One of the larger challenges of the entrepreneur or self-employed is how to manage their own personal finances. The challenge is manifold: income can be erratic, a business is a jealous cash flow mistress and the financial services industry is mostly made up of life-time employees with little understanding of the day-to-day lives of the self-employed (a frequent criticism by the entrepreneurial community- which is why, anecdotally speaking, many entrepreneurs tend to hire boutique owner-manager advisory firms. Like attract like).

The last issue is especially problematic. Some members of the financial services industry believe that advice that works for the employee applies equally to the entrepreneur.

There are certain pieces of advice that a run of the mill financial advisor cannot tell an entrepreneur; some of the items that immediately come to mind are:

Obtain credit before you start and manage your credit rating effectively.

The hard truth is that banks are the ultimate bandwagon fans of entrepreneurs: they only like lending to them when they are winning; to paraphrase Steve Shutt on the fickle Montreal Canadiens fans: “they love you win or tie.” Before an entrepreneur achieves success, the banks will have no time for you.

Thus, it is important to line up lines of credit, HELOC’s and other facilities before the business is ever started. When the business is up and running, most credit will have to be personally guaranteed by the owner manager. Thus, it is also important, no matter what stage the business is in, for: (i) the owner-manager to maintain its credit rating; and (ii) not take out too many credit cards (since it affects credit utilization and lowers credit scores).

Build a personal emergency fund. Put a stop loss on how much to fund a money-losing business

Businesses fail. If it does, the entrepreneur needs to ensure it has the proper financial resources to continue on with life. Establishing a properly funded emergency fund should have a higher priority for the self-employed than the employed (remembering that in many jurisdictions, unemployment insurance is not, or only recently, available to the self-employed so there is little to no cushion to fall back on if the business has to fold).

If the business is failing, it is important to put a stop on how much more to fund the business. In other words, do not deplete all your personal assets to fight a losing battle. Leaving something in the bank account to live life or launch another business (running businesses are addictive). One of my less successful venture died a quiet death not because the potential was not there but because I had reached my self-imposed limit of how more money I was going to put into it when it was cash flow negative month after month.

Consider having your spouse fund your retirement contributions in the first few years of the business or if the business is suffering a downturn

While I agree business owners need to fund their retirement, the practical answer is that it is very difficult to do so in the first few years of your business or if the business is suffering a downturn. Businesses require cash to start-up or to maintain. In start-up or downturn situations, squeezing out cash flow often comes at the expense of the owner-manager taking a reduced salary, no salary or contributing to the business with their own funds.

The practical advice investment advisors and accountants should be giving to owner-managers with start-up businesses or businesses suffering a downturn is not “fund your retirement,” which only reinforces entrepreneurial distrust of life-time employees giving them advice, but look at the spousal contributions to retirement portfolios, loss-carry back tax rules or similar tax planning. This involves a fair bit of co-ordination between different types of advisors but could well be worth it.

The traditional asset allocation rules do not apply to entrepreneurs

The traditional asset allocation rule is 120-your age equals the desired percentage of equities in one’s portfolio. However, how an owner-manager makes money is similar to the stock market – a higher risk, higher reward proposition. In other words, both the owner-manager’s income-production and investment philosophy share the same degree of risk.

Accordingly, a more appropriate asset allocation for owner-managers may be to set up a portfolio which is not correlated with income production- as erratic as it may be at times. This means a greater emphasis on steady income producing vehicles, to counter-balance really high or really low salaries from month to month, and an asset allocation which is less heavily weighted to equities. I have amended the 120-your age rule to 90-your age rule and the purpose of my dividend fund is to create income production from my investment portfolio to smooth out business income.

If the business is doing well, please pay yourself!

Some entrepreneurs hate paying tax so much, that when the business is doing well, they leave a lot of money in the business to take advantage of the lower tax rates. The one problem is that the business (privately-owned businesses at least) should work for the owner-manager and not the other way around.

To paraphrase entrepreneurial expert Rick Spence, the issue with entrepreneurs is that they over fund their business at the expense of their own personal finances. If the business is cash flow positive, there are a wide variety of vehicles owner managers can take advantage of which employees cannot such as Individual Pension Plans and Employee Life and Health Trusts. Use them. Fund them. These are specific vehicles created by government for owner-managers as a  reward for their innovation and risk-taking. It would be a shame if they were not used. No use building it and not enjoying it.

Although small business starts appear to be consistent regardless of the economic cycle, many people are forced into entrepreneurship during downturns. Some will succeed. Others will fail. Why a small business succeeds or fails is often a subject of great debate and academic research.

As a general comment, economic conditions, in and of itself, is not a prime reason for business failure. In fact, more than half of the 2009 Fortune 500 companies and nearly half of the 2008 of Inc. Magazine’s fastest growing companies were start up businesses which began during an economic downturn. Opportunity and risk are opposite sides of the same coin. More practically speaking, downturns tend to lower the cost of labor and goods- key expense controls for any business.

