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Small Business

Watchdog Criticizes Treasury's Role in Auto Dealer Closures

Mon, 19 Jul 2010 10:14:00 EDT

By Tom Barkley WASHINGTON -- A government watchdog criticized the Obama administration's push to close auto dealers quickly last year during bankruptcy proceedings for Chrysler and General Motors Corp., saying the accelerated process may have exacerbated job losses in the midst of a recession. The audit by the special inspector general for the Troubled Asset Relief Program, released Sunday, took the administration to task for failing to sufficiently oversee the closures and weigh the broader economic impact of its decisions. The companies had called for gradual dealer closures, an approach rejected by the Treasury's auto task force."Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses and thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls -- all based on a theory and without sufficient consideration of the decisions' broader economic impact," said the 45-page report.The report was prepared by special inspector general Neil Barofsky's office, which monitors the $700 billion financial bailout known as TARP. "Only time will tell" whether the accelerated closures will help the companies' profitability, the audit said. But Treasury should have "taken every reasonable step" to ensure the closures were necessary and that the benefits to the companies outweighed the economic costs of "potentially tens of thousands of accelerated job losses," it concluded.Treasury responded to a preliminary draft of the audit in a letter by "strongly" disagreeing with many of the conclusions, according to the inspector general's office."The outcome under the restructuring plans is far better than the likely alternatives had the administration not stood behind the companies," Treasury said in Friday's letter, which was included in the report. The closing of auto dealerships was among the most-contentious parts of the GM and Chrysler bankruptcy restructurings last year. Treasury and the auto makers agreed that the companies' networks had grown too large -- in some cases forcing nearby dealerships of the same brands to compete against each other and hurt profits -- although they differed on the pace of closure. But many dealers and their congressional representatives said the process by which GM and Chrysler chose which dealerships to cut was arbitrary. Congress eventually passed legislation setting up an arbitration process by which shuttered dealerships could seek to force GM and Chrysler to re-open the stores, and called for an audit of the decision-making. GM has since reinstated some of the closed dealerships. Write to Tom Barkley at tom.barkley@dowjones.com

When Business Fails, Filing for Bankruptcy

Tue, 27 Jul 2010 11:41:36 EDT

By Colleen DeBaise Adapted from THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press). My business, in operation for more than eight years, has been slow lately. There is little cash flow and debts are past due. Unsecured credit cards and business lines are up to their limits. Basically, we can't afford to pay our bills. Will I be held personally liable for the debts and liabilities of the company? Will this affect my personal credit? What are the consequences of filing bankruptcy? These questions that I received from a reader illustrate probably the most painful position that you can find yourself in as a business owner: Not only has business ground to a halt, but you're deeply in debt, too. Your first course of action, of course, is to try some of the cash-crunch strategies outlined in last week's tip (see related article, "Tips for Dealing with Cash Crunches"). If creditors are circling, you may want to consider using the services of a debtturnaround firm. While they charge a fee, turnaround specialists can help get creditors off your back and assist you in liquidating inventory, selling parts of a business (if applicable) and cutting staff. The alternatives aren't pretty. Can you be held personally liable for debts and liabilities of your company? Most likely yes. Credit-card companies, for instance, typically issue cards (even business credit cards) based on the owner's personal credit and require the owner to assume personal liability. As for bankruptcy, it's painful, messy, expensive—and generally should only be used when all other options have been exhausted. Consult an attorney familiar with small-business bankruptcies to figure out whether this is the best choice for you and which direction to take. In some cases, it might make sense to file separate bankruptcy cases—one for the business and one for yourself as an individual. The two most commonly used business bankruptcy proceedings are Chapter 7 and Chapter 11. If you've decided to shut your doors forever, you might consider a Chapter 7 filing, in which you turn your business over to a court-appointed trustee, who will then sell the assets and distribute the cash to your creditors. If you're hopeful that you may survive this downturn, at least enough to have a business left to sell, you might consider seeking Chapter 11 bankruptcy protection. When you file this type of petition, you come up with a reorganization plan to repay outstanding debts and continue to operate as a business. In most cases, unless you have personal means, you'll need to obtain debtor-in-possession (DIP) financing to keep the business afloat while in bankruptcy court. In recent years, with credit tight, many struggling businesses have been unable to file for Chapter 11 because they can't obtain DIP financing. In general, it certainly isn't easy to salvage a business through a Chapter 11 filing, and many business owners who try wind up converting to a Chapter 7 liquidation. Write to Colleen DeBaise at colleen.debaise@wsj.com

Entrepreneurs Flock to Pet-Chicken Market

Mon, 12 Jul 2010 09:04:58 EDT

By Sarah E. Needleman Hobbies often hatch small-business ideas. Chickens are no exception. Ruth Haldeman began adopting pet chickens in 2002. "I wanted fresh eggs, but I found that chickens are like peanuts, you can't have just one," she says. Before long, Ms. Haldeman had founded ChickenDiapers.com in Hot Springs, Ark. "Everyone was talking about how there was a need for diapers," she says, given that chickens typically can't be potty trained. "Oh, lord, what a mess they make."Ms. Haldeman, who is also a full-time chemist, designed a chicken diaper with a replaceable liner. She says it takes her about an hour to stitch one together, and her diapers are available in a variety of colors and patterns, such as rainbow and camouflage. She usually charges between $9 to $14 depending on a bird's size. Buyers hail from cities such as New York and Tacoma, Wash., and as far away as New Zealand."People like to have their chicks inside the house roaming free," says Ms. Haldeman, who declined to share how many diapers she sells a week because she's seeing more competition lately.More urban and suburban dwellers are keeping chickens, a trend that stems from both the recession and the local-food movement. Entrepreneurs, meanwhile—many chicken keepers themselves—have begun flocking to the aid of pet-chicken enthusiasts, dispensing starter kits, accessories and advice to go with the birds. Derek Sasaki and Traci Torres of Norwalk, Conn., launched My Pet Chicken LLC in 2005 while juggling full-time jobs they've since quit. They now sell roughly 2,500 baby chicks a week through a partnership with a hatchery in Ohio. The company, whose catalog includes layers of chocolate, white, brown and green eggs, says it sells birds weeks in advance. "We are literally counting our chickens before they hatch," Mr. Sasaki says.Beyond birds, the company also sells accessories such as $25 chicken diapers and $8 saddles, which are protective aprons for the hen, to keep her feathers from getting pulled out by a frisky rooster. They sell coops, heat lamps and decor for chicken lovers, such as a $10 black hen tape dispenser. The couple, who invested around $10,000 in savings to launch the small enterprise, expect revenues to top $1 million this year."Originally, we thought it would be a side business, but it started taking up more and more of our time," says Mr. Sasaki, previously an information-technology executive for an online health-media company.In January, Kevin Tschida bought diapers from Ms. Haldeman for the four chickens he and his wife, Paula, live with in their rented single-floor home in Bakersfield, Calif. "They have made a huge difference," he says. "There is less smell in the house, less bending over." Mr. Tschida says the birds, plus two ducks who wear diapers he bought from a different vendor, spend most of their time frolicking and sleeping indoors. "It is like the diaper removes them from the farmyard and gives them the status of pets," says Mr. Tschida, who also owns a dog, two cats, two parrots, a rabbit and some fish.There are no firm statistics on the number of pet-chicken owners in the U.S. BackYardChickens.com's growing membership is one indicator it's more than a flash in the pan. The information and networking site says it has more than 60,000 members today, up from 35,000 a year ago and 12,000 in June 2008. Rob Ludlow, the site's founder, attributes the rising ranks of chicken enthusiasts in part to the birds' ability to produce fresh eggs and fertilizer, as well as act as natural pesticides by eating bugs and worms. "They are the only backyard pet that can make you breakfast," he says. Plus, they're entertaining: "They're always interacting with one another and their environment. You can feed them from your hand, hold them and pet them.""Keeping chickens is addicting," says Melina Brown, who lately has been buying $5 "treat balls" made especially for the birds, which she fills with snacks such as greens and nuts for her 40 or so pet chickens. She hangs the toys in a children's playhouse that she converted into an outdoor coop a few years ago. "They like to peck at hanging things," she says. Ms. Brown, who also has pet parrots, ducks, a turkey and four dogs, lives on a 4.5-acre property in North Stamford, Conn. A writer in her 40s, she began adopting chickens about four years ago and has names for roughly half her flock, including Woostie, Casper and Lacey. "They are the most fantastic pets. They make me laugh," she says, although she notes, "I am a little sick of eggs."First-time chicken owners tend to have lots of questions, so customer-service comes with the business. Among the most common: "Do you need a rooster to get eggs?" says Judy Morris, owner of Coop D'État LLC, a pet-chicken consulting and retail company that she runs out of two farmers' markets in her hometown of Weston, Conn. (The answer is no.)Ms. Morris, who is also a part-time producer for Martha Stewart Living Omnimedia Inc., sells package deals of four baby chicks, coops she assembles by hand with the help of her three sons, and a starter kit for $1,200. Since launching her business in May, she's sold four sets. Andy G. Schneider of Alpharetta, Ga., who calls himself the Chicken Whisperer, hosts a daily hour-long Internet radio show on raising backyard chickens that attracts around 15,000 listeners nationwide a month, according to BlogTalkRadio. He sells Chicken Whisperer gear off his website, including T-shirts, watches, mugs, mouse pads and bumper stickers. "This all started out of a hobby," says Mr. Schneider, a former paramedic whose current line of work has been a full-time job since April 2009. Some chicken fans see more opportunities. Linda Celez, a nonprofit worker in Michigan, has made holiday-themed costumes for her pet hen Suzie and pet rooster Phillip. For July 4th, she put them in patriotic garb and for Halloween, has dressed them as Prince Charming and Cinderella. She's given away some of her poultry apparel to friends who have pet chickens, and is now thinking about it as a money-making prospect. "It's an area of business that's untouched," says Ms. Celez. Write to Sarah E. Needleman at sarah.needleman@wsj.com

NYU Starts Venture-Capital Fund

Mon, 28 Jun 2010 10:50:42 EDT

By Joseph De Avila New York University plans to launch a $20 million venture-capital fund that aims to spur technology entrepreneurship at the school.The NYU Innovation Venture Fund is the latest initiative from the school to support new companies emerging from the university's research.Earlier this month, the Polytechnic Institute of New York University said it would join with New York City and Columbia University to host the NYC Media Lab to foster collaboration between media and technology companies, and the universities' researchers."The fund is continuing that effort to bring the university in the direction of solving significant science and technology problems and making a material impact on society at large," said Frank Rimalovski, the fund's managing director. Mr. Rimalovski last worked at New Venture Partners LLC, a Murray Hill, N.J., venture fund that he co-founded.NYU contributed $2 million to start the fund. The rest will be raised through donations.The fund will be making investments ranging from $100,000 to $1 million in early-stage companies in sectors such as information technology, computer software and biotechnology.Several other universities, including the University of Wisconsin, Purdue University and Boston University, have started similar programs, Mr. Rimalovski said.When a university launches one of these types of funds, it's making a statement to the faculty—and prospective faculty—that the school is willing to support their research, said John Taylor, vice president of research at the National Venture Capital Association."It's a sign that they are taking things up to the next level," Mr. Taylor said.NYU's venture fund comes at a good time for New York, which needs to identify new sectors for job growth, said Jonathan Bowles, director of the Center of for an Urban Future, a nonpartisan research group."For too long the city's major universities have not been supportive enough of entrepreneurial ventures," Mr. Bowles said. "It seems like a real departure that could have a significant impact on the city's entrepreneurial economy." Write to Joseph De Avila at joseph.deavila@wsj.com

House Approves Small-Business Tax Incentives

Tue, 15 Jun 2010 18:58:51 EDT

By Martin Vaughan The U.S. House of Representatives approved legislation to eliminate capital-gains taxes on some small-business investments.The House adopted the $3.5 billion in tax breaks on a 247-170 vote. The bill will be fused with a separate measure, which the House will vote on Wednesday, aimed at boosting lending to small firms, and then shipped to the Senate for consideration.The House bill builds off proposals from President Barack Obama aimed at spurring investments in small business, and fits in with his recent theme of a helping hand for Main Street."This bill represents a continuation of our work to spur job creation and improve the quality of life in our communities," said Ways and Means Committee Chairman Sander M. Levin (D., Mich.).But Rep. Dave Camp (R., Mich.), said that "while the tax relief in here is welcome, it is not enough and won't actually help small businesses create the jobs we need to reduce our stubbornly high unemployment rate."The bill would provide a 100% exclusion from capital-gains taxes for certain small-business stock purchased between March 15, 2010, and Jan. 1, 2012. Current law allows investors to exclude 75% of income from such investments from capital-gains taxes.The stock must be held for at least five years to qualify for the exclusion.Before passing the small-business bill, the House defeated an amendment from Mr. Camp to repeal the requirement in the health-care law that Americans purchase health insurance. It failed on a 187-230 vote but drew support from 20 House Democrats.The bill also includes a provision limiting the use of grantor-retained annuity trusts, a vehicle used by wealthy families to minimize estate taxes. Those limits would raise $5.3 billion for the Treasury over 10 years. The bill raises another $1.9 billion by barring paper producers from claiming a tax credit intended for producers of cellulosic biofuel.The capital gains exclusion has been criticized because most small businesses won't benefit from it.Only small firms organized as C corporations will benefit. Investments in service corporations like law, engineering or consulting firms, farms, hotels, restaurants or natural resource extraction businesses are not eligible. Alan Viard, resident scholar at the American Enterprise Institute, said the multiple restrictions on the capital gains tax break made it "distortionary" and "inefficient.""In order to benefit from this, you've got to search out a corporation, to buy the stock at original issue, and hold on to it for five years," Mr. Viard said. "This is a pretty unambiguous thing to condemn." Write to Martin Vaughan at martin.vaughan@dowjones.com

Should a Business Offer Paid Maternity Leave?

Tue, 06 Jul 2010 10:52:38 EDT

By Sarah E. Needleman At a time when many small businesses are cutting back on their maternity leave benefits, Springboard Public Relations is expanding them. One of its eight employees became pregnant this year, a first for the Marlboro, N.J., firm, prompting owner and founder Domenick Cilea to actually enhance its maternity-leave policy to include four weeks of paid time off.That's right, paid time off."My motivation is to retain good employees," says Mr. Cilea. "During a life-changing situation, they have the security of not only their job but their compensation." While no male employees at Springboard have requested paid paternity leave, he adds that he'd support such an arrangement.Small businesses with fewer than 50 employees aren't required under federal law to give employees paid or even unpaid time off for maternity leave. They're exempt from the Family and Medical Leave Act of 1993, which guarantees qualified workers at larger firms up to 12 weeks of unpaid, job-protected leave to care for a child. Meanwhile, the Society for Human Resource Management released a survey last week showing that just 12% of U.S. employers with fewer than 100 workers offer paid maternity leave. And among businesses of all sizes, 7% said they plan to reduce or eliminate the benefit within the next 12 months. The Alexandria, Va., trade group's findings are based on a survey conducted late last year of 534 human-resources professionals.Whether they continue to get a paycheck or not, most small-company employees who have the option of temporarily leaving their jobs to welcome in a new family member take it. In 2008, Families and Work Institute surveyed 225 workers at U.S. organizations with less than 50 employees and who have one or more children under the age of six. Eighty percent said they've taken time off to care for a newborn, for 11 weeks on average, and 59% said they weren't paid during their absence, reports the nonprofit research organization in New York.For many small-business owners who don't provide paid maternity leave benefits, the reason is simple: They can't afford it. "We would love to but we operate on a fairly tight margin and it would not make economic sense," says Cassie Scarano, president and co-founder of Commongood Careers LLC, a national search firm in Boston for employers in the nonprofit sector. Commongood has 12 employees who have the option of taking up to 12 weeks of unpaid time off for maternity or paternity leave. Female staffers, however, may be able to receive short- or long-term disability insurance payments through the company's health plan, which pays 60% of their salary for up to six weeks, or eight for women who have Cesarean procedures.Another reason why some owners refrain from providing paid maternity or paternity leave is the possibility that those workers will decide not to return to their jobs. Jennifer McCabe, owner of Team Jenn Corp., a Los Angeles provider of accounting and human-resources services to small businesses, says she's seen this happen numerous times at client companies. Ms. McCabe advises small companies against offering paid maternity leave, even for workers they're certain will return. She argues that it's too much of a financial strain on owners who already need to find, train and compensate a temporary replacement for the employee on leave. And some owners may need to invest in extra help, especially if the female employee has a complicated pregnancy or delivery, she adds.But Jason Averbook, chief executive officer of Knowledge Infusion, a human-resources consulting firm in Minneapolis, argues that offering employees paid parental leave can give a small business an edge when it comes to recruiting and retaining talent. He advises owners to consider the impact such a benefit could have on the long-term sustainability of their businesses.It doesn't have to be an especially generous payout either. David Ulevitch promises to pay his 25 employees for two weeks while they're on maternity or paternity leave from the company he founded in 2005, OpenDNS, a provider of free Internet security and infrastructure services in San Francisco. They can also extend their paid leave by tacking on vacation days. "It's important for parents to spend time with their newborn kids," says Mr. Ulevitch. "It's only fair that we be compassionate when they have family needs." Mr. Cilea of Springboard Public Relations says that with some planning, owners may be able to avoid hiring and training a temp worker to fill in for a staffer on leave. Employees at his firm can take a total of 12 weeks off; for the first eight weeks that aren't paid, they can obtain disability insurance through the company's health plan. When a senior account executive took the full allotted time to have a child this past spring, he outsourced some of her projects to freelancers and divided up the rest of her workload among junior employees eager to take on new and more challenging responsibilities. "We've looked at it as a scenario to allow some of the other folks in the organization to elevate themselves," Mr. Cilea. "It actually helped us understand their capabilities." Write to Sarah E. Needleman at sarah.needleman@wsj.com

