Status Report: Small-Business

Status Report: Small-Business Lending
September 17, 2009
By Diana Ransom

SMALL-BUSINESS LOANS are up at many of the nation’s lenders, but business isn’t exactly humming, and growing apprehension about commercial lending could leave a substantial number of firms without a source of capital.

The recent increase in lending has been clear. JPMorgan Chase (JPM), the parent company of Chase Bank and Washington Mutual, said it issued about $1.5 billion in loans to 4,177 small businesses with revenues up to $10 million during the second quarter, up 32% over the first quarter. Over the same period, Regions Financial (RF) said it issued or renewed $2 billion in loan commitments to small-business clients, a 31% hike over the first quarter.

Further, the country’s top 22 banks receiving capital injections from the U.S. government collectively reported more of the same. Although the total outstanding balance of small-business loans fell 1% in June, the total number of small-business loan originations surged 26% over a month earlier, according to the Treasury’s latest monthly bank lending survey.

Some lenders are newly bullish about issuing loans to small businesses because of a slight uptick in demand and the apparent success of the Small Business Administration’s move to lift its flagship 7(a) loan guarantee to 90%, up from 75% or 85%.

“The SBA programs help you out with newer businesses or businesses that don’t have a lot of collateral,” says Maria C. Coyne, executive vice president of KeyBank (KEY) who also noted an increase in demand for loans.

Still, lending isn’t what it used to be. “In terms of our [current] lending pipeline, what we’re seeing now in lending demand is 60% of what we’d expect in a normal lending environment,” says John Asbury, the executive vice president of business services at Regions Financial. That’s up from loan levels of less than 50%, which the bank logged in December of last year. But it’s hardly back to normal, he says.

Firms holding their expansion plans in check may have a good reason, says Bob Coleman, a small business banking analyst in La Canada, Calif. “We’re still in a recession,” he says. “We’re not talking Armageddon here, but it will [likely] remain tough for businesses to get loans,” says Coleman.

The root of the problem is a lack of solid private backing for small-business loans. One example is the disparate markets for the two components of 504 loans, which business owners use to purchase real estate and equipment. Although the secondary market for 504 debentures (the 40% stake of each of these loans that is guaranteed by the government) is flowing relatively freely, there is no secondary market for 504 first mortgages (the 50% stake made by private lenders), Coleman says. In the American Recovery and Reinvestment Act (ARRA), the SBA was instructed to take steps that would establish a secondary market for these first mortgages, says Jonathan Swain, a SBA spokesman. “We are currently in the process of finalizing the regulations for that piece of the Recovery Act,” he says.

Still, Coleman insists that the SBA is dragging its feet. Through the program, the Treasury would purchase mortgages if no other buyers step forward. Assurance of a buyer might drive banks to continue issuing 504 loans. Without that guarantee, banks could remain wary about issuing such loans, as many analysts expect the market for commercial loans to be the next shoe to drop, he says. Already, there are about $135 billion in defaulted commercial mortgages, a figure that has more than doubled since the beginning of the year, according to Real Capital Analytics, a firm that tracks commercial property sales.

Small-business advocates also worry about what will happen once the $375 million set aside by the SBA to temporarily eliminate loan fees and increase the agency’s loan guarantee to 90% for 7(a) and 504 loan programs runs out. SBA-backed loans are expected to revert to their pre-Recovery Act status by the end of November or December, according to the SBA.

In addition, lending terms are still tight. According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, 35% of domestic banks said they tightened credit for small firms in July, down slightly from more than 40% in April. And as many business owners have seen their credit scores slide, they’ve lost some of their ability to qualify for loans.

The steady stream of regional bank failures isn’t helping either. Since last September, 108 banks have shuttered, according to the Federal Deposit Insurance Corporation. Many other banks have been bought out. For borrowers, industry consolidation means that there are fewer lenders to approach for loans, which can limit a company’s ability to attract funding.

When PNC Financial Services Group (PNC) acquired National City Corp. last December, John Snyder, a senior business consultant at Gannon University’s Small Business Development Center in Erie, Pa., said his clients were left with few alternatives. “National City was always the biggest SBA lender in the area,” he says. “Now that they’ve mostly been absorbed by PNC, they aren’t [necessarily] willing to do SBA loans for start-ups,” Snyder says. (According to PNC spokeswoman Meghan Cole, the bank does lend to start-ups — under the right circumstances, such as to those with an experienced manager or owner.)

