The Entrepreneurial Mind

The National Dialogue on Entrepreneurship highlights several programs that are having success in supporting rural entrepreneurial economic development.

For example, in Monroe, LA, Renewal, Inc., is operating a successful microenterprise program that trains new minority and women business owners. In West Virginia, the Conservation Fund is investing in businesses that utilize local natural resources in a sustainable and ecologically-sound manner. In Michigan, the Land Use Institute operates programs that link farmers to restaurants and food stores that are promoting "buy local" campaigns. All of these examples highlight innovative and effective means to link enterprise development, sustainability, and rural community revitalization.

All of these programs are featured in the latest issue of Routes of Change, an e-newsletter published by the W.K. Kellogg Foundation.

Posted by Jeff Cornwall at 09:27 AM | Permalink

Accurate revenue forecasting is one of the single most important steps an entrepreneur takes in planning for a new venture. And yet, we find that most entrepreneurs do not spend enough time determining how much revenue will come in their front doors. Although underestimating expenses is a common mistake in business planning, missing the mark on revenues can be catastrophic.

If sales fall way short of expectations, the business can fail due to lack of adequate cash flow. And if sales wildly exceed expectations, the business is not prepared for demand and customers will abandon the new start-up due to inability to meet their needs with products or services in a timely manner.

Some estimates indicate that entrepreneurs spend only about 20% of their time forecasting on revenues and 80% of their time on expenses, when they should spend most of their time trying to gain an accurate forecast of revenues.

Specifically accurate revenue forecasting is important for a number of critical reasons:

- Bank financing and equity investment are based in part of these forecasts. If the entrepreneurs misses the mark and as a result needs more cash than they first thought, this will cause a significant loss of confidence on the part of the banker or investor.

- Inventory assumptions are based on this forecast. Inaccurate revenue assumptions can lead to either too much or too little inventory. Both are potentially fatal errors for a start-up.

- Staffing decisions are also made in anticipation of future sales. If the forecasts are wrong, the business is either over or under staffed.

- Revenue forecasts will determine how much space is needed for the business. Again, too much or too little space are both detrimental to the new venture.

Revenue forecasting can be overwhelming for the entrepreneur. Some say they feel like they are looking into a crystal ball, and it is too cloudy to see the future. So rather than do the work to improve these forecasts, entrepreneurs take short-cuts. They simply plug in numbers into revenues that have no real basis in fact. Often they put in numbers that seem to give them the profits they hope to achieve. Expenses are easier to estimate as we can do fairly simple research to get these numbers. So we spend time getting good expense forecasts and then plug in revenues that make things look right.

There is a time tested approach to revenue forecasting that can significantly improve the odds that they will be more accurate. Revenues are a simply formula:

Revenues = Price X Number of Units Sold

A well developed marketing plan should be able to give you these numbers. Pricing is one of the questions that are answered in the marketing plan, so that will give you half the equation. Knowing what our customers want, how many customers we can likely expect, and how much of what we have to sell they will want will tell us the rest. That is why a good plan helps us to "Think Like the Customer." If we know how the customer thinks, that helps us determine how to position our product.

Knowing more about the overall market, including size and competition, can help us to begin to estimate demand. The promotion plan will tell us how we will reach these customers to tell them about our new business.

Experts on reading business plans, such as investors and bankers, usually do not read a business plan in the order it is written. They will often read the marketing plan and then go back to the revenue forecast to see if it numerically represents what is said in words in the marketing plan. That is the backbone of any good business plan. If the revenue forecast does not make sense based on the marketing plan, the investor or banker will usually read no further.

Posted by Jeff Cornwall at 06:34 AM | Permalink | TrackBacks (1)

COTC is at Phosita this week.

Posted by Jeff Cornwall at 11:08 AM | Permalink

Tim Faley from the University of Michigan offers his picks for the best books for new entrepreneurs at StartupJournal:

Crossing the Chasm, by Geoffery A. Moore

I have not read this book, but have heard it recommended by others. It is written from a marketing perspective.

e-Boys: The First Inside Account of Venture Capitalists at Work, by Randall E. Stross

I would not recommend this one. It is dated and for almost all new entrepreneurs venture capital is not going to be an issue anyway.

