Monthly Archives: July 2017

Does Your Business Have What It Takes To Become a Franchise?

I have been involved in franchising dozens of businesses, at last count over 60. Some from concept and some where we converted an existing business to the franchised model and I am really happy to deal with either pathway with one really important proviso.

The business owner must have a reasonable understanding on what it takes to run a business successfully – franchised or not.

And unfortunately I have concluded this is easier said than done.

Done well, franchising does help to structure a business so that it has the best chance of success because franchising helps to put some great business practices in place. Systems and money management being at the top of the list. But overall, I have found that in most businesses, there are some aspects about business success which need to be reviewed and without sound business experience, creating a franchise is not likely to succeed.

Understanding how business works is especially important, because you, as franchisor, will often be training less business savvy-franchisees on successful business practice.

The most useful way I have found to think about business success is to look at the stages of business growth because it is through this journey that many learn the value of different business skills needed as they grow.

The 5 Stages of Business Growth

Way back in the early 1980’s, the concept that businesses grow through defined stages was first discussed in an article published in Forbes by Neil C. Churchill and Virginia L. Lewis. This work is still cited to explain the importance of basic business elements to success.

Before I go into the 5 stages, there is one important point to make.

Businesses do not necessarily need to go through each stage. It is possible to speed through stages into whichever is your goal. The way to do this is to understand what is required. This is how the likes of Richard Branson create new businesses everyday – Richard will have all his business ducks in a row before he starts. But even his businesses will need to go through some of these stages on the way to creating an empire.

In a nutshell these are the stages

Stage 1 – Existence

This is generally the start-up stage for any business. With no revenue, the focus of the business owner is obtaining customers and delivering the product or service. Inevitably, the owner is definitely working in the business, often alone filling every role. A major concern is having enough money to cover this start-up phase. The strategy here is simply to stay alive.

Stage 2 – Survival

By now, the business has proven it is workable and can be profitable but it is still simple in structure. There may be a limited number of employees supervised by a sales manager or a general foreman but neither will make any major decisions independently. They carry out the rather well-defined orders of the owner.

Systems development is still minimal. Formal planning is, at best, cash forecasting. The major goal is still survival, and the owner is still the business and working in the business. The main aim is to get a return on investment and making the business profitable.

However if the business is to grow, it is important to begin to understand the need to systemise and understand how business operates.

Some small businesses choose to stay here, hardly making a profit, others choose to move into the Success Stage.

Stage 3 – Success

At this point, the company is stable and profitable and cash is not a problem. Most telling, basic financial, marketing, and production systems are in place to power effective delegation.

Organizationally, the company has grown large enough, in many cases, to have functional managers to take over some duties previously performed by the owner and some planning through operational budgets support this delegation.

There should also be some strategic planning in place and the owner and, to a lesser extent, the company’s managers, should be monitoring this in accordance with goals.

While cash is plentiful, the main concern is to avoid a cash drain in prosperous periods to the detriment of the company’s ability to withstand the inevitable rough times.

Some choose to stay in this phase while others choose to move into a phase of growth.

Stage 4 – Rapid Growth

If the decision is made to grow beyond the Success Stage, then key problems will be how to achieve growth and how to finance it. Growth will return to a phase where cash management becomes critical.

Churchill and Lewis report they found the keys to success here are having a sound understanding of delegation and how to manage risk in cash flow.

As staff numbers grow, systems need to become more refined to ensure delegation is efficient and both operational and strategic planning are crucial to make sure everyone is on the same page.

At this stage, the owner no longer works in the business but does have a strong presence over the way it is run and over things such as stock control.

Churchill and Lewis state:

‘This is a pivotal period in a company’s life. If the owner rises to the challenges of a growing company, both financially and managerially, it can become a big business. If not, it can usually be sold-at a profit-provided the owner recognizes his or her limitations soon enough’

Stage 5 – Maturity

The company has now arrived. It has the advantages of size, financial resources, and managerial talent. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market.

