Business Incubators Can Be Key to the Success of Qualifying Small Businesses

If you are a start-up company and you qualify, incubators can be a fantastic resource for you in your Bootstrapping pursuit of success. They provide the “help of others” part of Bootstrapping and the “limited resources” component of our initial definition of Bootstrapping (to pursue success with limited resources and with the help of others).

Here is the NBIA (National Business Incubation Association)’s description of Incubators. “Business incubation is a business support process that accelerates the successful development of start-up and fledgling companies by providing entrepreneurs with an array of targeted resources and services. These services are usually developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts. A business incubator’s main goal is to produce successful firms that will leave the program financially viable and freestanding. These incubator graduates have the potential to create jobs, revitalize neighborhoods, commercialize new technologies, and strengthen local and national economies.”

Critical to the definition of an incubator is the provision of management guidance, technical assistance, and consulting tailored to young growing companies. Incubators usually also provide clients access to appropriate rental space and flexible leases, shared basic business services and equipment, technology support services, and assistance in obtaining the financing necessary for company growth.

Incubators are physical plants that primarily house the offices of start-up companies. They will rent you flexible leases, which can allow you to expand or shrink your space quickly. Rents vary by incubator, but most often are lower than the market rates at the outset. As you grow, you can upgrade to more space. Specifically the Incubator can provide expert advice in areas such as accounting, legal, marketing, and provide more mundane needs such as telephone systems, fax machines, computers, conference rooms, and clean rooms in Tech Incubators. Fees are charged for some of these services and can vary by incubator. Some incubators have no fees but want equity in your company.

Although there are few of them, there is growing interest in purely virtual incubators. They do not have a physical building for clients’ offices. Services are provided on what you might call an outpatient basis and/or online. There are no face-to-face interactions. This virtual model extends incubation services in areas that don’t have a critical mass of entrepreneurs within a reasonable distance of the incubator.

A hybrid incubation program is gaining considerable traction where traditional physical Incubators are extending their services to off site companies. This fits well for home-based businesses and companies that already have their own buildings.

Incubators come in many flavors. Some are only for technology companies. Some are for a specialty technology. Some are mixed use while others are service or manufacturing oriented.

Here are some Incubator facts from NBIA.

  • There are 1115 incubators in the United States.
  • 27% of incubators have investment funds.
  • 61% have links to angel investors.
  • The average stay in an incubator is 33 months.
  • About 6% of North American Incubators are for-profit programs.

NBIA estimates that in 2005, North American incubators assisted more than 27,000 start-up companies that employed more than 100,000 workers and generated annual revenues of more than $17 billion.

Most incubator tenants accept start-ups, as well as existing companies

Besides the above described advantages afforded to incubator tenants, some other positives are:

  • Networking with other entrepreneurs.
  • Getting business from other tenants.
  • Getting assistance from specialists in the community to supplement on-site mentors.
  • Many Incubators are adding insurance for their tenants.

Be forewarned: it is not easy to get accepted into an incubator. You need to meet the criteria of the one to which you are applying. For sure, you need to prepare for your interview with a sound, well thought out business plan. These plans do not have to be lengthy dissertations. Succinct and short are good.

No matter the tediousness of the application process, an incubator acceptance can be a defining moment in your future success.

A study in 1997, funded by the U.S. Economic Development Administration, found that 87% of incubator graduates were still in business three years after leaving the program. This is considerably higher than start-ups outside of incubators.

To find the incubators near you, go to the NBIA website: www.nbia.org.

About half of the Incubators belong to NBIA. If you do not see one in your area, then contact NBIA. They will advise you of the ones in your locale that may not be their members.

NBIA’s address:

20 E. Circle Drive # 37198

Athens, Ohio 45701-3571

Phone 750-593-4331 Fax 740-593-1996

http://www.nbia.org

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Franchising – An Alternative to Starting or Buying a Business

Franchising is a type of business arrangement that lies somewhere between buying a business and starting your own business. It involves an agreement between a Franchisor (Burger King, Subway, Mail Boxes etc,) and you, the individual business person, called the Franchisee.

The Franchisor offers their established corporate brand name, experience, expertise, training, support, and proven methodology to the Franchisee. In return, the Franchisee pays an upfront fee and continuing royalties.