As to specific reasons why businesses fail, I would suggest the following as some major reasons:

Negative attitude of the owner manager. Owing a business is like being in a relationship. You can fake that everything is ok for so long but people will figure it out. Negative attitudes about business prospects, the good or product or, most importantly, self-image of the owner manager will doom the business. Ever meet an owner manager of a store who was rude to you? Most likely, it was because they do not like their business and they were taking it out on the customer. You would not shop at that shop again would you? Since it is a “soft skill”, it is often overlooked but successful entrepreneurs are positive (almost to a fault). Watch an interview with any successful business person. They are upbeat about themselves and their business. It is contiguous and their employees begin to emulate it too.

Failure to follow a plan- much less have one. Entrepreneurs typically figure out who among their colleagues are doing well. The successful ones have a really boring plan they are following with appropriate adjustments. The not as successful, but much more exciting, entrepreneurs are bouncing from plan to plan, idea to idea. Too often their emotions override a well-thought out plan, they don’t have the patience to follow a plan or they don’t have a plan in the first place. It is very similar to an investor with no investment plan. They just keep buying willy-nilly with often poor results.

The key is to think of the exit before you enter. Are you building to sell? Operating until you die? Building as a hobby which makes money? If an entrepreneur never had an exit strategy to start out with, best to think of one now and plan towards it.

Failure to understand the market. In the simplest sense, are you selling quantity or quality? If you sell quality, you should never engage in a race to the bottom in pricing and if you are selling quantity, you cannot necessarily spend too much time/money on the customer (this is why cell phone companies treat us properly; pricing wars have turned minutes/data into commodities. It has moved to a high volume, low margin business).

Determining the market is key since it should anchor how the business sells (mass advertising or targeted marketing-for example, Tiffany’s only advertises in high-end mediums), what expenses it incurs (retailer make little so they pay their staff little) and where it should expand.

Once this is figured out, what is the sales cycle of your customer/client? Is it fast (a dollar store), medium (website design) or long (selling anything to large corporate clients)? One needs to figure out sales cycle because…

Failure to understand cash flow cycles… dooms businesses from a dollars and cents perspective. For example, assume a business has accounts receivables aging, on average, at 45 days at a 95% realization rate (in other words, it takes, 45 days to be paid and 5% is never recovered), the business has to negotiate terms with suppliers or obtain credit from lenders or have sufficient cash to either pay the supplier on 45-60 day terms or have the cash or credit facilities to bridge between the time paying the supplier and when the business is paid. At a 95% realization rate, the business also cannot spend 100% of profit since not all sales will be collected. If the owner-manager is not a numbers person, it is strongly advisable to hire a good book-keeper who not only keeps the books but spots these trends (my belief has always been that a good book-keeper provides more value than a good accountant in the early days of a business since accountants are generally too backwards looking and the cash is all gone by the time they spot the mistake).

Lack of good talent management. This is my sin. Entrepreneurs are DIY to the extreme or, because they are so close to all facets of the business, they tend to delegate poorly or assume their employees have the same understanding and provide them with instructions under this assumption (he writes looking guilty).

The entrepreneurial saying is “sell what you are good at and buy what you are not.” It hurts to spend money on something the owner manager knows it can do but one has to leverage time properly towards the greatest revenue generating activities and nurture employees to support these activities.

Burnout. Entrepreneurs are, by heart, micro-managers. The issue with this is that taken at the extreme, it can cause the entrepreneur to resent the business (see negative attitude); King Henry VII of England notated and initialed every single ledger entry (mostly rent rolls from Crown lands) to ensure no one cheated him. He died the wealthiest King of England in centuries but was utterly miserable and alone.

My overarching advice is ask for help. Entrepreneurs as a community are always willing to help one of their own. One would be surprised how receptive entrepreneurs are to helping one another.

I also wanted to end with my favorite quote on entrepreneurship by Paul Gram: “Running a start-up is like being punched in the face repeatedly…But working for a large company is like being waterboarded.” Good luck to all the entrepreneurs out there.

The conventional wisdom on starting your own business is that the odds are against you. The frequently cited statistic is that 75% of all businesses fail within the first 5 years. However, the devil is in the details. The typical methodology of measuring business failure is to tabulate the number of employer accounts opened with the U.S. Department of Labor and the number of employer accounts closed in any particular year and using employer account openings and closing determine how long a typical employer account will remain open. A closing of an employer account is generally marked as a business failure.

However, employer accounts close for a wide variety of reasons other a termination characterized by bankruptcy. Businesses merge. Businesses close down voluntarily. Owners retire. Businesses move. In a 1996 study, researchers found that if business failure was solely defined as bankruptcy, the business failure rate drops to under 1%. The same study found that small businesses cumulatively failed 64.2% in a 10 year period but less than 6% due to bankruptcy. This is a far cry from 75% failure rate within 5 years.

