How to Protect IP When Outsourcing Software Development

intellectual property and contracts

We live in an era when technology permeates every aspect of our lives. Amazon and app-based services have changed our shopping habits, strangers control our hospitality experiences, and human connection takes place online as often, or possibly even more often, than it does in person.

Our commercial marketplace is ripe for innovation, and if you’re building a business right now, you’re probably thinking about how to streamline or disrupt an industry that’s been stagnant—just doing business as usual—for decades.

For a lot of non-technical founders—that is, entrepreneurs with a business idea but without technical expertise—sourcing software development talent is critical. In many areas, however, the high demand for tech talent appears to be larger than the supply of qualified tech and software developers for hire.

As a result, a lot of founders are turning to international outsourcing. While this may be an innovative solution to your immediate need for tech talent needs, the question of how to protect your intellectual property when outsourcing software development has probably crossed your mind.

The last thing you want is to have simply handed your idea and your intellectual property over to a potential competitor. It’s a valid concern. The best thing you can do is create an IP protection strategy and document it in a business plan, so you’ve integrated it into your larger business strategy.

If you’re in the early stages of starting your tech-based or SaaS business, it makes good sense to consider IP (intellectual property) protection a critical part of your business model. The benefits of obtaining protection will be far-reaching if you ever find yourself needing to deal with infringers. It’s a way to reduce your business’s risk.

IP protection is especially important when your company’s ethos is unique and one-of-a-kind, and you want to protect against the possibility of copycats. It also comes in handy with monetization and licensing opportunities.

So how can you protect your intellectual property when you outsource software development work? Start with a contract.

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Protect your IP with a carefully-crafted contract

Ultimately, it’s up to you to make sure you’ve covered your bases in all areas of risk management. One of the best ways to do that right out of the gate is to start with carefully-crafted contracts.

Even if you’re just hiring a project-based, short-term software development freelancer, you will need to have an airtight and carefully-constructed contract—even with one-time freelancers—especially if you decide to hire internationally.

JD Houvener, CEO and founder of Bold Patents, says, “The first big step is to make sure that your contract with the software hire will be enforceable in all countries involved. To do this correctly, you should hire an attorney from the home country of the person you will be working with, or any other countries you find necessary to involve, to make sure it will be binding there if breached.”

Use non-disclosure agreements

Confidentiality is key, as is specificity around what exactly you intend to keep confidential. In outsourcing to hire an international employee, a non-disclosure agreement (NDA) is crucial.

Your NDA must be worded broadly enough to cover anything under the scope of the outsourced talent’s work, as well as specific enough to clarify what cannot be shared, circulated, or kept by the employee. It is acceptable to have one standard-form NDA to utilize for every hire, as long as the document is flexible enough to accommodate modifications as needed.

When it is time to end the arrangement with your contractor, it is important to reinforce what the NDA covers once you part ways. Be sure to conduct an exit interview and reiterate what exactly they’re obligated to keep confidential.

Include these crucial clauses in your employment contracts

When you hire an employee, especially an international independent contractor, the importance of a well-written employment contract cannot be understated. The following are crucial clauses that you must include in any employment contract.

IP assignment clause

This specifies how any intellectual property generated by the nature of the work will be owned by the business entity doing the outsourcing/hiring.

Work for hire clause

This specifies how any work performed by the talent during their time working with the hiring company shall be considered “Work Made for Hire” as defined in the U.S. Copyright laws. This means that any work the independent contractor does shall be owned by and for the express benefit of the hiring company so that an employer is considered the author even if the outsourced employee actually created the work.

The contract should specify that this clause would apply to the development of any software. While the actual software code itself would be considered a trade secret, any software that is published, shared, licensed, or sold is akin to copyright and should be protected that way, much like a book is written. For example, source code will likely be kept internally as a trade secret, but the functionality or UX of software will be protected.

Compensation

For a contract to be binding, there must be consideration. This comes from a quid pro quo or a bargained-for-exchange of values.

This means that there must be adequate compensation for the talent’s work, such as equity or a fee so that the relationship is two-sided. Make it clear how, when, and what types of compensation your working relationship will contain.

Governing law and forum for dispute resolution

These clauses clarify which set of laws the parties to the contract will follow if there is a breach, and what country’s courts will be used to adjudicate the dispute.

Overall, while these guidelines are a great jumping off point to be on the right track with protecting your IP, it is a good idea to work with your attorney as well as an attorney from the country of the person you will be working with.

Keep in mind that software talent is in high demand and the pool of talent is likely aware of this, so your contract should be fair and beneficial to both sides so your talent is willing to agree to your strict terms about IP protection. In addition, your willingness to strike a fair and honest deal can make you a more desirable employer, and even be a leg up in the future if you decide to maintain a longer-term working relationship with your contractor.

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Carly Klein
Carly Klein

Carly Klein is a law student at Loyola Law School in Los Angeles. A graduate from Boston University with a B.A. in political science and philosophy, she has experience in marketing, communications, and sales. She is a Los Angeles native and seeks to pursue a career in IP and business litigation.

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How to Choose a Business Location

how to choose your business location

This article is part of our Business Startup Guidea curated list of our articles that will get you up and running in no time!

If you’ve been thinking about starting a business for a while, chances are you’ve got an idea of what your business location is going to look like.

That’s great, but it’s not enough.

Choosing the right location is about so much more than finding the place that looks closest to the one you’ve envisioned.

It’s about being somewhere your customers will see you, about being in a competitive location, about staying within budget, and about meeting local and state regulations and laws.

In this article, we’re going to review the things you need to keep in mind when choosing a location, offer you advice on where to look for a business location, and provide you with a few resources we think you’ll find useful as you work through the process.

Listen to Peter and Jonathan talk about the friendliest and least friendly cities for businesses on the fourteenth episode of The Bcast, the Bplans official podcast (at 27:42):

Click here to subscribe to The Bcast on iTunes »

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1. Questions to guide your business location search

Before you get into the nitty-gritty details of choosing the location, consider the following things.

General considerations:

  • Where is your target market located?
  • What image or brand do you want to convey?
  • How do you fit in with or stand out from your competitors?
  • How close do you need to be to suppliers?
  • What kind of neighborhood do you want to set up shop in? Is safety very important?
  • Will you easily be able to find employees?
  • Is your area business-friendly?
  • Do you have access to an engaged community that is eager to help?

Financial considerations:

  • Will you have to do extensive renovations before you can move in?
  • How much are property taxes? How much are income and sales taxes? Balance them out.
  • Could you pay less by choosing to start up in another state?
  • Can you afford to pay your employees at least the minimum wage?
  • Do you qualify for any government economic programs or incentives? Might you qualify somewhere else?

Legal considerations:

  • Can you legally conduct your business in this area?
  • If you want to make renovations or changes to the building, are there any legal restrictions?
  • Are you going to run into restrictions because of zoning laws in your area or location?

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2. Understand zoning laws and rental terms

Before you begin the “hunt” for the perfect location, it’s worth knowing a little bit about how zoning laws may affect you.

Zoning laws and setting up shop

In terms of where you can legally operate your business, you should consider local zoning regulations and ordinances. These will affect your ability to make changes to the property you purchase—and indeed, to purchase it in the first place. They will also define how various properties can be used and could place restrictions on things such as the height or size of a structure.

In general, a property is zoned either for commercial or residential use. This stops businesses from building in residentially-zoned areas, and vice-versa.

The best thing to do to find out how property in your area or city is zoned is to contact your local planning agency. You can also look to an attorney for help through the process.

A simple Google search should turn up a zoning map of your area as well, so give it a try.

Here’s an example:

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Zoning map of Eugene, Oregon.

If you’re operating a business out of your own home, many of the same zoning laws will apply to you. Common restrictions may include: limiting or prohibiting signage related to your business outside or on your home, making exterior changes to your home that relate to business activities, and traffic- or noise-related restrictions.

Depending on your city or council, you may also be required to obtain a Home Occupation Permit. Here’s an example permit for the city of Portland, Oregon.

It’s also worth remembering that if you rent your home, it may not just be zoning codes you have to contend with. Often, landlords will have a clause in a lease stating that the property may not be used for commercial purposes. In this case, if you break the law, you risk not just having your business shut down, but getting evicted.

