business is that you can
open your virtual doors without any inventory in stock. Talk about shoestring
business models! You do so by outsourcing what is called fulfillment.
A truly effective e-commerce site not only offers product and a shopping
cart, but it also is able to take an order and send it to a warehouse to fulfill
that order. The great thing is that you can hire a fulfillment warehouse that
stocks and owns all of the products; you just become the middleman who
takes the orders and sends a message to the warehouse to ship the product.
Using fulfillment services, anyone can go online and sell just about anything
without having any inventory at all and no one is the wiser. When customers
order a product from you, they are, in reality, ordering from your
warehouse partner. The key then is to choose the right warehouse service or
fulfillment company to act as your partner. The best way to find a warehouse
company is through word of mouth or by checking with your industry’s trade
association. There are many businesses geared toward e-commerce fulfillment.
Among those that you might want to check out are:
• <e-fulfillment.com>
• <fulfillmentplus.net>
• <ifssolutions.com>
• <weship4you.com>
Motivating without Money
Your business is often only as good as your employees. If you want to increase
sales, it is imperative that you have an energetic, motivated staff. How
do you do that without spending a lot of money? The first thing to realize is
that we all work for a variety of reasons, money being only one of them. Your
job as an entrepreneur is to realize what other things motivate your employees
and tap into those.
Often, what people want out of work depends on their age. If you can
understand the various motivating factors of different employees, you will be
able to provide incentives for a job well done, and do so without raising
salaries. The following details some of these groups and what each may be
looking for.
1 5 / G r o w i n g Yo u r B u s i n e s s w i t h o u t B i g B u c k s 191
Generation Xers
Generation X, comprised of those born roughly between 1964 and 1981,
is a different breed of employee. They like a good salary as much as anyone,
but just as important, they want to be in a challenging work environment
where they can grow while learning new skills.
For the most part, Generation Xers are independent and dubious. They
have entered the workforce knowing that they will have several careers and
employers throughout their working lives. What this means for you, the frugal
yet inspired entrepreneur, is that you can motivate them by creating a
work environment that develops their skills, thereby increasing their future
marketability. Offer assignments that challenge them, change their jobs around,
give them new and different projects, help them learn new skills.
Not surprisingly, training is greatly appreciated by Gen Xers, as is mentoring
and other continuing education techniques. Other rewards that work
with this group include:
• Telecommuting
• Gift certificates
• Dinners
• Tickets to sporting and cultural events
Finally, remember that younger employees like to have fun and value a
work-life balance. A workplace that demonstrates your support of that can go
far and doesn’t cost any money at all.
Baby Boomers
Baby boomers, born 1946 through 1964, are now middle-aged, and are
thinking about family, money, and retirement. Indeed, many boomers are worried
about their financial future. As such, one thing you can do to help motivate
them is to offer financial planning, good pensions and benefits, and
retirement planning.
You should also consider offering flexible work schedules and different
retirement options. A survey by the National Institute on Aging found that
nearly 80 percent of boomer employees would prefer a retirement plan that
is phased-in, rather than occurring all at once. Given that, use job sharing,
flex time, independence, and other similar options as ways to keep these employees
loyal.
192 T H E B U S I N E S S S T A R T – U P K I T
Training, especially computer training, is much appreciated by this group.
Finally, consider offering sabbaticals, either paid or unpaid. The possibility of
taking four or six months off work can be a great motivator and, therefore, a
very effective way to reinvigorate baby-boomer employees.
Older Employees
Older employees, born 1930 through 1945, usually have had a fairly
straightforward career and have worked for only a few employers. At this
point in their career, they are risk-averse. One of the best things you can offer
them is respect for their experience and their knowledge of your industry.
Giving them a more important title may help them work past retirement age,
if you want them to, especially if they are offered part-time hours and a flexible
schedule.
Resources You Can Use
Co-op Advertising Programs Sourcebook
<www.co-opsourcebook.com>
Guerilla Marketing
<www.gmarketing.com>
National Association for Promotional & Advertising Allowances
Co-op Advertising
<www.napaa.org>
1 5 / G r o w i n g Yo u r B u s i n e s s w i t h o u t B i g B u c k s 193
T H E B O T T O M L I N E
There are many ways of increasing sales without spending a
fortune. Everything from flyers to co-op advertising is available. To
succeed, you will need to experiment. Try out a few different options
and discover which ones work best for your business. After
that, turn it into a successful recipe and do it again and again.
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P A R T
V
· Growing Your Business
In this section, you will see how to grow your business
using proven advertising and marketing strategies. Moreover,
ideas for how to care for employees and customers are also
provided.
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C H A P T E R
16
· Successful Advertising
· Strategies
Not advertising is like being alone in a dark room—you know you are
there, but no one else does. The whole idea of almost all advertising is to turn
on the light and let people know you are there. You have to get the phone to
ring or get people to come in the store. Advertising will do that.
Advertising in General
Too often, small business advertising is wasted on a scattershot approach
that fails to focus on a company’s best prospects—the people who are ready,
willing, and able to purchase its product or service. Instead of targeting their
advertising to a specific audience, these entrepreneurs target a mass audience
in an attempt to reach everybody. Often, they reach nobody.
The way to avoid this unenviable fate is really quite simple. Before anything
else, you must define your target market. You have to determine:
• Who are your customers?
• Who are you trying to reach with your ad campaign?
• How old are they?
• What sex are they?
• What do they like to do, watch, and read?
• What do they want from you?
• What catches their eye?
197
Once you have answered these types of questions, picking the vehicle
to deliver your message to that market becomes much easier. If, for example,
you are going to open an Interior Design office, advertising on the sports
page makes no sense, but advertising in the home and garden section would
make a lot of sense. Knowing your audience up front will answer many of
your questions and save you from costly mistakes.
Advertising Options
Advertising in the newspaper is a great, inexpensive way to reach a big
audience. Newspaper ads can be used to promote a sale, grab attention, or
offer specials on your product or service. The downside is that newspapers
carry lots of ads, so yours can get lost.
Magazine ads cost more than those in the paper, but magazines stay in
the house longer than a newspaper, so the price may be worth it. Magazines
are especially good for promoting your image and building your brand. Trade
magazines are useful for business-to-business advertising.
Radio can be an inexpensive, high-impact way to reach a specific market.
Repetition is essential with radio advertising as studies show that it often
takes someone hearing your ad six times before it sinks in.
Television advertising is very effective, but is correspondingly expensive.
Car companies know more about how to sell their product than almost
anyone, and where do they advertise most? Television. Television advertising
works, bottom line. Cable channels are more affordable, but are seen by far
fewer people.
Yellow Pages advertising is not cheap, but it delivers people who are
ready to buy, now. Internet advertising is not expensive, but not all that effective
in many cases either. Outdoor advertising offers high visibility, and the
cost per viewer is relatively low.
Let’s look at each of these advertising options in more detail.
Newspapers
Almost every home receives a newspaper and there is something in it
for everybody: sports, comics, news, classifieds, food, home and garden, etc.
For this reason, you are able to reach your target market fairly specifically by
advertising in the right section, and that’s the whole idea.
198 T H E B U S I N E S S S T A R T – U P K I T
There are many advantages to advertising in the newspaper. Newspaper
reading can be deliberate and, as such, ads can be examined closely. Your
newspaper ad can contain details that electronic ads miss—things like prices,
phone numbers, addresses, and coupons. Another advantage is the large variety
of ad sizes newspaper advertising offers. If you have a small advertising
budget, you can place a small ad without taking a huge financial risk.
While advertising in the newspaper can be great, it is not without some
disadvantages. Newspapers are read only once and are then thrown away. Because
a newspaper page is fairly large, small ads can be overlooked, and your
ad has to compete with other ads and news articles for attention. And there
is no assurance that every person who gets the newspaper will see your ad.
They may not read the section in which you advertised, they may skip your
page, or they may just gloss over your ad.
Despite the downsides, the benefits of newspaper advertising are usually
worth the risk and running an ad in a newspaper can make a lot of sense. How
do you do so? Every newspaper has its own sales staff and you are normally
given your own sales representative. Befriend this person; a newspaper sales
rep can be very helpful. Your rep can help you devise a budget, suggest the best
sections and days to run your ad, and even have your ad designed in-house.
The hardest questions usually are what size ad to run, how often to run
it, and how much to spend. I suggest starting slow and small, and “test” the
ad. Once you see that a small ad works and determine when it works best,
then you can roll it out, make it bigger, and legitimately expect bigger results.
Keep in mind:
• Newspaper circulation decreases on Saturdays and increases on Sundays,
the day the paper is most often read.
1 6 / S u c c e s s f u l A d v e r t i s i n g S t r a t e g i e s 199
Advertising is sold by column and inch, and you can easily determine the
size and cost of your ad by looking in the newspaper. For example, an ad
that measures 3 columns across and 5 inches down would be a 15-inch ad.
If the inch rate is $50, your ad would cost $750 ($50 × 15 inches).
• Position is vital, so be sure to specify which section you want your ad
to be in. Sometimes there is a charge for exact placement, but it is
often worth it.
• If you are running a coupon, ask for an outside position to make the
coupon easier to cut out.
• The longer you run the ad, the greater the discount you will get.
Magazines
The great thing about magazines is that they target your market fairly
specifically. If your business caters to car enthusiasts, for example, advertising
in Car & Driver might make a lot of sense. Magazines are also good because,
unlike newspapers, they are usually kept around for weeks, thus
dramatically increasing the chance for many people to see your ad.
The downside is that magazine advertising is usually fairly expensive, and
ads often have to be in color to be noticed, increasing the cost even more.
Even so, the right ad in the right magazine has launched many businesses.