SBA, After Backlash, to Ease Limits on Loans for Buyouts

SBA, After Backlash, to Ease Limits on Loans for Buyouts

By EMILY MALTBY

The Small Business Administration, after enduring a backlash from lenders and business appraisers, plans Oct. 1 to modify a restriction it had placed on loans used to finance acquisitions of small companies.

In March, the SBA, capped the guarantee it was willing to extend on "goodwill" financing, which is the amount of a loan used to purchase an existing business's intangible assets, such as an established name, brand or customer base. The market price of a small business is based partly on its tangible assets, such as property, equipment and inventory, but often primarily on its goodwill. For some firms for sale, such as professional practices, Internet companies and service firms, the value of intangible assets can range between 55% and 95%.

For years, lenders were free to administer SBA-guaranteed loans with any amount of goodwill financing. But in March, the SBA changed its rules so that guarantees for goodwill financing would be capped at $250,000, or 50% of the loan amount, whichever was lower. The rules were designed in part to prevent sellers from inflating companies' intangible assets.

SBA-guaranteed loans are a small proportion of small-business loans. But the move didn't help in a market already taking a beating, business-acquisition specialists said. In March, closed business sales were 33% below the levels seen a year earlier, according to BizBuySell.com, an online marketplace for business acquisitions based in San Francisco.

"It was the antistimulus," said Ronald Feldman, chief executive of Siegel Financial Group, a consultancy firm for small-to-midsize business acquisitions in Bala Cynwyd, Pa.

Starting in October, the SBA is raising the cap on its guarantee of goodwill financing to $500,000. If the goodwill financing exceeds that amount, the SBA will recommend that lenders consider requiring more equity from the borrower or seller. SBA spokeswoman Hayley Matz said the agency adjusted the cap after collecting data on goodwill financing, and found that the average goodwill amount was close to $400,000. "We want to make sure they have continued access to capital," Ms. Matz said.

The National Association of Government Guaranteed Lenders, a Stillwater, Okla., group that represents lenders that make SBA loans, said the new rules are less restricting.

"Lenders really tightened up on business acquisitions after the March 1 rules took effect," said Tony Wilkinson, the group's president and chief executive. The guidelines also clarify the circumstances under which lenders may process loans. For instance, for goodwill financing that exceeds $500,000, the SBA recommends 25% in equity from the purchaser.

The guidelines are seen as a compromise between the free rein on goodwill that lenders and business appraisers had historically experienced and the March rules. For potential buyers, the new rules, like the March rules, may provide security that they aren't overpaying for a company's intangible assets.

Jeanine Vigeant of Providence, R.I., said she wished some goodwill restrictions were in place when she took out an SBA loan in April 2008 to buy a business that imported shoes from China for U.S. distributors. She paid $1.5 million for the business, relying on the seller's word that the loyalty of 10 customers, the primary basis for the goodwill, which made up 95% of the price, would continue.

But, within months of acquiring the business, those customers had severed their relationship, she said. Ultimately, she and her son, a partner in the business, defaulted on the loan after six months. The sellers of the business didn't return calls to comment.

"When I read [in March] that the SBA would put a cap on the goodwill or hold the seller accountable for more, I couldn't resist writing to the SBA," she said. "I told them I wished this had happened a year earlier, because then I would not be in this position."

How to Decide if Entrepreneurship is Right for You

How to Decide if Entrepreneurship is Right for You

By COLLEEN DEBAISE

Adapted from the upcoming book THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press, Dec. 29, 2009).

Starting a business is a lot like becoming a parent. Not only do you have to prepare for your start-up emotionally and financially, but you have to be committed to its constant needs until it's mature enough to hum along on its own. And even then (much like a child) it will always need you in some capacity, no matter how old it gets.

Here are five questions to ask before you start your own business:

1. Am I passionate about my product or service? Let's face it: the start-up phase is stressful. You will find yourself questioning whether you've made the right decision, especially when the hours are long and the initial profits (if any) are lean. As the business owner, you're also chief salesperson for your company. Your enthusiasm for your product or service— whether it's hand-knit sweaters or top-notch tax preparation— is often the difference that hooks customers, lands deals and attracts investors. It's unwise to start down the path of entrepreneurship unless you've got a zeal that will get you through rough patches and keep you interested long after the initial enthusiasm has faded.

