BE THE BOSS
HOW TO START A NEW BUSINESS, HOW TO BUY AN EXISTING BUSINESS, HOW TO PURCHASE A FRANCHISEBy MICHAEL BUSCHAuthorHouse
Copyright © 2013 Michael Busch
All right reserved.ISBN: 978-1-4772-9656-1Contents
Preface...................................................................vIntroduction..............................................................1Starting a New Business...................................................3Introspection.............................................................3Choosing a Business.......................................................5The Business Plan.........................................................6Creating a Business Plan..................................................7Executive Summary.........................................................8Revenue Sources...........................................................12Competition...............................................................13The Market................................................................17Marketing Plan............................................................18Management................................................................22Financial Plan............................................................23Operating Plan............................................................25Risk Analysis.............................................................26Business Formation........................................................27Legal and Accounting......................................................28Exit Strategies...........................................................29Financing Strategies......................................................30Purchasing an Existing Business...........................................37Buyer Motivation..........................................................37Seller Motivation.........................................................39Quick-Check...............................................................40Letter of Intent (LOI)....................................................42Due Diligence.............................................................44Pricing...................................................................47Negotiation...............................................................48Terms and Conditions of Purchase..........................................49Required Documentation....................................................50Personnel Retention.......................................................52The Business Plan.........................................................53Financing.................................................................73Closing the Transaction...................................................75Buying a Franchise........................................................77Introduction & Introspection..............................................77Finding the Right Franchise...............................................79Due Diligence.............................................................80Uniform Franchise Offering Circular.......................................80Corporate Headquarters Visit..............................................80Franchisee Visits.........................................................81Franchise Agreement.......................................................83Available Training........................................................85The Business Plan.........................................................86Financing.................................................................87Regulations & Requirements................................................88"Simple But Not Stupid" (A few tips on closing sales).....................91Exhibits..................................................................95Business Plan – prepared March 2000.................................97Small Business Administration Loan Forms..................................135Sample Asset Purchase Agreement...........................................137
Chapter One
Starting a New Business
Introspection
Do I have a vision? Do I have the skill-set to be a CEO? Can I function as the head of operations? Can I assume responsibility for sales? What about bookkeeping? Can I manage risk? How do I react to pressure and stress?
We could continue this dialogue forever, but you get my drift. Starting a new business begins with a process of self-examination. Believe it or not, few people that start businesses would do so if they knew the future. The unforeseen, the unknown, the unimaginable are the rule of thumb in every startup.
There are several essential elements that must be addressed before making the commitment. In today's rapidly changing job environment, this is even more critical. Many people are pursuing their own business as a defensive measure. These include middle-aged managers who have lost their jobs to layoffs, etc., and have minimal opportunity to find a comparable position. Therefore, it is vital to stack the deck as much as possible in favor of success.
Each of these elements is equally important.
• Do I have the support of my family?·
• Are my family and I willing to make the sacrifices necessary to succeed?·
• How will my family and I react to the ups and downs of running a startup?·
• Do I have the ability to step outside the box and away from the insulation· associated with working for a much larger company?
• Am I willing to assume total responsibility for my actions and their· outcomes?
• Can I control fear?·
• Am I secure enough to surround myself with individuals smarter than I?·
• Do I know how to manage?·
• Do I know how to delegate?·
• Should I allow my spouse and/or children to be active in the business?·
• How long can I survive without a paycheck?·
The process of introspection or self-examination is not an easy one. It cannot be rushed and must be thorough. It must involve everyone with whom you are interdependent. To honestly identify your weaknesses as well as your strengths is most important. Success depends upon neutralizing weaknesses while enhancing strengths. For example, when I choose a new physician, the most essential qualification is that they know what they don't know (as opposed to what they do know). Too much ego in the medical world can cost lives. Too much ego in the business world can stifle success. This is especially true in startup businesses.
The assumption used to be that one would never start a new business without extensive experience in that field. But in today's world, many businesses are being launched by inexperienced individuals. While these persons may have had a wealth of experience in other fields, the likelihood of success in these new ventures is slim. This is especially true in the food, beverage, and entertainment businesses. The lifespan of most new restaurants is less than one year. It is a business in which you are literally as good as your last meal. Management and cost controls in any of these three sectors are more complicated and more critical than in perhaps any other industry.
However, the changing business environment will thrust more and more people into starting new businesses in which they have limited experience. And while the interest level for a particular type of business may be very high, the lack of hands-on experience will be most challenging. Yet this can be a very exciting time for those willing to move outside the box. How many of us spent years working for the "Sears & Roebuck's" of the world, believing in job security and pension benefits? In reality, business growth and job creation is going to come from entrepreneurial ownership. Remember, every new business is a small business. This is your time. You are reading this book because you want to experience business ownership and want to avoid as many pitfalls as you can. You may have been forced into this career path, or you may have just tired of the rat race and corporate politics. Whatever your reason, if you are cut out to be an owner, you will embark on the ride of a lifetime and most likely, never return to the past. So don't underestimate the value of personal introspection. It's the first step to becoming a successful entrepreneur.