Radio
Radio can be a very cost-effective way to advertise your business. As
with magazines, it is fairly easy to target your market by advertising on the appropriate
show. As there are dozens of stations in most areas catering to
dozens of different tastes, your job is to find the station and the show that
best attracts your desired demographic.
Once you do that, call the station and make an appointment with a sales
representative. He or she will be glad to help you write an ad, and will even
produce it for you for little or no cost. The trick with radio advertising is to
be clever and grab the listener’s attention. Humor, music, and sound effects
can all be used to great effect on the radio. Notice which ads grab your attention
and model your own ad after that. There is no need to reinvent the
wheel.
The important thing to remember with radio ads is that repetition is the
key. Repetition is the key. Repetition is the key. Say it enough, and your audience
will remember your ad. What is the key? See?
200 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
Television
Television is the granddaddy of high-impact advertising. Companies
don’t spend $1 million a minute for ads on the Super Bowl for no reason.
They know that television advertising works. It combines visuals with sound
and a fairly captive audience.
Of course, the expense can be daunting. Advertising on a network station
is expensive and only makes sense if your business has regional appeal.
Cable advertising may be good because you can pick the stations that appeal
to your audience. As in radio, call up the stations and speak with a sales rep
to get an idea about costs and benefits.
Yellow Pages
Do you want the good news or the bad news first? Let’s start with the
good news. Advertising in the Yellow Pages is a proven way to get customers
1 6 / S u c c e s s f u l A d v e r t i s i n g S t r a t e g i e s 201
■ Yellow Pages Advertising
1. Get a discount. Less well-known Yellow Pages in your area offer a
substantial discount over the well-established leader. New advertisers
should also get a substantial discount. (See Chapter 15.)
2. Consider your category. There might be several different appropriate
sections wherein you can run your ad. Thus, a paralegal service
might advertise under “Paralegals,” or “Bankruptcies,” or “Divorce
Services.” Figure out a few different categories for your business
and see which one has the most ads. The odds are, the largest section
is the one that is read the most. Also, consider the option of
getting several small ads in more than one category.
3. Tweak your ad. Leaf through your phone book. Which ads catch
your eye? Try to model your ad after one of those. Also, studies
have shown that photographs draw people’s attention to an ad, as
do outrageous headlines and “white space.”
4. Learn more. A good book that you might want to read is Yellow
Page Advertising: How to Get the Greatest Return on Your Investment
by Jeffrey Price.
and make money. Almost every home has a copy of the Yellow Pages and
when it is opened the users are in the mood to buy. Many businesses sincerely
believe that they would be unable to keep their doors open without being
able to advertise in the Yellow Pages. The downside of using the Yellow Pages
is that buying an ad is expensive—quite expensive.
Should you? Well, it depends. Retail services like electricians and locksmiths
would be dumb not to advertise in the phone book, because that is
where the majority of people go when they are in the market for these types
of services. But even more targeted businesses can benefit from a campaign
in the Yellow Pages too. For example, a beekeeper supply store might be the
only listing in its category. Where would you look if you were new to the bee
business and needed supplies?
Internet
Internet billboard ads and popups were once the rage, but not today.
While industry execs swear by them, to most people, they are an annoyance
to be clicked off as soon as possible. You had better be quite sure someone
is going to read your Internet ad before dropping your money here.
Outdoor
Outdoor ads, billboards, bus stop ads, and transit ads can be a good way
to attract attention and get the phone to ring because they can be seen by
hundreds of thousands of people each month. According to Market Vision Research,
the Florida Lottery found that the most effective way to advertise its
product was through the use of billboards. Similarly, according to the U.S.
Travel Data Center, nine out of ten automobile travelers in the United States
rely on billboards to find gas, food, lodging, and tourist attractions.
Creating a Winning Ad
No matter which option you choose, you still need to create an ad that
pulls. Interestingly, all ads, no matter the media, are fairly similar in structure.
They all must grab attention and make an offer. One simple way to create a
successful ad, whatever the media, is through the tried-and-true AIDA method.
This stands for attention, interest, desire, and action. The AIDA formula serves
202 T H E B U S I N E S S S T A R T – U P K I T
as a good blueprint for creating a winning ad of any type—newspaper, magazine,
radio, or television.
Attention
The first thing you have to do is grab their attention. Once you do that,
you can get a potential customer interested in what you are selling. If you
don’t get their attention, they will not receive your message among the distractions
of the headline news, sports stories, and other more distinctive ads.
You must first hit your prospect between the eyes with a powerful headline.
A good headline will grab a customer by the throat, show them the benefit of
hearing more, and do so in two or three seconds. When writing your ad, keep
in mind the benefits that are most likely to get attention include saving money,
saving time, making money, and better health.
Beyond the headline, another way to capture their attention is to use a
great visual or photograph. One’s eye is naturally drawn to pictures, so incorporating
one into your headline can really make a difference.
Interest and Desire
After you have the prospect’s attention, you have to make your pitch in
the body of the ad. You do that by making the customer a compelling offer
and describing as many benefits as possible in simple and interesting terms.
Because the product or service must fill a market need to be successful, you
must explain how it does that. Your ad must be well written so it clearly explains
the benefits to customers and keeps their attention.
Action
Finally, you must ask for the order. Give reasons for the customer to buy
now, and make it easy for him or her to do so. This will involve a coupon for
mail orders, a toll-free order line, an e-mail address, an online order form, a
fax order line, or any other means to make it easy and simple to order. Be sure
to take the fear out of the purchase as much as possible by giving guarantees,
offering testimonials, and showing how the customer is going to miss out if
he doesn’t order NOW!
If you follow the AIDA formula, you should find that your ad works, no
matter what the medium.
1 6 / S u c c e s s f u l A d v e r t i s i n g S t r a t e g i e s 203
When Good Ads Go Bad
Even if you produce a great ad—one with a catchy headline and motivational
copy that spurred their interest and called people to action—it can
still sometimes fail. Why? Here are four reasons good ads sometimes fail. Avoid
these pitfalls to increase the chances that your ad will succeed.
1. The ad is in the wrong media. As indicated earlier, before placing
any ad, you must determine if the publication (or TV or radio station)
reaches your target audience. No matter how great your ad is, it
won’t pull if you placed it in the wrong media.
2. Obstacles exist. People won’t buy from you, no matter how great the
ad, if it is hard to do so. If your parking lot is too small, if your phone
is always busy, if they get stuck in your voice mail, if it is altogether
too hard for potential customers to make a purchase, they will give
up and buy from someone else.
3. The offer is not compelling. The offer in your ad has to be something
that stirs people to action. When an otherwise good ad fails to pull,
it may be that you have to sweeten the pot and strengthen the offer
to make the ad work.
4. You aren’t advertising often enough. Repetition is the key. Repetition
is the key. People usually have to hear or see an ad several times
before they actually notice it and respond. You should expect to run
your ad with some frequency before it begins to create significant
results.
Advertising and the Law
The last thing to understand about advertising is that there are rules by
which you have to play. Advertising is regulated by both federal and state
laws, and the general rule is that an ad is unlawful if it tends to mislead, deceive,
or contain a false statement.
Here’s an example: In Los Angeles, a used-car salesman appeared in a television
commercial with a chimpanzee and told viewers they could have one
of the cars on his lot for “1,000 bananas!” When an enterprising young man
drove up with a trailer of bananas, the dealer refused to sell him the car. The
man sued and won.
204 T H E B U S I N E S S S T A R T – U P K I T
Consumer lawsuits are one result of deceptive advertising. Federal prosecution
is another. The Federal Trade Commission (FTC) is the main federal
agency that regulates commercial advertising (although state and local governments
also go after businesses that violate advertising rules).
Over the years, the FTC has taken action against many businesses accused
of engaging in deceptive advertising. If FTC investigators believe an ad
violates the law, it usually uses informal means to bring the violator into voluntary
compliance. If that doesn’t work, things can get awfully expensive for
you. The FTC can issue a cease-and-desist order, bring a civil lawsuit, or require
you to run corrective ads admitting that you lied and your earlier ad was
deceptive.
You have to be careful what you say in your ads. Here are four rules to
keep you safe:
1. Be accurate. Make sure your ad is factually correct. “Puffing” is OK
(e.g., “We are the best dealer in Northern California!”), but deception
is not.
2. Be honest. It is fine to compare your goods and services with those
of other companies, but when you do, make sure every statement in
your ad is accurate. Lying about a competitor can lead to a nasty libel
suit.
3. Beware the word Free! Yes, free is the most powerful word in advertising.
I am not telling you not to use it, but I am telling you that
when you do use it, what you are advertising as free had better really
be free.
4. Have sufficient quantities on hand. Most states have laws that require
advertisers to stock an advertised product in quantities large
enough to meet a reasonable demand (unless the ad says “supplies
are limited”).
Advertising is one of the best things you can do for your business. You
can reap the most benefits when your ads are honest.
Resources You Can Use
Advertising Age Magazine
<www.adage.com>
1 6 / S u c c e s s f u l A d v e r t i s i n g S t r a t e g i e s 205
Advertising World
<advertising.utexas.edu/world/>
Creative Advertising: Ideas and Techniques from the World’s Best Campaigns
by Mario Pricken (Thames & Hudson, 2002)
Entrepreneur Magazine
<www.entrepreneur.com>
206 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
Advertising is usually one of the best things you can do for
your business, and you have all sorts of outlets in which you can advertise
your business: newspapers, magazines, radio, television, Yellow
Pages, the Internet, and outdoor ads. In most of these, using the
AIDA formula works: attention, interest, desire, and action.
C H A P T E R
17
· Successful Marketing
· Strategies
Customers do not appear out of nowhere. They must hear of your business
before they will ever call you, and that is the purpose of marketing. What
is marketing? Essentially, it is anything you do to promote your business, get
your name remembered, and generate sales. It encompasses promotions, giveaways,
publicity, customer relations, public speaking, signs—anything that
keeps your business in the public eye and brings customers in the door.
