Before Taking a Bet on a New Business, Think Like Sam Walton
Tom Taulli, AOL Small Business
I really like how Wendy first got a job in the field in which she wanted to start her business. True, there are many examples where entrepreneurs jump into a venture -- such as with Wes Hurt and Brian Morris -- but why not spend some time learning the ropes? Do you really need to rush?
Interestingly enough, if you try to get a bank loan, one of the first questions you'll get is: what's your experience in the industry? If you do not have at least a year's worth of experience, then you probably won't get a loan. Simply put, banks have learned the hard way on this.
If anything, by working in the field, you might realize that you really don't want to spend your hard-earned money -- and precious time -- in the business. Unfortunately, there are many unhappy business owners who feel they have no choice but to continue with their ventures. When doing your stint, it's critical that you study every possible aspect of the business. Think of it as a paid MBA (and it will probably be more valuable -- at least for entrepreneurs).
As for Wendy, she counted the number of customers, trying to estimate the revenues. Is this a business that can make money? Are there ways to improve things?
This reminds me of the legendary entrepreneur, Sam Walton. He was a sponge, constantly learning. He visited thousands and thousands of stores (even while he was on vacation), and he counted everything he could. He talked to as many people as possible (and got kicked out of a good number of stores). There was no end for his thirst of knowledge (to get a sense of this, it's definitely worth reading Sam's autobiography, Sam Walton: Made In America).
In fact, Wendy has practiced something else Sam was good at: looking beyond his business. For example, back in the 1960s, he attended a conference about computers. Somehow, he thought they would be important for the success of Walmart.
Wendy was smart to look at the distribution side of her business. How do suppliers work? What can be done differently? Are there ways to improve margins?
I know it's exciting when starting a business. At the same time, the temptation is to get started as fast as possible. However, try to resist this. Get some experience in the industry, learn, and learn some more. Like Sam, you should never stop learning.
Monday, August 31, 2009
Thursday, August 27, 2009
Six Ways to Speed Up SBA Loan Approval
Six Ways to Speed Up SBA Loan Approval
By DIANA RANSOM
Attention small-business owners: Time is running out on an opportunity to access fee-free business loans that are guaranteed up to 90%.
Earlier this year, the Small Business Administration set aside $375 million to temporarily eliminate loan fees and increase the agency's loan guarantee to 90% for certain loans. The moves were part of the American Recovery and Reinvestment Act (ARRA), which was signed into law by President Obama in mid-February. So far, the SBA has used about 55% of those funds; they have translated to $6 billion in loans under the 7(a) and 504 programs, says John J. Miller, an SBA spokesman.
However, barring another act of Congress, SBA-backed loans will revert to their pre-Recovery Act status by the end of November or December, Miller says. The impact will be palpable. Loans made once the funds run out will only get a 75% to 85% guarantee, down from 90%. The decrease will make it tougher to get approved for a loan because lower guarantees raise a bank's risk, says Eric Grimstead, a business advisor at the Center for Economic Vitality at Western Washington University in Bellingham, Wash. In addition, business owners taking out loans through the SBA loan will have to pay a 2% to 3% loan guarantee fee again, he says.
November is more than two months away, but given that the SBA loan approval process can take as long as 120 days, applicants had better get cracking, says Dave Mulcahy, the director of the Small Business Development Center at Lamar University in Beaumont, Texas.
Here are six ways to speed up the application process for SBA loans:
Update your financials
To accelerate a loan's approval, prepare and provide at least three years of tax returns and up-to-date financial statements, including income and cash-flow statements, balance sheets and sales projections, says Tom Burke, the senior vice president of Wells Fargo SBA lending in Minneapolis. If you don't have a business plan, write one. And if you don't have a marketing plan, write one of those too, he says. "Business owners have to be able to show that they can pay everyone back," Burke says. (Click here for the SBA's loan application checklist.)
Tap a preferred lender
Use a preferred SBA lender such as TD Banknorth or KeyBank, Grimstead says. Conventional wisdom says business owners should consult a bank with which they already work, but if that institution doesn't currently work with SBA loan programs, the process can be take weeks longer than comparable loans at SBA-ready lenders, he says. Not only is there a massive learning curve when working with SBA programs, which are complex and change frequently, but nonpreferred lenders also have to send loans into the SBA for approval, which can take up to four weeks, Burke says. Conversely, preferred lenders are generally able to underwrite their own SBA loans, he says.
Ensure the right fit
When scanning the list of preferred lenders, find ones that cater to businesses like yours, Burke says. For instance, some banks won't authorize SBA loans to start-ups. Others may avoid restaurants or other similarly risky ventures, he says. Also, take into account differences in banks' credit policies. For instance, Wells Fargo will extend a real estate loan for 25 years, but other banks do so for just 20 years.
Hedge your bets
Even if you secure the word of a preferred lender, make sure you've applied to a couple other banks backups, Grimstead says. "Some borrowers get three or six or even 12 weeks into the process only to get a 'no' from someone at the bank," he says. To slash your risk of rejection, apply to a few different banks at the same time. (Note that going through the application process at several banks will not harm your credit, says Mulcahy, from the SBDC in Beaumont, Texas.)
Offer more backup
SBA loan programs often require less of a down payment than typical business loans, says Becky Naugle, the state director for the Kentucky Small Business Development Center at the University of Kentucky in Lexington. For instance, banks providing normal business loans might require owners to put 20% to 40% down, but banks working through an SBA program might require just 10% down. Despite this lower standard, consider putting more down or offering some sort of personal guarantee, she says. "If particularly risky business owners can mediate a [bank's] risk by having a personal guarantee, that could push it through faster," she says.
Get help
An experienced business advisor can also help push your company's loan through quicker, Burke says. Check out a local Small Business Development Center, or tap a volunteer business professional in your area via SCORE, a nonprofit business counseling service, he says. There's also at least one SBA district officer in each state whom business owners can ask questions about SBA loans.
By DIANA RANSOM
Attention small-business owners: Time is running out on an opportunity to access fee-free business loans that are guaranteed up to 90%.
Earlier this year, the Small Business Administration set aside $375 million to temporarily eliminate loan fees and increase the agency's loan guarantee to 90% for certain loans. The moves were part of the American Recovery and Reinvestment Act (ARRA), which was signed into law by President Obama in mid-February. So far, the SBA has used about 55% of those funds; they have translated to $6 billion in loans under the 7(a) and 504 programs, says John J. Miller, an SBA spokesman.
However, barring another act of Congress, SBA-backed loans will revert to their pre-Recovery Act status by the end of November or December, Miller says. The impact will be palpable. Loans made once the funds run out will only get a 75% to 85% guarantee, down from 90%. The decrease will make it tougher to get approved for a loan because lower guarantees raise a bank's risk, says Eric Grimstead, a business advisor at the Center for Economic Vitality at Western Washington University in Bellingham, Wash. In addition, business owners taking out loans through the SBA loan will have to pay a 2% to 3% loan guarantee fee again, he says.
