March 2023 - Page 7 of 13 - BOLLYWOOD SURKHIYAN

Five Characteristics of a Good Business Plan

A business plan like any other write – up can either be good or bad. And if you want to know the difference of a good business plan from something that can be mediocre or even bad, then read on. But first off, let us start with giving everybody an idea of what a business plan is.

As implied, a business plan is a document that specifies and discusses the following:

• The company’s nature and identity

• Your objectives and the purpose of your existence in the world of consumers and entrepreneurs.

• The products you sell and offer

• Your marketing strategies

• The goals that you plan to achieve

• Your niche – the market that you plan to conquer

• Your plans for the business’ future

• And of course your financial standing prior to starting

By having all those information, you can see that a business plan is very much like a blueprint that will help you or anyone start and manage a business regardless of its nature.

Now that you realize its importance, the next thing that you should start working on is learning how to make one. But before you have the urge to get your computer going and start writing, here are the qualities of a good business plan that you have to keep in mind.

1. A business plan should be detailed. In listing your products and services for example, you should not really stop by just enumerating them. You also should write down the descriptions and scope of your products and services, touch base on production and identify means on how you can market your “brain – child” to your targeted niche.

2. It should include a market research that identifies your competitors, their share of the market and the range of the products they produce. By learning how they conduct their operations, you may learn tricks of the trade in the business you want to enter and you also get to have a basis on what you can do to excel.

3. It needs to have a list of everything you need. Note that the word everything here comprises of the equipment, technology, raw materials, financial and other resources that you may need when starting and running your business venture. Having all these listed will give you an idea on how much capital you need before you start and how much money should you make in a day to make your business survive.

4. It also needs to be written in formal format and style. You have to remember that a business plan is something that you may have to present to your business partners, financial firms and banks. So if you can, refrain from using slang in any part of your plan.

5. Finally, a business plan should be error – free. This is important because your business plan defines who you are as a business person. If it turned out sloppy, then that does not speak too highly of you.

Again those are five characteristics of a good business plan. Now that you know of them, you can start your research and start drafting your write – up.

SWOT Unravelled – Discovering Your SWOT Strengths & Weaknesses

The SWOT analysis technique is used to summarize your strategic analysis which includes both your internal and external analysis. This summary is categorised into four categories. These four categories are Strengths, Weaknesses, Opportunities and Threats.

Today, we will clarify for you the strength category and also provide you with a list of common strengths that you may find in your business.

The golden rule of Strengths: Strengths are characteristics about your businesses, they can only be identified in your internal analysis, as your internal analysis is the only type of strategic analysis that evaluates your business characteristics.

Now, let’s define strengths and take a look at the typical business characteristics that are commonly classified as strengths.

Strength Defined: Strengths are core capabilities of your business. They are areas where your business has an advantage over your competitor(s) that is valued by your customers.

In other words strengths are characteristics of your business that pass the better than your competitors test.

Recap Key Point: You will only find strengths when completing your internal analysis, A strength must be characteristics of your business.

Understanding Strengths

When completing your internal analysis you will find that your strengths will generally fit into two categories, tangible and intangible strengths. Let’s look at them both

Tangible Strengths: A Tangible strength is a characteristic of your business that can be precisely identified, measured or realized.
Intangible Strengths: An intangible strength is a characteristic of your business that can not be physically touched or physically measured

Now, we will look at examples of common tangible and intangible strengths that maybe found in your business.

Examples of Tangible Strengths

Your tangible strengths will tend to include characteristics about your business such as

Your physical assets including plant, equipment buildings and infrastructure
Long term rental agreements in good locations
Unique or market leading products
Access to sufficient financial resources to fund any strategic changes that you would like to make
Cost advantages over your competitors (This relates to your ability to provide the goods or service at a lower cost than your competitors. It has no reference to the sale price)
Volume, high volume can be a strength
Ability to scale volume up or down with relative ease

Examples of intangible Strengths

Your tangible strengths will tend to include characteristics about your business such as

The strength of your brand(s) such as having strong easily recognizable brands
Your market reputation, including a market perception that you are a market leader or an expert in your filed
The strength of your relationship with key customers, a strong relationship represents goodwill and is often seen as a strength
The strength of your relationship with your suppliers, again strong relationship can be seen as a strength
The nature of the relationship that you have with your employees
Any unique alliances that you may have with another businesses that compliments your businesses products or services in a way that is valued by your customers
The ownership of patents or proprietary technology can be a strength
A proven advertising process that works well
Having more industry experience in a field that requires some technical experience, including the skill of your managers, your collective industry experience and your profile in industry associations.