A Cautionary Tale
When Sarah was in law school, she took a class on how to start a law
practice. One day, her instructor invited a local lawyer to come speak to the
class. One of the first questions he got from the class was the same one you
may be asking yourself: Where do we get clients and customers? “Take out a
sheet of paper,” he said. “If you are going to make it on your own, you will
need at least ten sources of business. Make a list of your ten sources.” So they
did. Most had a list something like this:
1. Dad
2. Friends of Dad
3. Friends and relatives
4. Work associates
207
After looking the lists over, the attorney exclaimed, “Wrong! You have
to think bigger if you’re going to make it in your own business.” He explained
that number one on their list should be “Everyone I know.” Whereas most of
the students had lists comprised mainly of friends and associates, the successful
lawyer showed them that tapping everyone they knew was but one of
at least ten different sources they would need if they wanted to generate
business. Advertising would be another. Networking would be another.
This is a good exercise for anyone starting or running a business, and
you should do it now. Make a list of ten sources of business. If you are going
to make your business a success, you will need to be creative and come up
with many different ways to generate sales. Marketing must play a major role
in that plan.
The Need for a Marketing Plan
The lawyer’s tale above is illustrative because it indicates just how few
people really have a comprehensive, methodical, well-thought-out plan for
generating sales. And make no mistake about it, whether you are opening a
dentist’s office, a real estate agency, or a bakery, you will be in sales. How are
you going to generate those sales? In which media sources will you advertise
and which marketing options will you utilize?
A marketing plan will tell you. A marketing plan is nothing more than
your plan of action for bringing in business. It need not be long or complicated,
it simply needs to be a blueprint that you believe will work for you and
to which you are committed.
Your assignment for the rest of this chapter is to look at the various marketing
tools available to you, decide on a few that make sense for you and
your business, and commit those to paper, along with any advertising strategies
you have decided on. Committing to a marketing and advertising plan of
action will keep you focused and on target.
Marketing Tools
There are many different methods that you can use to promote your
business as part of your overall marketing plan. Following are many different
options from which to choose. Pick a few that seem to match your style and
business and add those to your plan.
208 T H E B U S I N E S S S T A R T – U P K I T
Correspondence. Any marketing campaign begins with your letterhead,
stationery, business cards, etc. These seemingly insignificant things are actually
quite important because they represent you to the outside world. If your
letterhead is professional, then you are seen as professional. Use high-quality
paper. Include all information, including e-mail and fax numbers. All correspondence
must be coordinated. Your fax cover sheet should mirror the letterhead
which should mirror your business card.
Newsletters. Physical and virtual newsletters are a great way to share information
with both potential and actual clients. Aside from positioning you
as an expert, they are inexpensive to create and allow you to contact people
without looking like a salesperson.
Tap into the magic words. The two greatest words ever invented for business
are FREE! and SALE! People love to get something for less, almost as
much as they love to get something for nothing. If you utilize these two
words in your promotion, marketing, and advertising materials, people are
sure to notice you.
Contests. A contest can generate interest and free publicity for your business.
By giving away your goods or services, you simultaneously present your-
1 7 / S u c c e s s f u l M a r k e t i n g S t r a t e g i e s 209
✎Marketing and Advertising Plan Analysis
1. Who are you trying to attract?
2. What are their needs?
3. What is it you want to sell them?
4. What do you offer that the competition does not?
5. What are the goals of the campaign?
6. How long will it last?
7. Who will be in charge?
8. What is the budget for the campaign?
9. Which marketing and advertising options can you use?
10. How will you be able to measure success?
self as an expert in this area while drawing people to your business because
they love free stuff.
Signs. A big, bold sign in the right location can be a very effective way to
bring in new business. Retail businesses swear by good signage. A number of
different factors need to be considered when choosing a sign:
• From what distance do you want the sign to be seen?
• Do you want it to be seen at night?
• What kind of weather will it be exposed to?
• How much can you afford to spend? Shop around.
• Can you legally put up the sign you desire? Check the zoning ordinances
in your area. If your proposed sign is illegal, you will first need
to get a variance from the city.
Telemarketing. You can buy some very specific lists and hire inexpensive
telemarketers, even students, to sell your product or services over the phone.
Telemarketing can also be used to let current customers know of a sale or
other promotion.
Direct mail. Like telemarketers, direct mail merchants can also generate
some very specific lists, which you can use to send potential customers a flyer
or other info. Direct mail is also a great way to stay in touch with current and
former customers and is less impersonal than telemarketing. Here are some
tips for making direct mail effective:
• Define your audience. The more specifically you can define who your
potential customer is, the more successful your direct mail campaign
will be.
210 T H E B U S I N E S S S T A R T – U P K I T
Spencer’s dad owned a discount carpet store, the kind of place where everything
was always on sale. Spencer spent many hours with his dad at the store.
One day when he was about six and just learning how to read, Spencer said
proudly to his mom, “Look mom, I can read! S-A-L-E spells . . . carpet!”
TEAMFLY
• Grab their attention. You have about five seconds to generate interest.
Use headlines and highlight benefits, benefits, benefits!
• Use a conversational tone.
• Deliver credibility. Include customer testimonials.
• Provide a strong incentive for the recipient to act.
• Include a guarantee.
• Using a self-addressed reply card can increase your response rate.
• Use postscripts (P.S.). Postscripts almost always get read, and provide
an excellent place to make an offer.
• Follow up. Often, several letters are needed to clinch the sale or generate
a telephone response.
• Don’t expect miracles. A good direct mail campaign generates about
a 5 percent response. That means that 95 percent of your mailing will
be useless.
Commissioned salespeople. Another way to increase business is by having
comissioned salespeople sell your wares to different retail stores. The obvious
advantage here is that you don’t have to pay the salesperson anything
until he or she gets a sale and, even then, payment will come from the proceeds
of the sale.
Brochures. When you go into a car showroom to look at a new car, what
do you leave with? A brochure. The reason is that a brochure enables a potential
customer to practically take your product with them and review it at home.
Magnets. All refrigerators are covered with pictures and magnets these
days. If you want people to see the name of your business several times a day,
give away free refrigerator magnets. This idea works especially well for neighborhood
services and restaurants.
Web sites. Even if you are not planning an e-commerce business, having a
promotional Web site can be a great marketing tool. You can put your site address
on all of your stationery, so people can check your site out later.
Aside from your own Web site, consider the possibility of expanding
your business by selling your wares on eBay or other online malls. I once did
a bankruptcy for an antiques dealer. Two years later, I ran into him at the airport.
He told me he was on his twice-yearly trip to Europe. Apparently, after
1 7 / S u c c e s s f u l M a r k e t i n g S t r a t e g i e s 211
the bankruptcy, he began to sell his antiques on eBay and his business just
took off. eBay works.
Don’t discount the eBay phenomenon. The site has over 42 million loyal
customers and 500 million page views a month; eBay is set to gross more than
$30 billion in sales by 2005.
eBay is also useful as a great place to test market your pricing strategy
without making a costly mistake. Will that couch sell for $399? Find out on
eBay.Will those shoes fly out the door at $9.95? Selling them on eBay first will
help you find out.
212 T H E B U S I N E S S S T A R T – U P K I T
■ Business Web Sites
Anthony Hill started AH Web Design with his cousin Rick Roelen in 2001
<www.ahwebdesign.com>. The company specializes in creating Web sites
for small businesses. Although they have been offered the chance to create
bigger e-commerce sites, Hill and Roelen turned these companies away,
preferring instead to concentrate on their target market—small businesses.
According to Hill, the small business market makes a lot of sense because
it is where both the need and the demand for their services are highest.
Hill believes that every small business needs to have a Web presence
for several reasons:
• It is an affordable and easy way for people to learn about your business
and contact you.
• Business cards offer too little information. A Web site allows you to
provide much more information, while also allowing you to put
your best face forward.
• Even if you don’t sell goods on the site, putting your Web address
in your advertising can increase sales by promoting your business.
Hill says that the best small business Web sites are “clean and simple.”
Unlike many big e-commerce sites, Hill believes that a small business Web
site should be simple, offer plenty of information, and get right to the
point. The cost for a simple site starts around $500 and goes up from there.
“Every business needs one,” says the master Webmaster.
Testimonials
Satisfied customers can be your best sales tools as they lend credibility
to your business.
Excellence
It costs five times more to create a new client than to retain an existing
one. Studies show that each satisfied customer will spread the good word about
your business to at least one other person, while an unhappy customer will
likely complain to many more than that. Doing great work and offering superior
customer service can go a long way toward creating continuing revenue.
Networking
Networking begins with your friends and family. Make sure that they
know how much you value new business and appreciate referrals. But don’t
stop there. Join a networking group. For instance, chambers of commerce
sponsor networking events where you can meet and mingle with other business
owners, who are, in fact, potential customers. Le Tip International is another
great group that usually meets weekly and creates a lot of business
opportunities for its members. Networking is particularly critical in local service
businesses. For certain types of specialized professional consulting fields,
such as attorneys or accounting, networking can make a huge difference.
Publicity and Public Relations
Another important aspect of marketing is the ability to get good press
for your company. A newspaper article or television news story about your
business is like a free commercial and an endorsement all in one. Even better:
You can copy the article or make tapes of the story and use them later in
other promotions.
Newspaper editors and television producers have to come up with stories
to fill their pages and airwaves—day after day, week after week—and it
is not always easy to fill all that space. Therefore, your business, along with
your ability to publicize it properly and work cooperatively with the media,
can become one of the stories if you do it right.
1 7 / S u c c e s s f u l M a r k e t i n g S t r a t e g i e s 213
So just how do you get the press to pay attention to your business? Begin
by reading the paper or watching your local news closely and noticing which
reporters do stories about small businesses. Then you need to think of a
“hook” or angle for the story. Local boy makes good is but one example. If
you sponsor a charity event, invent something new, lead your community, or
open a new store in a needy neighborhood, the press might just become interested
in your story. Come up with a hook.