2. What is my tolerance for risk? Whether it's quitting your day job or signing a lease on a new space, nothing about starting a business is for the faint of heart. Just ask Ina Garten, who bought a specialty-foods store called The Barefoot Contessa in East Hampton, New York, in 1978 and has since branched out into cookbooks, television and a line of products. Garten tells aspiring entrepreneurs that you have to "be willing to jump off the cliff and figure out how to fly on the way down." Even with enough passion to launch a thousand ventures, you could find any number of circumstances hastening your failure: a location that turns out to be less than ideal, a problem with city or state zoning boards or a kink in the supply chain that can't easily be ironed out. There's no guarantee of success, or even a steady paycheck. If you're risk-averse, entrepreneurship probably isn't the right path for you.

3. Am I good at making decisions? No one else is going to make them for you when you own your own business. Consider how you might handle these early decisions: Do I work from home or do I lease office space? Do I hire employees? Do I pursue high-end clients or sell to the masses? Do I incorporate? Do I advertise? Do I borrow money from friends or family? Do I use my entire savings? Keep in mind that the decision-making process only gets more complicated as time goes on, once you have employees or clients depending on you. The choices you make can lead to success or downfall, so you must feel confident in your ability to make the right call.

4. Am I willing to take on numerous responsibilities? While a corporate employee focuses on a special skill or role within the larger corporation, a business owner must contribute everything to the business. Solo entrepreneurs in particular must be versatile and play a number of roles, from chief salesperson and bookkeeper to head marketer and bill collector. If juggling many roles doesn't suit you, entrepreneurship probably won't, either. The recent economic downturn has made it more important than ever for business owners to have a good working knowledge of their companies' finances. While you will undoubtedly learn much on this topic from getting your hands dirty, the more knowledge you have in advance, the better prepared you'll be.

5. Will I be able to avoid burnout? Working seven days a week, losing touch with friends, abandoning old hobbies and interests and not making time for loved ones can quickly lead to burnout in the midst of starting up— and ultimately to business failure. That's what happened to James Zimbardi, an entrepreneur in Orlando, Florida, who says he didn't know any better when he started his first company in 1997 and worked as hard as possible, for as long as possible, until his creativity, enthusiasm and energy were sapped. By 2002, he was a broken man— the business took a downturn, and so did his personal life. Now Zimbardi is at work on his second company, Allgen Financial Services, and sticking to better habits to maintain work/life balance, such as not working on Sundays, making time for hobbies such as sailing and salsa dancing, and building close ties with other business owners through a faith-based support network.

Take some time to mull over these questions, do some soul-searching, and then if you think you have what it takes, go for it.

How to Decide if Entrepreneurship is Right for You

By COLLEEN DEBAISE

Adapted from the upcoming book THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press, Dec. 29, 2009).

Starting a business is a lot like becoming a parent. Not only do you have to prepare for your start-up emotionally and financially, but you have to be committed to its constant needs until it's mature enough to hum along on its own. And even then (much like a child) it will always need you in some capacity, no matter how old it gets.

Here are five questions to ask before you start your own business:

1. Am I passionate about my product or service? Let's face it: the start-up phase is stressful. You will find yourself questioning whether you've made the right decision, especially when the hours are long and the initial profits (if any) are lean. As the business owner, you're also chief salesperson for your company. Your enthusiasm for your product or service— whether it's hand-knit sweaters or top-notch tax preparation— is often the difference that hooks customers, lands deals and attracts investors. It's unwise to start down the path of entrepreneurship unless you've got a zeal that will get you through rough patches and keep you interested long after the initial enthusiasm has faded.

