Tag Archive for 'Andrew Sherman'

Four things you must know before buying a franchise

Over the years, I’ve met many people who want desperately to own a business, but 1) just don’t know what it should be; or 2) lack the entrepreneurial vision and/or desire to start a business from scratch.

Enter one of the great inventions America has given to the world: the franchise.

Purchasing and operating a franchise is entrepreneurial coloring inside of the lines.If you don’t have a problem playing in a sandbox someone else built, a franchise may be just the ticket for you.

The franchise universe is broad and diverse, with arguably thousands of options, which is both good and bad news - so many choices begets lots of intimidation. But fortunately, the fundamentals you apply to conduct franchise acquisition research, regardless of the one you choose, are basically the same.In his excellent book, Franchising and Licensing, my friend Andrew Sherman identifies a number of key components in any relationship between a franchisor (the developer of the franchise), and a franchisee (the purchaser of the franchise). From Andrew’s list I’ve chosen what I think should be the first four to help you narrow your search, followed by my thoughts.

1. A Proven Prototype
When you lay money down for a franchise, the model must be proven to work, because you’ll have to replicate the product over and over. Indeed, the prime expectation of any customer seeking out a franchise product is that it’s a known quantity. McDonald’s may not have the best hamburger in the world, but whether you’re in Moscow or Moline, it’s supposed to taste just like the one you had in Meridian.

2. A Strong Management Team
When you buy a franchise, not only will you need to seek periodic advice and instructions from the franchisor’s staff, but you want to have confidence in that support. There should be virtually nothing you can ask that they haven’t experienced and anticipated. Here’s a tip: If you aren’t getting overwhelmed with support and answers when considering a particular franchise, don’t expect much more once they have your money. I’d move on.

3. Comprehensive Training Program
In order to make that “hamburger” look and taste just like the last one you delivered, you must be able to learn how to do it yourself and teach your people how. That training MUST come from the franchisor. They will demand that you follow their rules, so you have a right to demand the best training.

4. Sufficient Capitalization
Franchisors are just like all other businesses in that they must have the capital to: a) Grow - you want your franchisor to expand their footprint; b) Innovate - to continue to offer relevant products and services every year; and c) weather the inevitable marketplace storms. When they ask about your financial condition, tell them “I’ll show you mine, if you’ll show me yours.”

Before you buy a franchise, you must talk with two people: 1) Someone who’s operating a franchise like the one you’re considering - ask what it’s like doing business with your franchisor prospect; 2) Someone who’s failed with a franchise - ask what happened and what they wish they knew before they started.

Remember that while owning a franchise is operating a business based on someone else’s idea, it’s still running a business. Other than being a single parent, there is no harder job. If you don’t love working, if you don’t value sweat equity, if you don’t appreciate deferred gratification, if you don’t have a lot of energy, if you like to sleep late, or if you’re a whiner, don’t buy a franchise - or start any business. And if you aren’t good at coloring inside the lines, like me, don’t buy a franchise.

Finally, in addition to Andrew Sherman’s book mentioned earlier, I also recommend one by another friend, Joel Libava, Become a Franchise Owner.

Write this on a rock … Franchising isn’t for everyone, but it might be for you.

Investor search mistakes to avoid, part 2

Last week I introduced you to a list of mistakes businesses make when searching for investment capital. The list came from a book by my friend, Andrew Sherman, titled, Raising Capital. As we learned, there’s more to acquiring capital than a business plan.

So now let’s take a look at the rest of Andrew’s list, and, like last time, each one is followed by my thoughts.

Mistake: Not understanding the investor selection process.
Don’t deliver information with a fire hose when a pitcher is preferred. If there is interest, investors will request the full details as needed.

You’ll need three documents: an initial, one-to-three-page executive summary (the pitcher), an intermediate 10-page (+-) model, and a long one with all numbers and research (fire hose). Deliver the last two only when requested.

Mistake: Too little research and analysis.
You must have market/industry research and analysis to back up your assumptions and projections. Investors don’t value promises or hunches. Don’t show extensive data until requested, but reference and summarize what you’ve learned in the short models.

Mistake: Underestimating the funding chronology.
If your funding requirements and the investor’s investment schedule are not in sync, guess who makes adjustments? Remember, to an investor, urgency sounds like desperation. And this will be true for crowdfunding as well.

Mistake: Being afraid to share your idea.
Sherman says you can’t sell if you can’t tell. Get a non-disclosure agreement that fits your project and use it. Investors not only expect to sign an NDA, they won’t respect you if you don’t give them one.

Mistake: Being dollar-wise and investor foolish.
Trick question: Which is the best alternative: a) $1 million from investors who know nothing about your industry; or b) $500,000 from investors who have industry background and contacts? Since the value of an investor relationship is usually more than cash, “b” is often the correct choice. Consider all forms of investor participation when evaluating an offer.

