So You Want To Start A Business

 Posted by at 5:26 pm  Commitment, Exit Strategy, Startup  Comments Off on So You Want To Start A Business
May 042017
 
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So You Want To Start A Business

Ok, so you’ve made the decision that you want to start a business. That’s great! Congratulations! Being an entrepreneur and living the “startup life” can be great! It can also, however, be extremely challenging at times, so you’ll want to make sure that it is the right decision for you.

Since starting a business is a decision that some people learn to regret, I want to encourage you to ask yourself three very important questions before you take the plunge. There are many more questions you should being asking before starting a business, of course, but these are three critical ones:

 

Why do I want to start a business?

There is a variety of reasons to start your own business. Maybe you are tired of working for and lining the pockets of others. Maybe you believe that being your own boss will be less work, or at least if you do have to work hard, you’ll be working for your own account. Maybe you’ve seen others enjoy extraordinary success as entrepreneurs and you’d like in on that action. The list could go on and on, but let’s address the reasons above, for starters.

Being tired of working for others can be a great motivator! Just realize that even if you don’t have a direct boss as an entrepreneur, there will always be people you are “working for,” including, and especially, your customers. Depending on the industry you’re entering, the level of competition and how demanding your customers are, you may find out that sometimes it doesn’t feel like you are your own boss, even if you own the business!

We won’t spend much time here on the idea of being an entrepreneur as being less work than working for others – it’s not! It starts and ends with you, so you are “on” 24/7. As an entrepreneur, you will likely find it very difficult to get mental health time to just relax and rejuvenate.

What if you’ve seen others be very successful, perhaps in a short period of time and you want to get in on that? Some entrepreneurs do reach extraordinary levels of wealth and success, but realize that usually those who appear to have gotten there quickly have most likely been at it, usually with a history of learning through mistakes, for a long period of time! There are very few instant successes in entrepreneurship!

 

What is my commitment level to the startup I’m about to create?

Following on what I said above about there being few instant successes in startups and entrepreneurship, realize that you are most likely in for a marathon, not a sprint! That’s true even if you feel like you’re running so quickly most of the time that it’s hard to catch your breath!

So, I ask again, what’s your commitment level to the business that you’re considering starting? Is it something that you can picture yourself doing, day and night, for many years to come? Could you be happy over a long period of time working in the business you’re looking at starting? If not, I’d strongly encourage you to rethink whether it’s the right business for you!

 

Is there an exit strategy for the company I am creating?

No matter how much you think you’ll love your startup and the business as it grows, at some point you are going to want to or have to get out of it – you will have to make an exit.

Is there a potential exit strategy for the business you are starting, or will you “be the business”? It’s not necessarily a non-starter if you can’t see a clear exit from your business for the get-go, but I can tell you from experience that it will become a lot more relevant as time goes on!

Some of the potential exit strategies would include selling your business to a third party buyer, or to employees, or even to your family members. In very few cases, you may also be able to take the company public or find other ways to refinance it to achieve some level of liquidity. However you think you may be able to exit the business, other than simply shutting it down and selling the assets, if any, for pennies on the dollar, you’ll want to consider that ahead of starting the business and factor that into your decision on whether it’s the right business for you to start.

Consider the questions above and other factors that are relevant to you, before you start your business! Be thoughtful in the startup process and you’ll greatly increase your chances of starting and building a business that will meet your financial needs, and equally important, allow you to be happy over the years to come.

 

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

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Apr 062014
 
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Baby Boomer Entrepreneurs

What Boomer Businesses Have Going for Them

By Lynne Strang

John Olson was 40 years old when he founded Graystone Industries, a Georgia-based pond and fountain supplies business. Today, Olson’s company is among the leaders in its industry. But what if he had started it ten years earlier?

“It would not have been successful,” he says. “I could not have run a company as a younger man.”

Olson isn’t the only 40-and-older business owner who feels this way. Between 2011 and 2013, I interviewed dozens of late-blooming entrepreneurs to write a book about the success principles they used to start and operate their businesses. Most said they could not have started a business in their 20s or 30s — or if they had, it wouldn’t have turned out as well.

That revelation is noteworthy for those who dream of owning a business but wonder if they’re “too old.” If you count yourself in this group, you can stop wondering. For some people, a later start may increase the odds for entrepreneurial success because it allows time to develop certain characteristics and assets. Among them:

A bigger and better network. In entrepreneurship, the “It’s not what you know, it’s who you know” adage matters. The longer you’re around, the more people you know – and the more likely it is that you’ll have the connections needed to open doors, obtain technical advice, market products or services and find the right help.

A stronger financial position. A later start can provide an opportunity for entrepreneurs to accumulate personal savings — the most significant source of funding for startups, found a 2009 survey of entrepreneurial company founders funded by the Ewing Marion Kauffman Foundation. And while banks usually don’t lend to a first-time entrepreneur, an older one may have a chance. That’s because he or she has had time to build financial assets, establish a credit history and cultivate relationships with lenders.  

A commitment to customer service. Many 40-and-older entrepreneurs are passionate about great service for customers because they’ve been one for so long. They understand the frustrations of long waits, unanswered phones, unreliable quality and indifferent salespeople. As entrepreneurs, they tend to be patient when resolving service issues and practice the Golden Rule. This wins customers’ loyalty and keeps them returning for more.   

More resilience. Older entrepreneurs have lived through peaks and valleys – an inevitable part of starting and operating a company. For younger business owners who haven’t endured as many life events, lean times and dips in business may cause more angst. When you’ve weathered a lot of storms, you know the sun will emerge again eventually.