Where people often go wrong?

The first area where it is common to see strengths recorded incorrectly is in the language used to describe them. It is an easy mistake to write Macro Environmental observation up as strengths rather than opportunities, however this tendency should be avoided. For example “One of our strengths is a strong economy” this really is an opportunity and can be reworded as follows “The economic outlook supports growth”

And

A SWOT analysis is normally completed by the leaders in your business. In completing their analysis they are likely to position their leadership capabilities in with the other strengths. It is, of course, unrealistic for all leadership in all businesses to be able to pass the better than our competitors test. When faced with this self assessment it is best to look for indicators such as higher engagement scores, lower turnover, and higher customer satisfaction to validate where you place leadership in your businesses SWOT.

SWOT Strengths Summary

Your SWOT Analysis summarises the three strategic environments that your business operates in, they are your Macro Environment, your Industry Environment and your Internal Environment. You will only identify strengths during your internal environment analysis, this is because your internal analysis is the only area where you will identify characteristics of your business that pass the better than your competitor test. Strengths can also fit into two categorise they can be tangible such as plant and equipment or intangible such as patents.

Now you will have a sound understanding of strengths and how to identify them in your business.

Integrative Business Planning – A Case Study On Insufficient Planning

Introduction

Entrepreneurs would always do some form of business planning before they start a new venture. Quite often this will result in a formal business plan. The format will probably be determined by one of the following:

A business planning software package;
A guidebook on business planning;
Another business plan;
An external consultant.

Although all the above can have satisfactory results, they all have potential pitfalls. One serious pitfall (when using one of the first three methods) is the way that the entrepreneurs tackle the problem. Although all of the methods cater for the addressing of the apparent salient features and even for the interdependence between them, they can not cater for all the intricacies and multi-directional relationships that exist between various features in a business.

Outsourcing the whole business planning process to a consultant also does not solve all the problems. A consultant would need to work quite interactively with the entrepreneurs to be of real value.

Over more than a decade Ventex Corporation advised and assisted companies from business planning right up to harvesting and beyond. This case study highlights the importance of having a well thought-out and executed integrative business planning process. It shows how apparent small issues, that are neglected in the planning process, can have grave consequences for the entrepreneurs.

Salient Features in an Integrative Business Planning Process

The first aspect of integrative business planning is to ensure that all the salient features are catered for. These features can differ drastically from one business to another. Some of the more general features are:

The Business – The opportunity, the business concept, products and services and growth strategy.
Marketing – Marketing strategy (price, promotion, etc.).
Market Research – Customers, market size, trends and competition.
Development – New products, services, markets and facilities.
Operations – All aspects.
The Team – Management team, skills needed, training, board composition and organisms.
Finances – Investment-, financing- and dividend decisions and policies. Also cashflows, profit margins, costs and growth.
Risk Management – Business-, operational- and financial risks as well as potential fatal flaws.

Multi-Directional Relations to Keep in Mind in Business Planning

Unfortunately the salient features can not be seen in isolation. Every feature impacts on various other features and are also impacted by many other features. These multi-directional relationships occur within each individual broader feature (e.g. finances) as well as between different features (e.g. between finances and marketing).

Higher profit margins can for instance decrease the volumes sold, but increase the net profitability. On the other hand can higher volumes (with lower gross margins) increase the volumes sold, but decrease the profitability.

Higher volumes on the other hand can increase the stress factor in production personnel (that already work at maximum human capacity), causing higher absenteeism, lower production levels, extra hiring costs and a corresponding decrease in profitability. Unfortunately these intricacies can not be ignored and an integrative approach of business planning goes a long way in handling it.

An Example of Things that can go Wrong

Ultimate Holidays had a very ambitious business concept in the tourism industry. The industry was booming at the time and they planned in detail to build a luxury lodge that would combine a health hydro, hotel school, conference facilities, adventure center and eco-cultural tourism. (Details are changed for confidential purposes – all the detail does, however, simulate the real-life scenarios close enough to demonstrate the actual learnings).The experience of the entrepreneurs includes business, entrepreneurship, tourism, archeology, law and politics. This project of around $320 million was a life-long passion for all of them. They covered in-depth the architectural designs, legal requirements, development and operational planning issues, the marketing plan and personnel development policies. They also ensured that they had senior politicians and excellent service providers on board.

