From time to time in these posts, I will be presenting links to cases of successful new business start-ups and the resources to help you as an entrepreneur to focus your thinking and assist you to turn your dream into a reality.
Solar energy has been around for years now. But getting a solar business started and making money has been another issue.
Recently the Commonwealth Club sponsored as talk by Dr. Richard Swanson entitled Solar Cells at the Cusp.
Wednesday, November 25, 2009
Monday, November 2, 2009
Do your due deligence before you buy into a franchise
Franchising is an attractive option for many who feel the desire to become independent entrepreneurial business owners. If you are interested in franchises, you can check out Franchising at Allbusiness.com
But before you do, read the following.
It is important that you do your due diligence before you invest.
Due diligence, according to Investorwords.com is
Franchising is a business model that can be very profitable for the entrepreneur who comes up with a unique, innovative, and compelling "value proposition" A value proposition is a clear statement of the tangible results that a customer can expect to receive from using your products or services. An effective value proposition is as specific as you can make it.
The value in a franchise is the business model that is created and implemented to bring the value proposition to life.
A business model is not the product or the value statement itself. The business model is how you turn your proposition into reality. The business model is really what goes into your business plan.
The business plan covers:
1. The definition of the need for your product/service in the marketplace and the size/location of the market for your solution to the need;
2. The organizational structure you will create to produce, manage and deliver your solution to the target market, including the legal, managerial, financial,production, and distribution systems;
3. The financial implications of the above are outlined and projected in the financial plan. This includes the start-up expenses, the revenue projects, operating costs, and the cash flow needs to sustain the organization and bring it to a break-even point.
Many "would be entrepreneurs" are overly optimistic about revenue and over estimate these. At the same time they are equally over optimistic about their expenses and grossly underestimate these. This is where most failures happens. Under-capitalization and faulty market research lead the neonate entrepreneur down an unmarked trail to bankruptcy.
A franchise is a business model that has been tested, or at least should have been tested, before it is offered to the public. It takes the value proposition and turns it into a business that is sustainable, at least at the initial stage of implementation. It is no different from a successful start-up in this regard.
Where a franchise differs is in the next step, scaling the business up.
A traditional business start-up will expand to the response it receives from the market -- customers. Expansion is generally driven by consumer demand for the product or service and financed through internal funds (profits) or debt based on realistic projections of sales and secured by company assets.
A franchise differs in scaling up their operations. A franchise is a license to use the founder's intellectual property -- a trademark or Brand name, and business processes in return for a licensing fee, royalty payments and a contract. The contract guarantees the franchisee a license to use the Brand and grants the exclusive rights to represent the Brand in a defined territory using the franchiser's intellectual property in the contractual defined manner.
For the franchiser, this is a quick way to capture new markets by using other people's money -- the investor/franchisee's investment --to scale-up the brand in the market place. For the franchisee, it is a way to get into the market quickly with an "established" value proposition and business model.
But there are no "quick" fixes without risk. There is risk in buying into a franchise.
There is the risk to franchiser that his franchisees will fail as business owners, default on their royalty payments, tarnish the brand name by poor management or bad customer relations, etc.
The risks to the franchisee is that franchiser will not follow through with the training and supervision promised to help establish the franchise locally; the franchiser becomes over-extended and fails to provide the logistical support guaranteed in the contact; the franchisee's contractual obligations prevent him/her from adapting to the changes in the local competitive environment. These are just some of the problems that can arise.
Take the time to do the due diligence before you invest in a franchise. Even SBA backing of your loan application is no guarantee you will succeed.
If you do decide to invest, stay on top of the business, monitor your franchiser businesses, and do your due diligence. The value of your business investment is intimately tied to the success of the franchiser and the Brand name.
No brand is exempted from failure.
Even Mcdonald's can fail
But before you do, read the following.
It is important that you do your due diligence before you invest.
Due diligence, according to Investorwords.com is
The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.
Franchising is a business model that can be very profitable for the entrepreneur who comes up with a unique, innovative, and compelling "value proposition" A value proposition is a clear statement of the tangible results that a customer can expect to receive from using your products or services. An effective value proposition is as specific as you can make it.
The value in a franchise is the business model that is created and implemented to bring the value proposition to life.
A business model is not the product or the value statement itself. The business model is how you turn your proposition into reality. The business model is really what goes into your business plan.
The business plan covers:
1. The definition of the need for your product/service in the marketplace and the size/location of the market for your solution to the need;
2. The organizational structure you will create to produce, manage and deliver your solution to the target market, including the legal, managerial, financial,production, and distribution systems;
3. The financial implications of the above are outlined and projected in the financial plan. This includes the start-up expenses, the revenue projects, operating costs, and the cash flow needs to sustain the organization and bring it to a break-even point.