A grip on reality. People who start businesses after age 40 tend to be more practical about timelines, resources and expectations, which helps them set attainable goals. Among those who concur with this idea is Ken Yancey of SCORE, a nonprofit that provides free support for aspiring and new business owners. At a recent Senate hearing, Yancey pointed out that “encore entrepreneurs” have sensible financial expectations and are “realistic in their scope and projections.” 

Self-knowledge. Older entrepreneurs know who they are and what matters to them. With this self-awareness, they can build profitable businesses that also reflect their core values and provide personal gratification. Julie Savitt, owner of Chicago-based AMS Earth Movers, is a prime example. “It took the first 40 years of experiences to identify the strengths and weaknesses that define who I am today,” she said.

Not every boomer who wants to start a business is cut out for it, of course. If you haven’t followed through on your entrepreneurial idea, it’s critical to evaluate why. Inaction may indicate habitual procrastination, a lack of commitment or motivation, poor time management skills, inadequate resources or an inability to focus. Each of these could doom a company before it gets off the ground.

On the other hand, an unborn business could be the result of a timing issue. For a variety of reasons, such as young children who needed full-time care or a spouse’s demanding career, the earlier years may not have been conducive for a startup. In addition, student loans, car payments and/or other typical bills for younger families may have required a steady income and made it difficult to set aside seed money. The passage of time can remove or ease these obstacles, clearing the way for a successful business undertaking.

The bottom line? If you possess the drive – as well as a viable business idea and sound financial footing – an ideal time to act is when you have gray hair. The second half of life brings wisdom and other benefits that weren’t available earlier. By applying this life experience to your business, you just might take it to another level

Lynne Strang is a writer and communications consultant based in Northern Virginia. She is the author of “Late-Blooming Entrepreneurs: Eight Principles for Starting a Business After Age 40.” Her email address is lbstrang@gmail.com..

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Nov 142012
 
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Should I Start A Business?  Probably Not.

Some people ask themselves this question quite often:  Should I start a business?  For most people, in my opinion and experience, the answer is,  “Probably not, at least not yet”.

The fact is that many startups have little chance of success from the outset.  They are ill conceived and often based solely on the entrepreneur’s desire to have their own business.  That is, they are not created to address a market need that the entrepreneur has identified; they are created in more of a hopeful, “if you build it, they will come” kind of way.

I’m not saying that such businesses can’t succeed, just as I’m not saying that people don’t win the lottery; they do, but the odds definitely are not in favor of such an outcome.

Many of the most successful entrepreneurs I know will not consider starting a business until someone comes to them and tells them that they have a need that is not being adequately served by the marketplace.  Since most of these entrepreneurs are not really passive types, they don’t sit around waiting for people to come to them with this news.  Rather, they constantly have feelers out for where businesses and consumers are experiencing frustration.

Successful entrepreneurs then sift through those frustrations to identify which ones are true business opportunities – the ones where customers are willing to pay sufficient sums of money to solve their problems.  Sufficient, in this case, is defined as “enough to make selling the product or service profitable to a level that it is worth making the investment and taking the risk to start and run the business”.

How many businesses do you know of that were started in this manner?  How many businesses have you started this way?  Again, I’m not saying you can’t be successful by just starting up and “course-correcting” along the way.  I’m just saying that you can do yourself a favor and increase your odds of success by identifying potentially profitable products and services before you invest the (serious) time, effort and many times, capital, necessary to get a business off the ground.

Understand, too, that it is not as though you are going to have a monopoly on the solution to a particular problem or frustration that the market is facing.  If you do, congratulations, but that would be highly unusual.  In most cases, once a particular business comes up on the radar as a decent profit opportunity, a lot of new entrants will come onto the scene.  At that time, in most cases, you can expect competition to increase significantly, which usually means there will be pressure on prices and profit margins.  That’s one of the reasons that it’s so important that the margins you expect at the beginning of the venture be very healthy; that way, they can take a hit and you can still have an attractive business.  Ideally, you should be looking for initial gross margins in excess of 60%.  Such businesses are not easy to find, but they’re out there.

Do yourself a favor and don’t put yourself behind the eight ball from the get-go by selecting a business that has weak margins from the outset, or worse yet, by selecting a business that has weak margins and does not address an identified market frustration / opportunity.  Entrepreneurship can be challenging in its own right, so don’t make it more challenging, or even impossible to succeed, by selecting a “dog” from the start.

I look forward to your thoughts!  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

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Sep 052011
 
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Entrepreneur – Be True To Who You Are

It took me a while to figure this out, but now I see it as a truism.  You must be true to who you are.  I think this is particularly important as an entrepreneur, as when you are charting new and different paths, there will never be a shortage of naysayers.  You must be true to who you are so that you will have an inner confidence that allows you to look beyond the negativity and press on in the direction of your goals and dreams.

I’ll give you an example in my own case, which was one of my early indications that it was futile for me to fight my entrepreneurial tendencies.  I had been an entrepreneur since a very young age, had done very well with it, and most importantly, loved every minute of being my own boss.  Yet, when I finished undergrad, I somehow thought it would be a good idea to go work for a large company.  As if that wasn’t enough, I went into a staid, high-end consulting environment.  The pay was good, the nice offices and prestige were abundant, and I was miserable.  In fact, I don’t remember a time in my work life when I felt more like a fish out of water!  I watched the work being piled on and the partners making excellent money.  I felt like an indentured servant.

At the point when I started “sharing” my work with other people at my “lowest on the totem pole” level, everything started to go seriously downhill.  One partner comment I remember:  “It’s not your job to delegate!  You need to do the work we give you.”  My response, “But he doesn’t have any work on his plate and I’m inundated.  Don’t worry; I’ll make sure it’s correct.”  There were many mildly humorous incidents like this.  I lasted just seven months, then left, probably shortly before they asked me to leave, to take a job with a small, entrepreneurial software company, where I felt much more at home.

