Find Me the Money
Knowing how much money you really need is a good place to start

One of the first questions Jeff Cornwall, director of the Belmont University Center for Entrepreneurship, asks hopeful entrepreneurs is, “How much money do you think you need?” Often, he says, people overestimate that amount.

“They’ll say, ‘I need $100,000,’ and when I ask them what they need that $100,000 for, they say, ‘I don’t know. I just think I need $100,000,’” he explains. “But in order to successfully raise money, you have to understand what money you need to raise.”

Once that amount is determined, however, Cornwall warns that raising the money is even more difficult. He says about 85% to 90% of startup capital comes from the entrepreneur and his or her friends and family. The rest usually comes from loans. Angel investors and venture capitalists fund less than 0.5% of entrepreneurial ventures, Cornwall says.

While commercial banks are the number one lender for small businesses, most are not interested in new ventures. Banks will, however, loan money based on personal credit and assets. Before approaching a bank for a loan, Walter Williams, vice chairman of the Knoxville SCORE office, says prospective entrepreneurs should develop a personal financial evaluation and a sound business plan with three years of projected financial statements, including income, loss and cash-flow projections. Banks also consider relevant business experience.

“I might have great experience in retail sales in a coffee shop, but if I don’t have management experience, that’s a completely different subject,” Williams says.

But Cornwall says the best approach for financing a startup is to minimize the amount of outside money necessary through bootstrapping—starting and growing a business with limited resources. Typically, entrepreneurs have about $7,000 to $10,000 to finance a startup, so they become very creative about utilizing bootstrapping techniques.

“I try to teach students not how to raise money but how to create a business that doesn’t need a lot of money in the first place,” Cornwall says.

For more information on bootstrapping, see marketing guru John Jantsch’s blog [3], or read the Bootstapper’s Bible by Seth Godin—now available as an e-book that can be downloaded on Amazon.com [4]

The Franchise Player
A “better odds than going it alone” option for entrepreneurs

Ever thought about purchasing a franchise? Experts say it can be a viable option for an aspiring entrepreneur, but like any other business venture, there are pros and cons to consider.

“It can be a good strategy for people who need the kind of structure and help with a business concept that they can get from a franchise,” says Belmont’s Jeff Cornwall, author of the blog, The Entrepreneurial Mind.

Cornwall says successful franchises offer proven and refined business models, established operating processes and procedures, and well-tested advertising strategies. The franchise route may also be viable for the first-time entrepreneur who wants to go into business for himself but lacks that creative business idea. Max Jones, a Knoxville-based consultant with the Entrepreneur’s Source, and Dan Aronoff, a Nashville-based consultant with FranNet, help clients search for and evaluate franchise opportunities. Both consultants tout not only the advantages that Cornwall references, but also statistics that favor the success of franchises over independent businesses.

“About 80% of franchises make it, as opposed to about 80% of small businesses failing,” Jones says. “But it’s not just the success rate. When we’re selecting a franchise, we are able to validate that success rate by calling the owners and asking them how they’re doing and whether they’re successful.”

Despite this, however, experts caution that like any business, operating a franchise is hard work. In addition, finding the right franchise to purchase requires extensive research.

“There’s a validation phase in determining if the business is right for you, and we stress that people do the research to mitigate the risk,” Aronoff says.

In its “Consumer Guide to Buying a Franchise” (www.sba.gov [5]), the Small Business Administration emphasizes the importance of studying a franchisor’s disclosure document, often called a Franchise Offering Circular, and provides an outline for understanding the document’s key provisions. Such provisions include the costs involved in starting one of the company’s franchises, as well as the company’s bankruptcy and litigation history.

Cornwall warns that lawsuits by franchisees against franchisors are fairly common—a fact one might consider a disadvantage when weighing whether to purchase a franchise. Another possible disadvantage is that franchisors charge a monthly percentage fee (usually about 5% to 8% of sales) for support services that may be beneficial to the franchisee in the beginning but lose value over time.

“This on-going monthly fee is often glossed over by franchisees during startup planning, as they tend to think only about the initial fees and capital expenditures in their planning,” Cornwall says. “They can eat away at profit margins if there is not real value added in what the franchisor provides.”

It’s often expensive to buy into well-established franchises, and some entrepreneurs get frustrated with the degree of control that franchisors exert. Yet, savvy franchisees can enjoy success and even learn to manage their businesses creatively without breaking established franchise rules. In addition to utilizing SBA’s franchise information, visit Inc.com (www.inc.com/guides/buy_biz/20674 [6]) for several articles related to buying and managing a franchise.

The Fundamental Five
Pay attention to the most common Achilles’ heels for growing businesses

The statistics are sobering. According to the Small Business Administration, more than 50% of small businesses fail within the first five years. But you can beat the odds. Devote time and effort to the following five areas of your business, and experts says you’ll increase your chance of survival and better yet, success.