Many "would be entrepreneurs" are overly optimistic about revenue and over estimate these. At the same time they are equally over optimistic about their expenses and grossly underestimate these. This is where most failures happens. Under-capitalization and faulty market research lead the neonate entrepreneur down an unmarked trail to bankruptcy.
A franchise is a business model that has been tested, or at least should have been tested, before it is offered to the public. It takes the value proposition and turns it into a business that is sustainable, at least at the initial stage of implementation. It is no different from a successful start-up in this regard.
Where a franchise differs is in the next step, scaling the business up.
A traditional business start-up will expand to the response it receives from the market -- customers. Expansion is generally driven by consumer demand for the product or service and financed through internal funds (profits) or debt based on realistic projections of sales and secured by company assets.
A franchise differs in scaling up their operations. A franchise is a license to use the founder's intellectual property -- a trademark or Brand name, and business processes in return for a licensing fee, royalty payments and a contract. The contract guarantees the franchisee a license to use the Brand and grants the exclusive rights to represent the Brand in a defined territory using the franchiser's intellectual property in the contractual defined manner.
For the franchiser, this is a quick way to capture new markets by using other people's money -- the investor/franchisee's investment --to scale-up the brand in the market place. For the franchisee, it is a way to get into the market quickly with an "established" value proposition and business model.
But there are no "quick" fixes without risk. There is risk in buying into a franchise.
There is the risk to franchiser that his franchisees will fail as business owners, default on their royalty payments, tarnish the brand name by poor management or bad customer relations, etc.
The risks to the franchisee is that franchiser will not follow through with the training and supervision promised to help establish the franchise locally; the franchiser becomes over-extended and fails to provide the logistical support guaranteed in the contact; the franchisee's contractual obligations prevent him/her from adapting to the changes in the local competitive environment. These are just some of the problems that can arise.
Take the time to do the due diligence before you invest in a franchise. Even SBA backing of your loan application is no guarantee you will succeed.
If you do decide to invest, stay on top of the business, monitor your franchiser businesses, and do your due diligence. The value of your business investment is intimately tied to the success of the franchiser and the Brand name.
No brand is exempted from failure.
Even Mcdonald's can fail
Monday, September 21, 2009
What are you doing to Prepare for H1N1?
We are in the beginning days of the H1N1 flu pandemic. This fall and winter, the traditional time for flu, America and the northern hemisphere can expect a massive increase in the number of flu cases, normal and H1N1. This will impact the economies of many nations as workers and consumers become infected; as the hospitals take on a heavier loads; and as those who remain productive attempt to fill in for those who have to stay home from work because of illness, their own or a family member.
For small businesses, especially those dependent on cash flow to survive, this epidemic may be a killer. The normal period of infection is not known but according to the Center for Disease Control
For further information about H1N1 check out this link to the CDC: Interim Guidance for Clinicians on Identifying and Caring for Patients with Swine-origin Influenza A (H1N1) Virus Infection available at CDC H1N1
As a small business person/owner you need to prepare.
What you do to protect yourself, and employees will not prevent your business from being at risk.
This information may help you deal with the disease and get you, your workers and families immunized, but what about the economic consequences to your business? How did you prepare for Y2K or post 9/11? Are you going to do the same thing?
What did you do for Y2K?
In 1999 I was trained as a Y2K consultant to work with small and midsized business to plan for what was feared to be a potential disaster as the Y2K (millennial) bug hit the nations computer systems. For small business, this could have been real disaster. The purpose of the Y2K consultants was to 1. Help business owner determine if their systems were susceptible to the Y2K problem; 2. If so, to help them prepare a plan for their business if they, their customers, or suppliers would be affected.
It turned out that there was a simple solution for most Small and Med size businesses.
The price of computers and advance in software created an opportunity and reason to buy new software and new equipment. So very few took advantage of the opportunity to do a top to bottom analysis of their business.
What did you about 9/11?
In the Spring of 2003, I went to a training session sponsored by the new Department of Home Land Security. Again the purpose was to train and prepare consultants to help businesses, small, medium and large to prepare for the post 9/11 threat. What Do you know what the threats are to your business? How do you protect against them? What is your plan to survive a repeat 9/11 type event? Again, few small businesses took advantage of the opportunity to plan for the threat. Instead they adopted the herd survival strategy, "don't attract attention to yourself."
What are you doing to prepare for the pandemic?
A pandemic is not a technological problem, nor a security or political problem. H1N1 is an equal opportunity disease. It is a PUBLIC HEALTH PROBLEM and a species wide biological disease problem.
