Update: September, 1999
Franchising
A franchise
is an agreement between a franchisor (the parent company that has a proprietary
product, service, or business method) and a franchisee (an individual or
firm that is willing to pay the franchise fee for the right to sell its
product, service, and/or business method). Subway is an example of a very
successful franchise system. The franchisor (Subway, Inc.) provides the
rights to individual businesspersons (the local franchisees) to use the
Subway trademark and business methods. The franchisees, in turn, pay the
parent organization a franchise fee and an ongoing royalty for this privilege
and agree to operate their Subway restaurants in a certain manner.
It is difficult to tell just
by visiting a restaurant or other businesses whether it is a franchise or
a company owned store. The hourly employees may not even know. A forty of
franchising is the development of a "standardized" business format, which
tends to make all the locations of a particular franchise organization look
the same. If you are really curious, you can ask the manager. Franchisees
have no reason to hide the fact that a particular business is a franchise.
The most common error is people think a business is a franchise when in
fact it is a company owned store. For example, Starbucks has no franchises:
to date, they have chosen not to use franchising as a means of growing their
company.
An area franchise agreement
allows a franchisee to own or operate more than one outlet in a particular
geographic area. For example, a franchisee may purchase the rights to operate
all of the Wendy's restaurants in Lake Mary, Florida, a suburb of Orlando.
The initial cost of a business
format franchise can vary from as low as $5,000 or less for a little known
franchise system to $500,000 or more for a McDonalds, Wendy's, or Burger King.
Approximately 80 percent of franchises cost between $25,000 and $125,000 initially.
Along with the initial cost of buying the franchise (called the franchise
fee), the franchisees obligation to the franchisor typically includes a percentage
of the gross income of the business and a monthly or yearly advertising fee.
Franchise Associations, Trade
Groups, and Professional Services:
Many franchise systems have
organized "franchise associations" (or franchise advisory councils) to represent
the collective interest of the franchisees and to provide a forum for franchisees
to communicate with one another. An example of the Denny's franchise association
is provided in the "Featured Web Sites of the Month."
Franchise associations that
are open to all franchisors and franchisees (like the two mentioned above)
have two primary purposes. First, to promote ethics in the franchise industry.
Unfortunately, because franchising can be a very profitable form of business
growth, fraudulent and/or poorly run franchise chains continually pop up.
The national and international franchise associations provide ethical standards
to help provide direction and legitimize the industry. The second purpose
of these organizations is that they act as a national clearinghouse for
franchise related information. Some franchise organizations also engage
in legislative lobbying efforts in support of franchising.
Franchise Opportunities
The following are guidelines
for determining if franchising is appropriate for a particular business.
Yes. The following are the qualities
of an attractive franchisor: Franchisors look for the following
qualities in prospective franchisees: Update: October, 1999
Managing International Business
Operations Most firms being their international
business operations as exporters. Exporting provides a low cost and low
risk way for firms to test the potential appeal of their products in international
markets.
The main advantage of exporting
is that it is a relatively inexpensive way for a firm to become involved
in international markets. The main disadvantage of exporting is that high
transportation costs can make exporting uneconomical, particularly for bulky
products. Along with exporting, the following
foreign market entry strategies have been successfully used by entrepreneurial
firms:
Country Issues A common misnomer is that the
"global economy" has standardized markets across the world and that there
is little difference between the markets of foreign countries. That might
be true for some products like Coca-Cola soft drinks, Nike shoes, and McDonalds
hamburgers. But these products are the exception rather than the rule. Countries
vary considerably in terms of their local customs, consumer tastes, export
regulations, currency exchange rates, etc. As a result, it is vitally important
that an exporter carefully study the subtleties of each foreign market that
it plans to enter.
