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A New Series on Business Startups — Part 4

As buying a franchise is really a special case in setting up a business — all the donkey work is done for you; you just buy a package — I’m slotting a few words about them here, so you won’t have to read on in this series if you don’t want to.

A franchise is a ready-made package, usually comprising the product or service, the equipment (often tailor-made for the job), the consumables, all literature, including leaflets, flyers, letterheads, customer-facing materials, training, plus image, exclusive area of operation, advertising and sometimes, leads to potential customers.

All that doesn’t come cheap. Expect to pay a 5-figure sum for anything worthwhile.

When signing up to a franchise deal, there are a few details you should get clear first:

1. Make sure your contract mentions the period of the agreement. This is often five years, but it can vary. It should also specify a renewal option. Check any small print in the renewal terms in case they involve much greater expense or other prohibitions.

2. Nail down the exact location you’re getting and your rights to exclusivity within it.

3. All fees and costs, plus calculation formulas, should be presented to you. You also need to know if you can sell the business on for a profit.

4. A clause specifying that you can leave the business to next of kin in the event of your decease is also important, if a little gruesome to the squeamish.

5. Costs of training of you and your staff should be met from the fees you pay to the franchisor. Hidden costs for training can be large and sometimes disabling.

6. If you think you know enough to set up on your own after a few years, talk to the franchisor. Enlightened businesses will provide opportunities for you to expand with greater input to the business as a whole.

Above all, make sure you are aware of all the subtleties of the business before signing away your cash.

Go to Part 5.

A New Series on Business Startups — Part 3

Now that you have established your venture concept and fleshed out some details, it’s time to look at the initial engine of business growth : finance.

We’ll look at debt and venture finance later, but first a few words about using your own money to get started.

I’ve long been an advocate of self-dependence in business, particularly at the startup and early stages. This is sometimes called “bootstrapping” in the sense of “pulling yourself up by your bootstraps”.

Many successful business folk prefer “self-resourcing” — using own-resources for the seed funding stage. Thereafter, in an ideal situation, income will fund growth and the business will be self-financing. All other sources of spending muscle introduced into the pot should be treated like fissile material — with great caution.

There are many things you can do without spending money you haven’t got. The principal method is cash-flow management — essentially, keeping costs to a minimum and collecting cash payments as deposits or complete fees upfront. This is not as difficult as it seems, but depends on the type of business you are in. If the industry standard is a “cantango” period of three months or so, after which a buyer pays you, be aware that this is not a suitable enterprise for a bootstrapper.

Other ways of collecting cash early from customers include, deposits to cover the cost of materials, stage payments — monthly fees paid over the life of a long project — or just plain cheek : asking customers to pay upfront. Any that refuse could be shown testimonials from satisfied customers or simply sent on their way. You won’t need everyone to sign up, just enough to get the business going, so don’t be disheartened at first.

The power of own-resources can vary, of course, but every time you use the resources of others, whether debt or by share sale, you reduce your power to control the business. Indeed, once the venture capitalists move in you’ve set yourself up for eventual sale or an IPO (Initial Public Offering on the stock market).

Either way, you can no longer look forward to building a business that can be handed down the generations. Unless, of course, you do what Evan Williams did with Odeo and buy back the shares from investors.

Another own-resource you’ll need to use early on is your brain. Many of the tasks in even a simple business are expensive to outsource. Building any business is painstakingly complex, so you’ll need to be up to much of the technical side, like setting up websites, bookkeeping, and designing your own literature and stationery. Add to that, the ability to write your own publicity, and it comes down to an intimidating package of learning curves to master.

That takes time, and you just have to grin and bear it. Later, you’ll have the cash to induct new personnel and outsource much of the work, but not at first.

If it’s just making money you’re after, you may think the VC route is no bad thing. But if, like me, you build a business for the sheer challenge and exhilaration of it, you may not wish to sell chunks of it to often fixed-tracked minds with very different aims from your own.

Bootstrapping, though, is not for someone looking for very quick results. If you really are a business farmer looking for a big buyout, go the venture route by all means. Be aware though, the pitching period is gruelling and long, maybe up to four months even for a relatively small sum. This is because the VCs are already anticipating further rounds of funding. First they put masking tape on your mouth, then they start cutting lengths of twine to restrain your hands, followed by thick ropes to thoroughly encase the rest of your body.

I’m told some people enjoy being trussed up like a turkey, but you may have other ideas.

Bootstrapping a business is for the buccaneers. Or else they’re so cashstrapped, there’s no alternative to penny-pinching their way to the top.

So it all comes down to those old antagonists : Time and Money.

If you’re time-rich but cash-poor, bootstrapping is made for you — make sure you have a decent limit on your credit card, though. If you’re cash-rich but time-poor why on earth would you want to start a business in the first place?

Go to Part 4.

The story that follows is a perfect case-study of how to bootstrap a business from scratch without a bean to your name.

Bootstrapping, as in “lifting yourself up by your bootstraps” is a method of starting a business with virtually no money. If it sounds more hair-raising than business-raising, do not fear, for many a giant has walked this path before you. Microsoft for one … and countless two-man garage startups that went on to dominate their niche.

Our case study is an interesting one because the business was created under conditions of some hardship :

In just a few years, John Fanuzzi built a national business in the U.S. employing dozens of workers. He did it with no capital and used basic cash-flow techniques to accomplish his dream.

John moved from Philadelphia to Montana in 1980 with everything he owned in the back of a pickup, including his two children of five and two years of age. He was a single father and had a lot on his plate.

He’d done a bit of project managing in the past and was a skilled carpenter. His business idea was to build a company in the unlikely field of massage tables.

Fanuzzi was in this situation because he had injured his back and a doctor said it couldn’t be treated. He was cured, however, by a single visit to a massage therapist. Who says alternative treatments don’t work?

The therapist had told him that it was impossible for him to source a portable massage table for the patients who couldn’t come to him. John was so grateful for his cure, he replied without thinking, “No problem, I’ll make you one.”

He began building it in his driveway, having spent $100 on materials and costs. It was so successful, the news got out and soon orders came flooding in. The problem was, John didn’t have enough to fork out $100 for each table while it was being made. He bridged the gap by asking for a deposit of $100 for each table, then charged $185 for the completed item. Classic bootstrapping methodology. Fanuzzi was in an ideal situation. He had no overheads and lots of customers.

After the move to Montana, he persuaded local teenagers to assemble his products for piece-rate wages and even shipped them on Greyhound buses.

Later, in the 1990s, Golden Ratio Woodworks, based in Emigrant, Montana, became an established and going concern. He was doing $200,000 of business a year. His debts were almost zero and customers paid in cash.

Then it took off in more sophisticated areas of the U.S, like California and the East coast, where buyers thought it “kinda folksy” to order from Montana.

The key to his success, as it is with all bootstrappers, is the management of cash-flow.

Careful cash-flow techniques are what a bootstrapper must master to succeed. In other words, the lower the costs, the less you have to earn to get into the comfort zone.