‘Cheshire Puss,’… ‘Would you tell me, please, which way I ought to go from here?’ said Alice.

‘That depends a good deal on where you want to get to,’ said the Cat.

‘I don’t much care where-’ said Alice.

‘Then it doesn’t matter which way you go,’ said the Cat.

‘-so long as I get SOMEWHERE,’ Alice added as an explanation.

‘Oh, you’re sure to do that,’ said the Cat, ‘if you only walk long enough.’

Lewis Carroll, Alice’s Adventures in Wonderland

So… pick any direction … Are you going anywhere in particular? How long can you keep walking?

Here are some of the many good reasons why every firm needs a business plan:

• When you want equity sources to consider your firm’s request for capital.
• When you want debt sources to consider your firm’s request for capital.
• When you want to show your sophistication.
• When you want to have a focused set of activities for your firm.
• When you want people to take your firm seriously.
• When you want to show your firm’s history accurately.
• When you want to show your firm’s management capabilities.
• When you want to show your firm’s competitive marketplace position.
• When you want to define where your firm is going.
• When you want how your firm is going to achieve its goals.
• When you want your firm to save money.
• When you want your firm to save time.
• When you want to understand your firm’s costs.
• When you want to understand your firm’s potential losses.
• When you want to show how prepared your firm is.
• When you want to understand your firm’s revenues.
• When you want to understand your firm’s customers.
• When you want to understand your firm’s products & services.
• When you want to control your strategies, finances, objectives, or anything else.
• When you want to understand your firm’s people.

The list goes on and on. If you are leading a business or part of the team leading the business, you have to know where you are, where you want to get to, and how you are going to get there. Your business plan is an absolutely critical foundation requirement for your business, and your plan should be a living roadmap that changes and grows with the changes and growth of your business.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
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Why Every Company Needs a Business Plan is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Secrets of Due Diligence for Small Business, Secret #7: Don’t Ignore All That Corporate Stuff
2. Do a Little Diligence Before You Ask the Bank for a Loan
3. Introduction to Equity Investment Due Diligence, The Next Generation

I am often asked where due diligence can be applied. What follows is a partial list of the many areas where due diligence can help a company:

• Accounting Procedures
• Accounting Systems
• Acquisitions, Mergers or Sales of Businesses
• Analysis of Present & Future Products & Services
• Assumptions for Projections
• Attendance at Seminars, Conferences & Shows
• Avoidance of Conflicts of Interest
• Board of Directors Issues
• Brand and Reputation
• Budgeting
• Business Plans
• Buy-Sell Agreements
• Capital Expenditures
• Cash Flow
• Communication & Teamwork
• Compensation & Benefit Plans
• Computer Systems & Capabilities
• Contracts
• Contributions of each Profit Center to Overall Performance
• Corporate Acquisition Candidates
• Corporate Budget
• Corporate Culture
• Corporate Planning
• Cost Structures
• Credit-Reporting
• Customers
• Decision Processes
• Developing the Optimum Timing of Exit Planning events for generating the Optimum Value of the Transfer
• Disaster Recovery
• Document Flow
• Employee Benefit Systems
• Employee Hiring and Retention
• Employee Satisfaction
• Employee Stock Ownership
• Equity Capital
• Equity Compensation
• Exit Planning for the Future Transfer of Business Interests to Family, Employees, Partners, or Outside Purchasers
• External Market Environment Assessment
• Financial Analysis
• Financial Statements
• Future Earnings Stream
• Future Expansion Projects
• Gifts of Stock or Securities
• Industry Publications
• Insurance
• Intellectual Property Policies & Assets
• Intellectual Property Security
• Internal & External Business Documents
• Internal Accounting Controls
• Internal Audit Function
• Internal Communications Strategy & Media
• Issuance of Securities
• Key Relationships
• Key Senior Positions
• Litigation & Administrative Actions
• Loans & Financings
• Management Communications
• Management Succession Systems
• Management Systems
• Managerial Skills & Talents of Key Individuals
• Market Research
• Marketing & Sales Methods
• Marketing Budget
• Marketing Procedures
• Methods of Evaluating Existing Products & Services
• New Products & Services Evaluation
• Objectives Set for the Business
• Organization Chart, Existing Team & Planned
• Organization Development
• Organizational Structure
• Outside Contractors
• Outside Professional Firms
• Partnership Dissolutions & Divorce Proceedings Affecting Business
• Performance Reviews
• Personnel Policies
• Personnel Training and Development
• Plans for New Locations
• Press Interaction
• Pricing & Pricing Strategy
• Profit Generators & Indicators
• Promotional Materials
• Public & Private Offerings
• Relationships with Vendors, Suppliers, & Alliances
• Reporting Procedures
• Research & Development
• Resource Handling & Availability
• Safety
• Sales & Marketing Relationships
• Sales Methods
• Security
• Shareholder Issues
• Strategic Business Planning
• Strengths & Weaknesses of the Organization
• Team Growth
• Technology
• The New Media

Applying due diligence to all parts of an organization will help improve financial performance, strengthen competitive positions, expand organizations more effectively, preserve human performance and increase internal know-how.  With these improvements, companies are better able to grow through mergers and acquisitions, spin-offs, and alliances. Comprehensive due diligence brings new power to the organization, adding to the existing strengths of management and staff, creating more value for a unit or division, as well as improving its abilities and success rate when acquiring or merging with new firms.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
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Where Can Due Diligence Be Applied? is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Better Due Diligence: Perform a Due Diligence Audit
2. Introduction to Strategic Planning Due Diligence

I came across an interesting post on A VC, Musing of a VC in NYC, where an entrepreneurial company wanted to know if it was standard venture capital industry practice to charge the entrepreneurs a fee for processing due diligence.