Mistake: Getting hung up on initial ownership and control.
Establishing ownership and control is where most investment negotiations break down. Here’s a handy rule: He who has the gold makes the rules, which usually includes control. Business founders are typically better served focusing more on the investor exit plan and less on initial control.

Accomplishing a successful investor relationship requires thoughtful preparation plus skillful negotiation.

Write this on a rock … Know the rules before pursuing an investor search.

Investor search mistakes to avoid, part 1

Small business capital comes from three primary sources:

1. Profits left in the business;
2. Debt, like a bank loan;
3. Equity investment.

For most small businesses the third source is, and has been the founder’s investment.

In recent years, this option has become more robust and multi-faceted in the form of outside investors, whether venture capital, angel investors, and even with crowdfunding. The challenge is developing a capitalization strategy that matches the right sources with the short and long-term goals of the founder.

It must be said that while many elements of finding and acquiring investor capital are similar to getting a bank loan, the former takes longer and is more complex. In his book Raising Capital, Andrew Sherman addresses this issue with a list of common mistakes entrepreneurs make searching for investor capital. This is the first of two articles where I’ll identify Sherman’s “mistakes” and follow each one with my thoughts.

Mistake: Using an investor search that’s too broad.
Each investor has an interest and related strategy. An investor that likes medical ventures won’t be a prospect for your retail idea. Qualify each investor prospect before making contact.

Mistake: Misjudging the time involved.
Part of Murphy’s Law states that everything will take longer than you think. Alas, Mr. Murphy is alive and well in the investment marketplace. It usually takes months, not weeks, to find, approach, and get an answer from investors. Even crowdfunding will take more time than you think. And remember, like prayers, sometimes the answer is “no.”

Mistake: Falling in love with your business plan.
Every mother’s baby is beautiful. But your plan is not your investor prospect’s baby. Expect that your business plan will have to be adjusted before you get funded. So be prepared to accept that changes will come with the capital.

Mistake: Taking financial projections too seriously.
First let’s establish the prime financial rule: All projections are wrong! Of course, you can show projections you believe are achievable. But also include a conservative set that shows your break-even point if things don’t go as planned.

Mistake: Confusing product development with sales.
Investors love real customers and real sales. Even sales projections based on history will be highly scrutinized. But projections based on projected sales will be highly doubted.

Mistake: Minimizing the management team.
A good management team can fix a bad plan, but a bad team can ruin a good one. Unless you’re asking investors to contribute management expertise, don’t seek investor capital without a qualified management team.

Next week, more investor search mistakes.

Write this on a rock …
Make your own mistakes, not these.

Nature emphasizes human insignificance

An earthquake is arguably the rudest of nature’s reminders of how insignificant we humans are. And even though we’re no longer shocked to hear about one happening somewhere else, still, it’s difficult to imagine how devastating a 9.0 earthquake can be. Even though footage of the associated tsunami, further emphasizing the awesome power of nature, may take our breath away, we’ve come to expect this one-two punch when the planet’s tectonic plates shift near an ocean.

But when nature performs the hat trick by unleashing its force under, around and over volatile man-made devices called nuclear power plants, as recently happened - and is still happening - in northeastern Japan, the needle of our disbelief meter pegs off the chart.

Here in the U.S., it was looking like the more than 30-year nuclear power plant construction moratorium, created by the 1979 Three Mile Island accident, was just about to end. Now what? Is this a sign from God, or just a disastrous coincidence.

Political and environmental interests seek desperately for non-carbon energy alternatives. But in the face of what’s still unfolding in Japan, what is the nuclear energy appetite of Americans? We wanted to know what you think about this, so we asked the following question last week in our weekly poll in the Newsletter and our website. “The Japanese disasters have put the potential risks of nuclear power in focus. Do you think we should continue to build more nuclear plants?” Here’s what you said:

Those who thought we should put things on hold at least until we see how things turn out in Japan represented 5% of our respondents. Surprisingly, only slightly more, 8%, said the Japanese disaster proves that nuclear energy is not worth the risks. But a resounding 88% of our sample said the U.S. should continue to develop nuclear energy, acknowledging that no energy alternative is without risks.

We continue to live the Chinese curse, “May you live in interesting times.” It will indeed be interesting to see how the alternative energy debate plays out over the next few of years. And while thinking about where you want to take your small business, remember what a wise person once said, “Life is what happens when you’re making other plans.” And, as we’ve come to know too well, nature is a big part of life.

On The Small Business Advocate Show, I talked with Andrew Sherman, partner at the global law firm, Jones Day and author of many books, including Be the Truck, Not the Squirrel, whether the events in Japan could have been predicted.

Japan and Middle East Black Swan events with Andrew Sherman

I also talked with Bob McTeer, Distinguished Fellow with the National Center for Policy Analysis and former President/CEO of the Dallas Fed, about the global impact of the disasters in Japan.

Global repercussions from the Japanese disaster with Bob McTeer

Please click on the interviews and take a few minutes to listen to our discussions. We’re also interested in your comments, so please tell us what you think.




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