Questions of Interest to Small Business Owners and Entrepreneurs


This page contains questions and answers on topics of interest to students of entrepreneurship and practicing entrepreneurs. The questions parallel the topics covered in the Featured Websites of the Month.

Update: September, 1999

Franchising

  1. What is franchising and how does it operate?

    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.

  2. How can I tell if a restaurant or other business is a franchise or a company owned store? Are there any tell-tale signs??

    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.

  3. What is an area franchise agreement?

    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.

  4. What does a franchise cost?
  5. 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:

  1. What is a franchise association?

    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."

  2. What are the primary purposes of franchise trade groups (or associations) like the International Franchise Association and the American Franchise Association?

    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

  1. What are the guidelines for determining if franchising is appropriate for a particular business (in other words, how do I know if my business could be sold as a franchise)?

    The following are guidelines for determining if franchising is appropriate for a particular business.

  1. Before an individual invests in a franchise, are there certain criteria that the franchise company should meet?

    Yes. The following are the qualities of an attractive franchisor:

  1. What qualities do franchisors look for in potential franchisees?

    Franchisors look for the following qualities in prospective franchisees:


Update: October, 1999

Managing International Business Operations

  1. How do most firms begin their 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.

  2. What are the main advantages and disadvantages of exporting as a form of foreign market entry?

    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.

  3. Besides exporting, what are the main entry strategies for entrepreneurial firms that are interested in selling in foreign markets? What are the advantages and disadvantages of each strategy?

    Along with exporting, the following foreign market entry strategies have been successfully used by entrepreneurial firms:

Country Issues

  1. How important is it for U.S. businesses to carefully study the foreign markets that they plan to enter?

    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.

  2. How can a firm determine if its products are suitable for foreign markets?

    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.

  3. How can a firm learn about foreign markets?

    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

  1. In general, what types of program does the federal government have available to help firms initiate an international business program?

    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.

  2. What is the International Trade Loan (ITL) Program?

    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.

  3. What are Small Business Development Centers?

    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

  1. What is 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."

  2. Who are venture capitalists?

    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.

  3. How do you find a venture capitalist?

    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

  1. What question should a firm ask itself before it tries to raise venture capital financing?

    Before considering raising venture capital financing, a firm should ask itself three basic questions:

  • Are you willing to disclose your entire business plan to the venture capitalists?
  • Do you have high growth ambitions for your company?
  • Are you willing to give up partial ownership of your company in exchange for the opportunity to raise additional capital?

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.
  1. How does a firm in need of financing approach a venture capitalist?

    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.

  1. What are some of the do's and don'ts of dealing with a venture capitalist?

    Do's:

  • Be passionate about your company and your business idea.
  • Know how much money you need and how much equity in your firm you are willing to give up in lieu of financing.
  • Negotiate a deal you can live with.
  • Know the venture capitalist - any agreement is a two way street.
  • Know the previous deals that the venture capitalist has funded and the current structure of his or her portfolio.
  • Be willing to walk away if the deal doesn't feel right.

Don'ts:
  • Don't be naive. The venture capitalist will ask tough, penetrating questions.
  • Don't avoid answering questions.
  • Do not hid significant problems or obstacles to your business success.
  • Do not be confrontational or argumentative.
  • Don't get overly optimistic. Many venture capitalists only fund 1 in 100 deals.
  • Don't take rejection personally.

Organizations Promoting the Welfare of the Venture Capital Industry

  1. What is a venture capital association?

    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.

  2. What is a venture capital club?

    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.

  3. Why is it important for venture capitalists, investors, and entrepreneurs to maintain a dialogue through venture capital associations and clubs?

    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

  1. What is a business plan?

    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.

  2. What are the main reasons for writing a business plan?

    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.

  3. What is included in a typically business plan?

    Although business plans vary, the following is the outline of a typical business plan:

    1. Executive Summary
    2. General Description of a Business
    3. Products and Services
    4. Market and Industry Data
    5. Marketing Strategy
    6. Operational Plan
    7. Management Team and Organization
    8. Financial Plan
    9. Appendix

Tips for Writing an Effective Business Plan

  1. How to Prepare to Write a 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.

  2. What are some tips for giving a business plan a sharp professional appearance?

    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:

    • Print the plan on a high-quality paper. Print on one side of the paper only.
    • Make the cover page as sharp as possible. Include the company logo if possible. Be sure to include the name of the business on the cover page along with the name, title, address, phone number, and e-mail address of the company's contact person.
    • Use a common font (like Times New Roman), 12-point type, and standard one inch margins.
    • Avoid presenting a "cluttered" look. For financial projections, use extra pages rather than reducing font size (lower than 10 point) to include all of the information.
    • Include a Table of Contents and number the pages accordingly.
    • Include pictures as appropriate (e.g. company facilities, top management team, products and service offerings).
    • Includes samples of ads, marketing material, and any other information that aids in the presentation of the plan.
    • Be sure to carefully edit the document. Spelling and grammar errors make a poor impression.
    • Don't go overboard on an expensive binder - but avoid looking cheap. Do what is appropriate and tasteful.

  3. How long should a business plan be?

    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

  1. What types of firms tend to complete 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:

    • New ventures.
    • Rapidly growing companies.
    • Firms involved in mergers, acquisitions and leveraged buy-outs.
    • Turnaround companies (i.e., companies trying to recover from an economic downturn)
    • Special project companies (i.e. companies that are developing new markets, developing new products or services, or entering into a major capital campaign).

  2. Should a company solicit feedback on its 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.

  3. What is an executive summary?

    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

  1. How big is 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.

    • Estimated number of Internet users, worldwide, at the end of 1998: 147.8 million
    • Estimated percentage of Internet users living in the U.S.: 52%
    • Number of U.S. households joining the Internet every hour: 760
    • Amount spent on Internet advertising in 1998: $1.9 billion.
    • Percentage increase in the number of registered domains from 1997 to 1998: 118%
    • Estimate of e-commerce by the year 2000 (discussed above): $200 billion
    • Growth rate in number of online shoppers in the U.S.: 8% per month

  2. What advantages do online businesses have over conventional ones?

    There are several advantages to doing business on the Internet.

    • Start-up capital is relatively low. Most Internet business can be operated from a person's home, and require a modest startup budget. As a company tries to increase its visibility, costs associated with advertising and the company's infrastructure increase.
    • Flexible location. The physical location of an Internet business is not as important as a conventional business.
    • Business hours and international potential. One of the most compelling advantages of the Internet is that a company's Web site is available 24 hours per day, seven days a week, 365 days per year. In addition, consumers almost anywhere in the world can access the Web site. As a result, the market potential for a Web based business is huge.
    • Popularity of medium. The Internet is gaining momentum, and consumers are increasingly turning to the Internet as an option for doing business.

  3. What are the ways that Web sites generate revenue?

    The majority of revenue that companies make online is generated in one of four ways:

    1. Advertising. Most non e-commerce Web sites generate the majority of their revenue through advertising. Web advertising is expected to reach $3 billion in 1999, according to Jupiter Communications, a New York Internet research firm. The amount spent on Web advertising is expected to continue to increase.
    2. Sponsorship. Another source of revenue is sponsorship. For example, several health related Web sites are "sponsored" by life insurance companies. Sponsors typically pay for the production of the content included in a Web site and a portion of the overhead. The benefit to the sponsor is the opportunity to be associated with a Web site that has a good reputation and the ability to put their name in front of the viewers of the site.
    3. Subscription. A small percentage of Web sites require their patrons to pay a monthly or hourly "subscription" fee to take advantages of the services provided at the site. Examples include the Wall Street Journal Interactive Edition and on-line game sites.
    4. E-commerce. Some companies, such as Amazon.com, Dell Computer, and Gateway Computer, sell products online. More information about e-commerce is provided below.

Electronic Commerce (E-Commerce)

  1. What is 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.

  2. Which products tend to sell well on the Internet, and which do not?

    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.

  3. What is the process of taking a small business online?

    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.

    1. First, build a Web site to display your merchandise and take orders electronically.
    2. Second, you need to find someone to "host" your site, unless you have the programming skills and dollars needed to buy and operate a Web server of your own. For as little as $50 per month, a business can secure a host and basic technical support, and have the flexibility to change the appearance of their site whenever they want.
    3. Third, you need to advertise and promote the site. For as little as $40 per month, Web Site Garage will lists a company's site on 400 search engines. Media advertising, such as television and radio, is much more expensive.

Resources for On-Line Businesses

  1. How does a company register a domain name?

    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.

  2. What is Internet multimedia? What are the pluses and minuses of incorporating multimedia into a Web site?

    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.

  3. What is an online "virtual community?"

    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.


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