It was a good learning experience for me.  I learned that I was not cut out for a large corporate job and all the realities inherent in such an environment.  I’ve had quite a bit of success in advising such companies, but as an outside advisor, not an employee.  I went through a phase, probably before maturing a bit, of thinking that one environment is better than the other, or said more directly, that entrepreneurship is better than working in corporate.  However, with time, I have come to realize that it’s not what’s better or worse.  In reality, we need both.  It’s about what works for you.  You have to be true to who you are.  My Dad spent over thirty years with the same large company, and if you asked him, I don’t think he’d tell you he regrets it.  I maxed out at seven months in such an environment.  Is one of us right and the other wrong?  I don’t think so.  You just have to be true to yourself.

So thus far I’ve talked about being true to yourself mainly when choosing between entrepreneurship and corporate.  Now let’s talk about it in a bit more depth, assuming you’ve taken the entrepreneurial path.  You must also be true to who you are as an entrepreneur.  What do I mean by that?  Well, you can take a lot of paths as an entrepreneur.  You can sell professional services.  You can open a convenience store.  You can develop proprietary technology, assemble an A-level management team, raise venture capital, and try to take your company public or sell it to a strategic buyer.  In other words, there is a very wide range of possible ways to pursue being an entrepreneur.  Before you start your venture, you should take some time to think about who you are as a person.  Consider what you like to do.  Take into account what skills you bring to the table.  Think about whether you want to work with a team or grow something yourself.  In short, you need to figure out what type of business you want to start up.

As you consider these questions, be true to who you are.  Start a business that makes sense for you.  It may not be what others recommend.  They may not even “approve”.  Who cares?  It’s your business.  You will be the one who has to run it, day in and day out.  Make sure that it suits you!  It will be your “blood, sweat and tears”.  If you start a business to try to please other people, trust me, you will never be happy doing it.

First, make sure you understand the difference between an idea and an opportunity.  Once you screen your business ideas and identify true opportunities, all else being roughly equal, choose the one that you feel the best about.  Once you’ve identified business opportunities that truly have a chance of succeeding, go with your heart!  Remember, you will spend a ton of time working on your business.  Make sure it’s something you enjoy.  Be sure it’s something that suits you at a visceral level.  Be true to who you are and you cannot go wrong.

I look forward to your thoughts and questions.  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com.

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Sep 012011
 
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7 Deadly Sins of Startups From a Valuation Perspective

7 Deadly Sins of Startups From A Valuation Perspective

With unemployment high and good job opportunities scarce, many displaced workers are taking the entrepreneurial route and starting their own businesses.  They are hoping their skills from years of employment, often at large companies, will translate into successful small business ownership.  Many are purchasing franchises or existing businesses, while others are using their own ideas or hobbies to start their own unique businesses.  As a result, Small Business Administration (SBA) guaranteed loan applications have soared and ROBS (Rollovers as Business Startups) plans that enable workers to rollover funds from 401k retirement plans to purchase or start a business without adverse tax consequences, have flourished.  The valuation analysis required by both these funding mechanisms has revealed common flaws in these new businesses.  As a result of our active participation in the valuation of businesses for these purposes, we have identified seven common “sins” of business startups from a valuation perspective. For a perspective more oriented toward what venture capitalists and high-end “angel investors” focus on, see 11 Things Venture Capitalists Look For.

1.       The First Deadly Sin—No Financial Projections

The value of most businesses is the sum of the present value of the cash flows expected to be generated in the future.  Amazingly, many entrepreneurs and new business owners are unable to provide a set of financial projections or budgets and the underlying assumptions.  Many believe that growth of the business will just happen and that they will react to that growth by paying the bills, making purchases, etc.  The most successful small business owners prepare, in advance, a forecasted income statement (or budget) and balance sheet that detail: expected revenue growth over the next three to five years, cost of goods sold, fixed costs or overhead, profitability, and how this translates into cash flow, the need for additional asset purchases, etc.  The financial projections may show, for example, that the business will not reach break-even in the first year and that the business will incur financial losses that will use cash on hand or require additional cash infusions to continue operations and pay the bills.  The financial projections may also reveal that the company is unable to service any debt or generate sufficient cash flow to enable the owner to take a salary.  All of these are significant problems that a relatively simple set of financial projections should reveal to the new business owner.

On the flip side, many startup business owners do create a set of financial projections, but they are based on underlying assumptions that are unrealistic.  For example, some startups may be expected to experience rapid growth in the first few years; however, there is a limit to that growth and the ability of the business to sustain that growth.  With growth of a startup come certain expenses that should be anticipated, such as the need for additional staffing, supplies, purchases of raw materials, etc.  Failure to plan and anticipate this can lead to cash flow problems.  Cash is king for any business.  Lack of cash or lack of access to funds to support operations can quickly lead to bankruptcy and closure of the business.

From a valuation perspective, the lack of financial projections, or providing unrealistic financial projections without supporting assumptions, suggests to the business appraiser that the entrepreneur is “wet behind the ears” or fails to understand the implications and necessity of financial planning.  Typically, this has a negative effect on the likelihood of success and therefore, on the current and projected value of the business.