The point? Do your research!

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3. Start your search on foot and online

Knowing what kind of location you want and what you need to consider is all very well, but where do you go to find a physical business location?

A few of your general options include:

  • Your local SBDC
  • The local Chamber of Commerce
  • Craigslist
  • Walking the neighborhood keeping an eye open for rental signs
  • Commercial real estate agencies

A few sites that list commercial properties to rent include:

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4. How others found their business location

Location prestige and SEO

Loveletter Cakeshop is a boutique wedding cake bakery located on 535 Fifth Avenue in Manhattan. Owner and head chef Brandon Baker says that he picked this location for a couple of reasons.

Firstly, that being on Fifth Avenue is a must for any luxury company in New York. “If you live in a city where certain streets carry clout and meaning over others, you must consider your address as an integral part of your overall branding efforts,” he says.

And secondly, that being positioned in the middle of the city gave his company an SEO benefit. “When you search for a local business in Google (e.g. New York Wedding Cakes), Google will show you businesses that are located nearest to your precise location. By positioning ourselves in the geographic middle of a large city, we made sure we were never too far from a searcher in Manhattan,” says Brandon.

For Bridgette Freeman, managing broker at Juwai Realty, location and prestige were also important deciding factors. “Although I am not pretentious, the industry I am in is very pretentious and location matters,” she says.

Of course, a great looking location in a good area isn’t all that counts. Bridgette adds: “I [also] looked at neighboring businesses, proximity to the interstate, and ease in getting to us. In this case, those things fit the bill and it was down to what’s in a name, or rather, a street name. Our business in located on Country Club Drive and down the street from a large country club community.”

Because Juwai Realty specializes in luxury property, it’s important that their business reflects the same. “An interior designer was hired to make the space shine. We close deals once people know our address and visit our office. We all know how important deals are to any business, especially a real estate business.”

Location, location, location!

Be where people expect you to be

For London-based tech startup Crozdeskpicking a business location had a lot more to do with where others like them were going to be located.

“As a tech startup, it was paramount for us to be located in what is called ‘The Silicon Roundabout.’ We identified a trend in London: the setting up of offices, communal spaces, and warehouses under the rails of the overground, inside ‘The Arches.’ Once we were sure about our location, we used Gumtree.”

In the tech world, access to talent is of paramount importance. When you situate yourself in the middle of the exact place things are going to be happening, you make your life that much easier.

Crozdesk is now located in the hub of London’s startup scene, granting them access to exactly these things: talent and a thriving lifestyle with lots of foot traffic (they’re just behind the famous Cargo Night Club).

Put your clients’ needs first

For Polaris Counseling & Consultinghaving a location that would be easy to get to was a primary consideration.

“We did some market research with our clients before we opened up shop. As therapists, we had existing clients at other agencies that chose to follow us to our new location. We made sure to let them know that we were leaving, and asked them where the easiest central location would be to get to,” they said.

Ultimately, they decided on a location in Pawtucket, Rhode Island, located right off the 95 and on every major bus route.

“For our local and some non-local clients this allowed easy access to all. We also saw after a few months the need to open up a virtual office for more of our out-of-state clients who wanted access to our services.”

Consider doing your own market research, and ask your target audience where the ideal location for them would be.

Think about your own values and where you will be happy

Harold Hughes was told that if he wanted his technology startup Bandwagon to be successful, he’d have to move to Silicon Valley.

The problem? He wanted to stay rooted in his community in South Carolina. “My company, Bandwagon, is a ticket market for college sports, so where better than the South to start a company? This is the home of college football, so by staying here in Greenville, SC, I get to stimulate job growth in my community while staying close to our customers—the fans!”

At the end of the day, Harold made the choice that was right for him, and he really couldn’t sound happier!

Other useful resources:

Do you have experience choosing a business location? What did you do right, and what would you change? Tell us on Twitter @Bplans!

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Industry Analysis: Know Your Industry Before You Start Your Business

Know Your Industry Before You Start Your Business

This article is part of our Business Startup Guide—a curated list of our articles that will get you up and running in no time!

I bet you agree: You need to know the industry you want to start a business in, and the kind of business you want to start, before you can start it.

Industry analysis is part of good management. That’s not just for the business planning, but rather for business survival, beginning to end. Most of the people who successfully start their own business have already had relevant business experience before they start, most often as employees.

But in this article, I focus on how to consolidate and formalize that industry knowledge into a formal business plan.

Although all business owners need to know their industry, the documented details and explanations are mainly for when you’re writing a business plan you need to show to outsiders, like bank lenders or investors. You’ll need to do some industry analysis so you’re able to explain the general state of your industry, its growth potential, and how your business model fits into the landscape.

And if your business plan is more of an internal strategic roadmap, you should still be very sure—whether you have to prove it to others or not—that you know your market, even if you don’t do a formal industry analysis. Whether you’re a service business, manufacturer, retailer, or something else, you want to know your industry inside and out.

What to cover in your industry analysis

Whether you write it all out in a formal business plan or not, when you’re doing your industry analysis, you’re looking at the following:

  • Industry participants
  • Distribution patterns
  • Competition and buying patterns

Everything in your industry that happens outside of your business will affect your company. The more you know about your industry, the more advantage and protection you will have.

A complete business plan discusses:

  • General industry economics
  • Participants
  • Distribution patterns
  • Factors in the competition
  • And whatever else describes the nature of your business to outsiders

A note on finding industry information

The internet has had an enormous impact on the state of business information. Finding information isn’t really the problem anymore, after the information explosion and the huge growth in the internet beginning in the 1990s and continuing in the 21st century.

Even 10 or 15 years ago, dealing with information was more a problem of sorting through it all than of finding raw data. That generality is truer every day. There are websites for business analysis, financial statistics, demographics, trade associations, and just about everything you’ll need for a complete business plan.

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Industry participants

You should know who else sells in your market. You can’t easily describe a type of business without describing the nature of the participants. There is a huge difference, for example, between an industry like broadband television services, in which there are only a few huge companies in any one country, and one like dry cleaning, in which there are tens of thousands of smaller participants.

This can make a big difference to a business and a business plan. The restaurant industry, for example, is what we call “pulverized,” meaning that it, like the dry cleaning industry, is made up of many small participants. The fast-food business, on the other hand, is composed of a few national brands participating in thousands of branded outlets, many of them franchised.

Economists talk of consolidation in an industry as a time when many small participants tend to disappear and a few large players emerge. In accounting, for example, there are a few large international firms whose names are well-known, and tens of thousands of smaller firms. The automobile business is composed of a few national brands participating in thousands of branded dealerships, and in computer manufacturing, for example, there are a few large international firms whose names are well-known, and thousands of smaller firms.

Distribution patterns

Products and services can follow many paths between suppliers and users.

Explain how distribution works in your industry:

  • Is this an industry in which retailers are supported by regional distributors, as is the case for computer products, magazines, or auto parts?
  • Does your industry depend on direct sales to large industrial customers?
  • Do manufacturers support their own direct sales forces, or do they work with product representatives?

Some products are almost always sold through retail stores to consumers, and sometimes these are distributed by distribution companies that buy from manufacturers. In other cases, the products are sold directly from manufacturers to stores. Some products are sold directly from the manufacturer to the final consumer through mail campaigns, national advertising, or other promotional means.

In many product categories, there are several alternatives, and distribution choices are strategic.

Amazon made direct delivery a huge competitive advantage, especially in its earlier years. Doordash and competitors chose to be intermediaries between restaurants and customers, and several businesses offer prepackaged meal ingredients delivered with instructions for finishing the preparations in the consumers’ kitchens. Now major grocery chains offer grocery delivery. Red Box made a strategy of DVDs in kiosks. An entire industry of food delivery options gives consumers choices like restaurant meals or fresh meals ingredients being delivered. Many products are distributed through direct business-to-business (B2B) sales and in long-term contracts such as the ones between car manufacturers and their suppliers of parts, materials, and components. In some industries, companies use representatives, agents, or commissioned salespeople.