2. What is my tolerance for risk? Whether it's quitting your day job or signing a lease on a new space, nothing about starting a business is for the faint of heart. Just ask Ina Garten, who bought a specialty-foods store called The Barefoot Contessa in East Hampton, New York, in 1978 and has since branched out into cookbooks, television and a line of products. Garten tells aspiring entrepreneurs that you have to "be willing to jump off the cliff and figure out how to fly on the way down." Even with enough passion to launch a thousand ventures, you could find any number of circumstances hastening your failure: a location that turns out to be less than ideal, a problem with city or state zoning boards or a kink in the supply chain that can't easily be ironed out. There's no guarantee of success, or even a steady paycheck. If you're risk-averse, entrepreneurship probably isn't the right path for you.

3. Am I good at making decisions? No one else is going to make them for you when you own your own business. Consider how you might handle these early decisions: Do I work from home or do I lease office space? Do I hire employees? Do I pursue high-end clients or sell to the masses? Do I incorporate? Do I advertise? Do I borrow money from friends or family? Do I use my entire savings? Keep in mind that the decision-making process only gets more complicated as time goes on, once you have employees or clients depending on you. The choices you make can lead to success or downfall, so you must feel confident in your ability to make the right call.

4. Am I willing to take on numerous responsibilities? While a corporate employee focuses on a special skill or role within the larger corporation, a business owner must contribute everything to the business. Solo entrepreneurs in particular must be versatile and play a number of roles, from chief salesperson and bookkeeper to head marketer and bill collector. If juggling many roles doesn't suit you, entrepreneurship probably won't, either. The recent economic downturn has made it more important than ever for business owners to have a good working knowledge of their companies' finances. While you will undoubtedly learn much on this topic from getting your hands dirty, the more knowledge you have in advance, the better prepared you'll be.

5. Will I be able to avoid burnout? Working seven days a week, losing touch with friends, abandoning old hobbies and interests and not making time for loved ones can quickly lead to burnout in the midst of starting up— and ultimately to business failure. That's what happened to James Zimbardi, an entrepreneur in Orlando, Florida, who says he didn't know any better when he started his first company in 1997 and worked as hard as possible, for as long as possible, until his creativity, enthusiasm and energy were sapped. By 2002, he was a broken man— the business took a downturn, and so did his personal life. Now Zimbardi is at work on his second company, Allgen Financial Services, and sticking to better habits to maintain work/life balance, such as not working on Sundays, making time for hobbies such as sailing and salsa dancing, and building close ties with other business owners through a faith-based support network.

Take some time to mull over these questions, do some soul-searching, and then if you think you have what it takes, go for it.

How to Start an Adventure Travel Company

How to Start an Adventure Travel Company
Check every hotel personally, says Brian Morgan of Adventure Life. Same goes for the zip lines.

By Leigh Buchanan Jul 1, 2009

Company Dashboard: Adventure Life
Founder Brian Morgan, 35

Location Missoula, Montana

2008 Revenue $11 million

Employees 16

Start-up Year 1998

Start-up Costs $3,000 for two brochures and a laptop

Breakeven One year out on sales of $125,000

Biggest Expenses $11,500 on advertising in 1999 and $33,500 in 2000. The biggest bite was print ads in magazines such as Outside and National Geographic Adventure.

Qualifications Fluency in Spanish. Relationships with trusted locals and longtime expats on the ground

Red Tape Regulatory burdens fall on lodges and providers of transportation and other services in countries visited, rather than on the tour operator.

In 1998, Brian Morgan traveled to Ecuador to learn Spanish and because someone he met in college once told him it was beautiful. There he trekked in the shadow of a volcano and rafted through the rain forest to a soundtrack of monkey chatter and birdsong. It would have been easy to put down roots in South America: Morgan envisioned building a life there as a consultant. But heart and home were in his native Montana. So, after some last-hurrah backpacking around Bolivia and Peru, Morgan flew back to Missoula. He hoped to land a job that would support regular visits south of the equator.

Then Morgan had an idea. "I thought I could put a group of people together a few times a year and take them to Ecuador -- show them the things that I found most spectacular," he says. His nascent business, Adventure Life, would lead travelers off the beaten path toward encounters with the land and culture. On some nights, clients would luxuriate in hot baths at a charming hotel. On others, they would rough it in a villager's plumbing-less home.