2.       The Second Deadly Sin—No Formal Business Plan

Along the lines of the first deadly sin, the lack of a formal business plan is also common among small businesses and startups.  New entrepreneurs often mistakenly believe that opening a business and putting a sign outside is enough.  It is usually the business plan that segregates viable businesses from an entrepreneur’s hobby that they hope to make into a business.  In some cases the hobby may be a viable business.  Successful entrepreneurs create a thoughtful and realistic business plan prior to opening the business to determine if the business is feasible both financially and operationally.  The business plan includes aspects such as how the business is going to market itself and generate revenues, its target market, operational plans such as staffing requirements, supplier analysis, capital budgeting or expectations regarding the need for fixed assets to start the business or maintain operations and meet growth demands, etc.  The business plan is the roadmap for the entrepreneur, telling where they are going, how they are going to get there, and what resources they need to get there.  A business plan that is well thought out and researched does not necessarily have to be a one hundred page document, but it should be sufficiently long to provide insight into the expected operations and “path” of the business.

The lack of a formal business plan in the valuation process once again suggests that the entrepreneur may not understand the importance of planning for various aspects of the business.  Just as the absence of a business plan bodes poorly for the value of the business, an unrealistic or haphazardly prepared business plan also instills little confidence in the business appraiser with regards to the entrepreneur’s ability to be successful.  A similar statement can be made about the likely confidence level of prospective investors.

3.       The Third Deadly Sin—No Break-even Analysis

A key part of the financial projections and business plan is for the entrepreneur to conduct a break-even analysis.  The traditional break-even analysis reveals what level of sales a business must achieve to cover both the variable costs (cost of goods sold) and the fixed costs (overhead), resulting in $0 profitability.  Beyond the break-even point, the business should be generating profits.  Until the company reaches its break-even point, the business must have adequate financial resources to pay the bills and fund ongoing operations.  Conducting a break-even analysis should enable the entrepreneur to test the reasonability of the business plan and financial projections.  For example, if the business needs to produce and sell 5,000 widgets per month to reach break-even but the capacity is only 4,000 widgets per month, the entrepreneur has a significant problem and will either need to cut costs to lower the break-even point or increase capacity to produce more products.  In addition to traditional break-even analysis, an entrepreneur may conduct a cash flow break-even, which shows how much must be sold for the business to begin generating positive cash flow.

A business appraiser will often consider the startup’s break-even point in the analysis of future returns and risk.  The break-even analysis can make the difference between the business having a value of $0, implying the business won’t survive, and a positive value and future prospects.

4.       The Fourth Deadly Sin—Operating On Shoestring Budget/No Working Capital

Too often, entrepreneurs believe the business will quickly generate enough cashflow to sustain operations and, thus, enter into the new business with insufficient financial resources.  They may try to operate on a shoestring budget until the business reaches cashflow break-even out of necessity due to a lack of access to additional financial resources.  This may involve getting behind on paying bills, which could hurt the business’s credit and relationships with suppliers and vendors.  Obviously, in the absence of access to additional funding sources or lines of credit, the lack of cash also can quickly result in the closure of a business.  Unexpected or unanticipated expenses can quickly lead to financial problems and growth constraints for shoestring operations.  For example, the need for an additional employee to accommodate demand, but not having the funds to hire, can constrict the business’s growth and profitability.

But just as important, business growth changes a business’s working capital.  For example, more sales create more accounts receivable and accounts payable.  The payables can’t be paid until the receivables are converted to cash without using other cash resources.  This lag can create cash flow problems for any business, particularly a startup whose financial resources often are more limited.  Adequate business planning and financial analysis at the outset can help identify potential working capital needs at various critical points in the company’s growth, enabling the entrepreneur to make arrangements for lines of credit, additional capital, etc.

From a valuation perspective, businesses that operate on a shoestring budget have high operating risk, which tends to increase overall risk and lower overall value.  In addition, inadequate working capital or lack of planning for working capital needs tends to increase the financial risk profile of a business and lower the value as well.

5.       The Fifth Deadly Sin—Lack of Startup Managerial Experience

While many startup entrepreneurs have experience in a corporate setting, few have had experience actually running an entire operation on their own.  In a corporate setting, there are already established relationships, financial resources, and managerial depth across other key functional areas of the business.  Usually, in a corporate setting, the functional areas are also managed by different people.  For example, human resources handles hiring and staffing issues, accounting handles the financial aspects and bill paying, the marketing department handles the marketing, and so on.  The entrepreneur who has come from the corporate world has likely been predominantly working in their own functional area with their unique and specialized responsibilities (except in some instances when they have been a high-level executive with full P&L responsibility).  In the entrepreneurial setting, however, they typically must wear several different hats, handling and overseeing sales staff, the accounting function, marketing, etc.  Those entrepreneurs who do not have significant cross-functional experience are often starting their business at a disadvantage, which may be evident in the lack of a business plan, financial projections, and other factors as previously discussed.  While startup ventures often require the entrepreneur to be the “chief cook and bottle washer,” no one can do it all; in most cases, it cannot be a one man show (with the exception being some professional services).  The most successful entrepreneurs have a solid understanding of all functional areas, but also surround themselves with other individuals who may have more experience in particular key aspects of business operations.  For example, a restaurant owner who is also a chef may have a mastery of back of the house operations but limited experience with front of the house operations, necessitating an individual with a skill set to fill that gap.

The business appraiser will typically consider the entrepreneur’s experience or lack thereof in valuing the business.  Individuals with little or no experience are usually considered much more risky than individuals with extensive business backgrounds, particularly if their experience is in the same industry of the new startup.  A higher entrepreneurial risk profile stemming from lack of experience will likely result in a lower value for the business.  While it is not always the case, a more extensive background and level of experience may tend to reduce the risk profile of the startup and increase the value, all else being equal.