November is more than two months away, but given that the SBA loan approval process can take as long as 120 days, applicants had better get cracking, says Dave Mulcahy, the director of the Small Business Development Center at Lamar University in Beaumont, Texas.
Here are six ways to speed up the application process for SBA loans:
Update your financials
To accelerate a loan's approval, prepare and provide at least three years of tax returns and up-to-date financial statements, including income and cash-flow statements, balance sheets and sales projections, says Tom Burke, the senior vice president of Wells Fargo SBA lending in Minneapolis. If you don't have a business plan, write one. And if you don't have a marketing plan, write one of those too, he says. "Business owners have to be able to show that they can pay everyone back," Burke says. (Click here for the SBA's loan application checklist.)
Tap a preferred lender
Use a preferred SBA lender such as TD Banknorth or KeyBank, Grimstead says. Conventional wisdom says business owners should consult a bank with which they already work, but if that institution doesn't currently work with SBA loan programs, the process can be take weeks longer than comparable loans at SBA-ready lenders, he says. Not only is there a massive learning curve when working with SBA programs, which are complex and change frequently, but nonpreferred lenders also have to send loans into the SBA for approval, which can take up to four weeks, Burke says. Conversely, preferred lenders are generally able to underwrite their own SBA loans, he says.
Ensure the right fit
When scanning the list of preferred lenders, find ones that cater to businesses like yours, Burke says. For instance, some banks won't authorize SBA loans to start-ups. Others may avoid restaurants or other similarly risky ventures, he says. Also, take into account differences in banks' credit policies. For instance, Wells Fargo will extend a real estate loan for 25 years, but other banks do so for just 20 years.
Hedge your bets
Even if you secure the word of a preferred lender, make sure you've applied to a couple other banks backups, Grimstead says. "Some borrowers get three or six or even 12 weeks into the process only to get a 'no' from someone at the bank," he says. To slash your risk of rejection, apply to a few different banks at the same time. (Note that going through the application process at several banks will not harm your credit, says Mulcahy, from the SBDC in Beaumont, Texas.)
Offer more backup
SBA loan programs often require less of a down payment than typical business loans, says Becky Naugle, the state director for the Kentucky Small Business Development Center at the University of Kentucky in Lexington. For instance, banks providing normal business loans might require owners to put 20% to 40% down, but banks working through an SBA program might require just 10% down. Despite this lower standard, consider putting more down or offering some sort of personal guarantee, she says. "If particularly risky business owners can mediate a [bank's] risk by having a personal guarantee, that could push it through faster," she says.
Get help
An experienced business advisor can also help push your company's loan through quicker, Burke says. Check out a local Small Business Development Center, or tap a volunteer business professional in your area via SCORE, a nonprofit business counseling service, he says. There's also at least one SBA district officer in each state whom business owners can ask questions about SBA loans.
Tuesday, August 25, 2009
Marketing in an Economic Downturn
Marketing in an Economic Downturn
By: Tony Fannin - President, BE Branded
Category: Marketing and Brand Development
In a down or tight economy the most rational thing for a business to do is conserve cash, cut costs, and invest less. Just hang on tight and hope your customers remember you and how wonderful you've been to them in the past. It happens time and again that I see the first thing to go is marketing budgets. Many believe that the best time to market is during the boom times.
The counterintuitive thing to do, and the most strategic, is to market as aggressive as you would if the economy is doing well. Here are several points why:
1. The chatter is down – what I mean by that is "everyone" is pulling back their marketing dollar, including your competitors. This opens up opportunity to be one of the minority of voices heard in the market space or your market niche.
2. The cost goes down – many media vehicles, including web, are ready to make deals. With the same marketing dollar you'll be able to garner more value from your investment because of simple supply and demand. With more supply, you'll be able to demand greater value.
3. Consumers find refuge in brands – this gets a little tricky because you'll need to have established your brand during the good times. When the economy tightens, research has shown many consumers fall back to brands they are familiar with and trust. Of course, there are always exceptions in various industry categories such as food (price is king here, but brands still dominate. i.e. McDonalds, Spam, Campbell's). But, if you've established your brand when the times are good, you've helped insulate yourself some when times are not so good.
4. You'll be stronger when the economy changes – because you've stayed visible while everyone else went dormant, your brand awareness and value will have given you an established platform to launch from when the economy gets going again. Plus, it will take less because your marketing machine is already in motion and hasn't stopped. Others will have to re-establish their brand and market value from a dead stop which means spending even more money and paying premium rates across the board because their will be less supply and more demand from magazines to web banners and everything in between.
Here are a few examples and comments from other marketers:
P&G, Colgate-Palmolive, Kraft Foods, Kellogg Co.
In a testament to how important advertising has become to their businesses, Procter & Gamble Co., Colgate-Palmolive Co., Kraft Foods and Kellogg Co. all have boosted or at least maintained their marketing budgets, even as they've had to implement cost controls elsewhere. And that trend looks set to continue as these giants are forced to hike prices in response to rising commodities costs – a move that will require them to continue pitching consumers on the merits of their brands.
P&G and Colgate last week reported stronger-than-expected organic sales growth, at least in the U.S., along with strong earnings growth. Both said private-label market shares were flat to down in their categories. The spending hike appears to have helped P&G pull out a surprising 6% sales increase in the U.S. last quarter, more than double the 2%-3% growth in retail sales it tracked in its categories and ahead of its 5% organic sales growth globally."
Bounty paper towels. It may reside in a commodity category where private label has been making big gains, yet Bounty has been gaining share throughout the downturn. Parent Procter & Gamble reported in January that Bounty's U.S. value share grew 1.5 points to more than 44%. The brand has continued to innovate within its premium product line without ignoring its lower-priced Bounty Basics line. Bounty has also maintained a strong marketing presence and honed its value messaging."
Anne Bologna – CEO, Toy
"In the Great Depression, Kellogg continued to market its cereals while rivals cut budgets. Kellogg pulled ahead of Post in sales, a change that has never been reversed. Point is, what you sacrifice now, you pay for later. Every thinking business person knows that, but few have the courage to invest. Be brave. You'll never regret it."
Joe Tripodi, CMO – Coca-Cola Co.
"Don't waste this opportunity to enhance brand love. This is the time to engage people and deliver experiences that excite them in unexpected ways. As an example, we recently introduced a new global marketing campaign around the idea of 'Open Happiness.' We are bringing it to life not only through traditional advertising but through the release of a music single, online experiences, social media, impactful point-of-purchase materials and the integration of the core creative idea into all of our existing properties, like the upcoming Winter Olympics in Vancouver. This is not the time to stop talking with consumers. If you use this opportunity to broaden your dialogue with the people who love your brands, you will come out of this period with a much stronger and deeper relationship with them."
In the end, it's about keeping your value and uniqueness out there, regardless of the conditions. In every downturn, there's opportunity. Being brave, bold, and unwavering in your brand and value your company brings is the only way to take advantage of the situation and not just trying to react to it.