Morgan had just a couple thousand dollars in savings, though, so he accepted a software job and relegated start-up work to evenings and weekends. He printed 200 brochures advertising a single excursion and deposited them in coffee shops and sporting-goods stores near universities. No one called. Travel agencies waved him away. Concluding that travelers wanted more than one option, Morgan created a second brochure offering three itineraries with six departure dates. He also built a website, which looked like the work of an Amazonian howler monkey. Fortunately, a graphic design student redesigned the site a few weeks later. Drawn by the brochure and the site, 100 people booked the first year.

Morgan had expected young backpackers to flock to the tours and assumed rudimentary accommodations and transportation would suffice. In fact, many clients were as old as 65. In addition, Morgan based his fees on data harvested from European company sites, which were plentiful. But because Americans take fewer vacations than Europeans, they are willing to spend more on shorter trips. "I lost money on my first group in Peru," says Morgan. "Once I got there, I was like, 'Oh, my God; we cannot stay at this hotel.' I had to spend an extra $100 per person to upgrade." Morgan began booking rooms in classier hotels and switched from bus travel to car services. That first year, prices rose 25 percent to 30 percent.

Morgan had also assumed he would maintain a staff of expat tour leaders in the countries in which he did business. Those guides would take over in challenging terrain and run tours themselves as the company grew. But on his first tour, Morgan observed that local guides were far better versed in the flora, fauna, and culture than their North American counterparts. Many spoke indigenous tongues as well as Spanish and English. And though local guides charged about twice as much per day as Americans, they were generally willing to sign on per tour rather than be hired as staff. So Morgan began recruiting locals, e-mailing people he had met on his travels for referrals.

Not surprisingly, the first few years required a lot of time in the (steamy verdant) field. Morgan spent a third of 1999 in Ecuador, Costa Rica, and Peru leading tours and inspecting hotels -- sometimes as many as 12 a day -- for cleanliness and character. "You lift the covers and check the sheets and mattresses; check the bathrooms for mold," says Morgan. He also personally auditioned activities offered to clients. "In Costa Rica, I rappelled down all these waterfalls," he says. "When I was done, I turned to my outfitter and said, 'My travelers can never do this.' "

With its founder abroad, Adventure Life needed a presence in the U.S.; at first, that presence was Morgan's mother. After 10 months, he hired an administrative assistant to help create new brochures and assist clients preparing for trips.

Over the years, Adventure Life's business has waxed along with interest in the environment and indigenous cultures. Today, 40 percent of sales derive from customer referrals and coverage in guidebooks and travel magazines.

Morgan warns that running a company like his may wear down even the most wanderlustful entrepreneurs. "I went through major burnout a few years ago and almost left the industry," he says. "I lost all the original things I loved about travel." To keep going, Morgan began mentally framing his trips as opportunities to see old friends and explore places he will never take clients. "It was totally unexpected that sharing my passion with others ended up dampening that passion," he says.

Restaurant Financing 2009 Update Re-cap

Restaurant Financing 2009 Update Re-cap
By: Colemanpublishing.com

September 15, 2009

2009 Restaurant Financing Update

-Roughly 50,000 SBA loans since 2000
-$11 Billion 7(a) and 504
-1 out of 9 SBA Loans finance restaurants
-15% failure rate
-12% of all Charge-offs since 2000
-1 Million Restaurants in United States
-(1 Restaurant for every 320 Americans)

Nathaniel Booker, President of First Innovative Financial Group, Inc. explains, "Quite often many of the deals that we have done are in strip centers, sometimes in malls. This is why it's very critical underwrite the business.

When you underwrite the business, you're underwriting the owner, management is very critical.

You want someone who has experience operating a restaurant. If they are opening up a second or third location you mitigate your risk of loss. When you're opening up a new location you need projections that are listed and supportable. Many of them don't do what I consider very critical analysis regard to table turn.

Chris Hurn, President & CEO of Mercantile Capital Corporation explains, "I want to see that they know their space well. If they're a sit down or fast casual, knowing what else is around that particular location is helpful.

"I'm a big believer that you can tell a lot about a company with the kind of measures restaurants have in place to try and make it such that the employee's enjoy what they do and then actually show it to the customers as well.

"Is the experience delivered consistently every single time? In the case of restaurants, do the waiters or waitresses check their attitudes at the door and they put on a performance when they're there. These are all non-financial, intangible items, but it's important to know that. It helps a lender contemplate doing a particular loan to know some of these things because it gives you a better feel for what this concept is going to be like and whether they should actually do it or not.