There are two ways to get a media outlet to pay attention to you: sending
out a press release or sending out a press kit. A press release is a one- or
two-page article that explains the who, what, where, when, and how of your
“news.” If an editor or producer agrees that the contents of the press release
are indeed newsworthy, they will either assign a reporter to interview you
about the story, or possibly just print the press release outright in the paper.
A typical press release may read something like the following.
214 T H E B U S I N E S S S T A R T – U P K I T
For Immediate Release
Local Real Estate Agent Wins Prestigious Award
Sam Spurgeon, a local real estate agent specializing in investment
property sales, joined Western Realty’s President Club last
week after selling his 100th duplex.
The President Club is a recognition awarded to only the top 5
percent of Western Realty’s sales force. “Sam is an outstanding real
estate agent who has been an up-and-comer for some time. We are
lucky to have him,” said Western Realty’s president, Sally Edwards.
“With the boom in recent real estate prices and the recent decline in
the stock market, buying investment property makes sense right
now for the average investor,” says Spurgeon.
Spurgeon grew up in the Land Park area, went to Land Park
High, and graduated from USC in 1995. He now lives in West Hills.
For more information, contact Sam Spurgeon at:
777-777-7777
sspurgeon5000@aol.com
www.SamsNo1.com
An editor who sees this press release may run most of it in the paper or
assign a reporter to cover Sam and the changes in the local real estate market.
If you want your press release to get this sort of attention, follow these
tips:
• Find out the name of the reporter who covers the area to which your
release relates and fax your release to that specific person. Do not fax
it to “newsroom” or “editor.”
• Create a catchy headline, but avoid hyperbole.
• Be newsworthy. Why would a reader want to read your story? Have
an angle that works and fulfills a need.
• Don’t sell.
• Keep it short. Your press release should be no more than 500 words.
Besides press releases sent to the right editor, you might also be able to
grab some press attention by sending out a press kit. A press kit is a collection
of information about you and your business. It could contain a press
release, previous stories about you, background information about your business,
frequently asked questions, a resume, or almost anything else you think
would pique an editor’s interest. The purpose of a press kit is to inspire
enough interest in you and your business that media types want to know more.
Press kits are relatively inexpensive ways to get you noticed; they can
cost anywhere from a couple of hundred to several thousand dollars to produce.
Of course, getting noticed does not guarantee you will get a story, but
it is a great start. But just what separates a good press kit from a lousy one?
Here are a few tips:
• Focus on substance, not flash. A fancy press kit won’t fool anybody if
you’re all hat and no cattle. Journalists see hundreds of press kits a
year. You can make yours stand out by calling attention to your substance,
instead of relying on a gimmick.
• Tell a story. Newspapers are in the story-telling business. News people
report stories and their audience remembers stories.
• Less is more. Focus on the story, the product or service, or the event
you want to highlight.
• Offer testimonials. A few good testimonials lend credibility to your
press kit.
An editor’s job is to report the news. So your job is to become newsworthy.
Always remember that news people are in the news business, not the
1 7 / S u c c e s s f u l M a r k e t i n g S t r a t e g i e s 215
promotion business, so you must offer yourself, via your press kit or press release,
as a community asset, not a huckster capitalist.
Be Prepared!
Whatever marketing avenue you choose, it is important to be ready
should your plan work. There are few things more embarrassing, and worse
for your business, than being hit by a tornado of new business and not being
ready—especially when you asked for it!
This is exactly what happened to “Liberty Pizza” (the name has been
changed). A new business, Liberty Pizza sent out a press release touting its
pizza as the “best pizza west of the Mississippi!” The local newspaper, having
received the press release, decided to send out its food critic. The critic loved
the pizza and he wrote a story that ran in the Saturday paper that said that the
place made the best New York–style pizza in the area.
That night, Liberty Pizza was deluged with take-out orders and dine-in
customers. The average wait time for a pizza that night was 90 minutes. And that
was before they ran out of dough. Unprepared for the onslaught that their press
release created, Liberty Pizza let a golden opportunity slip away. Customers
were mad about the wait, mad when they ran out of dough, and mad at the
overextended wait staff. The owner later exclaimed that the restaurant had
been “just hammered” by the amount of new business that the story created.
The moral is: Like a Boy Scout, be prepared. If you run out of dough, you
can’t make any “dough,” but if all goes well, be prepared to be hammered by
new business!
216 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
Create a marketing and advertising plan and follow it. The
choice of methods available to grow your business is almost inexhaustible,
and many are not expensive to use. By using the power of
the press (via a press release or press kit), you can gain business and
credibility in one fell swoop.
Resources You Can Use
American Marketing Association
800-AMA-1150 (800-262-1150)
311 South Wacker Drive, Suite 5800
Chicago, IL 60606
<www.marketingpower.com>
The Direct Marketing Association
212-768-7277
1120 Avenue of the Americas
New York, NY 10036-6700
<www.the-dma.org>
Guerilla Marketing Online
<www.gmarketing.com>
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C H A P T E R
18
· Caring for Customers
· and Employees
Advertising and marketing have the same goal in mind: to make the phone
ring or bring customers in the door. After that, what happens is up to you. If
customers like what they see, if they find great products or service, if they
are treated well, they will return. When that happens, you have the most prized
of all things: a valued, loyal, returning customer.
According to Inc. magazine, it costs five times more to create a new customer
than it does to retain a current one. Similarly, there is a rule of thumb
that says that 80 percent of your business comes from 20 percent of your customers
(the 80/20 rule). The best thing you can do to stay successful in business
is make new customers consistent customers by treating them well,
giving them exceptional service, and doing what you say you will do when
you say you will do it.
By the same token, you also need to care for your employees. Employees
are the backbone of your business. If they are happy, your business runs
well; if they are not, well, you know. Your job once you get your business up
and running (among your many other jobs) is to care for these two constituencies.
Take care of your customers and employees, and they will take
care of you.
219
The Three Stages of Customers
Almost every business will have three different types of customers: new
customers, existing customers, and exiting customers. You need to know
how to handle all three correctly if you want to succeed in business.
Creating new customers is an ongoing process, and it is one of the fun
aspects of business. Many entrepreneurs enjoy spending their time figuring
out ways to lure in new business. Where many drop the ball, however, is after
the initial sale. Flush with success, a new entrepreneur often neglects the
new customer after that sale, inadvertently failing to realize that that new customer
may become one of the valued 20 percent if treated properly. You turn
that new customer into a returning customer by treating him or her well from
the start. If you don’t, it’s the business equivalent of a one-night stand.
Existing customers are one of your most valuable business assets and
cannot be taken for granted. They usually make up the bulk of your business,
so it is incumbent upon you to nurture that relationship and let those customers
know how important they are. Existing customers should be given
special services and discounts when appropriate, and should always be
shown appreciation for their patronage.
Finally, all business will have customers who are ending their relationship
for one reason or another, and even this customer needs special treatment.
The ending may just be the natural course of the relationship; for
example, a chiropractic patient who is ending his care or a customer who is
moving away. Because you never know who they talk to or who they may
refer to you, this customer needs to be cared for just as well as the others.
Why do customers leave? Consider these statistics from a Small Business
Administration (SBA) survey:
• 4 percent of customers leave a business because they have moved
away.
• 5 percent change their purchasing habits.
• 9 percent decide that they like the competition better.
• 14 percent become disenchanted with a company’s overall service.
• 68 percent feel unappreciated.
The lesson is clear: Unless you want to lose the bulk of your hard-earned
customers, you had better make sure they know that you appreciate their
patronage.
220 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
As old customers leave, you need to constantly be bringing in new customers
to take their place. And as you do that, you need to be converting
your new customers into existing, loyal customers. This important cycle of
your business cannot be ignored. Old customers will leave (because they do),
and if there are no new customers coming in to pick up the slack, you will
soon be out of business.
What Is Great Customer Service?
While “great customer service” is a mantra we all hear about, few businesses
actually incorporate it into their modus operandi. It may be because
they have never given it much thought, or because it is simply not a priority,
or that the culture of the company may be so hectic that employees feel
stressed. Unless you want to be on a never-ending quest for new customers
because you have no returning, loyal ones, you had better make customer service
a priority.
Furthermore, serving your customers well is also a great way to distinguish
your business from the competition. You have to give people a reason
to patronize your business—better prices, a better location, better products,
or, yes, better service.
The essence of superb customer service is that service becomes one of
the guiding principles of your business. You need to put pen to paper, create
a policy, and then see that every employee receives and understands it. Also,
make sure that it is made a part of the employee manual. For employees to
realize how important you take customer service, it must be stressed every
day, in many ways.
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 221
At Carpet World, in Long Beach, California, a huge sign reads “Our Word of
Mouth Advertising Starts With You!” That is the attitude. Taking care of your
customers, all of your customers, and letting them know how much you
respect and appreciate them will go far toward keeping your business
on top.
Helping Employees Help Customers
The California Chamber of Commerce recently conducted a survey of
100 of the most successful small businesses in that big state. One of the questions
it asked was this: The real key to business success is:
222 T H E B U S I N E S S S T A R T – U P K I T
■ Great Customer Service
• Be attentive. Think like a customer. What do they want from you?
What are their needs? The better you can meet those needs, the
better your customer service.
• Make it personal. Endeavor generally to anticipate the needs of particularly
special customers. Offer recommendations and ideas that
they might be able to use. Become their partner. Send them a
handwritten thank you or other token of your appreciation. They
won’t forget it.
• Give them a discount. A discount on future purchases is a great way
to make customers feel special (and remain loyal).