Have you thought about the risks? Have you planned for the risks?
Here are some of the risks:
1. Key employees come down with the flu and are out of work for 2 weeks. Do you have a plan in place to cover their job responsibilities?
2. 20% or more of your work force is out of work with the flu for a month or longer. Can you still run an effective operation? If not, what is your plan to insure vital operations are not interrupted?
3. 20% or more of your suppliers are unable to fulfill their orders to you and your operations are effected because you don't have the inventory to maintain your minimum operations for more than a month. Do you have sufficient inventory? Do you have the ability to shift suppliers to insure no disruption in your operation? Do you have business disruption insurance and are you covered?
4. 20% or more of your customers are unable or unwilling to make purchases or pay their bills for a month or longer because of the impact of the pandemic on their business or jobs. Do you have enough cash or credit available to cover your operations for an extended period of diminished revenue and negative cash flow?
What are you doing to prepare your business for it and for the collateral damage of the epidemic on your suppliers/customers and community?
For small businesses, especially those dependent on cash flow to survive, this epidemic may be a killer. The normal period of infection is not known but according to the Center for Disease Control
In general, persons with novel influenza A (H1N1) virus infection should be considered potentially infectious from one day before to 7 days following illness onset. Children, especially younger children, might be infectious for up to 10 days.
For further information about H1N1 check out this link to the CDC: Interim Guidance for Clinicians on Identifying and Caring for Patients with Swine-origin Influenza A (H1N1) Virus Infection available at CDC H1N1
As a small business person/owner you need to prepare.
What you do to protect yourself, and employees will not prevent your business from being at risk.
This information may help you deal with the disease and get you, your workers and families immunized, but what about the economic consequences to your business? How did you prepare for Y2K or post 9/11? Are you going to do the same thing?
What did you do for Y2K?
In 1999 I was trained as a Y2K consultant to work with small and midsized business to plan for what was feared to be a potential disaster as the Y2K (millennial) bug hit the nations computer systems. For small business, this could have been real disaster. The purpose of the Y2K consultants was to 1. Help business owner determine if their systems were susceptible to the Y2K problem; 2. If so, to help them prepare a plan for their business if they, their customers, or suppliers would be affected.
It turned out that there was a simple solution for most Small and Med size businesses.
The price of computers and advance in software created an opportunity and reason to buy new software and new equipment. So very few took advantage of the opportunity to do a top to bottom analysis of their business.
What did you about 9/11?
In the Spring of 2003, I went to a training session sponsored by the new Department of Home Land Security. Again the purpose was to train and prepare consultants to help businesses, small, medium and large to prepare for the post 9/11 threat. What Do you know what the threats are to your business? How do you protect against them? What is your plan to survive a repeat 9/11 type event? Again, few small businesses took advantage of the opportunity to plan for the threat. Instead they adopted the herd survival strategy, "don't attract attention to yourself."
What are you doing to prepare for the pandemic?
A pandemic is not a technological problem, nor a security or political problem. H1N1 is an equal opportunity disease. It is a PUBLIC HEALTH PROBLEM and a species wide biological disease problem.
Have you thought about the risks? Have you planned for the risks?
Here are some of the risks:
1. Key employees come down with the flu and are out of work for 2 weeks. Do you have a plan in place to cover their job responsibilities?
2. 20% or more of your work force is out of work with the flu for a month or longer. Can you still run an effective operation? If not, what is your plan to insure vital operations are not interrupted?
3. 20% or more of your suppliers are unable to fulfill their orders to you and your operations are effected because you don't have the inventory to maintain your minimum operations for more than a month. Do you have sufficient inventory? Do you have the ability to shift suppliers to insure no disruption in your operation? Do you have business disruption insurance and are you covered?
4. 20% or more of your customers are unable or unwilling to make purchases or pay their bills for a month or longer because of the impact of the pandemic on their business or jobs. Do you have enough cash or credit available to cover your operations for an extended period of diminished revenue and negative cash flow?
What are you doing to prepare your business for it and for the collateral damage of the epidemic on your suppliers/customers and community?
Tuesday, August 25, 2009
The NFP -- Where's the Money
Not For Profit (NFP) organizations are different from the For Profit (FP) organizations in several key ways.
First, a major source of funding for a NFP comes in the form of grants from foundations and through government at various levels. A grant is a special type of funding vehicle and has a number of unique requirements. Below is a general outline that we have prepared for our clients.