Emerging Restaurant & Entertainment Area

Fountain fix designed to revitalize Square
Star report
Posted: September 8, 2009

Paul Baumgarten, manager of Fountain Square Main Street and a staffer at Southeast Neighborhood Development, is organizing the construction of a new Fountain Square fountain as part of revitalization efforts for the Near-Southside neighborhood.

The Pioneer Family statue at the intersection of Virginia Avenue and Shelby and Prospect streets will be replaced later this year by a cast-iron reproduction of Lady Spray, the water nymph sculpture that stood there in the early 20th century.

The Pioneer Family will eventually return to a new plaza nearby.
Baumgarten today answered some questions by e-mail about the fountain and the business district:

Q: How many businesses are in the Fountain Square district? Can you give me three or four primary ones, businesses that people who live far from the area might recall or know?

A: There are approximately 100 businesses and organizations in the Fountain Square district. There are 113 members (businesses, not-for-profit organizations, neighborhood associations and artists) of the Fountain Square Merchants Association (the boundaries are much larger than Fountain Square).

Our biggest attractors of outside visitors are the Fountain Square Theatre Building (which includes the Smokehouse on Shelby, Shelbi Street Cafe & Bistro, Fountain Square Theatre, Action Bowl and Atomic Bowl Duckpin Bowling, Shelby Suites and Fountainview Inn), great ethnic restaurants (Santorini Greek Kitchen, Siam Square, Naisa Asian Café, Luxor, El Arado, and Maria's Pizza), destination retail (Claus' German Sausage and Meats, Boca Loca Beads, Joe's Cycles, Mass Ave Knit Shop, Indianapolis Downtown Antique Mall, Domistyle), and creative facilities and businesses (AV Framing Gallery, indySwank: art - fashion - décor, Murphy Art Center, Wheeler Arts Community, Radio Radio, White Rabbit Cabaret, Deano's Vino).

Top recognizable businesses are Fountain Square Theatre Building (and duckpin bowling alleys), Santorini Greek Kitchen, Murphy Art Center and Deano's Vino.

Q: What are the district's primary challenges? Primary successes?

A: Our primary challenges have been to improve the physical quality of the Fountain Square commercial corridor -- buildings, infrastructure, landscaping -- while improving the quality and mix of businesses. We have also had to work to change peoples' perceptions about Fountain Square, and to introduce people who have not had reason to come to Fountain Square to visit. All of these things take a significant amount of time and money.

In the last ten years, there have been steady, gradual improvements to the commercial corridor. We have seen the quality of businesses in Fountain Square improve and, today, we're a neighborhood of fantastic independent and independent ethnic restaurants, and unique retail and entertainment venues. We also have businesses that support and serve the neighborhood residents (grocery, library, health center, thrift store, furniture store, laundry), and not-for-profit and professional service businesses that serve a wider audience.

Fountain Square is becoming known as a neighborhood where artists live and work. There are more than 60 artist studios and lofts on or near the commercial corridor, and many artists live in the greater Fountain Square area. Thanks to investments through the Fountain Square Main Street/FOCUS Program and the Cultural Districts Initiative, Fountain Square is becoming a vital hub of creativity. The Fountain Project, which has taken more that 14 years to get to this point, will be a significant physical change that will serve as a milestone in efforts to revitalize the neighborhood.

All of this is being accomplished through Southeast Neighborhood Development's commitment to improving Fountain Square, through the dedication and support of residents, neighborhood associations, and the Fountain Square Merchants Association, and through financial support from Lilly, Anthem (WellPoint), Indiana Farm Bureau Insurance, and the Indianapolis Foundation and the Local Initiative Support Corporation (LISC).

Q: Who is doing the Lady Spray water nymph? Is it an aritst from Indianapolis?

A: The new fountain (see attached drawings) is a new casting from Robinson Iron Works in Alexander City, Ala. The fountain is being made from molds taken from a historic fountain in New York State. The original Lady Spray in Fountain Square was a stock catalog item from Robert Wood in Philadelphia. The new statue is the same catalog figure that was on the original Fountain Square fountain.