(admittedly, given the difficulty in tracking a sector as large and diverse as small business, the statistics tend to be everywhere. Entrepreneur Magazine found an average life of a small business to be 11.2 years and 40% of small businesses survive after 6 years).

What the statistics tend to bear out is something I saw quite often as a lawyer. Businesses fail because the opportunity costs of doing something else outweighed continuing to run the  current business rather than the common perspection of some cataclysmic event ending the business. Owners found jobs. People retire. People sold out.  Entrepreneurs start other businesses (serial entrepreneurship is a common “ailment” among entrepreneurs. As Milton wrote: “better to rule in hell than serve in heaven.” There is a certain addictive quality of being the fool in charge as opposed to listening to another fool).

Beyond the statistics though, my professional opinion is that many business owners bail out too quickly; a non-tech business generally does not gain traction until year 2. Alternatively, owners shut down businesses quickly for two major reasons- poor cash flow planning and a failure to appreciate sales cycles properly (the quick and dirty is if you are in a high volume, low margin business you have to measure turnover carefully.  If you are in a low volume, high margin business your expense control and cash velocity are key).

This impatience draws a certain parallel to the average investor. The Dalbar Qualitative Analysis of Investor Behavior found the average holding period of a stock fund ranges from 2.46 years on the low end to 4.31 years on the high end. In most cases, this is far too short of a period of time for most retail investors to benefit from an investment.

Regardless of whether an entrepreneur stays a short or long time, how do they end up doing? The National Federation of Independent Business estimates that 39% of businesses are profitable, 30% break even, 30% lose money and 1% cannot be determined. This statistic, like all statistics, is subject to some debate.

However, what is striking about this number is it parallels surveys of real estate profitability. The U.S. Census of property owners and managers found 41.4% of those surveyed reported they made a profit, 16.2% broke even, 26.7% lost money and 15.7% did not know how they did (not knowing whether you made a profit, broke even or lost money is probably a good indication its time to think about not being in real estate anymore).

There is clear overlap between small business owners and property owners since the latter is a subset of the former. However, the larger point being that the degree of risk of starting a business is not materially different than investing if you believe the statistics to be true.

As a society, we tend not to embrace entrepreneurship given a minority of the population are entrepreneurs (in North America, self-employed taxpayers compromise less than 20% of all taxpayers) and our ignorance tends to impart a greater degree of perceived risk. Yet, in the same breath, those who dismiss entrepreneurship as too risky turn around and flip their stocks too quickly or become real estate investors with relatively the same success rates.

Entrepreneurship is not a lifestyle choice for everyone. Certain people are destined for business failure.  However, it is unfair to gloss entrepreneurship as a riskier investment choice. It is risky if you don’t know what you are doing but the same concept applies to investing as well.

To state this another way, what determines the risk of starting a business are the same factors that would make investing risky: lack of knowledge and education, lack of emotional control, lack of understanding of the market. Just because investing in stocks and bonds is more popular than investing in starting a business does not make the venture any more or less risky.

As an editorial note, it is important to continue to nurture small businesses even if you are not an owner manager. After all, small businesses are job creation machines and the economic recovery will not coming from big business but from small business and a better indicator of a main street recovery will not be stock prices but small business hiring numbers. As I stated before, my true metric of an economic recovery will be small business hiring numbers.

A funny thing happens during recessions. The number of people enrolled in multi-level marketing (MLM) businesses spikes even as the revenue of MLM companies (at least those publicly traded) decreases. For example, Pre Paid Legal Services, Inc., traded on the NASDAQ exchange, reported in its last quarter that membership revenue decreased 3% but associate services revenue rose 1% due to an increase in total new associate enrollment.

More specifically, I am being told that there are a number of MLM opportunities in the personal finance and self improvement/life enhancement niche (for lack of a better term) popping up with aggressive recruitment efforts underway. Certainly, with  set-up fees less than a traditional franchise and a work from home philosophy, MLM tends to appeal to those who want to make part-time income between jobs or simply want a new career opportunity. But is MLM for you?

First, let’s face facts. MLM has a terrible public relations record. As I posted in the past, MLM is not illegal as a business concept. However, the tactics used by many MLM business, most notably pyramiding, tends to give the entire industry a bad name. Whether perception or reality, the first thing you have to figure out is whether any particular MLM is actually engaging in illegal activities or not.

Pyramiding and building a sales team are very fine distinctions; large sales organizations often compensate senior sales executives an over-ride on their downline. The question often boils down to is an actual good or service being sold or are you building a sales team for the sake of building a sales team (a red flag)? If in doubt, google. FTC/Competition Bureau/SEC investigations or findings may show up and decide accordingly.

Let’s assume the business is actually legitimate, what are some things to consider?