Instinct: Tapping Your Entrepreneurial DNA to Achieve Business Goals, by Thomas L. Harrison with Mary H. Frakes

Kind of a fun book, but not a must read on my list.

The World is Flat: A Brief History of the Twenty-First Century, by Thomas L. Friedman

I strongly agree with this recommendation! It really helps you understand opportunity recognition from a unique perspective, and helps get you focused on dynamic change in the market.

Innovation and Entrepreneurship, by Peter F. Drucker

Read it. Read it again. And read it one more time. Calling this a classic does not do it justice. Even though is was written over twenty years ago it is still at the cutting edge.

The Art of the Start: Time-Tested, Battle-Hardened Guide for Anyone Starting Anything, by Guy Kawasaki

Some good insights, but again this one is too focused on the venture capital experience, which is a rare path for entrepreneurs to take. I find that too many entrepreneurs read books like this one and the eBoys tend to get entrepreneurs off track in their thinking. Entrepreneurship is not just about raising money and doing a quick exit. I like books like Drucker's that focus on building sustainable businesses. I like his web site better.

A few that he missed that I think should be on your shelf:

Growing Pains, by Flamholtz and Randel

Helps you think about and get ready for growth. It will come sooner than you think, and growth is what kills most businesses.

The E-Myth books by Gerber.

Some good advice from a small business perspective.

You Have to Be a Little Crazy, by Moltz.

Not as well known as some of the others, but a great read.

Posted by Jeff Cornwall at 07:57 AM | Permalink

Got the itch to be an entrepreneur, but haven't found the right idea? Ben Cunningham passed along a great website that offers a huge list of creativity techniques that might help stir up some great ideas for you to assess as business opportunities.

Posted by Jeff Cornwall at 11:15 AM | Permalink

A new approach using entrepreneurship to fight social problems is beginning to find success in Africa.

The effort is being led by Ian MacMillan and John Thompson of the Wharton School at the University of Pennsylvania:

"The basic thesis is that many social problems, if looked at through an entrepreneurial lens, create opportunities to launch a business that generates profits by alleviating the initial problem," says MacMillan. "In essence, it is a shift in activity from the public domain (governments and non-governmental organizations) to the private domain (businesses and private individuals). This sets in motion a virtuous cycle: The entrepreneur is incented to generate more profits and by doing so, solves more problems."

..."What we are arguing is that this is another dimension of socially oriented work and philanthropy that can have significant impact with relatively low levels of funding support. For people who understand true entrepreneurship, it resonates. They get the business angle" and they understand that profits are accompanied by "doing social good."

Initiatives include projects to deal with disease management issues associated with the HIV/AIDS crisis and with the health care system. The projects are initially focusing on Botswana.

Posted by Jeff Cornwall at 11:02 AM | Permalink

There are many really good business opportunities that never make it past paper. Would-be entrepreneurs agonize over every detail of their plan to the point that it never gets off the ground, or they miss their window of opportunity.

One of the virtues that Mike Naughton and I are writing about in our new book The Good Entrepreneur is prudence, which entails being good stewards of the resources we have at our disposal. Entrepreneurs who agonize over getting started are often concerned with being good stewards of their own resources they plan to put into their business and of the resources they will get from friends, family, other investors, and creditors.

But there are two critical errors that one can make when looking at how the entrepreneur manages their resources. One error is being careless, reckless and wasteful with resources. In this case the entrepreneur spends money without thought often on things that will do little to create sales and grow the business. For example, they lease expensive space or build huge and opulent buildings, they pay themselves huge salaries, or they hire more staff all that the business cannot support. They burn the investment on things that will not create a sustainable business within the time that their seed resources will carry them.

However, another error is to not ever put those resources to use. It is like the parable in the Bible of the man who buried the money that was entrusted to him, never putting it to use.

StartupJournal has a case study of Gary Doan and his innovative design for a network router that illustrates this error.

He proudly showed it off at trade shows and to industry reps. Amid the late 1990s tech craze, he raised some $19 million from investors over a couple of years. "We got feedback from all sorts of places, what it should look like and how it should be different," he recalls. His 70 engineers on staff continued to refine it with every new review. "It most definitely took too long to get out the door."