If not, it may enter a sixth stage of sorts: ossification and death.

Franchises often do it better

Yes, even in the 1980’s when the Churchill and Lewis first published their article, it was acknowledged that franchised businesses moved through the stages to Success and Rapid Growth better than those not franchised.

Why?

Because franchises often have the following advantages:

First of all, they have, in most cases, a franchisor who really understands, through experience, the essentials of business, making sure clear structures are in place from the beginning to move through Existence and Survival fast.

At the very least they will have:

  • A marketing plan developed from extensive research
  • Promotion and other start-up support such as brand identification
  • Sophisticated information and control systems so the whole franchise can be monitored
  • Operating procedures that are standardized and very well developed so delegation is consistent and efficient

I would add that, if the franchisor has really done the homework, there will also be:

  • Strong leadership for the group and an understanding of managing teams of equal partners
  • Good strategic and operational planning which has input from all franchise partners
  • And a very clear understanding of money management in the franchise group, making sure that all levels of the franchise can be profitable

I have to say, not many business I see have all these business aspects in place when they start to think about franchising. And the franchise process will help to put some in place. Things such as systems will be built and it will be essential to have a sound understanding of money management as the franchise structure is developed. If you are still working in the business though, putting in 60 or 80 hours a week, I think you will find the extra work and emotional energy to do the conversion can be more than a little overwhelming.

The Pillars for Successful Business Growth

So what’s the answer?

It’s really quite simple…

In discussing the five stages of business growth, Lewis and Churchill identified some skills needed and show that these skills are what are built up through the business growth process.

  • Money management
  • Systems development
  • Delegation, leadership and people management which results in leveraging you out of the day to day of the business
  • Strategic and operational planning

In my mind, today, there is at least one other skill to be added.

  • Marketing and your brand

The thing is, I know very few of us, if any, have the individual skill to deal with every business ability to a satisfactory level, so creating a team is an essential component as soon as it is possible. The key is to understand each area and to know who to put into your team to move you and your business forward.

9 Steps to Buying the Right Business

Purchasing an established business can be a daunting and complicated process for many individuals. Understanding the steps involved in the acquisition and doing the necessary planning and preparation will enable the buyer to increase their chances for a successful transaction. Following an established and proven process will not only reduce the stress that often comes with chartering new territory but also eliminate many of the risks and unknowns that often derail a business acquisition.

  1. PERSONAL ASSESSMENT

The first step in buying a business starts with introspection. This process should be a thoughtful and honest examination of the candidates’ strengths and weaknesses, skill set, as well as their likes and dislikes. This analysis will assist in narrowing the selection for the logical and best choice of business enterprise to pursue.

What talents, skills, and experience do you bring to the table and what are the types of businesses that can excel with these attributes behind the helm. Here are a number of questions that the introspection phase should involve:

  1. What type of business do you want to operate? Is it one where you are the owner/manager or do you prefer to have a management team in place?
  2. What hours are you available to dedicate to the business? Obviously, owning a small business will never be a 9 to 5 endeavor. Having said that, it will be important to determine the time available to manage the business. Do you prefer a B2B business that operates M-F 8-6pm or are you more flexible and would consider a consumer oriented business that is open late or often over the weekends?
  3. Are you successful at sales, meeting with clients, and being the face of the business or are you better suited to a managerial role and running the business from behind the scenes with an established sales force in place?
  4. Are you able to travel and be away from home for several days or do you require a business that keeps you close to the family each day of the week?
  5. Do you have a background and expertise in the manufacturing of products or is it the service industry or distribution model that is more your forte?
  6. Do you have any licenses or certifications that qualify you for a certain business? If not, are you prepared to obtain the necessary credentials required for successful ownership if the targeted business requires such certifications?
  7. What are the things that you really enjoy doing? What are the things that you prefer not to do? The best advice is to start considering businesses in industries that the buyer is passionate about.