• Keep them informed. Costco sends its all-important small business
customers a special newsletter every month loaded with information,
business tips, ads, and discounts. Can you do something similar?
• Take personal responsibility. Make sure customer service representatives
act promptly, keep their promises, and follow up. The idea is
to have one person accept responsibility for fixing a problem, do
more than the client expected, and do so in a positive, helpful way.
• Go the extra mile. Infusing your troops with the power to solve basic
customer problems without seeking extra authority will not only
increase the level of your customer service, but it will simultaneously
show your employees how important customer service is to
the company.
A. Hard work and perseverance
B. Fine products and service
C. Advertising
D. Knowing the fundamentals of business
E. Employees
The overwhelming answer was E, employees.
It is not hard to understand why. Employees do the work. Employees
make decisions. Employees are on the front lines. It follows then that if you
want to offer great customer service, you have to infuse your employees with
that desire, because for many businesses, it is the front-line employees who
deal with customers on a daily basis. If you want to be known for having great
customer relations, your staff needs to know what is expected of them.
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 223
■ Real Life Example
“For my whole career in retail, I have stuck by one guiding principle. It’s a
simple one, and I have repeated it over and over and over, but I’m going to
say it again anyway: The secret of successful retailing is to give your customers
what they want,” said the world’s greatest retailer, Sam Walton of
Wal-Mart.
Walton certainly knows a thing or two about business success. Bigger
than Sears, Kmart, and JCPenney combined, with nearly 4,440 stores, Wal-
Mart is the world’s number one retailer and employs more than one million
people worldwide. Not bad, considering Walton started with a single store
in Bentonville, Arkansas (population 3,000).
Sam Walton attributes much of his success to customer service, as exemplified
by practicing what he called “aggressive hospitality.” Said Walton,
“Let’s be the most friendly—offer a smile of welcome and assistance to
all who do us a favor by entering our stores. Give better service—over and
beyond what our customers expect. Why not? Exceed your customers’ expectations.
If you do, they’ll come back over and over again.”
This philosophy is also expressed in something Wal-Mart calls the
“Sundown Rule.” It is one reason the company is well known for its customer
service. The Sundown Rule states that employees strive to answer
customer requests by sundown on the same day the request is made.
When problems do arise, the company motto should be: This will be
fixed. Always acknowledge a customer complaint as soon as possible. Let the
customer know you are sufficiently concerned about the problem and your
team is on the job to resolve it.
224 T H E B U S I N E S S S T A R T – U P K I T
■ Helping Your Employees Help Your Customers
• Support employees who deal with customers every day. Make their
jobs easier. If they have what they need, they will be happier and
that will translate to the customer. Waiters at Outback Steakhouse,
for example, are allowed to offer patrons free food after a problem
has arisen.
• Train all employees in customer service. One CEO takes training so
seriously that he often teaches the customer service class given to
new hires himself. This training should also include phone-courtesy
training, which is the first contact many people have with your
business.
• Stress communication. Again, those who deal with customer complaints
need to know how to solve the problem and need to tell
the customer that they will solve it. Make sure they keep the customer
up to date and offer a solution in a timely manner.
• Reward a job well done.
• Have a “no tolerance” policy. Never tolerate employees who give
poor customer service, no matter how bright they may be. If you
begin to stress the importance of increasing the quality of your
customer relations and back it up with actions, the message will be
received.
• Poll customers frequently to get feedback on how you’re doing.
Not only do most customers not mind giving feedback, they feel
important when they do.
• Stress manners. Customers like hearing “Thank you” or “We’re so
sorry” or other considerate words, when appropriate.
For example, Nordstrom department store has an enviable reputation
for superb customer service. One reason is that customer service is stressed,
even as early as the initial hiring interviews. One interviewee tells the story
of how she was told by a Nordstrom executive that if a customer brought in
a used pair of shoes six months after the sale, Nordstrom would gladly take
the shoes back. That the customer is number one at Nordstrom is not hyperbole,
it is reality. Says David D. Glass, president and CEO of Wal-Mart, “Outstanding
customer service and Nordstrom are synonymous. Their innovative
approach has allowed them to find out what the customers want and then do
it. Their standards of service are what we all shoot for.”
Handling Complaints
Indeed, feedback from your customers, whether positive or negative, is
one of the most valuable things your business can get. According to the SBA,
most business owners get one to five complaints a week, and most are about
billing and pricing. Interestingly, the SBA survey also says 95 percent of dissatisfied
customers would do business again with a company if their problems
were solved quickly and satisfactorily. Solving the customer’s problem is
your job, even if you disagree with his or her complaint.
All you need to do is listen. To win back dissatisfied customers, be willing
to hear them out instead of being defensive. Then placate angry customers by
letting them know you are more than happy to correct the problem to their
satisfaction. After listening:
• Ask the customer how he or she would prefer the problem be resolved,
and resolve it that way if you can. If a customer wants a refund,
give it to him or her, if possible. If you do, you will likely keep
a customer.
• If the problem has to do with employees, discover whether the problem
is endemic and, if so, root it out.
• Even if you are convinced that your business is not to blame, be humble,
express your regret that the customer had a bad experience with
your company, and offer something to mollify him or her.
Complaints are good because they help you learn what your business is
doing wrong. But feedback need not be negative to be helpful. Soliciting feedback
is a valuable way to find out what customers like and dislike about your
business, as well as a way to discover what they would change or keep.
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 225
By offering a small gift certificate for participating, you can learn a lot of
valuable information from your clients, while also getting their addresses that
you can add to your mailing list. Another benefit of using customer feedback
surveys is that you can get testimonials from them. Once you get their permission,
those testimonials can be used in your marketing and promotional
materials.
Customer feedback can be one of the best friends your business has.
Caring for Employees
Not only must your customers know they are appreciated, but so should
your employees. There are many ways you can run your business. You can be
a dictator, a jerk, a facilitator, a cheerleader, or any number of other personalities.
The important thing to realize is that the style you choose to use will,
in large part, determine the kind of business you create. If your employees
learn to loathe you, you can bet it will affect the bottom line, just as it would
if they learn to love you.
A trait common to many highly successful businesses is that the owners
and managers put a lot of effort into communicating with employees to make
sure they are happy and motivated. A simple but highly effective thing you
can do to create a positive work environment is to be, like Ronald Reagan, a
great communicator. Good communication could be a quarterly “state of the
company” report to employees, encouraging them to give suggestions or ask
questions, or it could be one-on-one meetings devoted to career goals.
Another thing you can do to create a great work environment is to be
sure to properly reward your employees. A large part of making employees
happy has to do with compensation. Compensation comes in many forms,
the most obvious of which are paychecks, bonuses, profit sharing, and stock
options. While the thought of sharing profits with employees may nauseate
you, consider that doing so becomes an incentive for them to do well, it improves
productivity, and shows your appreciation for a job well done. Less evident
rewards can also make a difference too. A gift certificate, a luncheon to
honor employees who have made outstanding contributions, or free T-shirts
all help boost morale.
“Share your profits with all your Associates, and treat them as partners.
In turn, they will treat you as a partner, and together you will all
perform beyond your wildest expectations. Remain a corporation and
226 T H E B U S I N E S S S T A R T – U P K I T
retain control if you like, but behave as a servant leader in a partnership.
Encourage your Associates to hold a stake in the company. Offer discounted
stock, and grant them stock for their retirement. It’s the single
best thing we ever did.”
—Sam Walton, Made in America.
There are many measures for employee satisfaction beyond money. Employees
want to be appreciated, and they want a life outside the office. Knowing
that happy employees create a happy workplace, and, usually, a more
productive and profitable workplace, it is not a bad idea to take the pulse of
your staff once or twice a year to see how you are doing.
The things that you want to find out, via a feedback form, private meeting,
or some other method, include:
• If the employee feels that he is cared about as a person, not just a cog
in the machine
• If the employee feels her work is appreciated and praised
• If he feels that people care what he has to say
• If she likes her job, and what she would change about it
• What he needs to perform his job better (tools, training, equipment,
support, etc.)
You will be spending a lot of time at your new business and with your
employees. Being a good boss is one of the easiest, and least expensive, ways
to ensure the success of your business.
The Mission Statement
Another way to let employess know what is expected of them is to create
a mission statement for your business. A mission statement is a very effective
business tool because it tells you, your employees, and your customers just
what your business is really about and where it is supposed to be headed.
Knowing what your mission is also helps you know whether your daily activities
and policies, are getting you closer to or further from your goal. Thus,
it not only keeps you focused, it also helps employees understand what is expected
of them.
Many small businesses have a mission statement prominently displayed
somewhere, and employees often pay it lip service. But great businesses get
their employees to actually buy into that mission and believe in it. When
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 227
employees don’t understand what the business is about, or if they are forced to
heed to some maxim that they neither buy into nor believe is true, morale suffers.
Conversely, when they feel part of something larger, their value increases.
228 T H E B U S I N E S S S T A R T – U P K I T
■ Creating a Mission Statement
Your mission can be either personal or for your business. In this exercise, we will create one
for your business. It should be between 50 and 400 words. It is your dream, your focus, your
purpose. Create a mission statement by answering the following questions:
• What personal values do you want to be embodied in your business?
• What qualities and characteristics should be best exemplified by your business?
• What resources are at your disposal?
• What is your niche?
• What is your grand vision for your business? (Don’t be shy!)
• Based on your values, vision, characteristics, and resources, what is the purpose of
your business?
• Which of your personal qualities do you want to be infused in the business?
• How can your business best serve your clients, family, employees, and investors?
• How much money do you want to make? What are your markets? Who are your customers?
What is your responsibility and commitment to them?
• Are you willing to commit to your mission, your vision, your dream? Are you willing
to pay the price, whatever that is?