The business did, however, never got of the ground. What did the experienced entrepreneurs not see? What could they have done differently? They thought they had covered all the various aspects of the business. Analyzing the facts, the following major problems stood out:

The entrepreneurs were not flexible – they had strong pre-conceived ideas;
No detailed market research was done. Specifically not on occupancy rates in the niche industry and on critical investment criteria that investors are looking for;
All the planning was done on individual aspects that were optimized as far as possible. The way that these factors might have effected other factors were never considered.

The entrepreneurs were quite arrogant. They believed that any entrepreneur would be stupid not to invest and they would typically say that they only want investors that share their dreams and that the finances will sort itself out.

The business plan promised a “conservative” 22% internal rate of return (IRR) over a seven-year period. This included the expected capital growth of the facility. Expected occupancy rates were given as 50% in year one, rising to more than 75% by year four. The IRR and occupancy rates were much lower initially and were purely based on thumb-suck. The entrepreneurs then just chanced the figures to make financial sense without changing any of the other related factors.

Investors were often very keen on the concept, until they realized that the occupancy rates were inflated. The real figures based on realistic values indicated an IRR of only 15% – at least five percent below what the investors expected. The financial risk was just too high. Furthermore a breach of trust occurred.From the entrepreneurs’ viewpoint this was an insurmountable problem – they wanted it their way. In the end nobody invested. Much effort was applied and personal expenditures were sky-high. A high visibility in the business and tourism industry was also created. In the end some of the entrepreneurs were financially (and emotionally ruined) and all of them lost credibility.

The important questions in hind-sight are: Could the entrepreneurs saved this project? Could they have included all the features and genuinely expected an IRR of above 20%?

If the entrepreneurs used an integrative business planning process, they would have first ensured that all the salient features were examined. Secondly they would have ensured that all the multi-directional relationships (causality) between the different features were balanced.

By mapping the relationships between the various salient features it showed for instance that:

Occupancy rates are caused by service levels, product offering, marketing and price.
Occupancy rates on the other hand can affect the turnover, profitability and marketing (through word-of-mouth).
Profitability is caused by turnover (through occupants and outside guests), occupancy and cost of doing business (cost of sales and other expenses).
Profitability on the other hand have a direct bearing on the IRR, cashflow and sustainable growth of the business.

Only a very small portion of the multi-directional relationships that exist within and between the various salient features are shown above.

The entrepreneurs should have asked more in-depth “what-if” type of questions. They could start with questions such as: What would happen to the occupancy rate if the price per night increase by 10%? What would happen if the various aspects of the business are phased- in? Would it be possible to cut marketing costs and increase the occupancy rate? The last question typically seems like an oxymoron. This is part of integrative business planning – to look at the two opposites and try and find a solution where both aspects are catered for. In practice this can probably be achieved by using more free advertising in newspapers, internet articles and blogs and by working directly with the tourism associations of the region.

A major aspect (constraint) of this whole new venture was the high capital lay-out. By concentrating on this salient feature it was shown that costs could have been drastically reduced without having any detrimental effect on the occupancy rate. By using a light steel frame construction instead of the normal brick could have caused tremendous savings. The erection time could have been halved with savings in labor and interim interest. The long distances would have resulted in much less transport costs (light steel frames are much lighter than brick). Additional savings are also possible due to other construction benefits and different finishes. No negative effects would have been foreseen.

The building costs of the health hydro was 50% of that of the main complex, but the projected figures showed that it would only produce 33% of the turnover of the main complex (at much lower gross profit margins). This component could have been phased-in at a later stage when the complex was already in full production and when the potential occupancy and profits were much higher.

The analysis of the business showed, that by just changing these two factors (construction method and phased-in hydro) and by using a realistic occupancy rate, that the expected IRR will be in excess of 21%. Further solutions to decrease capital expenditure could have been explored and this could have resulted in a further increase of the IRR. The high road building costs (to the complex) could possibly have been shared with the government and other potential developers (e.g. of a shopping complex or a time-share game farm close by).

Summary

By neglecting some of the salient features or by not acknowledging and planning for important casualties can be problematic or even fatal for a new business. All the salient features need to be covered and at the same time the multi-directional relationships between them need to be balanced. One aspect of the business can not be optimized to the detriment of some of the others. An integrative business planning approach is needed to find the optimum balance for the company as a whole.

A Retail Clothing Store Business Plan – Customer Analysis

Your retail clothing store’s business plan requires a well-thought out customer analysis which describes what type of customers will make your store succeed.

Not Too Broad, Not Too Narrow

When choosing your customer target markets, make sure that they are neither too broad nor too narrow. The broader a target market, the more expensive and difficult to reach it and sell to it. For example, if the target market is simply “Residents of the Tri-state Area” this will tell you and readers little about the most effective means of reaching them.

