Review : Portable MBA in Entrepreneurship (Audio)

William D Bygrave - The Portable MBA in Entrepreneurship (Third Edition)

Below is CD 1-14 out of 14 CDs.

So far, from the notes below, the mini-summary is:
CD 2 - Don't go into a shitty business, go into one with high yield leverage points...
CD 3 - Buy a business, forget all the other shit...
CD 4 - Know who you're going after, who else is going after them (competition) -- and have a better front end (and back end, long term) positioning and offer to get em in the funnel and then monetize once you got em in your herd -- but when you're doing your market and competition analysis, do a lot of research on everything you can think of before you take any action cause your failure rate is higher if you don't plan.

....except they say it in fancy MBA lingo.

The section on Opportunity Recognition is worth reading.

CD 5 - You need a business plan and you might as well target it to the person you're requiring financing from.
CD 6 - You need an Integrated financial model for projections based on the 3 statements (balance sheet, P&L and cash flow) -- so figure it out.
CD 7 - All about Venture capital (didn't take many notes cause the CDs were pretty good and are worth listening to if you want VC funding)
CD 8 - firstly, internal and external financing sources (but quite frankly, the Gordon Bizar, Bizar Financing course is 1000x more helpful) -- and secondly, a couple idea for increasing cash flow by understanding how to do just that ... increase cash flow. Not very helpful, and using marketing ideas will be more helpful but basically gives categories you need to watch.
CD 9 - just some resources for small businesses and startups
CD 10 - Legal and Tax ideas, not nearly sufficient to understand the complexities but an okay start to see what is
required.
CD 11 - Great section on Intellectual Property....great ideas for undervalued assets and structuring.
CD 12 - Franchising -- okay overview, didn't gleen a whole lot. More information would have to be gathered from
other sources, but basically, don't do franchising for growth but rather focus on individual concerns.
CD 13 - Harvesting -- basically describes exit strategy. Worth reading. Basically, make a choice at the outset on the options based on what you value and keep it in mind.
CD 14 - Why entrepreneurs are important basically. Explains a lot of theory.
All in All - 

The 14 CDs are not bad at all. Useful ideas. Good stuff. Worth going through at least once as a vague overview of multitude of MBA ideas I suppose.

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The Entrepreneurial Process

The opportunity, The entrepreneur, The management team, The resources needed to start the company and make it grow...
Can you give me the names of prospective customers SPECIFICALLY? You must be able to name customers.
Industry Know-how Management (budgets, accoutability for P&L/increasing sales and profits... overhead low, productivity high, capital assets to a minimum when starting business)
What does the company expect to do better than any of its competitors? Put a disproportionate amount of your scarce resources here. (ie technical company = engineers and so forth...retail = put towards location...)
Resources = all business will need ...remember doesn't have to do all work in-house with its own employees vs. subcontract. Control critical resources without owning them. Start up ought not buy what it can lease since they don't have enough moola.
Assess resources you'll need to open business and make it grow. Put into business plan so you know how much business will need in capital before generating positive cash flow.
Level of reasonable profit depends on type of business. Average USA company makes 5% net profit income. On $1 revenue, average company makes 0.05 cents net profit after expenses and taxes.
But you can compare profit margin of your company with the wide variety of companies by picking up the RMA and comparing your forecast with the actual performance of similar companies in the same industry.

The founding entrepreneur

...then the market...specializing, niche markets
...fast, flexible, flat organization
...innovation and strategic alliances
...productivity and R&D

Happy customers
Happy workers
Happy suppliers

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Opportunity Recognition

Search for and shape superior opportunities

Founder and Team
Opportunity recognition
Resource requirements

1. Lead entreprenuer and quality of the team
2. Lead entreprenuer and quality of the team
3. Lead entreprenuer and quality of the team
4. Lead entreprenuer and quality of the team
5. Market potential

A team grows a business
A solo entreprenuer makes a living

If an entrepreneurs aspirations including growing business large and profitable enough to realize a capital gain, then he/she needs to think TEAM.
However, teams are not for everyone. Numerous solo entrepreneurs have carved out small
niches for themselves earning substantial 6-figure incomes and building wealth by wise  financial planning and investing.

An idea is not an opportunity. Entrepreneurship is a market driven process.
An opportunity is attractive, durable and timely and is anchored in a product or service that creates or adds value for its buyers or end user. Durable gross margins and profits.

The more imperfect the market...that is the greater the gaps, asymmetries, and inconsistencies of knowledge in information ... the more abundant the opportunities. A skillful entrepreneur can shape and create an opportunity where others see little or nothing, or see it too early or too late.

An opportunity depends on the mix and match of the key players and on how promising
and forgiving the opportunity is given the team strength at managings and shortcomings.

Furthermore, the vast majority of those founding new businesses run out of money before they find new customers for their good ideas.
Thus for entrepreneurs, timing can mean everything.
Need of enough products or services that can be sold in enough quantity to real customers.
The focal point needs to be the building of the business, rather than just one aspect of it -- the idea.

Experienced entrepreneurs exhibit an ability to quickly recognize a pattern and an opportunity while it is still taking shape.

In a free enterprise system, opportunities are spawned in circumstances of change, chaos, confusion, inconsistencies, lags, knowledge and information gaps and a variety of other vacuums in an industry or market. Sometimes idiosyncratic, other times generalizible and can be applied to other industries, products or services...in this way, cross association can trigger in the entrepreneurial mind the crude recognition of existing or impending opportunities.

Opportunities exist or are created in real time, and have what is called "a window of  opportunity". For an entrepreneur to seize an opportunity, the window must be opening -- not closing -- and it must remain open long enough to be used. The length of time the window of opportunity will be open is important, it takes a considerable length of time to consider whether a new venture is a success or failure. And, if it is to be a success, the benefits of that success need to be harvested. This does not happen overnight.

Especially important in opportunity recognition is the fit between the lead entrepreneur and the management team and the opportunity they encounter. Good opportunities are desirable to the team, and attainable by the team, with available resources.

Opportunity focus is also the most fruitful place for the founder to begin as they screen opportunities.

The screening process should not begin with strategy, which derives from the nature of the opportunity...with financial and spreadsheet analysis, which flow from the former...or with estimations of how much the company is worth and who will own what shares. These starting points and others usually place the cart squarely before the horse.
Sales per employee.

Opportunity -- and implicitly, the customer, the marketplace and industry.

* Market niche for product or service that meets an important customer need or
provides high value added or value created benefits to customers

* Customers are reachable and receptive to the product or service with no brand or
other loyalties

* The user or customer of a given product or service will receive the potential payback through cost savings or other valued added or value created properties in 1 year or less. This payback is identifiable, repeatable and verifiable.

* The product or service life exists beyond the time needed to recover the investment plus a profit.

* The company is able to expand beyond the limits of a single product.

Market structure is characterized by:
1. number of sellers
2. the size distribution of sellers
3. the differentiation of products
4. the conditions of entry and exit
5. the number of buyers
6. the cost conditions
7. the sensitivity of demand changes in price

A fragmented imperfect market or emerging industry often contain vacuums and asymmetries that create unfulfilled market niches. Ie. markets where resource ownership cost advantages and the like can be achieved.
Also attractive are markets in which information or knowledge gaps exist and competition is profitable but not overwhelming.

Unattractive industries typically are:
1. highly concentrated
2. perfectly competitive
3. mature or declining

An attractive new venture sells to a market that is large and growing, one where a small market share can represent significant and increasing sales volume.

A minimum market size of over $100 million in sales is attractive. In such a market it is possible to achieve significant sales by capturing roughly 5% or less and not threaten competitors. A multi-million dollar market may be too mature and stable, thus competition from fortune 500's or low margins and low profitability. Further, a market that is unknown or less than $10 mil in sales is also unattractive.

An attractive market is large and growing. That is, one where capturing a good share of the increase is less threatning to competitors and where a small market share can represent significant and increasing sales volume.

A market with annual growth rate of 30% to 50% creates new niches for new entrance. A
market growing at less than 10% or contracting is unattractive.

High durable gross margins of 30-40% allow for error...and mean that a venture can
reach breakeven earlier, an event that preferably occurs within the first 2 years...While 20% or less that are fragile do not, and are typically unattractive.

The potential to be a leader in the market and capture at least a 20% share of the market is important, cause it can create a very high value for a company that might be otherwise little more than worth book value. A firm that can capture less than 5% of the market is unattractive to most investors seeking a higher potential company.

A firm that can become a low cost provider is attractive...while a firm that continually faces worsening cost conditions is less so.

Attractive opportunities exist in industry where economies of scale are either insignificant or advantageous to the new venture.

Attractive opportunities boast a low cost of learning by doing.