Technology can change the patterns of distribution in an industry or product category. The internet, for example, changed options for software distribution, books, music, and other products. Cable communication first, and more recently streaming, changed the options for distributing video products and video games. Some kinds of specialty items sell best with late-night infomercials on television, but others end up working on the web instead of television.

Distribution patterns may not be as critical to most service companies, because distribution is normally about physical distribution of specific physical products such as a restaurant, graphic artist, professional services practice, or architect.

For a few services, the distribution may still be relevant. A phone service, cable provider, or an internet provider might describe distribution related to physical infrastructure. Some publishers may prefer to treat their business as a service, rather than a manufacturing company, and in that case distribution may also be relevant.

Competition and buying patterns

It is essential to understand the nature of competition in your market. This is still in the general area of describing the industry or type of business.

Explain the general nature of competition in this business, and how the customers seem to choose one provider over another:

  • What are the keys to success?
  • What buying factors make the most difference—is it price? Product features? Service? Support? Training? Software? Delivery dates?
  • Are brand names important?

In the computer business, for example, competition might depend on reputation and trends in one part of the market, and on channels of distribution and advertising in another. In many business-to-business industries, the nature of competition depends on direct selling, because channels are impractical.

Price is vital in products competing with each other on retail shelves, but delivery and reliability might be much more important for materials used by manufacturers in volume, for which a shortage can affect an entire production line.

In the restaurant business, for example, competition might depend on reputation and trends in one part of the market, and on location and parking in another.

In many professional service practices, the nature of competition depends on word of mouth, because advertising is not completely accepted. Is there price competition between accountants, doctors, and lawyers? How powerful are the insurance decisions in medicine, like in or out of network? How do people choose travel agencies or florists for weddings? Why does someone hire one landscape architect over another? Why choose Starbucks, a national brand, over the local coffee house? All of this is the nature of competition.

The key to your specific industry analysis is a collection of decisions and educated guesses you’ll probably have to make for yourself. There are few pat answers. Maybe it’s easy parking, a great location, great reviews on Amazon or Yelp, or recommendations on social media. You can’t necessarily look this up. It’s the kind of educated guessing that makes some businesses more successful than others.

Main competitors

Do a very complete analysis of your main competitors. Make a list, determining who your main competitors are. What are the strengths and weaknesses of each?

Consider your competitors’:

  • Products
  • Pricing
  • Reputation
  • Management
  • Financial position
  • Channels of distribution
  • Brand awareness
  • Business development
  • Technology, or other factors that you feel are important
  • In what segments of the market do they operate? What seems to be their strategy? How much do they impact your products, and what threats and opportunities do they represent?

Finding competitive information

Competitive research starts with a good web search. Look up competitors’ websites and social media, then search for mentions, reviews, announcements, and even vacancies and job search information. An amazing array of competitive information is posted in plain sight, where anybody can find it.

From, there, for a good review of additional sources of information, I suggest Practical Market Research Resources for Entrepreneurs, also here on Bplans.

Competitive matrix

A lot of businesses organize competitive analysis into a competitive matrix. The standard competitive matrix shows how different competitors stack up according to significant factors.

For more on that, you’ll want to refer to How to Use the Competitive Matrix to Explain Your Position in the Market, also here on Bplans. Or you can take the basic idea from this illustration:

features

Some people also use a SWOT analysis to think about competition in terms of opportunities and threats, the “OT” of SWOT. Opportunities and threats are generally taken as externals, which would include competition, so it’s valuable to run a SWOT analysis on your business to help figure this out.

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The Complete Guide to Choosing Your Business Structure

choosing a business structure

This article is part of our Business Startup Guide—a curated list of our articles that will get you up and running in no time!

Starting a business is exciting, scary and—let’s be honest—it can be confusing.

You don’t need an MBA or formal business training to start and grow a very successful business, but there are some important choices you’ll need to make right from the beginning, starting with choosing your business structure or entity.

What are the most common business structures or entities?

The most common business structures are sole proprietorship, partnership, limited liability company (LLC), and a few different types of corporations—the standard corporation (often called a C corporation or “C corp”), the small business corporation (often called an S corporation or “S corp”), and the benefit corporation (often called a B corporation or “B corp”).

Why does your choice of business structure matter?

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your personal savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is very important.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

SOLE PROPRIETORSHIP (1)

Sole proprietorship

The simplest business structure is the sole proprietorship. Your business is a sole proprietorship if you don’t create a separate legal entity for it. This is true whether you operate it in your own name, or under a trade name.

The main advantage of the sole proprietorship is that it’s fairly simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and your business assets. If you’re sued or your business folds, your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

If you are planning on being self-employed and running your small business by yourself, a sole proprietorship may be for you.

For example, a personal trainer who is planning on offering one-on-one coaching for clients would be a great candidate for a sole proprietorship. So too would an artist who creates beautiful one-of-a-kind jewelry to sell on Etsy.

How do you form a sole proprietorship?

A sole proprietorship is also the easiest business to form; no official registration action is required on your part.

So, you’re already selling your unique jewelry on Etsy? Congratulations—you’re a sole proprietor.

However, there will still likely be licensing, permits, and regulatory hoops to jump through, depending on your industry. You’ll want to check with your local secretary of state’s office website.

Additionally, if you’re planning on doing business under a name that isn’t your own, you’ll need to file for a DBA, or “doing business as.”

I cover how to get a DBA in this article here, as well as other details on how to register your business name, so check that out before you get started.

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What should you be aware of?

A sole proprietorship is fairly straightforward to form, but here are some considerations:

  • It’s relatively inexpensive: The biggest cost you’re looking at is probably the expense associated with setting up your DBA or “doing business as.” Depending on your state, you can typically obtain this through the county government, and there is usually a small registration fee. Some states also require a public notice in the form of a newspaper ad. Often, the whole process will cost less than $100.
  • Your taxes will be fairly easy: A sole proprietorship is what’s known as a “pass-through” tax entity, meaning that all the profits and losses pass directly through the business owner and are reported on their taxes. If you’re the only person working for your sole proprietorship, a Schedule C form, a form 1040, and a Schedule SE form are the only additions you’ll need to make.
  • You can still have employees: Just because you’re a “sole” proprietor doesn’t mean you can’t have employees. If you have employees, your taxes will be a bit more complicated, but not by much; see the IRS sole proprietorship page for more information.
  • You may have more difficulty raising money: As you cannot sell any stock in your company, you will not be able to increase your company’s worth that way.
  • You might have trouble getting a small business loan: Banks are often reluctant to give business loans to sole proprietorships, as they are seen as less credible.
  • You are assuming full liability: If your business fails and you become overburdened with debt, your personal assets (like your car, house, and personal savings) are at risk. You are also personally liable for any legal issues that may come up. That means that if someone sues you, they could go after your personal assets.

Further sole proprietorship reading:

PARTNERSHIP (1)

Partnership

So, let’s go back to that example of the personal trainer, who could start a sole proprietorship business and offer client coaching.

But, maybe she wants to pair up with a nutritionist, and the two of them plan on building a fitness empire together. Both entrepreneurs share ownership and have shared input and participation in the company.

Now you no longer have a sole proprietorship—you have a partnership.

Still a fairly simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll both contribute to the business in some way, and share in both profits and losses.

Partnerships are harder to describe because they change so much. They are governed by state laws, but a Uniform Partnership Act has become the law in most states. That act, however, mostly sets the specific partnership agreement as the real legal core of the partnership, so the legal details can vary widely.

Usually, the income or loss from partnerships passes through to the partners, without any partnership tax. The agreements can define different levels of risk, which is why you’ll read about some partnerships that have general partners and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners, and liquidation arrangements if that becomes necessary.

If you think a partnership might work for your business, make sure you do it right. Find an attorney with experience in partnerships, and ask them to give you references from present and past clients. This is a complicated area and a mistake in your partnership agreement will cause a lot of problems.

Who is a partnership for?

Think of a partnership as a slightly expanded version of a sole proprietorship. It’s similarly easy to form, and best for two or more people who want to formally agree to be business partners, and start a business together.