Think further about who the most profitable customers within these broader markets will be and whether there are distinct groups of profitable customers worth mentioning. Profitable here refers to the total revenue that a certain customer will bring in through clothing purchases over a certain period, the customer’s likelihood to remain loyal and keep purchasing after that period, and the cost of achieving that customer through marketing and sales work.

If customer groups are too small, readers will be concerned that there isn’t enough potential revenue from the target markets for the store to show a profit. Remember that readers will not believe that you can ever achieve 100% of a market. You have to show that you will be able to break even with much smaller market shares, especially in the early days of your store.

Three or Four Segments Is Good Enough

To prove the excellence of your store’s potential, you may be tempted to write a list of target markets segments that you can target. Resist this temptation, and clearly show your focus on three or four segments at most for the short-term. If the amount of revenues that you can achieve from these groups seems limited over time, then you can go on to describe some future target markets, labeled as such, to detail the next steps the company can take when the original targets are tapped out.

Customer Values

For customers in each segment you describe, write about their specific reasons to buy from your store based on their values. Show the difference between each segment, because if two segments have the same values and needs, they could probably be lumped together as one. Don’t detail your promotion methods and product line again here as a way of explanation – those are covered elsewhere in your plan. Do be clear as to why each group listed is a good target for your clothing store.

How to Set Goals For Your Business Plan

What are the goals for your business? It’s a fundamental question every entrepreneur needs to ask themselves. Why are you in business? What do you hope to accomplish and when? Goals can be defined as what you want your business to be when it grows up. Set a reasonable number of goals, one is probably not enough and twenty would be way too many. The goals relate to a time period as well, a year, or perhaps six months, is a good target. One way of setting goals is to describe your company one year from now.

Goals, objectives, and strategies are incorporated in a business plan that is used for internal purposes rather than raising capital. It’s an important exercise for management to go through and then incorporate the results in a working business plan.

It’s a good idea to complete the Historical background of the company the Industry and Economic Review and the Product section before tackling goals, objectives and strategies. Looking at where you’ve been and where you are is the starting point for where you want to go.

Brainstorming is a good way to get started on goals. Make a list of all the achievements you could make in the upcoming year. Just list them. Don’t make any value judgments on whether they’re achievable. Now rate each goal in five different categories: effort, money required, like and dislike, talent required, and payoff.

Effort is simply the amount of energy and time that will be expended to achieve the goal.

Money required is the investment that will be made. For example if staffing will have to be hired or outsourcing will be utilized that means it will be necessary to invest money in the business to pay for the employees or the outsourcing. Nearly all businesses require some investment of capital, if nothing else for Internet access and phone lines. Use ballpark figures.

Liking or disliking the tasks required to achieve the goal has an impact on whether the goal will be achieved successfully. If you like to write then it won’t be a problem establishing a ghostwriting service, but if writing is the last thing you’d choose to do, you probably won’t be a success at ghostwriting.

Talent means whether you have the abilities required. If you have no artistic talent then graphic design isn’t for you, unless you have such great contacts for clients that it makes sense to outsource the design function.

Payoff is the reasonable amount of money that can be earned. This is a guestimate of what you believe will be the payoff if the other factors – effort, investment, like or dislike, and talent hold true.

This is a simplistic way of rating the goals. It may turn out that the goal with the highest score also requires the most money to accomplish and that just doesn’t fit in with your budget. Or perhaps the lowest rated goals are the goals you have the most talent for and require the least effort. The point is rating the goals gives you a starting point.

How to Write a Business Plan For an Online Business Directory

Writing a business plan for an online business directory is as important as writing a business plan for any type of business. A proper plan is essential to making an online directory a success. This will outline the type of business directory you will be running and how you will make it profitable. Below are a number of tips to writing a business plan for an online business directory.

1. The plan should outline your strategies on how you will make the directory a money generator. It will detail how the directory will work and how you will maintain profitability. It will also help you plan for unexpected obstacles, such as if one method of acquiring business listing does not work, how you will modify the strategy to make it more effective. It is important to regularly update your business plan to maintain competitiveness. Create short and long term goals and establish time frames for achieving specific tasks and set goals, such as the number of businesses that will post their listing in a week, or in a month.

2. The mission statement is a blueprint to having successful directories. It should define your values and objectives to maintaining competitiveness in the marketplace. It is important that you outline how you understand your target audience, including their needs and wants and how your directory will meet them. It must detail how you will attract customers to list their businesses.