Disasters' Silver Lining: Green

Wed, 23 Jun 2010 16:44:49 EDT

By Sarah E. Needleman When a large number of people die, such as after a massive fire, shooting or natural disaster, Michael Richardson's 15-person business provides a way to keep the bodies cool while local authorities search for enough refrigerated facilities to house them."We benefit from other people's miseries more or less," says Mr. Richardson, president of Mortuary Response Solutions, a Belton, S.C., manufacturer of cadaver storage and transport equipment used when fatalities exceed the number of available units in an area. "It sounds kind of morbid or arrogant, but someone's got to do it."In recent years, many small companies have begun offering services and products for dealing with disasters. They say more businesses, government agencies and individuals are looking to safeguard themselves from potential catastrophes in light of the terrorist attacks of Sept. 11, 2001, Hurricane Katrina and more recently, the oil spill along the Gulf coast.DKI Services Corp., a national franchise system that specializes in cleaning up homes and businesses that have been inflicted by major trauma, hosts an annual trade show for the disaster-relief industry and has seen attendance increase in recent years. In January, the convention welcomed 500 participants, up from 430 in 2009 and 390 in 2008. Dale Sailer, president of the Woodale, Ill.-based franchise, which has 400 outlets nationwide, estimates that the number of disaster-preparedness and recovery businesses has increased by 20% to 30% over the past five years, adding that most are small.Last month, two disaster-relief companies were honored by the Small Business Administration. Engineering & Computer Simulations Inc., based in Orlando, Fla., was named National Small Business of the Year, while J.C. Restoration Inc., in Rolling Meadows, Ill., was second runner-up among 53 finalists, which were made up of winners from each of the 50 U.S. states as well as the District of Columbia, Puerto Rico and Guam.Engineering & Computer Simulations provides customized software programs aimed at helping emergency-response professionals design and practice strategies for reacting to various disaster scenarios. Its customers include the federal government, local police and fire departments and hospitals.The 55-employee company has seen its revenue grow by more than six times over the past five years, largely due to military spending, and last year earned $11.5 million, says owner Waymon Armstrong. J.C. Restoration provides 24-hour emergency services to homes and business throughout the U.S. that have been damaged by natural and other disasters. "When bad weather's coming, I got a smile on my face," says owner Warner Cruz.Mr. Cruz took over the business in 2002 from his father, a Guatemalan immigrant who built it 20 years earlier. He added marketing staff to promote it, something his father didn't focus on, and says sales have increased about 38% each year ever since. The company is on track to post about $16 million in revenue this year, according to Mr. Cruz. "Mother Nature has been active," he says.J.C. Restoration did see sales decline among one demographic last year—homeowners. Mr. Cruz says this group, which represents about 45% of his business's customers, in many cases may not have used money gained from insurance claims on damages to their homes for repairs, most likely due to the recession's impact on their finances.Businesses, on the other hand, continued to reach out to the company for as much support as usual, adds Mr. Cruz. "All they care about is getting back up and running," he says.Demand for disaster-relief services and products does tend to waver, though history shows that natural catastrophes and accidents occur regularly. So far this year, there have been 47 disasters declared in the U.S., 59 for all of last year, and 75 in 2008, according to the Federal Emergency Management Agency. "There's always going to be disasters," says Mr. Cruz. With hurricane season afoot, Agility Recovery Solutions Inc. has been fielding more inquiries than usual, according Bob Boyd, president of the Charlotte, N.C., provider of emergency-response services such as back-up computer support and mobile offices. The National Oceanic and Atmospheric Administration predicts this year will exceed the average of 11 named storms, six hurricanes and two major hurricanes along the Atlantic. "Anytime there's a big disaster, we have more customers calling us, and when we call prospects, they're more receptive to hearing about potential solutions," says Mr. Boyd.Agility, which has about 75 employees, originally catered to large companies when it launched in 1989, but after adding affordable options for small and medium-size concerns in 2005, the company's customer base grew seven-fold to its current roster of around 7,000 clients. "There was never a service like this for small businesses historically," says Mr. Boyd. Write to Sarah E. Needleman at sarah.needleman@wsj.com

Partisan Clashes Stall Legislation

Thu, 29 Jul 2010 21:03:21 EDT

By Naftali Bendavid And Stephen Power WASHINGTON—Partisan feuding Thursday jeopardized the prospects of legislation that would help small businesses and address the Gulf oil spill, but lawmakers anxious about political fallout promised to resume work on the small business bill next week.The 111th Congress has been one of the most active in decades, passing far-reaching overhauls of the nation's health-care system and financial industry regulations. But with midterm elections looming, lawmakers on both sides now are digging in for a tough campaign season and pushing to wrap up business ahead of their August recess.Senators on Thursday refused to advance the $42 billion small-business bill in a 52-48 party-line vote. That initially seemed to doom the bill for the time being, but its prospects had brightened considerably by day's end.The bill includes a $30 billion loan fund and $12 billion in tax breaks and other help, and many elements of the package have attracted wide support. But a dispute over how many amendments the Republicans could offer stalled progress.Democrats' failure to overcome a Republican filibuster, which would have required 60 votes, appeared to mean the bill would be delayed at least until after the August recess. But lawmakers of both parties face pressure to show they are doing something to help small businesses weather the tough economy, and enough progress was made by the evening that Senate Majority Leader Harry Reid (D., Nev.) suggested the talks resume next week."I say to everyone here, let's take a little time over the next couple days," he said.Senate Minority Leader Mitch McConnell (R., Ky.) added, "I know there is support on our side of the aisle for this bill, if we can get it right. ...I think we're heading back in the right direction."Partisan wrangling dimmed the prospects for quick action on Senate energy legislation. The House is preparing to vote Friday on its own bill in response to the Gulf of Mexico oil spill, but arguing between the parties jeopardizes that bill as well.The most contentious issue in both the House and Senate energy proposals is a provision to remove the current $75 million cap on economic damages paid to residents and small businesses by oil companies after oil spills.Republicans, and many oil companies, say this would kill jobs and make the U.S. more dependent on foreign oil by rendering offshore drilling impractical for all but the biggest companies.Democrats say the change is necessary to ensure that oil companies don't cut corners on safety and to protect taxpayers from having to foot the bill for such disasters.In an effort to break the impasse, Sen. Mary Landrieu, (D., La.,) a longtime ally of the oil industry, is pushing an alternative under which oil companies would contribute to a mutual insurance fund to cover spill damage. But negotiations over that idea are unlikely to conclude before the Senate goes on recess at the end of next week.On the small-business legislation, Republicans complained they were being blocked from offering their ideas for the bill."We could have been finished by this bill by now if you'd give the minority the right to offer a few amendments," said Sen. Olympia Snowe (R., Maine). Sen. Orrin Hatch (R., Utah) didn't criticize any provisions in the bill, but said it didn't address the real problems facing small business, such as the approaching expiration of Bush-era tax cuts."We don't have time to address small, Band-Aid bills when the patient, the underlying economy, needs a blood transfusion," Mr. Hatch said. Republicans also said Democrats were throwing unrelated spending into the bill, including $2 billion in agriculture disaster relief.Democrats, in turn, said Republicans offered amendments that had little to do with small business but were intended to embarrass the Democrats. Mr. Hatch, for example, suggested he wanted a measure to address the Bush tax cuts, which Democrats say is a broader issue that will be tackled later."I'm pleading frankly to a few Republicans senators," said Sen. Max Baucus (D., Mont.) "Let's pass it. Let's not get all hung up on who said what to whom."Mr. Reid at one point offered to withdraw the agriculture relief funds and allow the Republicans three amendments, but Mr. McConnell said that wouldn't be enough.Senators also fought over the $30 billion loan provision, which would provide money for community banks to lend to small firms. Many Republicans opposed that measure, saying it resembled the unpopular Troubled Asset Relief Program, which provided $700 billion to large banks.The $30 billion loan program would authorize the Treasury Department to lend money to smaller banks, those with less than $10 billion in assets, at 5% interest. That interest rate would fall to 1% if a bank significantly increases its loans to small firms.Other items in the bill included such provisions as allowing small businesses to apply tax credits to the previous five years, and letting investors avoid capital gains taxes on certain small business stocks. The bill also would increase the limits on a variety Small Business Administration loans and provide $1.5 billion to states for grants to small firms. Write to Naftali Bendavid at naftali.bendavid@wsj.com and Stephen Power at stephen.power@wsj.com

Affordable 3-D Arrives

Fri, 30 Jul 2010 15:26:39 EDT

By Emily Maltby (See Corrections & Amplifications item below.) Jeff David used to create his sports helmets the traditional way—sketch an idea on paper, hand-mold a clay model, and ship it to factories in Asia for it to become a plastic prototype. After two years and countless revisions, one might become suitable for mass production.But often the helmet's distinctiv e details "would get watered down or lost," says Mr. David, product manager of Troy Lee Designs in Corona, Calif. "And by the time we got to market, some of the design aspects were old news."Last October, Mr. David decided to invest $20,000 in computer software that could create the helmets in 3-D. He found the technology could better define the shapes. And the factories in Asia, after receiving the design by email, could produce an exact replica. Production is now about six months faster and about 35% cheaper, he estimates. Historically, small businesses that used 3-D technology were predominantly in the engineering, industrial design and architecture fields. But now, as software costs have dropped, more consumer-product companies like Mr. David's are finding it cost-effective to purchase sophisticated modeling tools, rather than outsource product development or use rudimentary in-house methods. Autodesk Inc., which develops 3-D technology, repackaged its software systems two years ago to appeal to small businesses, lowering the price range to $4,000 to $20,000, though the highest-end products still sell for $65,000. Since then, the company has seen more customers in a variety of industries outside the design world, says Thomas Heermann, Autodesk's director of conceptual design products.SolidWorks Corp., a subsidiary of Dassault Systèmes, says it has seen an influx in small businesses interested in its computer-automated design software in recent years, as the price for most small-business packages is about $4,000. "It's hard to compete without it once one company in an industry has it," says SolidWorks founder Jon Hirschtick.Some products today cost less than $50 retail or, in the case of software such as Google Inc.'s SketchUp, are free to download. But those products typically lack the more-sophisticated features and are primarily used by designers to conceptualize an idea rather than prepare it for market.Despite the growing small-business customer base, however, 3-D technologies still have drawbacks. Design systems are often memory-intensive and require powerful hardware to operate effectively—an upgrade that could be pricey for firms on a shoestring budget.And parts of the process still have to be outsourced. For example, after the product is designed on the computer, it needs to still become a physical object through a 3-D printer or molding machine. Such devices have become more affordable—Objet Geometries Ltd. recently lowered the price of its desktop printer to $25,000, and Z Corp. just introduced a printer for about $15,000—but the highest-end printers can top $250,000. Also, many programs, especially those that have evolved from highly technical design systems, still have a steep learning curve. Mr. David at Troy Lee knows that first hand. Before making the investment in an Autodesk product, he hired a recent art school graduate who was familiar with Autodesk's Alias Surface software. Today, that employee remains the only proficient person on staff, but Mr. David is considering in-house training for the other designers.Some companies have attempted to make their products more user-friendly. SensAble Technologies Inc. has an application called FreeForm that doesn't use mathematical commands or lines drawn with a mouse, but rather, a haptic device—like a joystick sculpting tool—that gives the user the same sensation as molding clay or other materials. FreeForm used to be primarily purchased by large companies with prototyping departments but it now can be licensed for about $17,500.Beme International LLC, a San Diego firm that sells curtain rods, hooks and other decorative drapery hardware to retailers such as Bed Bath & Beyond Inc. and Lowe's Cos., purchased FreeForm in September. The firm's 30 employees, which included artists and sculptors, had been used to working with waxes, clays, resins and urethane modeling materials. One of the technology's biggest benefits is its resizing capability, says Brian Graves, executive vice president of sales and marketing. Previously, when retailers would want to see versions in multiple sizes, the staff would have to make separate pieces. Now, the software automates that, leaving more time to create new designs.The software performs the work of two employees, Mr. Graves says, and sales are up 15% from last year, which the he attributes to the new production development process.But, Mr. Graves says, while it's great that he can show retailers prototypes the week they request them—rather than three weeks later—he sometimes worries that the expedited process "discounts the value and the artistry," he says. "You don't want it to be like anyone in the world can do it." Write to Emily Maltby at emily.maltby@wsj.com Corrections & Amplifications: Jeff David is the product manager of Troy Lee Designs. An earlier version of this article incorrectly identified Mr. David as the owner of the firm.

Bank of America Commits $10M in Small-Business Grants

Thu, 29 Jul 2010 13:25:21 EDT

By Darrell A. Hughes Bank of America Corp. on Thursday will commit $10 million in grants to nonprofit organizations that lend to small and rural businesses.A host of nonprofit lenders, such as Community Development Financial Institutions, or CDFIs, have been struggling to make loans throughout U.S. communities. Those entities typically receive their lending funds from federal agencies, but recession-driven funding restraints have limited the ability of these organizations to lend.Bank of America's Global Commercial Banking President David Darnell will announce the funding at a National Urban League conference Thursday."Even the smallest grant enables a CDFI to leverage as much as ten times that amount to lend to small businesses, which helps initiate a ripple effect," Mr. Darnell said in a statement reviewed by Dow Jones Newswires.According to Bank of America, the grants could lead to as much as $100 million in low-cost, long-term capital for small business microloans.Mr. Darnell said that "could translate into significant investment over the next five years."The banking giant's grant commitment comes after Federal Reserve Chairman Ben Bernanke expressed concern earlier this month that large financial firms aren't doing enough to help small businesses.Other companies are also promising action. Wells Fargo & Co. Executive Vice President Marc Bernstein's said his bank, in addition to providing funds for community lending entities, has undertaken a new "second look" program geared toward finding credible ways to approve small business loan applications that have been rejected. J.P. Morgan Chase & Co. has also rolled out in-house initiatives such as offering business customers reduced interest rates for hiring workers.Both Chase and Bank of America have second-look programs as well.Despite efforts to increase lending, many small businesses are still considered serious lending risks as indicators such as consumer spending remain subdued.Treasury's Assistant Secretary for Financial Institutions Michael Barr, in an interview, applauded the small business lending initiatives but said cooperative efforts between the public and private sectors are likely to be more effective.According to Mr. Barr, a pending small business bill would "help banks reach deeper into the small business pool to find borrowers that they might not otherwise lend to."The legislation provides some "downside protection" for banks, Mr. Barr said, stressing that a mixture of new and existing tools could lead to more readily, available credit.Mr. Darnell said the financial crisis has left small business in a tougher position than in previous downturns. "We're seeing something unique in this cycle," Mr. Darnell said, noting that many entrepreneurs have typically accessed home equity to fund start-ups but declines in personal wealth have limited that as an option. Write to Darrell A. Hughes at darrell.hughes@dowjones.com

The SBA Has a Deal for You

Mon, 21 Jun 2010 13:54:46 EDT

By Marshall Eckblad The government is trying to entice more small businesses to tap one of its loan programs. Before applying for one of these loans, though, there are some fine points borrowers should consider.The Small Business Administration's 504 loan program lets companies take out fixed-rate financing to buy property, build or expand facilities, or refinance some existing mortgages. The borrower typically needs to put down just 10% of the transaction's total price.With the weak economy deterring many small businesses from expanding in the past couple of years, demand for these loans plummeted: Last year, the SBA approved $3.8 billion in 504 loans, down 28% from 2008 and 40% from 2007. Hoping to spur expansion among small companies, the SBA is offering inducements like lower rates and no-fee deals.The plan seems to be working, since demand is picking up again. If you're thinking of pursuing a 504 loan, though, there are some strategies and caveats to keep in mind. Here's what you need to know.First, you may not be able to get one of these deals with your primary bank; many lenders aren't interested in offering them. Why? Only about half the final government-insured loan amount sits on a bank's balance sheet, with much of the rest covered by a bond offering. Some banks prefer to offer SBA loans through programs that allow them to hold the whole loan and collect its full interest payments. Grady Hedgespeth, director of the SBA's Office of Financial Assistance, advises small-business owners to start by contacting the nearest certified development corporation, an authorized government partner in the 504 program. CDCs are typically nonprofits that aim to promote growth among small-businesses.The SBA's website, SBA.gov, also lists local SBA offices that can provide data for which lenders are issuing the most 504 loans and are therefore more likely to know the program well. Remember, though: The government offers guarantees and parameters for 504 loans, but many details are left up to borrowers and lenders to negotiate; different banks may offer different terms. Because terms can vary, ask to see side-by-side quotes for a 504 loan and a conventional commercial mortgage or construction loan. Although the 504 program will usually offer a better deal, your lender should make sure. Even after choosing the 504 option, many borrowers will need "gap financing," since some deals will face a 60- to 90-day delay between closing and government funding. That gap can reach a full year for construction projects, since the government doesn't deliver the money and its guarantees until after the property is completed.Prices and terms for temporary mortgages typically vary based on the property, lender and region. These loans are usually available from the lender executing the 504 loan, but they may carry additional requirements.Solera Salon Inc., in Greenwood Village, Colo., was recently approved for a 504 loan to build new facilities. But the company had to pledge additional assets, beyond the 10% down payment for the SBA loan, to secure gap financing.Apart from shopping for rates, experts say it's important to look at each loan package's fees and other terms—especially what happens if the project unexpectedly violates SBA rules. Michael Kleinberg, Solera's chief financial officer, notes that Solera will lose its 504 loan, and be stuck with its pricier gap financing, if the project suffers any "materially adverse" change, such as a lawsuit.Another challenge: Currently, the program only allows borrowers to refinance a portion of an existing loan if the business uses at least two-thirds of the proceeds to invest in expanding.Congress hasn't yet authorized the program to allow current business borrowers to refinance existing whole loans. But the SBA hopes such a deal will be in place soon. Mr. Eckblad is a reporter for Dow Jones Newswires in New York. He can be reached at marshall.eckblad@dowjones.com.

Bernanke: More Needed To Boost Small-Business Lending

Tue, 13 Jul 2010 08:00:24 EDT

By Tom Barkley Federal Reserve Chairman Ben Bernanke urged banks and regulators Monday to seek out ways to ensure that small businesses get the credit they need to create jobs."Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges," Mr. Bernanke said in prepared remarks to the Fed's forum on restoring credit to small businesses.Declaring small businesses as "central" to tackling unemployment, the Fed chief said not enough is being done to ensure that financially sound companies can obtain loans.Fed officials have become increasingly worried about the stubbornly high unemployment. The jobless rate edged down to 9.5% in June from 9.7% the previous month. But the economy shed jobs for the first time this year, with nonfarm payrolls falling 125,000 last month."The formation and growth of small businesses depends critically on access to credit," Mr. Bernanke said in the text of his remarks. "Unfortunately, those businesses report that credit conditions remain very difficult."The forum is the culmination of a fact-finding mission the Fed launched in February to identify how to improve credit access for small firms, which account for about 60% of job creation.Fed officials have hosted more than 40 meetings around the country with small businesses, bankers and community leaders to identify obstacles that have contributed to a continued contraction in lending.Mr. Bernanke cited data showing that outstanding loans to small businesses have declined to less than $670 billion in the first quarter of 2010 from about $710 billion in the second quarter of 2008.While major banks eased loan conditions for big firms during the first quarter, lending standards remained tight among the local banks that small businesses rely on, according to the quarterly Fed survey. Similarly, a survey by the National Federation of Independent Business found that the proportion of firms reporting tighter credit conditions over the past three months remained "extremely elevated," Mr. Bernanke said.Some lenders participating in the meetings viewed the current lending standards a return to more normal conditions following a period of lax standards. But Mr. Bernanke said "it seems clear" that some creditworthy borrowers and having trouble getting credit, even when strong cash flow is compensating for a loss in collateral."The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment," he said.Lending to creditworthy borrowers is in their interest, Mr. Bernanke said, since "that's how they earn their profits."Meanwhile, he said regulators should continue to work with lenders to help improve credit availability to sound small firms.The Fed has been encouraging banks to ensure that credit-worthy small businesses can get the credit they need. Reacting to complaints that its own bank examiners are contributing to overly tight standards, the central bank is also conducting training programs with examiners to drive home the message that encouraging loans to small businesses that can repay is positive for the banking system.Still, Mr. Bernanke cautioned against "one-size-fits-all solutions," saying that the meetings confirmed that each small business has a unique combination of local economic conditions and relationships with creditors and customers.He didn't make any comments on the outlook for monetary policy. Write to Tom Barkley at tom.barkley@dowjones.com