This is an important question
that lies at the core of a firm's ability to successfully engage in international
business. At the outset, a firm must determine if its products are suitable
for overseas markets. Many pertinent questions need to be answered to make
this determination. For example, are a firm's products subject to significant
tariffs or foreign government health or safety regulations? Will the products
require local "after-sale" service and support? Are the products desirable
to foreign customers? If so, where? All of these questions must be investigated
and answer "before" a firm initiates an international business venture.
Just because a product is popular at home, that provides no guarantee that
it will be popular overseas. There are many resources available
on the Internet that provide assessments of foreign markets. Examples are
provided in the "Featured Websites of the Month." Export Management Companies
also specialize in helping firms become established in overseas markets.
Firm should exercise due diligence before hiring an export management company,
however. The best strategy is to ask for references and check the performance
of the company before entering into a business relationship. Government Resources The U.S. Department of Commerce
and the Small Business Administration have a number of programs available
that assist firms in setting up international operations. The types of programs
available include export-counseling, workshops and training conferences,
trade shows, trade leads, financial assistance, and overseas trips to investigate
the potential of foreign markets. Access to information about these programs
is available through the web sites of the respective agencies.
The ITL program helps small
business that are interested in international trade, as well as small businesses
adversely affected by competition from imports. The SBA can guarantee up
to $1.25 million for qualified borrowers, less the amount of SBA's other
exposure with the borrower. To qualify for an International Trade Loan,
the applicant must (1) establish that the loan will significantly expand
or develop an export market; (2) demonstrate that its business is currently
adversely affected by import competition; (3) demonstrate that the loan
proceeds will be used to upgrade equipment or facilities necessary to improve
the firm's competitive position in an overseas market, or (4) be able to
provide a business plan that reasonably projects export sales sufficient
to cover the loan.
There are many small business
development centers located throughout the United States that are affiliated
with local college and universities. Many of these centers provide international
business related workshops and advice either free of charge at a negligible
cost. Update: November, 1999
General Information on Venture Capital
A The National Venture Capital Association (NVCA) defines venture capital as "capital provided by firms of full-time professionals who invest alongside management in young, rapidly growing or changing companies that have the potential to develop into significant competitors in regional, national, and global markets."
Venture capitalists are individuals who form venture capital firms to invest money in emerging businesses. The visible venture capital market in the U.S. is composed of over 600 venture capital funds that manage about $40 billion. Venture capitalists are typically willing to invest in higher risk ventures than conventional lenders, and as a result expect a higher rate of return on their investment. It is not uncommon for venture capitalists to take an "ownership interest" in a business as part of a financing package. The ownership interest is typically in the form of stock or an instrument that can be converted into stock at a later date. Venture capitalists typically expect a 20% to 50% annual return on their investment at the time they are bought out.
Venture capitalists typically specialize in specific industries. As a result, networking in an industry and asking successful firms if they are acquainted with venture capitalists is usually the most effective way of locating venture capitalists. There are also a number of directories of venture capitalists available in print versions and on-line. A directory of venture capitalists is available on-line.
How to Go About Seeking Venture Capital Financing
Before considering raising venture capital financing, a firm should ask itself three basic questions:
Venture capitalists are not in ivory towers. However, they are typically very busy people who value their time. As a result, the best approach is to approach venture capitalists in a straightforward, professional manner through a phone call or a carefully worded e-mail message. Many venture capital firms have an established procedure that governs the initial contact. The venture capitalist will typically ask for a business plan, and will adopt somewhat of a "don't call us, we'll call you" demeanor. If a firm is granted a face to face meeting with a venture capitalist, it should prepare for the meeting by knowing specifically how much money it needs and how much equity in the firm it is willing to give up in lieu of the financing.
Do's: Organizations Promoting the Welfare of the Venture Capital Industry
Venture capital associations are groups of venture capital firms that band together to serve and represent the interest of the venture capital industry. An example is the National Venture Capital Association (NVCA). The NVCA works with all branches of government and the media to promote the public policy interests of the venture capital industry. Similar organizations exist in foreign countries advocating the interests of their venture capital industries.