1. You have to spend money to make money. Most MLM will charge their associates/members/representatives an enrollment fee. For example, Pre Paid Legal Services, Inc. charges new associates an average of $106 (as a note, I am not picking on or endorsing Pre Paid Legal. As a publicly traded company, they have the most readily available public information on hand and, hence, the multiple references to them). The enrollment fee may not be much. But, if you have never sold before, many MLM companies offer training tapes and instructional tools for sale. Even though you can work from home selling, every once in a while, you have to meet potentials.  This all costs money. Stripped of the negative connotations,  MLM is, in essence, like any other business. You can’t run a business without spending some money. Keep this in mind.
2. You have to be willing to sell. On a similar vein, a business that can’t or won’t sell is a business that dies.  You have to be willing to sell either to clients or sell to other people to join your sales team. Sales is hard. The best salespeople are the people who get rejected the most because they ask for the most sales. You really have to reconcile yourself to this fact (for MLM or becoming an entrepreneur in general). To address the issue head-on, the perceived ugly side of MLM is that you are “forced” to sell to friends and family. However, the first principle of any sales strategy is to sell to your hot and warm list first. Thus, I tend to believe this perceived ugly side of MLM is born of three objections: (i) the good or service is really not worth buying; (ii) a lot of people who loathe selling are joining MLM; or (iii) some MLMs are teaching terrible sales tactics. I am not sure I would have an issue with a friend who was in a MLM who sold food or some other staple at low prices (see the Tupperware parties- not typically MLM but same concept of selling to friends and family and people have little issue with them because they overcome objection (i)); I am not sure anyone appreciates being sold high-fee mutual funds, some dubious alternative medicine or some nebulous plan to reshape your life.
3. You have to be in it for the long haul. I have started enough business to know that a typical life cycle of a service-based start-up is an immediate spike in business (the hot and warm list sales), a leveling off and then comes the critical junction: you either go up or the entire thing falls apart (the overnight millionaires are so so rare in start-ups). The reason why things fall apart is that an entrepreneur typically fails to start putting prospects in the pipeline in the early stages of the leveling off stage but your costs increase (the mistakes being: (i) in the spike period, you think everything will be great and you increase your fixed expenses too fast; or (ii) you service yourself out of your own business by operating in the business too much and not selling). The same principles apply to MLM but with an additional quirk. The industry has so much bad publicity, sales cycles are typically longer than non MLM. MLMs are not get rich quick schemes.
4. Your exit strategy is? I can’t answer this question. If anyone can share how you get out of a MLM, it would be appreciated. However, as the Financial Blogger points out in the case of Primerica, your clients were never yours to begin with so you are building someone else’s brand for them.  This would appear to make exiting difficult since you can’t really sell someone else’s good will.

In the personal finance context, The Financial Blogger has long blogged on Primerica which is the most famous of all MLMs selling securities. As with everything else in life, investigate for yourself and then decide. Good luck.

I have to admit my bias upfront. I hate working from a home office. I suppose I was weaned in the old school culture of work-dress up, attend to your office to attend to work- and I enjoy the ceremony of going to work even if I don’t appreciate the armpits in my face in public transit. However, building a business, part-time or full-time, from a home office is an effective means to control costs and enjoy a work-life balance. I started a business from a home office and many of my legal clients enjoyed great success building businesses from home offices,  some having been only forced to move when growth in revenue and employees forced a relocation.

Based on personal and other people’s experiences, what are some effective tips in building a business from a home office?

1. Separate the office from the home. Your physical environment influences how you can increase your productivity. Working from home does not mean you can be and act like a slacker. Physically separate out your home space (in a small space, a screen or a cabinet with a fold out shelf can help) so you know what’s work and what’s life; anything that falls in the “life” category- tv’s, iPod speakers, books- you attempt to physically separate. Ideally, what you want to do is physically enter the home office  “work space” so that you are prepared to do business and you can get through the day effectively. It goes without saying that you should have separate phone lines and email addresses to keep the two separate to appear professional. This is harder to do in small spaces like condos but some new condos now have business centers for their residents.
2. It is a business. All businesses keep hours. Yours should too. This one does not need too much explaining. Keep a structure of when you work. Creating a scarcity of time may also focus you on prioritizing and being efficient which is harder in a home office when you think you always have time to do something else.
3. Make a real effort to get out of the office to sell and market. Successful entrepreneurship is dependent on the ability to sell and market no matter how much you may hate it. Non-internet based businesses based out of a home offices have an additional barrier to selling and marketing. The house may not be close to your clients and there is a natural pull to stay comfortable at home. Ideally, if you are not naturally a sociable person, you should discipline yourself to have a sales and marketing day out of the home (avoid Mondays and Fridays for obvious reasons).
4. Create a support network. Building a small business can be a lonely experience and, unlike working in a large organization, no one is arranging for lunch and learns, training and social events for you. The combination of loneliness and the potential inability to grow by hearing differing viewpoints can stunt small business growth and be mentally draining.  Just like workers in office towers meet their colleagues for coffee, create a support network for yourself (there are some devoted to other small businesses working out of a home office) and allot time and money for training.
5. Set your financial goals to support the expense of a traditional office. I may get some flak for this one but people move, there are too many employees for a home office, families grow and need your home office space. Your business should not be dependent on a nil to nominal office rent. Even if you never move, financial projections based on industry market rents as an expense will build contingencies in case you do move and its never a buy thing to aim high and reach it.