By: Tony Fannin - President, BE Branded
Category: Marketing and Brand Development
In a down or tight economy the most rational thing for a business to do is conserve cash, cut costs, and invest less. Just hang on tight and hope your customers remember you and how wonderful you've been to them in the past. It happens time and again that I see the first thing to go is marketing budgets. Many believe that the best time to market is during the boom times.
The counterintuitive thing to do, and the most strategic, is to market as aggressive as you would if the economy is doing well. Here are several points why:
1. The chatter is down – what I mean by that is "everyone" is pulling back their marketing dollar, including your competitors. This opens up opportunity to be one of the minority of voices heard in the market space or your market niche.
2. The cost goes down – many media vehicles, including web, are ready to make deals. With the same marketing dollar you'll be able to garner more value from your investment because of simple supply and demand. With more supply, you'll be able to demand greater value.
3. Consumers find refuge in brands – this gets a little tricky because you'll need to have established your brand during the good times. When the economy tightens, research has shown many consumers fall back to brands they are familiar with and trust. Of course, there are always exceptions in various industry categories such as food (price is king here, but brands still dominate. i.e. McDonalds, Spam, Campbell's). But, if you've established your brand when the times are good, you've helped insulate yourself some when times are not so good.
4. You'll be stronger when the economy changes – because you've stayed visible while everyone else went dormant, your brand awareness and value will have given you an established platform to launch from when the economy gets going again. Plus, it will take less because your marketing machine is already in motion and hasn't stopped. Others will have to re-establish their brand and market value from a dead stop which means spending even more money and paying premium rates across the board because their will be less supply and more demand from magazines to web banners and everything in between.
Here are a few examples and comments from other marketers:
P&G, Colgate-Palmolive, Kraft Foods, Kellogg Co.
In a testament to how important advertising has become to their businesses, Procter & Gamble Co., Colgate-Palmolive Co., Kraft Foods and Kellogg Co. all have boosted or at least maintained their marketing budgets, even as they've had to implement cost controls elsewhere. And that trend looks set to continue as these giants are forced to hike prices in response to rising commodities costs – a move that will require them to continue pitching consumers on the merits of their brands.
P&G and Colgate last week reported stronger-than-expected organic sales growth, at least in the U.S., along with strong earnings growth. Both said private-label market shares were flat to down in their categories. The spending hike appears to have helped P&G pull out a surprising 6% sales increase in the U.S. last quarter, more than double the 2%-3% growth in retail sales it tracked in its categories and ahead of its 5% organic sales growth globally."
Bounty paper towels. It may reside in a commodity category where private label has been making big gains, yet Bounty has been gaining share throughout the downturn. Parent Procter & Gamble reported in January that Bounty's U.S. value share grew 1.5 points to more than 44%. The brand has continued to innovate within its premium product line without ignoring its lower-priced Bounty Basics line. Bounty has also maintained a strong marketing presence and honed its value messaging."
Anne Bologna – CEO, Toy
"In the Great Depression, Kellogg continued to market its cereals while rivals cut budgets. Kellogg pulled ahead of Post in sales, a change that has never been reversed. Point is, what you sacrifice now, you pay for later. Every thinking business person knows that, but few have the courage to invest. Be brave. You'll never regret it."
Joe Tripodi, CMO – Coca-Cola Co.
"Don't waste this opportunity to enhance brand love. This is the time to engage people and deliver experiences that excite them in unexpected ways. As an example, we recently introduced a new global marketing campaign around the idea of 'Open Happiness.' We are bringing it to life not only through traditional advertising but through the release of a music single, online experiences, social media, impactful point-of-purchase materials and the integration of the core creative idea into all of our existing properties, like the upcoming Winter Olympics in Vancouver. This is not the time to stop talking with consumers. If you use this opportunity to broaden your dialogue with the people who love your brands, you will come out of this period with a much stronger and deeper relationship with them."
In the end, it's about keeping your value and uniqueness out there, regardless of the conditions. In every downturn, there's opportunity. Being brave, bold, and unwavering in your brand and value your company brings is the only way to take advantage of the situation and not just trying to react to it.
Thursday, August 20, 2009
Selling When Business Valuations Are Low
Selling When Business Valuations Are Low
By DIANA RANSOM
Investors weren't the only losers when the stock market crashed last September. Business owners also watched their company valuations plummet.
Timothy Butler, the president and chief executive of Tego, an RFID chip maker in Waltham, Mass., saw his firm's value fall quickly with the market's downturn. Moreover, the recession spooked venture investors. Before the crash, Butler had expected to land investment funds in the range of $1.5 million to $2 million. Instead, he says his firm wound up with just a third of that amount in its coffers.
"It was a very difficult time," Butler says. "We reduced salaries temporarily. We had to cut certain projects and renegotiate the timing and paying of creditors. And we had to rewrite our business plan to recognize current realities."
Many firms turned to equity financing during the downturn to make up for their cash shortage. That solution can help keep a business afloat, but each time this type of funding is raised, a company must be appraised, says Jeffery Sohl, the director of the University of New Hampshire's Center for Venture Research. If owners revaluate their companies when values are lower, they may have to hand over more ownership in the company because the same amount of money buys more when values sink, he says.
In an effort to shore up his firm's valuation, Butler decided to forgo traditional equity financing. Instead, he issued convertible debt, which is seen as less risky than regular equity investments. The strategy has paid off. Since February, Butler has managed to raise $1 million in debt financing.
Butler was able to avoid a lower valuation, but many other business owners — especially those who are older and angling for retirement — haven't been so lucky. In the second quarter, the median sale price for completed business sales dropped 20% to $160,000, from $200,000 the year before, according to BizBuySell.com, a web site that tracks business sales. "There's no question that it's a challenging environment," says Anthony J. Citrolo, a principal at New York Business Brokerage, a business brokerage firm in Melville, N.Y. "If the last three or four quarters haven't been great, some owners [looking to sell now] will have to accept about 12% to 15% less than what they would have gotten a year ago," he says.
Still, low valuations aren't impossible to overcome, says Citrolo. In fact, they might even benefit some business owners, he says. Here are three ways to sell your business when values are low:
Keep it in the family
For business owners who want to keep their companies in the family, now may be an ideal time to hand over the reins, says Matt Painter, a tax partner at LBMC, an accounting firm in Brentwood, Tenn. The total amount any one person is allowed to give away as a gift, tax free, over his or her lifetime is $1 million. So at this point, business owners can effectively give away a larger percentage of their businesses because valuations are lower, Painter says.
Let's say a business that was worth $2 million a year ago was broken down into 10,000 shares worth $200 each. Let's also say that business lost 20% of its value after the downturn, sinking the firm's shares to $160 each. So instead of being restricted to giving away 5,000 shares (to stay within the $1 million exclusion), the owner can now give away a larger percentage of her business (6,250 shares) to her children. The move could also mean a windfall in the recovery. "Depressed values are [likely] going to bounce back," Painter says.