Based on your answers above, based on your values, dreams, plans, niche, resources, etc.,
draft a mission statement for your business. Make it large and bold and fantastic; something
you believe in with all of your heart. Surrender to your purpose.
Excerpted with permission from the Speaking Success System by Burt Dubin, the number one speaking
success resource in the world <www.speakingsuccess.com>.
One anonymous writer explains the value of a mission this way:
“By intentionally raising your own expectations of yourself, you create a
gap between where you are and where you choose to be. Having created
this gap for yourself, everything about you automatically begins
working on your behalf to close it. This explains why people with a mission
enjoy boundless energy.”
Here’s an example:
Mission statements can also be created in conjunction with your employees.
The value of doing this is that everyone owns the result. The downside
is that you may not like the result. For a new start-up, it is probably best
to have the top management create the mission statement, and then help all
new employees buy into it from the day they are hired.
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 229
Mission Statement
Steven D. Strauss
My MISSION is to be—and to be recognized as and respected as—
The World’s Leading Entrepreneur Expert
In support of my MISSION, I will gather and disseminate the
very best hints, tips, ideas, and entrepreneurial strategies. I will offer
valuable insights and ideas that enable people to be freer, more independent,
wealthier, and happier.
Backing my MISSION, I will create significant books, columns,
programs, products, businesses, and speeches for the experienced
and amateur entrepreneur alike.
Steven D. Strauss
Liven Up Your Meetings
The purpose of a meeting is to share information, brainstorm, and work
toward accomplishing a goal. But that’s not what happens at most meetings,
and employees tend to tune out when meetings are confusing, lack focus, or
are boring. Bad meetings result in more meetings, lower morale, and decreased
productivity.
It need not be so. These tips should produce both better meetings and
thus a more efficient business:
• Keep it short and sweet. Meetings run into trouble when they are allowed
to continue ad nauseam. Of course, some meetings need to be
long, but those should be the exception. Most meetings, if they stick
to a well-thought-out agenda, can be finished in well under an hour,
and a good facilitator should keep the meeting on track and moving
forward.
• Speak plain English. Jargon and mumbo jumbo waste time and make
the meeting pointless.
• Offer recognition. Recognize the winners on your team. Take a few
minutes to congratulate and thank them for meeting goals, closing
deals, and making money. Praise reinforces positive behavior and encourages
everyone to do well.
• Open up your circle. Bring in people from the real world. Have a customer
attend a sales or staff meeting and explain why he or she buys
from you. This is a powerful dose of reality.
• Take action. It is a good idea to create an action plan at the end of
every meeting. The plan will list each task that needs to get done,
who will do it, and when it will be completed. The action plan should
be distributed to everyone who attended.
If your meeting becomes a way to help your staff make more money instead
of a rote rendition of the last meeting, then you just might find that the
once-dreaded sales or staff meeting is no longer an unwelcome chore.
Resources You Can Use
Breakthrough Customer Service: Best Practices of Leaders in Customer Support
by Stanley A. Brown (Editor) (John Wiley & Sons, 1998).
230 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
1001 Ways to Energize Employees
by Bob Nelson (Workman Publishing Company, 1997).
1001 Ways to Reward Employees
by Bob Nelson (Workman Publishing Company, 1994).
Raving Fans: A Revolutionary Approach to Customer Service
by Kenneth H. Blanchard (William Morrow & Co., May 1993).
301 Great Customer Service Ideas: From America’s Most Innovative Small Companies
by Nancy Artz (Inc. Pub, 1997).
1 8 / C a r i n g f o r C u s t o m e r s a n d E m p l o y e e s 231
T H E B O T T O M L I N E
Customer service must be your mantra. Customers are hard to
get and hard to keep, but you can do so by making exceptional customer
service a priority. Exceed their expectations. Offer personal
service. Fix problems quickly. And, by the same token, it is important
to treat employees well. Whether you like it or not, benefits and
profit sharing motivate people to do work better. Finally, a mission
statement can guide all of these endeavors.
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P A R T
VI
· Success Strategies
In this section, important success strategies are examined,
from learning how to see business opportunities inherent in
challenges to success secrets of the great entrepreneurs—it’s
all here.
This Page Intentionally Left Blank
C H A P T E R
19
· Business Jujitsu
Business challenges come in all forms and sizes. It may be a cash crunch
that you are unprepared for or losing a huge account. While it is impossible
to predict what sort of challenges you will face in your business—and you
will face challenges—it is possible to give you some advice about how to prevent
the preventable ones.
Business Jujitsu
A new business must have a plan, but it must also be adaptable to an
ever-changing marketplace. One thing most new businesses have in common
is that they may not have the experience of another more well-established
company. This means that you, the new businessperson, need to prove yourself
to potential clients. Businesses that have been around the block a few
times have established customers and practices. Your task seems more difficult,
but it doesn’t have to be. Turning a perceived business problem around
is not only possible, it also is smart.
Think about it. Yours is a new business. That can be seen as a disadvantage
but, seen in the right light, it can also be a tremendous advantage. Your
job is to show potential clients and customers that being new is far more an
asset than a liability. For example, you could explain to potential clients that
because you are new:
235
• They will get better, more personal service. Because you will have
fewer customers as you begin your business, you will be better able
to give new customers your time and energy.
• You are hungrier and more eager to please than more well-established
companies. New customers will reap the benefits of your desire to
prove yourself, do a great job, and establish your business.
• Because you are new, you will cost less than the competition. (If this
is not true, it should be.)
If you use your noggin, you should see that any perceived liability can be
turned into an asset, because it is just that—a perception. For example, let’s
say that you are a man who wants to open a ballet school. Sure, that is a traditionally
female business. You may stand out like a sore thumb—and that’s just
what you want! The very difference that your business embodies is exactly what
can set it apart, make it distinctive, and really help it to take off. Think smart
and any perceived business shortcoming can be turned to your advantage.
Here’s a famous example: In 1984, Ronald Reagan was running for reelection
against a younger Walter Mondale. At the first of their presidential debates,
Reagan looked and sounded like a doddering old man. The buzz was
that if he didn’t do dramatically better the second time around, he might lose
the election. When it was time for the second debate, everyone was watching
the 72-year-old president closely. Soon after the debate began, Reagan
took the initiative and broached the subject. He acknowledged that age was
an issue in the campaign and then, straightfaced, promised not to “exploit,
for political purposes, my opponent’s youth and inexperience.” With that
quip, Reagan turned his disadvantage into an advantage, the issue never again
came up, and he walked off with the election.
That is what you have to do. If you are able to turn your “liabilities” into
assets, you are halfway to entrepreneurial success.
If you think about it, this form of business jujitsu can be used to handle
almost any problem you face. The basic idea behind jujitsu is to use an opponent’s
own weight and strength against him. By turning the tables on an
opponent—using leverage, balance, and motion—the jujitsu master can overpower
superior opponents. In that sense, one’s problem might become an
opportunity.
In the area of business, this translates into an attitude. Just as a new business
can turn a perceived business disadvantage into an advantage, so too can
almost any business turn a business problem around by endeavoring to see it
236 T H E B U S I N E S S S T A R T – U P K I T
as an opportunity more than an obstacle. But don’t think that I am saying that
all you need is to have a positive mental attitude, because I am not. Rather,
business jujitsu is an attitude that you can adopt to turn almost any business
problem into a unique opportunity.
Here are some examples:
• Let’s say that you can only afford rent in a low-income area. The business
jujitsu master can use this to his advantage by viewing the local
residents as another possible client base or profit center.
• Let’s say that you are a lawyer and the legislature just radically changed
the law in your area of expertise. The business jujitsu master can learn
the new law as quickly as possible and then go teach it to other lawyers,
making even more money than before.
• Let’s say that your main distributor just went out of business. The
business jujitsu master can see this as an opportunity to infuse his
store with some new products.
Business jujitsu is an attitude that you can adopt that will help you through
tough times. Part strategy, part mental trick, part ancient plan of attack, it can
keep you one step ahead.
When Bad Things Happen to Good Companies
Something bad will happen to your business, you can count on it. While
reading books like this can lessen the likelihood and impact of those unfortunate
occurrences, it can prevent them from happening. That is the nature
of life, and of business. You can bet that Microsoft, probably the most successful
company in the last quarter-century, was ill-prepared for a lawsuit by
the Justice Department that accused it of being a monopoly that needs to be
broken up. Similarly,
• Firestone never expected that its tires would disintegrate.
• Tylenol never expected that someone would poison its product,
nearly destroying the brand.
• Cantor Fitzgerald never could have anticipated that it would lose twothirds
of its 1,000 employees in the World Trade Center attack.
• Pets.com and Webvan didn’t expect the dot-com bubble to burst as
quickly as it did, putting such well-funded start-ups as these out of
business.
1 9 / B u s i n e s s J u j i t s u 237
So something bad is going to happen; that is not the question. The question
is: What are you going to do when it does? Business jujitsu allows you to
turn it around so that you are not overwhelmed by it and you see the possibility
in it.
The first thing you can do is to be prepared, to the extent possible. You
can never know what will be coming down the pike, but the more you know
about business and the more you learn, the better prepared you will be when
the time comes to handle a problem.
The first thing you can do to prepare your business to handle the inevitable
challenge is to read more, take classes, go to seminars, listen to business
tapes, and otherwise continue your business education. Knowledge is a
very useful and valuable asset to lean on when problems arise.
A business crisis can take many forms, including:
• Financial (losing customers, theft, a money crunch)
• Violence (terrorism, war, armed robbery)
• Accidents (customers, the public, or employees get injured)
238 T H E B U S I N E S S S T A R T – U P K I T
■ Real Life Example
In El Segundo, California, Marium Industries (name changed to protect privacy)
was rocked when a colleague was shot and killed by his wife while he
was at work. That the man was much loved and admired in the company
made the situation that much worse. “The first thing you must do is ensure
the physical safety of your employees. After that, you must look after their
emotional well-being. Business must come last,” said Hunter Marium, president
of of the company.