Finally, I hope everyone takes a minute to honor those who serve or served. Lest we forget.

Picking a small business banking account can be like eating at a buffet. There is something for everyone but it is hard to tell which offerings are the best for you given that they are so diverse. The issue is compounded by the fact that small business banking is not like personal banking. A small business typically requires a lot more services than personal banking and there should be, from the customers’ perspective at least, there should be a balance between paying the lowest small business banking fees and deriving value.

I have used 5 different banks and 1 credit union for small business banking. As a lawyer, I have dealt with all the major banks on either transactions or written nasty letters on behalf of clients to these same institutions. From all these experiences I would make the following observations about picking the right small business bank account.

Not all small business bank accounts are built the same; every bank has a niche. As one of the comments in Million Dollar Journey’s  linked post noted, every bank has a professionals division (banking for doctors, dentists, accountants, lawyers etc. etc.) or some type of niche they serve. The plans for these types of industries are different than other businesses. Lawyers, for example, need to have no holds trust accounts (for example, a real estate lawyer has to be able to deposit mortgage funds in trust for a purchaser and then immediately pay it out to the vendor soon after deposit).

Some banks are great at servicing these types of industries (Scotiabank is traditionally the leader for servicing doctors and dentists; RBC is very active in this same industry). Others have a particular niche; TD is still my favorite for banking on-line. HSBC is a very good bank if you have business internationally (there is an extremely long hold period if a USD cheque is deposited from a non US bank; HSBC has a plan that avoids this issue). The key is to ask around and see who does what well because…

You need a good account manager. Forget purely a narrow focus on fees. Ask instead what someone is going to do for you for those fees. Most entry-level tellers have limited clearance; for example, most cannot process a deposit  over $500 without a supervisor signing off. This is not a large deposit for a business.  In other words, the person you see on the other side of the counter has limited authority to solve your problems.

A good account manager can authorize deposits with typos on them, release holds, transfer money from one account to another (with your authorization) if your account goes into the negative, waive fees (yes, it happens if you ask nicely), shift you from one fee schedule to another periodically and refer you clients (if you tell them what you want). I have requested or experienced every one of the above. The key is to maintain the relationship. Since an account manager’s compensation is partially based on their book of business, they have a vested interest in seeing you succeed as well.

Branches actually make a difference. There is a particular branch from a particular bank that consistently dropped the ball on client transactions: great bank, bad branch. Years later, I met an entrepreneur for the first time who complained about their bank. Sure enough, it was that same branch! Your analysis should not stop at the institution but the branch you are using.

My personal experience is avoid a large branch unless you have huge accounts. You are just another number and you are probably pretty far down in the pecking order of your account manager. Co-ordination is also an issue; right hand often does not know what left hand is doing in large branches. Avoid the small branches or credit unions with overwhelmingly personal accounts.  Small branches or these type of credit unions are not use to larger deposits, frequent deposits and withdrawals (they think you are kiting because they don’t understand cash flow of businesses) and what small business needs from their financial institution.

As a side-note about credit unions, they are good alternative to the traditional banks but not all credit unions are built alike. For smaller to modest sized accounts, they can be good choices but some credit unions are not built to service the small business account.

Picking the right branch comes down to word of mouth. Who are your neighboring businesses using? As everyone knows, there always 2-3 banks at every major intersection. But, if a large number of people are using the same bank and have nice things to say about it, it means that branch is doing something right.

______________________________________

Obviously, there will be certain small businesses that do nothing more than a few deposits and a few withdrawls each month. In this context, a focus on minimizing fees is warranted. But, for those requiring other banking needs, I would focus on the above in picking your small business bank account.

I would like to congratulate Quick Lunar Cop, Mitch and Brian for winning the 500th post prizes. Since there were several Brian’s that entered, I have emailed all the winners. Congrats! Enjoy the prize.

Although this post falls primarily in the entrepreneurship category, if you are investor of public or private businesses, the following are some factors to think about as well when you are making your investment decisions.

In the next 15 years, it is estimated over 9 million businesses run by baby boomers will have to sell their business. The question for these entrepreneurs comes down to “how much?” For most entrepreneurs, their largest asset is their business. Unlike publicly traded stock, there is no readily available valuation for the business. Thus, it is important that most entrepreneurs think about how to increase the value of their business early and often even if they have no desire to sell now. After all, increased valuation helps in attracting good employees and obtaining capital.

While there is no set formula for increasing business value (despite what the experts may say), there are 5 things that you can do to increase valuation:

Think bottom line (profit) and not top line (revenue). I once met an entrepreneur who had consistently run every expense they could through the business. When they decided to seek financing for a new venture, the bank saw a terrible bottom line and refused to provide financing. They wondered how this person could survive for so long on such thin margins!