So, that personal trainer and nutritionist pairing? A perfect partnership, as they both bring something to the table and are equal participants in the business. So too would be a pair of entrepreneurs launching an online consulting business, two master brewers starting a local brewery, and so on—you get the idea. If you’re thinking of starting a business partnership with your spouse, read more about that here.

Types of partnerships

Before we get into how to form a partnership, let’s take a look at the different partnership options. There aren’t many, but the type of partnership you choose will depend upon how long you plan to be partners, and how active a role all involved parties will take in your new business.

General partnership: A general partnership assumes that all parties are equally involved; that is to say, all profits, liabilities, and duties within the company are distributed evenly. If there is an intentionally unequal split in the partnership (for instance, if one partner opts to accept a greater portion of work in exchange for a greater profit share), this must be noted on the official partnership agreement.

Limited partnership: A limited partnership (also known as a partnership with limited liability) is often used for partners who serve an investor role only, and have limited input into the actual running of the company. It’s a significantly more complex structure, and less frequently used.

Joint venture: If you plan on partnering up for one specific project, a joint venture might for youJoint ventures function the same as a general partnership, but for a confined span of time, such as the completion of a one-time project.

How do you form a partnership?

Similar to a sole proprietorship, simply doing business together effectively forms your partnership. However, if you plan on doing business under a name other than that of yourself and your partner, you’ll need to file a DBA.

You may also need to apply for certain licenses and permits, depending on your business and your state.

What should you be aware of?

Here are a few things to keep in mind before launching your partnership.

  • A partnership agreement is strongly recommended: While not essential, outlining a partnership agreement (preferably under the supervision of each partner’s attorney) is a good way to make sure you begin your partnership right. This can help you clearly lay out who is responsible for what, and what will happen if you decide to stop working together.
  • Partnerships are also “pass-through” tax entities: Like a sole proprietorship, partnerships “pass through” all profits and losses to the partners. See the IRS partnership page for more info on filing your partnership taxes.
  • Don’t forget about added expenses: Since it’s a good idea to have a lawyer look over your partnership agreement, don’t forget to factor in this added expense.
  • Make sure you have a partner you can trust: It should go without saying, but as partners are solely responsible for any bad business dealings or debt that they may incur, make sure that you choose a partner that you trust with your business, your credit score, and your reputation. Again, don’t skip the partnership agreement—it will help you avoid problems down the road.

Further partnership reading:

LLC

Limited Liability Corporation (LLC)

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship, but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation, and offers a combination of some limitation on legal liability and some favorable tax treatment for profits and transfer of assets.

This is a newer form of legal entity, and be aware that LLCs vary a lot state to state, so the advisability and benefits of forming one will also vary. It’s a good idea to talk to a local attorney if you’re interested in setting up an LLC.

Who is a limited liability corporation for?

If the idea of taking on complete personal liability for your business makes you hesitant to start one, you might want to consider a limited liability corporation.

If you have substantial personal assets that you wish to protect and not involve in your business, an LLC might be right for you. On the same note, if you’re in an industry where lawsuits are common, having an LLC as your business structure can potentially protect your personal assets.

How do you form a limited liability corporation?

The process of forming an LLC is slightly more complex than a sole proprietorship or a partnership; you’ll have to choose a compliant business name, file your articles of organization, and create an operating agreement, in addition to any industry-specific licenses or permits and a DBA, should you choose to use one.

Check out our articles on forming an LLC at the end of this section for more information.

What should you be aware of?

While there are clear advantages to forming an LLC, it’s a more complex business structure than a sole proprietorship or a partnership, and you should determine first whether or not an LLC is right for you.

  • With added protection comes added difficulty: Compared to a sole proprietorship or a partnership, there’s no doubt about it: an LLC is more difficult to form. While this shouldn’t deter you, it’s a good thing to keep in mind.
  • Tax incentives are a big plus: An LLC is still a “pass-through” tax entity. But, with an LLC, you’ll be taxed on your share of the profits only, which are filed on your personal taxes. See the IRS limited liability company page for more info.
  • You can form an LLC of one: In nearly all states (sorry, Massachusetts) you don’t need multiple people (referred to as “members”) to form an LLC. Depending on your situation, an LLC may be a good alternative to a sole proprietorship.

Further LLC reading:

CORPORATION (1)

Corporation (S corp, C corp, B corp)

When most people think of a business structure, a corporation is likely what jumps to mind first.

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Keep reading to learn more about the different corporation types, and which kind of business is best suited to each type.

Who is a corporation for?

A corporation is the most complex business structure; so, if you’re starting a very small business and are working either by yourself or with just a few others (like a partner or a few employees), then a corporation might not be for you.

This business structure is recommended for companies that are larger and more established, have many employees, intend to sell stock in their company, will be scaling quickly, have many outside investors, or some combination of these traits.

How do you form a corporation?

To form a corporation, you’ll have to have registered your business name. You’ll also need to file your articles of incorporation, as well as get a Federal Tax Identification number (also known as an employer identification number or EIN).

For more detailed information on how to form a corporation, see our “further reading” at the end of this section.

The different types of corporations: C corp, S corp, and B corp

While the most common type of corporation is technically known as a “C corporation,” or “C corp,” there are a few other types of corporate structures you should be aware of.

Here’s a breakdown of the different types:

C corporation: What we typically think of when we refer to corporations. With a C corp, all shareholders combine funds and are then given stock in the newly formed business. A C corp is a completely separate tax entity in the eyes of the IRS, meaning that your business can take tax deductions. It also means that earnings can be taxed twice, both as they stand in relation to your business and on your personal taxes, if you take income in the form of dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your own lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation: An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return.

The S corporation is used for family companies and smaller ownership groups. The biggest difference between a C corp and an S corp is that the S corporation’s profits or losses go straight through to the S corporation’s owners, without being taxed separately first. In practical terms, this means that the owners can take their profits home without first paying the corporation’s separate tax on profits, so those profits are taxed once for the S owner, and twice for the C owner.

That being said, the C corporation doesn’t send its profits home to its owners as much as the S corporation does, because it usually has different goals and objectives. It often wants to grow and go public, or it already is public. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state, and then request S corp status. The IRS instructions for Form 2553 (which is what you’ll need to file to become an S corp) can help you determine if you qualify. You can also request S corp status for your LLC, however, it’s advisable to speak with an attorney before beginning this process.

B corporation: Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might want to consider becoming a B corporation, which stands for “benefit corporation.” However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s merely a C corp that has been vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in terms of ownership—with a nonprofit, there are no owners or shareholders; however, with B corp, which is still a type of corporation, there are still shareholders who actually own the company. So, a B corp has a social mission, but is still a for-profit company (as opposed to a nonprofit), and still has an end goal of returning profits to the shareholders.

What should you be aware of?

While there are advantages to forming a corporation, it’s certainly not for everyone, as corporations are the most difficult types of businesses to form. Here are some things to keep in mind:

  • You’ll have the most limited liability possible: A corporation is an entity unto itself; the concerns that a sole proprietor or partnership face if the business goes bad aren’t usually as present for a corporation. With a corporation, there’s more protection for personal assets.
  • Corporations have more potential to raise capital: Corporations can sell stock, which increases their ability to get investors.
  • Separate taxation from personal taxes: Corporate taxes are filed separately from personal taxes, meaning that your business will be eligible for corporate tax breaks. See the IRS corporation page for more info.
  • Corporations are more difficult to set up: The biggest potential downside to starting a corporation is the fact that it’s the most complicated business structure, and therefore takes the most work to establish. With a sole proprietorship, you can essentially set up a business simply by producing work or making a sale. With a corporation, there is official paperwork that you’ll need to file.
  • Double taxation can be a factor: Depending on the type of corporation you establish, this may not be an issue; for example, S corps are not subject to double taxation, as the shareholders are the ones who pay state income tax, not the corporation itself. However, if you establish a traditional C corporation, you will be responsible for both income taxes on earnings from the corporation, as well as paying taxes on dividends received from the corporation. You will probably want to work with a business accountant on this one—which may be an added expense and hassle for a very small business.

Further corporation reading:

Nonprofit (1)

Nonprofit

On the opposite end of the business structure spectrum, you’ll find nonprofits.