1. Create a business plan and update it regularly. Tennessee State University Paula Roberts says a good business plan includes a business’ goals and objectives, accurate financial statements, detailed industry and market analysis, a comprehensive marketing/advertising plan and management profiles. “A business plan is needed even if financing is not,” Roberts says.

Jeff Cornwall says business planning does not conclude once the business plan has been written and the business is up and running.

“Business planning early in the business is about getting the product, service and market right,” he says. “I have students and alumni who say, ‘I really thought customers were going to want this, but I had to adjust.’ It’s a continuous process, especially in the first couple of years. In two years, your business plan probably isn’t going to look anything like it did when you started.”

The “Small Business Planner” section of the Small Business Administration’s Web site provides comprehensive information, including sample plans, to help write a business plan. Take advantage of other resources, such as SCORE and the Tennessee Small Business Development Centers, but in the end, make sure you’re completely familiar with every aspect of the plan. It’s a reflection of you and your business, and you’re the one who will have to explain it to prospective investors and customers.

2. Maintain a controlled growth strategy. Growth requires planning. StartupNation, a valuable online source “founded by entrepreneurs for entrepreneurs” provides a useful entry titled “10 Steps to Grow Your Business” at www.startupnation.com/pages/grow/10Steps.asp [7].

Beverly Brockman, assistant professor of marketing at the University of Tennessee at Chattanooga, says growth strategies should include an ongoing analysis of the competition.

“A business owner should constantly be looking for new areas of growth that fit with the firm’s core competencies,” she says.

However, Brockman and others warn that while growth can be positive for a small business, it can also lead to its demise. In fact, Cornwall says an inability to handle growth is one of the main reasons small businesses fail. The key is pacing growth to successfully manage cash flow.

“Too many entrepreneurs assume that profits always follow sales,” Cornwall says. “This is not always the case. And even when profits do begin to follow sales, cash flow can lag even farther behind.

3. Transition from entrepreneur to professional management. Brockman says professional management incorporates a proper mix of delegation and management controls, such as creating job descriptions and setting and evaluating goals.

“Moving to professional management requires the business owner to shift from gaining satisfaction through doing hands-on work to gaining satisfaction through doing work with others,” Brockman says.

Cornwall says it’s about building a team.

“If you intend to grow, be ready to move away from the operational part of the business and become a strategic leader,” he says. “Lead and manage using your vision for the business, and create a team that can fulfill that vision at the operational level.”

Cornwall cautions, however, that each new hire can impact the culture of the business, so he says a strategic leader must maintain the value that initially shaped the business’ culture.

“Customers do not come to you because of the product or service, but because of how you operate and provide that product or service to them,” he says. “If the culture starts to suffer, that can have devastating consequences.”

Defining the CEO role in a small business also requires planning and effort.

“Most entrepreneurs have never been a CEO of a growing company,” Cornwall says. “It’s a new job, so they don’t know what it entails, and they sometimes don’t have the skills to do it. They need to continue to learn the necessary skills and figure out what it means to be a CEO and prepare themselves for that job.”

4. Sustain a risk management plan. Eliminating risk is impossible, but taking steps to minimize potential business threats and their impact is well within your control—and exercising such precautions go beyond insurance protection.

Insurance alone cannot provide a complete risk management plan,” Brockman says Entrepreneur magazine’s Web site (http://www.entrepreneur.com [8]) provides a risk management work sheet with a checklist that can help protect proprietary information, prevent crime and ensure that a small business is adequately insured.

But what about the other countless risks that stand to affect your business?

“What if a big deal comes through and financing is needed immediately? What if the owner becomes incapacitated?” Roberts says. “A business must be prepared for both the ebb and flow with updated legal documentation and agreements, written Standard Operating Procedures, up-to-date financial statements, including documented accounts payable/accounts receivable transactions, as well as contingency plans for emergency situations.”

It’s important to protect your assets and revenue streams by focusing on all business risks, and a well thought-out plan, say Roberts and Brockman, requires reevaluation on a regular basis. Devote time each week to considering what could go wrong with your business and decide how you can reduce the odds of such occurrences happening, as well as how you’ll handle them if they take place.

“Don’t wait until ‘what if’ comes knocking,” Roberts says.

5. Develop an exit strategy/management succession plan. How do you plan to exit the business? Do you plan to sell, go public or pass the firm on to your son or daughter?

“These questions should be planned for well in advance of retirement age,” Brockman says.

When you’re busy putting out fires, though, it’s difficult to plan for the end. However, experts say the way you plan to exit the business can impact even the smallest daily decisions. Again, the SBA Web site’s “Small Business Planner” provides tips for planning your exit.

“When it comes to planning, how you exit your business is just as important as how you start it,” writes Michael J. Franz in the “Planning Your Exit” portion of the SBA site. “The goal is to maximize the value of your company before converting it to cash and minimize the amount of time consumed.”