Beside the obvious audit risk of running up expenses, focusing on revenue over profit, in the medium to long term, typically results in a business with little cash on hand, poor cash flow management and less than ideal valuation. Even if you are not thinking of selling, this type of practice leads to a weekly grind to pay the bills. As for paying more tax on profits, paying tax does mean you are making money which is not altogether a bad thing.

Finally since people purchase businesses on multiples of earnings and rarely on revenue, high revenue growth without correspondingly growth in profits means less money on exit.

Create a unique value proposition. In 2003, PriceWaterhouseCoopers found that goodwill (an intangible asset such as a brand or reputation) represented 74% of the average purchase price of a business purchased in the U.S. Think about that for a second. People buy based on the reputation you have built and not necessarily you having the best product or service.

The foundation of a good reputation stating your unique value proposition- something that differentiates you from the competition- and carrying this through every aspect of your organization.

Think about Apple. It makes cool stuff. Its not really a computer company anymore (they dropped the ending “computers”  in their name several years ago) but a consumer goods company fusing technology with leading edge designs. Their goods look cool. Their stores are a sight to behold and they associate with leading edge people (no one had really heard of Feist in the mainstream before those 1-2-3-4 ads).

A unique value proposition is not just some cliche (trustworthy, reliable, we care about you) but a true differentiating factor from your competition. If you read profiles of top 100 fastest growing companies, the businesses on the top of those lists have a similar element- they express whatever they do passionately and it carries forward from owner to the newest employee.

Unique value propositions can take up entire books but for everyone- entrepreneur and employee alike- ask yourself this question, what is your edge and does it consistently follow through in your life?

Keep the books and financials clean. Off-balance sheet transactions, multiple related party transactions, transactions with valuation concerns, multiple notes in the financial statements- these all create the impression you are trying to juice the books. Banks tend to do double-takes in refinancing and start asking lots of questions. Potential purchasers think you are hiding something.  There are many book-keeping/accounting entries which are conventional (in and out transactions, inter-company dividends, debt to equity conversions by shareholders) but when you start doing the unconventional, it raises a concern. To use a real life example, too many financial wizardry got the financial industry in trouble and it would to your business as well.

Do you pass the test- if you went on vacation, could your business survive? If you honestly answer no, you have created yourself a job, which is fine if you are a life-style entrepreneur. But if your goal is to create something greater than you and you answered no, its time to think automation and investing in human capital. Its a huge leap of faith but purchasers and financial institutions tend to discount goodwill if its too vested in the owner-manager(s) personally.

A good place to start to untangle an over reliance on the managers it the e-myth series. The thesis of the whole series is that owners act too much like technicians and not enough like managers. My advice- find a marketer, a technician and a builder. If you have all three skill sets and can juggle the tension in all three, you have built a good team.

Can your business survive a stress test? Take away your largest customer (ideally not more than 15% of revenue). Increase the cost of capital by 10%. Assume the currency exchange rate works against you if you are in import/export. Can your business survive? Remember these are the same questions that banks, employees and potential buyers are going to ask. If the answer is yes because you have cash on hand, dominate a growing market niche and have management depth, then you are on the right track.

There is no fool proof way to grow a business but the above are some things to consider. Good luck.

Franchising is often seen as a good balance between being an employee and being self-employed. Ideally, a franchise provides its franchisees a turn key operation for a branded business while providing more freedom than typical employment. However, a 1995 study by Wayne State University found that 62% of franchises were operating after 4 years, compared to 68% of independent businesses. Furthermore, the same study found that independent businesses were more profitable during this period of time.

How do we reconcile what should be a business model designed to mitigate against business failure with a relatively lower success rate?

I used to represent franchisee and franchisor alike as a lawyer. It would be easy to say that the business model is fundamentally flawed but it is not. Like all things, it is how it is executed and there are always a few things to consider if you are thinking of buying a franchise.

You bought yourself a job

At the very worst, entering into a franchise agreement is like buying yourself a job. Franchises are about branding and operational consistency. You must follow the operational manual to the letter and franchises are constantly audited. In many respects, you continue to have a boss. This can be both a good and bad thing. For those who want to work hard but have a hard time maintaining discipline, a franchise may be an ideal structure since you are mandated to do certain things at certain times week after week, month after month, year after year.