Transition to employees
At a time when buyers are scarce, another option for owners is to sell the firm to its employees. Of course, buying a business on the spot is likely a stretch for cash-strapped workers. In addition, taxes, which are payable by employees, kick in on stock transfers to employees, says Matt Vandenack, an attorney who counsels small-business customers for the Principal Financial Group in Des Moines, Iowa. Still, as valuations are lower, so are taxes, he says. As a result, employees may be more willing to purchase the company via stock transfers today, Vandenack says. "It's an opportunity to get into the business for cheap," he says. "If you sell them a portion of the business today, that percentage of the business will presumably increase. And even if the company's value goes up before [employees] finish buying it, they've at least gotten a discount on a portion of the business."
Sell with earning potential
Getting anyone to pay for a business in full is a tough proposition these days. And although seller financing — transactions in which sellers agree to hand over the business in return for installment payments — has picked up steam, it doesn't encourage business owners with low-valued businesses to sell. Instead, many owners are increasingly turning to transactions known as "earn outs" in which business owners agree to sell their lower valued firms today in exchange for a cut of the company's future profits, Citrolo says. Here's how it works: Sellers and buyers agree on future earnings targets. If buyers meet these targets, sellers receive some agreed upon percentage over and above the target value, Citrolo says. However, if the buyer doesn't meet his target, the seller still receives payment. "In effect, the buyer is hedging his bet," he says.
By DIANA RANSOM
Investors weren't the only losers when the stock market crashed last September. Business owners also watched their company valuations plummet.
Timothy Butler, the president and chief executive of Tego, an RFID chip maker in Waltham, Mass., saw his firm's value fall quickly with the market's downturn. Moreover, the recession spooked venture investors. Before the crash, Butler had expected to land investment funds in the range of $1.5 million to $2 million. Instead, he says his firm wound up with just a third of that amount in its coffers.
"It was a very difficult time," Butler says. "We reduced salaries temporarily. We had to cut certain projects and renegotiate the timing and paying of creditors. And we had to rewrite our business plan to recognize current realities."
Many firms turned to equity financing during the downturn to make up for their cash shortage. That solution can help keep a business afloat, but each time this type of funding is raised, a company must be appraised, says Jeffery Sohl, the director of the University of New Hampshire's Center for Venture Research. If owners revaluate their companies when values are lower, they may have to hand over more ownership in the company because the same amount of money buys more when values sink, he says.
In an effort to shore up his firm's valuation, Butler decided to forgo traditional equity financing. Instead, he issued convertible debt, which is seen as less risky than regular equity investments. The strategy has paid off. Since February, Butler has managed to raise $1 million in debt financing.
Butler was able to avoid a lower valuation, but many other business owners — especially those who are older and angling for retirement — haven't been so lucky. In the second quarter, the median sale price for completed business sales dropped 20% to $160,000, from $200,000 the year before, according to BizBuySell.com, a web site that tracks business sales. "There's no question that it's a challenging environment," says Anthony J. Citrolo, a principal at New York Business Brokerage, a business brokerage firm in Melville, N.Y. "If the last three or four quarters haven't been great, some owners [looking to sell now] will have to accept about 12% to 15% less than what they would have gotten a year ago," he says.
Still, low valuations aren't impossible to overcome, says Citrolo. In fact, they might even benefit some business owners, he says. Here are three ways to sell your business when values are low:
Keep it in the family
For business owners who want to keep their companies in the family, now may be an ideal time to hand over the reins, says Matt Painter, a tax partner at LBMC, an accounting firm in Brentwood, Tenn. The total amount any one person is allowed to give away as a gift, tax free, over his or her lifetime is $1 million. So at this point, business owners can effectively give away a larger percentage of their businesses because valuations are lower, Painter says.
Let's say a business that was worth $2 million a year ago was broken down into 10,000 shares worth $200 each. Let's also say that business lost 20% of its value after the downturn, sinking the firm's shares to $160 each. So instead of being restricted to giving away 5,000 shares (to stay within the $1 million exclusion), the owner can now give away a larger percentage of her business (6,250 shares) to her children. The move could also mean a windfall in the recovery. "Depressed values are [likely] going to bounce back," Painter says.
Transition to employees
At a time when buyers are scarce, another option for owners is to sell the firm to its employees. Of course, buying a business on the spot is likely a stretch for cash-strapped workers. In addition, taxes, which are payable by employees, kick in on stock transfers to employees, says Matt Vandenack, an attorney who counsels small-business customers for the Principal Financial Group in Des Moines, Iowa. Still, as valuations are lower, so are taxes, he says. As a result, employees may be more willing to purchase the company via stock transfers today, Vandenack says. "It's an opportunity to get into the business for cheap," he says. "If you sell them a portion of the business today, that percentage of the business will presumably increase. And even if the company's value goes up before [employees] finish buying it, they've at least gotten a discount on a portion of the business."
Sell with earning potential
Getting anyone to pay for a business in full is a tough proposition these days. And although seller financing — transactions in which sellers agree to hand over the business in return for installment payments — has picked up steam, it doesn't encourage business owners with low-valued businesses to sell. Instead, many owners are increasingly turning to transactions known as "earn outs" in which business owners agree to sell their lower valued firms today in exchange for a cut of the company's future profits, Citrolo says. Here's how it works: Sellers and buyers agree on future earnings targets. If buyers meet these targets, sellers receive some agreed upon percentage over and above the target value, Citrolo says. However, if the buyer doesn't meet his target, the seller still receives payment. "In effect, the buyer is hedging his bet," he says.
Tuesday, August 18, 2009
Monday, August 17, 2009
For Bollywood, the Credit Crunch Means More Slumdog, Less Millionaire
For Bollywood, the Credit Crunch Means More Slumdog, Less Millionaire
HEARD ON THE STREET APRIL 4, 2009
By DEEPALI GUPTA
No money, no film; no film, no money. Bollywood is in a tough spot.
Lacking financing, India's movie producers are unable to finish and market their films. It could mean as many as half of the films scheduled for release this year mightn't make it, industry officials say.
The results speak for themselves. Bollywood, an industry that generates annual global revenue of above $2 billion, has released only about 20 major films -- targeted India-wide, with a reasonable publicity budget -- so far this year.
Associated PressBollywood actress Ameesha Patel gestures during a promotional event in Ahmadabad, India, Tuesday, March 31, 2009. (AP Photo/Ajit Solanki)
.
That is down from about 100 for the same period in past years, estimates UTV Software, a large movie production and distribution company.
Without these blockbusters, and the marketing behind them, to lure audiences into cinemas, ticket buyers are staying home. Cinema occupancy in India has dropped to 40%, from as high as 60% at the end of 2007, analysts estimate.
So the film industry is being forced to change the way it does business. Song and dance routines may be less flashy. And massive upfront salaries for film stars -- actors' pay accounts for nearly half of a film's typical budget -- are out.
Already, two of Bollywood's top male leads, Shah Rukh Khan and Aamir Khan, have agreed to be paid out of film profits instead of a straight salary. More are agreeing to similar profit-sharing terms.
Total film budgets could be cut as much as 30% to 45%, and more funds will go toward publicity to draw audiences, says Sheetal Talwar, managing director of Vistaar Religare, a $40 million fund that invests in films.