Where costs per unit are high when small amounts of the product are sold, existing firms that have low promotion costs can face attractive market opportunities. 

High and durable gross margins usually translate into strong and durable after tax profits. Attractive opportunities have potential for durable profits 10-15% or more...after tax profits of 5% and below are often quite fragile.

Break-even and positive cash flow for companies is 2 years...and once it exceeds 3 years, the attractiveness of the opportunity diminishes.

A corrollary to forgiving economics, is reward. Attractive opportunities ROI of 25% or
more per year...given the risk typically involved, a potential return of less than
15%-20% per year is unattractive.

New ventures based on strategic value, such as valuable technology, are attractive.
While those with low or no strategic value are less attractive.

Opportunities with extremely large capital committments whose value on exit can be severly erroded by unanticipated circumstances are less attractive. Ie. Nuclear power.

Venture requires low to moderate capital requirements are attractive...realistically
most higher potential businesses need significant amounts of cash, several $100K's and
up to get started.

Businesses acquired or sold privately or to the public are usually started and grown with a harvest objective in mind. Attractive companies that realize capital gains from the sale of their businesses have or envision a harvest or exit mechanism.

Unattractive opportunities do not have an exit mechanism in mind.

Attractive opportunities is potentially the lowest cost producer with lowest cost of marketing and distribution. It should certainly not have the highest costs. The inability to sustain a position as the low cost producer shortens the life expectancy of a new venture.

Attractive opportunities have potential to exercise a moderate to strong degree of control over prices, costs, and channels of distribution. Fragmented markets with no dominant competitors, no IBM, have this potential. These markets usually have a market leader with 20% or less of the market share. A major competitor with a market share of 40% to 50%, usually have sufficient power over suppliers, customers and pricing to create a serious barrier for a new firm. An enterprise starting up in such a market will have little freedom. Never the less, if a dominant competitor is at full capacity, is slow to innovate or to add capacity in a large and growing market or routinely ignores or abuses the customer - there may be an entry opportunity.

Have a favourable 'window of opportunity' is important. Having or being able to gain  proprietary protection, regulatory advantage, or other legal or contractual advantage such as exclusive rights to a market or with a distributor is attractive. 

Having or being able to gain an advanatge in response lead times is also important since these
can create barriers to entry or expansion by others. If a firm cannot keep others out, or it faces existing entry barriers, it is unattractive.

A firms capacity to gain distribution of its product.

A strong team that contains industry superstars is attractive. This team should have proven P&L experience in the same technology, market and service area as well as complimentary and compatibile skills. 

An opportunity is unattractive if there is no qualified team or no team at all.
Basically, attractive venture have no 'fatal flaws'.
One or more fatal flaws render an opportunity unattractive.
In many instances, markets are too small, competition is overpowering, the cost of entry is too high, inability to produce at a competitive price and so on.

Screening of personal criteria in evaluating opportunities.

Attractive opportunity does not have excessive downside risk.

An entrepreneur needs to be able to absorb the financial downside in a way that permits a rebound without excessive debt obligation.

Opportunity -- Opportunity Cost.

Ideas for higher potential ventures. Learning an industry and specific markets and
getting the know how and contacts to enable you to make some profits for someone else
before you try it on your own.

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Entry Strategies

entry strategies / 'wedges'

1. developing a new product or service --> intersection between market for the product or service and a way to create one

2. developing a similar product or service ("better mouse trap") --> parallel competition ie. restaurant in same location but different menu and price structure...by definition the firm lacks strong differentiation and tend to compete on price, or may be JUST different enough

3. buying a franchise

4. exploiting an existing product or service --> potential for profit generated by events outside the control of the entrepreneur, and what is needed is simply to notice the potential is there and exploit it. 3 types: Transfering a product or service to a new location (with the necessary capital and/or talent to introduce it to the new setting), Meeting a supply shortage (ie shortage of water), and/or Capitalizing on unused resources (ie recycable materials, or process surplus grain and make into ethanol as gasoline substitute)(Must ask why the resources were underutilized in the first place).

5. sponsering a start up enterprise --> typically the sponser is a customer, supplier or investor...venture must be credible and likely to succeed. Track record is useful here that shows entrepreneur can perform. More confidence someone has, the more likely they will help the venture.

6. acquiring a going concern --> This can be viewed as basically a BUNDLE OF HABITS.
Customer buying, supplier supplying, employees doing their jobs. In a going concern those habits are already present. Expertise in a going concern should already be present in employees in the business. Even if it is not, the buying entrepreneur should be able to obtain education and operating help from the selling owner to fill in the expertise needed. It is fairly common to find businesses owned by entrepreneurs who bought them with no prior experience in that particular line of work and never the less succeeded, which is a stark contrast to a start up. The need for capital is often circumvented by having a selling owner help with financing with leverging the buy out.

The purchaser may be able to borrow against assets of the business to provide a down payment to the seller and some working capital to continue operations. The seller takes a note for the balance owed, which the buyer pays off over time from earnings of the business. Thus the buying entrepreneur may be able to enter an independent business in a line of work new to him/her and make a salary and profit from it right away without putting up any cash at all. 

There will of course be a debt obligation for the buyer but the odds of succeeding with a buyout of a business, provided it has a history of profitability and is in reasonably good shape, is historically pretty high.

It is often the most effective way to enter independent business. Negotiation of price and terms may be the most discussed part of the acquisition. But the hard part may be finding a suitable buy out and establishing credibility. Developing a checklist of criteria about whether to buy the business should be used. Another key task is to develop a projected cash flow during takeover and subsequent operations of the business. Since this is so effective a method, the 2 catches are: 

There are far more people who want to do it than opportunities to do so thus making buying opportunities scarce...and the second major problem in accomplishing a buyout is to appear 

adequately credible to the seller. The ideal seller is a person who is getting older and wants to sell a business not because it has problems, but rather to retire. Such a person will likely care not only that the full purchase price will be paid on time, but that the business, it's employees, it's name, and its facilities will be well maintained.

Sometimes 'wedge' strategies can be combined, sometimes none may work...sometimes it's
based on the entrepreneur, and sometimes it's based on timing.

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Market Opportunities and Marketing 

Planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives.

Customer oriented implemented and integrated throughout the business to serve customers better than competitors and achieve specified goals.

"What does the customer want to buy?
These are the satisfactions the customer looks for, values and needs."
Make the business do what's in the best interest of the customer (not the other way
around)

Marketing Process:
1. Target market
2. Organization integration
3. Goal achievements

Product/production/technical/sales orientation vs. customer orientation
Product, production, technical and sales orientation revolve around creating customer  satisfaction in a target market...that is, marketing.

Everyone in the firm affects the way customer see the firm. Integrated consistent way of treating customers. This early stage philosophy provides the foundation for providing customer oriented guidelines and organizational structures as the company grows.

Sales volume vs. Profitable sales...other goals = image, taking away market share from existing firms etc.

Marketing management requires analyzing environmental situation and market opportunities, setting marketing objectives, formulating the marketing strategies and tactics, and then creating an action plan to implement the marketing practices.

Marketing is based on the entrepreneurs vision and mission, and the macro environment
encompassing broad economics, governmental, social and technological changes constantly provides new business opportunities as well as threats.

Marketing plan is part of the business plan or strategic plan.
Market opportunity analysis. SWOT analysis.

Marketing outline, to summarize, is:

1. analyze the environmental situation and market opportunity --> Involves analyzing
uncontrollable external influences. Customers and competition, as well as company
capabilities to determine SWOT's. Market Opportunity Analysis (MOA's) can only begin
once product and market have been selected. Customer Profiling - understanding why
demand exists by describing underlying needs and wants. Which attributes are best to
use depends on the market and products. 

Demand factors -- economic, legal, technological, social. 

Decisions to buy steps: awareness, interest, evaluation, trial, adoption. 

New product characteristics: Relative advantage, Compatibility (consistency with values/needs/behaviour), Complexity, Testibility, Observability or Communicability (ease of product benefits seen, imagined, described to/by potential customers). 

Analyze Industry (size, growth and structure -- marketing practices, target market coverage, key marketing objectives, marketing mix strategies and tactics -- find all this to evaluate changes in the industry as well as exploit weaknesses), then single out key competitors for indepth evaluations (key competitors are those in or predicted to enter the industry and have biggest effect on a ventures success -- size, growth, objectives, management, technical capabilities, and marketing practices of each key competitor. Construct a financial picture of each key competitor --> see dun and bradstreet, Standard and Poors) Second pay attention to comeptitors key objectives and capabilities. 