Launching Gilt Groupe, A Fashionable Enterprise

Sat, 24 Jul 2010 21:18:57 EDT

By Colleen DeBaise (See Corrections & Amplifications below.) Lunchtime wouldn't be nearly so fabulous for budget-conscious fashionistas if it weren't for Alexis Maybank and Alexandra Wilkis Wilson. The duo, classmates from Harvard Business School, joined forces in 2007 to launch Gilt Groupe Inc. and bring designer sample sales— famous in New York for inducing tug-of-war frenzies—to an online audience. A few minutes before noon Eastern time each day, the Manhattan company sends an email alert to its nearly three million members, announcing the day's online private sales in women's and men's luxury brands—think Christian Louboutin, Dolce & Gabbana and Valentino—at up to 70% off retail prices. With 2009 revenue of $170 million and a current valuation of some $400 million, Gilt Groupe appears to have more staying power than most fashion trends. The venture-funded, 450-employee concern in the past year has expanded its offerings to include deals on travel destinations and services such as spa treatments, restaurant reservations and exercise classes. Edited interview excerpts with Ms. Maybank follow. Q. How did you get the idea for Gilt Groupe? A. We took all our inspiration from attending sample sales here in New York City. This was something we already knew, and had spent hours sneaking out of offices to participate in. The sales create excitement, sometimes hysteria. So it seemed the perfect idea to bring to a national audience. Q. How did you start the company? A. In the summer of 2007, we spent two months building out a beta site and pipeline of eight brands. In this day and age, you can roll out an online business so quickly. It used to be six months to a year —now, literally you can spend two months. I had worked at eBay [as an early employee and founder of eBay Motors] and Alexandra had worked at Bulgari and Louis Vuitton. An industry like fashion is relationship-driven, so she brought on the majority of our brands. Q. How did you sign up your initial designers? A. We launched with Zac Posen, who we knew through work we had done at Harvard Business School (in 2004). Back then, he was an emerging brand that was starting to gain a lot of visibility, but didn't have a business plan in place [that focused on] a way to finance the brand's growth; we helped him take a look at that. Q. How did you get the word out about Gilt Groupe so quickly? A. This is a business that has grown predominantly through word-of-mouth marketing. Seventy-five percent of our membership has come from the suggestion of a friend, using our onsite 'Invite Friends' feature [in exchange for a $25 credit.] That's how we launched. We sent invites to a list of about 15,000 people—friends, former colleagues and classmates, dating back to grade school! I'm surprised you didn't get one. Q. What's been the biggest challenge so far? A. Convincing fashion labels to work with Gilt Groupe. Many of them were not familiar with us—and they were dubious about the Internet as a sales channel. So we had to educate them as to what e-commerce could do for their brand, while also convincing them that Gilt was the way to go. Also, getting the best talent in the door quickly. We've brought on about 450 people—many are buyers who visit ateliers and studios and hand-select items from recent collections—and doing it in a way where the culture stays consistent is a challenge. Q. Tell me about working with Kevin Ryan, the former CEO of DoubleClick and Gilt's chairman, who provided seed capital. A. We met him through a referral. He was very well-connected in a lot of ways—he had a big success under his belt taking DoubleClick public, and he had experience raising money in the venture-capital industry. He had deep knowledge. We are driven, but a lot younger. Q. You've raised money [$35 million in May and $43 million last summer] from venture-capital firm Matrix Partners and private-equity firm General Atlantic. Did you have trouble raising VC as a woman? A. It's an old boy's network, and that's intimidating for a lot of woman. I had worked [in venture capital] so I understood how it worked. At investor meetings where we pitched the idea, not a single firm had a female partner. So when explaining fashion to a bunch of men in khaki pants and blue button-down shirts, their response was always 'Oh, let me see if my wife thinks if this is a good idea.' But it worked. One thing that really helped us is that a similar company in France, Vente-Privee.com, had just received funding at an unbelievable valuation. It's better to be lucky than good sometimes.(See Ms. Maybank's advice for pitching investors in this video.) Q. Why the name Gilt Groupe? A. It means covered in gold leaf—timeless and beautiful, like a lot of the items we sell on our site. But it's also a fun word play with 'guilty pleasure.' We wanted it to be short, easy to spell and appealing to men while also attracting women. We added the French spelling for a little 'je ne sais quoi.' Q. Do you plan an IPO or a sale? A. We have no formal plans. We'd be incredibly lucky to go public or have a sale—but we're having a lot of fun right now in what we're doing. We're rolling out new categories and local services. And we plan more international expansion. [Gilt is currently in Japan.] Q. What's your best tip for other entrepreneurs? A. I can never underestimate how important that initial team is. Ideas are cheap and available—it's all about the execution. A team that's well-rounded, complementary and has personalities that gel is critical in building a strong and sustainable business. Write to Colleen DeBaise at colleen.debaise@wsj.com Corrections & Amplifications Alexis Maybank and Alexandra Wilkis Wilson worked with Zac Posen on a business plan that focused on the next stage of the brand's growth. An earlier version of the story incorrectly implied that Mr. Posen's company didn't have a business plan.

House Aims to Boost Small-Business Loans

Thu, 17 Jun 2010 19:40:37 EDT

By Martin Vaughan WASHINGTON—The U.S. House approved legislation Thursday to create a $30 billion fund to boost lending to small businesses through community banks.The vote was 241-182. The bill will now be combined with a $3.5 billion package of tax cuts directed at small businesses, which the House passed earlier this week and sent to the Senate for approval. "This bill will increase credit to small businesses and get them back on their feet, and help them continue to add jobs," Rep. Ed Perlmutter (D., Colo.) said during House floor debate. House Republicans derided the bill as more government bailout spending, labeling the $30 billion fund "TARP junior," after the Troubled Asset Relief Program. The House defeated a Republican motion which would have subjected the program to the oversight of the special inspector general of the TARP. Democrats contend that the fund is already under oversight of Treasury's permanent inspector general, and that it is unrelated to TARP. Industry groups representing regional and large national banks backed the legislation, as did some small business and real-estate groups. Banks with total assets of less than $10 billion would be eligible to receive capital investments from the fund, under the bill from House Financial Services Committee Chairman Barney Frank (D., Mass.). Banks with higher rates of lending to small businesses and farms would qualify to have interest rates lowered on those capital infusions. The bill would also provide $1 billion, to be matched by private capital, for a new equity financing program for start-ups. That fund will be overseen by the Small Business Administration. "Twenty years ago, entrepreneurs were likely to rely on loans and credit cards to launch or expand their businesses. This met the needs of most entrepreneurs, but today's start-up costs have grown dramatically," said House Small Business Committee Chairwoman Nydia Velasquez (D., N.Y.), explaining the intent behind the start-up fund. The bill also includes another $2 billion for state programs intended to leverage private bank lending to small businesses. The lending bill will be paired with tax incentives passed earlier this week by the House. That includes a proposal from President Barack Obama to eliminate capital-gains taxes on sales of certain small business stock. The combined cost of both measures is roughly $7 billion over 10 years, all of which is offset by revenue provisions. For instance, the bill would put curbs on the use of grantor-retained annuity trust to avoid estate taxes. The cost of the $30 billion fund is estimated at $3.3 billion over 10 years. This is because to the extent the capital lent out to banks is paid back, it is not counted against the federal budget. Write to Martin Vaughan at martin.vaughan@dowjones.com

What's in a Name? Sometimes, a Lawsuit

Thu, 24 Jun 2010 13:34:44 EDT

By Emily Maltby Jimmy Winkelmann started a clothing company several years ago to mock fellow students who wore the outdoorsy The North Face brand, despite having no inclination to venture into the wilderness. He dubbed his company "The South Butt" and flipped The North Face's half-dome logo to look like buttocks.But at least one party wasn't amused: The North Face.Mr. Winkelmann, now a student at the University of Missouri at Columbia, received a cease-and-desist letter from the company last summer. He declined to comply, prompting a trademark infringement suit that was settled out of court in April.The South Butt is still in operation. Mr. Winkelmann's lawyer and a spokeswoman for The North Face, a unit of VF Corp., said the matter was resolved amicably, but declined to comment further. It's unclear if Mr. Winkelmann is required to make any payments to The North Face or if the company has imposed any conditions on his marketing efforts. Small businesses, unwittingly or not, have a history of running into scuffles by playing off a larger company's protected trademarks—sometimes resulting in legal battles they can ill afford, given the limited resources of most start-up operations. Some 3,500 trademark cases are filed each year in U.S. district courts, according to FTI Consulting Inc., a Baltimore advisory firm that tracks intellectual-property statistics.Large corporations are highly protective of the brands and logos they often spend years and millions of dollars promoting. Inexperienced entrepreneurs may not realize "that a lot of big businesses have people who are assigned to find people who are using their trademark," says Anuj Desai, an attorney specializing in trademarks and licensing at Arnall, Golden, Gregory LLP in Atlanta. Victor and Cathy Moseley of Elizabethtown, Ky., say they received an initial complaint alleging trademark infringement from Limited Brands Inc., the parent company of Victoria's Secret, within two weeks of opening an adult novelty and lingerie shop called "Victor's Secret" in 1998. The Moseleys ultimately changed the name of the boutique to Cathy's Little Secret, but still entered into a 12-year court battle to keep the original name. The shop lost an appeal in May. "It's discouraging," says Ms. Moseley, who plans a further appeal. Limited Brands declined to comment. The big corporation doesn't always win. Last fall, McDonald's Corp. lost an eight-year battle to prevent a family-run restaurant in Kuala Lumpur from calling itself McCurry. Malaysia's top court ruled that the Indian-food eatery could keep the prefix "Mc" in its name, as long as it distinguishes its food from the hamburger giant's. McDonald's didn't return a call for comment.But many small businesses find it's not worth picking a battle with a deep-pocketed corporation. Legal representation alone can run $10,000 to $50,000, or several hundred thousand dollars if the matter goes to court, according to Mr. Desai. Most owners who find themselves on the receiving end of a cease-and-desist letter often settle the matter quickly to avoid the cost of a prolonged lawsuit, he says.Problems could likely be avoided with some due diligence, says Maria A. Scungio, co-chair of international trademark and copyright practice for Edwards Angell Palmer & Dodge LLP in New York. When starting up, many small-business owners don't seek legal advice or register their name with the U.S. Patent and Trademark Office, which could tip them off if they are encroaching on someone else's trademark, she says. Ric Trader says he regrets not registering his company's trademark when he started Yard Doctor Landscaping in Punta Gorda, Fla., in 1998. That process, he says, may have made him aware of the existence of Lawn Doctor Inc., a national lawn-care company in Holmdel, N.J., that began franchising in 1967.Mr. Trader says he was sent a cease-and-desist letter by Lawn Doctor in 2002, when his company was already well established, breaking $1 million in annual sales. He ultimately decided to ignore the letter, reasoning that customers wouldn't be confused by the similar names. Lawn Doctor soon filed a lawsuit against the small company. Mr. Trader, who didn't retain a lawyer, says that the ensuing years of legal paperwork were draining.In an out-of-court settlement in 2005, Mr. Trader says he agreed to change his company's name in exchange for a five-figure sum. But with all the setbacks as well as Hurricane Charley taking a toll on his business, Mr. Trader decided to sell the business just weeks later. Lawn Doctor declined to comment. Write to Emily Maltby at emily.maltby@wsj.com

Résumé Overload? A Shortcut to Spot Best Hires

Thu, 22 Jul 2010 09:31:44 EDT

By Mike Michalowicz If there's one thing we small-business owners need it's more time in our days. If you're like me, you're constantly on the hunt for the secrets to doing something faster, better or cheaper.Hiring employees is no exception. Finding the right people is never easy, but in today's turbulent economy, job seekers are responding to every job opening they hear about, inundating us with résumés. Many business owners think using the online job boards is a shortcut to finding the right potential employees. But the job boards usually elicit an overwhelming response from unqualified applicants, leaving us with hundreds of résumés and no clue as to how to cull through them all to select the best people.For years I've used a special filtering technique to avoid this problem. My secret? In the ad (about three-quarters of the way down) I tell the applicants, "To prove that you're a meticulous reader, you have to include the following sentence when you send your résumé: 'It is with my utmost respect I hereto surrender my curriculum vitae for your consideration.'"Then we use what I've dubbed the "Quick Qualifier" which sounds fancy, but is nothing more than an email filter which searches for the requested sentence. I only consider applications that contain the sentence, which cuts the number of résumés I have to look at by upwards of 80%.Why does this seemingly silly technique work? 1. Including the sentence shows the applicant has read the entire ad and knows what the job entails and if they're qualified to fill it. 2. Many people today are blasting résumés (batch responding) to everyone and their mother. They don't care what the job is; they're just looking for a paycheck. 3. Using the sentence shows they pay attention to detail. 4. Most important, business owners want employees who will do as they're told. If they've used the sentence, it shows they're more inclined to explicitly follow directions and do what you expect of them.I've used the "Quick Qualifier" dozens of times and it has rarely failed to select the best qualified people for the job. In fact, the best employee I ever hired not only included the sentence in her email response, but wrote, "Yes, I'm so detail-oriented I am including the sentence you requested. However, I also noticed you spelled the word 'meticulous' incorrectly, and here's the correct way to spell it." We hired her immediately and she ultimately became a partner in one of my companies.This method may seem like a gimmick to some of you, but it's been a timesaver for me. And it shows that the fastest path to hiring may indeed be the best.

Tax-Saving Moves for Small Businesses

Tue, 22 Jun 2010 10:59:40 EDT

By Bill Bischoff If you're a shareholder in a successful closely held C corporation, you know this year's federal income tax rate structure is favorable to your cause.But things are about to change. Here are the specifics about what's in store, along with some tax-smart strategies to consider right now. Higher Taxes on Dividends The maximum federal rate on dividends will automatically leap to 39.6% from the current 15% on Jan. 1 as the Bush tax cuts expire. Although the president has promised more than once to limit the maximum rate on dividends to 20%, the little-known fact is Congress must take action for that to happen. It's no sure thing. Even if it does happen, the maximum rate on dividends will jump again to 23.8% in 2013, thanks to the additional 3.8% Medicare tax that takes effect that year. So you're facing a 59% increase in the maximum federal tax on dividends (at least). Higher Taxes on Long-Term Gains Starting Jan. 1, the maximum federal rate on long-term capital gains will automatically increase to 20% from the current 15%. Starting in 2013, it will jump again to 23.8% due to the additional 3.8% Medicare tax. So you're facing a 59% increase in the maximum federal tax on long-term capital gains too.Thankfully, you still have some time to take advantage of this year's historically low tax rates on dividends and long-term gains. Here are three strategies to consider right now. Don't ponder too long, because these ideas will take some time to execute, and Jan. 1 will arrive before you know it. Strategy No. 1: Take Low-Taxed Dividends This Year Say your profitable C corporation has a healthy amount of earnings and profits, or E&P. The concept of E&P is somewhat similar to the more-familiar financial accounting concept of retained earnings. While lots of E&P indicates a successful company, it also creates a tax side effect. To the extent of your corporation's E&P balance, corporate distributions to shareholders (like you) count as taxable dividends. Since the 2010 federal rate on dividends can't exceed 15%, dividends received this year will be taxed lightly. That probably won't be true for dividends received in 2011 and beyond. Therefore, shareholders (like you) should weigh the option of triggering a manageable current tax hit by taking dividends in 2010 against the option of absorbing a potentially bigger (but deferred) tax hit on dividends taken in future years. Strategy No. 2: Do Low-Taxed Stock Redemption Deal This Year Another way to convert some of your C corporation wealth into cold, hard cash is with a stock redemption deal—where you sell back some or all of your shares to the company. When there are several shareholders, this is a common technique to get extra cash to one or more selected shareholders (maybe you) while other shareholders stay put.To the extent of your corporation's E&P balance, any stock redemption payment is generally treated as a taxable dividend, which is OK if it happens this year since the maximum federal rate is only 15%. However, our Internal Revenue Code provides several exceptions to this general rule. If one of these exceptions applies (consult your tax adviser if you don't know), redemption payments are treated as proceeds from selling the redeemed shares. In that case, you can offset the resulting capital gain with capital losses from other transactions earlier this year and with capital losses carried into this year. (Lots of folks still have big capital loss carryovers left over from the 2008 stock market meltdown.) The gain left after subtracting your capital losses (if any) will probably be a long-term gain taxed at only 15%, as long as the redemption happens this year.Since both dividends and long-term gains will almost certainly be taxed at higher rates in 2011 and beyond, getting a stock redemption deal done this year could result in a much smaller tax hit than if you wait until later. Strategy No. 3: Sell Stock This Year This last strategy is obvious. Speaking strictly from a federal income tax perspective, selling shares this year and paying no more than 15% on the resulting gains (assuming you've held the shares for over a year) sure beats paying 20%, or 23.8%, or maybe even more than that on gains from sales in later years. Bill Bischoff, a certified public accountant with more than 25 years of experience, has authored books and training courses for tax professionals, and frequently writes about consumer and small-business tax matters.

Apple Looks to Small Businesses

Thu, 22 Jul 2010 11:47:18 EDT

By Ian Sherr Apple Inc. is boosting efforts to appeal to a new type of customer: small businesses. The consumer electronics giant responsible for the iPhone is seeking to hire engineers in as many as a dozen U.S. retail stores to put together Apple-based computer systems for small businesses, according to recent job postings on Apple's website. The employees would implement computer systems for clients and are expected to be proficient in networking hardware and server platforms."Thousands of businesses run on Apple products," the posting reads. "Many more would like to, and that's where you come in." The new positions mark the latest development in Apple's evolving strategy, which has historically focused on the consumer market and niche businesses, like design and media firms. Now, Apple wants to leverage its popular iPhone and iPad devices, using their appeal as a selling point for more expensive products, including its line of Macintosh computers and servers. (See related article on C10.)Apple is targeting smaller, local businesses that it can reach through its chain of nearly 300 retail stores, according to two Apple employees familiar with the company's strategy. The new jobs could pay up to $80,000 a year, one of them said.Each of Apple's stores already has at least one salesman dedicated to managing accounts with local businesses, the employees said. Recently, Apple also began recruiting from within the sales staff to create a specialized team that negotiates leasing and pricing terms for business customers, one of the people said. Some stores have seen revenue more than double after implementing the program, the person added. An Apple spokeswoman declined to comment. The focus on smaller businesses is unlikely to push Apple into further competition with big computer makers like Hewlett-Packard Co. and Dell Inc., though it could upset its network of authorized consultants, who often serve local businesses. Targeting smaller businesses could prove lucrative. North American businesses with fewer than 1,000 employees are expected to spend $310.8 billion on information technology this year, according to industry tracker Gartner. The figure is seen rising roughly 6% to $328.3 billion next year. Capturing part of those sales could boost Apple's annual revenue, which is expected to grow 46% to $62.6 billion this year, according to consensus estimates from Thomson Reuters. "They're well aware of the opportunities in business," said Gleacher & Co. analyst Brian Marshall. "This is something they're focusing on even if they're not talking about it publicly."Apple has had mixed results trying to crack the business market in the past. Its computers are generally more expensive than comparable PCs, prompting cost-conscious companies to look for cheaper alternatives.Apple's retail staff historically hasn't provided the hand-holding and on-site support that many businesses expect. Instead, it has cultivated a network of authorized consultants, many of whose customers are referrals from Apple's retail employees. "Almost half of our new customers come from the Apple Store," said Allen Cleaton, owner of Virginia-based MacPro Solutions. He said local businesses often come to him because Apple's staff generally don't have the level of technical expertise needed to set up and maintain a businesses computer network.However, Mr. Cleaton said that if Apple starts providing a higher level of service, it could threaten local companies like his own. The Apple employees familiar with the new position said it was a natural progression of recent initiatives. Apple maintains a team at its headquarters to handle big companies and government agencies, but it has increasingly handed responsibility for small and mid-sized business accounts to its retail stores, the people said. Apple has put an incentive program in place to manage the growth of these new business initiatives, they said, assigning new business sales staff based on revenue targets for each store. Apple also has designed specialized conference rooms in its newer retail stores, like those in Minneapolis and Shanghai, which are specifically meant for meetings between sales staff and high-level business executives. Write to Ian Sherr at ian.sherr@dowjones.com