This request looks like an up front fee scam. I have seen a ridiculous number of such scams. However, to be fair I have not seen any of the established venture capital firms charge such a fee. (If you have, please email me right away!) You should NEVER pay upfront fees or charges to any capital source, such as a venture capitalist.

Now of course there is the investment banking route, which is an entirely different story. The poor entrepreneur gets poorer until the deal is done, by paying up front, during the money-raising process, and after the capital is acquired, for practically anything the investment banker can think of.

This brings up one of my pet peeves. Financial houses are really good at adding more and more charges to the deal. I have a rather strong opinion about this practice. Over the years, capital sources have created a myth that all this falls under the heading, ‘a standard industry practice.’ Baloney! There are no standards here at all! Every year they try adding new charges and categories, and when no one successfully challenges these, they build it in as if it were part of the foundations of every deal.

I have seen some absolutely outrageous charges. Probably the most outrageous of all time is the ‘non-accountable expense allowance.’ Let’s play that back. The entrepreneur pays for something that is nothing, just a number pulled out of thin air!

Make no mistake, all these charges do not benefit the entrepreneur at all, and in fact, come right out the entrepreneur’s pocket. So, the financial houses deduct all the charges from the amount of money raised, and the entrepreneur ends up with far less than their requested capital!

I suggest an industry-wide practice change. Add all the fees and charges on top of the requested capital and raise that amount, so that the entrepreneurs receive what they actually need vs. a watered-down remainder! One man’s humble opinions.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
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Up Front Due Diligence Fees from Investment Sources is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Investment Due Diligence for Corporations
2. Introduction to Equity Investment Due Diligence, The Next Generation
3. Why Every Company Needs a Business Plan

A Next Generation Due Diligence Assessment of an Industry Niche

Introduction

The fractional luxury property industry is a recent new vehicle growing out of the larger and older fractional vacation property ownership industry. Owning a fractional portion of a vacation real estate property allows consumers to enjoy vacations in a private setting without all the difficulties of owning, financing, and maintaining the entire property. Fractional ownership of real estate is similar to fractional jet ownership or private membership golf clubs. Simply put, why put out all that money to buy and keep up a second home that you only use a small portion of the year? Fractional real estate ownership allows people to leverage their financial capabilities, and purchase only what they want for their vacation experiences. Most of the traditional fractional ownership industry sells one-quarter fractionals, targeting up to the middle range of the market for second homes.

The luxury fractional property industry is the newest trend in vacation real estate, starting in 1992. Targeting the more upscale consumer, a luxury fractional property program offers four- and five- star, higher-end destination resort-style homes with special amenities and services, and often special privileges, such as access to private golf courses and beaches, private jet travel, private yacht travel, luxury travel services, safaris, and private tours. The consumer becomes a private club member by paying an initial fee, and then chooses a number of weeks at one or more of a group of luxury homes and/or condominiums in high-end locations. The member is also responsible for annual fees, and/or fees for various special services and amenities.

Definition

Phrases abound in this very new market niche, depending on factors such as the types of developers, locations, and styles of programs. The following phrases are most often used:

• luxury fractional property
• luxury fractional residence
• luxury fractional home
• luxury fractional second home
• luxury vacation residence club
• private membership club
• private residence club
• private vacation club

To be most comprehensive, a universal definition of the luxury fractional property niche should include the following elements:

• a high level of exclusivity
• a private club
• a real estate investment vs. a simple vacation
• affluent customers
• an investment asset
• concierge service
• event and activity reservations
• four and five star level of services
• highest-level finish work
• low-pressure sales tactics
• housekeeping service
• no general public access
• no sales gimmicks
• pre-arrival grocery shopping
• privacy
• relationship selling
• shared ownership
• sophistication
• top drawer furnishings
• trip planning

Background and History

The oldest fractional ownership method is when an extended family or group of friends cooperate by sharing the use of a vacation house, and allocating the costs throughout the group to lower each member’s individual financial burden.

Timesharing, a form of fractional ownership, began in in the early 1960s. First, European families decided to join together to purchase vacation homes, to “share” the costs and “share” the time spent. Soon, resorts in Europe started selling “weeks” in “shares” of “time” at their resorts. This concept migrated to the in the early 1970s, with the first timeshare units typically converted from motels and hotels and sold as efficiencies and one bedrooms. The concept quickly spread through resorts and condominium projects in the , and the process of swapping timeshares began by 1974.