They differ greatly from the previous business structures, for one obvious reason: they’re a “not for profit” business structure, meaning they do not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

A nonprofit business is great for those whose businesses mission is charitable, educational, scientific, religious, literary—essentially, businesses that qualify for tax-exempt status.

This can include organizations that provide shelters for the homeless, conservation groups, performing arts centers and museums, various education centers, and more.

How do you form a nonprofit?

Forming a nonprofit is similar to forming a corporation; you’ll need to file your articles of incorporation, as well as file for tax-exempt status with both your state and federal government.

What’s the difference between a nonprofit and a cooperative?

Similar to a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders, but rather toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs in the sense that it is owned by the members, referred to as “user-owners.”

If you plan on organizing your business so that it is democratically owned, it might be a good idea to look into the cooperative business structure.

What should you be aware of?

Starting a nonprofit can be deeply rewarding, but as they’re similar in structure to a corporation, they’re not a walk in the park to form.

Further nonprofit reading:

Not sure? Ask your attorney

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I do strongly recommend working with an attorney to go through the details of your company’s legal establishment and licensing.

By including information on common types of business structures here on Bplans, I don’t mean to imply you should do it yourself.

The trade-offs involved in incorporation versus partnership versus other forms of business are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. The cost of simple legal advice in this regard is almost always worth it. Starting a company should not involve a major legal bill except in special cases. Don’t skimp on legal costs.”

If you’re looking for more information on additional permits and licenses your new business will need, check out this guide to help you get started.

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Briana Morgaine
Briana Morgaine

Briana is the content marketing specialist for Bplans. She enjoys discussing marketing, social media, and the pros and cons of the Oxford comma. Bri is a resident of Portland, Oregon, and can be found working remotely from a variety of local coffee shops. She can also be found, infrequently, on Twitter.



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Easy Simple Plan for Entrepreneurs to Create a Marketing Plan for a Small Business

This first section defines your company and its products or services then shows how the benefits you provide set you apart from your competition. It’s called a “situation analysis.”

Target audiences have become extremely specialized and segmented. No matter your industry, from restaurants to professional services to retail clothing stores, positioning your product or service competitively requires an understanding of your niche market. Not only do you need to be able to describe what you market, but you must also have a clear understanding of what your competitors are offering and be able to show how your product or service provides a better value.

Make your situation analysis a succinct overview of your company’s strengths, weaknesses, opportunities and threats. Strengths and weaknesses refer to characteristics that exist within your business, while opportunities and threats refer to outside factors. To determine your company’s strengths, consider the ways that its products are superior to others, or if your service is more comprehensive, for example. What do you offer that gives your business a competitive advantage? Weaknesses, on the other hand, can be anything from operating in a highly-saturated market to lack of experienced staff members.

Next, describe any external opportunities you can capitalize on, such as an expanding market for your product. Don’t forget to include any external threats to your company’s ability to gain market share so that succeeding sections of your plan can detail the ways you’ll overcome those threats.

Positioning your product involves two steps. First, you need to analyze your product’s features and decide how they distinguish your product from its competitors. Second, decide what type of buyer is most likely to purchase your product. What are you selling? Convenience? Quality? Discount pricing? You can’t offer it all. Knowing what your customers want helps you decide what to offer, and that brings us to the next section of your plan.

 

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How to Define Your Target Market

how to define your target market

One of the most powerful tools of small business marketing strategy is defining and addressing your target market—the audience that you think is most likely to buy your product or service. The key to identifying this customer base is market segmentation, or figuring out the demographics of your specific market.

Common sense makes it seem obvious from afar. You can’t (and shouldn’t) try to sell your product to everyone in the world. You’d waste a lot of money and resources very quickly.

But how do you figure out who your target audience is? Who or what should it be? How would you know? Here are five tips to help you figure it out.

1. Don’t try to please everybody

Strategy is focus. Say you’re planning to start a restaurant; which of these three options is easier?

  1. Pleasing customers 40 to 75 years old, wealthy, much more concerned with healthy eating than cheap eating, appreciating seafood and poultry, liking a quiet atmosphere.
  2. Pleasing customers 15 to 30 years old, with limited budgets, who like a loud place with low prices and fast food.
  3. Pleasing everybody.

I really hope you chose one of the first two, and not the third. This is the essence of target marketing—divide and conquer. Different groups of people have different pain points and different desires. Most of the time, efforts to please everyone end up pleasing no one.

2. Learn market segmentation

It’s about segments, like pie segments or orange segments—except that in this case, it’s segments of a total market, or TAM.

In my “divide and conquer” example above in the first point, the specific age ranges, wealth, and atmosphere preferences describe particular market segments.

In the illustration here below, U.S. census data divides the population into demographic segments. Demographics are the old standards like age, gender, and so on.

demographic-segmentation-gov

U.S. census data divides into demographic segments.

You’ve seen market segmentations referred to frequently in business articles, interviews, and discussions. People will appeal to certain age groups, genders, income levels, and so forth. Divide and conquer is a simple concept; market segmentation is how you make it practical for your business.

Let’s say you think your target market is age 40 to 75 years old, wealthy, and interested in healthy eating. How do you validate your assumption that that demographic will be your ideal target customers? That’s where market research comes it. Talking to customers and potential customers is one of the best ways to do this kind of research, but there are many approaches.

3. Use segmentation creatively

Don’t limit your target market strategy for market segmentation by age, gender, and economic level.

For example, when I was consulting for Apple Computer, we divided the market into user groups:

  • Home
  • School
  • Small business
  • Large business
  • Government

I also liked a shopping center segmentation that divided its market into so-called psychographic market segmentation:

  • Kids and cul-de-sacs were affluent upscale suburban families, “a noisy medley of bikes, dogs, carpools, rock music, and sports.”
  • Winner’s circle were wealthy suburban executives, “well-educated, mobile executives and professionals with teen-aged families. Big producers, prolific spenders, and global travelers.”
  • Gen X and babies were upper-middle income, young, white-collar suburbanites.
  • Country squires were wealthy elite ex-urbanites, “where the wealthy have escaped urban stress to live in rustic luxury. Affluence, big bucks in the boondocks.”

I knew a business that segmented its business customers into decision-process types as well:

  • Decision by committee
  • Decision by functional manager
  • Decision by owner

And I call this final example, for lack of a formal definition, strategic intersection.

In the diagram here, the social media services that Have Presence offers are targeted to small business owners who:

  1. Want outside help with their social media; and
  2. Value business social media; and
  3. Have a budget to pay for the service.

have-presence-intersection
Any of these creative segmentations can help you set a target market, and can also be a jumping off point for putting together a user or buyer persona—another useful tool for understanding your target audience and developing better marketing messaging.

The Lean Business Plan Template

4. Consider your own unique identity too

Your business probably reflects who you are and what you like to do, as well as what you do best. Marketing to people you like as the target market is an advantage. If you like the feel of small business better than the big corporate giants, then you’re probably better off setting the small business as a target market.

As Palo Alto Software, the host of Bplans, grew up and grew our business plan software, its founder (that would be me) was more comfortable with the do-it-yourself entrepreneur and business owner than the high-end consultants, so we ended up targeting the do-it-yourselfers in business.

So, somebody who loves fine food, tastefully prepared and served, is probably more comfortable with an upscale target market than with price-sensitive young families.

5. Define your target market early and revise as needed

Do it well as soon as you can, and keep reviewing and refreshing as you go along. You shouldn’t think of your target market as set in stone. As you learn more about your customers, how you define your target market will probably change.

The right target market increases your chances of success because you can communicate better with a well-defined group, and that holds expenses down and makes results better. If you’re learning about defining your target market because you’re writing a business plan, or if you’re looking for ways to improve your marketing messaging and strategies, check out these resources on target marketing and doing market research.

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How to Think About (and Reduce) Risk When You’re Starting Your Own Business

starting a business risks

I understand that many of you are in startup mode or still contemplating whether to embark on the risky business of becoming an entrepreneur. My goal for the next few years is to encourage waverers to start their own business, and to mentor some of those who are on their way to become millionaires.