Earning Cash With YouTube Videos

Fri, 18 Jun 2010 14:35:07 EDT

By Diana Ransom Like many realtors in hard-hit markets across the country, David DeVore of Orlando, Fla., hasn't had much luck selling homes in the last couple of years. DeVore's Plan B? The social media career of his young son, David.Last January, DeVore posted a video on YouTube of the then 7-year-old David's tipsy antics after a visit to the dentist. Since then, that video dubbed "David After Dentist" has been viewed more than 61 million times—capturing the attention of Tyra Banks and NBC's "Today" show, among others. The clip has even managed to spawn a number of parodies including "Santa After Dentist" and "David After the Divorce."Although DeVore has traveled the same path as countless hobby filmmakers, he has been able to extend his family's 15 minutes of fame into a small business. "Having worked in real estate, I've always had entrepreneurial things going on," says DeVore. "I saw that this might be a short opportunity to make this whole thing into a family business."So how does buzz become a business? In addition to collecting advertising revenue checks from Google's YouTube, DeVore launched the web site DavidAfterDentist.com where fans of the video can purchase T-shirts and stickers. He also signed a licensing deal with Vizio, an electronics maker, which allowed the company to use David's likeness in an advertisement that ran during the latest Super Bowl. And most recently, DeVore inked a deal with FoneStarz Media, a mobile content provider in the U.K., which aggregates videos for mobile phone operator Vodafone Group. All told, DeVore has collected around $150,000, which he plans to use to fund his two sons' college costs and give to charity.Similarly, Howard Davies-Carr, a former IT consultant in Buckinghamshire, England, managed to parlay a video of one of his sons biting the other's finger into a lucrative advertising partnership with YouTube. That video called "Charlie Bit My Finger" has been viewed more than 200 million times since its original posting in May 2007—landing the clip handily in the rolls of YouTube's top 10 most viewed videos of all time. With that kind of attention, spoofs and the ad revenue followed. Davies-Carr won't say exactly how much his family has earned from the video, but the added income made it more possible to afford a new house, he says.The prospect of earning even a modest sum is attractive, says Kevin Yen, director of strategic partnerships at YouTube. Since YouTube's partner program became formalized in 2008, the video portal has signed up more than 5,000 advertising partners globally. "We have individuals who do very well—generating more views and revenues than mainstream media companies," he says. In fact, "a good handful of our biggest contributors started off as individuals posting on YouTube."Still, the longevity of these so-called businesses is questionable, says Alex F. DeNoble, the chairman of the management department at San Diego State University's College of Business Administration. "While these videos do draw a lot of eyeballs to the site, for a successful business, the fundamentals have to be there," he says. "You have to have a solid reliable product or service that people can pay for and can be delivered profitably."Of course, as a marketing tool, YouTube along with other social networking sites including Facebook and LinkedIn are instrumental, says DeNoble. "If you can generate buzz, and build a following, that gives investors and advertisers confidence," he says. And depending on how many online followers a business generates the more leverage it will have to build credibility, DeNoble says.For Jeffrey Harmon, the CEO of OraBrush, a tongue-brush maker in Springville, Utah, YouTube was a crucial marketing tool. "Four out of 100 Canadians have now seen an Orabrush video and 1.5 out of 100 people know about us in the U.S.," says Harmon, who began posting a series of webisodes about bad breath on YouTube last October. Recently, YouTube gave the fledgling firm its own branded channel—thereby encouraging added self-branding opportunities. Write to Diana Ransom at dransom@smartmoney.com

A Sample Can Be Simple and Cheap

Sat, 03 Jul 2010 19:11:19 EDT

By Sarah E. Needleman Kimberly Isaac used to dream of an easy way to transport the heavy tanks she relies on to indulge in her favorite pastime, scuba diving.But after getting laid off from an accounting job last summer, she set out to create the solution she envisioned -- a compact scuba-tank dolly -- and a new career as an entrepreneur.There was just one problem: "We're not engineers," says Ms. Isaac, referring to herself and Thomas Spiegle, a fellow diving enthusiast she recruited to be her business partner.Nevertheless, the duo set out to make a prototype using spare pieces of metal, foam, a glue gun and a hammer. "It was like a high-school science project," recalls Ms. Isaac. Now the two sell professionally manufactured versions of that crude model for around $300 apiece through a Thousand Oaks, Calif., venture they named Shark Bite Scuba. Thirty of the dollies have been purchased so far and another 30 are currently in production.Have a vision for an original product or an enhanced version of an existing one?Experts in entrepreneurship say only a rudimentary sample may be necessary to articulate to manufacturers how it should look and function. Or, you may be able to piece something together on your own by combining premade parts or ingredients."People think you have to spend a lot of money and make something elaborate," says Jen Groover, a serial entrepreneur and creator of the Butler Bag, a line of compartmentalized handbags sold by major retailers. But even ordinary household items can suffice."In my case, I took a dishwasher utensil tray and stuck it in an existing bag," says Ms. Groover, who wrote "What If? & Why Not?: How to Transform Your Fears Into Action and Start the Business of Your Dreams."Of course, it's typically a good idea to do some testing of your prototype and research into its marketability before investing in large quantities of a final version to sell. One way to do this is to make several low-cost prototypes and give them to people in your target market for free in exchange for their feedback, says Howard Hawkins, a counselor for the Orange County, Calif., chapter of SCORE, a small-business mentoring group. "Have them use it for a while and report back to you," he says.Even if your due diligence shows that there is indeed a demand for your product and it works smoothly (or tastes good if it's food), don't go overboard on your first production run, warns Mr. Hawkins. "Start small" and wait to ramp up after you see sales take off, he says.Last year, Terri Denno, a stay-at-home mom in New York, began creating a product from scratch after her husband got laid off from a copywriting job. She combined various plastic and silicone containers she bought from wholesalers she found online to assemble a lunchbox that could store items separately."Kids don't like their foods to touch," says Ms. Denno, who came up with the idea for the device from observing her two children's eating habits.After comparing different arrangements and prices, Ms. Denno settled on seven items totaling just $6 that together would make up her product. She ordered enough parts to make 50 units, plus wrapping paper and boxes to ship them in. Meanwhile, her husband created a website for her business, which she named Little Lunchbox, and a friend designed a logo.Today, Ms. Denno's website sells about 10 to 20 lunchboxes per month for $15 each. She regularly promotes the lunchboxes at no cost on a free online newsletter for parents. She also once got a mention in a New York kids magazine after sending its editors a sample product, which temporarily quadrupled sales.Heather Kenzie and Jennifer Love took it slow when developing their product. Using common ingredients, they initially produced just 100 of the chocolate health bars they cooked up last year in a commercial kitchen they rented in New York. The business partners then asked about a half-dozen local food stores to consider carrying the bars, called NibMor."We were just out there pounding the pavement and getting the product into people's hands," says Ms. Kenzie, an amateur chef and Broadway performer who turned to entrepreneurship after acting gigs started drying up.She says buyers soon emptied out their inventory, prompting them to whip up a second batch, with a slightly altered recipe, and approach more retailers, including some outside New York. These days, they're churning out 4,000 NibMors a month and expect to triple that number by the end of the year.One thing entrepreneurs should consider: filing for a patent with the federal government if they are looking to create and market an original product that could be easily copied. While this process can cost upward of $20,000 and take as long as five years to complete, "a patent may be your best barrier to competition," says Greg Bernabeo, an intellectual-property attorney at Saul Ewing, a Philadelphia law firm. Write to Sarah E. Needleman at sarah.needleman@wsj.com

Self-Employed? Remember Roth IRA Option

Fri, 02 Jul 2010 11:01:08 EDT

By Bill Bischoff Saving more for retirement is something we should all be doing. If you can save in a tax-smart fashion, so much the better. Making annual Roth IRA contributions is definitely tax-smart, because you can take tax-free withdrawals after age 59½. Of course, Roth contributions are nondeductible. That's OK because you'll collect your rightful tax savings on the back end.However, many successful self-employed individuals have dismissed the idea of making annual Roth contributions for two reasons. Reason No. 1: They figure their income is too high to qualify. Reason No. 2: They've been fixated on making maximum deductible contributions to their traditional plans (such as a Simplified Employee Pension, or SEP), and they forgot all about making Roth contributions too.So let's take a look at that first reason. It's a fact that the privilege of making annual Roth contributions is phased out, or completely eliminated, if your modified adjusted gross income, or MAGI, exceeds certain levels. MAGI is the adjusted gross income amount shown on the bottom of page 1 of your Form 1040 with certain add-backs that may or may not apply to you. The MAGI phase-out ranges for 2010 Roth contributions are as follows:At first glance, these phase-out ranges make it look like anyone with robust self-employment income will be ineligible for Roth contributions. But not so fast—let's look again.Your MAGI is likely to be considerably lower than the MAGI of another person in roughly equivalent circumstances who is not self-employed. That's because your MAGI will usually be reduced by things like: (1) home office and computer-related costs (maybe $5,000 or more in write-offs for expenses you would have incurred with or without your business); (2) contributions to a tax-deferred retirement plan (maybe $35,000 or more); (3) health insurance premiums (maybe $5,000 or more); and (4) the write-off for 50% of your self-employment tax bill (maybe $9,000 or more). The point is: A self-employed person like you can have relatively high net business income while still having MAGI that is low enough to allow annual Roth contributions.For example, say your business will have a healthy net income of $215,000 this year before considering the write-offs listed above. Your MAGI is $161,000 ($215,000 - $5,000 - $35,000 - $5,000 - $9,000 = $161,000), and you are eligible to make a full Roth IRA contribution this year ($5,000 if you will be under age 50 at year-end; $6,000 if you'll be 50 or older). This assumes, by the way, that you're a married joint-filer with little or no income from other sources.Now, let's take a look at that second reason, regarding nondeductible Roth contributions versus deductible contributions.Clearly, it's a good thing that you can deduct contributions to a tax-deferred retirement plan set up for your self-employed business, such as a SEP. However, that doesn't necessarily mean such contributions are preferable to contributing the same amounts to a Roth IRA instead. As long as your retirement savings game plan includes the following two assumptions, you're generally well-advised to make a deductible contribution to a tax-deferred retirement plan instead of a Roth contribution. Assumption No. 1: You will always take the tax savings from making a deductible retirement plan contribution and either invest the money in a taxable retirement savings account or use the money to make a bigger deductible contribution to your plan. Assumption No. 2: You expect to be in a lower tax bracket during your retirement years than you are now.In real life, many people are not disciplined enough to follow through with the first assumption; the second assumption looks highly suspect when you consider the ever-expanding federal deficit and politics. While it's not yet absolutely certain that tax rates will be higher in 2011 and beyond, it's a good bet. If it turns out that you pay higher rates during retirement, you'll wish you had made Roth contributions when you had the chance.If you're eligible to make annual Roth contributions (and I bet you are), you should take the plunge if you have the cash to do so. If you insist on maxing out on deductible contributions to your traditional tax-deferred retirement plan first, you'll get no argument from me. Then make your Roth contributions as well, and rest secure in the knowledge that you've played the game as hard as you could. Remember: You have until April 15, 2011, to make a Roth contribution for this year, and you can make another one for 2011 as soon as next January. Bill Bischoff, a certified public accountant with more than 25 years of experience, has authored books and training courses for tax professionals, and frequently writes about consumer and small-business tax matters.

What's Holding Back Women Entrepreneurs?

Fri, 21 May 2010 10:57:09 EDT

By Sharon G. Hadary The phenomenal growth of women-owned businesses has made headlines for three decades—women consistently have been launching new enterprises at twice the rate of men, and their growth rates of employment and revenue have outpaced the economy.So, it is dismaying to see that, despite all this progress, on average, women-owned business are still small compared with businesses owned by men. And while the gap has narrowed, as of 2008—the latest year for which numbers are available—the average revenues of majority women-owned businesses were still only 27% of the average of majority men-owned businesses.There are those who will say that these numbers substantiate what they always knew: Women just don't have what it takes to start and run a substantial, growing business. But I don't buy that: More than a quarter of a million women in the U.S. own and lead businesses with annual revenue topping $1 million—and many of these businesses are multimillion-dollar enterprises. Clearly, many women have the vision, capacity and perseverance to build thriving companies.So what's holding back so many women business owners?I have spent decades conducting research, studying the data and interacting with all the players involved—entrepreneurs, researchers, educators, bankers and others. And I am convinced that the problem is twofold. First, you have women's own self-limiting views of themselves, their businesses and the opportunities available to them. But equally problematic are the stereotypes, perceptions and expectations of business and government leaders.Understand: I'm not arguing that all entrepreneurs, all bankers, all policy makers are guilty of such limited thinking. But I've talked to enough of them, and studied enough of the research, to know that these problems are pervasive, and they are having a big impact—on both individual entrepreneurs and in turn on the health of the overall economy.In that spirit, here's a closer look at how I believe these factors are preventing so many women entrepreneurs from fulfilling their potential—and what can be done to prepare them to accelerate business growth. IT STARTS WITH THE GOALS: The value of setting high goals for growth is not just a motivational myth. Research shows that the only statistically significant predictor of business growth is not the industry, size of business or length of time in business. It is the entrepreneur's goal for growth.But research also shows that the differences between women and men entrepreneurs begin with their own reasons for starting a business. Men tend to start businesses to be the "boss," and their aim is for their businesses to grow as big as possible. Women start businesses to be personally challenged and to integrate work and family, and they want to stay at a size where they personally can oversee all aspects of the business.That mind-set is only reinforced by the training many women entrepreneurs get—at women's business centers, for instance, or seminars for aspiring women business owners, or at adult-education courses at community colleges. This training targeted directly at women too often tends to ignore planning for future growth, focusing instead on business start-up planning, marketing advice and personal-budget planning to ensure the new entrepreneur has enough cash to carry her until the business gets going.Once a woman starts a business, that lack of focus on growth planning can make a huge difference. She may not establish the necessary tools for tracking and analyzing financial information and business operations or invest in the technology that would facilitate future growth. So, if after a few years, the woman wants to expand the business and needs capital to do so, she is unlikely to have the financial records and projections that a bank requires. In the end, she either delays growth or, more commonly, lowers her goals. ACCESS TO CAPITAL: Women often come to entrepreneurship with fewer resources available to them than men. The result is that they are more likely to go into industries such as retail or personal services where the cost of entry is low—but so is the growth potential.Why the lack of resources? Again, women must accept part of the responsibility. Research shows that women tend to view debt as a "bad thing" to be avoided. For expansion capital, most turn to business earnings, which usually limits growth potential. Research supports the idea that one of women's strengths is relationship building, yet women seldom focus on building relationships with bankers. Lack of relationships with bankers and limited knowledge about financial products and services explain to a great degree why more women don't seek more sophisticated forms of financial products and services.Research from focus groups and seminars shows that many women business owners, especially those of color, believe they would not get credit even if they applied. So they don't even bother to try. And when they do apply for credit, they are often cautious, asking for as little as possible. This only feeds the perception that they are not serious about growth.Having said that, it's also true that women business owners' perception that they are not welcome at banks is not without cause. Despite highly publicized bank initiatives at the headquarters level to attract women business owners, my experience is that many bankers in local communities still operate with the perception that women-owned businesses do not have the capacity to grow and are not good credit risks. ACCESS TO MARKETS: The greatest potential for growth is in the business-to-business and business-to-government sectors. However, in the lucrative corporate-purchasing programs, many women business owners believe there is an unspoken perception that women-owned businesses do not have the capacity to perform, and that holds back their ability to win those contracts. Data confirm that women-owned businesses do not win a representative share.What's more, as corporate purchasing has moved to relying on "bundling"—consolidating purchasing through a limited number of large suppliers—women-owned companies are increasingly left out, according to women business-owner associations that focus on corporate and government contracting. That's because these large prime contractors, which are usually men-owned, include women-owned businesses as subcontractors in their bids in response to corporate requirements to have women- and minority-owned businesses on their team. But after winning, women consistently report, the prime contractor never gives them any of the work.The same thing also happens in government contracting. For more than 15 years, federal agencies have been required by legislation to set a goal of awarding 5% of all procurement dollars to women-owned businesses. However, that goal has never been achieved on a government-wide basis. Similar to the private sector, government contracting has moved to bundling for efficiency, which can close the doors to smaller women-owned businesses. ACCESS TO NETWORKS: Networks are a vital source of business and industry knowledge, leads on contracts, and access to decision makers in finance, purchasing and the community. Based on focus groups and seminars and my own personal experience, we find that most women don't have the connections for credible introductions into industry associations, chambers of commerce, venture-capital groups and other key networks. When women venture into diverse networks, they too often are not taken seriously and frequently are shut out of conversations and deals.While certainly progress has been made in addressing these issues, there is a long way to go. Specifically: CHANGE THE MIND-SET: The most successful women business owners "think big" from the start. Training and coaching for women entrepreneurs must stress the importance of laying the foundation for business growth from day one, regardless of the business owner's current plans for growth.Training for women business owners has focused primarily on start-ups. The next frontier is offering training in managing and accelerating growth for established women-owned businesses with revenue over $1 million.Training must include more about business finance, including how, when and why to use credit. The most successful women business owners take the initiative to learn about business finance—and give priority to building relationships with bankers—before the need for capital is critical.Women also must discard their perception that they won't get capital anyway, so there's no point to even trying. Research documents that more than half of women business owners who ask for credit get it. It takes persistence and a willingness to try multiple avenues, including changing financial institutions. WOMEN LEARN FROM WOMEN: Research shows that in general, women approach business leadership with a different perspective than men do, and as a result they relate more easily to the experiences of other women business owners. We need to convert the experiences of women who have achieved high business growth into practical learning programs that are available to every woman aspiring to lead flourishing enterprises. This body of knowledge must move beyond motivational commentary to focus on the nitty-gritty specifics of best practices and mistakes to avoid. In other words, learning to expand a business isn't only about being inspired, but also about learning the all-important how-to's. It's about teaching women what works and what doesn't work. BANKS MEAN BUSINESS: Bankers need to understand that serving women business owners must be more than marketing and publicity. They need to expand continuing outreach to women business owners at the community level, providing coaching and mentoring for business growth. NETWORK, NETWORK, NETWORK: Women business owners must expand their networking beyond community and women's entrepreneurship networks. The most successful women business owners join multiple, diverse networks to learn from their industry contacts, meet customers and develop connections to expertise. Having a critical mass of women in these networks helps women gain credibility, so women should reach out to other women and bring them into the networks. THE MORE WOMEN WHO LEAD, THE MORE WOMEN WHO LEAD: Corporations, financial institutions and government must reflect the market, with women at all leadership levels. Women business owners are more likely to receive credit, equity and contracts when there are women in decision-making roles. Public policy is more likely to reflect the needs of women business owners when senior staff and elected officials are women. ADVISORY COUNCILS: Corporations, banks and government should establish women-business-owner advisory councils and include women business owners, as well as the leaders of women's entrepreneurship advocacy groups. Senior executives must chair the councils and be actively involved. These councils serve as a platform for information exchange, demonstrate to the host organization the capabilities of women-owned businesses, provide insights on how to develop productive relationships, and can be a venue for capacity development. MEASURE IT: In business, if you cannot measure it, it is not real! Women business owners need to develop the metrics that document their capabilities. The women who have been most successful in the corporate and government markets have adopted recognized, standardized quality-measurement processes. These are available for both product and service businesses.In addition, third-party certification as a woman-owned businesses has become increasingly critical to winning corporate and government business.Corporations and government must track and report their spending with women-owned businesses at both the contractor and subcontractor levels—and establish rewards and penalties for meeting goals. Too often, as noted before, spending that is supposed to go to women-owned businesses never makes it. It's important that we have the data to hold contractors responsible. THINK EVEN BIGGER: Although the size gap is narrowing between men- and women-owned businesses, at the current pace it will take many decades for that gap to close. To speed things up, I believe we need to do more than simply help women plan for business as usual. We need to dramatically transform women's concepts of the future of their business enterprises—to move them into a place where they have the vision and the confidence to catapult their businesses to a whole new level.To do this, we have to show women how to embrace change; to be trend-setters rather than simply react; to innovate beyond expectations; to develop global integration; and to practice social responsibility. We need to help them identify ways to make their enterprises scalable and to build teams of talented people for where the enterprise should be in five years, not just today.Only by doing these things can we prepare women to jump-start their businesses onto a fast-growth trajectory. This is the next threshold for women-owned businesses—it is what will ensure that women achieve their full potential as business owners and that our economy fully benefits from these enterprising women leaders. Sharon Hadary is the former and founding executive director of the Center for Women's Business Research. She now is an adjunct professor at the University of Maryland University College and consults on women's issues. She can be reached at reports@wsj.com.