Second, the NFP is a special class of corporate structure from the routine business organization. It is a publicly held corporation created by the state for purposes the state demeans of value to the public and from which the public will benefit. In return for performing its services and functions, the not for profit is permitted to raise revenues for those specific purposes on a tax free basis. The board of directors are not the owners of the corporate assets, rather they are the trustees of the assets. The assets of the NFP belong to the public and can only be passed from one NFP to another.
Third, the NFP established at the state level is recognized by the United States government's Internal Revenue Service as a tax free organization under Sec. 501 (c)1 thru 27. Tax exemption may vary from complete exemption from taxes to partial exemption depending on the NFP's designation.
Fourth, the NFP is Mission driven rather than profit driven. This means the NFP's strategic goal is to achieve or promote a public good rather than to simply generate a financial profit for its owners. Here is where there is often confusion among those who work in the NFP sector. A NFP can and must be able to generate a surplus of revenue, that is earning exceeding expenses, if it is to survive. That surplus, in the For Profit organization, would be considered retained earning to be reinvested in the organization, and profit to be distributed to the owners. In the NFP there are retained earning just no profit category for the surplus.
Fifth, the unique nature, especially tax status, enables the NFP to pass on its tax benefits to those who donate money to it. The IRS allows the public to deduct from their income taxable income they donations that they make to recognized 501 (c) Not for Profit organizations. This creates a whole economy where funds can be donated to a public charity which in turn can donate its surplus to other NFP to actually carry of their mission.
So, if you are a NFP, or a planning to create one remember that the reason you exist is your Mission and you need to match your funding to your Mission and not the other way around. If you have any questions contact us directly or post a comment here.
First, a major source of funding for a NFP comes in the form of grants from foundations and through government at various levels. A grant is a special type of funding vehicle and has a number of unique requirements. Below is a general outline that we have prepared for our clients.
Second, the NFP is a special class of corporate structure from the routine business organization. It is a publicly held corporation created by the state for purposes the state demeans of value to the public and from which the public will benefit. In return for performing its services and functions, the not for profit is permitted to raise revenues for those specific purposes on a tax free basis. The board of directors are not the owners of the corporate assets, rather they are the trustees of the assets. The assets of the NFP belong to the public and can only be passed from one NFP to another.
Third, the NFP established at the state level is recognized by the United States government's Internal Revenue Service as a tax free organization under Sec. 501 (c)1 thru 27. Tax exemption may vary from complete exemption from taxes to partial exemption depending on the NFP's designation.
Fourth, the NFP is Mission driven rather than profit driven. This means the NFP's strategic goal is to achieve or promote a public good rather than to simply generate a financial profit for its owners. Here is where there is often confusion among those who work in the NFP sector. A NFP can and must be able to generate a surplus of revenue, that is earning exceeding expenses, if it is to survive. That surplus, in the For Profit organization, would be considered retained earning to be reinvested in the organization, and profit to be distributed to the owners. In the NFP there are retained earning just no profit category for the surplus.
Fifth, the unique nature, especially tax status, enables the NFP to pass on its tax benefits to those who donate money to it. The IRS allows the public to deduct from their income taxable income they donations that they make to recognized 501 (c) Not for Profit organizations. This creates a whole economy where funds can be donated to a public charity which in turn can donate its surplus to other NFP to actually carry of their mission.
So, if you are a NFP, or a planning to create one remember that the reason you exist is your Mission and you need to match your funding to your Mission and not the other way around. If you have any questions contact us directly or post a comment here.
Tuesday, July 21, 2009
Why are NFPs proactive externally and reactive internally?
The following is taken from a discussion I have had with Nick Nacov, on LinkedIn about the nature of Not For Profit (NFP) or NonProfit Organizations (NPO)
Nick began by asking the question:
Why are most non-profits very proactive regarding anything that could impact their core clients (however remote the chance) yet totally ignore internal issues such as financial management or their information/communication infrastructure (which could have a tremendous impact on their clients)?
An example of this could be an organization that wants to help abused women find a safe place to live. They will invoke lobbyists, mail/call campaigns and mobilize the masses to argue against any action that might have the slightest impact on their clients.
Yet they will ignore their own internal infrastructure, especially the financial side, until a problems arise (which can severely impact their clients).
I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business.
-----------------------
My response was:
"I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business"
Here is the problem. NFP's are not service driven. Service is the product of their actions. The energizing force is "Mission." They are mission driven --a mission in the religious sense -- where the goal is what counts.
Because they are mission driven they are flexible about the means for getting there -- that is, they trust that they will have the resources they need, and behave accordingly. This belief, or faith, may get them in trouble especially, financially. I've seen it frequently in my consulting.practice. But their commitment to their mission and clients often leads them to be resourceful and innovative in getting the job done.