I tell entrepreneurs that they often have to be comfortable with a plan that is 80-90% ready. The time it takes to perfect the plan is often time that will keep them from ever getting their business started. Here are some things to keep in mind if you are having trouble "pulling the trigger" to launch your business:

- Your business will most likely not look anything like your plan within six to twelve months. Your plan is a living document, not a blueprint that prescribes every step in detail for the entire life of your new venture. You will learn with each step along the way and that learning should inform and shape your planning as you go.

- You are most likely entering a dynamic market. That is usually what creates the opportunity you are pursuing in the first place. Be ready for what Peter Vaill call the permanent whitewater that you are about to enter. The assumptions you make today in your plan will likely look very different in a few months as your market evolves.

- You can never eliminate all risk and uncertainty, no matter how long you plan. That is part of the game. There will be surprises around every turn. Your success will be determined in how flexible and nimble you are in adjusting to all of these surprises. You cannot plan it all away no matter how hard you try. Entrepreneurship will always have some risk. Plan for as much as you can, and then forge ahead.

Posted by Jeff Cornwall at 06:57 AM | Permalink | TrackBacks (3)

A new strategy has emerged in the battle against the Kelo decision: the free market.

From Market Watch:

BB&T Corp. said Wednesday that it would not lend to developers that plan to build on land seized under eminent domain, calling such projects "plain wrong."

"The idea that a citizen's property can be taken by the government solely for private use is extremely misguided [and] in fact it's just plain wrong," said BB&T Chairman and Chief Executive Officer John Allison, according to a company statement. BB&T won't lend to projects that intend to deprive citizens of their property, he said.

Call your banker and ask him what your bank is planning to do to help preserve property rights. If you are currently looking for a new bank, ask each one you talk with about what there position is on lending to projects on seized property. Even if they don't think it is just "plain wrong" I promise you they listen to the market.

Hats off to BB&T.

Posted by Jeff Cornwall at 05:06 AM | Permalink

We know from the surveys of entrepreneurs and the e-mails and comments that I get here at this site that small business owners have strong opinions about issues such as health insurance, eminent domain, regulatory flexibility, and taxes. The NFIB has a way for you to be heard in Washington. They have a feature called the "Action Center" that is toward the right hand side of their home page (it is in red, so you can't miss it). It is any easy way for you to voice your opinion. You just enter your Zip Code and away you go.

Posted by Jeff Cornwall at 06:04 AM | Permalink

Jason offers his thoughts on my post from Monday about success at A Thought Over Coffee.

Posted by Jeff Cornwall at 07:50 AM | Permalink

While the initial reaction to the Supreme Court's Kelo decision (which broadened the scope and power of governments to invoke eminent domain) seemed to be overwhelmingly negative, proponents of eminent domain are starting to fight back.

For example, in Indiana there is momentum building to fight legislation that would restrict the use of eminent domain to its original intended uses, such as roads, military bases, hospitals and utilities. Indystar.com ran an editorial that argues for much broader parameters:

Responsible Indiana cities and towns historically have and will continue to judiciously balance the rights of private property owners with the interests of the entire community.

What that means it that your home or your small business are not as important to the "interests of the entire community" as let's say a new manufacturing facility, office park, or luxury condos. After all, they will give the local politicians more tax money to spend. What's wrong with stepping on private property rights if it is in the best interests of large corporations, developers and politicians?

There are similar push-backs or attempts to forge ahead with broader use of eminent domain in states such as Oregon, Alabama, North Carolina, California, Pennsylvania and Colorado.

In Iowa, the argument being made is as follows:

But to strip local governments of the power of eminent domain because they might eventually abuse it seems unnecessarily harsh. Talking about it should be warning enough for them to stay on course : Use eminent domain wisely and sparingly, or lose the power altogether.

That's right: "trust us, we're from government and we're here to help you."

While there are many important victories to save private property rights in the wake of Kelo, the war is not yet won. And while public attention moves on to other issues, we may even begin to see some of these victories taken away when we are no longer paying attention.

Posted by Jeff Cornwall at 06:07 AM | Permalink

Guy Kawasaki has a great post on "the dance" that goes on between entrepreneurs and VCs and venture capital forums and new product demos.

...entrepreneurs acting like they don't need capital, and VCs acting like they don't need entrepreneurs. (This dance is akin to acting prudish in a brothel, but I digress...)