For Disabled, a Job Hunt Alternative

Thu, 15 Jul 2010 10:43:58 EDT

By Sarah E. Needleman David Shunkey is autistic and doesn't speak. Around the start of the recession, he got laid off from two jobs. Now he's trying to run his own business.More mentally and physically challenged adults are looking to entrepreneurship as they get closed out of an exceptionally competitive job market, according to several organizations that help the disabled, including Community Options Inc., a nonprofit based in Princeton, N.J. of which Mr. Shunkey is a member. But in an economic climate that's been tough on entrepreneurs, the disabled are no exception, and many face extra challenges."It's more difficult for someone like David to obtain a normal job," says Heather Gooch, one of several Community Options workers helping Mr. Shunkey build a dog-treat business with an $850 state grant from New Mexico, where his enterprise is based. "He needs close supervision."The unemployment rate for disabled workers was 14.3% in June, up from 9.3% two years earlier, when the Labor Department first began tracking such data for this demographic. In June, the unemployment rate for the rest of the U.S. was 9.4%.Employment opportunities have historically been scarce for the disabled. Twenty years ago this month, Congress enacted the Americans with Disabilities Act, barring employers from discriminating against qualified job applicants with disabilities. Last year alone, more than 21,000 claims were filed with the Equal Employment Opportunity Commission against employers accused of violating the law.With the poor economy further restricting employment options for the disabled, some organizations are seeing increased interest in programs designed to assist this group in starting businesses.Applications for an entrepreneur boot camp for disabled veterans that's offered through a network of six U.S. business schools have risen every year since the program's inception in 2007, says Mike Haynie, its national director. This year he expects to receive more than 500 applications for the program's 150 seats. Founded by the Whitman School of Management at Syracuse University, the boot camp starts with a 40-day distance-learning course, followed by 10 days of on-campus classes. Participants are also paired with mentors and have access to free resources such as legal and accounting services from corporate partners and the schools' alumni.After graduating from the program in 2008, former Marine Brian Iglesias co-launched New York film-production company Veterans Inc. with a fellow veteran. Mr. Iglesias's neck and shoulder were injured during combat, causing permanent nerve damage to his right arm and requiring a metal plate in his neck. He says he previously spent five months searching unsuccessfully for a job in the entertainment industry—even failing to land unpaid internships. "I was begging people to work for free," he says.The 33-year-old Mr. Iglesias, who has a bachelor's degree in film production from Temple University, suspects that some employers were uncomfortable hiring him because of his war experience. "Out of all the people who are candidates, they think, a year ago this guy was being shot at," he says.Every year since the recession hit, about 3,000 disabled adults have contacted Disabled Businesspersons Association for referrals to resources and volunteer mentors—three times as many as before, according to Urban Miyares, the San Diego nonprofit's president.But success seems limited. "We have yet to show any significant increase in profit or individual incomes by these new business owners," he says. Mr. Miyares speculates that because more disabled adults are pursuing entrepreneurship, competition for grants and other funding set aside by government agencies for this group has increased. As a result, disabled entrepreneurs may have less access to the start-up capital or cash flow they need to build and maintain a business, he says.Meanwhile, it's been tough for business owners of all kinds to obtain credit. Only about half of small businesses that sought loans last year got all or most of what they needed, according to a survey from the National Federation of Independent Business, an association in Washington. And for business owners with severe disabilities, there are many other hurdles. Mr. Shunkey, the autistic entrepreneur, relies on a team of supporters to ensure he doesn't get hurt while running his home-based start-up, David's Peanut Butter Puppy Bites LLC. Because the 54-year-old Mr. Shunkey is diabetic and has a tendency to eat or drink anything within reach, his helpers need to keep a close eye on him at all times. "If there's hot coffee left out, he'll just pour it into his mouth," says Ms. Gooch. With the help of his support team, Mr. Shunkey sought his first customers by asking local pet groomers and supply shops to sell his product on consignment. While five businesses initially signed on, three have since backed out, says Ms. Gooch, adding that sales of Mr. Shunkey's dog treats, which are priced at $5 for a dozen, have totaled just $120 over the past three months. When asked in a phone interview if he enjoys running a business, Mr. Shunkey nodded, according to Ms. Gooch. He didn't respond to subsequent questions. Write to Sarah E. Needleman at sarah.needleman@wsj.com

Facebook Currency Rankles Some

Mon, 14 Jun 2010 22:36:03 EDT

By Sarah E. Needleman Facebook Inc. has been rolling out its own currency, to be used by members to buy virtual goods in games and other applications. But the move has rankled some game developers, who say the new monetary system comes with high fees and creates competition for developers who have their own virtual payment methods.Facebook's currency, called Credits, is being sold for 10 cents apiece and can be applied toward the purchase of virtual items, such as a "karaoke machine" for a game in which players run a virtual nightclub.For every credit a merchant redeems, Facebook is taking a 30% cut. "Thirty cents off of every dollar adds up," says Robert van Gool, founder of 10-employee San Francisco firm Gonzo Games, who says he had considered selling virtual toilets on Facebook for a racing game until he heard about the new credits. He plans to put the game on a different platform where he also expects it to receive greater exposure. "For a small company, the piggybank isn't that big," he says. Deborah Liu, a Facebook manager overseeing the Credits initiative, says the 30% fee "is line with industry standards." Apple Inc., for instance, collects a 30% fee from merchants who sell games and other applications through its "apps" store, as well as virtual goods sold within those applications, according to an Apple spokeswoman.Facebook says it hasn't yet determined whether its new currency—being tested by about 100 partners—will replace credit cards and other services to become the only payment option on the site. Facebook doesn't take a cut out of any of these other payment methods, the most popular of which, credit cards, charge fees as low as 3%.Facebook rival MySpace doesn't offer its own currency for virtual goods but is exploring such a service, according to a spokeswoman. People close to the company, which is owned by News Corp., publisher of The Wall Street Journal, say game developers would be charged a fee below 30%.The move by Facebook to install its own currency comes as demand for virtual goods, while still small, is rapidly increasing. The U.S. market for virtual goods is currently estimated at $1.6 billion, with social-networking sites accounting for around half—or double as much as a year ago, reports research firm Inside Network Inc.Some developers say Facebook's new currency conflicts with their own virtual money systems. "If someone spends $5 to buy our currency, they can only spend it on our games," says Russell Ovans, founder of Backstage Technologies Inc., a 16-employee developer in Victoria, Canada, that has seven games on Facebook, including a version of the TV game show, "Family Feud." But a user who spends $5 on Facebook Credits can use it on any of the site's more than 550,000 games and other applications.Zynga Game Network Inc., maker of the most popular game on Facebook's platform, "FarmVille," is one of the outfits testing Facebook Credits. The San Francisco company, which recently announced a new five-year "strategic relationship" with Facebook, declined to comment on the CreditsA number of the game developers that have so far been invited to experiment with Facebook's currency system say they like it and are seeing positive results, ranging from larger concerns such as Playfish and PopCap Games Inc. to smaller ones like Crowdstar International Inc. and Arkadium.Facebook's Ms. Liu says the new currency system benefits sellers because it creates a simple system for users to buy virtual goods, without having to fill out different payment forms for every merchant. Facebook Credits—which users can purchase using credit cards, mobile phones and PayPal—also relieve merchants from such issues as fraud and returns, adds Ms. Liu.Two-year-old CrowdStar began accepting Facebook Credits in December for virtual goods sold through its five games, which are exclusively on Facebook. Sales of the Dublin, Ireland-based company's virtual items—which range in price from 50 cents for a rainbow-colored cat to $129 for a mystery box containing a dragon—have since doubled, says Peter Relan, chairman and co-founder. Kenny Rosenblatt and Jessica Rovello, co-founders of New York-based Arkadium, say roughly 10% of users who play the company's three games on Facebook are buying its virtual goods with the platform's signature currency, about three times as many buyers who use other payment methods. "With Facebook Credits, when someone wants to buy on an impulse, they can do it immediately," Mr. Rosenblatt says. "They don't have to leave Facebook to go fill out a form on another site." Write to Sarah E. Needleman at sarah.needleman@wsj.com

BP's Independent Dealers Face Threat

Wed, 16 Jun 2010 00:17:29 EDT

By Naureen S. Malik Protests and boycotts of the BP brand generated by the Gulf spill aren't likely to have a big immediate impact on BP PLC, but could threaten the thousands of entrepreneurs who have staked their livelihoods on the company's name.Nearly all the 10,000 service stations around the U.S. flying the BP flag are owned by independent dealers that are obligated under long-term contracts to sell BP-branded fuel. Some worry that mounting anger over the spill's environmental and economic toll could turn the once-highly coveted brand into a liability.But the actual gasoline the stations sell is a mixture of fuel from multiple refiners or importers, so the direct impact of any slowdown at BP-branded stations is minimal for the oil giant, which can sell excess supplies as private-label fuels to other retailers. Maintaining a brand presence is important to BP, but the marketing segment only represents a sliver of profit for the company.BP stations in Florida immediately saw consumers turning away after the leak began in late April. Total sales at BP stations there declined 8%-10% in May compared with last year, while competitors benefited from additional traffic, said Jim Smith, president of the Florida Petroleum Marketers and Convenience Stores Association. The magnitude of the sales declines "means that we are going to have a lot of small business owners going out of business," he said.Hundreds of Facebook pages and Twitter accounts have sprung up dedicated to the spill coverage, and some have organized protests. Some BP station owners are hearing complaints from customers about the spill or motorists yelling as they drive by. But station owners and independent distributors, who bring fuel to the stations, say it is more difficult to quantify the silent protesters who simply drive to other stations to fill up."People are kind of melting away," said Jay Ricker, chairman of Ricker Oil, noting that same-store sales across the company's 35 BP stations in Indiana fell 5.4% last week, the first decline seen this year.Independent fuel distributors, known in the industry as jobbers, are worried about the reduced demand for BP-branded fuel. Station owners are concerned that a drop in motorists filling up their tanks will clip purchases for items such as chips and sodas at attached convenience stores, which account for less than a third of sales but two-thirds of profits."The distributor and retailer communities have really become the lightning rod of the consumer backlash, easy targets," said John Phelps, president of Carroll Independent Fuel Co., which supplies 110 BP stores in the Baltimore area. Carroll acquired most of them in the past five years in an effort to bank on BP's strong brand name and its push toward an environmentally friendly image, he said.Some BP-branded fuel retailers say there has been a noticeable change in consumers' attitudes since the start of June, when images of oil-blackened wildlife and tar balls on beaches heightened the public's anger about the spill."It really coincided with the oil coming ashore," said Jeff Miller, president of Miller Oil Co., a family-owned distributor based in Virginia Beach, Va., that supplies about 50 million gallons of BP gasoline annually and owns 16 stations. He has seen gasoline sales fall 2%-3% this month at four BP stations in tourist areas.BP employees are working with local fuel retailers to launch grass-roots marketing campaigns and are visiting sites to talk to concerned consumers, said John Kleine, executive director of the BP Amoco Marketers Association, an independent organization representing independent distributors. The company's support includes full reimbursement for advertising costs normally split with jobbers. The money frequently goes to on-site promotions at service stations. "BP looks at what they are doing now as a long-term investment for the brand and knowing that investment will play out over time if you are doing the right thing," Mr. Kleine said.So far, jobbers and retail stations are largely sticking with BP rather than switching to other brand names, which could require buying out expensive contracts, said Dan Gilligan, president of the Petroleum Marketers Association of America, an industry group. Write to Naureen S. Malik at naureen.malik@wsj.com

Obama Calls for Small-Business Incentives

Wed, 28 Jul 2010 17:09:09 EDT

By Jared A. Favole President Barack Obama, speaking at a sandwich shop in New Jersey Wednesday, urged Congress to pass legislation that would provide financial incentives to small businesses and said he expects it to be passed before mid-August. "We need to keep investing in our small businesses," Mr. Obama said in brief remarks at the Tastee Sub Shop in Edison, N.J. "America has always been a place where if you've had a good idea...you can see it through and you can succeed." Mr. Obama was in New Jersey to show his administration's support for the country's small businesses, which he frequently refers to as being the backbone of the American economy. He also planned to attend two Democratic fund-raising events in New York City. A bill that would extend credit to small businesses and give them tax breaks is stalled in the Senate. Mr. Obama met with Republican House and Senate leaders Tuesday to discuss, among other things, the small-business legislation. The president said he told the lawmakers that Republicans in the past have supported providing financial incentives for small businesses. He urged them to support such measures again and said he expects the legislation to pass before Congress breaks for vacation at the end of next week.

Summer Calls, but Getting Away Is Tricky

Wed, 14 Jul 2010 18:01:09 EDT

By Sarah E. Needleman The official start of summer may be just days away, but for many small-business owners, relaxing at a beach resort, touring a foreign city or camping in a remote forest is still tough to picture – at least not without a cell phone, laptop or other communication device by their side. More than half—55%—of 750 entrepreneurs surveyed in May say it's been two or more years since they last took off for a week or longer, according to Discover Financial Services, which commissioned the study. This year, 51% of business owners say they don't plan on taking a vacation. Of those, more than three quarters blame the sour economy for their inability to get away, with 47% looking to save money instead, the survey shows. But with "staycations" being a low-cost alternative to traveling—just 8% of respondents say they're planning vacations at home this year—business owners who never break from work may only have themselves to blame. "They feel they're too important," says Rod Means, a district director in San Diego for SCORE, a nonprofit small-business mentoring and training organization. "They're afraid to leave the business with their employees. Nobody can make a decision but them."Yet that kind of attitude can actually hurt a business's long-term success, he warns. "Teams win and individuals lose," says Mr. Means.Besides, he adds, the basic principle behind entrepreneurship and working in general is to be able to afford a healthy and happy existence off the clock. "Work is but to feed the fun of life," says Mr. Means. And that's why some business owners have come up with strategies for taking vacations—real ones that involve no contact with their workplaces other than in cases of grave emergencies. Here's how they do it, and their best advice for other entrepreneurs.

Curves Loses Stamina, Closes Clubs

Wed, 07 Jul 2010 09:58:28 EDT

By Richard Gibson Curves International Inc., whose 30-minute workout for women once made it among the world's fastest-growing franchises, seems to be running out of steam.Over the past three years its U.S. franchisees have been closing outlets at a rapid rate, shrinking the chain by about a third: to 5,208 U.S. sites at the end of last year from 7,748 at the beginning of 2007, according to a recent franchise disclosure document the company filed with state regulators. More than 1,000 Curves vanished across the country in 2009, while just 35 new locations opened.Franchisees and industry experts point to a failure to keep up with changing trends—including more flexible hours for busy working women—cheaper competition and the tough economy as major reasons for Curves' decline.The company disagrees with its critics, contending that much of the club closings were intended as part of a plan to "prune the system," according to Curves President Mike Raymond. Some owners had bought into Curves for the wrong reasons, he says, "they were motivated primarily as investors rather than owners."Curves was one of the world's most popular franchised fitness centers as of the end of 2008, boasting nearly four million members world-wide, compared with 3.5 million for runner-up Gold's Gym International Inc., according to the International Health, Racquet and Sportsclub Association, an industry trade group. Figures for 2009 aren't yet available, the group says.Financial statements filed by the closely held company show it to be profitable. For the year ended Dec. 31, Curves earned $16.4 million on revenue of $84.1 million, compared with earnings of $17.2 million on revenue of $128.7 million the prior year. The revenue falloff reflects lower franchising royalties and equipment sales. Franchisees pay the company 5% of their monthly gross plus another 3% for advertising.The Curves formula is fairly simple: Each club features a circuit of strengthening and cardiovascular exercise equipment. Accompanied by upbeat music, members move from machine to machine, prompted by an audio tape. Monthly dues vary by market, but can range from about $29 to $49.Some say the women-only concept helps combat the "intimidation factor" that may discourage trips to a local gym where one might encounter buffed bodies in Spandex—and men. Also, from the start Curves has encouraged women to operate the facilities, and the chain soon became a magnet for would-be female entrepreneurs.The company's most recent disclosure document, dated March 25, says the total investment to open a Curves in the U.S. is between $31,825 and $39,100, excluding real-estate costs. But many Curves on the market are being sold for much less than that, brokers say.Founded in 1992 by Gary Heavin, now its chief executive, Curves initially focused on small towns that couldn't support a full-sized gym. The business model allowed a franchisee to make a profit with as few as 100 members, Mr. Heavin once said. At its zenith Curves was opening one club every three hours.But as Curves moved into urban markets some competitors exploited its vulnerabilities. Many Curves aren't open over the lunch hour, so working women began looking elsewhere for a quick workout. Soon round-the-clock rivals opened, such as Snap Fitness Inc. and Anytime Fitness, as did those with a larger array of workout equipment and exercise routines, including yoga and aerobic dance. Showers and dressing rooms were among their amenities, challenging Curves' bare-bones facility.Curves franchisees say they began asking headquarters to modify its format so they could retain members, but were largely ignored—a contention the company denies. Mr. Raymond says Curves wants to be flexible and responsive to the needs of women, and that franchisees can seek permission to make adjustments in their offerings.But Curves gained a reputation in the fitness industry for inflexibility. Diana Tavary of Helena, Mont., says she walked away from her clubs after 10 years because the company's exercise format didn't keep up with the times. "They didn't allow you to offer anything different than just the" 30-minute circuit, she says. "They're so constrained in their present model they don't appear to be open to enough feedback from their franchisees," says Tom Garmon, a broker with Fitness Industry Business Brokers, a Hattiesburg, Miss., firm that buys and sells health clubs, including Curves facilities.Curves' Mr. Raymond says "the notion that we have not innovated is absurd." He points to a new generation of exercise equipment that gives immediate feedback and adjusts the intensity of a workout accordingly. As for extended hours, Mr. Raymond says the company has "safety issues" with the idea of keeping its clubs open around the clock.The recession also has taken its toll on membership. Katherine Randall, who closed her lone Curves in Truckee, Calif., last month, says that when she bought the club in 2007 its membership was about 300; this year it was down to 70, which she says partly reflects a tough job market and other pressures on discretionary income.Some franchisees think much of Curves' woes stem from marketing miscues. "There is also a perception that the Curves workout is a 'sissy workout,' which is a complete misunderstanding," says Jim Gasson, a multi-unit franchisee in northern Virginia. Write to Richard Gibson at dick.gibson@dowjones.com