Marium took the lead as the crisis unfolded, and then helped comfort
those traumatized by the incident. He brought in grief counselors, gave
people extra time off, and patiently prodded the business back toward normalcy
after it was all over.
Mr. Marium’s role illustrates that in a time of crisis a business leader
must lead. Says Marium, “A crisis is not the time to retreat behind the office
door, but rather, the time to be most visible. You must be strong and empathetic.
You must communicate clearly and without fear.”
• Products (bad lots, recalls, negative publicity)
• Natural (earthquakes, floods, tornadoes)
Kim Polese was the chairman of Marimba, a software company that had
a Manhattan office near the World Trade Center, on September 11, 2001. She
was in New York that day about to attend a meeting at the World Trade Center
when the attacks came. She never expected that her business crisis would
take that form. What Polese discovered was that a business in crisis requires
that the president or CEO be strong and available. “The role of the CEO is really
being a rock, a source of emotional stability,” Polese said.
When a business leader is faced with a crisis, the lessons are clear: Be
empathetic, be strong, care for your people, and tell the truth. After that, the
best thing you can do is to get everything back to normal as soon as possible.
What people want in a time of crisis is some familiarity—a feeling that things
can be regular again. You are the one who can lead them there.
1 9 / B u s i n e s s J u j i t s u 239
■ Handling the Media During a Crisis
• Get a spokesman out there quickly to get out your side of the story.
• Set up a central command post.
• Be honest, credible, forthcoming, direct, and sympathetic.
• Remain calm and courteous.
• Use your Web site to release information.
• Don’t speak in jargon; use plain English.
• Avoid saying “No comment.”
• Do not speculate. Stick to the facts.
• Avoid discussing fault.
• The media loves a crisis. Resolve it as quickly as possible and let
them move on to something else.
Avoiding Common Mistakes
Beyond those moments of crisis, if you are going to survive and be a
long-term business success then you need to be aware of the most common
mistakes and pitfalls that can ruin the best-laid plans. Business jujitsu requires
preparation. The following are potential problems of which to be aware.
Insufficient start-up capital. This is a real killer. You can have the best
plan in the world, but if you don’t have enough money to get it off the ground
and survive for those first few scary months, you are wasting your time and
money. Don’t start a company if you cannot come up with more capital than
you think you’ll need—at least enough money to cover the first year, and
preferably the second year as well.
Going first class from the start. This is the opposite of the insufficient
funds crisis. Until you know what you are doing and until you know how to
turn a consistent profit, you need to conserve your funds, no matter how
much money you have to start. Dropping $20,000 on an office remodel, new
furniture, and a top-of-the-line computer is a prescription for failure. It is analogous
to throwing a graduation party for yourself in the first semester of your
freshman year. Smart entrepreneurs part with their capital only when they
are convinced it will make a real difference.
Failure to analyze the business objectively. Failure to do adequate market
research, including getting out into the marketplace and talking to potential
customers, is an easily avoidable mistake. You must decide whether
there really is a market for your business. Many entrepreneurs have failed because
their projections were far too rosy and not grounded in reality. Being
optimistic is great, but not at the expense of sound business judgment.
Litigation imbroglio. Lawsuits are legalized war. And they are a danger to
the financial well-being of your new start-up. Prosecuting a suit can cost a fortune,
as can getting hit with a judgment. Either way, you lose. Justice is all too
often not realized. The vast majority of the time, entrepreneurs would be better
served by biting their tongues, settling out of court, and getting on with
building their businesses.
240 T H E B U S I N E S S S T A R T – U P K I T
TEAMFLY
Not giving the customer a reason to change. I’ve said it before, but it
bears repeating: You have to give your potential buyers a great reason to consider
purchasing your product—better prices, better service, something that
distinguishes you. If the buyer has no reason to switch to you, he or she probably
won’t.
Betting the ranch. As has been stated time and again throughout this book,
great entrepreneurs are not big risk takers, they are calculated risk takers.
Never risk it all on one venture.
1 9 / B u s i n e s s J u j i t s u 241
■ Real Life Example
In the 1980s, Coca-Cola was having some serious problems, despite being
one of the biggest, most recognized, companies in the world. At the time,
its biggest rival, Pepsi, had begun touting the Pepsi Challenge—a head-tohead
taste test whereby cola drinkers were asked to compare the tastes of
the two colas. Of course, the television ads always showed Pepsi winning
the taste test, but even more troubling to Coca-Cola was that the test results
were real. In blind taste tests in the lab, consumers thought Pepsi
tested better than Coke. Coke was losing market share, and the company
was scared.
So, in what may be the dumbest decision in the history of dumb
business decisions, Coca-Cola decided to mess with the greatest brand in
history and create what would become an unmitigated disaster, New Coke.
Changing the taste of Coke was a radical idea. They might as well have
banned moms and outlawed apple pie while they were at it. Nevertheless,
on April 23, 1985, New Coke was released to a great deal of fanfare. The reaction
to New Coke was swift and strong. People hated it. The Coca-Cola
Company suddenly became something of a national joke.
How did this happen? Coca-Cola failed in the most basic business
fundamental—it didn’t analyze the business properly. Amazingly, Coca-
Cola did no test marketing; it never actually tried out the new formula in a
few cities to see how people would react to it. Even worse, it never explained
to people that liking New Coke meant that there would be no old
Coke. A big mistake and a waste of its $4 million worth of research.
Avoid the Cash Crunch
Nothing can diminish your enthusiasm for business more than a cash
crunch. Being short on funds when the mortgage is due or when a supplier
is supposed to be paid is the secret sad downside to being an entrepreneur.
Not only can a shortage of funds hurt your business and your reputation, but
it can wreak havoc on your marriage and family. If you want to retain your
sanity, protect your significant other, and keep the dream alive, you must beware
the cash crunch.
Usually, a cash shortage is the result of poor planning. In the beginning
of your venture, you cannot be faulted for not knowing when money will
come in the door, but as you proceed there should be no excuse for not planning
accordingly. You must know your business cycle and when money is
supposed to come in the door, and budget for that. Having a cash reserve in
the bank for the proverbial rainy day makes good business sense.
If you find that you consistently run short of funds, then it is time to do
something fundamentally new. Essentially, your options include:
• Give yourself a raise. Successful entrepreneurs respect themselves
and charge a fair price for their services. Because you are your own
boss, you set the prices. Although you should be concerned that you
will drive away clients if you do charge more than you have been, it
is still worth a shot. If your fears are valid, you can always lower your
prices again; but if your fears are ungrounded, you will be giving yourself
a well-deserved raise and thus eliminate the cash crunch.
• Receive your receivables. When you allow someone to buy your product
“net 30” (that is, payable 30 days after the purchase), you are essentially
lending that person money. Permitting these people extra
time beyond 30 days to pay for a purchase is a commonplace, yet easily
correctable, mistake. Would your bank allow you an extra 60 days
to pay your loan? Of course not. Your business should be run the
same way. Always remember that receivables are the lifeblood of your
business, representing your business’s cash flow and liquidity. Getting
your receivables current, therefore, can bring in immediate cash.
• Get a loan. Sometimes business owners just need a short-term infusion
of cash to get things moving again or maybe a long-term note or
a line of credit might help.
242 T H E B U S I N E S S S T A R T – U P K I T
Good businesses, long-term success stories, are not beset by consist needs
for large cash infusions. You want to run your business the same way. Plan appropriately,
budget accordingly, pay your creditors and suppliers on time,
build a good business credit rating, and you will avoid the cash crunch dilemma
and build a solid business.
Succeeding in Business during Tough Times
When times get tough, what do you do? The best recourse is to remember
what has worked best for you and fall back on that. The business jujitsu
master knows his strengths and weaknesses. When weak, it is not the time to
attack. Rather, it is the time to fall back and concentrate on that which you
do best. Succeeding in business, even in uncertain times, is possible if you follow
some of these tips.
Use your best recipe. After some trial and error, successful businesses figure
out what works. After that happens, they do the same thing over and over
again. It could be an ad that works, a sale that brings in customers, or a monthly
seminar. Whatever it is, it is a “recipe” for success. You make your business
dough by utilizing a successful business recipe. Repeating a successful formula
is the hallmark of any well-run business, and it is what you should do in
tough times.
Advertise, advertise, advertise. Advertising is one of the most important
things a small business can do. All too often when times get tight, the advertising
budget is the first thing slashed. That is a big mistake. Various entrepreneurs
through the years have said that when hit with a cash crunch, they
refused to scale back. In fact, they opine that the best way out of a tough time
is to expand business, not contract it, and advertising is a big part of that.
Play good defense. Entrepreneurs like to play offense. They like to come
up with new ideas and implement them. That’s great, but if you don’t have a
good defensive scheme in place, it’s easy to get blindsided. Good defense is a
twofold process. First, it means having structures in place to protect you,
most notably, insurance and incorporation. The second part of playing good
defense is to avoid stupid mistakes.
1 9 / B u s i n e s s J u j i t s u 243
Try, try again. The path of the small businessperson is not always an
easy one. Growing a business often takes trial and error, followed by a few
mistakes, a couple of bonehead moves, and then, maybe, a home run.
Get Advice
Business jujitsu works when you have a problem to overcome. But what
if you just need a friendly ear; someone off of which to bounce some new
ideas? As you go about setting up and running your business, you will likely
find that you need advice about all sorts of various and sundry matters.
Where do you get it, especially if you have set up the business without a partner?
The answer is from a board of advisors. A board of advisors is an independent
group whose purpose is to give you ideas and feedback about your
business. Board members can be business associates, colleagues, customers—
anyone whose advice you will trust. Having people around who can give you
a different perspective can be invaluable.