This article will include examples of the risks I took and how I overcame them as presented in my book, “Raise the Bar Change the Game.” I hope you can get some benefit from some real-world examples. Let’s start with four questions to help you think about risk well before you launch.

What’s your tolerance for risk?

It is this idea of risk that is generally the first barrier for budding entrepreneurs. Not only for entrepreneurs, but investors too. A bank or fund manager will always ask you what is your appetite for risk; is it low, medium, or high? If your risk tolerance is low, don’t start a business—because most days will contain some risk or other.

What’s your business idea?

Before you can start a company, you need a business idea. and I always tell people I mentor not to get stuck on trying to find a new and disruptive idea. It’s great if you can, of course, but in my opinion, most of the great ideas have already gone. Unless you have invented something revolutionary, stick with a business model that involves something you are passionate about and do it better than anyone else.

Being passionate about an idea is crucial as it is this that keeps you going through all the inevitable knocks and disappointments. Learn to love your customers and not your product or service. You need to go the extra mile for them, and nothing will be too much trouble.

The Lean Business Plan Template

How will you fund your business right in the beginning?

In the early days, you may have insufficient money and be in a comfortable job with a regular income. This is a good time to check on your partner’s appetite for risk too, as you will need their support. Especially since you may need to have a lower standard of living for some time—they need to be on board.

But don’t use lack of money as an excuse not to start the business—you can always get money either from friends, family, or credit cards. Making sure your customers pay you before you have to pay your suppliers is another way. The important thing is to surround yourself with positive people rather than naysayers who will be quick to throw cold water on your idea and encourage you not to start.

What’s your plan B?

You must have a risk mindset. I always found it helpful to ask, “What’s the worst that can happen if I fail?” The answer was that I’d be back where I started. If I went bust, I could always pick myself up and start over again. I developed a plan B in case things went wrong and I could change my strategy if I needed to.

Finally, I asked myself how I’d feel if I didn’t go forward. Would I regret it for the rest of my life? One of my many mantras is that I have no regrets at all in life, nor will I ever. Never look backward, look forward. Have the courage of your convictions and generate your own self-confidence by ticking off goals and achievements. Recognize that failure is good—provided you learn from it—and always remain positive and mix with positive people.

So what you can you do to reduce the risk of starting your own business?

Write a Lean Business Plan

Running a business is much less risky if you have a business plan. You can use your plan as a framework for making a risk assessment against every business goal. From there, because you’ve thought through and are aware of all the risks you might encounter, you can strategically mitigate them and adopt a plan B quickly if necessary.

Your business plan can be a Lean Plan, meaning that it doesn’t need to be lengthy. If you’ve heard of a Business Model Canvas, a Lean Plan is a much more useful alternative. You can use it as a jumping off point if you end up needing to write a formal business plan for a bank loan or investor pitch.

For more on what should be included in your Lean Plan, check out this article. If you’re looking for some help getting started, use the Bplans free downloadable Lean Plan Template.

Beyond business planning basics, like telling what your company does and explaining your business model and how you’ll get customers, take some time to set goals and milestones. If you’re just getting started, think about your top five goals for your first year, and a BHAG (big, hairy, audacious goal)—a dream well into the future where you visualize what your company would ideally look like that seems impossible today.

Be sure to articulate how you plan to achieve those goals and make them SMART: specific, measurable, achievable, results-orientated, with a timeline

Hire the best people

You can’t do everything yourself—if you’re honest, you just don’t have the skills. But until you can afford to hire help, you will have to get along on your own. If you have a friend or partner you trust with complementary skills—such as being a details person if you are a visionary, or vice versa—this is an ideal way to split the shareholding 50-50 percent from the beginning.

When I was starting out, I was fortunate that my wife brought the soft skills to my business, and that she was also willing to be an important sounding board for me. I am a visionary—not interested in day to day management—so now I have someone in each company who runs it on a day to day basis so I can do the strategic thinking. It’s important to understand your weaknesses.

Hire people who are more intelligent and clever than you. They will bring in new ideas and skills. Do not be so proud that you can’t listen to new ideas. Make sure you take interviewing seriously and consider how they would fit in with the culture of the company. Then look at their past performance for clues of future performance.

Focus on profits and cash above all

Nothing lasts forever. Your business’s product or service has a life cycle, so from the beginning, you should anticipate the risk of competitive disruption or replacement.

As your looking at your financials, remember that profits are important, but cash is king. If you don’t have a background in finance, learn how to read basic management reports: your balance sheet, your profit and loss statement, and your cash flow statement. You can have plenty of business and be generating large profits, but if your customers are not paying their bills on time, you can run out of cash and so go bust.

Even the healthiest of businesses ultimately can run out of cash without seeing it coming. I once went to my bank and asked for $50,000 to buy one of my competitors. I knew it would only take a year to show a return on investment—a slam dunk, if you will.

My bank turned me down and put me into incubation where they controlled all my cash movements until I had repaid all my loans from them. My brother lent me the money, and I did get my money back in a year, but the bank had seen that I was spending too much on my other business. The more successful it got, the less cash I had available to service my debts. They saw an additional loan as a bigger risk than they wanted to take. But I knew my cash flow in and out, and I knew a solid investment opportunity when I saw it.

So, learn to read your cash flow position daily, weekly, or monthly. Make it a habit.

Summary

You will be faced with many challenges during the life cycle of your company, so keep your eye on your vision—the big picture—and keep in touch with what the competition is doing.

My biggest risk was to enter the Eastern Bloc prior to the fall of the Berlin Wall in 1989 and create business leaders in five countries, giving them a controlling share in each business. I lost a great deal of money but kept at it, and it took seven years to break even.

Along the way I faced bankruptcy, staff leaving and going to work for the competition, getting kidnapped and held up by the Russian mafia, deaths of significant staff members including my wife, and even adopting a child in the midst of all this.

But my appetite for risk is high, and my self-belief, coupled with my great team, has enabled us to remain market leaders throughout. You can do the same!

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Brian Marcel
Brian Marcel

Brian Marcel, author of Raise the Bar, Change the Game, is the founder and chairman of International Bar Code System (IBCS) Group, known for bringing the game-changing barcode technology to a part of the world in desperate need for change. Since its start in 1988, he has built the IBCS Group into the top enterprise mobility integrator in Central and Eastern Europe. With more than 35 years of hands-on, high-level senior and corporate entrepreneurial experience, Marcel—known as “Mr. Mentorvator”—has helped seven entrepreneurs become millionaires. His goal is to do the same for ten more people in the next five years.

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Before You Buy a Hotel Business, Answer These 4 Questions

buying a hotel business

Buying a hotel is no small feat. It’s a competitive venture that offers little room for mediocrity, but it can pay out to anyone willing to do the work. In fact, this slice of the hospitality industry is worth over $200 billion in the U.S.

This is not a life decision to make half-heartedly, so the first question you should be asking yourself before buying a hotel is this: “Am I ready to run my own business?”  

If you can confidently answer this question, then you’re well on your way, and frankly, further along than most.

There are a number of reasons why it might make sense to buy a business, rather than building one from the ground up yourself, but either way, you’ll want to make sure you’re prepared for the investment of money, time, and resources needed to run a business that thrives.

Before undertaking what will likely be one of the most significant professional pursuits of your life, you might have a few questions. So, here are the answers to some of the most pressing ones.

Is the property up to code?

One of the most important initiatives prior to buying a hotel will be compliance. Nothing quashes an enterprising spirit quite like opening a business and then having to shut down due to negligent preparation. This is why the first question you should have answered is whether or not the property is compliant and up to code.

Review local and federal rules and regulations to ensure your facility is in check. Do not take it on good faith that the previous owner kept things copacetic—don’t let another person’s complacency become your liability.

Figure out if any licenses or permits need renewing and re-up inspections that might have fallen by the wayside. This could be for the property itself, but also any equipment or heavy machinery such as industrial-strength kitchen appliances, cleaning equipment, company-owned vehicles, and more.

The key here is to make sure you understand the risks and liabilities that come with purchasing an existing property and business.

The Lean Business Plan Template

What are the pros and cons of buying into a hotel franchise?