Competitor profiles: 

1. Mission and business objectives

2. Market position and sales trends 

3. Management capabilities and limitations 

4. Target market strategies 

5. Marketing objectives 

6. Marketing strategies and tactics......the result is a picture of the way in which a key competitor strives to reach markets and position itself against competiton. Thus you evaluate a key competitors Strength and Weaknesses. Finally, you must predict changes in key competitors marketing strategy and tactics. Don't place too much weight on trend
analysis. 

Other methods include the following: 

1. Analyzing key competitors probably responses given their management styles to anticipate a changes in market conditions.
2. Interviewing key competitors suppliers, distributors and customers 

3. Hiring away key competitors executives. So, must meet customers requirements and also effectively position itself against competition. The essence of planning marketing is to position
the company against the competition in the minds of customers. POsitioning refers to use of marketing strategy to match strength of competition and to exploit its weaknesses, thereby giving customers a reason to buy from your company rather than another. Achieve positioning through target marketing selection while exploiting competitive weaknesses in market coverage. 

The payoff from an MOA comes when you review the info and target market options, determine important customer requirements, review competitive Strenghts and Weaknesses for building a differential advantage, and Forecast the sales expected from marketing strategy.

2. develop marketing objectives (for a particular product market) --> should be stated for each target market in terms of sales, profit, contribution and other qualitative such as image. 2 types, basically the actual result, and the things that are done to lead to the number result.

3. formulate a marketing strategy --> guidelines and policies used to match marketing
programs (product, distribution, pricing, and promotion) with target market
opportunities in order to achieve the ventures objectives. 

Overall marketing strategy ensues mutually beneficial exchanges occur which is part of the definition of marketing. Oriented toward the long run, not day to day adjustments, and developed with an eye on competition as well as markets. 

Marketing strategy involves deciding which customer to target and how to position products and the business relative to competitors in the minds of existing and potential customers. 

These guidelines and policies (marketing strategy) narrow the range of marketing actiosn that are appropriate given the overall marketing objectives. Basically, marketing strategy guides how marketing objectives will be achieved. 

Marketing must consist of integrated strategy aimed at providing customer satisfaction. To develop strategy, firm uses demand influencing variables that make up the marketing mix. 

Marketing mix, like a puzzle, must be appropriately combined and involved: 

1. product or services 

2. distribution channels (wholesalers, distributors, retailers to make product available
to customers) 

3. Price firm charges 

4. Promotion (advertising, sales, publicity)...marketing program, marketing offer...etc. Strategy provides broad long framework (a year or usually more) for marketing action, and are fundamental decisions that guide day to day actions. Tactics determine how marketing strategy is to be carried out on a day to day basis. Each marketing mix element should be discussed in
the plan. Product/service (anything valued by target market for the benefits or satisfactions it provides including objects, services, organizations, places, people and ideas). 

Making product decisions requires grouping the various means of the term 'product' into 3 levels: benefits or satsifactions product delivers, tangible product attributes, and third the extended product goes beyond the actual product itself that are valued by customers. These 3 levels create the overall perception the customer has of a product. 

The entrepreneur must blend the 3 in a synergistic manner to meet the needs and wants of the defined target markets. Channel of distribution is an organization of agencies and institutions which, in combination, perform all the activities requires to link producers to users and users to producers to accomplish the marketing task. Companies in the distribution channel perform various functions: procurement, storage, packaging, financing, transportation and councelling. 

The price paid for by customers for products is frequently a result and accounted for by these
companies. Ie. 69 cents of every 1 dollar paid for food is used to pay for distribution and processing activities. Efficiencies are offered by distribution systems vs. lowering costs by not using them. 

Pricing is often used by entrepreneurs to enhance the business or product to increase sales and discount pricing or in combination with promotion to build future sales. Establish specific objectives for pricing programs -- specific qualitative and quantitative operating targets that

reflect the basic role of pricing in the marketing plan. 

Determine the extend of pricing flexibility (determined by cost, demand, competition, and legal and ethical constraints). 

Develop price strategies (the guidelines and policies used to effectively guide pricing decisions to match target market conditions). Establish prices. Cost established the floor for possible price range. 

Thus cost + pricing often involves adding a percentage of the cost to set the price. Promotion involves sales promotion of communicating with an audience through non-personal, non-media vehicles such as free samples, gifts and coupons. 

Advertising is communicating with an audience through non personal paid media. Publicity is communicating with an audience through personal or non-personal media, and media is often percieved as the source of the message. 

Lastly, personal selling is communicating with an audience through paid sales persons in the organization or its agents. 

Together, these 4 tools make up the 'promotion mix'. Promotion mix is a combination of Promotion tools used by a company to communicate with its audience. 

Selling includes locating prospective customers, planning calls, marketing sales presenation,

interacting with customers, closing sales. In addition, sale speople collect info on competitive products, price, customer reaction to product use, stock levels, and service and delivery problems. 

Customer service can encompass a variety of responsibilities from delivery, marketing assistance (ie. promotional and display advice), credit evaluation, product application assistance, and repair of products. 

The importance of these job components varies depedent on different sales promotions. The task of the entrepreneur is to select the best combination of marketing mix elements to obtain the desired responses from target markets.

4. create an action plan --> delineate numerous tasks, and develop a detailed time table and budget with an assignment of responsibilities. Flexibility is essential once market feedback begins to flow, but it is still helpful to identify the major tasks required to implement the marketing plan and establish a timeline to achieve various milestones. 

Certain tasks (ie advertising) may require detailed scheduling as a subpart of the overall marketing plan.

Marketing Management, pre-venture analysis, is absolutely crucial.
Some unique marketing challenges are inability to spread advertising cost, poor access to good quality distributors and lack of access to retail shelf space.

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Creating a Successful Business Plan

Business Plan sells the business as a whole.

 
You write it for you and convince yourself that it's financially sound.
To obtain bank financing.
To obtain investment funds.
To arrange strategic alliances.
To obtain large contracts.
To attract key employees/best people/executives.
To complete mergers and acquisitions.
To motivate and focus your management team.

3 types

Summary business plan - work best in: bank loan, well known founders, lifestyle business, gage investor interest. 

Full business plan - work best in: seeking a substantial amount of financing, looking for a strategic partner.

Operational business plan - must get into details of distribution, production and other essentials areas so everyone knows what is expected.

Cover page
TOC

Executive summary --> business plan for the business plan that gets people excited and
they say 'OH, I get what they're up to'

Company --> business strategy (overall approach to producing and selling your product
and its goals for maximizing success) (rest of document supports the strategy cohesively, and in strategy you address factual past, present and future) and management team Market (determining best prospects and how best to reach them)

Product / service
Sales and promotion (convincing the aformentioned prospects to buy from you)

Finances (financial history and projections...look back and ahead 3 to 5 years for the
balance sheet, profit loss, and cash flow with explanations and follow GAAP.)

Appendix

Market research is just:
1. are there enough potential customers to achieve the growth you want?
2. are they increasing or decreasing in number?
Questions that need to be answered:
What is the market precisely?
Growing or shrinking?
Is it worth your while?

Must carefully analyze competitors Weaknesses AND STRENGTHS on sales, number of
employees, products and services, and future plans.

Business plan should be TARGETED at specific stakeholders important to your business.

Have several business plans each targeted to a specific set of stakeholders. The plan need not differ on the facts, only in presentation of the company needs.

To obtain VC - "we use the funds to obtain fast growth"
to obtain bank - "we use money to improve quality and productivity at a slower growth rate"

Use examples to back up general statements.
Statistics, studies, and examples...evidence.

Ease writing by having partners and subordinates write sections of the plan etc.

Writing is re-writing, but at some point declare the plan complete for now...but the
business is always changing so the plan must struggle to keep up. Review the plan
annually and probably more often. As market changes speed up, so do the need to adjust
the plan.

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Financial Projections

Financial projections differ in how, why and from whom they should be constructed in terms of comparison to accounting numbers that are based on the past.

Should include the 3 statement with good reasons underlying the projections.
Show what a business will realize in sales, gross profits, net profits, net worth, cash flows and several other measures associated with balance sheet, P&L and CF statements.

But it's for answering questions:
"How much money will business need to maintain positive cash flow?"
"When exactly will I need this money?"
"What kind of money? debt/equity or both?"
LINKED financial projections so you can make GOOD DECISIONS not disasterous ones.
Answers 'What if...'

Integrated financial projections. You need a financial model that produces integrate  financials. Financial decision making models. 

Earn a positive operating cashflow. Only if operating cash flows increase over time can true wealth be created and equity increased so your venture is worth something since other put value on it.

Integrated financial projections allows you to take calculated risks and test and re-test your basic assumptions about your business. You can understand the impact of changing many variable simultaneously.