Pro Bono Work Helps Firms Fight Economic Slump

Pro Bono Work Helps Firms Fight Economic Slump
Employees Volunteer Services to Charities and Nonprofits, Fostering Potential New Customer Relationships

By RAYMUND FLANDEZ

Some small businesses are following the recession playbook of the unemployed.

Just as many laid-off workers are volunteering more to fill up their free time and enhance their résumés, small-business owners and their employees are doing more pro bono services or volunteer work as a marketing and customer-relations strategy.

The recession hit Studio G Architects Inc. of Boston particularly hard last fall, causing 2008 revenue to drop 30% from the prior year, says Gail Sullivan, the principal. Clients of the 16-year-old architectural firm killed or put on hold 10 projects last October. With work slowing down, the company began providing 15 to 20 hours a week in pro bono services to keep employees occupied and potentially attract future contracts. It worked.

This spring the firm prepared preliminary design projects, such as a playground for severely handicapped children, for various charities. The projects later received full funding and Studio G obtained several contracts, which ranged in value from $16,000 to $100,000. "Offering the pro bono services has given us a chance to maintain our design vigor [and] resulted in people hiring us," Ms. Sullivan says.

For a small business that has lost clients or seen revenue-generating projects dry up, performing free work is a way to keep employees engaged while cultivating new relationships. Donating services to charity groups, churches, schools and other nonprofits can "increase local visibility, deepen local business ties and create opportunity for new business," says Christine Banning, vice president of marketing and communications at SCORE, a Washington-based group that provides free counseling to small businesses.

While it is a strategy that can bear fruit in a tough economy, she warns that small-business owners should set parameters in terms of how much they give away. With charitable giving falling in 2008 for the first time since 1987, dropping about 2% from a year earlier, according to a Giving USA study released last month, more nonprofits could be seeking donations from local businesses.

That is why Robert Politzer, president and chief executive of GreenStreet of New York Inc., made sure his pro bono work can benefit his company in the future.

At a networking event four months ago, Mr. Politzer met the director of the Hudson River Clearwater Sloop Inc., a nonprofit that aims to preserve and protect the Hudson River. Now, the green-building and consulting firm is serving as the volunteer construction manager of the group's new headquarters in Beacon, N.Y. As a public-relations move, GreenStreet is uploading videos on YouTube as it documents the pro bono work.

"This is only going to help expand our network, which should lead to more business for us," Mr. Politzer says.

Indeed, relationships matter now more than ever, says Audrey Murrell, professor of business administration at the Katz Graduate School of Business at the University of Pittsburgh. Those customers who get a first-hand look at a company's expertise during a pro bono project will likely turn to that company later, Ms. Murrell says.

"When there are fewer opportunities, there are more choices of whom people are going to do business with," she says, adding that people are going to "be more influenced by the relationship that you've cultivated."

One of the beneficiaries of eMazzanti Technologies' largesse this year was a local church, which had trouble setting up an outdoor wireless digital sign board. The Hoboken, N.J., technology company worked on the four-month project free of charge, saving the Our Lady of Grace church some $7,000 to $12,000.

In exchange, the company received an endorsement unlike any other. At a Mass, the pastor thanked the company in front of the congregation.

"My wife says, 'It's almost like a referral from God,' " says Carl Mazzanti, the 33-year-old chief executive.

With business ebbing, George Amorim, the co-owner of Divine Catering LLC of Madison, N.J., is offering free food and catering services this summer to local charities, in preparation for more business in the fall, when holiday parties are typically in full swing.

So far this year, he and his five employees have put on a Fourth of July barbecue party at a local children's hospital and donated a cheese tray for a bowling fund-raiser. In September, the company plans to cater a 10K running event. "We're trying to get the word out," says Mr. Amorim, whose business started in 2004 as a caterer for private-jet passengers. "All these things that we're doing now are for the future."

Steve DiFillippo, owner of Davio's, a 24-year-old Northern Italian steakhouse in Boston, shifted 30%, or some $20,000, of the company's advertising budget to pro bono work. This year, he says, not a week goes by that the company doesn't offer its services for charity events, or give away gift cards. Last year, the frequency was every other week.

"It's worth more to do charity work than to advertise in a local magazine," he says. "It's more like guerrilla marketing. People see that we're involved in the community."