Money is not the focus or purpose of true nonprofits. It is what money can buy that is important and that is people and materials. People can be recruited as volunteers and material can be donated in lieu of money.
In fact, many nonprofits are better at getting the job done than the for profit sector. They don't have to worry about share holders.
------------------------------
Then Nick came back with this interesting observation.
I didn't consider the mission angle, which could explain some of this. I will admit that many of our clients are good at doing more with less,
I have though seen similar zeal at huge NPOs (ex American Chemical Society, NRA) as those struggling to get their first million.
Where I see a difference is that these large NPOs understand that the mission of the organization is just as well served by those internal to the group as the external facing contacts.
The ones facing failure are usually the ones where management views internal staff as necessary evil (ex to placate the board) and treats them as secondary citizens.
-------------------
My response is
You do raise a good point. I would look to what size does to good intentions. The Red Cross and other major charities have had their problems in part do to their size.
I agree about the large or Mega Non-profits. They are not much different than the mega for profit enterprise. Size, or scale, impacts the way an organization is governed and managed. But again it is unfair to apply private business management criteria to the way nonprofits are managed. The legal structures for the two are different.
I find that the culture of the non-profit is the determining factor. When someone with an MBA goes into a nonprofit as a manager the logic she has been trained in is changed by the philosophy and type of clients and co-workers who have values that do not know or care about ROI.
Also there are multiple types of NFPs. The NRA is a membership organization and a political lobbying group a 501c4 and not a 501c3 which most NPOs are.
501(c)(4)
A 501(c)(4) exemptions are given to civic leagues and other organizations operated exclusively for the promotion of social welfare, or local associations of employees the membership of which is limited to a designated company or persons in a particular municipality or neighborhood and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.Characteristics that set these organizations apart from 501(c)(3) organizations include an unlimited ability to lobby for legislation and the ability to participate in political campaigns and elections.
While 501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
As for the American Chemical Society see:http://en.wikipedia.org/wiki/American_Chemical_Society.
-------------------------
To which I would add:
These are the exceptions that prove the rule, I believe. Most non-profits are mission driven and therefore never grow to the size of an NRA,AMC or Red Cross. Those that do are forced to act more like for-profit firms and take on managers with a for-profit mind set. This can lead to conflict if the boards of directors fail to understand the fundamental cultural differences between NFP and FP organizations
Nick began by asking the question:
Why are most non-profits very proactive regarding anything that could impact their core clients (however remote the chance) yet totally ignore internal issues such as financial management or their information/communication infrastructure (which could have a tremendous impact on their clients)?
An example of this could be an organization that wants to help abused women find a safe place to live. They will invoke lobbyists, mail/call campaigns and mobilize the masses to argue against any action that might have the slightest impact on their clients.
Yet they will ignore their own internal infrastructure, especially the financial side, until a problems arise (which can severely impact their clients).
I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business.
-----------------------
My response was:
"I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business"
Here is the problem. NFP's are not service driven. Service is the product of their actions. The energizing force is "Mission." They are mission driven --a mission in the religious sense -- where the goal is what counts.
Because they are mission driven they are flexible about the means for getting there -- that is, they trust that they will have the resources they need, and behave accordingly. This belief, or faith, may get them in trouble especially, financially. I've seen it frequently in my consulting.practice. But their commitment to their mission and clients often leads them to be resourceful and innovative in getting the job done.
Money is not the focus or purpose of true nonprofits. It is what money can buy that is important and that is people and materials. People can be recruited as volunteers and material can be donated in lieu of money.
In fact, many nonprofits are better at getting the job done than the for profit sector. They don't have to worry about share holders.
------------------------------
Then Nick came back with this interesting observation.
I didn't consider the mission angle, which could explain some of this. I will admit that many of our clients are good at doing more with less,
I have though seen similar zeal at huge NPOs (ex American Chemical Society, NRA) as those struggling to get their first million.
Where I see a difference is that these large NPOs understand that the mission of the organization is just as well served by those internal to the group as the external facing contacts.
The ones facing failure are usually the ones where management views internal staff as necessary evil (ex to placate the board) and treats them as secondary citizens.
-------------------
My response is
You do raise a good point. I would look to what size does to good intentions. The Red Cross and other major charities have had their problems in part do to their size.
I agree about the large or Mega Non-profits. They are not much different than the mega for profit enterprise. Size, or scale, impacts the way an organization is governed and managed. But again it is unfair to apply private business management criteria to the way nonprofits are managed. The legal structures for the two are different.