Need a Loan? Ask the Boss

Fri, 04 Jun 2010 15:48:26 EDT

By Sarah E. Needleman Every year, business owner Jim Fab lends his 25 employees as much as $4,000 interest-free for personal expenses they can't afford up front, ranging from down payments on homes and cars to funeral and legal fees. Most pay him back – eventually."I had a guy send me $300 a month for three years after he quit," says Mr. Fab, whose electrical-contracting company, Fab Electric Inc., has been in operation in Gaithersburg, Md., since 1978.At small, closely knit companies, business owners like Mr. Fab sometimes take on an extra role: that of the parent who opens up the wallet when the kids need cash. After all, they typically can't steer their penny-pinched workers toward the kind of resources that many big companies have, such as credit unions and debt-counseling programs. Instead, the only option they usually have is to dig into their own pockets – and many say they do with little hesitation."It's normal," says Laura J. Wellington, co-owner of Giddy Gander Company LLC, a Ridgewood, N.J., provider of educational media content for children. Entrepreneurs often develop close ties with their staff members given they have so few, she explains, adding that's why she's felt comfortable loaning her 12 employees around $10,000 over the past two years. "I know my employees exceedingly well," she says, down to their spending habits. "If the person is credible and there's good reason to give out the loan, then I will do it."These days, more workers may be prone to asking for financial support, as they're more likely to be the only members of their households earning an income. A report released earlier this week from the Labor Department shows that the share of families with an unemployed member rose to 12% last year from 7.8% in 2008 – the highest level since the government agency began collecting such data in 1994.There's no firm statistics on how many small-business owners lend money to staff. But those who frequently engage in the practice say it makes good business sense. One reason, they say, is that it can help prevent a slowdown in productivity because workers who are stressed out about money may have difficulty focusing on their jobs.Another rationale for helping employees overcome financial hardships is that it can boost loyalty, morale and unity within a work force, says Elie D. Ashery, co-founder of Gold Lasso Inc., a software company also in Gaithersburg that's given out loans to its 10 employees of up to $3,000 each. "Sometimes they're living paycheck to paycheck so we regularly go out of our way to help our employees keep their family obligations," he says. "It really helps to create better cohesiveness." Offering financial aid to employees also can enhance a company's reputation, adds Shaun Burwell, chief financial officer of 2HB Software Designs Inc. in Columbia, Md. The systems-engineering firm has loaned its 17 employees more than $50,000 over the past five years, he says, and many recipients have shared that fact with family and friends. "It has been a positive discussion point," he says.Certainly, there are potential downsides to lending workers money, such as the possibility of never getting paid back. For this reason, some owners say they only give out amounts they could live with losing for good. Others require workers to provide some form of collateral, such as the title to a car they own, or arrange to withdraw payments directly from their paychecks. But John A. Snyder, a partner with law firm Jackson Lewis LLP in New York, says arranging for employees to pay back loans through salary deductions can have legal consequences. "You have to be careful about violating wage laws, especially if any deductions could potentially bring the employee below minimum wage," he says.Mr. Snyder also warns that owners could be sued should they opt to give out loans to some workers but not others. "Whatever policy they have should be implemented in a uniform and nondiscriminatory way," he says, adding that it should also be put in writing and signed off on by an attorney. Employee loans don't need to reported as income to the Internal Revenue Service since they're designed to be paid back, unlike monetary gifts, which are considered compensation, says John McQuaig, founder of McQuaig & Welk PLLC, a public-accounting firm in Wenatchee, Wash. But for safe measure, he urges business owners to record every loan they give out to employees on paper, including details on how it should be paid back and by when, and have them sign it, he advises. Meanwhile, owners should consider the possibly that lending money to employees will create an awkward work environment, warns Christopher Carey, a small-business adviser in Brooklyn, N.Y. He says some might find it uncomfortable to inquire about late payments as well as embarrassing for the recipient, particularly in a small firm where other staffers might be within earshot. "It can cause undue stress," he says.It's also possible that some workers will make a habit of asking for handouts, adds Mike Faith, founder of Headsets.com Inc., a retailer in San Francisco with 55 employees. "It could become a norm or expectation," he says. "It's got to be for a one-off event rather than just giving them money to feed bad spending habits."But the bottom line, says Mr. Fab, the electrical-contracting company owner, is that there needs to be a high level of trust and respect between everyone involved to ensure a positive outcome. "It's not a good practice to get into unless you have a personal relationship with your employees," he says. As long as that's the case, Mr. Fab doesn't see much of a need to worry. "You're the guy who signs their paycheck," he says. "They're going to pay you back before anybody else." Write to Sarah E. Needleman at sarah.needleman@wsj.com

Firm Toots Horn Via Search Ads

Thu, 01 Jul 2010 11:25:56 EDT

By Sarah E. Needleman A common gripe among U.S. soccer fans is that vuvuzelas, the South African horns heard buzzing throughout the World Cup tournament, are obnoxious noisemakers. But for 365 Inc., the plastic trumpets represent the sweet sound of success.Late last year, the 10-employee online retailer ordered several thousand vuvuzelas on a hunch that they'd become popular among U.S. soccer fans. The Birmingham, Ala., company then promoted the instruments mainly using paid-search advertising on Google Inc. and Yahoo Inc. amid minimal competition for relevant search terms such as "soccer horn" and "stadium horn." Since then, the small firm has sold nearly 30,000 vuvuzelas for about $8 each, pulling in roughly $240,000 in revenue."It was a massive opportunity for us," says Jeff Stephens, director of marketing for 365 Inc., which also sells team jerseys and other sports supplies. The company declined to disclose how much it cost to purchase the vuvuzelas or what they've spent so far on the ads.Many small businesses rely on paid-search advertising to draw consumers to their websites. In 2009, U.S. concerns with 500 or fewer employees spent $5.4 billion on pay-per-click ads, about the same as in 2008, reports research firm IDC. The Framingham, Mass., company anticipates spending for this group on pay-per-click ads will increase to $7 billion this year. But capitalizing on the strategy—even with professional help—can be tough. It requires identifying the search terms that consumers would most likely enter to find a company's products or services while competing against other businesses looking to benefit from the same phrases.In general, the higher the bid for a search term, the greater the odds of a business's ad landing at the top of a user's paid-search results. The paid ads can typically be found above or to the side of organic search results. And while advertisers pay search engines only when a user clicks on their ad, there's no guarantee a click will convert to a sale.It's easy to set up a paid-search campaign, "but it's not easy to do it efficiently and effectively," says Greg Sterling, a senior Web analyst for Opus Research in San Francisco.When launching online retail company Modern Brands Inc. in 2004, founder David Lalumendre says he invested in search ads for the phrase "branding iron" in an effort to sell monogrammed steak irons for barbecue enthusiasts. While the words generated a significant number of clicks, sales remained flat, he says, adding that he suspects many came from ranchers seeking branding irons for livestock. He now bids on more specific search terms such as "steak branding iron" and "BBQ branding iron." Popularity can also be detrimental. Naveed Usman, a principal at Usman Group Inc., a search-marketing and Web design firm in Lincolnshire, Ill., says he may need to put a bid for a search term on hold if it suddenly becomes trendy, which could happen if it pertains to something in the news. The term will likely see more competition from bidders, pushing its price up while inadvertently generating clicks from consumers seeking results unrelated to what his clients sell, he says.For example, Mr. Usman says he regularly bids on search terms such as "AWOL" and "Don't Ask, Don't Tell" on behalf of one of his clients, a law firm that represents members of the military. But should either term abruptly gain attention in the media, Mr. Usman might refrain from bidding until the issue dies down.In the U.S. alone, searches on the term "vuvuzela" increased by about 70 times between June 5 and June 19, according to market-research firm Experian Hitwise.Mr. Stephens says 365 Inc.—which became a subsidiary of midsize sports-retailer Sports Endeavors Inc. in 2005—faced little competition for search terms relevant to vuvuzelas, allowing it to spend just 15 to 30 cents per click on ads leading to its flagship website, worldsoccershop.com. "I don't think people realized it would be as big a phenomena as it was," he says.About 20% of consumers who clicked on the company's search-engine ads for vuvuzelas purchased at least one, according to Mr. Stephens. "We may never have an opportunity like this again," he says. Write to Sarah E. Needleman at sarah.needleman@wsj.com

When the Folks Give You the Business

Wed, 28 Jul 2010 15:22:45 EDT

By Sue Shellenbarger Watching fellow college students working for $7.50 an hour after graduation, Tana Walther, a fashion-design major at Kent State University in Ohio, snapped up an alternative offered by her father—to run a Pita Pit restaurant franchise he would buy."I guess I bought her a job," says her father, Jan Walther, of North Canton, Ohio. Prospects of a career in fashion seemed remote, and Tana, a college athlete, loved eating at Pita Pit restaurants while traveling with her track team. Her first new restaurant opened last year near campus in Kent, and the 25-year-old hopes to open several more.Parents often say they would do anything for their child. Setting a child up in business is surely one big test of that bond. A lot is at stake: Small-business failures are common, and parents risk losing their entire investment, their life savings, or more. They also risk straining their relationships with young-adult children intent at this stage on independence.Still, many parents see business ownership as a better bet for their kids' future than a graduate degree. And in this era of renewed interest in entrepreneurship, some parents I interviewed described it as a way of recapturing for their children a stake in "the American dream"—the opportunity to control their destiny and have a chance at gaining wealth.Even when such start-ups work well, both parents and adult children have to make sacrifices. Dave Hughes, North Little Rock, Ark., bought a College Hunks Hauling Junk franchise last year for his son Nolen, then 22 and graduating from college. Dave had to cash in a retirement account, and Nolen had moved back home with his dad to conserve money."You have to be willing to make sacrifices when you own your own company," Dave told Nolen. When the two disagree, Dave says he has learned to step back. "If we butt heads, most of the time I just walk away and say, 'OK, fine, I told you what I had to say,' " Dave says. But Nolen has worked hard, often rising before dawn to drive his big trash-hauling truck around the city during rush hour. "It's a big billboard," he says. His father is pleased. "Nolen has more business savvy than I did at his age," Dave Hughes says. He heaved a sigh of relief when the business broke into the black a few months ago. After that, "I didn't worry any more. I think Nolen will be rolling on his own by next year," Dave says.Respecting an adult child's need for autonomy while watching them make mistakes can be painful, says Marvin Himel, a Jacksonville, Fla., sales-training consultant. After Mr. Himel bought his son Drew an Internet-consulting franchise, WSI, in 2007, Drew at first underestimated the need to get out and sell his services, spending time studying the Internet instead. "Those first few months you want to step in and do it for them, but at the same time you want them to grow and learn on their own," Marvin Himel says. "Finally I just stepped in and said, 'Look, nothing is ever going to happen if you don't make a sale.' " At first, Drew, then 23, dug in. "I was pretty independent-minded. I'd say, 'OK, Dad, what you say is great. I can see that you're a success. But I'm going to pave my own path.' " But when sales fell short of his goals, he relented and asked his dad for advice. "I told him, 'I'm going to follow what you say verbatim. Tell me what to do.' From that point on, I started to have a lot of success," Drew says. Drew has hired two employees, his income has risen and the business is growing.The setups can be stressful for young adults, too. Jon Kelecy's father, a Tampa, Fla., financial executive, set him up recently in a franchise for Fibrenew, a leather- and plastic- restoration business. Jon, 26, of Gainesville, Fla., loves the work and appreciates his dad's support. But he dislikes "being in his pocket," he says, amid all the anxiety of a start-up. Many parents choose franchises for their kids because they seem to offer marketing, branding and management support. While no data on failure rates is available, a study by the Small Business Administration's Inspector General in 2002, the latest available, said there was no evidence that franchises succeed any more often than independent businesses. Start-up costs, including leases for space and equipment, range from roughly $5,000 to $10,000 for such low-cost operations as cleaning franchises, to $1 million or more for popular fast-food restaurants. Information on risks and legal pitfalls for franchisees can be found at BlueMauMau.org, an online trade journal. Howard Bundy, a Kirkland, Wash., lawyer who represents franchisees and franchisors, says parents considering such a venture need an attorney experienced in representing franchisees, and both an accountant and an experienced business mentor familiar with both franchising and the target industry. Mr. Bundy also warns that parents run a high risk of losing their investment. One mother lost $250,000 when a fast-food franchise she purchased for her son failed, Mr. Bundy says. In another case, parents lost $350,000 on a coffee-shop business they financed for their daughter.For some parents, the potential rewards seem worth the risk. "As a parent, the best gift you can ever receive is to see your children happy and successful," and equipped to make a living, Marvin Himel says.None of the parents I interviewed expect any short-term return on their investment. A few viewed it as a gift. Some structured it as a loan and deferred repayment. Others took stock in the business, with an agreement that their child would use future earnings to buy it back.Some parents look farther ahead, hoping their child's business will support them in retirement. After supporting his own father in old age with proceeds from his Canton, Ohio, restaurant, Walther's Cafe, Mr. Walther says he hopes his daughter will do the same for him. Ms. Walther says she welcomes the prospect, adding, "this is a partnership." Write to Sue Shellenbarger at sue.shellenbarger@wsj.com

Small Firms Chafe At Senate Payroll Tax Proposal

Fri, 11 Jun 2010 17:23:02 EDT

By Martin Vaughan Gabriel Durand-Hollis, owner of a San Antonio, Texas-based architecture and interior design firm, is no John Edwards.But he could nonetheless see his taxes rise as a result of a Senate measure that seeks to crack down on a technique Mr. Edwards, a former U.S. Senator from North Carolina, once used to avoid paying hundreds of thousands in payroll taxes.The Senate provision, part of a broad bill that extends jobless benefits and renews expired tax cuts, would subject more of the profits of lawyers, accountants and other professionals to the 2.9% Medicare tax.Mr. Durand-Hollis, one of two owners of a firm that employees 25, said the provision, if enacted, would boost his federal tax bill by $30,000 or more."If we had to send a big check like that to the IRS at the end of the year, we'd have to take a hard look at whether we can afford Christmas bonuses, or that new software purchase," Mr. Durand-Hollis said in an interview.Criticism of the Senate tax provision comes as President Barack Obama Friday sought to highlight his support for measures aimed at helping pull small firms out of the economic recession."Small businesses will help lead this economic recovery. And that's why we will continue to stand by them," Mr. Obama said.Some small business advocates say the Senate provision does the opposite, and they have enlisted a powerful ally to fight it—Sen. Olympia Snowe (R., Maine), considered a swing-vote on the broader tax package.Snowe on Friday called the payroll tax provision a "poison pill in this tax bill, robbing American small businesses of the capital they need to create new, good-paying jobs."Congressional Democrats say it targets an abusive strategy used by some owners of S corporations. Those business owners paid themselves a nominal salary, while the rest of the firm's profits are paid through a dividend that is not subject to payroll taxes.Mr. Edwards drew criticism during the 2004 presidential campaign for his use of the tactic. He earned $26.9 million in four years in the late 1990s while reporting only $360,000 in salary.Mr. Durand-Hollis declined to disclose his salary, but said it is commensurate with what other architects with his experience make. His firm had gross revenue last year of about $3.5 million.There are about 4 million S corporations in the U.S., not all of which would be subject to the new taxes. The taxes would apply only to certain professionals including doctors, lawyers, athletes, performing artists and investment advisers.Dr. Joseph Smith, a Virginia podiatrist, said he could pay an additional $6,000 in payroll taxes as a result of the change. He paid himself a salary of $71,500 in 2009, and took an additional $48,500 as a dividend.His accountant, Nick Potocska, said Smith's salary is not unusual since he works almost exclusively with Medicare patients, who pay less than patients covered by private insurance.Critics of the Senate provision say it would treat all business profits the same as wages for services rendered, while failing to distinguish the return firm owners reap for investments of time and capital to grow their business."This bill blurs the line between a return on your capital and your risk, and wages. It's almost neutering the whole concept of capitalism," Mr. Potocska said.The Senate proposal has its defenders. James B. Davis, who heads the tax practice at the Gunster law firm, said the provision targets an area that is rife with abuse and brings the tax treatment of S corporations more in line with other types of business structures."All they're doing is putting S corporations on a parallel with C corps and partnerships. They are closing what would be easily construed as a loophole," Mr. Davis said.Snowe's opposition suggests that changes might be needed to the payroll tax provision to get it through the Senate.But changes that scale back the proposal will be difficult. It is projected to raise $11.2 billion for the government over 10 years, and any scaling back of the proposal would have to be replaced with other revenues. Write to Martin Vaughan at martin.vaughan@dowjones.com

How to Win Venture Capital

Sun, 06 Jun 2010 22:10:03 EDT

By Colleen debaise Adapted from THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press). The process of selecting, pitching and ultimately negotiating with a VC can be intimidating, especially to those not accustomed to the world of high finance. I asked Lori Hoberman, head of Chadbourne & Parke LLP's emerging-companies/venture-capital practice in New York, to explain the various steps. Here's what she said: Pinpoint the ideal VC. First, an entrepreneur must target the right venture capital investment fund to pitch. That requires some research. It's a good idea to attend venture capital and private equity conferences. Ask an attorney or accountant for a referral. Online databases such as VentureSource (owned by Dow Jones) provide information on the latest venture deals. And most VCs host websites that describe their "sweet spot" and existing portfolio investments, Ms. Hoberman says. Don't waste time pitching your biodiesel fuel business to a VC that only invests in software. Prepare a "teaser" document. This one-or two-page document that you send to VCs is your way of introducing yourself—and it's got to be memorable. Tell the VC who you are, what need you fill in the market and how that market translates into dollars. Because most VCs are barraged with investment requests and can give each one only limited consideration, every sentence of your teaser needs to "answer the question about why an investor would ever dream of putting money into you," Ms. Hoberman advises. "It forces you, as the entrepreneur, to think in sound bites." She recommends incorporating text and graphics (pictures, pie charts or graphs) into the document. "The whole idea is to tease the investor into wanting to hear more," she says. Send financials. If your teaser has done its job, a VC often will ask you to provide financial statements, including projections. If you're building out your business model and are attracting paying customers, "it's a much easier sell," says Ms. Hoberman. Show how you've gotten to your current stage, whether that's through bootstrapping, help from family and friends, or funding from angels. Prepare your pitch. If a VC wants a meeting after reviewing your financials, the initial face-to-face encounter will probably last less than a half hour, so use the time wisely. Don't forget the thirty-second rule, Ms. Hoberman advises. "You have to tell the investor in the first thirty seconds who you are and how you are going to make them money," she says. If you plan to show visuals, such as a slide show or online demonstration, keep it short so that there's time for questions. Demonstrate your belief in the company and your knowledge of the market or industry. "The VC wants to get a sense that you know what you are talking about," she says. When a company has more than one founder, it's also important for partners to demonstrate that they are a strong management team. "Look at each other when you talk, and show respect," she says. Review the terms. If your pitch was successful, you'll receive a term sheet for a first or "series A" round of financing (later rounds are called series B, series C and so on). The document outlines the deal that the VC is proposing before investing in your company. At that point, you and your advisors (specifically, an attorney who specializes in venture financing) should begin negotiations. The term sheet outlines voting rights, liquidation preferences and, more important, how much equity the VC will receive. Figure out what you're worth. In order to negotiate, you need to place a value on your company, which can be tough or imprecise at such a young stage. One approach is a so-called back-of-the-envelope valuation, which can be determined by deciding how much venture capital the company needs and how much equity you're willing to sell. "You try not to give away more than one-third of the company in the series A round," Ms. Hoberman says. For example, if you need $3 million in financing for your consumer product company but don't want to sell more than a one-third stake, you'd value your company (prior to receiving the capital) at $6 million. Do your due diligence. Before signing on the dotted line, take some time to consider the ramifications of your decision. Talk to other companies in the VC's portfolio about their experiences. Keep in mind that the VC will take board seats and expect progress reports at monthly meetings. Good VCs "understand the hills and valleys and can wait it out," Ms. Hoberman says. "The really bad ones ream the entrepreneur every time the slightest thing goes wrong." Write to Colleen DeBaise at colleen.debaise@wsj.com

Will Your Business Idea Fly?

