March 2011 Archives

March 23, 2011

Be Prepared Before Undertaking a New Business Venture

Continued from Starting Your Own Business - Be Willing to Commit.

Before starting up a new business, it's important to have a plan.  This may seem obvious, but all too often young entrepreneurs incorrectly believe that the idea itself is good enough.  They are hungry for success and anxious to get started.  In many cases, an important facet of the new business is in place providing a false sense of security.  For instance, it may be that a head chef discovers an ideal restaurant space is for lease.  He or she knows the broker and learns that excellent commercial lease terms are being offered.  Rather than diligently examining the business' prospects, the excited chef dives in taking out loans with unfavorable terms, entering into oral partnerships, engaging the services of the first vendors that come along and/or exposing his or her personal assets without the benefit of adequate insurance or the formation of a corporation or limited liability company.  

768095_study.jpgIf the head chef's plans for a successful restaurant are sound, they won't depend solely on the restaurant's location.  It is best to first diligently analyze all aspects of the business and develop a business plan before starting any business venture. Consult with trusted advisors such as your business attorney, accountant, banker and insurance agent to ensure that you are prepared for all of the professional requirements of business ownership.   In the above case, this is true even if it means losing out on the favorable lease terms being offered.  The development of a sound business plan includes: identifying the target market for the goods and services being offered; developing a marketing strategy that includes an examination of the prospects for capturing and maintaining a profitable share of that market; strategies for growth; securing funding and capitalization; consideration of employment and management structures; personal income needs; analysis of potential risks; and consideration of alternatives such as purchasing an existing business or franchise.  This is not an exhaustive list and an in-depth analysis of the development of a business plan is beyond the scope of this article.  See Writing an Effective Business Plan.  

When starting a new business, consider the competition.  Successful competitors have well developed plans and proven systems in place.  They remain acutely aware that entrepreneurs are poised to challenge their market share at every turn.  They are ready for any contingency because they understand that even "the best laid plans of mice and men often go astray".  Diligent preparation and thoughtful consideration are necessary if one plans to seize market share from these dedicated capitalists.  Consider contacting a San Diego Business Attorney for assistance with your initial planning.

Part Three of this series "How to Fund Your New San Diego Business" examines funding options. 
March 17, 2011

Starting Your Own Business - Be Willing to Commit

Starting your own San Diego business is as scary as it is rewarding.  It requires an entrepreneurial spirit, common sense, commitment, organization and resources.  This series looks generally at the process in order to focus the young San Diego entrepreneur on the task at hand beginning with the opening move.  The series is not for those with unlimited resources.  For most of these folks, business opportunities abound whether expanding on already successful business models or selecting among numerous business ventures proposed by others, those with unlimited resources can afford to risk their capital.  They simply choose among the most lucrative options, if they choose at all. For most of the rest of us, we pour everything into a new business and each decision is life affecting.  

860593_small_guy_at_peer.jpgIn this writer's opinion, the single most important factor in the success of a business venture is the owner's steadfast commitment.  While the phrase is perhaps an overused cliché, "No Fear" should be the guiding light for the young entrepreneur.  A timid part-time attempt at developing and nurturing a new business idea rarely pays off.  This is not to suggest that the young business owner should ignore reality and dive head first into an empty pool.  What it does mean is that after carefully surveying the territory, taking inventory of his or her resources, doing the leg work necessary to evaluate the business venture's potential (due diligence), determining the income necessary to maintain a living wage (including that necessary to support his or her family) and evaluating worse case scenarios and exit strategies, the entrepreneur can make an informed decision, and upon making that decision should commit to it.   

The prevailing wisdom is that one should have two years worth of living expenses set aside before starting a new business.  This is of course hard to argue against.  Nonetheless, putting aside that much money is not always practical for every entrepreneur and the ultimate decision depends on one's individual risk profile.  Someone with a family of five will be far more concerned with risk than the unmarried graduate just out of college.  Whatever one's risk profile, there are other ways to marshal resources including business loans, investment capital, selling and collateralizing existing assets, revolving credit and the assistance of friends and family.  While the topic of marshaling resources will be dealt with later in this series, it is illustrative here as one of the advance considerations one makes before committing to the business venture.

Continue reading "Starting Your Own Business - Be Willing to Commit" »

March 10, 2011

Venue Provisions in Franchise Agreements

There are countless franchise opportunities available to San Diego entrepreneurs.  The majority of these opportunities are offered by out of state franchise companies.  Purchasing and operating a franchise can be a lucrative option for those looking for alternatives to starting a new business from scratch.  Franchises offer economies of scale, proven systems and existing markets.  It is a known quantity that is typically well marketed, often nationally.  These advantages are obvious.  However, franchising is not a guaranty of success.  Much depends on the geographic location of the franchise, the proximity to other franchises, the proximity of similar businesses, the market for the franchises goods or services in the area, the economy and the skill and commitment of the franchisee.  When lucrative, franchises rarely result in conflict and the terms of the franchise agreement seem less important.  When the franchise is not profitable for whatever reason, the terms of the franchise agreement become critical.    

