Start-up: September 2004 Archives

Ever since I returned to academics, I have gotten frequent calls from people wanted someone to write their business plan. Not help writing it. They just want someone to write it for them.

Those who are looking for a bargain ask if our students would write a plan for a class project of some sort. There was a time several years ago, when we might be able to find a few students with an interest to do such a project. But not any more. Students today want to start their own ventures as soon as they can, and express no interest in doing free consulting for someone else.

A few of these callers explore my interest in consulting (which I do very little of any more no matter what the project--too much to do helping our students and alumni). When they ask how much I might charge, I give a really high figure that they'd be nuts to pay me. (No takers so far, but even I can be bought in this situation).

When I'm asked why I won't help or prefer that my students don't either, I offer my advice to all aspiring entrepreneurs about business plans:

1. Business plans should be the last thing you do, not the first. The common wisdom seems to go like this: "I've got a great idea, so I guess I better write a business plan". Wrong.

2. Figure out how much you need to make in income and look at all of the non-financial factors that are important in your life. That becomes the standard you use to evaluate each feasible business that you identify. If it can't meet your needs, go on to the next idea.

3. Research the market to make sure that there is really a market. Try to figure out what a customer might pay for what you want to sell. And look carefully at all of the competition to see if that market is already being nicely taken care of. And by the way, there is always competition, no matter what you try to tell me to the contrary. If the market potential is marginal, go on to your next idea.

4. Examine what it will cost to provide the service or make the product. Compare this cost to what you figured out you think you can charge in the previous step. If there is enough profit, keep going forward. Enough can be a difficult standard to nail down. But I like to see at least a 50% profit margin at this early stage. (Of you can't calculate profit margin, take an accounting class somewhere to learn how--you need to know the "language of business"). If there is not enough margin in your idea, give it up and go on to your next one.

5. Make sure you know what you're getting into. Lifestyle issues matter. Know the hours and the investment a business requires before jumping in. Make sure it is something that builds from your experiences in some way, and is something you can be passionate about. There will be some long days and weeks and even months, so do something that excites you and can carry you through these low points. If your hear can't be in this deal, go on to your next idea.

6. Now it is time to write your plan, but first you need to figure out why you need a plan. A plan you write for yourself is very different from a plan you write for an investor. Know the audience of the plan. You probably will need to write a couple of different versions for different uses: one for you, one for your investors, and one for creditors. If the plan starts to break down financially or in your ability to make it happen, give it up and go on to your next idea.

As you can see, a business plan starts with you and your needs. And equally important, it provides a process that helps you learn about the business. It is a process with many exit points that you need to pay attention to so you don't get in too far too fast.

You'll need to intimately know all the details and nuances that are discovered. And when it comes time to use the plan to raise funding, the banker, creditor or investor will expect you to know the plan inside and out. Only the person who writes it will have that knowledge. And it would not look good for you to drag me or some group of college students along to explain everything for you.

StartupJournal offers some follow-up advice to yesterday's post that touched on the fundamental risks of franchising. It offers some ways to reduce this risk.

Small Business Trends reports on a study by the International Franchise Association (IFA) Educational Foundation and PricewaterhouseCooper, which reports that franchised businesses make up 9.5% of our economy (they provide a direct link to this study, but beware that it is a 181 page pdf file).

It is important to keep in mind that the IFA is an advocate of franchising. These figures reflect the very broadest definition of franchising, which includes distribution companies such as car dealers, bottlers, and gas stations. It is not just the small retail business, such as a bagel shop, that most think of when the term franchise is used.

Franchising is often not the happy partnership that the marketing packages franchisors send out to interested parties. Franchisees will often band together in an almost union-like manner. In fact, one of the most common seminars for franchisors done within this industry addresses the litigation issues they face with their franchisees. Broken promises, unmet expectations, and a perception of little value for the often high monthly fees paid to the franchisor lead to these legal battles.

So although franchising can be a good entry into entrepreneurship, do your homework and go in with your eyes wide open.

Anita Campbell has a list of the "hot businesses are for not for those who want get-rich-quick schemes. Rather, they're for entrepreneurs serious about operating a business." The list includes examples of folks who create significant income from a sustainable business. Too bad the government only counts these people as "employed" in the household survey!

Too often I hear pitches from entrepreneurs only to be left less clear on what their business is all about afterward than I was before they began. Presentations to potential investors or even customers can be filled with too many technical buzz words. These entrepreneurs also use language that is intended to impress, but ends up confusing the intended audience. An article in StartupJournal offers some good advice for making a presentation about your business to any audience, but particularly to investors or customers.

"The ability to speak and write concisely and with clarity is fast becoming a competitive advantage for entrepreneurs and small-business owners….Articulating clearly what your business is, what kind of goods or services you sell and how much they cost helps the bottom line. Potential customers or clients appreciate clear and meaningful information. It even can make the difference between success and failure."

Technology start-ups are some of the worst offenders. "Using plain English is crucial when seeking funding to start or grow a business. Venture capitalists and bankers have little tolerance for gobbledygook. If small-business owners can't cut to the chase with answers to their questions, their chances of securing funds are basically zilch."

I was once asked by a friend of mine (a former U.S. Senator) to help him with his struggling consulting business. I started my conversation with my usual question, "So, tell me about your business." Twenty five minutes later, I finally had to ask him to "Stop!" (I found out from his reaction that Senators are not used to people cutting them off no matter how long they go on). However, I had no idea what he was providing through his consulting services even after his twenty five minute pitch.

So, like any professor worth his salt, I gave him an assignment (he was not used to getting assignments from people either). I told him to go away and develop a twenty five word, not minute, description of what he did in his consulting. I wanted his to be prepared so that when asked at a cocktail party in Washington about what he was doing now that he longer held elected office, he would be ready with a clear and concise answer.

He did it, and it worked. Soon he had a steady flow of business because people knew what kind of work he could perform for them. Good business communication should always be clear and concise, but especially when you are an entrepreneur trying to get the attention of badly needed investment money or customers.