I find that the culture of the non-profit is the determining factor. When someone with an MBA goes into a nonprofit as a manager the logic she has been trained in is changed by the philosophy and type of clients and co-workers who have values that do not know or care about ROI.
Also there are multiple types of NFPs. The NRA is a membership organization and a political lobbying group a 501c4 and not a 501c3 which most NPOs are.
501(c)(4)
A 501(c)(4) exemptions are given to civic leagues and other organizations operated exclusively for the promotion of social welfare, or local associations of employees the membership of which is limited to a designated company or persons in a particular municipality or neighborhood and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.Characteristics that set these organizations apart from 501(c)(3) organizations include an unlimited ability to lobby for legislation and the ability to participate in political campaigns and elections.
While 501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
As for the American Chemical Society see:http://en.wikipedia.org/wiki/American_Chemical_Society.
-------------------------
To which I would add:
These are the exceptions that prove the rule, I believe. Most non-profits are mission driven and therefore never grow to the size of an NRA,AMC or Red Cross. Those that do are forced to act more like for-profit firms and take on managers with a for-profit mind set. This can lead to conflict if the boards of directors fail to understand the fundamental cultural differences between NFP and FP organizations
Sunday, May 24, 2009
What I am worth? Summary:
This is a summary of a 5 part series on business start-ups. It focuses on how to value your role as owner/operator of a business start-up. That is, what are the answers to two simple questions: As owner --“What should I pay myself?” and as employee/operator -- “How do I price my services?”
When you do something because you want to do and are happy to spend money to do it, we call that a hobby. When you expect others to pay you to do it, then that is a business. When your hobby becomes a business, you become the investor, owner, and employee in the company you create to conduct your hobby as a business.
The First Day:
Non-business owners seem to think that there is secret formula that will produce good hard numbers to answer these questions. However in my experience with start-ups, the only executive compensation formula that works is the survival of the company.
On the first day of business, the company owes you, other investors, and lenders every dime that has been put into it. At that moment, before the first sale, the ROI (return on investments) for everyone is zero. So, regardless what salary you set for yourself, the company will not have any money of its own until its first customer has paid its bill.
The Challenge:
The major challenge for the owner/operator is adapting to the responsibilities of all three roles.
As the initial investor you want to know: “When can I start taking my money back out of the company?”
As the owner or co-owner, you want to know: “What can I afford to pay someone to do this job?”
As the employee you want to know: “What can I expect the company to pay me for my services?”
Valuation:
Valuation is a special financial skill. It is more craft than science, filled with subjectivity, uncertainty, and risk.
Difficult even under the best of circumstances, a fair evaluation of a start-up company, with no track record, is impossible. “What are the chances the business plan will work?” Others can only value it based your, and/or your partners’, personally qualities, and not on the company’s.
Starting a business is not about the money you make or will make. It is about investing yourself, your ego, and, yes, your soul in creating something you believe in enough to take the risk of not failing.
The Simple Method:
In Part 1 of this series, I proposed “The Simple Answer” to the initial questions.
As the investor: “To yourself, you are worth what you want.” If you think your investment of $10,000 is worth $20,000 at the end of one year, then you will demand a 100% ROI (return on investment) from the company. If you can wait 2 years, a 50% ROI annually will do.
As the owner of the company, “You are worth what the company can afford to pay after satisfying its other fixed and variable costs.” If you want to earn $10,000 a year as the owner, then you need to generate $10,000 of profits above the gross costs of all other business expenses.”
As an employee of the company, “You are worth what you are willing to settle for, and the company of can afford to pay.” If you want to earn $10,000 a year as an employee, then your services should generate at least $10,000 a year in value to the company.
By combining all three income sources: investment, profit, and salary; you could earn $25,000 to $30,000. This value would be: $5,000 to $10,000 appreciation in the value of your company shares (capital gain), $10,000 in dividends paid on your stock, and $10,000 of salary in cash.
The formula for personal earnings is: Capital Gain + Dividend + Cash = Salary
To apply the examples above to fit your own case, use your own numbers and ratios.
The Detailed or Life cycle Approach:
The main point in Parts 2, 3, and 4 is to show how you have three different ways to monetarize your investment in a start-up company. These can be phases to reflect the life cycle of the start-up process.
Part 2, Equity, explained how you might monetarize your sweat equity by creating a valuation for the company at the time it is transformed from a hobby to a business. This establishes the basis for an exit strategy.
Part 3, Debt, explains how you, and other owners, can prevent an excessive drain on the firm’s cash position, while still paying the owner/employee at a fair or desired salary rate. This is done by paying a salary based on a combination of cash and IOU’s that the owner/employee can cash in at a later time.