Some are hoping low-cost but high-quality content targeting the urban elite -- pointing to the success of "Slumdog Millionaire" -- will get them out of this spot.
Still, one thing Bollywood mightn't be able to address is cheaper alternative entertainment that has been keeping audiences at home. A key new rival is the TV broadcast of the Indian Premier League cricket tournament.
A spat between the producers and cineplexes that screen their films could make a bad situation worse. The producers have threatened that, unless they get a full half of ticket sales, they will stop releasing films entirely, as of Saturday.
This is a hard bargain to drive. As it is, multiplexes -- which currently share between 38% and 48% of collections, according to the finance chief of one large chain -- are dropping ticket prices. Movie-goers also aren't spending as much on high-margin food and beverages.
The key to combating Bollywood's malaise could be spending more money on promotion to draw in audiences.
The snag: That requires financing to flow again.
HEARD ON THE STREET APRIL 4, 2009
By DEEPALI GUPTA
No money, no film; no film, no money. Bollywood is in a tough spot.
Lacking financing, India's movie producers are unable to finish and market their films. It could mean as many as half of the films scheduled for release this year mightn't make it, industry officials say.
The results speak for themselves. Bollywood, an industry that generates annual global revenue of above $2 billion, has released only about 20 major films -- targeted India-wide, with a reasonable publicity budget -- so far this year.
Associated PressBollywood actress Ameesha Patel gestures during a promotional event in Ahmadabad, India, Tuesday, March 31, 2009. (AP Photo/Ajit Solanki)
.
That is down from about 100 for the same period in past years, estimates UTV Software, a large movie production and distribution company.
Without these blockbusters, and the marketing behind them, to lure audiences into cinemas, ticket buyers are staying home. Cinema occupancy in India has dropped to 40%, from as high as 60% at the end of 2007, analysts estimate.
So the film industry is being forced to change the way it does business. Song and dance routines may be less flashy. And massive upfront salaries for film stars -- actors' pay accounts for nearly half of a film's typical budget -- are out.
Already, two of Bollywood's top male leads, Shah Rukh Khan and Aamir Khan, have agreed to be paid out of film profits instead of a straight salary. More are agreeing to similar profit-sharing terms.
Total film budgets could be cut as much as 30% to 45%, and more funds will go toward publicity to draw audiences, says Sheetal Talwar, managing director of Vistaar Religare, a $40 million fund that invests in films.
Some are hoping low-cost but high-quality content targeting the urban elite -- pointing to the success of "Slumdog Millionaire" -- will get them out of this spot.
Still, one thing Bollywood mightn't be able to address is cheaper alternative entertainment that has been keeping audiences at home. A key new rival is the TV broadcast of the Indian Premier League cricket tournament.
A spat between the producers and cineplexes that screen their films could make a bad situation worse. The producers have threatened that, unless they get a full half of ticket sales, they will stop releasing films entirely, as of Saturday.
This is a hard bargain to drive. As it is, multiplexes -- which currently share between 38% and 48% of collections, according to the finance chief of one large chain -- are dropping ticket prices. Movie-goers also aren't spending as much on high-margin food and beverages.
The key to combating Bollywood's malaise could be spending more money on promotion to draw in audiences.
The snag: That requires financing to flow again.
Wednesday, August 12, 2009
Learn to Impress Lenders
Learn to Impress Lenders
Proper preparation is key when you're angling for money to fund your business.
By JOSEPH BENOIT, ENTREPRENEUR.COM
Posted: 2009-08-11 13:21:31
Filed Under: Small Business, Small Business Funding
While obtaining a loan may be challenging amid the current economic climate, you can increase your viability as a loan candidate by taking steps to prepare for that initial meeting with a lender.
First, be thorough when preparing documents a lender may request. These include: past financial statements and tax returns, a copy of your current note and payment schedule (if your business is already established), and a detailed business plan.
Your business plan should include:
* Executive summary: A critical introductory statement encapsulating the main points of the plan; a window into every facet of your business.
* Market analysis: A thorough overview of your industry, target market and competitors.
* Company profile: A summary of your company's industry and a description of the elements that will make your business stand out.
* Organization description: A description of your management and organizational structure, the marketing and sales strategy; a description of services or products and financial information, including the requested loan amount, your company's current and forecasted income statements, balance sheets and cash-flow statements.
In addition to preparing a comprehensive business plan, consider these strategies prior to seeking a small-business loan:
* Contact a financial advisor early. Consider cultivating a relationship with your financial advisor before you need a loan. By establishing a relationship early on, you can build a foundation the advisor can draw on later to make a determination about a loan.
* Research loan options. Find out which loan options will best suit your needs and be prepared to discuss these options when meeting with a lender. Will you seek a secured (collateral-backed) or unsecured loan, and what type of payment terms would best meet the needs of your business?
* Plan ahead. Anticipate the questions a lender may pose and have honest, well-researched answers ready. Decisions to lend are fact-based; don't be idealistic when answering questions and providing projections. Lenders will appreciate your practical perspective. It may also be wise to organize all of your documents prior to the meeting for easy access to specific items when requested and to highlight your meticulous attention to details.
* Lend to your venture. Amid the tightened credit market, managing risk is increasingly important for lenders. With this in mind, consider providing ample collateral or money toward your venture if possible. Your willingness to invest in your success may reflect added confidence in your plan.
* Preparation before meeting with your lender is key. The time and commitment you dedicate in advance may help increase your appeal as a solid loan candidate in this competitive market.
Joseph Benoit is the small business banking executive for Union Bank, N.A. Visit www.unionbank.com for more information.
Proper preparation is key when you're angling for money to fund your business.
By JOSEPH BENOIT, ENTREPRENEUR.COM
Posted: 2009-08-11 13:21:31
Filed Under: Small Business, Small Business Funding
While obtaining a loan may be challenging amid the current economic climate, you can increase your viability as a loan candidate by taking steps to prepare for that initial meeting with a lender.
First, be thorough when preparing documents a lender may request. These include: past financial statements and tax returns, a copy of your current note and payment schedule (if your business is already established), and a detailed business plan.
Your business plan should include:
* Executive summary: A critical introductory statement encapsulating the main points of the plan; a window into every facet of your business.
* Market analysis: A thorough overview of your industry, target market and competitors.
* Company profile: A summary of your company's industry and a description of the elements that will make your business stand out.
* Organization description: A description of your management and organizational structure, the marketing and sales strategy; a description of services or products and financial information, including the requested loan amount, your company's current and forecasted income statements, balance sheets and cash-flow statements.
In addition to preparing a comprehensive business plan, consider these strategies prior to seeking a small-business loan:
* Contact a financial advisor early. Consider cultivating a relationship with your financial advisor before you need a loan. By establishing a relationship early on, you can build a foundation the advisor can draw on later to make a determination about a loan.
* Research loan options. Find out which loan options will best suit your needs and be prepared to discuss these options when meeting with a lender. Will you seek a secured (collateral-backed) or unsecured loan, and what type of payment terms would best meet the needs of your business?