These are a few of the questions that will help an individual assess the types of businesses that they are best suited for and assist in narrowing the range of enterprises where the buyers skill set, experience, capabilities and passions can be leveraged.

  1. DEVELOP INVESTMENT CRITERIA

Now that you have established the type of business that is a ‘good fit’ the next step is to put pen to paper and concisely define your investment criteria. If you will be seeking bank financing it will be important that the investment criteria match your resume or the transferrable skills that you are bringing to the table. The investment criteria will state the following:

    1. What is the price range of the business that you can afford to buy?
    2. What is the geographic location for the business you seek to buy?
    3. What type of business are you looking for?
      • Manufacturing
      • Wholesale/Distribution
      • Service
      • Retail
      • Web-based
    4. What industry should the business be in?
    5. Management structure (owner managed or management team in place)?
    6. Size of business. In terms of:
      • Revenues
      • Profits/Earnings
      • Number of employees
      • Number of locations
    7. Recurring revenue model vs. project based

  1. LENDER PREQUALIFICATION

If you plan to use bank financing to acquire a business it is important that you obtain a prequalification before your search process. Not only will this the ‘prequal’ provide you with the data as to how large of a business you qualify to purchase but it will also demonstrate to the business broker and seller that you are a serious buyer. If you are serious about buying a business and will need to obtain financing, receiving a bank prequalification is a required step at some point in time. Therefore, what would be the reason for procrastinating and not having this in place at the outset? There is zero downside and only considerable benefits. Contact your business broker as they will be able to recommend a financial institution that does business acquisition lending for the type of business you are interested in purchasing. This is an area where having the right lender is critical.

  1. BUSINESS SEARCH (Individual or Retained)

What is the process that you are following to locate and qualify businesses for purchase? Will you be conducting the search on your own or will you utilize the services of a professional business intermediary or broker. There are literally thousands of business for sale at any given moment. A process needs to be established for conducting the search and qualifying businesses. Few of these businesses are of the quality, caliber, and profit level that distinguish them as being best in breed. What have you done to ensure that you will stand out and be given the proper consideration when engaging a broker regarding a business for sale? The business-for-sale marketplace is plagued by unprepared and non-serious buyers inquiring about any enterprise listed for sale. It takes the right preparation, message, and professional team to establish contact and quickly get to the point where the business can be qualified as a legitimate candidate or one that should be dismissed. Too many prospective buyers fall prey to the late business internet search process and clicking on any business that catches their interest. Unfortunately, serious buyers get lost in the field. This is where the prior steps come in handy – having a personal bio, an established investment criteria, as well as a lender preapproval.

  1. QUALIFICATION

A business that is professionally represented for sale will have a number of documents available for review by prospective buyers (e.g. Financials, Asset list, Business Summary, etc). Buyers will need to execute an NDA in addition to demonstrating that they are qualified both from a financial standpoint as well as an experience standpoint to be considered a serious candidate.

At this stage the buyer should already have completed individual research or have first-hand knowledge on the industry. For those without direct industry experience there are trade magazines for just about any business sector not to mention the wealth of data available on the World Wide Web.

The buyer should have a list of questions already prepared, designed for one purpose – determining if the business meets the majority of elements within the investment criteria. The buyer should understand the value of the business. If the business is priced outside of their financial ability they should not be evaluating the business and wasting anyone’s time, most importantly their own. It will be important for a serious buyer to recognize that there is no such thing as a perfect business and each will have different strengths and weaknesses. Most buyers are seeking businesses with growing revenue, a stable customer base, excellent staff, established policy & procedures, and increasing profits. What are the most important qualities that you are seeking? Ranking the criteria is often helpful when qualifying businesses. Finding a business which meets some but not all of the criteria is more the norm than the exception. In many cases, the buyer may be positioned and experienced to improve certain business aspects that are deficient. Following this approach will also enable the buyer to quickly and efficiently eliminate those businesses which will not be a suitable fit, an endeavor that will save all parties considerable time. A quick no is far better than a slow no for everyone’s sake. Lastly, the buyer should recognize that the better the business is, the more they will be expected to pay.