On the other hand, don't get so caught up in introspective study that you allow it to delay a decision. Your gut feeling is critical to the process—but the decision must be made within a reasonable timeframe. Whether it is "go" or "no go," it must be made on a timely basis. Understand, I said the decision. Once that is made, you cannot shortchange the process of getting your business started.
Choosing a Business
Perhaps the most important step in business ownership is product selection. By that I mean choosing a business for which you are well suited. When you begin to select your business, it's important to ask yourself:
• Am I passionate about this business?
• Am I being realistic about its market potential?
• Am I familiar with the market?
• Do I have any experience in this field or related fields?
• Can I handle the financial requirements – finance necessary growth?
• What is the anticipated gross margin?
• Is it capital intensive?
• Is it labor intensive? If so, what is the skill level required?
I can't emphasize enough the value that passion adds to creating a successful business. If you aren't passionate about your business, you can hardly expect your potential customers to have passion for what you are doing. I've found that a good part of my success has been driven by involving my customers in my business. I've never failed to ask a satisfied customer for referrals. Believe me, it works!
I'm sure you're aware of this, but it's worth repeating. The highest margin businesses are service businesses, and virtually all service businesses are a form of consulting. This means that you will primarily be selling your time. These businesses have virtually no inventory and generally very few hard assets. Although this is my favorite type of business, it can have drawbacks. If you don't have any proprietary technology or systems, these businesses can be very difficult to finance. This is because there are few assets that can be used as collateral to secure either a loan or other type of investment product. It's much easier to obtain financing later on when the business cash flow has improved. I will talk more about this later.
It is very important that you do as much research as possible into your prospective industry, target market, competition, etc. The next section on business planning covers much of this in depth.
The Business Plan
Whether you are starting a new business, purchasing an existing business, or buying a franchise, you must develop a written business plan (sometimes referred to as a strategic plan). A good business plan will enable you to focus on desired outcomes and will serve as a road map for you to follow. It should be updated at least quarterly, to reflect your level of performance. Your business plan should include strategic goals and objectives to guide you from becoming a new owner to a seasoned one.
The business plan is absolutely critical to obtaining financing for your venture. This will be discussed in great detail in the chapter "Financing Strategies."
The business plan is critically important to those inside and outside your business. As mentioned above, it is your road map to defining operating strategies, desired outcomes, profit and loss projections, current financial information (in the case of purchasing an existing business), exit opportunities, capitalization, personnel requirements, marketing strategies, sales strategies, etc. If you intend to do any financing, gain favorable vendor terms, seek investors and/or build a banking relationship for the future, your business plan must also present you—and what you wish to accomplish—in the most favorable light.
The business plan must be compatible with your hopes and expectations. Great ideas fail due to lack of execution. In this case, you are not only the visionary, but the operator as well. As you follow the guidelines in this book, you should be able to move forward with reduced risk and greater confidence. Depending upon the size and scope of the business you intend to start, you may wish to obtain professional help to guide you in the planning process. As discussed later in the book, I am available to mentor, coach, and provide hands-on assistance in getting your business started.
My research has shown that 80% of all new businesses fail. That is eight out of every ten. One business planning service company states on their website that of 29,000 new businesses surveyed, 26,000 failed. This translates into 90%. Of these failures, 67% never had a written business plan, 57% had no outside guidance, and 71% of the owners had not taken any business courses. I repeat, you must have a written business plan if you want to be a successful business owner.
Creating a Business Plan
To begin with, keep it reasonably short, covering the subject matter in a concise and to-the-point manner. We all have short attention spans, and most of us do not read too much detail. Important content is best presented in the fewest possible words. It is critical that we start by developing the plan's table of contents, keeping in mind that as we prepare a business plan, we will likely insert information that will require us to change the content outline. All good business plans contain the same basics, which are then tailored to a specific business. Line up a good copy editor to ensure that your plan has correct sentence structure, spelling, and grammar. I can assure you that the very best writers when reading their works multiple times ... two, three, four times ... find mistakes with each reading. Here is a basic table of contents that has served me well and aided me in raising millions of dollars for new businesses.
• Executive Summary Introduction Value Added Proposition Capital Requirements Use of Proceeds
• Revenue Sources Three years of Projected Revenues
• Competition
• The Market Target Audience Size of Market
• Marketing Plan
• Management
• Financial Plan
• Operating Plan
• Risk Analysis
Executive Summary
Introduction
The introduction is perhaps the most critical element of your plan. It should be no longer than two pages. Depending upon the business model, it could be less than a page. The first paragraph must concisely state your business's legal name and form, business purpose, and general strategy for success. Let's talk about your legal name. This is where I assert a disclaimer. I am neither an accountant nor an attorney and do not provide accounting/legal advice. Nevertheless, there are five common types of business entities: proprietorship, c-corporation, s-corporation, partnership, and limited liability corporation (LLC). Each has its own benefits and limitations, and some are better suited for certain types of businesses. By all means, obtain legal and tax accounting advice! Even if you're not ready to create the entity, you should at least have it in mind when writing your business plan. The second paragraph should identify your target customer and the size of your market.