He offers eleven great tips on what it takes to get the VC's attention at such an event. You only have a few minutes, so it is critical to make the most of it. It is worth a read for anyone raising money, hiring employees into a start-up, or trying to make a sale.

(Thanks to Bruce Schierstedt for passing this along).

Posted by Jeff Cornwall at 05:45 AM | Permalink

Even with all that Katrina victims have been through since the hurricane, they now are facing new challenges thanks to the IRS:

The deadline for filing federal income taxes is three months away, but...filers (effected by Katrina) are already preparing for what could be the most complicated tax return they'll ever file.

Thanks to Katrina, they're sorting through tax issues involving everything from deductions on property losses to gains achieved through insurance settlements....Holly Sharp, an accountant and financial planner with Laporte Sehrt Romig and Hand in Metairie, said clients can expect the cost of tax returns to double or triple....

Yet one more reason to start over with our federal tax policy and get rid of the current code.

(Source: Newhouse New Service).

Posted by Jeff Cornwall at 05:11 AM | Permalink

COTC is over at Patent Baristas this week.

Posted by Jeff Cornwall at 01:26 PM | Permalink

It is often assumed by the uninformed that the only reason for becoming an entrepreneur is to make a lot of money. While making money is clearly a fundamental goal for entrepreneurs, profit is not the only metric they use to measure their success. Just ask any entrepreneur how their business is going and you will begin to see the richness of how they measure their successes.

For some entrepreneurs, success is measured by the jobs they create. When I was asked about our business, the number of employees we had grown to was always at least part of my answer. My partners and I took pride in creating good jobs in an industry that was not always kind to its workers.

For others success is measured by the satisfaction of their customers. A famous local coffee shop owner here in Nashville, known as "Bongo Bob," takes great pride in creating coffee shops that have a sense of community for his customers. The number of "regulars" who come into his stores indicates to him that he is doing well in his business.

Reell Precision Manufacturing, located up in Minne-so-cold, measures success in terms of creating "an environment that fosters human development and provides for the common good". Their policies reflect this commitment and they find ways to asses whether they are reaching this goal.

Clearly financial success is fundamentally important for all entrepreneurs. We need to make a living and most want to create wealth. But, profits can be viewed as a natural outcome of pursuing what each of these entrepreneurs view as their real success.

Posted by Jeff Cornwall at 07:47 AM | Permalink

The Supreme Court may soon be getting into the debate over what constitutes a small business in the US as they decide a case that is before them this term.

From Inc.com:

The case, which was heard on Jan. 11, may not only have an immediate impact on small employers currently mired in lower-court battles, but could also help define small-business employment for more than half a dozen federal statutes -- including the Americans With Disabilities Act and the Family and Medical Leave Act.

Posted by Jeff Cornwall at 04:56 AM | Permalink

I wrote the other day about the importance of having a clear and compelling vision. Part of that vision should spell out the values and principles that will guide your business and define its culture. However, too often we see entrepreneurs who are long on rhetoric about their values, but fall short when it comes to putting those values into action day-to-day in how they run their business.

Our values should drive our specific actions toward each of these stakeholders:

- Toward partners, investors, family members

- Toward those who provide debt financing

- Toward employees

- Toward customers

- Toward vendors and other resource providers

- Toward competitors and industry

- Toward the community and society

You need to commit to specific actions and policies for each principle and stakeholder that are important to you based on your values.

For example, it is not enough to say that we are going to be open and honest. We should develop specific policies on who we are going to provide information, how much we will provide, and in what form we will provide it. We cannot realistically be open and honest about every aspect of the business to anyone and everyone. There is some information that employees just do not need to know and should not know. So define what this value really means and how you will put it into operation in your business.

As another example, saying you value your employees and want to create a family atmosphere in your business is a lofty principle. How are you going to bring this to life in your business each and every day is the challenge. You need to commit to specific actions and policies or the odds are that this principle will remain words on paper.

Posted by Jeff Cornwall at 05:28 AM | Permalink

"How do I make the leap from my current job to the business I want to start? I can't afford to just quit working, and my new business will take several months to make a profit."

I hear this type of question quite often. For many entrepreneurs the transition from their current job to their new business becomes a real challenge. For some start-ups, there is no option beyond a clean break. The entrepreneur, for a variety of reasons, cannot keep her current job while starting up the new business.