6.       The Sixth Deadly Sin—Unrealistic Growth Expectations

Planning for too little growth and trying to play catch up when growth exceeds expectations creates a number of challenges, such as the need to expand operations and capacity and the resulting requirement for capital expenditures and potentially, additional financial resources.  However, planning for too much growth is just as bad, if not worse, in that overinvestment in equipment and materials reduces asset efficiency and return.  As mentioned before, some startup businesses are likely to experience extremely rapid growth in the first few years of operations.  However, the growth of a startup is not limitless and is bound by, among other factors, the business’s capacity to produce its goods and services.   It is easy for an entrepreneur to exhibit “irrational exuberance” when it comes to growth.  In creating growth expectations, the entrepreneur should first consider the maximum potential output of its goods or services based on available equipment, human capital, etc.  Growth over and beyond that level will require additional capital investment, as well as more financial and human resources.  In forecasting growth, the entrepreneur should, of course, also take a close look at the potential demand for its goods and services by considering the markets being served, the competition, and the potential market share that the company may gain given the size, scope, and competitive landscape.

Unrealistic growth expectations typically are easily spotted.  For example, a maker of gourmet marinades has initially good growth potential.  However, its facility can only produce enough cases annually to equal a 1% total market share.  Based on the competitive landscape, the company would need significant investment in advertising to build brand awareness in order to potentially increase its market share to 5%.  However, the revenue expectations as expressed in the company’s financial projections suggest production in the second year that is beyond the facility’s capacity and the financial projections do not account for additional capital expenditures or advertising campaigns.  Fixed costs grow by only 2% in the financial projections, yet by the fifth year, revenues for the company imply a market share of over 15%!

Based on these inconsistencies, the growth expectations obviously are “pie in the sky”.  The business appraiser will likely notice this glaring error, which tends to undermine the integrity of the financial projections as well as the credibility of the entrepreneur.  As a result, the value is likely to be negatively impacted.

7.       The Seventh Deadly Sin—No Risk/Return Analysis

One of the most difficult considerations for an entrepreneur is the risk/return analysis of the potential business venture.  An incomplete or poorly-reasoned risk/return analysis on the part of the entrepreneur may lead a savvy financial investor to turn down a potential investment in the business in favor of an apparently less risky opportunity.

Even in a world with the global financial system and markets turned upside down, there is a relatively clear relationship between risk and return.  An investor in a higher risk investment should be compensated with a higher return.  For example, an investor in a risk free asset such as US Treasury bonds would expect a return of roughly 4%.  An investor in a publicly-traded, blue chip company (a utility company, for example) may expect a dividend yield of 5-6%.  Corporate bonds have returns of 5% and higher.  A well diversified investment portfolio may have a return in the 6-12% range.  “Junk bonds” have returns of 12% or higher.  Venture capitalists expect annual compounded returns anywhere from 30% and up for “risky” equity investments in startup ventures.  Entrepreneurs should recognize that owning their own business involves significant risks.  As such, any investor (whether it is themselves or a financial buyer under the fair market value standard in business valuation) would expect a return significantly higher than that on Treasury bonds, a diversified portfolio of publicly-traded stocks, etc.

For example, suppose an entrepreneur invests $500,000 of his or her own money into their business.  For the first two years, they expect losses which they finance with external debt.  After three years, they are projecting a net cash flow to equity of $20,000, representing actual cash available for distribution as a dividend at year end.  The return in this case is only 4%, which is hardly enough to compensate for the level of risk.  A financial investor would likely opt for any one of a number of other potential investments that offer a higher projected return for an apparently lower level of risk.  For the entrepreneur, however, the investment in the business only makes sense if they factor in their $20,000 net cash flow along with their projected salary and benefits of $50,000, for a total return of $70,000 or 14%, in year three.  The financial investor will receive no salary, so the return calculation is not as attractive for them.

Many entrepreneurs are new to the business world and are overwhelmed with emotions that may tend to cloud their investment decisions.  The most successful entrepreneurs are those who proactively address the seven deadly “valuation sins” of business startups prior to starting operations.  Business owners who are reactive in dealing with these “sins” generally find themselves at a disadvantage, which can often lead to failure.  Entrepreneurs should seek to maximize the value of their business.  To do so, they must address these seven deadly sins or be prepared to face the negative valuation ramifications.

This article was written by Robert M. Clinger III and Paul Morin.  For more information on Robert M. Clinger III and Highland Global (HG), see www.HighlandGlobal.com.  For more information on Paul Morin, see HG and www.CompanyFounder.com/about.

Please leave your comments and questions below or in the top right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 .

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Jul 242011
 
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How To Start A Business

Even though these days I often deal with entrepreneurs and senior-level managers who are much further along in their entrepreneurial careers, I still frequently get asked how to start a business.  Amazingly it’s often these further along and usually successful entrepreneurs or larger corporations who are asking me how to start a business correctly!  How can this be?!  Didn’t I just get done saying that they’re experienced and usually quite successful already?

As it turns out, many folks who have been in entrepreneurship their whole lives and have attained some significant success have never really thought through how to start a business.  Instead, they have subscribed to the “just do it” mentality.  In my experience, while this approach can frequently lead to success, it a can much more often lead to failure.  Granted, in any large group of people just “throwing it against the wall and seeing if it sticks,” there will be successes, some of them notable.  That said, just because there some successes with that approach doesn’t mean it is the way to go.

In my experience and observation, the best answer to “how to start a business” is carefully and deliberately, but with a great deal of confidence and belief.  Just because you take a meticulous, well-thought-out approach does not mean that you’re not an entrepreneur!  In fact, the best entrepreneurs do just that.  They take a measured, deliberate approach to assessing and starting up each business they get into.  They are willing to take risks, but they greatly prefer to take calculated risks and they are willing to constantly update their approach based on the ongoing feedback they receive from their target market(s).