Cornwall also provides the following exit planning tips: a) Evaluate timing issues for your exit periodically to make certain the market will support your time frame. Sometimes exits must be moved ahead if market conditions warrant. b) Consider the ethical issues of exit plans. What do you want for your employees, customers and other stakeholders after you exit the business? c) Set specific financial goals, and the time frame to achieve these goals, based on your aspirations related to wealth. Then establish a specific plan to meet these financial goals. This plan should be both strategic, but also tactical—making clear commitments to action to meet your goal for exiting the business. d) Begin external audit or review processes as any buyer will want your books verified. Three years is the minimum most will want to see. e) Evaluate the various exit options that make sense for your business and understand the implications for your decision-making and planning for the next several years.

Kissing Your Business Goodbye
Experts say it’s never too early to start thinking about selling. In fact, they suggest developing an exit strategy long before that next business opportunity beckons or it’s time to retire.

“Things can be done today that can have big impact on how valuable the business is 20 years from now,” says small business expert Jeff Cornwall.

David Doyle, director of the Tennessee Small Business Development Center at Southwest Tennessee Community College in Memphis, agrees.

“Grow the business to sell it,” Doyle says. “Don’t let the day-to-day activities of the business prevent you from being able to focus on business growth.”

Doyle and Cornwall also say it’s vital that business owners position businesses to run without them.

“If all of what is in your business is based on you and your relationships, it doesn’t have real value in the business world without you,” Cornwall says. “You have to make sure the business is independent of needing you over the long term. If you have an accounting firm, for example, you want to create an accounting firm with 20 employees capable of managing relationships when you are not there.”

Cornwall says one of the fundamental mistakes people make when it’s time to sell is assuming that what buyers are buying is the book value of the balance sheet.

“While assets are important on one level, they don’t have value if they don’t create cash flow,” he says. “What a buyer buys is the ability of the business to generate cash flow in the future, so they’re not interested in assets that can’t create future revenue.

Doyle suggests hiring a business broker to facilitate the sale. Business broker Sam Cantor of Sam Cantor and Company in Memphis says it’s advantageous to use a broker because selling a business is a fulltime job and losing focus on daily operations may result in a competitive downturn that could prevent an acquisition from materializing.

“If you’re trying to run the business and sell it at the same time, there may not be enough hours in the day,” he says. “So I tell my clients, ‘You do today what you did the day before, and let me worry about selling the business.’”

Cornwall says a broker can particularly add value in more obscure industries.

“If you know people buying up companies in your industry, you might approach them first yourself, but if that’s not going on, a broker might be able to help you find potential buyers,” he says.

When it comes to selling, spending money to hire people who know what they’re doing will pay off in the long run, Cornwall says. For example, he advocates working with an attorney who specializes in mergers and acquisitions, rather than a general business attorney.

“They can be expensive, but they pay for themselves many times over,” Cornwall says. “It’s important not to cut corners at this point in the business. You want someone who can put together a solid transaction that will hold up, so that you don’t have to worry about it haunting you later.”

ADDITIONAL RESOURCES

Tennessee Small Business Development Centers

Funded in part through a cooperative agreement with the U.S. Small Business Administration and with additional funding provided by the Tennessee Board of Regents and the State of Tennessee, all SBA-funded programs are extended to the public on a non-discriminatory basis. Reasonable accommodations for persons with disabilities will be made if requested at least two weeks in advance.

Small Business Administration<
The SBA Web site, www.sba.gov [5], offers a wealth of small business resources, including the Small Business Planner, which includes information for the small business owner in any stage of the business lifecycle.

SBA Nashville District Office
50 Vantage Way, Ste. 201
Nashville 37228
(615)736-5881

Visit the SBA Nashville District Office site,http://www.sba.gov/tn, for local information and resources. The training calendar provides details on local classes and events. Download the SBA Tennessee Small Business Resource Guide at www.reni.net/guides/pdf/english/tennessee.pdf [9]

The Tennessee Department of Economic & Community Development
Small Business Resource Guide
www.tnecd.gov/res_guide.htm [10]

SCORE
Counselors to America’s Small Business
The Service Corps of Retired Executives (SCORE) is a national volunteer organization of executives who provide counseling and training to entrepreneurs and small business owners. Visit the national SCORE Web site (www.score.org [11]) for small business tips and tools and to e-mail a business expert for free, confidential advice. SCORE offices throughout the state also provide valuable information on their Web sites and sponsor seminars and workshops.

Chattanooga SCORE
Franklin Building
5726 Marlin Rd., Ste. 515, Chattanooga 37411
(423)553-1722
www.scorechattanooga.org [12]

Nashville SCORE
50 Vantage Way, Ste. 201, Nashville 37228
(615)736-7621
www.scorenashville.org [13]

Knoxville SCORE
412 North Cedar Bluff Rd., Ste. 450, Knoxville 37923
(865)692-0716
www.scoreknox.org [14]

Memphis SCORE
Clark Tower
5100 Poplar Ave., Ste. 1701, Memphis 38137
(901)544-3588
www.scorememphis.org [15]

Northeast Tennessee SCORE
AmSouth Bank Building
208 Sunset Dr., Ste. 507, Johnson City 37604
(423)461-8051
www.scoretn.org [16]