Mon, 14 Jun 2010 11:33:25 EDT

By Sarah E. Needleman Before committing to a solo public-relations practice last year, Saverio Mancina emailed more than two dozen executives in his network to find out if their companies would consider hiring him on a project basis. Then, he consulted with industry colleagues through social-networking sites like LinkedIn for feedback on his proposed business model."The question I needed to answer for myself was 'Would clients pay a certain rate to work directly with me or would clients want to know there was a team behind me?'" says Mr. Mancina, who at the time was anticipating a pink slip from his employer of five years.When he was indeed laid off about four months later, Mr. Mancina, who is based in New York, says he felt confident moving forward with his solo plan. Today, he has 10 steady clients and earns about 85% of his previous income.If you're financially motivated to launch a business, you may be tempted to simply jump in. But experts strongly recommend first taking the time to do some research to determine if your venture has legs to stand on. Otherwise, you could end up in worse economic shape."Once you've started a business, you've already invested a lot of money and time," says Andrew Zacharakis, professor of entrepreneurship at Babson College in Wellesley, Mass. "If you find out afterward that consumers don't want what you're selling, it can be very hard to make a midstream adjustment."One way to explore a business idea's feasibility is to solicit the opinions and advice of experienced professionals in your target industry, even prospective competitors. Mr. Zacharakis recommends starting at trade shows, seminars and other business events if you don't have specific contacts in mind. Ask people what they like and don't like about your planned venture, if they foresee any obstacles to building it, and what suggestions they might have.Also go directly to your target market and ask about their interest in your product or service and how much they'd consider paying for it, Mr. Zacharakis says. If you plan to sell a product or service to pet owners, for example, you could canvass dog parks, groomers and veterinarians' offices.Low-cost services like SurveyMonkey.com and Zoomerang.com let you compile a survey online. In general, you pose a question and select answer options, such as multiple choice or fill-in-the-blank. Then you receive a Web link that you can post to your Facebook page, Twitter feed, personal blog or other website.Richard Daniels and Seth Burgett implemented this strategy before co-founding Yurbuds, a St. Louis-based maker of custom-fit earbuds, in early 2009. More than 300 survey takers provided insights into the features that matter most to them in portable listening devices and how much they'd pay for the ideal pair.The duo—who met soon after Mr. Daniels was laid off from an executive job and while Mr. Burgett was in business school—now sell the earbuds in about 200 retail outlets. The firm is on target to be profitable by next year."You have to roll up your sleeves and talk to real people to find out if your business idea has value," says Mr. Daniels. "Hope is not a strategy." Write to Sarah E. Needleman at sarah.needleman@wsj.com

U.S. Business Faces Burden From New IRS Rules---Report

Wed, 07 Jul 2010 17:07:09 EDT

By Martin Vaughan An Internal Revenue Service watchdog warned Wednesday the paperwork burdens on small businesses may outweigh the benefit of tax collections generated as part of the new health-care law. Starting in 2012, about 40 million businesses, charities and other entities will be required to report to the IRS payments they make to suppliers and service providers, the IRS Taxpayer Advocate Service said in its midyear report to Congress. The reporting regime is aimed at giving the IRS more information to help it collect taxes from the vendors. But the report said it could disrupt commerce and that IRS systems might not be equipped to make much use of the information anyway. Businesses are already required to report payments to noncorporate service providers that exceed $600 in a given year. The health-care law expanded that to cover incorporated service providers, and also vendors of goods. That means that a self-employed person who pays the same vendor more than $600 for office supplies, equipment or consulting services in the same year must now generate a 1099 form for that vendor and send it to the IRS. "The Office of the Taxpayer Advocate is concerned that the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance," wrote National Taxpayer Advocate Nina E. Olson. The Taxpayer Advocate is an office within the IRS charged with assisting taxpayers and identifying unfair policies and practices. The IRS has announced that businesses wouldn't have to report payments made by credit card, as those payments will be picked up by a separate reporting regime. That isn't much comfort, said Small Business Legislative Council President John Satagaj, as many transactions within a single industry -- like the payments between manufacturers and distributor -- are handled by check. Mr. Satagaj's group, which represents a variety of industries from electricians to toy makers, has fought the new requirements. The rules could well push more small businesses toward making payments by credit card in order to avoid the extra paperwork, said Mr. Satagaj. "The credit-card companies get a major windfall out of this," he said. Ms. Olson highlighted other problems with the new law. For instance, the law requires that the vendor provide its business customers with a taxpayer identification number, which the customer must then include on the 1099 form. If the vendor doesn't provide an ID number, the business is required to back-up withhold, on behalf of the IRS, 28% of the purchase price. "A vendor may simply refuse to sell goods to any purchaser that refuses to pay the full purchase price. Such an outcome could significantly impair the normal course of commerce," Ms. Olson wrote. In addition, she said large company vendors will have an advantage over small firms because they may offer to keep track of payments for their customers to help meet the IRS requirement. The new reporting requirements were included in the health-care bill to help offset the cost of new health-insurance subsidies. They were estimated to raise $17 billion for government coffers over the next 10 years. The information-reporting requirement is one of two main areas of concern on which the Taxpayer Advocate said it will focus during the coming year. The other is what Ms. Olson called declining levels of IRS taxpayer services. Write to Martin Vaughan at martin.vaughan@dowjones.com

Cash for Chocolate? Creative Ways to Raise Funds

Fri, 25 Jun 2010 12:05:34 EDT

By Barbara Weltman The NFIB Small Business Economic Trends Report for June 2010 continues to show that owners complain about lack of access to capital. Despite the challenge, there are still plenty of options for finding the capital you need to start or expand a business. Instead of going to a bank or tapping your family and friends, consider some alternative financing options. Ask happy customers for help Small businesses can be successful in raising funds if they turn to those who know them best: their customers. Customers who want to see a business continue and grow because they enjoy the business' products or services may be willing to make small loans or investments. Here are some examples:•One chocolatier in the U.K. that was too small for a public offering arranged to borrow needed funds ("chocolate bonds") from its clients—and repay them in chocolate. In return for the cash, the chocolatier promised a regular "tasting box" of chocolates delivered to investors' (gourmands'?) homes. •A specialty food market gave its customer-investors a discount each week based on the size of their investment. For a $10,000 investment, the customer-investor was entitled to $125 worth of groceries each week for two years, which amounts to a 30% return over two years.Note: In the case of public companies, there are now rules governing loans from customers. While privately-owned small businesses don't have to follow these rules, it doesn't hurt to do so. This means, among other things, putting the loan and any modifications in writing. Try vendor financing If you're buying expensive equipment or stocking up on inventory, look to vendors or suppliers for help. A vendor or supplier may be willing to finance your purchase. The benefits:•The loan is easy to arrange. You don't need to present a business plan or complete a lengthy application. •The interest rates are usually more favorable than on other financing options, such as a credit card.If your vendor can't loan money to you to swing a purchase, the vendor may have contacts with financing companies who can. There are lenders that specialize in financing for medical equipment, heavy machinery and other items. For more, read SCORE's tips on vendor financing here. Enter a contest Small businesses can find capital if they can be winners at national and local business-plan competitions. Many competitions are held at universities, such as MIT's 100K Entrepreneurship Competition, a yearlong series of events with three contests that focus on different skill sets, and Rice University's Business Plan Competition, which offers a top prize of $20,000 cash, plus an investment offer and $80,000 in services. These contests usually culminate with a winner announced in the spring; some require a student, faculty or alumni contestant. Find information about business-plan competitions and their application deadlines at BizPlanCompetitions.com. (See related article about the work involved, "Competitions Might Not Be Worth Effort.") Business-plan competitions aren't the only types of contests around. A variety of large companies offer contests from time to time that typically pay off in cash and/or prizes, including items or services from the sponsor. For example, Intuit Inc.'s Love a Local Business Contest gave $5,000 to winners around the country and a grand prize of $30,000 is to be awarded soon. Some contests are limited to technology businesses, women-owned companies, businesses in a certain city or other unique entrants.Note: Contest winnings are fully taxable. Score a grant Grants are the best possible source of financing. Unlike contest winnings, they aren't taxable and, unlike a loan, you don't have to pay them back. Keep in mind: Grants typically don't cover all of your capital needs, and you usually have to pony up an equal amount for the project you're trying to finance.Grants aren't easy to come by, despite what some spam emails may say. Often, grants are made only if they benefit the community. For instance, there may be state or local grants for child-care centers, for certain "green" projects or for a business promising to create jobs in an economically distressed area. To secure a grant, you must go through a rigorous application process and follow submission deadlines.To find out about grant opportunities at the state level, check with your state's economy development agencies. Also look for federal grant opportunities on the government's site. Build a reserve Looking ahead, your best banker is yourself. Create your own rainy day account by setting aside small sums on a regular basis. A corporation that doesn't distribute all of its profits in dividends has "retained earnings." But even if you aren't a corporation, you can set up a special savings account to build a reserve that can be tapped when and to the extent you need the funds.

CIT's Challenge: Find Cheap Funding Source

Wed, 09 Jun 2010 13:21:29 EDT

By Aparajita Saha-Bubna Lack of cheap funding continues to hamstring CIT Group Inc. (CIT), six months after leaving bankruptcy.The longer it takes for CIT to right its funding model, the lower its chances of making it as a stand-alone company and the more likely it is that it will be bought by a bank looking to expand its lending business to midsize firms.While CIT raised funds earlier this year in the credit market, its ability to increase deposits is hamstrung by restrictions imposed by banking regulators. This inability to increase its deposit base, a stable and inexpensive funding source, is forcing it to whittle down its balance sheet. Total assets at the company fell in the first quarter by $2 billion from the end of the year to $58.1 billion as CIT made fewer loans."If CIT is able to fix its funding model, we believe the company will be well positioned for growth," said Adam Steer, an analyst at CreditSights Inc., a credit research firm.CIT's new chief executive, former Merrill Lynch CEO John Thain, took the helm in February and has reiterated the lender's commitment to lowering its costly debt load and winning the confidence of regulators who have limited CIT's ability to raise deposits.To this end, CIT has paid down $2.25 billion of an expensive $7.5 billion credit facility. It reported a surprise first-quarter profit, proving wrong analysts who had predicted a loss. The lender also has put together a management team and is hunting for a finance chief. In addition, CIT is selling off assets it doesn't consider critical to its core business as it seeks to shore up its balance sheet. CIT also is employing existing deposits to make corporate loans.But its costly debt load is cutting into profits. For instance, as of the first quarter, for every $100 CIT lent, it earned 65 cents, as its interest payments ate into margins, compared with about $3.50 it earned before the financial crisis, estimates Keefe, Bruyette & Woods.The company not only has to get the go-ahead from regulators to increase its brokered deposits, it also has to get the green light allowing it to use its deposits to make more types of loans. In addition, it needs to build on its deposit base to include retail deposits, which are considered more stable than the brokered deposits CIT has now."There is no clarity around the time frame for when things can be cleaned up by the regulators," said Mr. Steer at CreditSights. CIT's Mr. Thain said in March that it would take at least a year to regain the confidence of regulators."There's room for more upside for CIT shares but for a really significant upside to occur, investors may have to be patient," said Sameer Gokhale, an analyst at KBW. "From what I can see, it may take until 2012 for CIT to report positive cash earnings." Mr. Gokhale has the equivalent of a hold rating on CIT shares.CIT shares closed Tuesday at $35.25, up about 28% so far this year."CIT continues to make progress reducing its cost of funds, improving operating efficiencies and charting the optimal path for its commercial businesses," said Curt Ritter, a CIT spokesman. "Our return to profitability this past quarter further strengthens our financial position, which includes strong liquidity and a solid capital base."Founded in 1908, CIT relied on bonds and commercial paper to raise funds, which it then lent out at a higher interest rate. The credit crisis made it difficult for CIT to raise capital cheaply and, unable to restructure its debt, the lender filed for bankruptcy protection in November.The bankruptcy court wiped out about $10 billion of CIT's outstanding debt, as well as a $2.3 billion investment from the U.S. Treasury's Troubled Asset Relief Program. CIT emerged from bankruptcy in December.KBW's Mr. Gokhale doesn't rule out a potential acquisition of CIT by a bank seeking to expand its lending business. Indeed, a marriage between CIT's knowledge and relationships in the small-business-lending space and a bank's access to low-cost deposit funding could be an outcome welcomed by shareholders."CIT may be better suited to being part of a larger bank," says Mr. Gokhale.CIT's Mr. Ritter declined to comment on that possibility. Write to Aparajita Saha-Bubna at aparajita.saha-bubna@dowjones.com

Slow Gains In Credit For Small Business

Tue, 13 Jul 2010 09:50:13 EDT

By Shayndi Raice WASHINGTON—The worst may be over for small businesses struggling to obtain credit, but this important corner of the financial system doesn't show signs of recovering very quickly, according to officials and business leaders who gathered at the Federal Reserve for a one-day conference. "Overall, the survey data seem to suggest that current economic conditions for small businesses, though still quite challenging, are less dire than they were in 2009," said Robin Prager, an assistant research director at the Fed, at the forum on small-business lending. Ms. Prager, citing the Fed's Senior Loan Officer Opinion Survey, said weak demand from businesses and banks' still-stingy credit rules made lending tight. But the most recent April survey showed that bank lending standards for small businesses stopped tightening in the first quarter, after tightening sharply throughout 2008 and 2009.Small business owners and the groups that represent them said they haven't seen lenders becoming more lenient. "It still feels very depressed," said Leslie H. Benoliel, executive director of the Philadelphia Development Partnership, one of the area's largest providers of micro-enterprise business advice.In his opening remarks, Fed Chairman Ben Bernanke acknowledged the continuing depressed state of the lending market. "The formation and growth of small businesses depend critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult." The forum is the culmination of a fact-finding mission the Fed began in February to identify how to improve credit for small firms. Fed officials have hosted more than 40 meetings around the country with small businesses, bankers and community leaders to identify obstacles to obtaining credit. One major problem has been a lack of data that could help determine whether the problem is based on lack of demand for credit, tight supply or some combination of the two.While major banks eased loan conditions for big firms during the first quarter, lending standards remained tight among the local banks on which small businesses rely, according to the quarterly Fed survey. Similarly, a survey by the National Federation of Independent Business found that the proportion of firms reporting tighter credit conditions over the past three months remained "extremely elevated," Mr. Bernanke said.He cited data showing that loans outstanding to small businesses have declined to less than $670 billion in the first quarter of 2010 from about $710 billion in the second quarter of 2008. "We fell into a 100-foot well, and we just stopped falling," said Zoltan Acs, an economist with the Small Business Administration, during a panel at the forum. "How do we get out? I guess the recession is over, but there's a lot of damage to the economy."Mr. Bernanke noted that small businesses are essential to job creation, saying that data show that small firms employ roughly one-half of all Americans and account for about 60% of job creation. "Making credit accessible to sound small businesses is crucial to our economic recovery, and so should be front and center among our current policy challenges," he said.Some lenders argued the current lending standards are a return to more normal conditions following a period of laxity. "I keep hearing remarks that credit standards have tightened, and I don't believe that," said forum panelist Jack Hopkins, president and chief executive of CorTrust Bank N.A. and director of the Independent Community Bankers of America. "I need to make loans to survive, to make money." Other lenders at the conference said they were ready and willing to work with borrowers, but that some small firms were sitting on cash and afraid to invest in an uncertain economy. "That comment floored me," said Selma Taylor, executive director of California Resources and Training, a group that advises small business. "The market I'm dealing with, people don't come to me when they're sitting on cash." Write to Shayndi Raice at shayndi.raice@dowjones.com

Brewing Honest Tea

Tue, 27 Jul 2010 17:26:55 EDT

By Michelle Wu (See Corrections & Amplifications below.) Seth Goldman was thirsty, and all he wanted was a beverage that was less sweet than soda but still flavorful. At the time (in the mid to late '90s), there didn't seem to be a product on the market that fit the bill. A light bulb went on. Mr. Goldman discussed the idea with his business school professor, Barry Nalebuff of the Yale School of Management, and together they came up with Honest Tea—a brand of low-sugar bottled tea made with organic ingredients. The pair launched the Bethesda, Md., company in 1998, and by touting some home-brewed tea in thermoses, soon landed their first account with Whole Foods. A decade later, Coca-Cola Co. bought a 40% stake, opening up new distribution channels. Today, Honest Tea has 130 employees—up from just 23 in 2006—and posted 2009 revenue of $47 million. Next year, Coke has the option to buy the company completely. If the deal happens (Coke says it's "under consideration"), Mr. Goldman hopes to stay on at Honest Tea.Edited interview excerpts with Mr. Goldman follow. Q. Early on, you wanted Honest Tea to be an all-natural, eco-friendly brand. How did that philosophy develop? A. Because tea is a healthy product, it should be connected to a sort of consciousness or mindfulness about the earth. Tea is one of the few agricultural products that's never rinsed—the chemicals that are sprayed on tea leaves stay on all the way through production. Q. Did you expect to be working in the beverage business? A. I went to business school with the mindset of being an activist. I wanted to get more skills to lead a nonprofit. And I [sometimes joke] that I did lead a nonprofit for the first five years of Honest Tea. But you can really have a public agenda while pursuing a business. It's a vehicle for change. Q. How did you initially get funding for the company? A. The founding in 1998 was financed by Barry and me, his parents, my parents, my sister, his roommates from college—basically people who couldn't tell us no. Then once we got up and running our first year, people who liked the product approached us about investing. We never took institutional venture capital. There can be a lot of strings attached with these venture investors, and if you take that in, you don't want to lose control of your ultimate destiny. Q. What was the biggest challenge in growing your business? A. Distribution. With beverages, you can't ship it through the mail, and you definitely can't stuff it down an Internet cable. You have to get it on a store shelf where someone's going to buy it. It takes persistence. Distribution was a huge challenge. Now that we have this relationship with Coke, it isn't. But for the first 10 years it was. Q. How did the deal with Coca-Cola come about? A. Coke approached us in 2007, to ask if we were interested in selling—which we weren't—but we did have real needs around distribution and capital, as we were still losing money. We wanted a partner who would allow us to keep control of the company. So they bought a 40% stake, with the option to buy the company out next year. It's no guarantee that they will, but my expectation is that they will buy the company. Q. When you made the agreement with Coke, did you feel like you were selling out? A. I thought about it a lot before we did the deal. But look at where we are at now: none of our drinks have gotten sweeter; none of our [ingredients] have gotten cheaper. When we started we had two fair-trade certified drinks. Now we have 17. So, I'll say [to critics]: Show me how we've changed or how we've stepped back from our mission? I, at least, don't think we have. Q. In the past, Honest Tea has done little traditional advertising. What's your approach? A. It's always been a question of resources. This is the first year we've had the money to do more than give out samples. So [now] we are doing our first paid advertising, through some radio, posters and billboards. We're also doing some fun guerilla things. We're not going to have paid spokespeople. It's got to be authentic. Q. It's been reported that President Obama is a fan of Honest Tea. How did you find out about that? A. Back several years ago, when he first got elected to the Senate, we got a call from his office because he moved [to the D.C. area] from Chicago and he was interested in getting Honest Tea for his office. Later, I ran into him while he was on the campaign trail, and he said: 'It's keeping me going!' It's totally fun. It's neat. Q. What's next for Honest Tea? A. We're working to expand our distribution from the natural foods world and [primarily] the coasts to the whole country. It's a huge expansion. We're going to be reaching delis, college campuses and grocery stores in a way we never have before. Q. Do you have any words of wisdom for aspiring entrepreneurs? A. When you go into our office in Bethesda, on the wall there is a Chinese proverb that says: 'Those who say it cannot be done should not interrupt the people doing it.' So clearly for us, that's how we live. Also critical: Believe in what you're doing. This isn't about money, this isn't about ego—this is about believing in something. You have to have a passion for it. It's way too hard to succeed if you're just looking for a payday. Write to Michelle Wu at michelle.wu@wsj.com Corrections & Amplifications Coca-Cola Co. first approached Honest Tea in 2007. An earlier version incorrectly listed the date as 2000.