These days, when I’m asked how to start a business, I provide the following steps.  While it is not intended to be an exhaustive list of what needs to be done, and the order of the steps may change slightly depending on the particular situation, I have used and seen this approach used successfully many times.  As one of my mentors told me early in my career, “you want have a powerful plan that can change”.  You must be willing to adapt to changing circumstances and feedback.  You must not be rigid in your behavior.  You must believe that you can succeed, but you must be flexible.

Here are the “how to start a business” steps.  Posts elsewhere on this blog go into greater detail on most, if not all of the steps.

1.)    Understand profitability and break-even analysis — too many people go into business not understanding these basic concepts.

2.)    Understand upside goals and potential — what kind of business are you trying to create? Does the business you are starting right now match your objectives?

3.)    Screen and sort your ideas/opportunities using criteria that make sense.

4.)    Understand the psychology of markets and niches.

5.)    Develop products and/or services that meet a true market need.

6.)    Understand and select appropriate marketing strategies.

7.)    Deploy appropriate marketing tactics.

8.)    Create a full, formal business plan.

9.)    Strive for operational excellence.

10.)  Replace yourself/sell your “baby”.

It should also be noted that you may choose to raise capital at any point along this process.  However, I would suggest that you should not seek to raise capital from angel investors or venture capitalists until you’ve at least reached Step 5, where you are developing products or services based on a true market need.  Depending on how well you know the angel investors and/or venture capitalists, and depending on how much capital you are seeking to raise, you will also likely need to have a formal business plan completed before it makes sense to approach them.  As discussed elsewhere, angel investment and venture capital don’t make sense for a large percentage of start-ups, so before investing a great deal of time in approaching them, be sure you have a business with characteristics that make sense for that type of equity investor.

I look forward to your questions and comments.

Paul Morin

paul@CompanyFounder.com

www.CompanyFounder.com.

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May 062011
 
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There Is No Instant Success

Deliberate Practice Is The Only Way To Become Great

Occasionally, we hear of a competitor, an athlete, or a person in a particular field of endeavor who “came out of nowhere” and appeared on the scene as a major contender. This “instant success” is hardly ever the case. Upon further investigation, almost invariably, this person has had years of preparation and training, and not just random practice here and there. In order to reach expert level in most anything, according to prominent researchers on the subject (for example, see many of the works of K. A. Ericsson), it takes around 10,000 hours (or 10 years) of deliberate practice. This is a form of practice where you don’t just go out and hit a bucket of balls (for example) each day; rather, you hit that bucket of balls (or 20 of them) with a particular iron, with a particular objective in mind, bearing in mind and noting any issues you had. You then focus in on improving your swing and your approach in your areas of weakness. This is a “continuous feedback” loop that will keep you improving. You don’t just go out and “hit your favorite iron” over and over again and hope for improvement.

I am lucky to have an advisory and coaching practice that spans strategic planning, startup and entrepreneurial development, and peak performance coaching. It is a truly fascinating area, as it deals with human potential and performance, individually and in teams and larger organizations. In my experience and observation, the “10,000 hour rule” really does hold true. While it may not be a hard and fast rule at 10,000 hours, it’s a good approximation of the time anyone will need to invest if they want to reach “master” or “expert” level in their chosen endeavor. Most remarkably, this benchmark is not widely known or talked about, and further, even among those that are aware of it, they don’t often stop to consider the implications. The main implication, from my perspective, is that most people will never reach the expert level at anything. Why? Because even if they do end up doing something consistently for ten years, and most will not, they will not have done it in a “deliberate” way. Rather than have 10,000 hours of deliberate practice, they will have had 10,000 one-hour, relatively random, relatively unconnected experiences.

This reality holds true regardless of the field of endeavor we look at. If you are a golfer, or you understand golf to some extent, think for a moment about how the vast majority of people shoot almost the same score (let’s say within 5 strokes), for 30 years or more! How is this possible? Is it because they are simply incapable of doing better? In most cases, OF COURSE NOT! It happens this way because most of them are not practicing “deliberately”. The easiest way to do so would be to work with a coach who understands the concept of deliberate practice. But it’s also very possible, though perhaps a bit more difficult, to practice deliberately on your own. Do most people do so? No they do not. Instead, they essentially go out and play the same round of golf over and over again. Now that may be OK, depending what their objectives are. For example, if their score really doesn’t matter much to them and they just want to be out there to get some exercise and enjoy themselves, so be it. That is a perfectly valid pursuit. If, however, they are truly trying to become “masters” or “experts” with this approach, they are deceiving themselves. It will never happen.

So does this reality only apply to sports? Not at all. It applies to any endeavor, physical or mental, at which you are trying to become an expert. Think about it in terms of your small business or your job. Do you “practice deliberately”? Do you analyze your weaknesses and constantly strive to improve in these areas, day in and day out? Or do you just stick to the things you like to do and feel comfortable with and metaphorically, like the golfer above, continue to play the same round and shoot the same score, day after day, quarter after quarter, year in and year out? Take a close look. Be honest with yourself. Ask yourself if you are willing to do what it takes to become a “master” or “expert” in your sport, business, field, or other area of endeavor. If not, consider doing something else, as dabbling will not get you anywhere you are likely to want to go.

I look forward to your thoughts, comments and questions.

Paul Morin
paul@companyfounder.com
www.companyfounder.com.