When looking for board members, you will want people:
• Who are strong. You don’t want a rubber stamp. The whole purpose
of a board of advisors is to give you a second (and third!) opinion. Getting
some honest feedback can only help your business.
• Who have different skills. Even the best entrepreneurs only have some
of the skills necessary to run a great business. Having board members
who complement your skills can create a positive, synergistic effect.
Similarly, having board members with skills and backgrounds different
from one another can give your board an even broader base.
• Who are experienced. It is not uncommon when looking for outside
funding that potential investors and bankers will call your board of advisors.
When they do, it is far better if they find some experienced
businesspeople and not your best friend from high school.
244 T H E B U S I N E S S S T A R T – U P K I T
Board members are often compensated for their time, either with money
or stock, although some are willing to assist for free. Those folks do it because
they welcome the chance to be involved in a start-up. Sharing what
they know and watching the company grow is pay in itself.
Another good thing about creating a board is that it can help you build
credibility in the business world. A strong board full of professionals and businesspeople
indicates that you have contacts and can take criticism.
The Work-Life Balancing Act
Finally, business jujitsu requires balance. It is very easy for new businesspeople
to become consumed by work. Even though you might think your
new business is all you can concentrate on right now, it is also important to
remember that, however trite it might sound, there is more to life than business.
Losing your balance can lead to burnout, marital problems, health problems,
and business setbacks. If you don’t strike a balance, you may come to
resent your business.
What is a balanced life, exactly? There are probably as many definitions
as there are people, but a simple way to look at it is to imagine your life as a
pie chart cut into six equal pieces. The six slices represent the following:
1. Your new business. You already understand the importance of this
slice of the pie.
2. Your family and friends. It is imperative that you spend enough time
with your loved ones.
3. Leisure time. Balance means that you take time out to go to the
movies, watch a game, hang out, play with the kids, or otherwise do
those things that are fun for you.
4. Physical and mental health. It is easy when you are in business for
yourself to be so stressed about time that you let your exercise routine
and eating habits falter. But one reason you go into business for
yourself is that it frees you up to do what you want. This is one of
those places where you should take advantage of that freedom.
5. Personal enrichment. You need to take classes, read a book, learn
something new, listen to music, go to a concert or play, and stay involved.
Business becomes a burden when it is the only thing in your life.
6. Spirituality and religion. Go to church or synagogue, meditate, take
a walk—however you connect, keep with it.
Each one of these six areas need to be fulfilled if you want to have a life
that is fulfilling. There is little point in creating a great business if you end up
being married to it 24/7. If you can figure out in which areas you are lacking,
you can start to rebalance your life. The important thing is to take the time to
1 9 / B u s i n e s s J u j i t s u 245
reflect on what is important to you. It is usually not until something is out of
balance that it actually comes to our attention.
Resources You Can Use
The Essential Guide to Managing Corporate Crises: A Step-by-Step Handbook for
Surviving Major Catastrophes
by Ian I. Mitroff (Oxford University Press, 1996).
Harvard Business Review on Crisis Management
(Harvard Business School, 2000).
Kauffman Center for Entrepreneurial Leadership
Ewing Marion Kauffman Foundation
816-932-1000
4801 Rockhill Road
Kansas City, MO 64110
<www.entreworld.org>
The United States Ju-Jitsu Federation
<www.usjujitsu.net>
You’d Better Have a Hose If You Want to Put Out the Fire: The Complete Guide to
Crisis and Risk Communications
by Rene A. Henry (Gollywobbler Productions, 2001).
246 T H E B U S I N E S S S T A R T – U P K I T
T H E B O T T O M L I N E
Knowing what may lie ahead may also help you prevent it.
Business jujitsu requires that you take the challenges (and potential
crises) that might come your way and turn them into your advantage.
Be balanced, flexible, and positive. Turn it around. The more
you try business jujitsu, the easier it will become. That way, when
you really need it, your skills are honed and ready for action.
C H A P T E R
20
· Business Success Secrets
At my Web site <www.MrAllBiz.com>, there is a free newsletter that we
send out every other week called Small Business Success Secrets! In it, entrepreneurs
like you share what they believe to be their best ideas for succeeding
in business. Many of those ideas have been interspersed throughout this
book. But unlike Einstein’s elegant theory, E=mc2, it is impossible to create a
grand theory of business success because it depends on many unquantifiable
variables. What follows are some of the most important.
Create a Winning Recipe
After some trial and error in your business, you will figure out what
works best. Once that happens, you will want to do the same thing over and
over again. This is your recipe for success. Just like a food recipe, a business
recipe can be followed time and again to achieve the same result. In fact,
some believe that that’s why money is called dough; you make your dough by
using a recipe. In your business, your business dough recipe could be:
• An ad that works
• A monthly mailer
• A sale that brings in customers
• A monthly seminar
• A stall at the Saturday public market
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• A billboard
• Great locations
• Almost anything that works and can be duplicated
If you think about it, repeating a successful formula is the hallmark of
any well-run business. Budweiser sponsors sporting events because it knows
that it will sell more beer if it does. Sponsoring sporting events is a tried and
true business recipe. It works time and time again. Microsoft too has a recipe.
We might call it “tweak and put out a new edition of Windows every few
years.” Microsoft knows that if it does so, it will be able to predictably count
on those sales. Hollywood does the same thing. Whereas no one knows for
sure what movie people will like, Hollywood knows that it reduces the risk
of failure if, for example, Tom Cruise or Julia Roberts stars in it. Getting a big
name to star in a movie is a business recipe.
If your business is going to be a long-term success, you will need to do
the same thing. What will your recipe be? You need to experiment and figure
out what works best. After you do, long-term success will be much more
likely if you reduce that thing, whatever it is, to a formula that you can repeat
over and over again.
In his great book The E-Myth: Why Most Small Businesses Don’t Work
and What to Do About It, author Michael Gerber explains that many people
go into business because they love something and want to make a living at it,
a baker who loves to bake, for example. Gerber makes clear that what trips up
the baker is that, while what he wants is to bake, being a business owner
248 T H E B U S I N E S S S T A R T – U P K I T
■ Creating a Winning Recipe
1. Experiment. Try several different ways to bring in business and
quantifiably measure the success of each.
2. Which one can be reduced to a tried-and-true formula? Pick that
one and write down the recipe.
3. Try the recipe to see if the results are consistent.
4. If so, stick with it; if not, go back to Step 1.
demands that he be an entrepreneur, which many bakers are not. Gerber’s solution
is to have the business owner, to the extent possible, create an efficient
system that allows the business to run without him, much as McDonald’s is
run. This allows the baker to concentrate on what he loves best, rather than
what he does worst.
Creating a winning recipe is an extension of this philosophy. Finding
and creating a business success formula, the essence of your recipe, reduces
your risk, makes the business far more predictable, allows you to concentrate
on finding new recipes, frees you up to do what you love, and altogether
makes being an entrepreneur a more fun, less scary, endeavor.
Create Multiple Profit Centers
The problem for most small businesses is that they learn one good
recipe, stick with it, run it into the ground, and never bother to figure out another
one. The owner has learned only one method of making a buck. The
problem with having just a single moneymaking formula is that it will inevitably
be hit when the dreaded business cycle turns south.
Just like the economy, all businesses have a business cycle. The ice
cream store sees sales spike in the summer and drop in the winter. Starbucks
sees sales rise in the winter and drop in the summer. While experience will
teach you, often the hard way, what your business cycle is, you can learn it
much easier by speaking with people in your own line of work who have
been around for a while.
Once you know what your business cycle is, either through research or
the school of hard knocks, you will want to minimize its effects on your business.
One of the best ways to do that is to create multiple profit centers, a
term coined by Barbara Winter in her book, Making a Living Without a Job.
The theory is essentially this: To succeed long-term in business, you need
several recipes. You need to diversify your income.
A smart stock investor does just that. He knows not to buy just one
stock. That stock may go up, but it may go down. Having more than one stock
ensures that when one stock does go down, the likelihood of taking a big financial
hit is remote. His income is diversified. Your business must diversify
as well if you are going to last.
Your new profit center could either be another “division” of your business
or simply a new product:
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• Amazon.com took the new division route. Amazon.com began by selling
books online. Now it sells everything. Why? When one of its businesses
is slow, it is unlikely that another will be as well. Instead of the
business suffering a cash crunch, the money continues to roll in.
• Starbucks introduced new products. Knowing that its business
slumped in the summer, Starbucks began to sell slushy-type iced coffee
drinks. That’s a different profit center than hot coffee and reduces
the impact of the company’s seasonal business cycle.
A lawyer may want to add a divorce practice to her wills and estates practice.
A car rental agency might want to sell cars in addition to renting them.
A photographer can add portraits to his wedding portfolio. The important
250 T H E B U S I N E S S S T A R T – U P K I T
✎Creating Multiple Profit Centers
1. What is your main profit center?
2. Name ten possible offshoots from that profit center that you could start:
3. Reduce that list to the five most likely successes:
4. Which of those would be the easiest to start?
5. Implement the best idea and then go on to the next. Create several recipes, several profit
centers.
TEAMFLY
thing is that you create several recipes so that you have a few different ways
to bring in money.
Give Them What They Want
“Ask them what they want and then give them what they want” is a philosophy
mentioned earlier that bears repeating. Think about the best businesses
around—those businesses that provide a great service, where people want to
work, and that make money for the owners, investors, and employees—and
you will find one thing they share: They serve the market.
A business that does not fulfill a market need is a business that will not
succeed. Whether yours is a small mom-and-pop operation or a large company
with many employees, the lesson is the same. You must know to whom
you are selling and what it is they want. Finding that out can be as simple as
chatting with the people who come in your store or as complicated as hiring
a market research firm to survey potential customers. Whatever your method,
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■ Real Life Example
Of a