One of the most significant decisions you will need to make is whether or not to open a franchise hotel. Prospective buyers should weigh the pros and cons of franchise options, because it’s not always a clear-cut choice.

For example, consider these franchise pros and cons:

Pros:

  • Established marketing materials such as ad campaigns, website, and reputation
  • Recognizable branding
  • Established customer base

Cons:

  • Lack of autonomy
  • Few opportunities for personalization
  • Franchising fees

That final point may be the most prohibitive factor for aspiring entrepreneurs. Franchise fees can quickly offset the initial benefits of owning a franchise, but before you discount this option, consider what these fees entitle you to. Although franchise fees are nonrefundable, the skills you will learn in marketing, management, upkeep, and so on within the context of a franchise are invaluable and can be transferred to new business opportunities down the line.

If you choose to buy a franchise hotel from an existing owner, be sure to inquire about the existing agreement. The agreement may transfer to you without a hitch, or you might need to draft a new contract. Either way, acquiring ownership can come with hidden fees that must be anticipated.

Is the property in the right location?

Travelers and tourists come to destinations for the location, not for the hotel per se. An exceptional stay will certainly resonate with clientele, but no one is packing their bags, leaving the comfort of their home, and hopping on a plane just to stay in a hotel. Your hotel is an extension of the location. It’s the crudités to the vacationer’s entree—not the main course.  This is why great hotels always compliment a great location.

This is when you consider whether or not you want to buy in a highly-traveled area. While areas such as Las Vegas, San Francisco, and New York bring in the most tourists a year, know that high-mileage areas are already saturated with hotels and come with a more expensive up-front cost.

Finding a location is a sliding scale—the more alluring the location, the more you will have to pay for the property. The hospitality industry is a high-risk/high-reward venture, so now is the time to ask where you want to put down roots and how much you are willing to gamble. Whether you’re buying a recognizable franchise or quaint mom-and-pop, the location will certainly be a major success factor.

Demographics: Who are your potential customers?

Finally and most importantly, you need to consider your potential customers. Although it might seem reductive, getting to know your customer base is truly the best thing you can do to promote ongoing hotel success.

Consumer demographics will inform who is staying at your property, why, and for how long. This information is important for determining your target clientele and driving business. When backed by historically-proven consumer data, you can better cater to your customers’ experiences, promote satisfaction, and encourage ongoing loyalty.

There was a time when anticipating your target demo was more or less guesswork. You would have to gather anecdotal information and just hope your business adjustments resonated with your clientele. Luckily, today things are more sophisticated thanks to the Internet of Things (IoT) and artificial intelligence.

Some hotel chains are leveraging IBM analytics technology to collect transactional and customer data into a central repository. This data can then be analyzed to make decisions about room arrangements, amenities, and customer experience services. The hotel industry is just now experimenting with big data, so expect this technology to continue to influence hospitality innovation.

The good news? When you buy an existing hotel, there’s a good chance that the seller has a solid repository of data on their existing customer base. Take advantage of this—but be sure to also do your own market research, especially if you’re planning to rebrand or target a new demographic when you buy the business.

Resources for preparing to buy a hotel business

This is far from a comprehensive list of questions to ask before buying a hotel, but this is a good place to start. Above all else, be diligent and be discerning. When it comes to buying a hotel, doing your homework is the answer to a successful purchase.

Write a business plan

Writing a Lean Business Plan and modeling different financial scenarios is a great way to make sure you’ve thought through every aspect of your hotel venture.

You can download a free Lean Plan template to help you get started. You’ll want to use your Lean Plan as a framework for writing a full business plan if you’re planning to seek financing through a bank or investor. Lenders typically require a traditional business plan. You can see sample hotel business plans in the Bplans gallery if you’re not sure what to include.

Learn more about the hospitality industry

If you don’t have much experience in the hospitality industry, start with learning as much as you can about the industry and running a successful business.

Check out these resources:

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Bruce Hakutizwi
Bruce Hakutizwi

Bruce is the U.S. and International Business Manager for Dynamis Ltd., the parent company of us.BusinessesforSale.com, one of the largest online global marketplaces for buying and selling small-to-medium-size businesses. He is focused on helping small businesses succeed and regularly writes about entrepreneurship and small business management.



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What Is a Franchise? | Bplans

What is a franchise? McDonald's is an example of a franchise business.

This article is part of our Business Startup Guide, a curated list of our articles that will get you up and running in no time!

What is a franchise? I posed this question to a high school entrepreneur club. Their answers were interesting:

  • “A franchise is a business that you see in different cities. They are recognizable because their signs and colors are the same.”
  • “It’s is a type of business that is the same everywhere you go.”
  • “McDonald’s is a franchise. So are KFC and Burger King.”

Those answers are all correct. But, there’s more to franchising than just uniformity.

What is a franchise?

A franchise is a type of business that is owned and operated by an individual (franchisee) but that is branded and overseen by a much larger—usually national or multinational—company (the franchisor). Many of the stores and restaurants that you see every day are franchises: Subway, 7-11, The UPS Store, Ace Hardware, Pizza Hut, Hilton Hotels, Molly Maid, and thousands more.

When you buy the rights to open this type of business, you’re buying the rights to use a proven business model and system, with proven prices, products, and marketing techniques. You’re also buying the rights to a brand: You get full access to the company’s trademarked materials including logos, slogans, and signage—anything that has to do with the brand.

How to become a franchisee

To become a franchisee, you need to pay an up-front franchise fee. Paying the up-front fee (and signing the franchise agreement) gives you the right to use:

  • The business or brand name
  •  The system of doing business
  • The operations manual
  • Marketing materials
  • Software
  • All other proprietary material

In addition, you may be given an exclusive geographical territory to cover. Information about territory is always spelled out in your franchise agreement, as is the time period for which you own your franchise business. Typically, this sort of contract lasts between 5 to 10 years in length and you usually have the right to renew them.

Why do some companies franchise their businesses?

Franchising can be a great way for companies to increase their distribution. Issac Singer created an early form of franchising with the way he sold his Singer Sewing machines, and Henry Ford did it with automobiles.

Mostly though, franchising a business offers one huge advantage to companies: they don’t have to use all of their own money to grow their business. Instead, they can use Other People’s Money (the franchisee’s).

Offering franchises allows the founder to reduce some of their own financial risk as they look to expand a business to multiple new locations. The franchisor still has to invest his or her money to create the franchise system—they take quite a risk putting their business concepts together—but they don’t have to invest as much of their money in each new location.

Franchising is a great product and service distribution method. But, all franchises are not created equal. You must choose your business opportunity wisely.

Determining what franchises you should investigate

It can be quite challenging to choose a franchise. One reason is that there are over 3,000 different concepts available. How do you choose just one? Here are three tips:

1. Figure out what you’re good at

It’s really about creating the right match for your skill sets. Here’s something you can do right now that will give you a leg up on your search: Make a list of your top skills. Write down what you’re really good at doing.

For example, are you a people-person, a relationship-creator? If so, write it down.

Or, maybe you’re not an outgoing person; maybe you’re better behind the scenes. Are you an operations person? Write it down.

Whatever you’re good at doing, whatever you’re known for, write it down. One way to do this is to perform a SWOT analysis on yourself. A SWOT analysis is just a simple matrix that makes it easy to examine your (or your businesses’) strengths, weaknesses, opportunities, and threats. Read more about doing a SWOT analysis here.

Click here to download our free SWOT Analysis template

2. Match your top skills to franchise opportunities

This is easier than it sounds. All you have to do is keep the list you just created in front of you while you’re searching for some franchises to start looking into. But, where should you look?

Start your search online. Franchise portals are the best place to start. To find a few of them, use your favorite search engine, and type in “franchise opportunities” or “franchises for sale.” That should keep you busy for a while. If you don’t want to weed through all of the portals yourself, you can check out my list of The Top 10 Franchise Opportunity Websites. It could save you some time.

Next, pick out a few specific opportunities that you‘re attracted to. Look at each of them, and see if you’d be able to use your skills—the ones you wrote down and have in front of you—in these franchises.