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Venture Capital

Lifestyle ventures <$10 mil Middle Market ventures 5 year projections of $10 mil to $50 mil, may require financing High potential ventures >$50mil, several rounds of 6 or 7 figure financing. Good section if you want to raise finance. Listen to this section if so. 

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Debt and Other Forms of Financing

Internal vs. External Financing

The timing of receivable collection and payment of A/P, working capital, are key determinant in whether a firm is cash rich or cash poor.

Ie, an increasing in net working capital (assets - current liabilities) does not necessarily translate into an increase in liquidity. 

One reason being because increases in net working capital often result from increases in operating assets, net of increases in operating liabilities. The operating asstes (ie a/r, inventory) are usually tied up in operations and not commonly liquidated prematurely to pay bills.

Bills are typically paid with liquid financial assets such as cash and marketable securities. Thus only the liquid financial assets can be used to assess a firms liquidity. Corporate insolvency usually occurs when a firm fails to service debt obligations or callable liabilities in a timely manner. 

Consequently, corporate liquidity can be measured fairly accurately by taking the difference from liquid financial assets and callable liabilities. This is referred to as a net liquid
balance. 

Net liquid balance / total assets, may be more indicitive of liquidity than either the current ratio or quick ratio.

A/R are a major element in working capital for most companies. And Working capital is
not the same as available cash, and the timing of short term flows is vitally important.

2 possible errors a firm can make: A firm can deny credit to a good customer (incur cost of being too conservative) or grant credit to a poor customer (risk being too aggressive).

The magnitude of a company's A/R depends on a number of factors: the level and the pattern of sales, the breakdown of cash and credit sales, the nominal credit terms offered, the way these credit terms are inforced through a collection policy.

The basis of all receivables and collections is clearly actual net sales, that is any items sold minus returns. From actual sales comes the assumptions about receipts from future cash sales and collection of future credit sales. 

These are the key inputs in forecasting cash flow.

The relative proportion of cash sales to credit sales may make a substantial difference to cash flows. Entrepreneurs often have little control over this.

Credit policies can be summarized into two general questions:
1. To whom should credit be given?
2. How much credit should be given?

How much freedom a company has in setting its terms on which it will grant credit depends very much on its competitive position. Credit policies may be influenced by the length of the company's order backlog and whether or not the company is working at full output capacity. A company operating below capacity or below it's optimum output may be tempted to offer unusually generous credit terms in order to stimulate demand...the key question then being whether the cost of the additonal funds tied up in A/R will be more than offset by the additional sales and reduce operating costs.

Alternatively, a company working at full capacity with its product backordered is in a position to tighten up on its credit policies to reduce its investment in receivables.

The terms of credit involve both length of time given before payment is due and the
discount given for prompt payment. (ie 2/10 net 30 - 30 day payment with 2% deducation
if paid in 10 days or less.)

Character of individual creditor or managemetn of the creditor firm and the capacity of the firm to repay the loan.

5 c's of credit:

Character

Capacity (cash flow and ability to repay debt)

Capital (borrowers financial net worth)

Collateral (resale value of product in the event that repossesion become necessary)

Conditions (national or international economics, industrial and firms specific
prospects during time of the credit)

Keep A/R and Inventory as low as possible through monitoring without interfering with sales.

Extending A/P - especially to new A/P suppliers looking to gain market share and will give you favorable terms.

Asking for payment, hand written notes.

Factoring A/R at a discount with or without recourse (without recourse riskier for factor company, more charge to you)

Inventory as collateral.

Property mortgage secured by specific assets.

Floating or blanket lien (instead of specific items to secure a loan, borrows may
pledge all the inventory)

Public and Field warehousing

Customer financing (large complex long term projects ie defense contractors, building
contractor, ship builders, management consulting firms...stages and payment upon
completion at each stage)

Entrepreneur secures required short term funds at the lowest cost - usually resulting
from some combo of trade credit, unsecured and secured bank loans, A/R financing and
inventory financing.

To select the best package you should consider:
the firms current situation and requirements
the current and future costs of alternatives
the firms future situation and requirements

After entrepreneur has fully used trade credit and collected receivables as quickly and competitively as possible, may turn to bank for short term loan:

Short unsecured 90 day bank loan (most common bank loan) (can get 30 to 1 year maturities but banks often prefer 90 day maturities, thus check entrepreneurs statements for 3 months regularly, thus if notices deterioration can refuse line of credit and avoid future losses.)

May need in 6 months down the road, so apply for line of credit vs. take it out now and pay unnecessary interest. Also, can get bank to give guaranteed line of credit up to certain amount. In return for line of credit banks usually require compensating balance to be maintained, that is, keep a specified amount in a checking account without interest.

Rates of interest by banks vary:
General interest varies over time.
At any given time, different rates are charged to different borrowers.
Interest represents price borrowers pay to bank for credit over specified periods of time. 

The amount of interest paid depends on: the dollar amount of the loan, the length of time involved, the nominal annual rate of interest, the repayment schedule, the method used to calculate the interest.

Since so many variables, only the effective annual rate should be used as a standard
of comparison to ensure that the actual costs of borrowing are used in making the
decision.

Banks may require collateral, and if loan not repaid, can sell collateral to cover the loan.

Banks use blankey liens when individual items are of low value, but the collective value of all items is large enough to service collateral.

May require personal signature to ensure if anything happens to actual entrepreneur that can use personal assets to repay the loan. May also require insurance by the entrepreneur.

To maximize success of bank loan, entrepreneur should keep good bank relations, visits, as well as quarterly delivery of income statements, balance sheets and cash flow statements are useful means of sustaining such relations.

Line of credit or bank loans must be conducted with on a personal level with a bank
loan officer. 

They will want to know:
how much money the company needs
how the company will use the money
how the company will repay the bank
when the company will repay the bank

...you must be able to answer these question and support them with past results and realistic forecasts. If so, you improve the chances of obtaining the line of credit or loan you need.

Restrictive covenants placed on loans may be classified as: (and you ought to negotiate every one of them)

1. general provisions - these are found in most loan agreements are designed to force the borrow to preserve liquidity and limit cash out flows, and they typically vary with the type of loan.

2. routine provisions - again found in most loan agreements and are normally not subject to modification during the loan period.

3. specific provisions - used according to the situation and are used to achieve a desired total level of protection

Term lending by insurance companies is less common than by banks. But has intermediate
and long term credit. A package of bank and insurance funds may work for you.
Pension funds have much the same stability and predictable cash flows as life insurance companies, and their managers also prefer the same type of longer maturity loans. Pension fund characteristics lending infact are also the same as those of the insurance term loans.

Capital equipment often funded by intermediate funds. May be straightforward term loans secured by equipment itself. Banks and financing companies may loans of this type. The non-bank companies charge higher interest rates, and are used primarily by smaller companies unable to qualify for bank term loans.

Conditional sales contract normally cover 2 and 5 years. Buyer agrees to buy piece of 

equipment by installment payments over a period of years. During this time, buyer has use of the equipment, but seller retains title to it until payment's are completed.

Companies unable to find credit from any other sources may be able to do so on these terms. 

Lenders risk is small since can be repossesed at any time if installment is missed.
Leasing. (also sharing tax benefits between leasor and leasee)...but big incentive of leasing continues to be flexibility, hedge against obscolecense and inflation risk, service and maintenance contracts, convienience, lower cost and off balance sheet financing.

SBA guaranteed loan from bank.
SBIC's.
VC's.
Angels.
Understanding the guidelines required by lending of all.

Bankers demand:
Proforma financial statements
Personal balance sheet and credit history
A list of all equipment assets and pledged collatoral
A description of how loan proceeds are being used
A description of shareholder and credit interests
Personal business disclosures
A detailed business plan

Also, should be able to respond to questions about your own:
Salaries
Spending habits
And willingness to co-sign a note on borrowed funds

The management of working capital requires more than monitoring liquidity balances.
Also requires managing A/R, Inventory, and acquiring appropriate levels of financing from suppliers and creditors. In order to forecast the amount and timing of its funding requirements, you need to develop a detailed cash forecast...which is also useful in determining the appropriate maturity of funding sources.

Remember, cahs flows are not the same as profit.

Free cash flow ... firms cash flow from operations minus investments and capex's required to maintain the companies competitiveness.

Pretax undedicated cash flow...free cash flow + tax + interest expense

Only a part of net working capital is liquid. The balance of net working capital is tied up in firm operations. Liquidity is largely a function of a firms growth and the timing of receipts and payments.

Payments to suppliers before customers pay, growth in sales generally results in lower
liquidity.

Growth funded exclusively through internal cash generation is not often in small business, and the more Common occurence is external debt sources, leasing, cash innovations and small firm governmental programs.