Part 4, Cash, explains the impact of cash payments to the owner/employee and the company, and the critical role that cash flow plays in the success of the venture.
I ended with a set of questions that you, as the investor/owner/employee, should consider for your own start-up.
At B. R. Bainton Associates, we can provide more detail to help you answer these questions in your own specific case. Feel free to contact me personally with your questions at brbainton@gmail.com.
When you do something because you want to do and are happy to spend money to do it, we call that a hobby. When you expect others to pay you to do it, then that is a business. When your hobby becomes a business, you become the investor, owner, and employee in the company you create to conduct your hobby as a business.
The First Day:
Non-business owners seem to think that there is secret formula that will produce good hard numbers to answer these questions. However in my experience with start-ups, the only executive compensation formula that works is the survival of the company.
On the first day of business, the company owes you, other investors, and lenders every dime that has been put into it. At that moment, before the first sale, the ROI (return on investments) for everyone is zero. So, regardless what salary you set for yourself, the company will not have any money of its own until its first customer has paid its bill.
The Challenge:
The major challenge for the owner/operator is adapting to the responsibilities of all three roles.
As the initial investor you want to know: “When can I start taking my money back out of the company?”
As the owner or co-owner, you want to know: “What can I afford to pay someone to do this job?”
As the employee you want to know: “What can I expect the company to pay me for my services?”
Valuation:
Valuation is a special financial skill. It is more craft than science, filled with subjectivity, uncertainty, and risk.
Difficult even under the best of circumstances, a fair evaluation of a start-up company, with no track record, is impossible. “What are the chances the business plan will work?” Others can only value it based your, and/or your partners’, personally qualities, and not on the company’s.
Starting a business is not about the money you make or will make. It is about investing yourself, your ego, and, yes, your soul in creating something you believe in enough to take the risk of not failing.
The Simple Method:
In Part 1 of this series, I proposed “The Simple Answer” to the initial questions.
As the investor: “To yourself, you are worth what you want.” If you think your investment of $10,000 is worth $20,000 at the end of one year, then you will demand a 100% ROI (return on investment) from the company. If you can wait 2 years, a 50% ROI annually will do.
As the owner of the company, “You are worth what the company can afford to pay after satisfying its other fixed and variable costs.” If you want to earn $10,000 a year as the owner, then you need to generate $10,000 of profits above the gross costs of all other business expenses.”
As an employee of the company, “You are worth what you are willing to settle for, and the company of can afford to pay.” If you want to earn $10,000 a year as an employee, then your services should generate at least $10,000 a year in value to the company.
By combining all three income sources: investment, profit, and salary; you could earn $25,000 to $30,000. This value would be: $5,000 to $10,000 appreciation in the value of your company shares (capital gain), $10,000 in dividends paid on your stock, and $10,000 of salary in cash.
The formula for personal earnings is: Capital Gain + Dividend + Cash = Salary
To apply the examples above to fit your own case, use your own numbers and ratios.
The Detailed or Life cycle Approach:
The main point in Parts 2, 3, and 4 is to show how you have three different ways to monetarize your investment in a start-up company. These can be phases to reflect the life cycle of the start-up process.
Part 2, Equity, explained how you might monetarize your sweat equity by creating a valuation for the company at the time it is transformed from a hobby to a business. This establishes the basis for an exit strategy.
Part 3, Debt, explains how you, and other owners, can prevent an excessive drain on the firm’s cash position, while still paying the owner/employee at a fair or desired salary rate. This is done by paying a salary based on a combination of cash and IOU’s that the owner/employee can cash in at a later time.
Part 4, Cash, explains the impact of cash payments to the owner/employee and the company, and the critical role that cash flow plays in the success of the venture.
I ended with a set of questions that you, as the investor/owner/employee, should consider for your own start-up.
At B. R. Bainton Associates, we can provide more detail to help you answer these questions in your own specific case. Feel free to contact me personally with your questions at brbainton@gmail.com.
Wednesday, May 13, 2009
How do you spot a fake venture capitalist on the Internet?
Recently someone asked me, "How do you spot a fake venture capitalist?
Apparently, she was concerned by the recent financial scandals and what she could do to avoid being taken. Margaret has a business idea which she has turned into a business plan (BP). She explained, "I have been shopping it around to ALL the VCs on the internet."
She had met a number of Venture Capitalists (VC), or persons she thought were VCs on the internet. They were from the USA, Europe AND Latin America.
She told me, "The US VC's seemed real and had money; but the others ... Well, they seemed fake."
I asked her what she meant by that. She said that the Europeans and Latin Americans (she is Hispanic), she had spoken to seem to be just interested in getting her BP and then trying to sell it to a bank or someone else for a fee.