27833_stores_windows.jpgVirtually all franchise agreements include a venue provision wherein any litigation and/or arbitration will be heard in the home state of the franchisor.  For San Diegans, this means somewhere other than California.  This is of course problematic especially for the small businesses with limited resources.  Litigating or arbitrating a case in a distant jurisdiction is more costly and time consuming than it would otherwise be here in San Diego.  In many cases, franchisees are simply priced out of the process and have little recourse but to try and negotiate some sort of reasonable solution with the franchisor in lieu of facing a default judgment and/or bankruptcy.  

Unfortunately for franchisees, it is almost always impossible to negotiate away venue provisions in franchise agreements.   This is particularly true with national chains.  Venue provisions provide the national chains legal consistency, and it's the rare circumstance that they would be willing to give up this important benefit.  Nonetheless, it's important for franchisees to discuss the matter with their business attorney and/or try to negotiate the provision's removal.  Understanding the consequences of the provision better prepares the franchisee should a dispute later arise with the franchisor.  It also provides the franchisee the opportunity to explore other options.  Selecting a franchise located in one's home state is a better option all other factors being equal.  If you are considering the purchase of a franchise, consult a San Diego franchise attorney for assistance.
March 4, 2011

The Importance of Negotiating Power - Part Two

Continued from Negotiating Power - The Often Neglected Contract Position.

In most cases, the party with the greater bargaining power presents a draft contract to the other and asks them to sign it as is.  The draft will set forth the major contract terms already discussed by the parties such as price, delivery method, term of a lease, etc.  The remaining terms tend to favor the party who prepared the contract.  If you are an entrepreneur looking to capitalize on a new shopping center for your small café, you will have a harder time convincing the landlord to agree to changes in a commercial lease than a national chain that will anchor the center.  

Corporate formalities 3.jpgUnderstanding your bargaining position prepares you for the negotiation process whether or not you are working with an attorney.  If you really want to open your café in the new shopping center, you will want to tread carefully during negotiations.  First, understand your rights and obligations as set forth in the proposed contract.  If you are negotiating without the benefit of legal counsel, consider asking a San Diego contract attorney to at least explain these rights and obligations.  Next, consider those terms you would like to change and prioritize.  What are the most important changes?  Remember, less bargaining power is not zero bargaining power.  By focusing your negotiations on only the most important issues, you preserve leverage.  Direct your discussions to the success of the transaction.  If we change Term X, it will improve both our volumes.  If you keep Term Y in the lease, I will lose significant business.  Stressing the success of the transaction shows that you are focused and professional, and the other side has little choice but to accept it as a valid concern.  Avoid the temptation to play "hard ball" with a party holding all the cards.  Finally, where possible increase you bargaining power by giving yourself alternatives.  No deal should be so important that you are willing to agree to terms destructive to the end goal.  If you are convinced there are no reasonable alternatives, make sure the other side doesn't know the extent of your desire.  

There are of course a myriad of negotiation schemes (too many to address in this short article).  Whatever the scheme, understand and accept your bargaining position and ensure that your attorney does as well.
March 3, 2011

Negotiating Power - The Often Neglected Contract Position

Because San Diego businesses routinely enter in to contracts with vendors, clients, customers and other partners, it is important that they are familiar with basic contract principles and the need for negotiating favorable contract terms.  This is true whether or not they retain the services of a San Diego contract attorney.  The art of negotiating contracts requires a careful balancing of nuance and tactic.  Contract lawyers must weigh the needs of their clients against the desire for and/or business necessity of the contractual relationship.  The business contract binds the parties to its terms.  It defines the rights and obligations of the parties moving forward and can have far reaching effect, especially where disputes arise.  

864602_escalator_2.jpgIn the vast majority of contract negotiations, one side is considerably more concerned about ensuring the success of the agreement.  In such circumstances, the "more concerned" party must decide how much they are willing to give up.  This defines the "more concerned" party's negotiating power.  The more the party is willing to walk away from the agreement, the more power that party has.  Negotiating power is probably the single most important factor in contract negotiation.  It is simultaneously one of the most often overlooked factors.  

The issue of course is not black and white.  The mere fact that one side has more negotiating power than the other does not necessarily mean that no negotiation is possible - although clearly this is the case sometimes.  The key is to recognize your negotiation power and leverage it to its fullest with skill, tact, bluff and perhaps a tad bit of humbleness.  Humbleness may seem counter-intuitive to some, especially attorneys, but it can and should make up at least a small part of your negotiation tactics.  No matter how hard seasoned attorneys and negotiators work to dehumanize the negotiation process, it is still conducted by people.  A soft touch often disarms even the most purposeful intent.

Continued in The Importance of Negotiating Power - Part Two.