Growth stages often require large funding requirements and hueg risk to those who can't meet payroll and supplier demands, however once negotiation of external level of funds is set by you - including bank financing, privately placed debt, leasing options, other financing innovations....you have a better chance for long term corporate survival.

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External Assistance for Start Ups and Small Businesses

US Small Business Administration (SBA), Small Business Development Center Program
(SBDCP), The Service Core of Retired Executives Program (SCORE) into which the Active
Core of Executives Program (ACE) was merged. The University based Small Business
Institute Program (SBI).

Financial assistance programs may be divided into:
Guaranteed loans
Direct loans
Other loans
SBA requirements.
SBA Preferred Lender.
SBA Certified Lender.
US Department of Commerce
US export import bank
Overseas Private Investment Corp (OPIC)
State department of commerce.
Chambers of Commerce (city based grouping of businesses)
Incubators. (low cost shelter and services, inhouse councellers and other tenant support)
City funded public libraries
University libraries

================================

Legal and Tax Issues

Limitations of former agreements (previous work agreements etc.) or simply law of employees
Corporate opportunity doctrine - loyalty owed by an agent to a principle. 

In its simplest form, it Prohibits an office or director of corperation, a partner in a partnership, or a person in a similar position from identifyinga business opportunity that would be valuable to his company and using that information for his own benefit or the benefit of a competitor.
Duty of loyalty...

Employee cannot take action designed to harm the employers business.

Use of information or technology belonging to former employer ... need not have formal
patent or copyright protection to be protected.

Trade secrets, not just technology but company information not known to outsiders etc.
Not dependent upon contract.

Copyright laws
Patent
Obligation not to compete, employer and employee (loyalty)
Non-compete ... scope of obligation, time, geography, compensation, length

Legal/business forms:
Sole proprietorship
Corporation
- "s" corporation - sub chapter s, small business corp.
- professional corporation
- "c" corporation
limited partnership
non-profit (not for profit)
examination of appropriate form can be guaged based on endless ideas... but common/relevant comparison guidelines are: control issues, exposure to personal liability, tax factors, administration costs.

Control:
SoleP - sole owner
Partnership - as laid out by agreement between partners
Corporation - 3 levels... stockholders vote in proportion to the shares owned on election of the board of director, sale, or disollusion of the business and amendments to the corporations charter ...decisions made by the majority or 2/3rds of the shares. Board of directors, in turn, makes all the long term and significant policy decisions in for business, as well as electing the officers of the corporation...votes are virtually always decided by majority...officers (consisting of president, treasury, secretary at minimum) run day to day business, and as such are only level fo authority that can bind corporation by contract or in tort.

Limited partnership - all control within general partners, with control allocated in the agreemen, only general partner have authority to bind partnership by contract or in tort with 3rd parties.

Personal Liability:
Partnership - not seperate from owner, unlimited liab.
sol P - not seperate from owner, unlimited liab.
corporation - limited liab., but banks will require personal guarantees of stockholders for extending credit, and also under certain failed conditions the corporate veil can be peirced...

Tax factors:
sol p - personal partnership - personal and reported percentages by each partner set out in agreement limited partnership - same as partnership corporation - pays seperate corporate income tax, ...double taxation (makes money is taxed, then pays dividend to stockholders and then tax on the dividend...taxed twice on the same money) ...but this provides opportunity as most small corporations reduce or eliminate profit by increasing salaries and bonuses for owners. This can be done up to the point where the compensation of the individual is deemed unreasonable by revenue services. 

If profit eliminated in this way, owners will have removed their money from the corp. and will pay only their own individual income tax on it. 

"s" corp - shield personal liability and allows advantage of short term losses on tax returns

admin costs/requirements:
federal identification number, sales and use tax registration number, accounting expense
corporation (and also limited partnership) may also file annual report in addition to tax return. And there is fee for annual report maintenance fee, in addition to any income tax, and must be paid to avoid dissolution...

Choice of name for business investments would normally be memorialized in the stockholders agreement partnership agreement lays out equity, right to distribution of profit and cash  flow...but also employment terms (responsibilities, commitment to provide services and
level of compensation for doing so...should lay out, responsibilities, titles, compensation and related issues -- this is especially important when each of the stockholders holds only a minority interest ina corporation), disposition of stock, distribution of companies profits...

Other items in stockholders agreement: disposition of stock held by the stokcholders
under certain circumstances, disposition of each parties stock in the event of death
(Redemption Agreement (corp. owns life insurance policies and is obligated to purchase
the stockholders shares upon death), Cross Purchase Agreement (provides for each stockholder to own insurance on the others and to buy a proportional amount of the deceased shares)...)

Of course stokcholders agreements also agree on disposition of stock in events other than death...repurchase of stock upon termination (no longer actively employed) of  employment can be very important for both parties.

Stockholder and partnership agreements may also include numerous provisions perculiar
to the facts and circumstances of the particular business.
'' '' right for investor to demand repurchase of his stock at some predetermined formula price at designated future time so he will not always be locked into minority investment in closely held corp. Conversely, sometimes it's the corp that can repurchase at predetermined price usually at premium should the capital no longer be needed.

Presence or abscense of these these provisions depends on the relative negotiating
strength of the parties.

Employees are agents of the company, and as such governed by many agency rules that
define the relationship of partner to the partnership, and officers to corp., thus:
loyalty to the comp.
respect confidentiality
account for activities
not to compete
at the same time, employees can bind employers to contracts with 3rd parties if such actions have either been expressly or implicitly authorized.

Outside of the contract arena, the employees power to bind the employer is based on similar considerations...vicarious liability --> employer is responsible for any actions of the employee occuring within the scope of his employment.
Common law above.

Statutory law employee-employer considerations:
laws prohibiting employ discrimination ... sex, race, national origin, religion, age, handicap...can 'hire and fire at will' if not discrimination under law and not involving employment contract
other statutes of employment.
1. osha ....safety health acts
2. fair labor standards act, minimum wages, overtime pay and prohibiting child labor
etc.
3. social security and unemployment compensation
4. workers comp.

In additiont to common law and statutory law commont o hiring all employees... the hiring of persons for professional positions in engineering, marketing and sales presents new set of issues. Such persons likely to demand employment agreements and a piece of the action in some form.

Employment agreement = firing without cause
major negotiation point will likely be term of contract .

employment contract is essentially a one way street...employee promised employment for
certain period of time...company salary, bonus and incentive provision...but can leave
company at any time without consequence.

Negotiating employee obligations usually comes in the form of non competition proprietary information covenants.

In addition tojob security, higher level employees will ask to share in company's success...thus, a grant of stock. Can often be satisfied by incentive bonus plan tied to the success of the company, or more effectively, through the accomplishment of individual goals set for the employee.

The issuance of stock option is often thought of a solution to the tax problem.

Employee given right to purchase stock in corp. at a fixed price for a significant period of time. But recognition of income is required by authorities when stock is purchased in the amount of difference paid value of the stock at the time. 

This occurs when employee has recieved no cash and likely has little ability or desire to sell.
Recognizing the problem congress provided more favourable tax treatment for ESO
(employee stock option) that meets a number of requirements. If these requirements are met, the employee is not taxed until he actually sells the stock acquired under the options and has cash to pay the tax and the income is taxed at a favourable long term capital gains rate.

Insurances:
Workers comp
property insurance
liability insurance
key person life insurance
business interruption insurance
group life, disability, and health insurance for employees

Any personal guarantees circumvent the limited liab. entrepreneurs hope to achieve
through use of the corporate form.

As a matter of strategy, the form in which a guarantee is given can have serious
negative tax effects if insufficient care is given to structuring loan transactions.
(ie better to loan to corp. not personal guarantee as corp. could then repay loan directly deducting interest as a business loan, and the money would never pass through the hands of the stockholders. Alternatively, with more risk, Stockholders could borrow directly from the bank, but grant a second mortgage as collatorol, thereby rendering the interest deductible for them as mortgage interest.)

Alternative to institutional lending, we've previously stated as outside investments.

Offering Circular (disclosing all investor would need to know about your company to make intelligent decision)

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Intellectual Property

Defined as businesses intangible assets including patents, trademarks, copyrights and trade secrets. 

Some things (a new idea, product or method) that may be protected:
a new service
a new product/ideas for new product lines
a process
a new method
a new promotional or merchandising scheme or approach/a new advertising or marketing
program
new packaging
a new design
a new trademark idea
the identity of a critical supplier
a refinancing plan
...and all of these can establish an edge over the competition and gaining a greater market share.