While the timeshare industry suffered very serious reputation issues for some time, Marriott Hotels and others worked hard to bring the industry into a respectable position, and by the early 1980s, over 150,000 timeshares were active in some 500 resorts. By 2000, there were over 5,000 resorts with over 5 million timeshare vacation properties.

The first fractionals, basically just portions of a property larger than time-share portions, started appearing in 1971 and 1972, with pioneers such as Email Hanslin and Carl Berry creating larger then 1 or 2-week programs, and building and marketing true fractional properties. Unfortunately, these programs did not catch on with the public, and the timeshare industry flourished.

In 1992, the Deer Valley Club was created in Park City, Utah, and the Franz Klammer Lodge was started in Telluride, Colorado . These were the first luxury fractional properties, and Derring, Hanna and Whitteron, founders of the Deer Valley Club, created the phrase ‘private residence club.’

Soon, everyone from small developers to the Four Seasons and the Ritz-Carlton jumped on the bandwagon. The early concentration of the industry was in the RockyMountain ski-areas, including Aspen, Jackson Hole, Lake Tahoe, ParkCity , Snowmass, Steamboat Springs, Sun Valley , Telluride and Vail. This quickly expanded into many destination resorts, golf resorts, beach resorts, and even urban areas in the US, Mexico, and the Caribbean, including Arizona, Bermuda, Cabos San Lucas, California., Charleston, Florida, Grand Bahama Island, Grand Caymans, Hawaii, Hilton Head, New York City, Palm Desert, Palm Springs, Pinehurst, Scottsdale, St. Barths, St. Johns, and Texas.

The industry boomed to over $510 million in sales in 2003 with about 150 projects, and by the end of 2004, about 200 fractional property projects existed in one form or another. The industry is expected to reach $1 billion in annual sales within 2 to 3 years.

Structure

There are two types of luxury fractional property structures, the straight fractional program and the club-style program.

Fractional-ownership programs fall between owning a second home completely, and time-share programs. Full ownership means you have exclusive use, and all the responsibilities. Time-share purchases give you a set number of weeks that you can use at their resorts, but you do not own any of the real estate.

Purchasing a fractional-ownership program gives you a “fraction” of the property rather then the entire property. You receive a legal deed to the property giving you an undivided, fractional fee-simple interest in the property, also known as strata title ownership. You share the costs with the other owners of the balance of the fractions. Shares in fractional-ownership programs range from 1/13th to 1/2, with the most common share size being the 1/4 share.

Typically, some form of professional third-party is responsible for the management of the property, with all the fractional owners contributing their share of the costs. In some cases, a homeowner’s association model is used, where you sub-lease the shares in the property from the association, who in turn leases the property from the developers. Each fractional owner is also responsible for their share of property taxes, insurance, utilities, upgrades, remodeling, etc.

Owners of fractional shares can re-sell their shares, often for a profit, or leave them to family members in their estate.

Club programs differ from fractionals in that you first buy a membership in a private club, then commit to paying annual dues and some variable costs. For that, you receive the right to use a number of weeks every year, choosing from a number of upscale properties in the club list.

Club members cannot typically re-sell their memberships, but usually can sell their memberships (but not their dues and costs) back to the club, sometimes for 100% of the original cost, sometimes less. Making a profit is usually not the case with memberships, although some newer program models will raise the membership return as the new membership fee grows over time.

The club is responsible for all property requirements, including employee costs, general overhead, maintenance, taxes, utilities, upgrading, remodeling, etc.

Target Customers

The traditional timeshares typically focus on customers in the $50 to $100 thousand income range. Fractionals are typically targeting customers with incomes north of $150,000, and luxury fractional programs target customers above a minimum of $250,000 annual income, with $500,000 and above often preferred. The luxury fractional programs also accommodate wealthy customers whose assets outweigh their income. Customers of luxury fractional programs are motivated more by the ‘soft factors’ such as amenities, luxurious appointments, privacy and exclusivity as opposed to the cost of the program.

There are other issues and topics that would complete this assessment, including pricing, types of properties, legal issues, market information, performance of luxury fractional properties, and industry developments. If you are interested in learning more, please email.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.

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The Fractional Luxury Property Industry, A Next Generation Due Diligence Assessment of an Industry Niche is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Introduction to Equity Investment Due Diligence, The Next Generation
2. Intellectual Property Protection – You Better Enforce Your Rights Sooner Rather Than Later!

Worrying about all that corporate stuff, articles of incorporation, bylaws, minutes of board meetings, minutes of shareholder meetings and on and on and on… The usual attitude is “What a pain!” These are the last things small business people want to think about. So, onward and onward they go, some day, many times years from starting, they come up against the big request to see all that corporate stuff, from commercial banks, investor prospects, joint venture prospects, all sorts of regulatory agencies, potential cooperative arrangements of all kinds with other firms, the IRS, State government agencies, Federal government agencies, potential Board members, potential senior executives, local government organizations, leasing companies, etc., etc.