3. You must detail your understanding of your competitors and how your directory will be unique and stand apart from your competitors’ directories. For instance, will yours fill a particular niche market? You need to outline your promotion plan and how you will implement your marketing strategies. You need to create a strategy that gives you a competitive edge.

4. You need to detail a comprehensive financial plan. You have to include such information as advertising and promotion costs and the expected revenue you will generate. You should outline all of the methods and programs you will use to effectively monetize your directory. This can include affiliate programs, offering paid listings…etc. You should create an effective budget that is practical and takes hidden or unexpected costs into consideration. You will need to break down your expenses and revenue to make sure you have a plan that generates more revenue that money paid out.

Starting a new online business directory can seem overwhelming as there are so many online directories on the internet. To stand out from the others, you need a strategic plan, clearly defined objectives, clear promotion and marketing plan, and a practical budget. It will help minimize the risks and maximize the benefits. A general guide on writing a business plan for an online business directory is helpful when planning to build a successful online business directory, but it is essential that you do your research and consult with others to make sure your business plan is a blueprint to success.

Marketing Strategy Plan: What’s Your Unique Selling Proposition?

Every business must have a marketing strategy plan. The success of every business, whether online or offline, depends on business planning. Experts have shown that strategic planning in marketing is the key to improving efficiency and effectiveness in business. Business owners are advised to always present unique selling propositions. Deep insights in marketing are necessary for reasonable propositions.

Unique Selling Proposition and Its Benefits

A unique selling proposition (USP) can best be described as a marketing idea that differentiates one businesses product or service from its competition by way of a benefit or way of doing business. Your USP will convince the potential buyer from doing business with you because your proposition is seen as much more valuable as compared to your competition. Here are three famous USP examples:

“You get fresh, hot pizza delivered to your door in 30 minutes or less – or it’s free.” Domino’s Pizza

“The ultimate driving machine” BMW

“The milk chocolate melts in your mouth, not in your hand” M&Ms

Furthermore, a USP helps greatly in product marketing strategy. Every seller must be able to identify the company’s unique selling proposition. You do not sell what you do not know. You will be able to provide answers to any question asked by the buyer and thus convince the buyer to buy even more.

How do you know your USP?

1. Consider yourself to be a buyer.

The USP must be unique indeed. It ought to be an addition to the benefits that are obtainable in your industry. The consumer market research should be critically conducted. This will reveal the needs of the consumers and it’s the tool that will be used to uncover the USP. Having understood the needs of the consumer, the solutions to the needs are then made unique in such a way that it is completely different from those of the competitors.

2. Determine customers’ motivating buying factor.

You can get to know this by a simple questionnaire or by short interviews of your customer. Most customers will provide genuine answers as per what gives them the drive to purchase your products. This is very essential.

3. Determine reasons why consumers prefer your products and services.

The best source of getting feedback is through your customers. They provide you with the information you need to know about the reasons why your services or products are distinct and preferred to others in your industry. Some of your customers will even suggest how you can improve your services.

Ensure that your selling propositions are convincing enough to persuade customers to use your products and services. Also ensure that you retain your customers while you increase your customer database.

The Importance Of Perseverance In Entrepreneurship

Perseverance is undoubtedly an important aspect of successful entrepreneurship. The saying “If at first you don’t succeed, try, try again” means that few individuals are able to achieve great things without first overcoming the obstacles that stand in their way.

Here are four examples – two from the past and two from the present day – of successful perseverance in business to help inspire you to achieve the seemingly impossible.

Thomas Edison

When he was young, Thomas Edison’s parents took him out of school after his teachers declared that he was “stupid” and “unteachable.” Edison spent his early years working and being fired from various jobs, culminating in his firing from a telegraph company at the age of 21. Despite these numerous setbacks, he Edison was never discouraged from his true calling in life: inventing. Throughout his career, Edison obtained more than one thousand patents. And although several of these inventions — such as the light bulb, stock printer, phonograph and alkaline battery — were groundbreaking innovations, the vast majority of them could be fairly described as failures. And now Edison is famous for saying that genius is “1% inspiration and 99% perspiration.”

One of Edison’s best examples of perseverance occurred after he was already a successful man. After inventing the light bulb, he began seeking inexpensive light bulb filament. At the time, ore was mined in the Midwest of the United States, and shipping costs were very high. In order to combat this, Edison established his own ore-mining plant in Ogdensburg, New Jersey. For nearly ten years, he devoted his time and money to the enterprise. Edison also obtained 47 patents for innovations that helped make the plant run more smoothly. And even despite those inventions, Edison’s core project failed because of low quality ore on the East Coast.