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Apr 142011
 
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startup co-founder lawsuit -- Facebook debacleIf there’s one thing the Facebook startup partners debacles have illustrated to us about getting involved with other entrepreneurs and investors in starting a company, it’s this: get everything in writing. In fact, don’t just make sure it’s in writing, make sure it’s written as unambiguously as possible. MAKE SURE YOU INVOLVE COMPETENT LEGAL COUNSEL. I cannot emphasize this enough! You must have competent, and better yet, exceptional, legal counsel, when you are starting a venture. This is particularly true if you are starting the venture with partners and/or investors! What good does it do to get everything in writing if your attorney who’s drafting and reviewing the documents doesn’t know what he or she is doing, especially with regard to protecting you from the many pitfalls of partnering in a startup? This subject merits a lot more discussion and education. I will bring in legal experts to discuss the key issues in further detail, but in the meantime, I wanted to make sure that all of the craziness happening with supposed significant equity owners in Facebook has raised a huge red flag for you. Not every venture will be Facebook of course, but pretty much every startup will be subject to the same issues and risks when co-founders and investors are part of the picture. Your comments and questions, as always, are welcome.

Paul Morin
paul@companyfounder.com
www.CompanyFounder.com.

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Apr 042011
 
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If you are like many entrepreneurs, you probably have at least ten ideas each day for potential businesses, products and services. You’re constantly seeing things and processes that can be improved and you’re probably very interested in and aware of trends in a variety of marketplaces. So are you rich yet? Has your ability to come up with ideas gotten you where you want to be?

Unless you constantly force yourself to differentiate between ideas and opportunities, chances are that your ability to brainstorm new solutions for just about anything has not yet made you as wealthy as you’d like to be. So what is the difference between ideas and opportunities? How can you determine whether this one is just another idea, or a real opportunity that can be turned into a profitable business?

In another article I wrote on a similar topic – idea screening – I provided a series of criteria to help you determine whether a particular idea could provide you with a business that suited you well. Those criteria included:

Does the business have high gross margins?

Are there a lot of employee headaches associated with the business?

What potential does the business have to reach break-even cash flow within 12 months?

What is the startup capital investment required relative to what you are able/prepared to spend?

Do the strengths necessary to be successful in the business suit those of the founder(s)?

What is the founder(s)’ level of enthusiasm for the industry?

What is the founder(s)’ level of enthusiasm for the idea?

Does the business have potential for residual income?

What is the market growth rate for the market/niche you want to go after? How is it expected to behave in the future?

What is the number and strength of the competitors you’ll be going up against? Competition is not necessarily bad, but you’ll want to understand what you’l l be up against.

What will be your ability to take a vacation in this business? Retail, for example, can be tough.

What is the potential for “significant” (to you, based on what you consider “significant”) upside in the business, if you are successful?

Will there be a lot of liability risk in the business? Anything that deals with products or services for young children, for example, can carry a high level of liability risk.

This is certainly not an exhaustive list to measure your potential venture against, however looking at it against these criteria will help you determine whether it’s “just another idea” or a true opportunity that you would like to pursue. Also, and very importantly, what may look like just another idea to some people, may look like a great opportunity to others. It depends very much on your perspective and where you’re coming from. It also depends on what type of business you are trying to create. In another article, I described five broad categories of businesses that you could consider pursuing. These categories included:

Hobby Businesses: for example, if you were to try to turn your love for collecting antique toy trains into a business.

Lifestyle Businesses: an example here would be if you were trying to capitalize on specialized knowledge you had developed and use it to become an independent consultant to businesses on that topic. Rather than a career, you’d be seeking a business that allowed you time and geographic flexibility, while at the same time allowing you to earn a comfortable living.

Franchise Businesses: This would be where, for example, you’d open up a Subway or McDonald’s franchise, with the desire to take advantage of the strong brands and systems they have created and provide to their franchisees.

Self-Funded Growth Businesses: In this category, you invest your own financial resources and “blood, sweat, and tears,” with the objective of creating a growth business. Here you’re not looking at hobbies usually and you’re not just looking at creating a comfortable lifestyle with time and geographic flexibility. Rather, you are “putting the pedal to the medal” and trying to build a “real” growth business, with multi-millions in sales and most likely, a decent number of employees.

Outside-funded Growth Businesses: Here is where you try to do pretty much the same thing as in the Self-Funded Growth Business model, but you try to do it more quickly and/or on a greater scale. In this case, you would typically take equity investment from “angel” and/or venture capital investors.

There is no wrong type of business to start, of course – it is an individual and personal decision, based on your biases and where you happen to be in life when you decide to start a business. Even though there is no wrong type of business to start though, as you can see, your mentality with regard to which type of business you’re trying to create will have a significant impact on how much weight you put on the various screening criteria discussed above. If you’re trying to start a Hobby or Lifestyle Business for example and you determine that the startup costs will be $10 million, that may be an extreme negative. If you’re looking to start an Outside-funded Growth Business, on the other hand, then startup costs of $10 million may be very much in the realm of reason.

So, in conclusion, work hard first to understand what type of business you would like to create. This doesn’t need to be cast in stone, but depending on where you are in life, you may gravitate strongly toward one of the categories mentioned above. Once you’ve thought that through, when you get your normal flow of business/service/product ideas, likely on a daily basis, consider them in light of the type of business you’d like to create.

Once you’ve considered your ideas in the context of the type of business you are trying to create, and discarded those that don’t match with your objectives and vision, you are now in a position to apply the idea screening criteria mentioned above, as well as any others you may like to add. You can find an Excel (or PDF, if you’d prefer) screening worksheet here to help you with this process.

I hope you have found this post helpful as you work to differentiate between ideas and true opportunities, in the context of the type of business you’re trying to create. If you have questions or comments, don’t hesitate to contact us or to leave a question or comment below or in the top right corner of this post. Either way, we’d love to hear from you as you look to turn your ideas into opportunities and profitable businesses.