Here are just some of the categories of all that corporate stuff:

• Agreements of All Kinds
• Bank Relationships
• Benefits
• Board of Directors
• Capitalization
• Client Information
• Contracts
• Corporation Information
• Customer Service
• Directors
• Employee Information
• Executives
• Financial Statements
• Insurance
• Inventory
• Labor Disputes
• Legal Matters
• Licenses
• Litigation
• Material Commitments
• Officers
• Operations Procedures
• Patents, Copyrights and Trademarks
• Properties
• Quality Procedures
• Real Estate
• Records Retention
• Regulatory Affairs
• Shareholder Information
• Tax Matters
• Vendor Information

Here’s a sampling of some of the details:

• Articles of Incorporation (or similar documents for different types of corporations), Incorporators’ Names, Addresses, DOB’s, SS#’s, Telephones, Citizenships
• Board, Shareholders & Other Meetings, Since the Incorporation Date, Resolutions, Minutes, Notices or Waivers of Notices of Meetings, Dates of All Meetings, Records of All People Present or Absent for All Meetings, Dissenting Information, Signatures, Consents of All Types
• Board Directors & Corporate Officers, Names, Addresses, DOB’s, SS#’s, Telephones, Citizenships, Dates Started, Dates Stopped, Curriculum Vitae for All
• Detailed Corporate Identification Information
• Authorized Representatives and Limits of their Authority
• History of the Firm, including Pre-Incorporation
• Certification of Incorporation, Jurisdiction, Incorporation Number, ID Number, etc.
• Articles of Amendment
• Capital Structure, Share Classes, Voting Rights, Dividends, etc., etc.
• Regulatory Notices Requirements
• Certificates of Compliance

This is a tiny sample. Over the years I built a system that now runs into hundreds of pages!

Here’s the bottom line. Don’t put off the corporate stuff. Start when you start the firm. If you don’t know what to do, or how to do it, find out. All the Directors, Officers, Executives, Shareholders… everybody who has any authority or something to lose, must discipline themselves from the very beginning. If you start early, you stay ahead of the curve.

Here’s the scary part. You can lose everything! If you don’t do any of this stuff, everybody in the organization is exposed to all sorts of liabilities. Your firm can get sued for anything. I had a client once who got sued over a very small misunderstanding, and the matter eventually went to court. The client was about to receive a summary judgment because the other side’s attorney claimed they were not a valid corporation. It turned out that my client did not include the “Inc.” on their letterhead, business cards, or any other paperwork. Attorneys call it piercing the corporate veil. If there is no public use of the “Inc.” than the law says that the corporation is not operating correctly as a corporation, and no longer has the corporate veil in place, and everyone in the corporation is wide open to every liability imaginable. I told the client to get everyone in the entire firm in first thing on the next day and go through every filing cabinet, every desk, every box… dig in all the corners and try to find anything with the “Inc.” on it. We found paperwork for a very old seminar they did when they first started which they had publicly advertised, and the firm suing them had received the paperwork, which had the “Inc.” on the last line. That was enough to stop the piercing of the corporate veil. They got lucky!

So, even if you think you have done everything right, and you have all the reams of paperwork and all the filings and all the copies, all you need to do is miss one tiny but critical aspect. If you don’t have it, you can quickly be out of business, go broke, lose your reputation, lose your family, go deep in debt, go to jail, or all the above. It’s that simple.

Do it right. Do it from the beginning. Don’t ignore all that corporate stuff.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
email

Secrets of Due Diligence for Small Business, Secret #7: Don’t Ignore All That Corporate Stuff is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Secrets of Due Diligence for Small Business, Secret #73: Equipment Vendors Are Your Friends
2. Why Every Company Needs a Business Plan
3. Corporate Naming Due Diligence

Here’s how this works. Obviously you will first need to get the cooperation of the selling company to do this. Then, both you and the seller tell the vendors of the possible sale, and ask them to come in and look at each piece of equipment. Ideally, ask the seller to allow you to be alone with each vendor. Whether that is possible or not, after the visit, arrange to have lunch or coffee with each vendor independently. Also, go to their offices, see everything, meet everybody, pick up every piece of literature. Tell them you want to learn everything, and let them educate you.

It is very important to show these vendors that you want to develop long-term relationships with them. Most of the time, these vendors are an incredible font of knowledge, not just about the equipment directly, but also about how the equipment used in operations, and the industry in general. And you can usually learn their opinion of the company you are thinking of buying. At the very least, you should be able to learn such things as:

• Is there equipment that absolutely has to be replaced?
• Does some equipment have safety issues critical to the workforce?
• In the normal life of the existing equipment, when should each piece be replaced, modified, or upgraded?
• Has the seller grossly misrepresented something about the equipment?
• What is the true market value of the equipment?

Of course you have to take everything the vendors say with a healthy grain of salt, since they would love to sell you more equipment! But my view is that these people are part of your extended family. If you treat them well, they will do the same for you.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
email

Secrets of Due Diligence for Small Business, Secret #73: Equipment Vendors Are Your Friends is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Secrets of Due Diligence for Small Business, Secret #7: Don’t Ignore All That Corporate Stuff
2. If a Bank Buys a Bank, You Would Think They Know How To Do Diligence
3. Why Every Company Needs a Business Plan

Doesn’t it seem way overdue that people start building a more robust understanding of what it takes to do due diligence on private equity funds? There are only about 3,000 funds with about $150 billion under management, and expectations for 2007 are in the $200 million range for additional money going into private equity funds. Private equity funds have only been around since the early 80s.