However, for others, it can be possible to straddle the worlds of employment and entrepreneurship long enough to make the financial pressures more manageable. StartupJournal has a profile of an entrepreneur who was able to make a relatively smooth transition.

Posted by Jeff Cornwall at 09:42 AM | Permalink

Entrepreneurs are told time and time again about the importance of having a clear and compelling vision for their business. But, what exactly goes into a vision and how should it be used?

An entrepreneur's vision should include three main elements. First, the vision includes a mission statement, which should (in 25 words or less) define the product/service the business produces, the market for which it is produced and any specific and unique aspects of the business that will give it a competitive advantage (such as technology, customer orientation and so forth). This should become your quick answer to the question, "Tell me about your business."

Second, the vision goes beyond the more objective description in the statement of mission to include the core values and principles that the entrepreneur intends to use to guide the business. It is through the pursuit of the new venture within the entrepreneur's moral framework that he begins to address the purpose of his work. More specifically, this can be shaped by the opportunities he pursues, the people with whom he chooses to do business, whom he hires, decisions he makes about products and markets, decisions about whether and how fast to grow, the corporate culture he builds and his engagement with the community as a leader and/or citizen. Each action we take shapes our character. These actions become habits -- good or bad. The moral principles we bring to our business will become the seeds of the shared culture the business will have as it grows.

Finally, the vision also incorporates the entrepreneur's aspirations of what outcomes are hoped for from the venture. An entrepreneur's definition of success can go well beyond profit maximization to include a whole range of other factors, including employment in the community, ability to create balance with family responsibilities, bringing a needed service or product to the market, or creating a certain work environment for employees that is not available in other businesses.

Initially a clear and compelling vision is critical to keep you focused. We often get tempted to pursue more opportunities than we can effectively handle. It is also an essential part of attracting employees, investors, suppliers and customers.

As your business grows, your vision becomes a compass to guide decision making both from a strategic and from an ethical perspective. It helps create order and meaning out of the chaos that so often part of a growing venture.

Posted by Jeff Cornwall at 05:29 AM | Permalink

A group of VCs recently gave Red Herring their top tech trends for 2006. This is interesting to note as it shows where they are planning to invest their funds.

1. More investment in green startups

2. Voice becomes free within data networks

3. Electronic technology changes from a growth engine to a commodity

4. China to become low-cost world innovator

5. Microsoft, SAP, and Oracle will lose dominance in software

6. U.S. on path to following the third-world

7. Biological sciences become popular in colleges

8. Most compelling technologies will help save time

9. Wires will disappear from the home network

10. Design will count more than ever

Posted by Jeff Cornwall at 02:49 PM | Permalink

Entrepreneur magazine and PricewaterhouseCoopers released their 2006 "Entrepreneurial Challenges Survey" Here are what they found to be the biggest challenges for entrepreneurs with growing companies in 2006:

Retention of key workers--73%

Developing new products and services--38%

Expansion to markets inside the U.S.--36%

Increased productivity--35%

Upgrading technology--28%

Creating business alliances--23%

Better management of cash flow--21%

Expansion to markets outside the U.S.--14%

Improving risk management--13%

Finding new financing--11%

Buying another company or launching a spinoff--11%

Preparing company for sale--7%

Going public--2%

Posted by Jeff Cornwall at 07:18 AM | Permalink | TrackBacks (2)

Podcasting, the audio version of blogging, may offer some opportunity for profits according to an interview with podcaster Chris Pirillo post at Red Herring.

Mr. Pirillo told beginning podcasters to pay the extra money for audio quality, focus on building a brand, and provide enough text to attract good search results but not be a substitute for actually listening to the audio.

"We've gotten to the point that everybody and their grandmother can produce a podcast and everybody and their grandmother is producing a podcast," he said. "Now it's about separating the wheat from the chaff."

As for a business model, Mr. Pirillo--who said he makes a fifth of his income from podcasting-- recommended sponsorships. He suggested there are legions of companies who will pay for relevant discussion of their products to an engaged audience, mentioning his own lucrative deals with Citrix, Nikon, and Microsoft.

And as for my podcasting career? I've been told that I have a face for radio and a voice for newspaper, so I guess I'll just stick with blogging for now.