Venture capital clubs are typically local, non-profit organizations that form for the purpose of bringing together all of the participants in the venture capital industry. The participants often include venture capitalists, entrepreneurs, investors, corporate executives, financial professionals, local government officials, attorneys, representatives of the media, and business consultants. The clubs often hold monthly or quarterly meeting to provide a forum for the dissemination of information pertaining to the venture capital industry.
Dramatic changes are taking place in the business environment of the U.S. and most foreign countries. As a result, it is imperative that all participants in the process of launching and financing firms maintain an open dialogue.
Update: December, 1999
General Information About Business Plans
A business plan is a written document that carefully explains a business, including its management team, its competitive environment, its products and services, its financial position, goals, and its strategies for reaching its goals. A business plan typically runs 20-40 pages typewritten, and may include an Appendix with supporting information.
There are two primary reasons for writing a business plan. First, to obtain financing or investment capital. A business plan provides a potential lender or investor a complete picture of a proposed or existing business. In fact, it is becoming increasing difficult to raise money without a business plan. The first thing that most investors and lenders ask for when approached for financing is a copy of a business plan. The second reason for writing a business plan is to provide the managers of a business a "roadmap" to follow for launching and/or growing the business. A well-written business plan can be a tremendous internal asset. It can act as a managers "play book" in launching and/or growing a business.
Although business plans vary, the following is the outline of a typical business plan:
Tips for Writing an Effective Business Plan
There are many examples of business plans available in books, magazines, and on the Internet. The "Sample Business Plans" section of the Featured Websites of the Month contains five examples. There are also software programs available to assist in preparing business plans. An example is JIAN. While most business plans share a similar structure, each is also unique in that it describes the characteristics surrounding a particular business. A business plan should reflect the consensus views of the managers and owners of a business (or a proposed business). The plan should look sharp, be concise yet thorough, and reflect the managers/owners passion for the business.
The physical appearance of a business plan is important. If a business plan looks like it was prepared in a hurry or is unprofessional in any way, it is easy for the reader of the plan to jump to the conclusion that the people that put the plan together are unprofessional too. Here are some tips for making the plan itself look as sharp as possible:
Most business plans are read by people who are extremely busy and are not interested in reading a long document. As a result, a fairly reliable rule of thumb is that a business plan should not exceed 20-40 pages. Obviously, the more complex a business is the longer than plan will need to be. Supporting information can be put in an Appendix. For example, a company might want to include a short bio of each member of its top management team in the business plan, and place a copy of the complete resumes of each of its top three managers in the Appendix. This approach gives the reader of the plan the option to look at the complete resumes, without extending the length of the business plan itself by including lengthy material.
Sample Business Plans
Although all firms can benefit from completing a business plans, the following categories of firms tend to benefit the most from completing a formal business plan:
Yes. A common mistake is that companies write business plans and never ask for any meaningful feedback. A company's business plan should be critiqued by a cross section of people that the company admires, trusts, and respects. After feedback is obtained, the plan should be reworked and made as substantive and sharp as possible. A company should also practice orally presenting the plan. If a company uses its plan to try to raise investment capital, it is not uncommon for venture capitalists and other investors to ask the company to make an oral presentation of its plan and be willing to answer questions about the plan and the business.
An executive summary is a short summary of the major points in the plan. It is often the only part of the plan that many people will read. As a result, it should be carefully written, and provide a concise overview of the major points in the plan. Most executive summaries are not more than one to two pages long. Most writers of business plans complete the executive summary last (even though it appears at the beginning of the plan). It is necessary to step back and look at a business plan in its entirety before an effective executive summary can be written.