However, despite that failing, one of those 47 inventions (a crushing machine) revolutionized the cement industry, and actually earned Edison back almost all of the money he lost. Later, Henry Ford would credit Edison’s Ogdensburg project as the main inspiration for his Model T Ford assembly line. And in fact, many believe that Edison paved the way for modern-day industrial laboratories. Edison’s foray into ore-mining demonstrates that dedication can pay off even in a losing venture.

Milton Hershey

Milton Hershey had a long path to the top of the chocolate industry. Hershey dropped out of the 4th grade to take an apprenticeship with a printer, only to be fired. Next he became an apprentice to a candy-maker, and then started 3 unsuccessful candy enterprises.

However, Hershey was not giving up. After these unsuccessful attempts, he founded the Lancaster Caramel Company. Despite his initial setbacks, Hershey’s caramel recipe was a huge success. Looking beyond caramel, Hershey believed that chocolate products had a much greater future, and sold the Lancaster Caramel Company in order to start the Hershey Company, which brought milk chocolate to the masses.

In doing so, Hershey overcame failure and accomplished his goals. He also created hundreds of jobs for Pennsylvanians and was generous with his wealth, building houses, churches, and schools.

Steve Jobs

Perseverance is not just limited to the beginning phases of a person’s career. In fact, failure can often occur after a long period of achievement.

Apple founder Steve Jobs achieved phenomenal success early in life. When he was 20 years old, he founded Apple from his parents’ garage, and within ten years the company had grown into a $2 billion juggernaut. However, when Jobs turned 30, Apple’s Board of Directors fired Jobs from the company he created, and he found himself unemployed. Rather than seeing this as a curse, Jobs treated it as a freedom to pursue new initiatives. In fact, Jobs later stated that being fired was one of the best things that ever happened to him, since it provided him with the opportunity to think more creatively and to start a new company.

After being fired from Apple, Jobs founded NeXT, a software company, and Pixar, the amazing movie company that has produced animated films such as Finding Nemo. NeXT was subsequently purchased by Apple. After founding these companies, Jobs not only went back to Apple, but he helped launch their current resurgence in popularity with the creation and success of the iPod and iPhone. Jobs credits his career success and his strong relationship with his family to the fact that he was terminated from Apple.

Simon Cowell

Although Simon Cowell is now a pop icon and wealthy man, Cowell faced struggles earlier in life. When he was fifteen, he dropped out of school and worked various odd jobs. Cowell eventually received a job working in the mail room at EMI Music Publishing, where he was able to work his way into the A&R department. After EMI, Cowell formed his own publishing company, E&S Music.

Unfortunately, Cowell’s new company folded in its first year of operation. As a result, Cowell was burdened with a lot of debt, and had to move back in with his parents. However, he was persistent, and eventually landed a job with a small company called Fanfare Records. Cowell worked at Fanfare for eight years and was able to help build the company into a successful record label. From there, he spent several years signing musicians and cultivating talent before launching the “American Idol” and “X-Factor” franchises that would make Simon Cowell a household name.

Franchising Strategy: Strategic Business Plan Development

As with any business, you must have a solid business plan. Do not think that you can start a franchise without a good plan. The plan is a roadmap to how you will operate, how you will reach new franchisees, how you will market your business and must have solid financials. A mistake of a single percentage point on a franchise royalty can easily cost you millions of dollars. It does not seem like a big mistake, when you have a single franchisee. It simply means that the franchisor will make $5,000 less in royalty revenues. But in franchising, we are talking about continuing growth, and this mistake might be multiplied 100 times or more. Other business decisions that a new franchisor will make that could impact long-term profitability include:

• Advertising fees

• Technology fees

• Product margins

• Type of franchise offered (individual, area development, area representative, etc.)

• Organizational structure

• Compensation structure

• Geographic growth strategy

• Territorial rights provided to franchisees

• Reservations of rights for the franchisor

• Franchise Disclosure Documents

Conflicting or ambiguous communications when a franchise is first sold can form the basis for future franchise litigation. The cost of defending any franchise lawsuit, even an inconsequential one, can be enormous. The cost of prosecuting even a “small” franchise litigation lawsuit can easily exceed $100,000 to $200,000, or more.

You must have a solid, coherent Franchise Disclosure Document. An integrated Franchise Compliance Program that stipulates rules and expectations, manages Franchise Disclosure Documents and controls the publishing of all information is extremely important. It is also one of the best investments a franchise company will ever make.

Understanding a franchise agreement

A Franchise Agreement includes all of the key facets, requirements and principles of the franchise, including the privileges and commitments of both parties, the length of time the agreement will last, the territory (if any) granted to the franchisee, and the costs involved and how they are to be calculated.