Good News from SBA

Bulletin: Government Relations Update

The Small Business Administration issued its new Standard Operating Procedures document today. Though we are still reading its contents, there is great news contained within the SOP!

In effect, the cap on goodwill on SBA backed loans has been removed! Business acquisition loans under $500,000 can go into the Preferred Lender Program of the SBA without any SBA oversight and for loans above $500,000, as long as the equity (buyer injection plus standby seller loan) is 25% or more, no SBA review is needed. “This is great news for the business community as well as for the business broker profession,” said Bernie Siegel PhD, CBI, Chair of the IBBA Government Affairs Committee. “We have been working tirelessly on this issue and our efforts have finally paid off.”

“This is the first step that the IBBA has taken to build a long term relationship with the SBA,” said Andy Cagnetta, CBI, BCI, Chairman of the International Business Brokers Association. “We want to be a valued partner with the SBA as it works to get small businesses in America back on their feet.”

More details to come as we continue to digest the new SOP.

SBA Studies Say Franchises More Likely to Fail than Small Businesses

SBA Studies Say Franchises More Likely to Fail than Small Businesses

Posted Fri, 2009/08/28 - 00:06 by Mr. Blue MauMau

WASHINGTON - Separate studies by Professor Timothy Bates and now two studies by the Small Business Administration report that franchises fail more than independent small businesses.

Over the years, studies have emerged with opposing views when comparing “success rates” of franchising to independent business ownership. Franchise experts are familiar with the reports from the U.S. Commerce Department and those authored by Bates (1996). There are numerous private studies as well delving into franchise ‘success’ and franchise regulation, such as those cited and discussed in “Beguiling Heresy: Regulating the Franchise Relationship," co-written by Paul Steinberg and Gerald Lescatre.

However, two lesser known studies undertaken by the Small Business Administration have received little to no attention. In September of 2002, the U.S. Small Business Administration’s Office of Inspector General’s Inspection and Evaluation Division published a report comparing the failure rate of the SBA’s non-franchise loans to the SBA’s franchise loans. Titled “SBA’s Experience With Defaulted Franchise Loans," the SBA queried:

“If franchise-based businesses are indeed “safer”, then Section 7(a) and Section 504 loans to franchisees – hereafter called franchise loans – should perform better than non-franchise loans in terms of SBA having to purchase defaulted guaranteed loans. In other words, franchise loans should have significantly lower purchase rates than those of non-franchise loans.” (pg 1)

The SBA’s findings?

“Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.”(pg. iii)

The SBA also found:

“There is also potentially more exposure per loan on franchise loans. In FY 2000, the average (mean) franchise loan origination was 40% larger than that of the average non-franchise loan. In FY 1991, the comparable figure was only 1%.” (pg iii)

Equally interesting was the following point:

“Moreover, a previously mentioned SBA-funded study [Shane’s 1997 study] found that a franchisor must reach a minimum efficient scale to lower its (as opposed to a franchisee’s) costs. Given this necessity plus the need to collect franchisee-paid fees, franchisors have an incentive to encourage as many prospective entrepreneurs as possible to become franchisees and find financing. Moreover, there is always a risk of some franchisors’ overly optimistic financial projections enabling under qualified prospective franchisees to obtain – and default on – SBA guaranteed loans.” (pg. 1&2)

Prior to publishing, the OIG’s Office of Inspection and Evaluation forwarded this report to the SBA’s Office of Financial Assistance (OFA) for review. In James Rivera’s, the Associate Administrator for the OFA, response to this request for review he stated “A member of my staff conducted a similar study and analysis of the SBA loan data base for the same period under inspection and came to the same conclusion supported by your finding related to the relative success of franchise verses non-franchise loans.” While a copy of this specific OFA’s report is not currently available, the aforementioned letter appears as Appendix C to the attached report.

Although not looking into franchisee success rates as the other studies did, Prof. Scott Shane and Foo conducted research (1997) that shone a light on the high mortality of franchisors, revealing that 1,292 franchise brands studied between 1979 and 1996, only 15% of the franchisors lived to be 17 years old, a rate comparable to independent start-up failures.

Editor’s note: This article was written by Blue MauMau member Oldsword, a former franchise owner-operator. This article has been edited and the facts verified by this journal’s editor.