* Plan ahead. Anticipate the questions a lender may pose and have honest, well-researched answers ready. Decisions to lend are fact-based; don't be idealistic when answering questions and providing projections. Lenders will appreciate your practical perspective. It may also be wise to organize all of your documents prior to the meeting for easy access to specific items when requested and to highlight your meticulous attention to details.
* Lend to your venture. Amid the tightened credit market, managing risk is increasingly important for lenders. With this in mind, consider providing ample collateral or money toward your venture if possible. Your willingness to invest in your success may reflect added confidence in your plan.
* Preparation before meeting with your lender is key. The time and commitment you dedicate in advance may help increase your appeal as a solid loan candidate in this competitive market.
Joseph Benoit is the small business banking executive for Union Bank, N.A. Visit www.unionbank.com for more information.
Tuesday, August 11, 2009
Coffee perks up McDonald’s global sales
Coffee perks up McDonald’s global sales
By Jenny Wiggins in London
Published: August 10 2009 17:51 Last updated: August 10 2009 23:43
McDonald’s move into mochas and iced lattes has helped the fast-food chain report its seventh consecutive month of increases in global sales this year, underscoring the resilience of its business model in the recession.
The company’s shares rose 1.9 per cent on Monday to $56.27 after it said comparable-stores sales had risen 4.3 per cent in July, compared with an increase of 8 per cent a year earlier but beating analysts’ consensus expectations of a 3.2 per cent climb and ahead of June’s 2.6 per cent rise.
Jason West, analyst at Deutsche Bank, said the global sales increase had alleviated concern about a possible “downward spiral” in comparable sales, as had been seen at competitors like Burger King. “Globally, they have not had a negative month [in sales] in several years,” he said.
Sales were up 2.6 per cent in the US – which contributes about half the company’s profits – because of strong sales of coffees and core menu items like hamburgers and fries.
McDonald’s expansion into fancy coffees under the McCafé brand is part of a strategy to capture more customers at breakfast time and win them over from coffee chains to its lower-priced drinks.
The move has forced Starbucks to defend its brand. It has been running marketing campaigns with the slogan: “It’s not just coffee. It’s Starbucks.”
In the US, McDonald’s is selling espressos and mochas in its existing stores.
In Europe, it is emulating its Australian business and opening separate McCafé counters, operating in or next to its restaurants. The group plans to have 1,200 McCafés in Europe by the end of the year.
McDonald’s strongest sales were in Europe, up 7.2 per cent because of the popularity of its “tiered menu” – which offers cheap, middling and expensive options – as well as summer specials such as chicken, bacon and onion sandwiches in France and burgers based on the “great tastes of America” in the UK.
These include a “New York special”, which has beef, streaky bacon, smoked cheese, lettuce, onions and onion mayo in a chilli, chive and sesame bun.
In Asia-Pacific, Middle East and Africa – which make up 13 per cent of total profit – sales rose 2.1 per cent. McDonald’s attributed the rise to the “creativity” of its Australian business, which runs marketing campaigns based on a single theme – currently, family – and has introduced apple and cinnamon mini-muffins and spinach feta strudels, as well as opening more 24-hour and drive-through stores.
But sales in China, where it has been slowing new store openings, were weaker as consumers favour cheaper local brands.
McDonald’s has some 1,000 stores in China and plans to open 150 this year, compared with earlier projections of 175.
By Jenny Wiggins in London
Published: August 10 2009 17:51 Last updated: August 10 2009 23:43
McDonald’s move into mochas and iced lattes has helped the fast-food chain report its seventh consecutive month of increases in global sales this year, underscoring the resilience of its business model in the recession.
The company’s shares rose 1.9 per cent on Monday to $56.27 after it said comparable-stores sales had risen 4.3 per cent in July, compared with an increase of 8 per cent a year earlier but beating analysts’ consensus expectations of a 3.2 per cent climb and ahead of June’s 2.6 per cent rise.
Jason West, analyst at Deutsche Bank, said the global sales increase had alleviated concern about a possible “downward spiral” in comparable sales, as had been seen at competitors like Burger King. “Globally, they have not had a negative month [in sales] in several years,” he said.
Sales were up 2.6 per cent in the US – which contributes about half the company’s profits – because of strong sales of coffees and core menu items like hamburgers and fries.
McDonald’s expansion into fancy coffees under the McCafé brand is part of a strategy to capture more customers at breakfast time and win them over from coffee chains to its lower-priced drinks.
The move has forced Starbucks to defend its brand. It has been running marketing campaigns with the slogan: “It’s not just coffee. It’s Starbucks.”
In the US, McDonald’s is selling espressos and mochas in its existing stores.
In Europe, it is emulating its Australian business and opening separate McCafé counters, operating in or next to its restaurants. The group plans to have 1,200 McCafés in Europe by the end of the year.
McDonald’s strongest sales were in Europe, up 7.2 per cent because of the popularity of its “tiered menu” – which offers cheap, middling and expensive options – as well as summer specials such as chicken, bacon and onion sandwiches in France and burgers based on the “great tastes of America” in the UK.
These include a “New York special”, which has beef, streaky bacon, smoked cheese, lettuce, onions and onion mayo in a chilli, chive and sesame bun.
In Asia-Pacific, Middle East and Africa – which make up 13 per cent of total profit – sales rose 2.1 per cent. McDonald’s attributed the rise to the “creativity” of its Australian business, which runs marketing campaigns based on a single theme – currently, family – and has introduced apple and cinnamon mini-muffins and spinach feta strudels, as well as opening more 24-hour and drive-through stores.
But sales in China, where it has been slowing new store openings, were weaker as consumers favour cheaper local brands.
McDonald’s has some 1,000 stores in China and plans to open 150 this year, compared with earlier projections of 175.
Monday, August 10, 2009
Tuesday, August 4, 2009
Chains, franchisees square off over discounted menu items
Chains, franchisees square off over discounted menu items
By RON RUGGLESS
(July 27, 2009) The recession-driven rush to grease sales with promotions and value deals is leading to mounting frictions between franchisors and franchisees.
Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes and KFC all have recently found themselves working to restore the delicate balance between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.
Burger King recently battled franchisees over plans to offer a $1 double cheeseburger.
Most recently, Burger King franchisees in mid-July twice rejected plans by Burger King Corp. to offer a $1 double cheeseburger that could square off against value items from quick-service competitors. The Miami-based franchisor eventually capitulated, deciding to offer the value item with a coupon program planned for August.
“It’s a challenge for any franchisor to push through a promo that cuts at franchisee’s profit margins,” said Lorne Fisher, chief executive and owner of Fish Consulting Inc. in Hollywood, Fla., whose clients include a number of restaurant and retail franchisors.
Communication from both parties is key to dissipating such tensions, Fisher said.
“From our experience, it is important to quantify the benefits to the franchisee to ensure they understand the value despite the cut in margin,” Fisher said.
“Whether the increase comes in consumer traffic, average check size or brand awareness, the franchisor must be able to present the tangible benefit to sell the promotion successfully and maximize the system’s participation,” he said.