I bring Franchising up in the Bootstrapping context as it almost completely solves the experience/know-how part of the limited resources equation. As to the cost part, many Franchises will be clearly out of most start-ups’ reach. However, the franchising industry is so big and diverse that many have a relatively low initial cost. Recently Entrepreneur magazine had an article on 80+ Franchises that required an initial cost of $25,000 or less. (Entrepreneur.com)

Franchising is a large business sector. There are over 300 types of business categories supporting over 18,000,000 employees and accounting for 3% of US gross domestic product (GDP). There are many and diverse categories of businesses available for Franchising. A partial list of the different franchise businesses is Automotive, Business Services, Children’s Products & Services, Education Financial Services, Food, Health Care, Home Improvement, Hotels & Motels, Maintenance, Personal Care, Pets, Recreation, Service & Tech businesses, and more every year.

Jeffrey Tannenbaum, the former Wall Street Journal’s expert on Franchising, described franchising as a mixed bag. He said, “For many people becoming a franchisee is the shortcut to prosperity, but for others, it is the shortcut to hell.”

Let’s look at the pros and cons of franchising.

ADVANTAGES

  • Allows you to be in your own business with a limited knowledge of the industry and of running a business. You get the advantage of the Franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
  • Some major risks of business failure are reduced.
  • Quick start to get your business operational. Every facet of starting and running the business is provided to you. An entrepreneur, starting on his or her own, would take considerably longer to begin.
  • Expansion:  If you become successful, you can expand quite rapidly through the expertise and cooperation of the Franchisor. They are anxious to discover successful operators who have proven they have what it takes to grow. Sometimes the Franchisor will block your expansion plans, despite your proven success. If this happens, you can draw inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry to retailing was as a Franchisee for the Ben Franklin 5 & 10 Cent stores. He followed their formula and added his creativity and work ethic to become a leading franchisee. He started to expand in neighboring Arkansas towns. Early on, Sam spotted the advent of retail discount stores. He approached the Ben Franklin management to let him pioneer a discount store under their umbrella. They summarily dismissed him, and Wal-Mart was born. Little did the Ben Franklin management realize how profoundly they would affect retail history.
  • Due Diligence:  Franchising is a highly regulated business. By law, every potential Franchisee upon asking must be provided with a Franchise Disclosure Document from the Franchisor. This will give you details of the arrangement with Franchisees, financial strength of Franchisors, their list of existing Franchisees, and, in many cases, lists of past Franchisees. You want to know everything you can about your potential partner.
  • Training is provided to you and to your employees. The learning curve of running a business is accelerated.
  • In most cases Advertising and Marketing of the brand is provided. In some cases, you may be required to contribute to the costs of it.
  • Territory: You are assigned an exclusive Franchise for a specified geographic area. No one else can use your brand in this defined area. This provision should be specifically spelled out in the contract.

 

DISADVANTAGES

  • Lack of Control: You don’t have the independence of an owner of a business. The Franchisor requires you to strictly follow their rules and to use their systems. Changes require approval. You are also limited in where to buy your supplies, how to advertise, which products you can and cannot offer, volume goals, etc. The arrangement can be frustrating for a creative personality.
  • Costs can be high, both the initial fee and ongoing royalties. However, costs are never to be considered in a vacuum. They need to be measured against the profits you create.
  • Royalties are paid on volume and not on profits in most instances. This is usually not a great arrangement as one party can lose money while the other profits. Their interests are not aligned even though it is a partnership.
  • Inequality: It is an unequal partnership. The Franchisor has much more power. If the Franchisor does not deliver on their support promises, you may not have much recourse, as most contracts favor the Franchisor. Also, you may not have the money to pursue your expensive legal options.
  • Selling the company may be difficult. Let’s say you’ve been successful over the years in building the franchise and want to now retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at any price you desire. This is not necessarily so for a Franchisee. Some contracts won’t allow you to sell, or you can only sell back to the Franchisor. This might not allow you to get a fair price. So, you should try to address this issue in your original contract.

 

WHERE TO GET HELP

In determining if Franchising is for you and which ones best fit your pocketbook and passion, you can go to the following sources:

  • Google: Just search for Franchising, and you will get enough sources to look at to keep you busy for a lifetime.
  • Entrepreneur.com is the website of Entrepreneur magazine which puts out a yearly issue of the top 500 Franchises. They offer a list by category and by costs. You can get a brief outline of each Franchisor and their website for more information.
  • FTC: The Federal Trade Commission is the government regulatory body for the Franchising industry. The FTC website is www.ftc.gov.  They are located in Washington, DC, and their phone number is 202-326-2222.
  • The American Franchising Association (AFA) is an industry association located in Washington, DC. They have lots of information about Franchisors and the industry. Their website is www.franchise.org. Phone number is 202-628-8000.
  • www.bestfranchiseopportunities.com. This website lists a multitude of Franchising opportunities with descriptions of each. You can check up to 10 of them, and with one click, your request for more information goes out to each company. I found that I received the same day replies from all that I clicked, with phone calls from them starting the next day.
  • www.Inc.com is the website for Inc. magazine, the publication for entrepreneurs. They have extensive information about Franchising and lists of questions to ask a potential Franchisor.