3 kinds of patents:
utility - cover 3 clases of inventions 

a. chemical inventions (include new compounds, new methods of making new or old compounds, new method of using new or old compounds, and new combinations of old compounds) 

b. general mechanical invention (include everything from gears and engines to tweezers and propellers etc.) 

c. Electrical inventions (include from lasers to light switches, from smallest detail to overall architectural concepts) --> Utility patent requirement: idea must be new and be embodied in a physical form (which may be a thing or series of steps to perform)...and upon completion of patent stops others for 17 years from making, using or selling the patented idea, and patent must be within 1 year of public disclosure of the patented item or it will be barred.
Design - (ie hockey shirts, automobiles, shoes etc) only covers appearence, not the idea or underlying concept...14 years but subject to rules of other patents.

Patent application parts:
1. drawing
2. written description
3. 1 or more claims

Trade secrets - cover everything patents cover and much more. Trade secret is knowledge which may include business knowledge or technical knowledge that is kept secret for the purpose of gaining an advantage in business over ones competitors.

Customer lists, sources of supply or scarce material, or sources of supply with faster delivery or lower prices may be trade secrets. Secret processes, formulas, techniques, manufacturing know-how, advertising schemes, marketing programs and business plans are all protectable. 

Trade secret is protected eternally against disclosure by all those who have received it in confidence and by all who would obtain it by theft for as long as the knowledge or information is kept secret. 

There are no restrictions on the subject matter unlike patents (which must be novel or new to be applied for). 

The disadvantage with tradesecrets compared to patents is there is no protection against
discovery by fair means such as accidental disclosure, independent inventions and reverse engineering. (ie formula for coca cola is priceless). 

Trade secrets can form basis for lucrative licensing. Secrecy is essential to establishing trade secret rights, without it there is not trade secret property. Enough must be done so a person
who missappropriates secrets cannot reasonably excuse his conduct by saying that he didn't know or that no precautions were taken to indicate that something was a trade secret. 

Care should be taken to protect trade secrets early and consistent Trademark Protection - is obtainable for any word, symbol or any combination thereof that is used on goods to indicate their source. Any word (ie look, apple, life etc) can become a trademark if it's not used descriptively. 

A servicemark is any word, symbol or any combination thereof that is used in connection with the offering and provision of services. 

Collective mark indicates membership and group, such as a labor union, faternity or trade association. Certificationmark is used to indicate a party has met some standard of quality (ie good housekeeping seal of approval). 

Trademarks can be more valuable than all of a companys trade secrets or patents. (ie hagandas,
ben and jerry's, IBM, Kodak, GE -- the value these bring to even a brand new product is huge) A trademark, unlike a patent, is established without any formal governmental procedure. 

Ownership is acquired by simply being the first to use the mark on the goods of commerce, and remains the owners property as long as the owner keeps using it. A trademark cannot be sold seperately, and must be sold together with the business or goodwill associated with the mark or the mark will be abandoned. 

Further if a mark is licensed for use with a product or service, provision must be made for quality control of that product or service.

Copyright - cover all manner of writings. And writing is broadly interpreted (includes books, advertisments, brochures, spec sheets, catalogues, manuals, promotional materials, packaging and decorative graphics, fabric designs, photographs, pictures, film and video presentations, audio recordings, archetectual designs and even software and databases.) 

Software and databases are protected not only in written form but also stored in electronic memory....it is said a copyright does not protect the mere idea, but it protects the form of the expression of the idea. But this is broadly interpreted. One can infringe a book without copying every word. 

The theme is protected, even though upon successive generalizations the theme will devolve to one of seven non-protectable basic plots.

A patent in one country does not protect the invention in another country. A novel product or method must be protected by a patent in each seperate country. In addition each country has certain restrictions or a patent protection cannot be obtained. The first important restriction is the time within which you must file an application to obtain a patent or else forever lose your right to do so.

A license is simply a special form of contract or agreement. Each party promises to do or pay something in turn for the other party doing or paying something. Contracts that deal with the transfer of technology, or more broadly intellectual property (patents, trade secrets, copyright, know how and trademarks) are generally refered to as licenses. 

The licensed property can be anything from the right to use Micky Mouse on a T-shirt or to make copies of the movie Star Wars to the right to operate under the McDonald's name to a patented method of making a microchip to reproduce, use or sell a piece of software. 

Software licenses are just one of many types of licenses. 

The basic considerations are the same as with any type of license but specific clauses and
language are tailored to the software environment. The term 'license' is typically used to refer to a number of different types of contracts involving intellectual property including, primarily: an assignment (outright sale of the property - title passes from the owner (assignor) to buyer (assignee)), an exclusive license (give the licensee the sole and exclusive right to operate under the property to the exclusion of everyone else - even the licensor), and a non-exclusive license (permits licensee to operate under the licensed property but without any guarantee of exclusivity). 

A license is more like a rental or a lease. The owner of the property (licensor) retains  ownership, the buyer (licensee) receives the right to operate under the property right be it a tradesecret, patent, know how, copyright or trademark. 

Within either form of Non-exclusive or exclusive license may be included a right to Sub-License which is right of the licensee to license others. The term 'transferable' in a license means
the license can be transfered as a whole along with the part of the licensees business to which the license pertains. It does not confer the right to sub-license.

Great care must be exercised to clearly define the property being licensed.
Licensees must be sure they are getting what they want and need. And the licensor must
make clear the limits of grant.
If grant is only to use software, not to modify it or merge it with other softare - that must be expressily stated.

A license may have numerous different limitations including: time, unit quantity and dollar value of products or services sold. The license can also be limited geographically. 'Field of use' limitations are also quite common - this restricting the licensee to exploit the licensed property only in a designated field or market.

How do you assign a dollar value to intellectual property?

determine what it costs to acquire the property/to build it

determine how this property effects the profitability of the product or business
(determine dollar value for profit and cost savings associated)

A typical royalty rate for non-exclusive intellectual property/patent licenses is stated to be 5%. But is breached as a rule.

In any commercial agreement in which the consideration promised by one party to the other is a percentage of the profits or receipts or as a royalty of goods sold, it is nearly always an implied promise of dilligent careful performance and good faith.

Perhaps the best insurance is a competent enthusiastic licensee (preliminary investigation of licensees: net worth, credit rating, experience, reputation, manufacturing and sales capability, and prior success/failures...can assuage alot of fears and eliminate risky licensees.)

Geographic divisions in relation to treatment of IP in each country. Ie. Manufacturing of IP may be limited to USA, but sales may be permitted worldwide.

Payment must be defined as to the currency to be used, as well to who will pay it in
taxes and transfer charges.

Copyright not only protects against the coding, but also organization and structure, look and feel (re: software)

All forms of programs are protectible by copyright. Flowcharts, source programs, assembly programs etc etc...and makes no difference whether operating system or application program. 

Databases too are protected by copyright.

Software may also be protected through a trade secret approach seperately or in conjunction with patents and copyright protection.

The game can be won or loss far before you have an opportunity to establish of a form of protection in terms of a copyright, patent, tradesecret or trademark...hence why the fundamental forms of protection: confidential disclosure agreements, employment contracts, and consultant contracts are so important.

Whether or not an idea is protectable by a statutory right such as a patent or copyright, there is still a need at an early stage before such protection can be obtained to keep the basic information confidential in order to prevent public use or disclosure which can result in the loss of rights and inspire others to seek statutory rights for you.

Employment contracts, consultant contracts, and confidential disclosure agreements all
should be in writing and signed before the relationship begins, before any work is done, before any critical information is exposed and before any money changes hands.

Employment contracts must be fair to both parties and should be signed by all employees, at least those who may be exposed to confidential company matters or may contribute ideas or inventions to the business. They should also be short and readable.

One of the most important clauses in an employment contract is the agreement by the
employee to transfer to the company the entire right, title and interest in and to all ideas, innovations, and creations. 

These include designs, development, inventions, improvements, tradesecrets, discoveries, writings, and other works including software, databases and other computer related products and processes. 

The transfer is required whether or not these ideas are patentable or copyrightable. They should be assigned to the comapny or made, conceived or first reduced to practice by the employee. This obligation should hold whether the employee was working alone or with others, and whether or not the work was done during normal work hours or on company premises. So long as the work is within the company's business, research or investigation or is
resulted from or suggested by any of the work performed for the company, its ownership
is required to be assigned to the company.

Another concern is 'moonlighting'. The employee should agree in the employment contract, that during employment by the company there will be no engagement in any employment or activity in which the company is now or may later become involved. Nor will there be moonlighting on the company's time or using the company's equipment or facilities.

Closely related notion is a 'non-competition provision' whereby the employee agrees not to compete during his employment with the company and some period after leaving the company's employ. 

A few months, a year or even 2 years can be acceptable depending on how fast the technology or market is moving. Bare in mind, that even if ex-employees are free to compete, they are not free to take with them in their memories or in recorded form any trade secrets and any information confidential or proprietary to the company or to use it or to disclose it in any way.