After the initial information exchange the buyer should prepare a second set of questions based upon the particulars of the specific business. After receiving this information the time has been reached where the buyer knows whether their basic criteria has been met. The buyer is clear on the business valuation, the financials, and the business operations and the seller (through the broker) should be clear on how the candidate will be financing the transaction.

A teleconference should be arranged by the business broker to fill in any gaps of information and to allow specific business questions to be asked by the buyer and answered directly by the seller. Should this interaction satisfy the requirements of all parties a personal meeting and site visit is often arranged. During this meeting the buyer, seller, and broker can discuss the framework for a transaction that will satisfy the needs of each party. Only serious contenders should be involved at this point. Now is not the time to waste anyone’s time as a tire-kicker if the goal is not to proceed. Buyers should be clear that regardless of signing the NDA, data such as names of specific clients will not be divulged, not just at this point, but until the transaction closes.

  1. LETTER OF INTENT – TERMS SHEET

A Letter of Intent (LOI) and Terms Sheet are typically non-binding documents which are used for one fundamental purpose… to determine if there is a meeting of the minds between the buyer and seller on the price and terms of the sale. The LOI will outline the strategic points of the agreement. Investing time at this stage and preparing a more detailed document will avoid misunderstandings and prevent key terms from being renegotiated later. Some of the broad points that should be addressed include:

  1. Who is buying the business?
  2. What is being acquired (Assets, Stock)
  3. Transaction price and how that money is being paid
  4. Loan commitment letter date.
  5. Proposed closing date.
  6. Is there a consulting agreement and if so, what are the terms?
  7. What are the contingencies for the transaction to close?
  1. LOAN COMMITMENT LETTER

With an executed (signed) LOI in hand the buyer will now need to obtain a ‘Loan Commitment Letter’ from the lender. A loan commitment letter is produced by the bank and will confirm that the buyer is approved for financing to acquire the business. The Loan Commitment Letter is generated after a thorough review of both the buyer’s data as well as the target business’ data.

  1. DUE DILIGENCE

Most business acquisition transactions will require bank funding. The bank will have a proven, structured, and very detailed due diligence process and it is this methodology that the buyer should rely upon when acquiring a business. Why attempt to recreate the wheel? The bank works solely on behalf of the buyer and their fundamental interest is in ensuring that the buyer is acquiring a business that has the required financial framework for the new owner to be successful and positioned to repay the principal and interest on the acquisition loan. The bank will provide a DD checklist that covers a wide variety of documents, including but not limited to the following areas:

  1. Financial Statements & Tax Returns
  2. Asset & Inventory List
  3. AP & AR
  4. Corporate Books & Records
  5. Contingent Liabilities
  6. Sales & Marketing Materials
  7. Employee Agreements & Benefit Plans
  8. Equipment, Vehicle, & Property Leases
  9. Customer and Supplier Contracts or other Agreements
  10. Insurance Policies
  1. PURCHASE CONTRACT

The business for sale contract aka Definitive Purchase Agreement (DPA) is typically drafted by the Buyer’s ‘Transaction Attorney’ after the LOI is in place. If the proper care was taken in developing the LOI, the DPA should be a much easier document to produce. In circumstances where the major deal components were not properly negotiated or addressed in the LOI, the DPA becomes much for complicated and a higher risk level is associated with the transaction closing.

Upon execution of the LOI, the DD period commences and the DPA should begin being drafted. The DPA is the binding contract covering all aspects of the transaction. The DPA will cover all assets that are connected to the purchase, including but not limited to:

  1. Assets/Stock being acquired
  2. Price, Terms, & Payment
  3. Representations & Warranties
  4. Covenants
  5. Indemnification
  6. Non-Competition Agreements
  7. Lease Assignments
  8. Landlord Consents
  9. Consulting Agreements
  10. Asset Allocation

In most transactions the DPA is executed at the closing table but this is not a requirement. In certain circumstances, the buyer and seller will elect to execute this Agreement prior to the actual close.