With a lot of due diligence, Franchising may be the low risk, low cost way to become your own boss.

Mentors – Free Small Business Consulting

One of the best ways to start and grow a small business is to get expert advice. I’m not referring here to paid consultants, a luxury that most early stage and small companies can’t afford. (When you can afford the right ones, by the way, they can be an excellent investment.) Instead, I’m referring here to getting a mentor of one kind or another.

I did 27 in depth interviews with successful entrepreneurs in writing my book, Low Risk, High Reward. They came in all flavors and sizes. When I asked them what factors they would attribute to their success, the almost unanimous answer was that, early in their career, they had a mentor. Bud Pironti of NSI, a direct response company, was particularly passionate on this subject, and he credits a great deal of his early and continued success to the mentors he’s cultivated over the years. (His wife accuses him, jokingly, of “collecting antique men.”) Bud stresses that you have to work at these relationships. If you’re sincerely humble and solicitous, he says, you’ll get back your investment five times over.

What does this mean? It means simple things like saying thank you to your mentor and following up to let that person know what happened when you pursued that lead he gave you or when you tried out that idea she suggested a few weeks ago.

Where do you find mentors? The answer is, “Lots of places including unexpected ones.” The senior managers of your suppliers may be fertile ground, or perhaps people you’ve worked with in the past, or college professors, or publishers of industry magazines. Entrepreneurs who own their own businesses are ideal mentors. They’re easier to approach than many corporate managers, and they’ve already been through much of what lies in store for you. Join your local Chamber of Commerce and be active. A mentor-in-waiting can be there.

“Surround yourself with people,” entrepreneur Earl Peek advises. “People whom you can call upon for different things. Get someone you can bounce things off of—someone you trust. Get someone with scrapes on his knees, someone who’s lost something. The best advice you can get is from someone who’s been through something bad.”

Again, mentors are everywhere. Think about the people you respect. Can you call upon one of them for advice? Could you build on that relationship over time?

When I talk to young people at business schools who want to start their own companies, I often feel their intense frustration at not having experience and having no way to get the experience they need. (You have to have a job to get a job as the old Catch-22 goes.) But I tell them that youth and inexperience are actually great cards for them to play. There are lots of experienced, successful business people who are more than willing to help young entrepreneurs if they are approached respectfully. They want to help, and they know that in many cases, teachers learn as much as students.

Another mentoring possibility is SCORE, which is a non-profit, founded in 1964 and funded in large part by the Small Business Administration. Go to www.score.org to find a chapter near you and how to access their free advice.

A major source of free advice is a Board of Directors—or the equivalent. I use that qualifier because if you’re a small business, you probably don’t want to incur the cost of directors’ insurance. (This is a must if there are other stockholders involved.) To get around this, call it a “Board of Advisers.” But this name change doesn’t mean you should take the creation of such a board lightly. No, this board doesn’t have the right to get rid of you and hire your successor—as does a formal board of directors—but you should consider it a serious obligation nevertheless. Run it in a formal way, and make sure it deals with the same matters as a traditional board of directors. (In most cases, this means policy-level questions rather than operational issues.) Share the numbers. Put together a binder of relevant materials, perhaps including both historical information and forward-looking material, and prepare an agenda. Then send it to the Board well in advance of the meeting. Don’t think you are too small for a board.

You can solicit retired executives or entrepreneurs, suppliers or anyone else whom you respect and who might have skills or knowledge that would complement your own for board members. Offer to pay their expenses and—when you can afford it—a nominal fee. (If you make products, think free samples!) Do everything necessary to make this work for you. It’s a great discipline, and it can help you focus on tomorrow’s problems. Be prepared to take criticism. Remember: that’s why you invited them.

Depending on where you’re located, there may be other similar resources available to you. If there aren’t, try thinking a little “sideways.” Is there an inventors’  or entrepreneurs’ club in your city? Maybe you’ll find some kindred spirits there—or at least, some original thinking. Find other entrepreneurs to talk to! Keep Learning!

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