Wednesday, June 4, 2014

Buying a Home Based Business Part 4: Due Diligence

image This article was written by Mike Capsuto, SCORE Orange County Business Mentor

Ten days ago I couldn’t spell “entrepreneur”, now I are one. Unknown

Many people rush into buying a business with their “eyes wide shut” - there's more to what you are seeing that, without closer inspection, you simply don't see. Sales listings can exaggerate or conceal important information that if known could negatively affect a buyer's decision. Due diligence is the precautionary research a buyer performs to verify the information provided by the seller and to make further inquiries to uncover information and identify opportunities or risks in the company's performance.

This process is usually conducted in the 60 to 90 days prior to buying a business after the buyer and the seller have signed a letter of intent in which the seller agrees to gives access to all business data, including finances, sales figures, customer data. This is not a go alone process. It requires involvement of legal and financial advisers as well as technology experts.

Information in this article is provided for general educational use only. No responsibility is assumed for any problems associated with the use of its content. One should seek the advice of their financial and legal counsel in every step of purchasing a business.

The starting point for the due diligence process is a thorough review of the financial statements and its underlying data. This includes the verification of the value of fixed assets, inventory, accounts receivable, and liabilities. The buyer's accountant should review profitability and check company financial data against common financial ratios to note any positive or negative trends or unexplained changes. Review the tax filings and note any discrepancies with the financial records.

Other important areas needing review include:

General company information:

A history of the company, its original and any succeeding business plans, the company's mission statement and short-term and long-term goals and objectives. You can use this retrospective to compare which goals were achieved or exceeded and to establish the next set of goals for your business.

Legal matters:

Depending on the legal structure of the business, review copies of the articles of incorporation, by-laws, minutes of meetings, and formation documents, any partnership agreements or LLC filings. Other legal documents would be copies of contracts and agreements binding the company, warranties/service agreements on company products and any product liability documents. A discussion of current or pending litigation as well as any relationships with regulatory agencies or industry-specific organizations.

Personnel:

Home based businesses have few if any employees physically located in the home. However, there may be employees located in warehouses, delivery, or outside sales. Obtain a listing of all employees, their functions and employment contracts if any. Documents relating to employee hiring, pay, and benefits need to be reviewed. Review employment tax reports (Forms I9, 941, 940 and others), both federal and state. Check the status of independent contractors to make sure they are correctly classified.

Products and services:

If the company sells products, a catalog or listing of products is needed, along with cost, pricing strategies and information about competitiveness of these products. Brochures and price listings for products and services must be reviewed. Documents relating to company patents, copyrights, and trademarks must be provided, as well as licenses owned by the company and agreements with licensees.

Marketing and competition information:

Documents needed include the company's marketing plan, market analysis, growth opportunities, and purchase agreements. Information about the competition include lists of major competitors, and analysis of the competition - present and future.

Intellectual property:

Most Home businesses rely heavily on the internet to sell their product or services. It is not uncommon to discover that they do not have ownership of the designs, databases and software source code for their website. This can be problematic if no agreement on web ownership is specified. These means an application may have to be completely re-built, or cannot be modified without using the original developers. Sometimes ownership or control of the primary domain name resides with another party. This should be identified and ownership verified.

Third parties:

Most home based businesses rely on third parties. There will often be contracts with payment authorization services, external hosting companies and fulfillment services. The success of the business may be highly dependent upon all of these working together. Contracts may be expiring or need to be renegotiated with a change of ownership.

Sensitive data:

State and Federal regulations mandate that adequate consent has been acquired to track the use of personal data and credit information. Data source information, consents, uses, data retention & disposal policies and procedures should be reviewed.

Security:

Hacking is a major problem with commercial websites. Security considerations should be built into all stages of the website application from design through implementation. Evidence of security problems, verification, detection and incident handling processes should be evaluated. Backup procedures for disaster recovery and business continuity should exist and have been tested. Otherwise customer and other valuable data could be lost due to an accident or technical fault.

Operations:

The maintenance and ongoing development may allow access by third parties to sensitive data and information. Examine who has access to the system. Details of previous and upcoming scheduled maintenance may reveal system problems..

Confirm the website traffic claims:

Review the load monitoring data. Obtain statistics on hits, page views, visitors Is some of the traffic the seller claims actually traffic that was secretly paid for?

Due diligence can be costly, because it usually involves the services of outside advisers. Without "due diligence" one may end up buying something that is not what was expected, or end up in a business relationship that will cause a loss of your personal investment and that of others.

Have You Ever Wondered “What’s A Great Idea for a Business?”

image This article was written by John Rau, SCORE Orange County Business Mentor

Are you searching for business ideas and want to start a business? How do you decide what it should be? You don’t’ want to pick one just because it sounds like a fun thing to do. You want to pick one that makes economic sense.

In her article “Starting a Business: Finding Business Ideas,” Susan Ward http://sbinfocanad.about.com/od/businessideas/a/businessideash.htm) says that “Sometimes the hardest part of starting a business is coming up with an idea, whether a small business is a part-time one person operation run out of someone’s home or a multi-million dollar company with dozens of employees. You know, for instance, that you want to work in a particular field but don’t know what you might do specifically. Or maybe all you know is that you want to start a business, but you’re on the lookout for an idea that inspires you.” To help you get started, here are some sources of ideas:

· “Business Idea Center-969 businesses you can start today”

(see http://www.entrepreneur.com/businessideas/index.html)

· “How to get 752 New Business Ideas” (see http://www.innovationexcellence.com/blog/2013/04/10)

· “Master List of Over 400 Business Ideas That You Can Start From Home” (see http://www.ahbbo.com/ideas.html)

· “101 Small Business Ideas—A List of Small Business Ideas to Get You Inspired to Start a Business”

(see http://sbinformation.about.com/od/business-ideas/a/small-business-ideas.htm)

Unfortunately, one doesn’t “order business ideas from a menu” as might be suggested by the reference sources above, but the value of the above-cited lists is to give you “something to think about”. To help you narrow your search and get started, S.H. Wallick in her article entitled “Finding Ideas for a New Business” (see http://voices.yahoo.com/finding-ideas-business-10258343.html) suggests the following approach:

· Before searching for a business idea, think about what you love to do and identify what you really enjoy, since the most successful businesses are based on an entrepreneur’s passion.

· Look for an unsatisfied or underserved need in your market.

· Look for ways to improve on what is already there. Improving an existing successful product or service is potentially the fastest and surest way to build a successful business. Starting a business with brand new products or services is, however, very risky.

· Look for ways to deliver a product in a new way.

· Look for ways to take advantage of societal changes. Catching a trend at the right time could get your new business off to a strong start. For example, the advent of the Internet created a new marketplace and entrepreneurs responded with thousands of creative new businesses.

· Look for the new and unique. Maybe even invent a new product or service.

Once you have selected your “candidate” business idea, the next step is to put it to the “personal due diligence test” in the sense of evaluating the business idea from the perspective of where it fits with what you want to do and how well it matches with your strengths, experience and capabilities. A suggested 10-step question-based approach in this regard that can assist you in this evaluation is provided in the article entitled “Ten Ways to Evaluate a New Business Idea-For Dummies” (see http://www.dummies.com/how-to/content/ten-ways-to-evaluate-a-new-business-idea.html) as follows:

1. Is this business idea something you really want to do? Take a moment to think about turning your idea into a business. Is your heart in it? Is it something you really care about? Is it how you want to spend your time? If you answer all of these questions with an enthusiastic “Yes”, then read on. If not, then maybe you need to go back to “brainstorming”.

2. Is this business idea something you are capable of doing? Beyond desire, is this a venture that you are capable of doing? Do you have the resources, connections, skills, and experience to convert this idea into a success story? And, if you don’t have everything required to do the job well, do you have the knowledge and resources to assemble a team that does?

3. Does this business idea tap into your personal strengths? Your strengths and weaknesses will go to work with you every day, so take time to consider whether your idea aligns well with your personal attributes or whether it requires talents in areas where you are weak. You may need to add team members who bring the appropriate skills and background to cover your weaknesses.

4. Can you describe your business idea in 25 words or less? This is sometimes referred to as the “elevator speech” in the sense that if you need a half hour to explain it to someone, then it’s too complex! As part of your evaluation, you need to pare down your idea to its essentials and describe it as simply and concisely as you can.

5. What’s the closest thing to this business idea in the marketplace? What is you competition? Are there other products or services similar to yours in the marketplace and, if so, how do they compare with your idea?

6. Does your business idea meet a need or solve a problem? Customers spend money because they believe that what they buy can solve their problems, fulfill their needs or satisfy their desires. If your business idea doesn’t address a real problem, need or desire, then you may have difficulty presenting your product or service as the best solution to meet existing needs.

7. Does your business idea take advantage of a new opportunity? Business success often hinges on having the right idea in the right place at the right time. Are there new customer trends and preferences in the marketplace not currently being met with existing products or services? Could you be “the first to market’?

8. What appear to be the biggest drawbacks and/or limitations to your business idea? Examples would include such considerations as easy for would-be competitors to copy or counter, maybe requires changes to ingrained customer behavior to get them to accept your product or idea, time from development of your new product idea until it enters the market place is potentially too long, or maybe it will require difficult marketing challenges, to name a few. The point is that you need to put your business idea in perspective relative to the potential impacts of any drawbacks and or limitations on your future success.

9. Will this business idea make money and, if so, how fast? You need to give serious thought to the following types of questions: “How long will it take before your business idea will generate profits?”, “How long can you afford to wait”, “Who specifically will spend money for your product or service?”, and “After the sales start rolling in, can you sustain profitability over time?”

10. Would you be willing to remortgage your house to fund this business idea? The point of this question deals with whether or not you are both serious enough and have enough passion about this business idea that you would be willing, if need be, to “put the family farm at risk”. You most likely will have to take some financial risks when you launch a new business. If you’re not willing to take on that risk, then maybe you’re not cut out for the business you’re thinking about.

In summary, Frank Joseph in his article entitled “How to Find the Perfect New Business Idea” (see the November 7, 2013 issue of Start a Business) puts this question in perspective when he says that “The perfect business idea has to be not only something that a person enjoys, but it also has to be a profitable venture. If a person’s idea cannot make them money, it will not be worth investing time into.”

If it looks like your business idea has potential and you have done your homework, than you are ready for the next step which is to create a business plan. Here’s where SCORE counselors can help you.

8 Ways to Make Your Crowdfunding Campaign Pop

image This article was written by Jodi Helmer, in Entrepreneur Magazine, reprinted by permission

For Joanna Griffiths, launching a crowdfunding campaign was about more than raising capital for her startup. Griffiths turned to Indiegogo in 2013 to test the market for Knix Wear, a line of women's underwear made from moisture-wicking, odor-absorbent fabrics. "It was the last test in a series of tests I conducted before launching the business," explains the Toronto-based entrepreneur.

Even though Knix Wear garnered support from 518 backers who pledged more than $50,000 for the 2013 campaign--on a goal of less than $40,000--crowdfunding was a challenge. "I thought if I had a great idea and a strong platform, I would sell thousands of units," Griffiths recalls. "But getting every single new backer was a struggle."

As crowdfunding gains popularity as a financing model--Kickstarter, for example, has seen more than $1 billion pledged since its 2009 launch, and more than 19,000 successful campaigns last year alone--a growing number of startups are clamoring for support from backers, making it that much harder for 'treps to stand out.

Before you sign on with one of the 200-plus U.S. crowdfunding platforms, master these tricks for launching a successful campaign.

 

#1. Have a solid plan.

The "field of dreams" approach doesn't work for crowdfunding, according to Indiegogo co-founder Danae Ringelmann. "You can't launch a campaign, go on autopilot and expect money to come rolling in," she says.

Merely posting pleas for support on social media isn't enough to help startups reach their funding goals, either. Successful campaigns are built on solid plans.

"People fund people, not just ideas."

--Danae Ringelmann, Indiegogo

In fact, Richard Swart, director of research at the Program for Innovation in Entrepreneurial and Social Finance at the University of California, Berkeley, found that campaigns that successfully raised $100,000 spent at least 200 hours preparing for a crowdfunding effort and an average of 136 hours managing it--all before pledged funds hit the bank.

Prior to launching the Knix Wear campaign, Griffiths studied successful crowdfunding efforts and backed a handful of projects to get a better idea of the ways in which smart startups approach their campaigns. She also created an editorial calendar that outlined the day-to-day strategies for social media, posting updates and soliciting media coverage from national news outlets and popular blogs that served as a running to-do list for the six-week campaign.

 

#2. Solicit prelaunch support.

It's a rookie mistake to wait until a crowdfunding campaign goes live before reaching out to prospective backers. "To reach the funding target, the first 30 percent of funds needs to be committed before the campaign goes live," Swart says.

That goes beyond simply contacting everyone in your network to request support. "You need to develop relationships with thought leaders, celebrities and other supporters who will back the project and [agree to] amplify your message on social media before going live," he says. "To be successful in crowdfunding, first you build a community, then you engage them."

 

#3. Make it personal.

"People fund people, not just ideas," Ringelmann says. Successful campaigns feature videos that introduce entrepreneurs and capture their passion, as well as offer cool perks that allow backers to engage with the product.

To raise capital to create her Jiva Cubes line of instant coffee, Natalia Rodriguez recorded a three-minute video highlighting the product's organic Fair Trade ingredients and offered boxes as incentives. She hoped that coffee lovers would contribute toward the $15,000 goal she set for her 2012 Kickstarter initiative.

But pledges totaled a little more than $3,500. Rodriguez attributes the lackluster response to her failure to create a compelling campaign. "I didn't think about what people wanted," she explains.

Less than one month later, Rodriguez launched a revamped campaign to secure startup capital for Jiva Cubes. Her new video highlighted her entrepreneurial spirit and provided a more in-depth product demonstration; new perks gave backers more opportunities to sample the product and share feedback. Backers responded to the changes, contributing $21,173.

 

#4. Respond to feedback.

Engaged backers offer more than just cash--they are "a critical resource for the entrepreneur, not just for the funds they are donating to the project but for the ideas they are sharing," according to Dan Marom, co-author of The Crowdfunding Revolution. In other words, soliciting feedback from supporters--and responding with adjustments to marketing strategies, product designs or price points--is as important a part of crowdfunding as raising capital.

Within a week of launching on Indiegogo, Griffiths realized that marketing Knix Wear as a product for incontinent women was ineffective. Based on feedback from potential customers, which included questions about whether the fabrics wick sweat and minimize odors, she reshot the video, scrapped the original messaging and refocused her campaign to emphasize the benefits of the product for all women, not just those with health issues.

"Crowdfunding allowed me to engage with customers and get their feedback before spending a ton on production," Griffiths notes.

 

#5. Consider a lower funding target.

Although her inaugural crowdfunding campaign exceeded its goal, Griffiths lowered her funding target for a 2014 follow-up, believing she had a built-in psychological advantage. "It's a lot easier to rationalize backing a campaign that is 100 percent funded," she points out.

The strategy worked: The follow-up campaign hit its target of more than $13,000 within two weeks and went on to raise more than $38,000.

Setting a smaller goal on Kickstarter, where just 44 percent of campaigns hit or exceed their funding targets, could mean the difference between collecting a check or conceding a failure. "Reaching a funding goal is the kind of early validation that makes [backers] want to get onboard," Indiegogo's Ringelmann says.

 

#6. Take it offline.

Crowdfunding relies on online platforms, but most successful bids include real-world components, too. To reach backers, Berkeley's Swart suggests hosting launch parties, organizing roundtable discussions with leaders in relevant industries and establishing a presence at community events. For example, a startup developing a product for long-distance runners could partner with marathon organizers to connect with prospective customers and garner support for the campaign.

"You want to build excitement, get people excited about backing the project," Swart notes. "Don't ignore offline opportunities to build engagement."

To generate buzz for her first crowdfunding effort, Griffiths sent a video to the vice chairman of Hudson's Bay Company, one of Canada's largest retailers, introducing Knix Wear and offering a special retail pack through Indiegogo; the exchange led the corporation to place an order for 18 of its retail locations via the crowdfunding campaign.

Prior to her second campaign, Griffiths developed a relationship with lingerie e-tailer BareNecessities.com, which placed an order for Knix Wear through Indiegogo as a result of personal interaction with Griffiths.

"I did a lot more than ask backers to donate to the campaign through social media," she explains. "It was all of the work that I put in behind the scenes that made the campaign successful."

 

#7. Excel at follow-through.

Most backers are interested in a behind-the-scenes look at the business and creative process. This means sharing updates and following through with promised rewards.

Engaging with backers is more than just good customer service: Indiegogo has determined that campaigns that sent out at least three updates raised 239 percent more than those that sent out fewer updates.

Rodriguez of Jiva Cubes believes her third Kickstarter campaign attracted support from more than 2,700 backers because of the positive reviews she received on her previous campaigns, including feedback about her ability to deliver the products and perks as promised. "A project isn't successful when it's funded," Rodriguez explains. "It's successful after the creators deliver a product."

 

#8. Consider follow-up campaigns.

Successful startups know that a one-and-done attitude is not the best approach to crowdfunding. In fact, Swart believes, "it's smart to do successive campaigns."

Crowdfunding endeavors that raise millions might get a lot of attention--nine projects posted on Indiegogo and 62 Kickstarter campaigns have hit the seven-figure mark--but most startups set much smaller goals. On Kickstarter, the average amount raised is just $15,000.

Launching a series of small campaigns to reach specific benchmarks may make more sense than launching a single campaign with a huge funding goal, because it builds brand loyalty over time and gives fans additional opportunities to support the startup at various stages.

Rodriguez has followed this model, launching a subsequent Kickstarter campaign to introduce the sugarless variety of her coffee cubes and to appeal to fans for both funding and feedback. "We value their opinions," she says. "Without our backers, we wouldn't be successful."

Jodi Helmer is a freelance writer living in Portland, Oregon. Visit her online at www.jodihelmer.com.

Hiring Your First Salesperson

image This article was written by Barry McKinley, SCORE Orange County Business Mentor

The majority of small businesses fail within the first five years, not because of the product or service, not because of poor accounting practices, but from lack of sales! The owner is trying to wear too many hats, and at some point must commit to hiring a full time salesperson to continue sales growth.

Hiring the right person is not luck; it takes a lot of work and planning. It is not uncommon to interview 25-75 applicants before finding the right fit. I am sure you didn’t marry your mate after a ½ hour discussion. Hiring the right person is critical to the success and growth of your business.

In your planning stage you want to consider the following:

· What is the profile of your ideal applicant?

· Write a complete job description, who will they be calling on and what will they be selling?

· How will they determine who the customers are?

· What lead programs are in place?

· How will they be paid, commission, salary or a combination?

· How will you handle expenses, car, travel, meals, gas, insurance, parking, and misc.?

· Who will train the salesperson and what type of training is required?

· Who will be doing “Role Playing” with the salesperson?

· What type of sales tools will you be providing?

· Will you have a sales process to follow?

· What will be the requirements for support staff of the sales person?

· How much leeway will be given to the salesperson in regards to terms and pricing?

· Will you hire somebody within or outside the industry?

· Will you have defined sales areas?

· What type of search will you use to find the idea candidate?

· What will be their sales goals, 3 months, 6 months and a year?

· How will you establish these goals and will there also be incentives?

· How will you measure the sales person production and results?

· How will you manage them without micro-managing?

· What type of reporting will you require from them?

· What are the needed special skills of the person you wish to hire?

· Who will be doing the interviewing and what questions will be asked?

· Who will check references, social media, and handle drug testing?

Too many companies hiring expect almost immediate results. Depending on the product and the selling cycle it may take anywhere from one month to one year for the salesperson to become effective and profitable.

Salespeople should be put on a commission program at some point 60-100% commission. But at the start without having any sales or ramp up time the salesperson can’t be expected to live on “air”. A draw program where the salesperson is paid a minimum salary until sales commissions exceed the draw then they are put on straight commission or some variation of that. At the start expect turnover, normally even in the best situations sales people are coming and going every 2-4 years.

As the territory begins to grow you can base your sales quota on 2-10 times sales, depending on volume, profit, competition and other variables.

Some mistakes to avoid:

· Not having a sales plan in place before hiring

· Not having a clear picture of your “Ideal Candidate”

· Not interviewing a number of sales people to be able to compare

· Trying to hire ONLY a person with your industry experience

· Not making the applicants aware during the interview process of what is expected

· Not having a fair compensation package –keeping in mind lack of sales at startup

· Not having a good product and sales training program

· No sales tools

· No support and cheerleading from the office

· No systems to measure progress and results

· Setting expectations too high

Remember it will cost your company to hire a “good” salesperson anywhere from 100% to 200% of annual earnings. So you want to move slowly and have an excellent plan and training program in place to insure success.

For more ideas, SCORE offers a hiring workshop “Hiring Made Easy”, as well as offering personal one-one counseling regarding hiring sales team members.