The DPA is the actual contract that consummates the sale of the business. It will include a number of Schedules and Exhibits detailing all of the terms of the sale. This is a custom Agreement and the level of detail, length, and companion schedules and attachments is predicated on the particular business.

During this stage the buyer should already have their new business entity established (assuming it is not a stock sale), business bank accounts created, insurance policies prepared, merchant credit card accounts (if applicable) in place, etc.

7 Tips to Start a Small Business

According to a recent Forbes.com article, over a half a million small businesses get started each month while more shut down than start-up. With this statistic, it’s not a surprise that some would be leery in joining the almost 30 million small businesses in the United States. It may also come as a surprise that over half of the working population works in a small business and that most small businesses are home-based. Why then do people start small businesses with these kinds of odds? Because many of us are still deciding what we want to be when we grow up. And once we’ve learned that, we choose to make a go of it on our own.

Starting a small business or a home-based business is not something that should be entered into lightly. More often than not you’ll go through a long period languishing while trying to make your business viable. As with many big decisions in life, starting a business is a very big risk. There’s never an assurance of success. Rather, it is expected and statistically likely that you’ll fail. However, if you’re willing to work at beating the odds and fulfill a professional goal, this may still be the route for you.

I’d worked in libraries for over a decade. I spent the majority of that time in library administration. I knew a good deal about how to run a small business because I’d essentially been doing so for quite some time. However, when you go out on your own there are many pitfalls that can be made in your businesses’ infancy. Contrary to the popular song lyrics, the best things in life aren’t free. Shortcuts will likely come back to haunt you and so too will not putting in the sweat equity needed to not only financially succeed, but to also feel emotionally and psychologically empowered.

If you want to start a small business it has to be a deliberate process. However, it doesn’t have to be an expensive one. It doesn’t hurt for you to do some research. The Small Business Administration is a great free resource. So too are the books. Really, there are any number of tools to help you start-up or navigate the waters of small business. If you’re like the almost 75% of all U.S. business who are non-employers (self-employed with no additional payroll or employees), then you can be sure that there is plenty of information to help you achieve your goals.

Running a small home-based business can be inexpensive, not cheap. Don’t scrimp on the stuff that can really make you appear more professional without breaking the budget. Here are a few startup tips for your business:

1. Get a domain name.

You may not need to register your business’s name with the state. The fact is, that process may be unnecessary and It can be costly depending on the nature of your business. However, it helps if you have a domain name so that you can have a traditional online storefront and presence. That isn’t to say that you need to sell products through your site, it just means that you have a place that you can send people to online to find out more information about you and your products and services.

2. Use social media.

No longer can people lament about how they don’t use Facebook or Twitter, being on social media also lends an air of credibility and savviness to your business. Using social media is inexpensive and easy. There are plenty of online tutorials on how to use social media and by getting yourself out there by using the social media networks, it opens you up to more clients and the ability to interact in real-time with them as well. Also, don’t simply have a presence on social media, depending on your demographic, there are still some people who simply aren’t using social media. Thus, you must also have an easily accessible webpage as well.

3. It doesn’t hurt to use old school marketing tools.

Professional business cards as well as marketing items are now nominal in cost. Don’t just settle for free cards, pay that little extra to brand your items. This way you can be fully in charge of the message you’re putting out there. Think about it, what did you think of the person who handed you a business card that were clearly free ones?!

4. Use accounting software.

Quickbooks, Freshbooks, Nutcache and the list goes on. You can even use Excel if you’re so inclined. Regardless, it’s imperative that you start consistent and accurate record keeping from the very start. Make sure that all of your transactions, big and small, are in a place that will make it easy for you come tax time.