Posted by Jeff Cornwall at 07:05 AM | Permalink

For all of you would be restaurateurs, DocuTicker has the latest trends in what America is eating. Remember, the key to success with any business is meeting market needs. Too many start restaurants with their own tastes in mind.

More take-out foods, a penchant for premium, and a very healthy attitude are redefining what Americans eat.

(Thanks to Ben Cunningham for passing this along).

Posted by Jeff Cornwall at 07:27 AM | Permalink

I have just returned from the annual conference of the United States Association of Small Business and Entrepreneurship. What I came away with from this meeting was a renewed sense of optimism about the state of entrepreneurship and small business in America. Just a few years ago it was rare to see entrepreneurship taught in Colleges of Business. Now it is not only common in Colleges of Business, but is moving across campuses to reach students of all majors at colleges and universities of all sizes. The innovation in these programs is amazing. When I get caught up on e-mails and get rid of this nasty cold that won't seem to go away I hope to highlight some of the innovations going on in higher education across the country.

Inc.com today offers a profile of just one of the many new programs being offered.

Posted by Jeff Cornwall at 07:16 AM | Permalink

COTC is at Worldlab this week.

Posted by Jeff Cornwall at 07:11 AM | Permalink

Anita is hosting the Blawg Review at her site, Small Business Trends.

Posted by Jeff Cornwall at 07:09 AM | Permalink

The Global Entrepreneurship Monitor Report for 2005 has just been released by Babson University, and it has some interesting findings:

- Entrepreneurs in middle income countries are beginning to catch-up to their counterparts in richer economies by tapping into technologies unavailable to them just a year ago

- Entrepreneurs with 'innovative' businesses drive higher growth rates of GDP per capita

- Middle income countries tend to start more businesses than high income countries

These results show the dynamic nature of global economic growth in the new entrepreneurial economic era we are entering into. Entrepreneurship seems to be the key to finally spreading prosperity around the globe. Let's hope that policy makers in these countries take heed to previous findings showing that reducing regulation and simplifying taxes are key steps in fostering this grassroots economic development.

Posted by Jeff Cornwall at 08:15 AM | Permalink | TrackBacks (1)

Inc.com reports that staffing is becoming a growing concern among entrepreneurs now that the economy is heating up.

One of the ways that smaller companies can compete for staff is to make them convenient and flexible places to work by offering perks that employees want. StartupJournal has a good overview of the types of conveniences that many growing companies offer.

There are other ways to attract good talent. I found that just listening to what the employee really wants and being flexible in how you structure the offer and the job can be very effective. Here is a story from our business that I told in a post from last year.

There was a manager I wanted to hire to run a new program we were starting, as he was one of the best in our industry. He worked for a large, national company. I knew I could not match his salary, but I did not give up.

I got to know him and found out what he was really looking for in his career and in a job. He wanted to have more control over his department. That was easy as we were small and our structure was quite decentralized. He wanted to have some real ownership in the business he worked in. We could do that, too, as we set up separate corporations for each new program we started and we had already planned to offer a small ownership stake for the right manager.

There was one more thing he wanted, however, and it was clear it was a deal breaker for him. His current employer had very strict rules on vacations and holidays. He was a Viet Nam veteran and had wanted to go to Washington, DC each Veterans Day to remember his fallen comrades. His current employer's rules did not make it possible to guarantee that, and he had missed the last two Veterans Day observances. So, in my offer I promised him that he would be guaranteed Veterans Day and one work day on either side of it off each and every year (they were counted as vacation days). That was all it took to convince him that we were the best place for him to work. He came to work for us taking a significant cut in base salary from what he had been making before.

Many from the Entrepreneurial Generation (those born between 1977 and 2002) are actively seeking out smaller entrepreneurial firms to work in. Work with your local universities to let their graduates and recent alumni know about your company and the opportunities you can offer. The best contact point would be the career services office in the college of business. Don't be afraid to hire a new graduate. If your business is small, they should be able to handle scope of what you need right now and can continue to develop their skills as your company grows.

I wrote a post last summer with my list of specific suggestions on how to manage your staffing effectively as your business grows (click here to see that post).

Posted by Jeff Cornwall at 06:56 AM | Permalink | TrackBacks (1)

Ben Cunningham passed along a great essay posted at Eidelblog titled " The rule of law, 'overpriced,' market clearing, and information in markets," in which the author examines the proper role of regulation in a free market.