A Franchise Agreement is the foundation of your business. You must be certain that you understand it clearly before you start to build on it. The following is an outline of some of the key aspects contained in Franchise Agreements.

Every Franchise Agreement needs to be carefully read and you should therefore have your attorney review the Agreement clause by clause with you, to make certain that you understand all of its terms. Franchisees also need to be aware that, while it can be relatively simple to enter into a Franchise Agreement, it may be far more difficult to remove yourself from one. A standard Franchise Agreement is a long-term commitment to a third party (often of six to ten years in length). The Agreement will include stringent requirements which have to be complied with for the full length of the term. Failure to conform to these requirements may in many situations allow the franchisor to terminate the Agreement.

While the strict stipulations of Franchise Agreements are there to protect the interests of all parties and particularly the franchise system, from time to time Franchise Agreements can include or exclude clauses which aim to protect the franchisor.

A provision that any costs involved in defending the use of the trademark should be paid by the franchisee

Immediate rights for the franchisor to cancel without notice if the franchisee misses or delays payment of royalties

Lack of clauses regarding ongoing support, training and development of the business by the franchisor

Limitation of the franchisor’s liability to the franchisee even if the franchisor breaches their requirements to the franchisee

Widely drafted clauses undermining a franchisee’s ‘exclusive’ territory in unwarranted circumstances.

The presence of these clauses will vary between Franchise Agreements. An experienced franchise lawyer will be able to highlight them for you. Some franchisors will not be willing to make any changes to their agreements especially when there are other franchisees already in operation.

Regardless of what you may dislike about some provisions in a Franchise Agreement, it is nevertheless essential that you understand it fully and the requirements it places on you as a franchisee. Careful attention should also be paid to supplementary documents, as these may contain provisions that, if breached, constitute a breach of the Franchise Agreement.

You should also be certain that any pre-contractual statements regarding turnover or other aspects of the business that may have attracted you to the franchise are carried over into the Franchise Agreement or in some other written form.

Grant of Rights

The Grant of Rights sets out the term of the franchise and its renewal provisions. It is important to make certain that the term of the franchise is adequate to allow you to achieve a realistic return on your investment. Renewal provisions need to be looked at carefully along with any renewal fees. They may contain some or all of the following:

Notice of renewal – this is usually required within strict timeframes. If the renewal notice is not given in time, the right to do so may be lost

Payment of renewal fee

Changes to terms of the Agreement by the franchisor upon renewal

Changes to the franchise territory size by the franchisor where the particular Agreement provides exclusive rights to the franchisee

Changes, alterations and improvements to operating practices to meet competitive and other challenges

First options or first rights of refusal for additional franchises.

It is important that the franchisee understands that, more often than not, the right of renewal may in fact be a right in favor of the franchisor. The franchisor often has the ability to reject the renewal if a franchisee has not been performing to set standards.

Ongoing costs and royalties

Many Franchise Agreements include ongoing payments to the franchisor such as:

• Royalties

• Advertising levies

• Mark-ups or margins on products supplied by the franchisors

• Training fees.

There may also be requirement to attend franchise conferences and other meetings. The Agreement should clearly set out the details of what has to be paid and when, including circumstances relating to any deposits payable before securing the franchise.

For advertising and promotion costs, the Agreement should specify when the payment is to be made and to whom, including details of any special banking arrangements. Back-up assistance and assistance are essential to the operation of a successful franchise. Details of the support and training to be provided by the franchisor should be stated in the Agreement, including both initial and ongoing assistance. As well as having your attorney review the Agreement for these provisions, talk to existing franchisees about the level of support they have received.

Initial costs

The Agreement, or often an ancillary document, should set out in full all beginning costs. These may include the initial franchise fee, equipment costs, working capital requirements, fit-out costs, initial training costs and the cost of opening stock.

Premises, leases and mobiles

Lease provisions usually allow the franchisor to take over the lease at the end of the term, and also if the franchisee defaults during the term

Often the franchisor will lease the property itself and grant a sub-lease to the franchisee. You are responsible for paying the rent, so you should ensure the amount negotiated is a fair market rent

Mobile franchises usually contain terms that set out the sign writing and other décor required by the vehicles from which the business is operated, and possibly for any major items of equipment

One issue that is often overlooked is the need to ensure that the length of the franchise term coincides with the length of the lease term.

Requirements

Every Agreement should contain clauses setting out the initial and continuing requirements of both franchisor and franchisee

• Examples of franchisee requirements include minimum operating hours, insurance, engagement of staff, and uniform requirements.