Quiznos is among the franchisors that have run into conflict with franchisees this year. The Denver-based franchisor encountered wide pushback from franchisees over the $5.29 sandwiches it had hoped to give away in its “Million Sub Giveaway.” McDonald’s franchisees reportedly expressed concerned over the national introduction of the premium Angus burger in early July, while some Subway franchisees were upset by the chain’s ongoing “$5 Footlong” promotion.
Tempers also flared at both Popeyes and KFC over one-day product giveaways that found many franchisees emptying their larders as cash-strapped consumers rushed in for free goods. KFC’s high-profile marketing boost from Oprah Winfrey exacerbated the situation.
Burger King on July 14 reached detente with its franchisees when it said it would beef up the promotion of its $1 Whopper Jr. and feature the double cheeseburger in an August coupon offer.
“Burger King Corp. remains fully focused on its value offerings and delivering value for the money to its guests,” the company said in a statement. “As such, many product and menu options are always in development and under consideration.”
The company added, “BKC will also be deploying traffic-driving national coupons to nearly 80 million households during this time period with almost $50 in savings per coupon booklet.”
A spokeswoman added: “The direct-mail coupon book includes a $1 double cheeseburger offer from Burger King restaurants, and with more beef than a similar sandwich from McDonald’s, the offer will represent motivating affordability to burger lovers nationwide.”
McDonald’s replaced its double cheeseburger that had been on its Dollar Menu with the McDouble, above, which has only one slice of cheese.
Rival McDonald’s raised the price of its double cheeseburger from $1 to $1.19 late last year amid rising costs and franchisee complaints that a profit could not be made on the item. The double cheeseburger was replaced on the Dollar Menu with the McDouble sandwich, which contains two patties but only one slice of cheese.
Joe Buckley, an analyst with Bank of America-Merrill Lynch, said in a report that franchisee tension stemming from an ongoing soft-drink contract dispute could be a roadblock for Burger King as it seeks to add value offerings to drive traffic.
“We are concerned that the lack of alignment between Burger King and its franchisees could complicate efforts to turn sales,” Buckley said in downgrading the stock to “neutral” from “buy.”
The economic downturn has only served to heighten franchisee-franchisor tensions. Analysts said low-margin promotions in flush times could be a “loss leader,” drawing in customers who may buy additional, more profitable items to raise the check average. However, as patrons cut back on those extras, the “loss” loses its “leader,” and the franchisee is left holding the bag.
McDonald’s recent introduction of both the new coffee line, of which both the iced and hot mocha are being offered for free on Mondays through Aug. 3, and the new premium Angus burger have raised the eyebrows of franchisees. They have expressed concern that McDonald’s is trending too far away from its value focus and placing too much strain on franchisee operations.
In an April survey of McDonald’s franchisees by former stock analyst and independent researcher Mark Kalinowski, one unidentified McDonald’s franchisee called the Angus burger “another poor-margin item.”
However, Danya Proud, McDonald’s senior manager of U.S. communications, said many franchisees’ concerns were allayed.
“The franchisees told us they couldn’t get it in their restaurants quickly enough,” she told Nation’s Restaurant News earlier this month. “I think people misconstrued things. During the early stages of the test we were using a slightly bigger burger that would have required new equipment. But we went to slightly smaller burgers that can be prepared on existing grills.” —rruggles@nrn.com
By RON RUGGLESS
(July 27, 2009) The recession-driven rush to grease sales with promotions and value deals is leading to mounting frictions between franchisors and franchisees.
Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes and KFC all have recently found themselves working to restore the delicate balance between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.
Burger King recently battled franchisees over plans to offer a $1 double cheeseburger.
Most recently, Burger King franchisees in mid-July twice rejected plans by Burger King Corp. to offer a $1 double cheeseburger that could square off against value items from quick-service competitors. The Miami-based franchisor eventually capitulated, deciding to offer the value item with a coupon program planned for August.
“It’s a challenge for any franchisor to push through a promo that cuts at franchisee’s profit margins,” said Lorne Fisher, chief executive and owner of Fish Consulting Inc. in Hollywood, Fla., whose clients include a number of restaurant and retail franchisors.
Communication from both parties is key to dissipating such tensions, Fisher said.
“From our experience, it is important to quantify the benefits to the franchisee to ensure they understand the value despite the cut in margin,” Fisher said.
“Whether the increase comes in consumer traffic, average check size or brand awareness, the franchisor must be able to present the tangible benefit to sell the promotion successfully and maximize the system’s participation,” he said.
Quiznos is among the franchisors that have run into conflict with franchisees this year. The Denver-based franchisor encountered wide pushback from franchisees over the $5.29 sandwiches it had hoped to give away in its “Million Sub Giveaway.” McDonald’s franchisees reportedly expressed concerned over the national introduction of the premium Angus burger in early July, while some Subway franchisees were upset by the chain’s ongoing “$5 Footlong” promotion.
Tempers also flared at both Popeyes and KFC over one-day product giveaways that found many franchisees emptying their larders as cash-strapped consumers rushed in for free goods. KFC’s high-profile marketing boost from Oprah Winfrey exacerbated the situation.
Burger King on July 14 reached detente with its franchisees when it said it would beef up the promotion of its $1 Whopper Jr. and feature the double cheeseburger in an August coupon offer.
“Burger King Corp. remains fully focused on its value offerings and delivering value for the money to its guests,” the company said in a statement. “As such, many product and menu options are always in development and under consideration.”
The company added, “BKC will also be deploying traffic-driving national coupons to nearly 80 million households during this time period with almost $50 in savings per coupon booklet.”
A spokeswoman added: “The direct-mail coupon book includes a $1 double cheeseburger offer from Burger King restaurants, and with more beef than a similar sandwich from McDonald’s, the offer will represent motivating affordability to burger lovers nationwide.”
McDonald’s replaced its double cheeseburger that had been on its Dollar Menu with the McDouble, above, which has only one slice of cheese.
Rival McDonald’s raised the price of its double cheeseburger from $1 to $1.19 late last year amid rising costs and franchisee complaints that a profit could not be made on the item. The double cheeseburger was replaced on the Dollar Menu with the McDouble sandwich, which contains two patties but only one slice of cheese.
Joe Buckley, an analyst with Bank of America-Merrill Lynch, said in a report that franchisee tension stemming from an ongoing soft-drink contract dispute could be a roadblock for Burger King as it seeks to add value offerings to drive traffic.
“We are concerned that the lack of alignment between Burger King and its franchisees could complicate efforts to turn sales,” Buckley said in downgrading the stock to “neutral” from “buy.”
The economic downturn has only served to heighten franchisee-franchisor tensions. Analysts said low-margin promotions in flush times could be a “loss leader,” drawing in customers who may buy additional, more profitable items to raise the check average. However, as patrons cut back on those extras, the “loss” loses its “leader,” and the franchisee is left holding the bag.