Others were "Consultants who wanted to charge her a fee just to look at the BP. None of them had any real money to invest."
She asked, "How can I tell? I seem to be waste my time and I'm afraid I going to make a mistake. What can I do?"
I told her the following:
"My experience with the start-ups and start-up funding is that the VC often come in much later than the Business Plan (BP) stage. They are looking for a going concern that has proof of concept, intellectual property protection, a basic corporate structure and systems in place, and some key human capital in place. VC will do a deal for a piece of the action and an active role in the future development of the business. VCs will be there for the 'long term (3 to 5 years)'. They will also own 50% - 80% of the business."
"There are deal makers who may claim or allow you to think that they are authentic VCs. But these are middle men who will shop around your business plan to investors (Angels, and others) for a fee. Their fee is based on successfully matching you with an investor.This is what you will be buying from them."
"Deal makers can be useful in opening doors, but you should not expect more from them than they can deliver. Deal makers invest their special knowledge of the small investor network. Deal makers are not there for the long term."
"Yes, there are the Consultants who are there to earn a fee for their advice. Consultants invest their intellectual and experiential capital in your business plan. They can be a valuable resource to help you identify the strengths and weaknesses in your Business Plan and your marketing strategy for the plan. Again don't expect them to get the funding for you. It is your BP, not theirs."
I then asked her:
"Do you want to spend days, months, or years searching for just the right investor? If so, that is your choice. But if you want to take your dream and turn it into reality, you are going to need help."
"That help comes in many forms and to succeed as a business you will have to learn what help you need, where to look for it, and how to use it to your advantage."
"You have been focusing too much on your idea and not on the job of selling your idea. VCs are only one part ofa complex investor market made up of many different parts."
"What you need to learn is management. Management is the most difficult lesson an innovator like you, hoping to become an entrepreneur, can learn."
Lesson:
Once you decide to turn your idea into a business, you must change your orientation from innovator (the creator of the idea) to manager(the one who guides and nurture the idea through the development process).
Apparently, she was concerned by the recent financial scandals and what she could do to avoid being taken. Margaret has a business idea which she has turned into a business plan (BP). She explained, "I have been shopping it around to ALL the VCs on the internet."
She had met a number of Venture Capitalists (VC), or persons she thought were VCs on the internet. They were from the USA, Europe AND Latin America.
She told me, "The US VC's seemed real and had money; but the others ... Well, they seemed fake."
I asked her what she meant by that. She said that the Europeans and Latin Americans (she is Hispanic), she had spoken to seem to be just interested in getting her BP and then trying to sell it to a bank or someone else for a fee.
Others were "Consultants who wanted to charge her a fee just to look at the BP. None of them had any real money to invest."
She asked, "How can I tell? I seem to be waste my time and I'm afraid I going to make a mistake. What can I do?"
I told her the following:
"My experience with the start-ups and start-up funding is that the VC often come in much later than the Business Plan (BP) stage. They are looking for a going concern that has proof of concept, intellectual property protection, a basic corporate structure and systems in place, and some key human capital in place. VC will do a deal for a piece of the action and an active role in the future development of the business. VCs will be there for the 'long term (3 to 5 years)'. They will also own 50% - 80% of the business."
"There are deal makers who may claim or allow you to think that they are authentic VCs. But these are middle men who will shop around your business plan to investors (Angels, and others) for a fee. Their fee is based on successfully matching you with an investor.This is what you will be buying from them."
"Deal makers can be useful in opening doors, but you should not expect more from them than they can deliver. Deal makers invest their special knowledge of the small investor network. Deal makers are not there for the long term."
"Yes, there are the Consultants who are there to earn a fee for their advice. Consultants invest their intellectual and experiential capital in your business plan. They can be a valuable resource to help you identify the strengths and weaknesses in your Business Plan and your marketing strategy for the plan. Again don't expect them to get the funding for you. It is your BP, not theirs."
I then asked her:
"Do you want to spend days, months, or years searching for just the right investor? If so, that is your choice. But if you want to take your dream and turn it into reality, you are going to need help."
"That help comes in many forms and to succeed as a business you will have to learn what help you need, where to look for it, and how to use it to your advantage."
"You have been focusing too much on your idea and not on the job of selling your idea. VCs are only one part ofa complex investor market made up of many different parts."
"What you need to learn is management. Management is the most difficult lesson an innovator like you, hoping to become an entrepreneur, can learn."
Lesson:
Once you decide to turn your idea into a business, you must change your orientation from innovator (the creator of the idea) to manager(the one who guides and nurture the idea through the development process).
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