Paul Morin
CompanyFounder.com
paul@companyfounder.com.

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Apr 032011
 
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If you are starting or already have an early-stage business, you may have come up with an idea and just decided to go for it. While that works for some, I have found that it is always a good idea to get very clear in your head the objectives you have for a business, before you start it, or at the very least, before you try to grow it too much.

There’s probably an infinite number of categories of businesses you could create, particularly if you want to get very specific about the venture’s characteristics. Rather than try to take on the world here, we’re going to focus on five broader categories of businesses that I have found encompass the vast majority of companies out there.

1.) The first category is what I call Hobby Businesses. An example of a business that falls into this category would be one where you collect antique trains, so you decide to go into business buying and selling them. The beauty of a business like this is that typically you won’t lack for passion for the subject matter, as it’s something that you’re already willing to do in your spare time for free. Another positive about this type of business is that no matter how much time and resources you invest, within reason, with deference to your relationship with your family, you can hardly lose. You love the subject matter and would probably be spending money on it anyway. The downside to a business like this is that it’s hard to keep your hobby and love of the merchandise separate from the commercial interests of the enterprise. In the end therefore, while there are exceptions, a business such as this typically remains in the hobby realm and does not develop into a larger, more profitable enterprise.

2.) The second category is Lifestyle Businesses. This is the kind of business that allows you to have flexible hours and maybe even flexible geography, yet pays you well enough to make it worth doing. An example of a lifestyle business would be working as a business coach. There’s no doubt that there are some coaching businesses that are large, have several partners and various administrative staff and are extremely profitable, but on average, these are one- or two-person Lifestyle Businesses. They take advantage of the background and capabilities of the owner and allow that owner to make a good wage with a lot of flexibility; however they are highly unlikely to become fast growth companies with many employees. There is nothing wrong with Lifestyle Businesses, in fact, they can be great! It is important though that you understand their limitations and realize that if you are trying to create a fast growth business, then that is a different animal, with different lifestyle, investment, risk and upside expectations.

3.) The next category is Franchise Businesses. This one does not require too much explanation, since as consumers, we’re all familiar with a large number of very successful food franchises, such as Subway, McDonalds, etc. Franchise Businesses do not appeal to all entrepreneurs, but they do appeal to a good number, particularly those who have come from jobs in corporate America and are accustomed to a structured environment. Franchises can be great businesses, with excellent profitability. Also, on average, given the proven system they usually provide to their franchisees, Franchise Businesses fail at a much lower rate than the overall startup population. On the downside, Franchise Businesses can require a significant initial investment that is outside the reach of many entrepreneurs. They also require ongoing royalty payments to the Franchisor. That said, they can be an excellent alternative for the aspiring entrepreneur who has very little experience in startups and who has some funds available to dedicate to the franchise startup costs.

4.) The fourth category is Self-funded Growth Businesses. These are not hobbies, they are not Lifestyle Businesses and they are not Franchises. Rather, they are businesses that you start with the intention of growing them into large enterprises with many employees and many millions of dollars in revenues. In this category, you are funding the startup costs yourself, from your own assets and available credit. You are not seeking outside investors, most likely because you want to retain control of the business and you do not want to have to answer to equity investors, whether they be friends and family, angel investors, or venture capitalists. Since you typically need significant funds to start a growth business (let’s say $250k plus), this type of business is usually started by someone who is either independently wealthy from other sources, or has started and been successful with other businesses and wants to pursue their next great idea. Just because businesses in this category are self-funded at the outset, does not mean that they will not take growth funding down the road, rather it means that in the startup phase, the company founder(s) do not want the complications of having outside investors. Businesses in this category can fall into a number of industries and business types, depending on the background of the founder(s).

5.) The fifth and final category on this list is Outside-funded Growth Businesses. Such businesses often fall in the technology space, as this is an area of great interest for angel and venture capital investors, two of the most common types of equity investors in early-stage companies. Because they are “Outside-funded” does not mean that none of the founder(s)’ money goes into the business; it just means that a significant portion of the funding comes from outside sources and a good portion of the control of the venture is ceded to those outside investors. For many types of true growth companies, given the startup costs required relative to the net worth of the company founders, there is no choice but to take outside capital [investor pitch template, here]. This is not all negative, of course, as having the participation of the right investors can help the founders accomplish many of the early partnering and customer seeking activities necessary to achieve success. On the other hand, most any entrepreneur who has worked with outside investors will tell you that they would much rather be able to drive the business in the direction they want, without having to answer to outsiders. So taking equity investment from outsiders is a doubled-edged sword, but the reality is that, particularly in the tech space, very few of the great companies that you would know by name were started and grown without the benefit of outside equity capital.

This list of startup business types is not exhaustive, but it gives you an idea of the five broad categories of businesses that you may consider starting. Before you invest the first dime in your business, I strongly suggest that you come to terms with the type of business you are trying to start. If you find that you want to start a business that you simply cannot afford to fund from the resources of the founder(s), you will need to seek outside capital. In that case, there’s a wide variety of funding sources that you can consider. In any case, you will want to make sure you do a good job of screening your ideas to ensure that they truly represent the types of opportunities you want to spend your time, money and other resources pursuing.

I hope you have found this helpful in gaining perspective on the types of ventures you may start up and grow. If you have any questions with regard to how to apply these ideas to your particular venture, don’t hesitate to contact us. In any case, we’d love to hear your thoughts/comments/questions/ideas. Please enter them below or in the top right corner of this post.

Paul Morin
CompanyFounder.com
paul@CompanyFounder.com.

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