I am catching a plane to Tucson. I will post from there tomorrow.

Posted by Jeff Cornwall at 05:25 AM | Permalink

Entrepreneur.com presents their annual review of the "hot" franchising opportunities. Here is my take on the pros and cons of franchising as an entrepreneurial strategy should any of these oppotunities look tempting to you.

There are several very good reasons to pursue a franchise as a first time entrepreneur.

First, most franchises have a business model already in place that has been tested and refined. In most cases, the model must have already been proven to attract the financing that is necessary to launch most franchised concepts.

Second, the systems should be well established and ready to go. Much of the trial and error that first time entrepreneurs have to go through with their specific ventures is in the operating processes and procedures. The devil is most often found in the details, so having these systems in place at start-up can save time and money.

Third, a franchisor should be able to provide significant help in marketing. Not only can the franchisee benefit from any regional or national promotion supported by the franchisor, but well tested content and strategies for local advertising should also be available.

Fourth, many would-be entrepreneurs I meet with are struggling to find an idea to pursue. A franchise eliminates the need to come up with an original, creative business opportunity. If creativity is not your strong suit, a franchise may be a viable option to investigate. But, make sure to look at several options, as costs and quality can vary significantly between franchised businesses.

Finally, a franchise is a good option for someone who has an interest in a specific type of business, but who has little experience or knowledge about the industry. Although specific experience is not always necessary for success as an entrepreneur, it does create a major advantage in certain industries such as restaurants. Franchising allows you to "buy" that expertise.

With all of these advantages, there are several sobering disadvantages of franchising that should be carefully weighed by any aspiring entrepreneur. Lawsuits by franchisees against franchisors are actually a fairly common event. And almost every major franchise at some point in time establishes a franchisee relations committee to help deal with complaints and grievances from franchisees. In fact, both franchisees and franchisors both have their own national associations to deal with public relations and the mounting legal and regulatory issues facing this form of business. Beyond the contractual issues that arise in franchising, there are some fundamental business and personal concerns that many franchisees experience after it is too late.

One of the biggest sources of frustration among franchisees is that they perceive that the value added they get from association with their franchisor diminishes over time. A franchise will charge a significant monthly percentage fee (this can average about 7% of sales) associated with all that they offer in terms of systems, marketing, purchasing power, and so forth. Over time, many franchisors realize that they can be just if not more effective on their own without paying the monthly percentage of sales to the franchisor. This on-going monthly fee is often glossed over by franchisees during start-up planning, as they tend to think only about the initial fees and capital expenditures in their planning. These on-going fees can eat away at profit margins if there is not real value added in what the franchisor provides.

Another concern expressed by franchisees is that with all of the rules and standardized procedures, they tend to feel more like an employee than a business owner. Those who try to break away from the predetermined model and processes can face the wrath of the franchisor. Larger franchisors have entire staff dedicated to franchisee compliance.

A financial risk to consider is that many first time entrepreneurs can only afford newer franchised concepts, since well established franchises can cost hundreds of thousands of dollars to buy in. These start-up franchisors can begin to experience their own growing pains. Some don't survive. In some cases they may take the franchisees down with them.

It is critical to understand all of the ins and outs of franchising as a general business strategy first. Then if the idea of a buying a franchise still makes sense, do your homework on the company and its concept. All franchise opportunities are not created equal.

Posted by Jeff Cornwall at 05:43 AM | Permalink | TrackBacks (1)

COTC is over at The Social Customer Manifesto.

Posted by Jeff Cornwall at 01:49 PM | Permalink

The time between opening the doors and the first month of positive cash flow can be harrowing for many entrepreneurs. Certainly anything you can do to keep expenses in line through bootstrapping is critical. But as this piece from StartupJournal points out, we should not ignore things we can do to boost revenues during this time.

Some experts say that smaller, lesser-known companies are particularly well-suited to buzz campaigns. While at large companies, there is more pressure from upper management to maintain control of a marketing message, "the whole point [of a buzz campaign] is to get consumers talking," says Max Kalehoff, vice president, marketing at BuzzMetrics, a New York word-of-mouth research and planning firm. "Word of mouth is the ultimate form of consumer engagement," he says.

Creating a buzz or word of mouth can start well before the doors open. This helps to increase the customer flow from the first day of operation. I call this priming the pump.