I’ll give you an example:

Let’s say that you’re interested in a commercial cleaning franchise. You read the information provided by the franchisor, and one thing you like about commercial cleaning is that it’s B2B (business-to-business). As a franchisee, you wouldn’t be dealing with consumers—you’d be dealing with other business owners and/or their managers.

You check the skills list you created, and they’re definitely in-line with a commercial cleaning franchise. Your strongest skills include sales and sales management, and from the information provided thus far, it looks like your role as a franchisee would be very sales-oriented. A commercial-cleaning opportunity is something you should check out. All you have to do is fill out the “Request more information” form that can be found on just about every franchise portal, and wait for the franchise representative to contact you.

3. Watch the trends

I want you to become a trend-watcher. I want you to keep your eye on consumer and business trends. I want you to stay ahead of the game.

I do not want you to get stuck with a franchise that was “hot” when you started looking into it, and “not hot” after you purchased it.

It’s human nature to be attracted to what’s hot and what’s popular. I’m not suggesting that you avoid opportunities that are popular now. What I’m suggesting is that you choose a franchise that doesn’t have the potential to fizzle out fast. Try to avoid fads. Stay current with what’s going on in the world of business. Watch the trends.

You need to find out what consumers (if that’s your target market) are spending their money on. You also need to find out what they’re not willing to pay for—this is all market research. If you’re leaning toward buying a franchise that’s in B2B, like commercial cleaning or corporate training and coaching, you need to find out what business leaders are discussing. What are their needs? Do they have the budget for what you’re thinking of offering?

If you want to stay current with the trends that will affect you as a franchisee, start searching for business websites and blogs that frequently write about the trends that are taking place right now.

Here are a few that are worth subscribing to:

If you’re interested in buying a franchise as a way to start or run your own business, learn all you can before you buy.

Here’s to your success!

Editor’s note: This article was originally published in 2013. It was revised in 2019.

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Market Research Resources | Bplans

market research resources

This article is part of our Business Startup Guidea curated list of our articles that will get you up and running in no time!

Most every small business or startup will benefit from even the most elementary market research. If it does not provide new information, it will at least confirm what you know.

When you’re starting your business, you need to have a deep understanding of your customers. In fact, knowing your customers inside and out is probably the most important key to success.

Your customers are the people who desperately need your product or service. You need to know who they are, why they want your solution, what they like and dislike, and even what they had for breakfast. Knowing all of this will help you find more customers and build a better product that your customers will clamor to buy and tell their friends and colleagues about.

This is where market research comes in.

What is market research?

Market research is the process of gaining information about your target market—a fancy way of saying “getting to know your customers.” Ideally, you find specific information about your target market and the key factors that influence their buying decisions.

As you get started, you’ll need to determine what type of market research is going to work best for you. Make that decision based on the value of the insights you think you’ll gain, versus the time and effort you need to invest to find the information.

Market research is often confused with an elaborate process conducted by fancy consultants that takes a tremendous amount of time and money.

That’s certainly not true. You can, and should, do most of your own market research, and it doesn’t even have to be that hard.

After I explain the different types of market research, I’ll share all the resources you need to do your own.

types of market reserach

Types of market research

1. Primary market research

Primary market research is research that you conduct yourself, rather than information that you find already published. Primary market research is information that you gather by talking directly with your potential customers.

Here are a few ways to gather primary market research:

Hold focus groups

A focus group requires you to gather a small group of people together for a discussion with an assigned leader.

Survey your customers

Distribute these both to existing customers and potential customers. Sending out a survey using tools like SurveyMonkey is a great way to collect this type of information from current or potential customers of your business. You can even run tiny surveys right on your website with services like Qualaroo. Make sure to ask specific questions—but try not to lead people toward the answer you want to hear. Be as objective as you can.

Assess your competition

Look at your competition’s solutions, technologies, and what niche they occupy. Completing a competitive matrix can help you understand how you stack up against them.

One-on-one interviews

Find potential customers and talk with them about their problems and your solutions to those problems. Ideally, conduct these in-depth interviews in your customer’s workplace, or wherever they will be when they might consider shopping for your solution.

secondary market research

2. Secondary market research

Market research may also come from secondary sources. This is information others have already acquired and published about customers in your industry.

Access to this secondary market research data may be yours for the asking, and cost you only an email, letter, or phone call. Much of it is entirely free and easily available online.

Here are a few ways to gather secondary market research:

  • Trade associations: Trade associations are organizations that serve specific industries. There’s almost certainly one for your industry. Once you find it, contact them and ask them for information about their industry and markets in the industry.
  • Government information: The U.S. government has a treasure trove of information to wade through. The data is all free but may take a little bit of time to find.
  • Third-party research sites: For reasonable fees, there are market research companies that will sell you pre-written industry reports that provide information on industries and their target markets.

Click here to download our free SWOT Analysis template

Where to find information

Here are our favorite resources for doing market research.

US government market research resources

U.S. government resources:

Here are sites that provide excellent data within the United States:

  • U.S. CensusThis is a great starting point for data about the U.S. population. You can drill into the data and find out nearly anything you want to know about different locations and demographics.
  • Census Business Builder: Beyond population data, you can look at how much people in your industry spend.
  • Industry Statistics Portal: If you want to look up U.S. industry data, start here.
  • American FactFinder: Use this tool to find income levels and other key facts about communities throughout the U.S.
  • Bureau of Labor StatisticsA fantastic site for information on specific industries, like hiring and expense trends as well as industry sizes. If your target market is other businesses, this is a good place to look for data.
  • Consumer Expenditure Survey: If you want to know what people spend their money on, this is your go-to source.
  • CensusViewer: While it’s not a U.S. government resource, this free tool leverages US Census data and other data sources to give you access to data in an easy-to-use format that you can explore both visually on a map or in data reports for cities, counties, and entire states.
  • Economic Indicators: Offers free economic, demographic, and financial information.

industry summary market research

Industry summaries:

  • SBDCNet Business SnapshotsYou’ll find a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. You should also check out their list of market research resources, sorted by industry.
  • Hoovers Industry Research: While not a free resource, the industry summary data provided here can be helpful if you need in-depth industry reports.
  • BizStats: This site will let you search for useful industry-specific financials so you can see what companies like yours spend on marketing, healthcare, and other key areas.

business location market research resources

Business location market research tools:

  • ZoomProspector: This tool can help you find the ideal location for your business, or find new locations similar to where you already are for expansion and growth.
  • MyBestSegments: This tool from Nielsen is a great resource for finding out what demographic and psychographic groups live in a given zip code or where the highest concentration of a given segment lives. While the most detailed data is not free, you can get a lot of great insights from the free version.
  • SizeUp: This is a useful mapping tool to help determine where your target customers are. It’s very useful to help you determine the ideal location for your business.

survey market research

Survey tools:

  • SurveyMonkey: Should you need to poll a group for business purposes, SurveyMonkey is free and reliable. Simply build the survey and send it out to your audience.
  • Google Consumer SurveysYou don’t need to have a contact list to send out a survey on this site. With Google Surveys, you can target users from around the web and get instant feedback on your business idea.
  • TypeForm: Whether you need a simple form or a survey, TypeForm does it beautifully. It’s especially good on mobile.
  • Qualaroo: If you run a website and want to get quick feedback from the people that are already showing up there, Qualaroo is a great tool for this purpose.

trade market research

Trade and industry associations:

Many industries are blessed with an active trade association that serves as a vital source of industry-specific information. Such associations regularly publish directories for their members, and the better ones publish statistical information that tracks industry sales, profits, ratios, economic trends, and other valuable data.

market trends

Market trends:

  • Google TrendsUse Google Trends to discover what people are searching on and how search volume on important topics is changing over time.
  • Statista: If you’re looking for statistics and trends, Statista is a great place to get started. You’ll find data on virtually everything here.

Doing market research is a powerful way to reduce risk for your small business or startup. The more you know about your customers and your industry, the less likely you are to waste money on marketing and advertising campaigns that don’t reach the right people.

You probably already have a gut feeling about who your customers are and what their needs and pain points are, but taking some time to validate (or invalidate) your assumptions can make a big difference to your company’s bottom line and long-term viability.

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