In this sense, buying yourself a job is not necessarily a bad thing since a successful franchise owner can make well in excess of six figures annually if you like hard work and don’t mind following instructions. However…

The flip side of the equation, and a constant sore point for franchisors, is some franchisees do not like following instructions and like to experiment and get off play-book. For some of the more established and successful franchises, there is a reason why there is an operational manual. The process works. Getting off play-book means you are moving from something that works to something that may not and the negative consequences which may follow. In this sense, you have bought yourself a job where you never listen to the boss and you know what happens when you don’t listen to the boss…

Franchises can be drains on cash flow

Most established franchises require a rather large infusion of capital. To maintain priorities in the event of default, most franchisees also cannot obtain bank financing to purchase or operate the franchise. The result is that some franchises can make a franchisee short of working capital since most of it is used to obtain the franchise. Meanwhile, franchise license and marketing fees (in the aggregate, being in the range of 5-8% of gross revenue) eats up profit. The result can be the franchise is constantly in a cash flow squeeze and tend not to have much cushion if things are slow.

To avoid this issue, some franchises, especially service based franchises (personal care, baby-salsa, day-care), tend to avoid stacking the franchisee with upfront fees. The morale of the story is always keep a lot of operating capital on hand (good advice for all entrepreneurs) and research carefully.

Some franchises are simply bad

Unfortunately, some franchises are simply bad for their owners and it has nothing to do with the goods or services being sold. Franchises can simply not be marketing aggressively, not supporting the franchise owners, squeezing too many franchises in an area or simply not providing value for the fees paid.

The key here is to conduct careful due diligence. Typically, I use to advise my clients to call as many other franchisees as possible for reference checks, calling franchisees who have left (certain jurisdictions mandate by law listing who have left and why), touring headquarters to get a sense of staff (at some point, a franchise with many owners and few staff means bad support), visiting franchise chat forums to assess reputation (certain individuals are known to set up bad franchises, disappear for a few years and then set up another franchise), become a customer if you already have not and ask as many questions as you can before you hand over your money.

The key, as usual, is to conduct the proper due diligence before investing your hard earned dollars. Good luck.

Show me a successful entrepreneur and I’ll show you someone who understands how money works.  Personal finance and entrepreneurship are highly inter-related disciples. What makes one a successful entrepreneur also makes one a good manager of money. Just as improper use of credit card debt can begin a debt spiral for most people, a recent study found that an over-reliance on credit card debt by start-up companies reduces the chances the business will survive past the first three years. In fact, for every $1,000 increase in credit card debt, the probability of survival decreases 2.2%.

This is hardly surprising. Combine high credit card interest rates with the constant need to re-invest in a business and you have a recipe for business failure.

Financing a small business is a larger-scale exercise of personal money management and the lessons of one apply to the other. What then are some best practices to finance a small business?

• Budget your own cash in and build a revenue model around this

In other words, assume no will help you and work around these two pillars of successful boot strap entrepreneurship: (i) build an infrastructure for what you have now and not where you think you will be because who can predict the future? (ii) figure out your break point- the monetary sum you will not exceed putting into your business- and then put that entire amount into the business bank account.Then figure out a revenue model which keeps you in business initially based on that sum of money.

Even if the break point is very modest what it does is it focuses the business on earning revenues quickly rather than to try to chase potential big sales which are cold leads (big sales= long sales cycles = negative cash flow = business death for start-up). As the business gains momentum, the business can think bigger with cash under it to expand (you also work out all the little glitches on smaller sales to chase the big lead successfully).

The alternative, which I had sadly seen too often, is the death by thousand cuts where an owner-manager continually trickles in small amounts of money into the business and exceeds the break point by doing so. The personal finance analogy is negotiate the price of a car based on the price and not what you can afford in monthly payments since if you do the latter you typically end up paying more than your price ceiling.

Can a business be started with no money down? Certainly it can. But if you are seeking financing, one of the first questions that will be asked is let’s see your skin the game. Sweat equity is not valued as greatly by lenders as owner-managers. Thus, if one of your strategies for expansion is to seek financing, you best to put some of your own money in.

• Forget the bank extending a line of credit to a start-up business
  

Unless you qualify under a small business loan program, banks are loathe to take a chance on extending a line of credit to a start-up business. It is a category of business which is seen as too risky. Instead, some entrepreneurs will obtain a line of credit personally while they are still employees and use that line for business purposes first before dipping into credit cards or personal savings.

If a bank offers you a business credit card, take it. In and of itself, a credit card is not a tool of wealth destruction and proper use can build business credit history. It is the reckless use of a credit card that is destructive.

Using a credit card to finance the business is acceptable if one clearly understands the good debt/bad debt concepts. For example, purchasing materials for a closed sale on a credit card would be a prudent use of this form of financing (assuming you build cost of capital into your costs). Racking up thousand of dollars for a staff dinner would not be a wise use of a credit card (there are better and cheaper ways to boast employee morale).

• Assume there are no angel investors or venture capitalists to help you

Angel investors are basically individuals with free cash to invest in your business. For some reason, dentists and doctors are associated with being angel investors (on the theory they make and manage their money well). The issue is that angel investors are few and far between and one could spend their time better selling and marketing then chasing investors.

Venture capitalists are like Trojan horses to many businesses. Most require the owner-manager to cede control and require an exit strategy of selling the business or going public. If this is not your desired exit strategy, the business could be torn apart with competing visions and, given VC’s have the money, the owner-manager is often on the outside looking in.