Some entrepreneurs find blogging to be a good tool for this in their businesses, such as Jason, who we have been following as he prepares to open his coffee shop in Montana. Street teams are a common tool used in the music business.

One of the keys when creating a buzz before the business opens is timing. You want to do it soon enough to actually build a buzz, but you don't want to do it so soon that people lose interest or assume you are never going to open. Keep in mind that there are inevitable road blocks to almost every business opening, so don't pull the trigger too soon on your buzz marketing.

Posted by Jeff Cornwall at 05:39 AM | Permalink

Kauffman's eVenturing site has put together a new collection of articles on buy-sell agreements. Clear buy-sell language needs to be a fundamental part of any shareholder/partnership agreement. Although you and your partners get along great as you set up your business, things can change. Partners may need to part ways for any number of reasons:

- One partner wants to retire
- One partner is just ready to go "in a new direction"
- Fundamental business disagreements
- Death or disability of a partner (Insurance can be an important tool for this situation)

What ever the reason, the rules of a partnership break-up require a clear understanding of how and under what circumstances the partner can leave, and what it will cost the remaining partners for his/her departure.

The collection at eVenturing includes a nice group of war stories, some how-to's, and a few tools and techniques.

The best time to set up a buy-sell is when you start-up the business. And while it is never too late, the longer you wait the more complex and expensive it can get.

You and your partners should use the type of resources this site and others can provide to iron out how you want your agreement to look. Don't just think about how and when a buyout might happen, but the valuation method to use as well. Think about how you want to be treated if you are the one to leave. Too many entrepreneurs assume that they will be the last one in the business and try to find ways to "stick it to the other partners" when they leave first. This is the classic situation where you should "do unto others as you would have them do unto you."

Once you get a clear understanding between partners, then you should go to your attorney to get it formalized. It will cost you much more and not be as true to your wishes if you go to the attorney too soon. And never just completely defer this important agreement to your attorney to figure out. The attorney's job should be just to put into legal language you and your partners' understanding of what would be fair to all.

This is hard stuff to talk about, but I believe it is one of the most important things to plan for in your new business.

Posted by Jeff Cornwall at 07:25 AM | Permalink | Comments (1)

Small businesses have been the leaders of the current economic expansion, however some new data suggests that some of the wind is being taken out of the sales of small companies. SurePayroll publishes a monthly payroll scorecard, which shows a slow down in small business employment growth. Their latest report shows a flattening of small business hiring, which should be sending out alarm bells across the country. Instead there is virtual silence.

Michael Alter, SurePayroll's President, has some theories on what is going on:

There are many reasons that the deck is stacked in favor of larger companies. Larger companies can engage high-paid lobbyists who promote laws that give them an advantage over smaller companies. Small businesses have to deal with higher health insurance costs and higher costs of capital.

If we look at the overall transition that our economy is in right now, Alter's comments should raise some serious concerns. It is fairly well established that we are in a new entrepreneurial age right now. When we look over the past 20 plus years, it has been small businesses leading our economic growth. I have written a couple of essays about this in the recent past (here and here).

If Alter is correct on the causes of the small business slow down that his scorecard seems to indicate, it is alarming indeed. What he is suggesting is that small businesses fuel our economic expansion only to have large companies lobby to their way into economic advantage once the recovery is well underway. The current poster child of large corporations bullying small business (in full cooperation with government I might add) is the use of eminent domain to take land from entrepreneurs and give it to corporations and developers, as can be seen in the last post I made yesterday (see below).

And over regulation of small business and the costs this creates for these entrepreneurial firms, adds an additional tether to slow down the little guy. Efforts such as those to enact regulatory flexibility for small businesses help, but we need a fundamental shift in our economic policies to truly support entrepreneurial economic growth. Changes need to be enacted in how we think about regulating business. Instead of thinking about our economy in only in terms of large powerful corporations and passing regulations accordingly, we need to think first about the small businesses that are fueling our growth and try to understand how we can keep out of their way. We also need some very serious rethinking about our tax system.

The corporate/union/governmental alliance that defined the economy of the 1900s could literally strangle the life out of the new entrepreneurial economic era if we don't change our public policies and governmental strategies.

Posted by Jeff Cornwall at 06:34 AM | Permalink