5. Work in the cloud and back it up.

Cloud-based software is available for everything. It also doesn’t hurt to use free ones in this case. Google is the gold standard when it comes to free. However, document creation and retention aren’t the only things you can do in the cloud. Accounting software, website administration, almost anything you can think of can be done in the cloud. Plus, it makes your data accessible anywhere that has an Internet connection. And don’t forget to backup your work. If you’re saving your work to your computer or saving it to a virtual drive in the cloud, be sure that you have a backup. Redundancy is key and it can also be very economical. A good rule of thumb is to have a physical and virtual off-site backup because Murphy’s Law always happens.

6. Be virtual.

Depending on the type of services you offer, there are companies out there that can assist you in getting jobs/projects. Companies like Upwork provide you with a place to offer your services to others and provides you with an online workplace. Being a freelancer has never been so easy. As a freelancer, you don’t have to limit how and how many clients you have.

7. You have to pay some to get some.

Yes, you can start a new business with no cost, however, by investing just a little money upfront you’ll almost ensure a return on your investment. Pay for a virtual fax service, marketing materials and other little things that will go a long way in ensuring that your business isn’t like every other “mom and pop” business. Just be careful not to go all in too fast. Recurring costs, though small, can add up fast. If you have recurring costs it means that you have to earn at least that much money per month.

Business Ownership Bullet.

One of the strong motivators for starting a business is that we want to be our own boss because we believe we can be more financially successful that way. What happens, in fact, is that most small business owners do little more than generate a wage for themselves.

While being very good at doing the work of the business, they lack the skills, knowledge and expertise to build the business, to make it financially successful. They do not know how to work on the business, only how to work in it.

They want to build a secure future for themselves and their families with their business, but instead what happens is that they place that future at great risk because they do not understand how to protect their business from the many challenges to its success. They do not know how to bullet-proof it.

This is the very reason why every small business owner needs this book by Daryl La’Brooy. How I wish I had this book in my hands when I started my business more than 25 years ago. Wealthy small business owners have the resources to pay for this kind of advice but those who have not yet reached that level are not aware of the steps they need to take to protect this important asset.

This book is a consciousness raising book for small business owners where Daryl opens up the challenges and unforeseen problems that can emerge for people setting up small businesses. He presents a pro-active approach to how small business owners can meet those challenges, discussing everything from how to start a business and how to grow it, to how to exit it. In fact, the first key in Daryl’s bullet-proofing plan is that you plan the way you want to exit as you set up your business. Most small businesses don’t do this, rather they wait until shortly before they are ready to retire and find they cannot exit when they want because they are not financially secure enough to finance their retirement.

His second key is about the challenges and risks around ownership both for the sole trader and when other partners are taken into the business. He highlights the fact that if the business owner is not aware of what can happen here and so does not bullet-proof the business against unforeseen and unexpected events, the consequences can be dire for the business.

Ensuring that the wealth created in your small business ultimately ends up in the hands of the people it is meant for is Daryl’s third key. He demonstrates how so often lack of awareness, naivety or lack of planning sees the money, the business owners have spent their lives earning, ending up in the hands of people for whom it wasn’t intended.

Setting up a personal wealth management plan independent of the business including an estate plan, demonstrating the bullet-proofing this gives the family finances, is the fourth key in the book.

The last chapter of Daryl’s book is on how you can create your own Do-It-Yourself Financial Plan to bullet-proof your business. No one wants to face the trauma of bankruptcy or the collapse of the business into which they have put so much of themselves. That can have a devastating impact, both emotionally and financially.

Many of you reading Daryl’s book, and having your eyes are opened to the vulnerable position your own business is in, may not have the confidence to take the action you need to bullet-proof your business. What the book does is highlight the enormous value that good financial planners can be to small business owners and their families in assisting them to do that well, covering all bases and possibilities. They can provide the expertise that ensures that your small business will provide a financially successful future for yourself and the important people in your life.