A few random due diligence points:

Of course fund management is the first place to look. Unfortunately there are no shortcuts here. To perform proper due diligence on a fund’s management team is a long, grueling and difficult process. It’s easy to run a few background checks and call a few people. This is not good due diligence, although I have seen this all too many times. I wouldn’t even call it due diligence. This is barely basic investigation. To really check out a management team, you have to dig into every fund ever managed by each person. You have to talk to people above and below them. You have to run every claim made by each person. If you can do this (it is often impossible, since people sometimes move around a lot, and funds start and stop every day, changing hands, etc., etc.) then you are beginning to see the character of the team.

You then have to look into some much more complicated issues. For instance, how many of the team benefited personally by co-investing alongside the fund? What happened at the end of the funds this team managed?

What kind of actual business plan does the team have? (you will be shocked by the shameful lack of business plans!) If they do have a plan, how thorough did they really get? Is there a complete plan for succession in the event of untimely events?

Moving on, what are the management fees, pay schedules (and expenses!), transactions fees, incentives, offsets, finder’s fees, and on and on? Are the fees paid when earned or does the team get paid no matter what? Do the management fees ratchet downward as the fund grows older and there is less work to be done? Remember, the management fees are not the big hit for the team, that comes from their carried interest.

Who are the real control persons? What are all the “related parties” relationships and transactions?

Dig into each and every disclosure document. It is sometimes amazing to see tons of details in required government filings that somehow never make it to the more readily available documentation that they are happy to share with you. In other words, are they transparent, translucent or opaque?

Have they even tried to build any sort of secondary market liquidity?

Do they have a hard budget process that they rigorously follow?

If they have international aspects, how smart are they about the myriad minefields (political risk, government restrictions, different accounting, legal and tax issues…..) For instance, the European market is currently starting to be a bit overheated.

What kind of clawback provisions exist?

Do they have the typical 20% carried interest, or do they have more, say 25% or even 30%, and if so, why do they deserve a bigger percentage?

As you can obviously see, this is a very sophisticated place, and is not for the faint of heart. If you want to play in this game, you better remember a few things. Stick to your portfolio diversification allocation for high risk, and don’t go above the percentage you originally set! If you have never played any where near this level, then don’t. This is really the place for the institutionals. Of course it’s a shame that many of these don’t seem to have any common sense either. So what else is new?

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
email

Private Equity Funds Due Diligence is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Introduction to Equity Investment Due Diligence, The Next Generation
2. Why Every Company Needs a Business Plan
3. Introduction to Strategic Planning Due Diligence

That being said, here are some of the more salient factors I am concerned about when we are helping a client consider buying a franchise.

Education

Before anything else, I start a new client who wants to buy a franchise, by telling them: “Stop. We will not be looking at any specific franchise yet. Learn all you can about franchising… Take your time…  Educate yourself. When you actually start looking at a franchise, you will barely have enough time to assess the franchise, even with our help, and you will be lost without a good grounding.”

Readiness

After I am certain a client has educated themselves sufficiently (this may take weeks, or even months), I then ask:

1. Do you want to be in this business?
2. Are you ready to invest your own money?
3. Are you ready to borrow more money if need be?
4. Do you have enough money to last what may be many months and can cover all the costs of looking at a number of different franchises, traveling, hiring attorneys, accountants and specialists?
5. Do you then have enough money to last until the franchise turns profitable for you?
6. Are you ready to put all your time and energy into the franchise?
7. Do you know how to hire people?
8. Do you know how to manage people?
9. Can you handle working in a restrictive fashion, following all the rules, working for someone else’s brand?
10. Will you have a partner?
11. Are they fully capable in all the areas needed?
12. Can you work well with your prospective partner?
13. Do you work well with people, especially the public?
14. Do you realize you will have to stay on top of many different things, such as employment law, banking, various kinds of insurance, corporate taxes, bookkeeping, marketing & sales, and on and on?
15. Are your expectations of returns, quality of life, etc. realistic?
16. How long can you last without an income until you can take out a regular income?
17. Is your family ready to be put with barely seeing you for a long time, and if and when they do, how well will they put up with you most likely to be sleeping, or getting up in the middle of the night to work on paperwork?
18. etc., etc., etc… There are lots more questions but I think you get the point.

If I am satisfied that the client is truly ready for all this fun, and their family is also totally ready to put up with all of this, then we can get into the basics.

Professional Members of the Team

Anyone getting into franchising will need a competent attorney, specifically skilled in franchise law, preferably with at least 10 years experience. A competent accounting firm, also with significant franchise experience, will also be required. Additional professional services people may be required in the specific arena of the franchise market space. If you don’t have a very good franchise attorney and an excellent accounting firm, we will not work with you.

The time to find these people is now, long before the first franchise is looked at. Meet several attorneys, several accountants, and several in each of the specialty professional services areas that may be needed. This is a critical part of your education, and of course building the team necessary to properly handle all the aspects of franchising.