Update: January, 2000
General Information About Doing Business on the Internet
The Internet, which was virtually nonexistent to the average person prior to 1996, is emerging as a powerful and pervasive medium in the U.S. and abroad. For example, E-commerce is expected to be a $200 billion industry by the year 2000. While that may sound like a small number given the total market for goods and services in the U.S. is around $2.3 trillion per year, the growth rate of e-commerce and Internet usage is impressive. The following statistics provide an indication of the growth rate of the Internet. These statistics provide a vivid illustration of why so much enthusiasm has surrounded the growth of this medium.
There are several advantages to doing business on the Internet.
The majority of revenue that companies make online is generated in one of four ways:
Electronic Commerce (E-Commerce)
E-Commerce (or Electronic Commerce) refers to the buying and selling of goods and services over the Internet. The evolution of e-commerce has been one of the most significant developments associated with the Internet. Amazon.com, eToys.com, and dell.com are examples of e-commerce Web sites.
Generally, everything that was traditionally sold through catalogs or mail order will sell well on the Internet. Any item that requires fitting (e.g. clothes), testing, (e.g. sound systems), or items that people feel that they need a salesperson to help them are hard to sell online. In addition, products that are complicated (e.g. life insurance), heavy (due to shipping costs), and perishable are difficult to sell online. Products like books, CDs, computer software, toys, and airline tickets sell well online. These products are easily understood, light (requiring low shipping costs), and nonperishable.
One of the most attractive aspects of the Internet is that the process of taking a small business online is relatively simple, particularly if a business uses a browser-based Web-site package and support service such as Yahoo! Inc.'s Yahoo Store or IBM's HomePage Creator. IBM's HomePage Creator walks a small business owner through the process of setting up an online store - complete with a product catalog and a virtual shopping cart. It usually costs $100 or less to set up a site, and about the same per month for support services. The following is a do-it-yourself approach to taking a business online.
Resources for On-Line Businesses
The process of registering a domain name is simple. All one has to do is check with one of the several companies authorized to register Internet domain names to see if the name is taken. Examples of domain name registration services include Network Solutions and Register.com. If the name that a company want is not taken, a ".com," ".net," or ".org" domain name can be registered for $70 for the first two years and $35 per year thereafter. The only restriction on registering a domain name is that it is becoming increasingly difficult to register a domain name that conflicts with an established trademark. In domain name disputes, courts tend to favor companies that have an existing trademark regardless of who registered the Internet domain name first.
Internet multimedia refers to the audio, video, animation, 3-D and other media that can be incorporated into Web sites. On the upside, multimedia can help company's spice up rather dry data. For example, Ford Motor uses animation on its Web site to spice up otherwise dry information about its environmental plans and car designs. In addition, multimedia can be an important part of the consumer buying experience. Clothing retailer Lands' End allows shoppers to create a "personal model" on which they can virtually try on clothes. Multimedia may also help drive traffic to a Web site. One estimate suggests that multimedia sites generate 20% to 60% more traffic than text-and-graphics based Web sites. On the downside, a lot of the Internet multimedia currently in use has considerable room for improvement. In addition, multimedia tends to slow Web sites down. Many viewers and potential e-commerce customers have little patience for poor quality and slow Web sites. As a result, the tradeoff between the advantages and disadvantages of multimedia is a careful balance. Improvements are in the offing. Better quality multimedia and faster connectivity is a major emphasis on many Internet infrastructure firms.
Virtual communities allow people with common interests to meet, communicate, and share ideas and information through an online network. Over the past several years, the creation of virtual communities has been one of the most powerful and potentially significant developments on the World Wide Web. Virtual communities are built around groups of people who have common interests. An example of a virtual community is SeniorNet. SeniorNet provides adults 50 years old and older access to education about computer technology and the Internet to enhance their lives and enable them to share their knowledge and wisdom.
Copyright ©
2000 South-Western College Publishing. All Rights Reserved.
Venture capitalists are typically very discerning, and are only interested in funding firms with real growth prospects and top-notch management. If a firm cannot answer "yes" to each of the questions indicated above, venture capital financing is probably inappropriate.
Don'ts: