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Great Article

I was reading the Advisor Garage blog this morning and found this article that I think is interesting. It's all about choosing the right business partners. I am extremely fortunate in that my business partner and his wife are also my closest friends in the whole world. We've been working together now for more than two decades. We've worked with different people over the years, partnering with them on various projects--sometimes it has gone well and others have been a complete disaster. Anyhoo...here's the article:

Choosing the Right Partners…

OK, so you’re all fired up! You’ve just been hit in the head by a sledgehammer of an idea for a new business and you just can’t stop thinking and talking about it. Friends, family, the dog…everyone has to be subjected to your new, world-shaking idea - you just can’t hold it in. Your passion just overflows…

The idea stays - buzzing around in your head when your not dragged from it by more mundane things like earning a living, studying or whatever else you did before the idea came along and lets face it - everything is more mundane than your idea! Anything that takes time away from thinking about it becomes an aggravation, an annoyance. You wake up in the morning and there it is - poking up at you (Yes - still talking about that idea!).

Anyway - you get the picture. The eureka moment that’s the beginning of a new company is like falling in love and its needs to be - because tough times are ahead and you’ll need that passion and commitment to see it through.

What happens next? If you’re lucky, you’ll start thinking about how to make your idea real. If this is your first start-up you’ll probably be nervous…wow, this is a big step - what if it fails? How will I pay the bills? I have some skills but not all that this is going to need…and then it hits you - you’ll need other people. Hey, if I can convince someone else to do it with me then I’ll be sharing the risk and they’ll be two of us so it’s more likely to succeed right?

The short answer is ‘maybe’.

Choosing the right partner is critical. They need to:

• Bring something to the table
• Be completely comfortable with the risk of being in a start-up
• Want to see this idea become real just a badly as you do but perhaps most important…

They have to work well with you no matter what the situation or pressure. Being in a start-up can be a more intense relationship than marriage! Yes…honestly!If you can’t answer a strong positive to all of the above then this may not be the right partner and don’t think it doesn’t matter - it does.Being in a start-up, especially during the early days is daily challenges and pressure - its true that its probably the most enjoyable ‘career’ you can have (at least I think so!) but if you choose the wrong partner then it soon becomes a nightmare for everyone. Don’t make the mistake of choosing to pursue a start-up with someone because somehow it’s more reassuring to have someone in there trying to make it happen with you. That’s just not a good enough reason.

As founder’s you will have to deal with all kinds of pressures, not least of which is:

• Who is the ‘face’ of the company?
• Who makes the key decisions after all the discussions and debates have come to an end?

…basically, where does the buck stop?

Two people trying to be joint CEO is often a recipe for not making decisions and for getting stuck in the quagmire of all talk and no action. Entrepreneurialism IS action because the clock is ticking - every day is more money spent until revenue, is another day closer to when your competitors notice you or the market you’re pursuing…there’s only so much gas in the tank so speed is everything.

That’s not to say two CEOs can’t work but what usually happens is they divide the territory - each owning a set of responsibilities and deliverables - clear areas where one person calls the shots after the debates have ended.One last thing - even founders should have shares in the company which they have to EARN over time based on their initial and ongoing contribution. Coming up with an idea or being the second or third person to walk through the door is not a good enough reason to instantly own a big chunk of the company. If the first few in instantly own a big chunk then they can effectively disappear or not contribute and still get just as much equity as the other founders. Not fair! Everyone has to earn it every day - that way everyone contributes and keeps contributing all the way through until the business becomes more than just an idea…until it lives and breaths…and with enough passion and perseverance - it will, just like http://www.AdvisorGarage.com

“Copyright © 2007, Andrew D. Ive, Advisor Garage.

A great resource

The Small Biz Survival blog is an excellent small business resource. Their focus is on small businesses in small and rural towns. It's a well-organized site with tons of useful information, small business tools, podcasts and resources. Be sure to check it out, you'll be glad you did.

Small business failure rates

There have been lots of studies of small business failure rates over the last 30 years or so but from what I've seen, the results have been either contradictory or very vague. I remember reading somewhere once that more than 90-95% of small businesses fail within the first five years, but they didn't have any real data to back up the claim. The latest statistics from the Small Business Administration (SBA) though, show that "two-thirds of new employer establishments survive at lease two years, and 44 percent survive at least four years."

Brian Head, Economist with the SBA Office of Advocacy, noted that the latest statistics are a much more accurate assessment of new business success rates, and that "as a general rule of thumb, new employer businesses have a 50/50 chance of surviving for five years or more."

Now those numbers are a lot more encouraging than some of the stuff I've seen in the past. Although from the number of new business startups every year, the unsubstantiated claims of 90-95% failure rate didn't seem to deter very many folks from going into business for themselves. Even if those numbers were true, I doubt that it would stop many people because for a lot of us, it's in our nature to think, "Oh, that will never happen to me. I'm smarter than that."

Dun & Bradstreet and mass merchants

Here is some more detailed information about the sort of things that mass merchandisers such as Wal-Mart look at when they review a firm's D&B report before determining whether or not to do business with them. Like I mentioned before, big chains need to know that a potential supplier has the financial stability to do business on a mass-scale. That's why they review what's called a Supplier Evaluation Report. This is a rundown of what this report contains:

• Risk Summary: A rating of a supplier's financial strength based on financial, public record, and operational information. The risk rating is on a scale of 1-9 with a 1 being the lowest and 9 being the highest.
• Risk Commentary: Details the important factors used to determine the rating. Includes sales, net worth, payments, UCC filings, financials, and operations.
• Financial Profile: Shows key solvency/profitability. Ratios of supplier versus industry. This section also includes the financial appraisal ranking scale of 1-4.
• Operation: The description of the business and SIC codes, number of accounts and terms, number of employees, description of facilities and location, number of branches, and identification of subsidiaries.
• History: Displays the management's business background and any corporate relations. It also includes the date and state of incorporation (if applicable), and the date the business started.
• Federal Government: The description of any activity with the U.S. federal government as well as if the company is a possible candidate for socio-economic program consideration. Also details classifications showing minority ownership.
• Payment Trends:  Compares the monthly payments of the supplier with other companies in its industry for up to a two-year period.
• Payment Summary:  Learn the company's high credit, number of trade experiences, and how bills are paid in relationship to terms.

At least for Wal-Mart, the risk summary is going to be the key factor that determines whether or not a company makes the cut. A company with a risk factor of 7, 8 or 9 has no chance of doing business with Wal-Mart. A risk factor of 6 puts a company on the margin--it could go either way but unless there's a real compelling reason for them to do otherwise, they'll probably decide that the risk is too great. Obviously, the lower the risk factor the better but anything between 1 and 4 will generally be approved without a problem, while a 5 might require additional information from the potential supplier to show that the company is indeed viable.

Some more retail terms defined

Here are some definitions of retail terms that you might run across:

• Advertising Allowance: An advertising allowance is money that the manufacturer provides to a distributor or retailer for advertising a specific product or brand.
• EDI (Electronic Data Interchage): A system that enables retailers to integrate their purchasing and accounts payable/receivable activities with their stores and/or vendors.
• End-cap: The shelves at the end of an aisle--they are perpendicular to the shelves in the aisles (see photo below).
  
• Power Panel: Another way in which to display goods (see photo below).
  
• SKU (Stock Keeping Unit): A number assigned to a product by a retail store to identify the price, product options and manufacturer of the merchandise.
• Turnover: Used to determine how quickly merchandise is selling during a given period.

This is an example of an end-cap

This is a power panel

A few tips for the new year

Well, it's a new year so what better time to get started on the right foot. Here is my first tip of the year: Whenever you can, learn from others' mistakes. Why go out and make them yourself when you can let someone else do it for you? When you see someone run out into the middle of a busy freeway and get flattened like a pancake, learn from their mistake and instead of doing the same thing (because you'll probably get squashed too), find the overpass and cross safely. That was a tough lesson for me to drill into my thick skull. I always figured that I was smarter (or craftier or whatever) than the rest of the world and that regardless of the situation or the lesson, it didn't apply to me because I could take care of it myself. So having said that, here are a couple of simple ways to avoid some potentially monumental (and costly) mistakes:

1. Always have a lawyer review contracts before signing them. A sentence--or even a few words--can make all the difference in the world. Once, we were negotiating a very complex contract (28 pages) with a large company. The contract kept going back and forth and we didn't have the lawyer review every single version because we were under the gun to get this thing finalized. Well, in the final version that we did sign, three little overlooked words cost us nearly $50,000. Because we were in a hurry, we didn't notice the addition (but our attorney did after the fact). Now, our attorney reviews everything before we sign.
2. If you are not a financial expert, don't pretend to be one. Instead, hire someone who is. Entrepreneurs in general tend to think of themselves as self-made persons who are capable of handling everything themselves. Do yourself a favor and make a list of areas where you're strong and areas where you're not.