McDonald’s recent introduction of both the new coffee line, of which both the iced and hot mocha are being offered for free on Mondays through Aug. 3, and the new premium Angus burger have raised the eyebrows of franchisees. They have expressed concern that McDonald’s is trending too far away from its value focus and placing too much strain on franchisee operations.
In an April survey of McDonald’s franchisees by former stock analyst and independent researcher Mark Kalinowski, one unidentified McDonald’s franchisee called the Angus burger “another poor-margin item.”
However, Danya Proud, McDonald’s senior manager of U.S. communications, said many franchisees’ concerns were allayed.
“The franchisees told us they couldn’t get it in their restaurants quickly enough,” she told Nation’s Restaurant News earlier this month. “I think people misconstrued things. During the early stages of the test we were using a slightly bigger burger that would have required new equipment. But we went to slightly smaller burgers that can be prepared on existing grills.” —rruggles@nrn.com
Monday, August 3, 2009
Restaurants, Franchising and Discounting
Restaurants, Franchising and Discounting
by john a. gordon
In a June 23 New York Times Business article, Discounts Have Restaurants Eating Own Lunch, the woes of chain restaurants offering discounts—and the possible long term effect of doing so, was well outlined. The following passage caught my eye:A T.G.I. Friday’s promotion in April and May offering $5 sandwiches and salads led to a small-scale revolt among franchisees. Ross Farro, who has seven T.G.I. Friday’s restaurants in Ohio and Pennsylvania, said the promotion included salads that normally sell for as much as $10 and a steak sandwich priced at $11.89 on the regular menu. The ingredients alone for each steak sandwich cost about $4, he said.
The promotion was supposed to run at lunch and dinner, but Mr. Farro said he and some other franchisees put away the $5 menu inserts at night to stop the bleeding.
This was not the first such example just this year of such issues plaguing chain restaurants and franchisees. Sonic (SONC), for example, has been struggling for almost the entire last year by promoting either drinks or its $1 value menu, and having declines in average customer ticket, not offset by increases in customer traffic. It reported earnings on June 23, which were still weak. And Burger King (BKC) and Subway franchisees have also noted the same problem. But Subway units, with their overwhelming US presence, seem to be visually busy, and seem to of the right scale.
Routinely, in my field visits of restaurants so far this year, I find situations where the company’s central marketing thrust is all but hidden or ignored by misplaced restaurant outdoor posters, in store merchandizing, OR where cashiers actually “trade down” customers to the more discounted offers, from a higher margined item. Either action results in a very sub-optimal outcome.
In the example above, the TG I Friday’s franchisee pointed to a gross margin of only about 20% on that particular steak sandwich item. That’s far below the typical 60-70% margin. I’d bet that not every item in the mix resulted in such a steep discount. But any discount means that incremental sales traffic must be generated to offset the lower margin resulting from the promoted item sales.
Franchisees are more margin centric in their needs and outlook, while the large publicly traded companies are more comp sales oriented, because that is a key metric The Street is looking for.
A lot of that tension is due to the franchise model, where franchisors get royalties based on sales but franchisees make profit the old fashioned way, taking what’s left after expenses are paid. Also, franchisees generally have higher cost of capital (if they can get credit at all right now) and have lower potential margin structures, as they must pay a royalty to the franchisor off the top, usually 3-8%.
Very clearly, deal and value is very important in retailing, but how do you drive it optimally?
One, is that you avoid the mistakes noted in the TGI Fridays example above: work to make the discounts meaningful but not such that individual item sales are slashed beyond feasible (rule of thumb: 50% gross margin is a starting point).
Another is that Fridays could have limited the discount to lunch only—most casual dining operators are slower daytimes and are much busier in the evening. Work to fill in your gaps but play to your strengths.
Another is offering attractive, limited time offers with the price point and margin you can tolerate. Both Brinker (EAT) and Darden (DRI) have kept their product development groups busy lately, creating and rolling out such items.
About the author: John A. Gordon is with Pacific Management Consulting Group, an analytically oriented chain restaurant management consultancy; focused on restaurant economics and earnings
by john a. gordon
In a June 23 New York Times Business article, Discounts Have Restaurants Eating Own Lunch, the woes of chain restaurants offering discounts—and the possible long term effect of doing so, was well outlined. The following passage caught my eye:A T.G.I. Friday’s promotion in April and May offering $5 sandwiches and salads led to a small-scale revolt among franchisees. Ross Farro, who has seven T.G.I. Friday’s restaurants in Ohio and Pennsylvania, said the promotion included salads that normally sell for as much as $10 and a steak sandwich priced at $11.89 on the regular menu. The ingredients alone for each steak sandwich cost about $4, he said.
The promotion was supposed to run at lunch and dinner, but Mr. Farro said he and some other franchisees put away the $5 menu inserts at night to stop the bleeding.
This was not the first such example just this year of such issues plaguing chain restaurants and franchisees. Sonic (SONC), for example, has been struggling for almost the entire last year by promoting either drinks or its $1 value menu, and having declines in average customer ticket, not offset by increases in customer traffic. It reported earnings on June 23, which were still weak. And Burger King (BKC) and Subway franchisees have also noted the same problem. But Subway units, with their overwhelming US presence, seem to be visually busy, and seem to of the right scale.
Routinely, in my field visits of restaurants so far this year, I find situations where the company’s central marketing thrust is all but hidden or ignored by misplaced restaurant outdoor posters, in store merchandizing, OR where cashiers actually “trade down” customers to the more discounted offers, from a higher margined item. Either action results in a very sub-optimal outcome.
In the example above, the TG I Friday’s franchisee pointed to a gross margin of only about 20% on that particular steak sandwich item. That’s far below the typical 60-70% margin. I’d bet that not every item in the mix resulted in such a steep discount. But any discount means that incremental sales traffic must be generated to offset the lower margin resulting from the promoted item sales.
Franchisees are more margin centric in their needs and outlook, while the large publicly traded companies are more comp sales oriented, because that is a key metric The Street is looking for.
A lot of that tension is due to the franchise model, where franchisors get royalties based on sales but franchisees make profit the old fashioned way, taking what’s left after expenses are paid. Also, franchisees generally have higher cost of capital (if they can get credit at all right now) and have lower potential margin structures, as they must pay a royalty to the franchisor off the top, usually 3-8%.
Very clearly, deal and value is very important in retailing, but how do you drive it optimally?
One, is that you avoid the mistakes noted in the TGI Fridays example above: work to make the discounts meaningful but not such that individual item sales are slashed beyond feasible (rule of thumb: 50% gross margin is a starting point).
Another is that Fridays could have limited the discount to lunch only—most casual dining operators are slower daytimes and are much busier in the evening. Work to fill in your gaps but play to your strengths.
Another is offering attractive, limited time offers with the price point and margin you can tolerate. Both Brinker (EAT) and Darden (DRI) have kept their product development groups busy lately, creating and rolling out such items.
About the author: John A. Gordon is with Pacific Management Consulting Group, an analytically oriented chain restaurant management consultancy; focused on restaurant economics and earnings
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Son Isaac on Camel in Tangiers