Example: The Company targets an audience of the more than 35,0001 independently owned and regional chain pharmacies accounting for 35% of the total market. Collectively, they maintain a detailed patient database of more than 135 million lives. 1999 total industry Rx revenues of $120 billion are expected to double, generating $240 billion by 2005.
In the example above, the emphasis is on collecting accurate facts and statistics. It is not sufficienttoguessatthemarketsize;youhavetobackitupwithlegitimatedocumentation (in this case, with a footnote).
Whether we are talking about opening a restaurant, manufacturing facility, or consulting practice, the Introduction contains the same type of information, tailored to each business.
It is very important that you avoid words that are superlative in nature (e.g., superb skills, outstanding marketing strategy). You should also refrain from minimizing your goals and objectives. Many business plans make this mistake by using the word "conservative" (e.g., "The financial projections are a conservative estimate"; "The stated results from our marketing plan are very conservative"). No! No! No! Investors or lenders will form their own opinions as to how aggressive or conservative your projections are. Lenders and investors will discount your projections regardless of where they fall. This is just the way it is. So if you try to direct their thinking by use of words, you do yourself a great disservice and may totally turn off the reader.
Value Added or Unique Proposition
What is unique about or provides added value to your business model? In business terms, this quality is called a "value added" or "unique" proposition. At the time I created Medicine Shoppe International, Inc. I operated one pharmacy that was a pseudo-prototype of what I wanted our Medicine Shoppes to be. I say pseudo because the only thing they were going to have in common was the business model. The new stores were going to look totally different. The value added or unique proposition was that I developed a low-entry investment model that could compete with major chains like Walgreens. Because Medicine Shoppes limited their services to prescriptions and related items, we were able to offer an affordable investment product to pharmacists who wanted ownership—or pharmacy owners looking for an expansion vehicle. In short, the value added proposition was that we were selling a system of doing business. So-called industry experts told me that we could never sell a franchise to a pharmacist who was "professionally qualified" to open and operate a pharmacy. Nevertheless, at its optimum there were over 1,200 Medicine Shoppes operating internationally as far away as India and Taiwan.
Here is another example. Several years ago, I raised $750,000 for a client who wanted to open a flower shop in a major indoor mall location. I succeeded in doing this because I recognized a unique proposition in his business plan. This unique proposition was that we were not in the business of selling flowers or floral accessories. We were in the business of making people feel better(by celebrating special occasions or providing comfort during illness). Therefore, we were competing with the bookstore, liquor store, candy shop, gift shop, etc. By understanding this, we taught a whole different method of selling our products, and that was the "value added" proposition. I will discuss this in greater detail in the section on competition, and again in the section on selling.
The following is an excerpt from the business plan of a B2B (Business to Business) company in the throes of raising venture capital during the dot.com era. This business plan is provided to you in its entirety as an exhibit in the back of the book. But this shows you how this company describes its value added proposition.
"The Company believes it will achieve a market share of eight percent or 3,000 ASP users by the end of Year Two and a fifteen percent market share representing 5,400 users by the end of Year Three. The Company outlines the value added propositions supporting this projection below.
• Electronic linkage in the pharmacy value chain is a foregone conclusion. Pharmaceutical manufacturers, patients, physicians, pharmacies, PBMs (Pharmacy Benefit Managers) and Managed Care Organizations (MCOs) will all be part of the link. Independent retail pharmacies and smaller chains must opt to participate in the company's program or a similar model or risk exclusion from participation.
• The Company enables the pharmacies to keep pace with burgeoning prescription growth by providing the stores with its three-part outside pharmacy fulfillment program, mitigating the stores' need for additional capital requirement while increasing store profits.
• While all B2B solutions can add value, B2B companies incur high marketing· costs to attract "eyeballs." The Company provides connectivity to its target audience, the pharmacy community. Its ASP applications zero in on tools to enable its participating pharmacies to grow market share without a corresponding proportionate investment."
Although this business plan detailed only a concept and vision, with the technology still in development, we were able to obtain a $10 million venture capital commitment. My associates and I envisioned building a business that five years down the road would have a market capitalization of somewhere between $300 and $500 million dollars. But it was not to be! Along came the dot.com bust and the venture capital companies were up to their ears in huge investment losses. Most decided to eliminate new investments except in those ventures that they believed could be saved.
Only months before, these same venture capitalists were throwing money at startup dot. coms as fast as the startups could absorb the capital.
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Excerpted from BE THE BOSSby MICHAEL BUSCH Copyright © 2013 by Michael Busch. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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