Another potential area of conflict is 'Employee raiding', the hiring away of employees by the ex-employee who is now employed by a competitor or who has founded a competing business. 

This can be addressed by a clause prohibiting an employee during her/his employment period and for some period thereafter from hiring away fellow employees for another enterprise.

One of the most hazardous area of ownership involves the title to copyrights. If a copyrighted work is created or offered by an employee, the company automatically owns the copyright, but the employee must be a bonified employee. This means if the company hires a part-time employee, a consultant, a friend or a moonlighter that person may end up owning the copyright for the work.

Another area that must be considered is the moral rights of authors in their works.
'Moral rights'...rights and attributions and integrity or the rights of paternity and integrity. It is prudent, in copyrights, to include a clause in writing in which the artist...specifically refers to the work or works and weighs the moral rights of all uses of all the works.

Another issue to consider under employment contracts is to obtain a copy of the employment contract with the last employer or last few employers when a new employee is to be hired to determine whether this employee is free to work for this company now in the capacity the employee seeks. Prior employees have rights to that conflict, rightly or wrongly, with the employees new employment.

Consultant contracts should contain provisions simpler to those in an employment contract along with some additional provisions. 

Consultant agreement should clearly define the task for which the consultant is hired (ie. to analyze and solve a new problem, to research a new area, design or redesign a new product, set up a production line, or assist in marketing / sales / management / technical / or financial matters)

This important to show why the consultant was hired, what the consultant is expected to do, what the consultant may be exposed to in the way of company trade secrets and confidential and proprietary information, what the consultant is expected to assign to the company in the way of innovations inventions patents and copyrights...

Whenever an idea, information or invention or any knowledge of peculiar value is to be
revealed, a confidential disclosure agreement should be signed by the receiving party to protect the disclosing party. 

The disclosure may be necessary for the reasons of:

To interest a manufacturer in taking a license to manufacture or sell a new product, to hire a consultant to advise in a certain area, to permit a supplier to give an accurate bid, to allow a customer to determine whether or not they want a product or a product modified, to interest investors to invest in the business...

Domestic agreements are important not only to protect the knowledge and information itself, but also to preserve valuable related rights such as domestric and foreign patent rights. 

These agreements should be short and to the point.

The basic forms of protection...employment contracts, consultant contracts, and confidential disclosure agreements...need not be complex or lengthy but they are essential at the earliest stage of the idea generation to protect and preserve for the business some of its most valuable and critical property.

 
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Franchising

A business opportunity by which the owner, producer or distributor (franchisor) of a service or trademarked product grants exclusive rights to an individual (franchisee) for the local distribution of the product or service, and in return receives a payment or royalty and conforms to quality standards.

Business format franchising:
Marketing plan
Documented and enforced procedures
Process assistance
Business development and innovation
Is different than franchising for product distribution.
Product franchising
Business format franchising

The success issues pertaining to franchise success are the same as in any business, the difference being that the array of factors responsible for a frnachises success are tried and true and there is a proven ability to transfer this system of excellence to varied and dispursed locations, therefore the franchise model is predicated on the assumption that value has been developed through the careful operation, testing and documentation of a commercially viable idea.

Standalone business or Franchise ...the choice lies in 2 questions:

1. Is risk sufficiently mitigated by the trademark value, operating system, economies
of scale and support process of the franchise to justify a sharing of equity with a
franchisor, visa viz the franchise fee and royalty payments?

2. Is my personality and management style amenable to sharing decision making  responsibilities in my business with franchisor and other franchisees?

Franchise vs. Standalone startup is a question of due dilligence of evaluating the competitive advantages offered by the franchise.

License agreement/Franchise contract.

Franchisor and Franchisee obligations.

Real estate investment.

Property specifications/Real estate and selection of said real estate with relation to Target audience. Primary target audience numbers within scope of area/wide of a
market.

Traffic pattern. Volume...corner location, homebound vs workbound site, Speed of
traffic...

Visibility, 3 pronged: sign, building, property entrance...locations that provides adequate turning time with respect to all 3 visibility variables has highest ranking in this area.

Cost and time requirements related to zoning.

Matching existing location success factors to business development sold to franchisee.
Compromising individual stores in a rush to gain market share. Choosing franchise simply to grow quickly cannot substitute good business practice if long term stability is an objective.

Training -- outlines in license agreement, and franchisor specific requirements and form, and should extend beyond manual and classroom. Training will vary with the franchise, but should include organized and monitored on-the-job experience.

Trade name and mark are the most valuable assets in the franchise system. This is result of delivery of the product on a consistent basis to consumers who acknowledge the value through paying a price that includes a profit margin.

A poor training regiment will inevitably dilute the standardized consistent delivery of the product and reduce tradename value.

Economies of scale for R&D is a principle benefit in franchising. Research of a franchise should track operations level changes of frnachisors over 2-4 year period.

Franchisor must standardize operations but also encourage change. This paradox is overcome by realizing change will occur but must be managed. Franchising provides the mechanism for the efficient managment of change.

Customers needs, the legal environment, competition and most of all, the entrepreneurial ferver of franchisees will stretch the envelope of standardization.

Marketing, advertising and promotion are the most sensitive areas in the ongoing franchise relaitonship. Marketing imprints the tradename and mark in the mind of the customer.

3 levels of advertising:

National advertising fund is controlled by franchisor. Each franchisee contributes a percentage of topline sales.

Regional ...area of dominant influence (adi)

Local advertising or local store marketing...franchisee contractually require to make direct expenditures on advertising.

Franchisor must monitor and enforce marketing expenditures.

Bulk buying and inventory control.

National and regional contracts.

Product specifications list. Quality standards.

Approved suppliers. Franchise tying arrangement occurs when business format franchise
license agreement binds the franchisee to the purchase of specifically branded products.

Business format is documented in a manual or series of manuals.

Fact that it is documented should be noted in the license agreement.

Operations manual is the heart of the franchise asset as it delineates the manner in which the trade name and mark are to be delivered to the customer.

The franchise purchase will be made under the basis of the businesses' effectiveness in the marketplace. However, to remain viable, the operations manual must be a dynamic
instrument.

Demographics and Geographic Territories. Territorial issues.
Relocation clause. May give right to give franchisor right to compel a franchisee to relocate the business under specific economic or demographic conditions.

Renewal rights.

Control of the sale of existing franchisee company issues should be covered in the license agreement. Procedures by which controls are implemented must be clearly defined.

Franchisees ability to sell the business effected by 3 other clauses:

right of first refusal
buy out formula
license agreement
License agreements signed personally = franchisee must devote all or majority of life to work in franchise. Upon death, his estate or otherwise may be forced into sale or even loss of frnachise rights. Short term help from franchisor is often stipulation until transfered to qualified source or heir.

Cost of litigation, arbitration clauses...

Issues of default must be specifically delineated. Reasonable right to remedy the default provided breaches are not recurring.

Termination - franchisee must cease using a tradename or makr and other property rights of the franchisor. 

Taking down all signs etc returning all materials etc.

Uniform Franchise Offering Circular...is a matter of public record.

If real estate component to franchise is often treated as a lease or rental and not included in startup calculation. If part of the strategic plan must be accounted for separately.

Low initial investment effects operating expenses. Lease is simply as way to leverage your startup costs. Startup losses should be funded in the intiial capitalization but are not always included in the disclosure. Undercapitlization is a major reason for failure.

P&L statement should be adjusted for franchisee to reflect the realities of the area where operations are planned.

Proforma income statements are often annualized. The ramping of sales and accural of
expenses on a monthly basis will prove invaluable in first year of operation.

Many institutions require 36 months of proforma statements...franchisors may avoid
doing this for fear of misleading franchisee and incurring liability.

Using historical data of all 3 data sheet (balance, pandl, cash) of the franchise is the advantage franchises give you, thus laying proper foundation for solid capitalization. Cash flow statements should also be done on 36 month to match balance sheet and incomestat. on proforma.

Search cost/site search and acquisition cost may be ommitted from cash flow...but must be considered or will strangle cashflow.

Financing requirements for franchise are no different than for any other startup. Acquisition or alteration of business premises, Fitting and fixtures, Machinery and equipment, and Working capital are all included in the list.

Franchisor will systematically meet with large banks to keep building confidence and allay hurdles for franchisees. Structuring a debt proposal should utilize much of the due dilligence included in the franchise search.

Financing of franchise...
Sale of franchise...
Disclosure...
Legal and costs of franchising...
Equity in the business being sold when franchise is sold. Partnership idea between franchisor (maximize system sales) and frnachisee (optimal unit sales not necessarily maximum system sales to maximize profit)

Optimal number of outlets in market not necessarily maximum
Conflict...
Franchising, the combination of unique corporate organizations and the unique form of raising capital.