• Examples of franchisor’s requirements include maintaining the manuals, providing products, and training

• Records of accounting must be up-to-date, with regular reporting and auditing

• Intending franchisees should pay careful attention to the requirements since breach of any may entitle the franchisor to terminate the franchise.

Intellectual property

Intellectual property is a key element of most Franchise Agreements, specifying legal ownership rights by the franchisor concerning patents, copyright, trademarks, designs and even operating systems. Other relevant laws include the Fair Trading Act and common law rules prohibiting the copying of a business’s identity.

Sale of the franchise

Most Agreements will allow the franchise to be sold during its term, but you should note that as a franchisee your rights to sell the business may be restricted.

• The franchisee may have to give the franchisor the right to buy the business first known as right of first refusal, which in itself can destabilize the value of that business and the goodwill for a selling franchisee

• If the franchisor chooses not to purchase, they may rigorously control the sale process

• The incoming franchisee must be approved by the franchisor

There may be a transfer approval fee, which the franchisee will need to pay to the franchisor when a sale takes place. This is designed to cover the franchisor’s costs involved in training the incoming franchisee.

In some Franchise Agreements, the term of an existing franchise for sales purposes covers only its unexpired remainder, unless the Agreement provides for the franchisor to offer a new Agreement for a full new term.

Termination

Franchise Agreements provide for circumstances in which the Agreement may be terminated in advance of the original ending date. These include:

• Bankruptcy, company liquidation or criminal conviction of the franchisee

• Termination of leases to the franchise premises (where premises retention is important).

Termination provisions should be considered carefully as they are often points of disagreement. There are frequent misunderstandings by franchisees as to what happens at the end of a term and procedures vary from one franchise system to another. However, it should also be kept in mind that if the franchise is operating well and the franchise relationship is a good one, it is likely that both franchisee and franchisor will want to renew the Agreement.

Disputes

Although disagreements between franchisors and franchisees are usually solved through discussion and negotiation, mediation and arbitration are also effective methods for working out disputes and less damaging to franchise relationships than legal proceedings.

Other terms

The Entire Agreement clause is especially important as it usually states that what is contained in the Agreement overrides anything which may previously have been promised unless it is expressly referred to in the Agreement

As a franchisee, you should be certain that anything on which you have relied in selecting your franchise is included in the Agreement in some way

The Definitions section, usually close to the beginning of the Franchise Agreement, contains key definitions. One of the most important is Gross Sales, the figure on which the franchisor’s royalty is usually based. Usually this covers substantially every type of transaction carried out by the business and almost every payment received. Often it will include sales made, whether or not payment has actually been received.

Business Plan Mistakes To Avoid

Don’t Do The Following

Claim A Lack of Competition

Some entrepreneurs get carried away in their zeal to demonstrate barriers to entry that set their company apart from others. A “Barrier to Entry” is proprietary information or knowledge, or a set management team experience no one else can claim. Factors that make your company stand out are attractive, but the reality is that no business has no competition.

The Industry Analysis section of your Business Plan must show the size of the industry in which you compete. The Market Analysis will show the sub-set of that industry on which you will focus. The Competitive Analysis must show your competitors strengths-and how you will overcome them.

You can have your cake and eat it too, in other words. You must show there is enough competition to convince investors that the market is large enough to cash in big- time, but that your strategy is focused and unique enough to navigate an exclusive path through the waters of that competition.

Use First-Mover Advantage As Your Chief Exit Strategy

Companies who’s sole exit strategy, or investor payout point, is to flood the market with a new product or service, and then sell the company in a year, will not find worthy investors. Things move too quickly in the information age. Investors want a company that can grow quickly but steadily in phases. They look for Business Plans that show a sober, realistic lookout, and fiscally responsible exit strategies.

Target Just One Large Company To Eventually Buy Your Smaller Company

For example, if your company is developing new software, do not place all your eggs in the Google and Microsoft basket. If the exit strategy of your Business Plan depends on a larger company buying yours, provide parallel case studies. Show sufficient evidence that the conditions are the same for your company as they were for the successful sale of the case study companies.

Furthermore, show why a larger company would not want or be able to develop the same product in-house.

Let us be absolutely clear:

Don’t Claim a lack of competition

Don’t Use first-move advantage as your chief exit strategy.

Don’t Target just one large company to eventually buy your smaller company.

Avoid those Business Plan mistakes and your path to funding will be much clearer. Make sure to set your Business Plan aside once completed for a few days and review it again with fresh eyes.