• Your best strategies are increase cash flow and secure sales

Start producing cash flow and your financing options suddenly open up. In other words, take a “go it alone” financing strategy as much as possible in the beginning and don’t assume a bank will help you (see above). If you are in a business that require heavy capital investment, it may be prudent to start selling services, such as consulting or becoming a reseller, to produce cash flow to scale up. Businesses die not for lack of ambition but for too much ambition. Start steady and build slowly.

If you secure a sale, there are various other types of financing, such as purchase order financing or factoring, that can finance your business. Interest rates can run high so you have to factor cost of capital into your margins (in other words, figure out your costs of sale early in the process).

The key, however, is that most of these types of financing are not typically offered by the banks but by niche lenders. Thus, if there is cash flow and sales in place, one has to ask around. Some banks will refer you off to some of these lenders but you have to do some networking.

_____________________________________________

The emphasis here though is, just like in personal finance, don’t expect someone to magically extend you financing when you start up. Worry about what you can control- sales, marketing, expense minimization- rather than hoping that something you can’t control will occur. Best of luck.

Ever consider buying a house with a friend to flip? Starting a hobby or full-time business with a colleague?  Co-coaching a children’s sports team with a neighbor? We often are presented with opportunities to partner with someone whether it be a formal business venture or something a little more recreational. No matter what you want to do, who you do it with is as important as what you are doing. After all, in some partnerships, you spend more time with your partner than your spouse. So, how do you chose wisely?

I have had good, bad and indifferent partners. I left one partnership after a month because it was a bad fit. We had another partner leave us before we even launched after making the unreasonable request for him to actually work. I had one partner who was almost a complete stranger who ended up becoming a great mentor.  A friend of a friend once had a partner who refused to obtain key-man life insurance for fear his partners would kill him for the money (I am told, in the part of the world where this partner grew up, this is not an unusual occurance). In other words, I am learning, through a lot of mistakes, on what makes a good partner. Here are few things I have learned (painfully):

1. Think twice about partnering with anyone. Think three times about partnering with a friend. Colleagues tend to show you more deference and respect in a partnership than your buddy who you got plastered with during a stag in 2003. Most partnerships need to have some professional distance- both in how you respect the other’s opinions and spending time apart after hours. It is harder to maintain that distance if you partner with a good friend especially if…
2. How your partner runs their personal lives says a lot about how they will approach the partnership so observe carefully. We (not the royal we) once had a partner that was terrible with finances in his personal life. We quickly learned not to trust him with any financial decisions. You obviously need to partner for skill-set but also observe how a partner or potential partner runs their lives- are they good with money, do they deal with their own personal issues constructively (trouble at home equals trouble at work), are they healthy body, mind and spirit? I had to paper over many corporate divorces as a lawyer- typically, what does lots of partnerships in begins as personal issue spilling over into the business (substance abuse issues, money issues at home, marriages falling apart) so watch your partner’s behavior in their personal lives.
3. Have the “what do you want out of this?” conversations before you partner. At some point during the dating cycle, you typically give out a direct or indirect indication of what you want  (“I want something long term” or “no names in the morning please…”) and, if the person you are dating wants the same thing, you continue dating.  Same thing with a partnership. You both have to want the same end-goal. You can’t have one partner wanting to build a leisure business and the other one wanting to go public with the business. With such differing goals, it will not end well.
4. Everyone has to have skin in the game. Some people may disagree with me on this but every partner has to put some money in. It is not enough to say: “my contribution to the business is my contacts or skill set in and I have no money to put in.” It doesn’t have to be $50,000 or some large amount. It has to be, relatively speaking to each partner, enough that if the business fails it hurts everyone’s wallets.  When people put no money in, there is no real sense of loss so how motivated will a partner be when you hit the first bump in the road? If you have no money in, you can always take your contacts or skills elsewhere when trouble arises. The aversion of a lost investment is a great motivator in business.
5. There must only be one chef in the kitchen/partner with someone who has a different personality than you. This typically becomes an issue when type A personalities get together on something. Everyone wants to be the boss but everyone can’t be the boss. So, you have to make sure you partner with someone who is ok with one of you being Batman and one of you being Robin (if you have a large group, find yourself a “glue” person to keep the entire thing from flying apart). Similarly, too much of a good thing can be bad. If you are outgoing, find a more wallflower-ish personality. It will keep everyone sane and certain personalities tend to gravitate towards certain functional roles (most super outgoing people go into sales and marketing over, say, accounting) so you end up with skill-set balance as well.

You will probably notice I did not concentrate on skill set. Conventionally, in every business, you want someone who understands the technical end of the business well, someone who can sell it and someone who can build the business. But, if you have worked in a toxic work environment, you know no amount of talent will make up for the fact no one is motivated to help the group succeed. Thus, start with the soft stuff first since you can always buy the skill-set later on. Good luck.