The terrain: harsh.
The challenges: unforgiving.
The potential rewards: priceless.
It’s a jungle out there for small-business owners. Many trek through the wilds of entrepreneurship to gain their bounty: from the psychic compensation of being your own boss to profiting from one’s passion. The spoils oftentimes come at an enormous price. But the courageous emerge stronger and wiser from the journey.
Rochelle Thwaites is one of the newly-minted business owners taking the entrepreneurial expedition. “I wouldn’t call it scary, it’s exciting to me,” she asserts. “I get very excited about it because it is a challenge. I like challenges.”
In January, Thwaites launched a line of luxury handbags under her company, Los Angeles-based Mimeki L.L.C (www.mimeki. com). Using $150,000 from real estate investments, the former interior designer literally turned her vision into a reality. “I had a dream about walking into a store and all I saw were handbags on shelves,” says the 31-year-old wife and mother of two. “So I immediately woke up my husband. And it all went from there.”
Although familiar with the design process, Thwaites was new to the industry. So she needed to do extensive industry and financial research to start. Besides talking to experts and meeting with manufacturers, she traveled to New York City to get hands-on experience—all of which she says were critical steps. “There is tons of information out there, and I’m still learning,” says Thwaites. “And I think 10 years down the line, I’ll still be learning. Do your research before getting in because there is a lot of money involved. And if you want to do it and want to do it right, then it’s a matter of taking the time to research.”
This past June, Mimeki was the swag bag for the 2007 Alma Awards. With her bags ranging in price from $200 to $1,000, Thwaites projects revenues of $150,000 for year-end 2007 and anticipates that 2008 will usher in revenues of $200,000 with the help of fashion and trade shows.
And as any small-business owner should be, Thwaites is confident her company will stay the course despite the economic _uncertainty. “You have to keep positive and on track in an economy like this,” she says. “I try not to let anything influence me otherwise because you’ve put so much time and effort into something so dear to you. And how I look at it, there’s no way to go but up.”
Unlike Thwaites, many would-be entrepreneurs don’t act on their dreams, deferring them due to nail-biting fear and overwhelming pressure. And they have good reason to worry: _According to the study Survival and Longevity in the Business Employment Dynamics, 34% of new businesses don’t survive the first two years.
So what does it really take to make it? Passion? Yes. Hard work? Of course. But these will get you nowhere without knowledge and preparation. black enterprise developed the Small Business Success Guide for prospective and current entrepreneurs because far too often they attempt to make the journey without the proper research, guidance, and tools. On the following pages, we address the key areas on which small-business owners need to focus: business structure, financing, marketing and advertising, technology, branding, growing, and exit strategy—plus we provide essential resources and expert advice.
Anyone can set off for uncharted territory. They just have to be equipped to handle whatever comes. And those who _complete the trip unbowed and unbeaten will be well on the path to profitability.
STRUCTURE
A Sound Setup
Choosing an ownership structure can be tricky, but knowing your options can help determine the right fit
By Anthony Calypso
Over four decades and a myriad of changes, _College Crib, a Nashville, Tennessee-based Greek fraternity and sorority apparel store, is still standing strong. Started in 1966 by the late Earl Price Sr. and Hortense Price-Jones, the business began selling T-shirts and other paraphernalia from a 600-square-foot space. Like most businesses, College Crib was set up as a sole proprietorship. By the 1990s, College Crib was in the hands of the couple’s son, Treachery Price; it was then that the Price family redefined the scope of their business by purchasing a portion of the surrounding property and restructuring the company.
Today, Price Plaza is a 12,000-square-foot shopping area that rents retail space and houses College Crib in a 4,000-square-foot store. The family meets weekly, including Price’s retired mother, to discuss company objectives. The Price family incorporated each of the business entities: The College Crib and Price Plaza are incorporated as C corporations with limited liability under the umbrella company, Price Investment Properties.
“If anyone got hurt [at the store] or if anyone tried to sue, we wouldn’t lose the business,” says Price, 39, co-owner of the company. “It’s like insurance—great coverage when you need it.”
Choosing the right type of corporate identity can help ensure that a business has a foundation to build upon. Of course, there is plenty to consider, but there are a host of resources to help entrepreneurs navigate the process (see sidebar, “Choosing Wisely”).
A critical element to an entrepreneur’s success is deciding between the pros and cons of business structures. Typical choices include a general corporation, a limited liability company, or a company qualified under subchapter ‘S’ of the Internal Revenue Code.
“The choice of entity is often driven primarily by tax concerns,” says Kevin L. Freeman, a Chicago-based corporate attorney with Drinker, Biddle & Reath L.L.P. “But generally speaking, in addition to tax considerations, the decision is also driven by the number of equity owners, the type of equity owners, management structure, and cost of filing formation fees.”
“The trend among entrepreneurs is to form a limited liability company or an S corporation,” Freeman continues. Both types contain business-related flexibilities and restrictions. Freeman recommends that entrepreneurs decide prior to formation (to avoid potential tax ramifications later on) which entity might best suit their specific corporate needs, as well as consult both a tax and legal professional for guidance during the decision-making process.
Choosing Wisely
Here are the most common types of business structures along with a few things to consider for each. Note that laws for corporate entities vary from state to state.
Sole Proprietorship
No state filing required
Unlimited liability, including personal assets
Full management control
Does not face double taxation
The owner or owners’ personal wealth and assets are linked to the business. All liability—financial and legal—is with the owners, rather than the company itself
General Partnership/Proprietorship
No state filing required
Unlimited liability
Is not taxed as an entity
Partners arrange/agree on management structure
Limited Liability Company (L.L.C.)
Available in all states; state filing required
Can consist of an unlimited number of _owners/partners
No restrictions on the class of stock(s) offerings
Retroactive changes to the operating agreement are permissible
Members and/or member–managers make _managerial decisions
C Corporation
Available in all states; state filing required
Owners have limited personal liability
Managerial decisions made by an elected board
Business must pay its own income taxes on profits
S Corporation
Available in all states
Must offer just one class of stock
Limited to 100 shareholders
Retroactive changes to operating agreement impermissible
Taxed as an entity: profits also taxed
A board of directors makes managerial decisions
Sources: Illi
nois Institute of Continuing Legal Education (www.iicle.com), Harvard Business Services Inc. (www.delawareinc.com) and nolo. (www.nolo.com)
FINANCING
Capital Resources
Money Matters
Using sound resources, you can find capital for your business
By Carolyn M. Brown
Fashion designer Kara Saun garnered national praise as runner-up on the first season of Bravo’s reality competition series Project Runway. Showing her styles at the 2005 New York Olympus Fashion Week, Saun not only wowed _television viewers, she also inspired an angel investor from _Connecticut to help launch her Fall 2006 clothing line at Los Angeles Fashion Week.
“He and his wife saw me on Project Runway,” says Saun. “He liked my work and personality.” Over the course of six to eight months from their initial meeting, a contract was drawn whereby Saun’s investor (who provided an amount in the low six figures) would get an equity percentage, but she would retain full creative and operational control.
Having a solid business plan is what helped seal the deal, says the 39-year-old Los Angeles-based designer. “Even though he sought me out, I still needed a strong presentation,” says Saun on what investors expect. “I worked with two business writers and my accountant. I had a full budget and marketing plan. They want to see what the profits are going to be and the return on their investment.”
Saun’s line of gowns and cocktail dresses, starting at $1,500, is sold in boutiques throughout California, New York, Texas, and Connecticut and at www.karasaun.com. She still designs custom clothing for celebrity clientele and does costume design for television shows. Next, Saun wants to secure second-round financing to sell her line in high-end retail stores such as Nordstrom and Saks Fifth Avenue.
A shortfall of capital is one of the most commonly cited reasons businesses fail, says Todd McCrackin, president of the National Small Business Association (NSBA), a small-business advocacy group based in Washington, D.C. These days, it is tougher than ever for entrepreneurs to raise money.
According to the NSBA, small businesses in 2007 were less likely to obtain adequate financing than they were 10 years ago. For America’s smallest businesses, credit cards are a primary source of financing, followed by earnings of the business and then private loans. Larger companies rely much more on bank loans. New companies, however, generally don’t have access to commercial bank loans because they lack operating experience and solid credit history, says McCrackin. “It doesn’t matter if an entrepreneur is asking for $10,000 or $1 million, bankers require the same information.”
CAPITAL RESOURCES
Angel Investors: Typically among the earliest sources of funding for budding entrepreneurs. Such investors are available to finance your business and believe in your vision just as much as you do. They provide seed capital ranging from a few thousand dollars to as much as $1 million. Angel Capital Association, www.angelcapitalassociation.org
Interpersonal funding: Private monies from friends and family, a fast and easy source. Terms are usually more lax than with other forms of borrowed capital. Receipts should be drawn up to show the exchange and any stipulations for repayment. Circle Lending, www.circlelending.com
Loans: The Small Business Administration offers various loan programs. Its Community Express Program grants loans from $5,000 to $50,000 in conjunction with preferred lenders (www.blxonline.com/Products_Community_ Express.cfm). Small Business Administration, www.sba.gov
Microlending: For startups without access to traditional financing. Regional and national nonprofit groups make loans from as little as $500 up to $35,000, and repayment terms are less stringent. Lenders may also offer financial and business workshops. Each organization has its own lending requirements. ACCION USA, www.accionusa.org
Venture Capitalists: The least likely source of funds for startups, according to NSBA president Todd McCrackin. He says venture capitalists tend to shy away from very new businesses and rarely invest less than $5 million at a time. National Association of Investment Companies, www.naicvc. com; National Venture Capital Association, www.nvca.org
Where to go for help:
Association of Small Business Development Centers, www.asbdc-us.org
National Business Association, www.nationalbusiness.org
SCORE (Service Corps of Retired Executives), www.score.org
The Minority Business Development Agency, www.mbda.gov
Books
Raising Capital for Dummies by Joseph W. Bartlett and Peter Economy (For Dummies; $24.99)
MARKETING
Every Little Bit Helps
Effective
By Tennille M. Robinson
“I actually bite my nails, which most people find to be the most ridiculous thing in the world,” says TriciaLee Riley, owner of the Polis Bar of Brooklyn, in New York.
After 13 years in the cosmetics industry, Riley launched Polish Bar, a salon that offers manicures, pedicures, makeup application, and waxing, in August 2006. The 32-year-old entrepreneur attributes her success to a multilayered marketing strategy. “The most important thing to me is marketing,” she maintains. “I have a marketing calendar that runs 12 to 18 months out, and everything on it is very detailed.”
For entrepreneurs like Riley, marketing and advertising is a vital ingredient in attracting customers and, in turn, boosting revenues, market share, and cash flow. “From the service you offer to the décor, all transcend into your marketing and advertising initiatives,” says Steffon Isaac, Polish Bar’s creative director. “Once you understand what your customers want, need, and value, you can then take that data and craft a tailor-made initiative.”
The marketing thrust included the placement of Polish Bar’s line of body products in the restrooms of local lounges and cafes, which Riley says is an inexpensive way to encourage brand awareness. “I’ve had people walk in and say, ‘Oh my God, I keep seeing your product everywhere I go,'” she says.
In addition, the Polish Bar is part of a cooperative advertising initiative lead by the Myrtle Avenue Brooklyn Partnership, a local nonprofit. In one campaign, nearly two dozen business owners, including Riley, were featured in postcards highlighting their companies and the neighborhood. Instead of spending as much as $1,350 on developing her own series of ads, Riley spent only $700 as part of the cooperative.
“Certainly you’re getting more bang for your buck,” says Jennifer Stokes, a program manager with the organization. “It’s getting the word out about your business, but also it’s affording some entry into a media outlet that may not have been financially in reach before.”
Riley confesses that she spends only about 2% of Polish Bar’s revenues on marketing initiatives, opting to develop more imaginative strategies that are inexpensive yet effective.
Polish Bar saw 2006 revenues near the $500,000 mark. Just nine months into 2007, its revenues were already up 52%. Today, the salon averages 50 to 60 clients per day and generates at least 10 new appointments overnight via the Website.
The Internet is one tool that should not be overlooked. “Web presence is important,” says Maisha Walker, president and founder of Message Medium (www.messagemedium.com), a New York City marketing firm. “Visibility is about making sure you can compete in all arenas so you can take advantage of the real revenue that can be generated through a Website.”
Do’s & Don’ts when looking to market your business
- Do… Know your business. Having a clear understanding will impact who you align with and how you are portrayed.
- Do… Vet ideas wit
h others. Riley and Isaac use a marketing template to discuss the pros/cons and prospective results of a marketing/advertising initiative. - Do… Develop strategic partnerships. “Cooperative advertising brings your advertising up a notch, says Stokes. “Now you’re working with increased dollars and voices.”
- Do… “Start small and sharp,” recommends Walker about building your Website. “Grow the site as your revenues grow.”
- Don’t… Bore online visitors. According to Walker, your Website should answer: “What can you do for me?” in a way that is clear and compelling.
- Don’t… Wait too long to measure impact. Monitoring a marketing initiative throughout its run can save money.
TECHNOLOGY
Keeping Up With the Joneses
Outfitting your company with up-to-date technology is vital
By Sonya A. Donaldson
When global shipping giant UPS offered Summitline Industries Inc. a small-business supplier contract back in 2003 worth $10 million, it came with a stipulation. “We needed to do a technology overhaul in order to get the contract,” says Stan Richard, president and owner of the Fort Wayne, Indiana-based company, which offers warehousing, packing, and distribution services.
Whether you’re a multimillion-dollar powerhouse doing business with corporate giants, a startup, or an established home-based business, success means keeping pace with tech developments on all fronts—hardware, software, and the Web. Continually upgrading your business can maximize its reach, its ability, and ultimately its bottom line.
Richard says Summitline did need a more robust and integrated tech backbone and that its methods were becoming obsolete. “Products would come in and employees would enter the information manually,” he recalls. “We would then designate a place in the warehouse to store products. Of course, this wasn’t as efficient and accurate as an [automated system].”
Complying with the request from UPS, Richard, 51, embarked on a bold plan. Over the last four years, he has invested some $500,000 in technology integration, upgrades, and employee training. His supply chain management company handles written documents and forms for UPS and serves as a consolidation entity on behalf of the shipping giant at work centers across the country and the globe.
“Rather than customize the product to fit what we were doing, we brought ourselves up to an industry-wide standard,” says Richard.
At Summitline, which projects year-end 2007 revenues of $40 million, the investment has paid off in many ways, including the ability to win contracts with other companies. In addition to UPS, which accounts for 25% of Summitline’s business, the company now has a roster of 200-plus clients. The company also has 20 employees and is about to break ground on a new, 70,000-square-foot building.
“Once we got the technology in place, we were able to support the kinds of businesses we were contemplating working with,” says Richard. “And it enabled us to be considered for other opportunities.”
Today, the firm’s systems are totally automated within its enterprise resource planning application package, which includes software tools to handle logistics, distribution, inventory, shipping, invoicing, and accounting. Summitline employs a variety of solutions, including a bar coding system that uses radio frequency devices to receive and track products. Since the upgrades, the company has received awards for its performance as well as its ISO certification, a worldwide quality-management standard for delivery of services.
“We now have a greater degree of efficiency,” says Richard, who trains employees for nearly four months. And training is an ongoing process, because as new technologies emerge, Summitline remains eagerly poised to adapt.
Team Up with Tech
All entrepreneurs can stay competitive by investing in maximum technology utilization. Begin with these tips:
- Do your research. “Research the companies you want to work with, find out what the industry standards are in terms of technology, and keep up with upgrades,” says Richard. He attended corporate trade shows, learned about competition in his space, and worked closely with original equipment manufacturers as well as a consulting firm to ensure he invested wisely.
- Train employees. “The integrity of your operation really rests on the ability of your employees to manage technology,” says Richard. “Our employees are well-trained and cross-trained to perform a number of functions.”
- Invest in tech support. “We have an IT person who’s on board full time,” says Richard. “Prior to the overhaul, we didn’t have that. But now, if you want to be an industry player, you have to have a full-time IT person to help manage processes.”
BRANDING
Making Your Mark
Five steps to brand your success
By Erinn R. Johnson
What is a brand? According to Melissa D. Johnson, founder, president, and CEO of Velvet Suite Marketing Consulting Group L.L.C. (www.velvetsuitemarketing.com), a Cincinnati firm that assists clients in building brands, a brand has the courage to position its core value in an uncommon way that leaves an invaluable mark.
“Coca-Cola, the Rockefellers, IBM, and Magic Johnson are all product/services or people/brands that have made an imprint on society,” explains Johnson. “They have created longevity through job creation, community engagement, and generational wealth.”
Johnson believes that everything about you and your business speaks volumes about your brand. Here, she offers tips on developing and building a solid brand from her book, Brand ME! Make Your Mark: Turn Passion Into Profit (Ambassador Press).
1 Discover your value. Your business is an extension of your brand. Johnson recommends conducting a branding audit and exploring the attributes that you are consistently and constantly reinforcing across all touch points to your audience. Identify any room for improvement.
2 Know your audience. Business owners must have an intimate understanding of their audience. “Maintain ongoing communication with your audience,” says Johnson. This may include a two-way newsletter, which lets you maintain contact, give valuable information, and gain insight. “[All of this] will help you refine your approach and strategy.”
3 Focus your position. Johnson recommends you first identify the one thing that you want to be known for and then develop a compelling position statement that will allow you to reinforce it.
4 Pursue partnerships. “Creating powerful partnerships is a great way to elevate your business as well as expand your offering,” says Johnson. “Dedicate one day a week to developing and nurturing relationships.” Sort contacts into three areas: project sourcing, marketing and media, and strategic alliances.
5 Pass on the legacy. Johnson says that our ultimate goal is to leave a legacy with our distinct brand mark. Some key questions to ask: How do you want to be remembered? What are you doing now to protect your brand for the future?
GROWTH
Knowing is Growing
Five strategies to develop you and your business
By Erinn R. Johnson
“Let me tell you why people don’t reach their goals,” says Andrew Morrison, “They don’t reach their goals because they don’t believe that they’re going to reach their goals.”
As founder and president of the Small Business Camp (www.SmallBusinessCamp.com), a New York-based entrepreneurial training, coaching, and marketing services firm, Morrison helps entrepreneurs get themselves—and their businesses—in tip-top shape. Here, Morrison shares some of his tools of the trade courtesy of his audio CD, 27 Keys to Growing Any Business in 90 Days ($20).
1It’s all in t
he pitch. An elevator pitch is your commercial; it sells others on what you do. Quick, in 30 seconds: Who are you? What does your service, product, or business offer? The pitch includes: your name, the business’ name, the problem that your product or service solves, past clients, and how the listener(s) can be of a support to you.
2The proof is in the package. How the business is presented—from logo to Website to product presentation—matters. “Once you begin to repackage your business with certain brand attributes,” continues Morrison, “you allow your clients to begin to engage you, get [to know] you, and also buy from you—which in turn leads to you becoming more successful.”
3It just takes one. Morrison says first-time business owners tend to fall into the trap of trying to be all things to all people. He recommends entrepreneurs pick one thing to focus their efforts on initially. Remember to “grow rich in a niche.”
4 Uncover the underperforming. Three key areas many business owners are not using effectively: resources, relationships, and results. Resources: What are the tangible resources or products you already have that you can turn into a new revenue stream or properly market? Relationships: Who do you know? Who do you know who may know someone else? Results: So, what have you done?
5 Time management = great results.
Assign each business activity to a time of day. “You can’t walk in two different directions at the same time,” asserts Morrison. “So, why try to speak on the phone and answer e-mails [at the same time]?” For example, every 90 minutes of a day, focus on one thing and one thing only.EXITING
A Graceful (and Lucrative) Exit
Succession planning lets you profit from your business even after you leave
By Tamara E. Holmes
“You work your whole life to build a great _company,” says Julie Gordon White, principal of the Richmond, California-based BlueKey Business Brokerage M&A, which assists clients in buying, growing, or selling a business. “And the goal should be to exit with a nice cash benefit.” Developing an exit strategy is just as important as creating your business plan, because you want to exit your business as successfully as you operate it.
There are four main paths to exiting a business. Here is how to determine which plan will work for you:
Selling to a third party If you choose this option, start planning at least three years in advance since a buyer and a lender will use three years’ worth of tax and profit and loss statements to evaluate your business, says Gordon White.
For a percentage of the transaction, an investment banker or a business broker can guide you through the selling process from beginning to end, helping you determine what your business is worth and identifying prospective buyers. The size of your business generally dictates which one you use: investment bankers typically work with businesses that have revenues of $30 million or more, says Gordon White.
The exit strategy will also determine when to sell. Owners should “stay in the business long enough to develop enough value so the money they receive is enough for the rest of their lives,” says John H. Brown, author of How To Run Your Business So You Can Leave it in Style (Business Enterprise Press; $24.95).
Brown says the key benefit to selling to a third party is maximizing your profit. He suggests business owners who want to walk away from the business entirely explore this option.
Keeping it in the family Early planning is most crucial when wanting to implement this strategy. “[Business owners] have got to start planning early so they can bridge the gap between the two generations,” says Jeff Faulkner, a partner with The Rawls Group, a succession planning business based in Orlando, Florida.
Unlike a third-party sale, where an owner exits the business entirely with a maximum profit, “with a son or daughter, you want to transfer the business and perhaps stay involved for a period of time,” says Faulkner. “You also want to transfer it in such a way that they can afford it.” That may mean having the child or family member buy stock gradually or pay you through a promissory note based on future earnings. Faulkner says the key is making sure you have enough investments outside of the company “so you can turn over control of the business without hindering or impacting your sense of security.”
Selling to partners or employees This is an effective option when you want to relinquish control gradually. Generally, “you’re not transferring initially a controlling interest,” says Brown. “You’re selling a smaller amount. They pay for that smaller amount and then they buy some more. So the owner can maintain control for a far longer time period.” As with selling to family members, it’s important to make sure you have enough resources from the business and outside of the business to maintain your retirement.
Liquidation Generally the least desired and most tax-costly exit strategy is liquidation, in which a business simply sells its assets and closes its doors. The main reasons for liquidating, says Brown, include: “You can’t sell the business based on the money it’s making, or the asset value of the business may be more than the value that the owner can sell the business for.”
Exit Checklist
Once you determine which exit strategy you’ll take, there’s still work to be done. Make your transition is profitable and smooth with these tips:
Know your business’ worth. Whether you’re selling your business or liquidating and selling the assets, an appraiser can help you identify an asking price that is likely to get results.
Assemble an advisory team. A tax professional, legal adviser, and financial planner can help ensure that you relinquish control of your business with as much cash as possible. After all, “it’s not how much you get, it’s how much you keep,” says Julie Gordon White. Author John Brown says, “The only way to ensure you will exit successfully is by spending the time to develop an exit plan based on your objectives and the resources of your business.” A trained exit planning adviser is critical to properly designing a plan to convert the owner’s largest asset to cash.
Have key managers in place. If you’re selling your business, you want to have key employees who can keep things running. “If I want to sell my business to an outside third party, they are going to want to see that someone remains who knows the business,” says Brown. Likewise, “If I’m going to sell to a key employee or child, they have to be able to run the business.”
Improve business cash flow. “A business needs to look for places where it can create improvement,” says Gordon White. “Improving the cash flow of your business is going to give you that premium price that every seller is looking for.”