Franchise Consultants

Be very wary of the ‘franchise consultants’ who are all over the place. Except in very rare cases, these people do not represent you, they represent the franchise! Do not work with such people. Deal directly with the franchise. Why should you pay additional fees for what amounts to a typically medium- to high-pressure salesman?

A Little Franchise History

The franchise concept first appeared in Europe in the Middle Ages, with sovereign rights being granted for all sorts of things, such as hunting on the King’s land, operating markets, operating ferries, and operating fairs, later moving into areas such as brewing beer and ale, and building roads. In the 1840s, the first franchises in a modern sense came into being, with German brewers granting franchises to taverns exclusive ale sales rights. 1851 marks the date the Singer Sewing Machine Company started offering sewing machine distribution rights, and in the 1880s, street car monopoly franchises started to be granted by cities. After WWII, the franchise format that is still with us today began appearing.

Early Abuses & Problems in the Industry

In the 1960s and the 1970s, there were huge abuses in the franchise world, and also lots of very poorly constructed, poorly managed and poorly capitalized franchisors.

New Laws & Regulations Come Into Being

One of the great things about the United States is that some of the laws actually protect the little guy! After all these abuses became so obvious, lots of laws came into being at the Federal and State level, the FTC set up the Uniform Franchise Offering Circular requirement in 1978, and also the International Franchise Association was created. Some US State laws are more stringent than the Federal laws, so check with your attorney or us to see if you are in one of these States, called registration States.

Your Best Friend, the Uniform Franchise Offering Circular

Moving on, prepare to make very good friends with the Uniform Franchise Offering Circular (UFOC). This is the best single document that you will receive from a franchisor. Now here is where all that education and preparation comes in. By law, the franchisor and you cannot sign the franchise contract, nor can you pay the franchise fee, for an astoundingly long time of 14 days! Don’t mistake my point. It’s fantastic that such laws exist to protect people from franchisors who are greedy, naïve, crooked, or all three. It’s just that 2 weeks is not enough time to truly evaluate any franchise, even if you have our help. In any event, go through the UFOC as many times as it takes for you to understand every single word, getting help from your franchise attorney, accountant and specialists such as my organization. Over the many years, I have developed a number of atypical due diligence techniques. One of the more interesting techniques I use is to not only look at the current UFOC, but also get several older UFOCs to see what changes have occurred. It can be most fascinating to confront the franchisor with their own history! Of course if any one of those changes is substantively negative, I immediately advise my client to run, not walk, in the opposite direction.

Some Factors to Consider

Here is just a short list of some of the factors that I get into with a client considering a franchise:

1. Communications: Keep track of every communication, every scrap of paper, every conversation, even in the hallway outside the conference room, so to speak. Write down everything, no matter how trivial it may seem. Keep track of every single person you communicate with. Some people even record everything, but don’t forget to get formal permission; otherwise you are breaking the law!
2. Competition: Analysis of competitor documents is often very interesti
   ng (their UFOCs and other materials can be very useful)
3. Contract: Among countless other things, every item, no matter how small, must be in the big contract. This includes any verbal agreements, which are worthless unless reduced to writing. And don’t be afraid to ask for addendums. Franchisors work very hard to have a standardized agreement, which is actually very important. But your situation may have any number of non-standard things to agree on, and stick into addendums.
4. Correspondence: Registered letters are a very good idea for anything major. It is also very interesting to use written correspondence to re-ask questions and ask for a written response….. It is quite fascinating to see how answers change when someone has to put it in writing.
5. Current and former franchisees: Talk with every current franchisee you can, and as many former franchisees as possible, especially on your own without the franchisor present. Ask every question from you, your attorney, your accountant and the rest of your team. One of the more interesting questions is “Would you have gone into this franchise knowing what you know now?” Another good question is: “Knowing what you know now, what are all the things you would do different?” Don’t forget to ask if there was anything different from any written documents they received from the franchisor, and then ask them if there is anything different in the new documents.
6. Due diligence plan: Create a formal due diligence plan. Work with your attorney, your accountant and your specialist team to make sure this plan covers every possible item
7. Entrepreneur Magazine: Check their ranking.
8. Equipment selection: Lots of details here. Look closely at the franchisor’s requirements, and then measure against some competent equipment people’s opinions.
9. Exclusivity and prohibition clauses (These are on you!… ex: you have to devote all your efforts to the franchise… or you cannot own anything like another business without their approval)
10. Expansion: Generally I want to see fairly rapid franchisor expansion now, and planned.
11. Experience and expertise of the franchisor (in many different disciplines!)
12. Financing: How are you going to finance the fee, inventory, facilities, etc? Be really careful here. The SBA has good programs. Do not put all your family’s money at risk. Do not go the venture capital route. Angel investors are ok, but be careful that they understand franchising, and if they want to become involved beyond investment.
13. Franchise shills: Ask every current and former franchisee if they are receiving or received any form of compensation from the franchisor in any way connected with helping the franchisor get new franchises.
14. Franchisees out of the system: Check for so-called “renegade” franchisees
15. Franchisees working together: Ask if other franchisees can help each other
16. Franchisor Executive & Franchisee Coaching: What programs do they have, how long do these programs run, how much are the costs, what did other franchisees think of these programs, etc?
17. Franchisor information: Collect every scrap of paper they offer, or display. You should also ask for: incorporation papers; bylaws; minutes of main board and shareholder meetings (typically annuals); financials (beyond the 3 years in the UFOC), and dig into the details of their P&L, cashflow and balance sheet statements; and their business plan.
18. Franchisor Size: Look at the franchisor’s facilities and staff. If it looks too big, ask why, especially when these funds could be better used helping the franchisees, such as with marketing & advertising.
19. Great Expectations (on your part, on the franchisor’s part, or both): Get real; get pragmatic… work with your attorney, accountant and specialist team to carefully construct a list of all your expectations, and how you are going to get there.
20. Industry Associations: Find out what associations you should be joining
21. Intellectual property: Check into all trademarks, patents, copyrights, trade secrets, licenses, service marks, and know-how packages. You may need a specialist intellectual property attorney to work with your franchise attorney.
22. International Franchise Association membership: Very good if the franchisor is a member.
23. Inventory selection: Similar to equipment. Look carefully at the franchisor’s requirements. For instance, ask current and former franchisees how much inventory was not needed up front, and on an ongoing basis.
24. Lawsuits: Check for historical, current or pending lawsuits, especially to see if a significant number of franchisees have gone, are going, or plan to go this route.
25. Liabilities: Have your accountant check into all the franchisor’s liabilities, go over this list with your attorney, and then listen to their combined opinion.
26. Liens: Check for historical, current or pending liens.
27. Location: Location, location, location. The old adage is true. Site selection is a critical area. We often recommend you get help from a competent commercial real estate broker who understands franchising.
28. Management assistance: What is the ongoing management assistance program, costs, etc?
29. Market: We have a really big sub-list here. Analyze your market thoroughly. Is the market saturated? What are all the key market trends? etc., etc., etc. This is another one of those areas that if you do not have the specific skills and experience, hire a solid professional to help.
30. Marketing and sales activities and materials: What will the franchisor provide up front, and ongoing? Can you cooperate with other franchisees to get benefits of volume, multiple placements, etc., etc? What are your costs, now and ongoing? How often do the marketing and sales programs update?
31. Marketing assistance: What is the ongoing marketing assistance program, what are the costs, etc?
32. Master franchises (forget it!)
33. Number of fully operating franchisees
34. One of the fun questions is asking the franchisor what mistakes they made so far.
35. Ongoing percentages: What does the franchisor charge for ongoing percentages, and what is the detailed breakdown?
36. Operations manual: Look for a really serious, high quality manual.
37. Other franchisors: What can be the other franchisors’ impacts on your franchise? (This can be a real problem, and often there is practically nothing you can do about it!)
38. Publications: Learn which are the best industry publications to which you should subscribe,
39. Publicity: Check back as far as possible, especially looking for bad publicity.
40. Reduction Rate: Calculate the average rate of franchisees leaving, and look for unusual rates per year.
41. Registration with your State agency
42. Renewability requirements: When it comes time, can you renew, how easy is it, what are the costs, etc?
43. Reputation, Trusted name in the marketplace: Without a good franchisor reputation, walk away,
44. Resale: This is a huge area, with too much detail to list here. You really have to look very closely at all the resale issues from your point of view, the franchisors, and the other franchisees.
45. Specialized training: Is there any? What is it? What are the costs?
46. Start-up assistance: This is usually a long list. Go through this area very closely.
47. Territorial protection (competition from other franchisees and/or the franchisor)
48. Training: Really important… look at their training program carefully, as detailed as possible, talk with other franchisees, etc.
49. Turnover rates: look back in time at least 5 years, preferably 10, to see how many franchisees are gone.
50. Undercapitalization: You, and/or the franchisor! Either or both, walk away. If it is you, look at less costly franchises.

Again, the above list is only a small snapshot of the process. My complete list of due diligence requirements for a client to go through all that is necessary to pick, purchase and run a franchise runs dozens of pages.

Some other thoughts:

Testing

Don’t be put off by any testing, including personality profiles, even math and writing. Some franchisors do this more than others. They want to know if you are going to be the right fit, or if you have sufficient skills.

Franchise Business Models Changing

The old command-style franchisors, generally from several decades ago, are being replaced by more open-style franchise systems. These systems acknowledge the fact that the franchisor and the franchisees, working more closely together, can make a much better go at it.

The Facts About Franchise Failure Rates

I keep hearing that franchises fail less than other businesses. Franchises do survive the early years at a much better rate than other business models, and everyone widely quotes the Small Business Administration’s 95% franchise success rate. I am still shaking my head as to where the SBA gets its data. According to the prestigious MIT Sloan School of Management in their Sloan Management Review, the real facts are that not 5%, but three times that, 15% of all franchises fail in their very first year! And somewhere around the 3rd year, the rate of franchises failing goes up to about 30%, which is about the same failure rate as all other business models. The same source also points out a rather insidious practice, namely, the franchisor might buy back your franchise, even over your stringent resistance! Finally, if you take a look at the rate of failure of the franchisors, about 75% of all new franchise systems fail with a dozen years.