For franchising to work best the franchisor and franchisee's goals must be congruent. The relationship must be highly interactive and dynamic. Although the license agreement is the focal point of franchising, if it is strictly interpreted, the probability of conflict being resolved threough litigation is hightened.

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Harvesting

Need for strategy in harvesting the opportunity.
The financial value of the harvest.
Options available for harvesting a company.

VALUING A FIRM CAN BE CATEGORIZED IN 4 WAYS, thus to develop a harvesting strategy:

(valuation of opportunity)

Asset based valuation - modified book value, appraisement value, liquidation value.

Market comparable valuation - Once comparables found Market-To-Book values of these
companies are computed and then applied to the earnings and book value fo the firm to be valued...need to find company that is in the same or similar type of business and has similar growth rates, financial structure, asset turnover ratios and operating profit margins.

Earning capitalization valuation - determine normalized earnings and capitlize this
amount at some rate of return (called capitalization rate). There is inverse relationship between value and the capitalization rate (higher capitalization rate, lower the value). As risk of income stream is perceived to be greater you raise capitalization rate and thus lower value. 

Capitalization rate is reduced and value increased as growth propsects and future earnings are greater. Lower capitalization rate being used for higher growth company. The problem here is using earning rather than cash flows in the evaluation.

*** Present value of the firms future cash flows --> The heart of a firms instinsic or economic value. This method of evaluation may be stated as follows: Find the present value of the firms expected free cash flows using the companys' cost of capital as a discount rate. To value a firms future free cash flows and thereby value a firm itself, you project future cash flows and then determine the present value of these flows. 

Ie Develop a strategic plan for 250 years, estimate the expected cash flows and then find the present value of these amounts. Decide on the planning period (preferably one that expects the duration of any competitive advantage the firm enjoys ...within this time period the firm should expect to earn rates of returns on its investments in excess of it's cost of capital)...make assumptions about the cash flow stream beyond the planning horizon...assume relation between future growth of sales and increasing asset requirements (might rely on historical relationships between assets to sales)...then find present value of the free cash flows during the planing period and present value of the cash flows beyond the planning horizon, the residual
value, and then sum these two values to estimate the present value of all future free cash flows.

Be more concerned with cash flows from a business than profits. Only by receiving after tax cash flows do you receive a return on your investment. It depends on the cash, not on earnings based on GAAP.

The driving forces of value include the following items: (the value of a firm is driven by changes in these items)
1, beginning sales
2, the estimated growth of sales both for the planning period and beyond
3, the time duration of the sales growth
4, the expected operating profit margin
5, the firms tax rate
6, the projected ratio of operating assets to sales
7, the firms weighed average cost of capital

Harvest Strategies:

1. increase the free cash flows - maintain current market, restrict growth and don't try and grow into new markets etc. You retain ownership of company and you don't need to find a buyer for your company...but there can be negative doubletax implications if simply receive dividends from company, shrinking competitive advantage, and patience and time is required assuming there's no management to help run the company.

2. management buy out (mbo) (LBO) - leveraged buy out

3. employee stock ownership plan (esop) - unleveraged and leveraged esop. Firm establishes esop and guarantees any debt borrowed by esop for purpose of buying company's stock. Esop then borrows money from lender. Cash is used to buy owners stock. Shares are held by a trust, and company makes annual tax deductible contributions to the trust so it can pay off the loan. 

As loan is paid off, shares are released and allocated to the employees. ESOP benefits owner by providing market to sell stock, but also carries tax advantage that makes the options attractive to owners and employees. 

Benefits: company can deduct both principle and interest on esop loan, if esop owns at least 30% of firm after purchasing shares seller can avoid tax on the gain by using the proceeds to buy stock or bonds of another US industrial company, if esop owns more than 50% of company those who lend money to esop are taxed only 50% of income received on such loans thus lender can afford to offer lower interest rate usually one and half percentage points below company's normal borrowing cost, dividends business pays on a stock held by the esop are allowed as a tax deductible expense (treated like interest expense when it comes to taxes)...BUT esop is not an
option if owner of company doesn't want employees to have ownership of the company.

Also, esop's must cover all employees and owners must disclose certain info about company like performance and key executive salaries which for some entrepreneurs is not palatable. 

Finally, using an esop can place owner in double jeapordy where both their job and retirement fund depend on the success of a single business. But esop should be given serious consideration when contemplating and strategizing a harvest strategy.

4. merging or being acquired - to capture value created through the venture. ...
Estate planning and need to diversify ones investment. Second reason, need for finance and growth, where owner can't provide funds. Other simply want change for personal or
family reasons.

5. initial public offering (ipo) - unless you understand the other sides compensation and reason for doing what they do for you, your expectations may be overstated. You lose control on the 'road show' to the investment banker and the market afterwards dictates what you get...but you're basically free.

The financial issues are the same for selling firm for any exit strategy:
How should the company be valued for the purpose of sale. 
How is the payment to be structured.

But financial issues may not be the only or primary concerns when selling a firm.
During selling of company sellers might be dissapointed with advice received from experts during negotiations.

1. you only sell once, so prepare thoroughly and leave nothing to chance.

2. selling your company cannot be delegated to a business broker, it is a personal affair. 

3. If you want liquidity and your assets not tied up in someone elses company, sell for cash.

4. negotiate with two or more willing buyers at the same time, however approach potential buyers descretly to avoid giving your company a 'shopped around' image. 

5. carefully select those companies your firm will appeal to most and then develop a sub-strategy for contacting them. 

6. Plan on 18 months to complete the sale, especiallyif you must locate the buyer. 

7. once you negotiate the framework of the deal, select a lawyer who will negotiate
the details and style compatible with your own personality. 

8. stay alert and healthy, the process is stressful. 

9. avoid becoming complacent about the transaction, after you have reached an agreement in principle the hard work has begun. A company has not been sold until the money is in your bank account.

Concerns

1. lose of purpose once business sold. 

2. managing cash/liquidity received not as fun vs. managing business ...and harder and less rewarding...A rewarding harvest can come only if you've built a company of value. If the busness has provied a good lifestyle and not created value, there will be no harvest. The only option then is liquidation or even possibly bankruptcy.

That is, the only option is no harvest, which will not be attractive when time comes to leave business.

Thus, contrary to what you might plan to do, anticipating and planning for the harvest is the only viable choice.

Making this choice is to a large extend dependent on an understanding of what you value and what is important to you, a deep and genuine understanding. Otherwise, you will be disappointed with the end result - so make a good decision for you and enjoy the fruits.

Entrepreneurship Economics

How does a society create new wealth?
How does a society distribute wealth among its members?
Entrepreneurship ensures both.

New demands brings new wealth...Innovations create new demand ... and entrepreneurship
brings new innovations. Thus entrepreneurs are central to wealth creation and distribution.

You bring innovations into existing markets. Destroy existing markets and innovations create demands and new wealth. Entrepreneurs distribute and increase wealth through shareholders and works experiencing new wealth, and old set experiencing decline. This idea is 'creative destruction'.

Entrepreneurs are the creators of wealth through innovation. They're at the centre of jobs and economic growth.

With the right innovation, no matter how many competitors there are, firms can
survive.

Because, in research, it's been more closely related that the entrepreneurs themselves
largely control the factors that influence their survival. The type of business and changes thereof, and size of firm (resources), are decisions made by the entrepreneur.

May not have complete control over the growth of their firms, but can influence
growth. Therefore, to ensure survival, entrepreneurs need to carefully choose their
type of business, adjust the type according to market needs, define birth size, and
work hard to achieve growth. And they need not move out of state or away from
competitors to survive.

4 out of 5 firms fail within first 5 years is mistated.

The actual statistic is half of all firms will survive for more than 8 years.
Understand, growth of a firm may not come until 6 or 7 or 8 years, not immediately.
Rate of innovation to Rate of firm growth (dependent on success of the innovation)

4 classes of firm:
Economic core
Constrained growth
Glamorous
Ambitious

Economies of scale (and larger firms) are overcome by innovation. But need to make sure the innovation you bring is significant enough to overcome any economies of scale that exist within the markets you are entering.

Location is not an impediment to entrepreneurial success.
High innovation is not the only route to success. Firms with low rates of innovation can and do succeed.

Larger your business at startup, greater your chances of survival. Takes a wide variety of skills to start a new firm, and few possess all the skills needed. So round up some partners to round out your skills and to provide the early stage startup capital.

A good innovation finds an initial small market segment, and grows it into a major market share. Large competitors are especially slow to respond to innovation. (ie. the patent.)

Buyer satisfaction drives the success of entrepreneurs.