As with all decisions, it all boils down to carefully doing the very best due diligence possible when looking at a franchisor and the franchise you are considering purchasing.

Charles F. Bacon, CEO & Keeper of the Vision
Email
Due Diligence, Inc.

Franchise Due Diligence is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Great Blog on Misleading Advertising Law
2. Fraud Prevention, Part 1

Strategic planning is a lot of work. The process will take months, even in the most proactive organization. The ideal strategic plan is a living document, an ongoing roadmap, changing as rapidly as the organization changes. The process is really the key, not so much the end document. Every critical person must be fully engaged in the process, from the Board, to top executives, to middle management… any member of the team who needs to be involved in strategic planning. Outside constituents should also be involved, such as vendors, and of course, customers. There must be a strong commitment, and also a willingness to make changes, even in the face of disagreements from others on the team.

Here are some of the more important categories that are part of the strategic planning process, and a good strategic plan. Each of these categories will have a number of components, sometimes only a few, sometimes many, including sub-categories to better organize all the components.

• Advertising Strategy
• Brand Strategy
• Communications
• Competition
• Competitive Advantage Strategy
• Competitor Assessment
• Customer Strategy
• Demand
• Differential Advantage Strategy
• Environmental Factors
• External Environment
• Financial Aspects
• Financial Assessment
• Funding
• General
• Growth
• History
• Human Resources
• Information Systems
• Intellectual Property
• Management
• Market
• Market Research
• Market Segmentation Strategy
• Marketing administrative controls
• Marketing management
• Measurement
• Operations
• Personnel
• Physical Resources
• Plan Organization
• Plan Style
• Pricing Strategy
• Products/Services
• Projections
• Promotion Strategy
• Resources
• Resources
• Risk
• Strategy Assessment
• Value Proposition

This list is a very basic example, and is not complete, even for smaller organizations. Every organization will need to customize the categories and components for their strategic planning. Adding sub-categories and components, this list can easily run into the hundreds of components necessary for an organization to properly encompass all that is needed for an organization’s specific strategic plan and process.

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
email

Introduction to Strategic Planning Due Diligence is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Introduction to Equity Investment Due Diligence, The Next Generation
2. Where Can Due Diligence Be Applied?

Investments can be many different types:

• Corporate Internal Finance
• Credit from Customers
• Credit from Equipment Suppliers
• Credit from Suppliers
• Credit Terms from Banks
• Grants from Government Bodies
• Lease Finance
• Loans from Government Bodies
• Loans from other Banks
• Loans from other Stakeholders
• Loans from own Bank
• Loans from Owners
• Preferential/Special Funding
• Private Equity Capital
• Public Equity Capital

Investments can come from different sources:

• Advisors
• Banks
• Board Members
• Existing Investors
• Finance Firms
• Individuals
• Investment Banks
• Government Sources
• Industry Sources
• Intermediaries
• Merchant Banks
• Principals
• Team Members

Corporate Investment Due Diligence

A strong corporate investment due diligence process should provide corporate investment decision makers with a complete system. That system should include a list of steps to appreciate their investment wishes, to make their investments, and then to make sure that those investments perform to everyone’s satisfaction. Here is a series of recommended steps to understand and refine corporate investment programs, guiding those investments to perform at their best.

1. Set up Your Investment Fundamentals, including:

• Build solid strategic and tactical plans for corporate investing
• Determine if there any overly concentrated or restricted investments
• Determine if there are any unrealized gains
• Determine the existing portfolio investments, liquid & illiquid
• Determine the liabilities of the existing portfolio investments
• Determine the true investment experience of the team

2. Build a Solid Set of Investment Parameters, including:

• Approval procedures for all steps in the investment process
• Cash flow needs
• Performance objectives
• Risk tolerances
• Tax planning
• Time horizons

3. Develop the Investment Strategy, including:

• Determine how much of your investment process will be internal or external
• Determine the acceptable risk / reward ratios
• Determine how to maximize the risk / reward ratios
• Determine how to minimize tax costs
• Determine what asset focus is appropriate
• Determine how investment decisions affect corporate benchmarks

4. Implement the Investment Strategy

5. Measure Performance, including:

• Performance Attribution
• Performance Reporting
• Performance Tracking

6. Monitor the Investments, including:

• Review objectives & strategies on an ongoing, periodic basis
• Revise methodologies
• Monitor market conditions
• Assess market conditions changes
• Revise strategic assumptions
• Revise tactical assumptions
• Change asset allocations

The primary points for corporate investment due diligence are:

• Accurately and totally define investment assumptions
• Constantly and completely understand current investment strategies and tactics
• Accurately define investment goals
• Accurately define methodologies to achieve those goals
• Implement carefully but firmly
• Measure everything
• Monitor everything
• Change assumptions, strategies and tactics when necessary

Charles F. Bacon, CEO & Keeper of the Vision
Due Diligence, Inc.
Email

Investment Due Diligence for Corporations is a post from The DuePortal.com Due Diligence Learning Center

Related articles:

1. Introduction to Equity Investment Due Diligence, The Next Generation
2. Do a Little Diligence Before You Ask the Bank for a Loan
3. Up Front Due Diligence Fees from Investment Sources