Steering Grads to Start-Ups

Tue, 08 Jun 2010 23:07:29 EDT

By Shira Ovide Like many other college students, 19-year-old Ian Jennings Jablonowski treks to rock concerts and plays videogames. But the East Brunswick, N.J., native also designed his first website when he was 13. Now, he's part of a new project trying to reshape New York's job market. He's among a dozen local students working this summer through HackNY, a new organization that hopes to steer more graduates in computer science, math and related fields to New York City technology start-ups instead of the well-worn path to Wall Street.Many of the best New York college graduates in quantitative fields are often scooped up by big companies such as IBM and Google, and increasingly by Wall Street firms relying on computerized trading and statistics. "In New York, there's such a large pipe that's been constructed for 100 years to take people and bring them into finance," said Chris Wiggins, a HackNY organizer and a professor in Columbia University's department of applied physics and applied mathematics. Mr. Wiggins said some of his students who take finance jobs haven't been happy with their decision.According to a 2009 survey of students at Columbia's Fu Foundation School of Engineering and Applied Science, for example, the largest group of students—36.8%—went to work in financial services. An estimated 17% went to work in software-related jobs. Mr. Jennings Jablonowski is spending his summer crunching data and prepping new potential features for bit.ly, a nine-person company in Manhattan's Meatpacking District that allows people to easily swap and track Web links on Twitter and other social-networking sites. Another HackNY fellow, Princeton University student Christopher Triolo, 20, said he is re-evaluating his chosen career in finance just a week into his internship with database firm 10gen. "This really opened my eyes," he said about the HackNY program. (The word "hack" traditionally refers to a reconfigured computer program, and it now serves as a catch-all tech term for clever problem-solving using limited resources.)The program started this winter after a meeting among Mr. Wiggins, New York University professor Evan Korth and Hilary Mason, a former academic and chief scientist at bit.ly. The three had separately been trying to encourage more links between academia and New York technology companies, and came up with the idea of a 24-hour student "hacking" competition, paired with a summer fellowship.The 12 HackNY fellows were chosen—naturally, with the help of a computer program Ms. Mason wrote—from more than 100 applicants. The companies pay the students $400 a week, and they are offered free housing in an NYU dorm thanks to the New York chapter of the Internet Society, a nonprofit, and a $37,500 grant from the Kauffman Foundation, a nonprofit that encourages entrepreneurship.The fellows will also spend at least one evening a week participating in workshops to learn technical skills, and practical skills such as how to land investors for their own tech companies. "I don't want to just feed my kids to the wolves," said Mr. Korth, referring to the HackNY students.This is the first real-world work experience for many of the HackNY fellows, and at small start-ups they can jump in and do meaningful work right away. Interns also have a chance to try out the famously loose culture of technology companies. Plasma TVs, Xbox videogame consoles and wardrobes of T-shirts and jeans are work staples. "Compared to a traditional job, start-up life is different," said Tal Safran, 26, a HackNY fellow who just finished his junior year as an NYU computer-science major. Start-ups say the HackNY program gives them a better shot at hiring top students when they graduate. Financial firms pay newly minted graduates compensation deep into the six figures, compared with pay of $80,000 and up, excluding ownership stakes, for start-up jobs, according to professors and technology executives. These people say Wall Street careers have lost some of their luster after the recent financial downturn, but for many students the financial sector is more stable and more socially acceptable than telling their parents they're going to couch surf for six months and write computer code.The participating companies also say they want to contribute to the long-term vitality of the New York tech community, which has always played second fiddle to California's Silicon Valley as a tech hub."New York is really a hotbed for start-ups, but students don't necessarily know that just yet," said Michael Galpert, a co-founder of Aviary, a 17-person Web company where Mr. Safran is interning. The HackNY program, Mr. Galpert said, shows students "that they don't have to go on the West Coast to spend their summer working with cool start-ups. They can do that in New York." Write to Shira Ovide at shira.ovide@wsj.com

Recession Brings Tough Love to Family Firms

Mon, 07 Jun 2010 13:23:34 EDT

By Ruth Mantell Expecting Mom and Dad to set you up with a cushy job in the family business? Not so fast. In this economy, some family firms are finding themselves forced to turn down job requests from relatives, and business owners are laying off family members and long-time trusted employees because of the length of the downturn, said Wayne Rivers, president of the Family Business Institute, a consultancy in Raleigh, N.C. "Most of the people I talk to are thinking right now in terms of pure survival: How do I survive 12 more months?" Mr. Rivers said. "If a business is already struggling and you are staying awake at night trying to figure out lay offs then the last thing you need to do is increase headcount."William Dunkelberg, chief economist with the National Federation of Independent Business, said businesses should not hire family members who don't earn their own way, especially during a recession. "If you hire a ne'er-do-well nephew you are basically giving them your income," Mr. Dunkelberg said. "The bottom line is if you hire somebody and they don't earn their salary that comes out of your pocket." Plus, family members shouldn't receive additional compensation because of their connection. "You should be able to pay people whatever you think they are worth," Mr. Dunkelberg said. Certainly, the economy is forcing some family-owned firms to consider tweaking their pay structure, among other changes, according to some initial survey results about the adaptability of closely held and family businesses. "What we are seeing is that the recession really started challenging the way they did business before, causing them to question what they thought to be the 'tried and true,'" said Barry Cain, managing director at Blackman Kallick, a Chicago accounting firm which conducted the survey in conjunction with the Family Firm Institute, a Boston-based trade group. The results should be published in September. "The depth of the recession and the shock that came from it was a reality check for many family businesses and owners," Mr. Cain said. Going forward, family businesses may be more transparent about compensation. The survey showed some evidence that the move toward transparency might lead to family workers taking pay cuts to bring their compensation more in line with non-family employees. "There is a move toward more recognition that people should get paid for what they are doing and how well they are doing it. Family business owners are trying to get their compensation structures in line," Mr. Cain said. The weak labor market is prompting people to ask for jobs at their family's business, said Barbara Spector, editor-in-chief of Family Business magazine. "That has caused some strain in families," she said. When family members ask for jobs, managers may wonder whether they should create a position—but owners should assess whether doing that is best for the business. "There are certainly other ways to help a family member out," Ms. Spector said. "Hiring a family member to work in a business is not the only way to provide financial assistance." Family businesses can face special challenges, such as a conflict between the family's goals versus the business's goals. "Families are built on love and equality—parents love all their children equally," Ms. Spector said. "But businesses are a meritocracy; they are based on rationality, competitiveness." If a family member is an underperforming worker the best thing for the business is to get rid of them, she said. In the office, family ties should be put aside. "The family in the long run will benefit by having a healthy business," Ms. Spector said. "Sometimes in a recession people need to be laid off." Write to Ruth Mantell at ruth.mantell@marketwatch.com

What Makes a Mattress Cost $33,000?

Wed, 16 Jun 2010 15:07:56 EDT

By Anjali Athavaley How much would you spend for a good night's sleep?Some people might say $33,000. That's the price of E.S. Kluft & Co.'s hand-tufted, king-size Palais Royale mattress and box spring, currently the most expensive American-made mattress set on the market. The company says it has sold about 100 since introducing it in 2008.Or maybe it's $44,000—the price tag on Kluft's Sublime model, which the company has teed up for a launch later this year.European shoppers will pay even more. At $69,500—roughly the price of a Porsche Cayenne S hybrid SUV—there's the Vividus king-size mattress set from Hästens Sängar AB, of Sweden. Hästens says it takes 160 hours to assemble this mattress entirely by hand, which has a Swedish-pine frame with thick layers of horsehair, cotton, flax and wool inside. The company says since introducing the mattress in 2006, it has sold 250 of them world-wide.There's an arms race under way in the world of luxury mattresses that jittery economists and sluggish home sales seem unable to stop. Even at the middle-to-upper-middle tiers, mattress prices are creeping up as companies cater to mainstream demand for luxurious sleep.At Sealy Corp., in Trinity, N.C., the lineup of products aimed at the luxury end of the market is expanding, says Jodi Allen, chief marketing officer. The company's higher-end Stearns & Foster mattresses range in price from $1,200 to $5,000 and take twice as long to make as the company's Sealy-brand mattress. This year, Sealy launched its most expensive Stearns & Foster model, the black-and-gold Golden Elegance, priced at $4,999 for a king set. It features individually wrapped inner and outer coils, which give extra support, and it contains wool, horsehair and natural latex inside.Earl Kluft, chief executive of E.S. Kluft, a family-owned company based in Rancho Cucamonga, Calif., says it takes 10 craftsmen about three days to make the Palais Royale, which contains 10 layers and more than 10 pounds of cashmere, mohair, silk and New Zealand wool that has been washed, dried and crimped. Natural latex foam and certified organic cotton are among the materials used to reduce motion transfer and provide cooling. The Sublime has a layer of horsehair for resiliency."We really want the consumer to get a better night's sleep," Mr. Kluft says. "When you think about it, the mattress is the most important thing in your house. You spend more time on your bed than anywhere else." Mr. Kluft says super-premium mattresses, or those costing $20,000 or more, made up 5% of Kluft's sales of $33 million in 2009, a year when overall sales were flat. In 2010, first-quarter sales were up 50% over the year earlier, Mr. Kluft says. At the high end, other mattress options range from Hollandia International's "3-D fabric," with raised fibers creating ventilation, to a customizable mattress from Organic Mattresses Inc., featuring layers of latex in varying firmness that are stacked to suit the customer. Some mattresses have aloe vera or lavender built into the top layers; a luxury mattress from Magniflex, an Italian line, is covered with fabric containing 22-karat gold. Exactly how much better will a person sleep on a super-expensive mattress, a shopper might ask. Not much, according to one sleep expert, Clete Kushida, medical director of the Stanford University Sleep Medicine Center. "For the vast majority of people who are generally healthy, bed surface won't make much of a difference in terms of their sleep," Dr. Kushida says. But as people age, they experience more sleeping problems and become more attuned to the comfort of their beds. And for those with medical problems, such as chronic pain syndrome, "even something as simple as a bed surface can make a significant difference," he says.Yet bad sleep was what drove Scott Kimple, a 44-year-old hedge-fund manager in Dallas, to invest $27,500 in a king-size Hästens 2000T mattress set two years ago. "I've had problems sleeping in the last couple of years, and I thought well, maybe a mattress might help," Mr. Kimple says."When I heard there was a $20,000 mattress out there, I thought it was kind of ridiculous." But Mr. Kimple is a convert. "It's light years better than anything I've ever slept on. It's like you're floating on air." An added plus: "They will come to your house and flip the mattress for you," Mr. Kimple says. The Hästens store in Dallas offers the monthly service to local customers for the first year; Mr. Kimple had it done.Less-expensive rivals are skeptical of a $20,000 mattress. "I don't know what the rationale is, quite frankly, as to why someone would spend that much," says Rick Anderson, North American division president at Tempur-Pedic International Inc., of Lexington, Ky. The company is planning this year to roll out the Tempur-Cloud Luxe collection, including a softer version of its signature Tempur foam, which conforms, with body heat, to the shape of the sleeper. A king set with an advanced adjustable base system costs $9,000—making it the company's second-most-expensive."Hand-made doesn't necessarily mean better sleep," Mr. Anderson adds. "I think you have to look for meaningful differences."The industry offers a little evidence to back up the notion that a new bed will help you sleep better. In 2006, the Better Sleep Council, an arm of the International Sleep Products Association, funded a study at Oklahoma State University. Researchers divided 59 people, who had no clinical history of sleep problems, into groups according to their "sleep efficiency"—that is, how well they reported sleeping. They recorded their quality of sleep for 28 days in their old beds, which were on average nine years old. Then they did the same for 28 days in a new, medium-firm bed. Subjects with poor sleep efficiency experienced greater improvement, but those with good sleep efficiency also experienced benefits, says Bert Jacobson, head of the School of Educational Studies at OSU. "A new bed is certainly not a cure-all," Dr. Jacobson says, but it can improve the sleep of even those who don't feel they suffer from poor sleep. And that may be why, in the luxury mattress business, unhappy customers are rare. Last year, Linda Wilde, 51, a hospital health information official, and her husband, Wayne, an administrator at a law firm, set out to replace the mattress she'd been sleeping on since the year Ronald Reagan was elected president (1980, to be exact)."It was a full size mattress, and we are two full-size people," Ms. Wilde says. "It was time we got a new mattress." The couple went to a mattress store near their home in Half Moon Bay, Calif., and tried out a Kluft. They glanced at the price and saw $1,700. "When we laid on that bed, it was like heaven," she says. "We were thinking, What a steal."Make that $17,000. But it was already too late—the Wildes were sold. Since purchasing the bed, her husband's back pain has vanished. Ms. Wilde says she doesn't intend to buy another mattress. "This is the bed we're going to die in," she says. "Hopefully not soon."For some, the eye-popping price is part of the appeal. "For any luxury brand, there has to be a perception of scarcity," says Dean Crutchfield, senior partner at Method Inc., a New York brand consulting firm. "If everyone was running around buying these beds, they wouldn't be as special. "Let's be honest, not everyone can have this. Not everyone can afford this. That's what this is about," Mr. Crutchfield says.Bloomingdale's, a unit of Macy's Inc., currently offers Mr. Kluft's Palais Royale in several stores. Just a few years ago, the company's mattress assortment topped out in the $5,000-to-$6,000 range."Once my buyers started testing the stuff and we saw the results, we went very aggressively after that business," says Joe Laneve, the retailer's senior vice president of home furnishings. Customers who buy a $33,000 mattress want to take their time in the store. "They lie down for a long time," Mr. Laneve says. Kluft trains the sales associates—Mr. Kluft calls them "disciples of the product"—to answer questions. "We do not pressure them to make a quick decision of that magnitude," Mr. Laneve says. Fidel Lecer, manager of a Mancini's Sleepworld store in San Francisco, says the most expensive mattresses sell themselves. Just a few days ago, he recalls, a woman walked in looking to spend less than $1,000 on a mattress-box spring combination; she walked out with a set that cost her $8,000."There's no one, in 95% of the cases," Mr. Lecer says, "that comes in and says 'Oh, I'm here to spend $15,000.' " Write to Anjali Athavaley at anjali.athavaley@wsj.com

The Art (and Journey) of Raising Funds

Tue, 13 Jul 2010 09:49:46 EDT

By Rosalind Resnick For an entrepreneurial start-up, landing that first check from an investor is a milestone.What many start-ups don't realize is that the seed capital they raise – often from friends and family – is just the first step in a fundraising journey that can drag on for months or even years. My client, John White, is more than two years into the process of securing $14 million in funding for his company, Joy Berry Enterprises Inc., which plans to republish the works of popular children's author Joy Berry across multiple media platforms. In June 2008, he and partner John Bellaud won their first $600,000 from angels to jumpstart the company—and expected smooth sailing from that point on. Then the financial markets collapsed in the fall of 2008, and John's company found itself smack in the middle of the worst fundraising environment in decades. Piecing together funding from angel investors and family offices (which typically manage money for high-net-worth families), the company managed to scrape together $3 million – enough to license Berry's titles and bring them to market but not enough to acquire the intellectual property and fully execute the business plan. Today, with the economy beginning to recover, John and the company's chairman, Kay Koplovitz, founder of USA Network, are back on the road raising $800,000 in working capital to fund operations through December 2010 and a larger round of $10 million to acquire Berry's catalog of titles, develop animated properties and pursue licensing opportunities. Here are some of the lessons that John and his partners learned along the way: • Don't expect to raise all the money at once. While the purpose of a business plan is to show investors your company's true potential, don't fold your cards if you can't raise the money you need to execute your entire plan right away. Over the last two years, Joy Berry Enterprises has raised money in five separate tranches, some as small as $200,000. • Be prepared to give investors more. Even in good times, investors in early-stage companies expect to be compensated for the risk that your company might fail and they'll walk away with nothing but a write-off. With early-stage capital in short supply, start-ups need to be ready to give away a larger chunk of their company than they might have when times were flush and to pay higher interest on the money that they borrow. In John's case, his company raised $800,000 in convertible debt at 12% interest in 2008. After the market crashed, JBE raised another $600,000 at 15% interest in April 2009. The new note will convert to equity upon a $5 million capital raise. "The terms were tough, but we needed the capital," he says.• Adapt your business plan to the funds available. If you wait to fund your entire plan before starting operations, you may never get your company off the ground. At the same time, you may need to scale back your plans if you decide to start your company with less. "We raised our first round of $600,000 from angels and founders to jumpstart the company and anticipated closing the rest by the end of the year," John says. "When the market crashed and we were unable to raise the full funding, we had to re-think our launch plans and shape the business plan in a way that we could execute," delaying product releases and concentrating on key items, promotions and holiday sales cycles.• Be ready to survive on a shoe-string. Many entrepreneurs think that, once they raise capital from investors, the pressure is off and they can get back to running their company. The truth is that you've got to keep a laser focus on expenses – especially if your company is burning cash and you don't know where the next check is going to come from. "When you raise money in pieces rather than all at once, you have to stretch the money as far as possible," John says. Particularly tricky is paying manufacturers upfront when the company is waiting for payments from retailers. "Watching every penny go out is a hardship," he says.• Be honest with your investors. Whether your investors are friends, family, angels or VCs, nobody wants to be kept in the dark. It's better to break the bad news about money concerns, such as missed revenue projections or cash-flow gaps, before there's nothing left in your company's bank account. "Our investors have been very supportive and patient," White saysWith the market for small-business capital still tight and the recovery lackluster at best, start-ups looking for capital would be wise to take a page from Joy Berry Enterprises' playbook. Raise money when you can, be prepared to pay a premium for your capital and scale back your plans if necessary, but do whatever it takes to get your business up and running and your product out the door.

Commercial Deals Abound but Loans Are Scarce

Fri, 04 Jun 2010 10:25:43 EDT

By Emily Maltby Real-estate prices are enticingly low in many areas of the country, prompting business owners to pursue sweet deals on storefronts, manufacturing facilities and other commercial properties. But because banks remain wary of commercial real-estate loans, landing financing to make such a purchase can be time consuming and tedious. Compared to peak prices in October 2007, commercial property values are down 42%, according to Moody's Investors Service Inc. Price index reports compiled by Moody's and Real Capital Analytics Inc. show that as of March 2010, the cost of industrial and office space fell 32% in the last two years. Retail space also plummeted 28%."There is excess space, which opens an opportunity for small firms," says Bill Dunkelberg, chief economist at National Federation of Independent Business, a Washington advocacy group. "You won't see prices like these for a long time."Some owners are heeding the call. Randy Scheidt, who heads the legislative subcommittee of the National Association of Realtor's commercial division, says that he is noticing business owners "feeling more comfortable with the future" and weighing whether "such an acquisition would be fiscally prudent."But the tight credit environment is making it difficult for entrepreneurs to secure those loans. "What is so different today versus 2006 is the underwriting scrutiny," says Mr. Scheidt. "It's not unusual for [the loan process] to take an additional 30 to 60 days." Eliot Boyle, owner of U.S. Metals LLC in Denver, decided last year to move his sheet-metal roofing and siding business to a new facility. Lease rates in the area were steady, but commercial spaces for sale on the market were falling. "We thought this was a good time to take advantage of how well we were doing and how poorly the real-estate environment was doing," he says.After preparing his business plan, he visited five banks and was turned down by four. The remaining lender, Bank of the West, which had previously worked with Mr. Boyle, issued him a Small Business Administration loan to buy a $680,000 building. The price for the space —a 50%-larger facility—had dropped 40%.The process took longer than anticipated and closed one day before the scheduled move. The delays, says Mr. Boyle, stemmed from the bank's requirement of additional environmental reports and other due diligence."All those appraisals showed that…if the bank needs to move fast and has to liquidate the building quickly, it can do that," says Mr. Boyle. "The approval timelines are really not that different than they were in the past," says Jim Cole, spokesperson for the San Francisco-based Bank of the West. "Appraisals take the same amount of time and, as always, environmental reports can take longer than expected."Many banks taking extra precaution before issuing commercial mortgages are reeling from those kinds of losses and are wary of putting more of those loans on their books. According to a Real Capital Analytics' study of Federal Deposit Insurance Corp. and bank data, the default rate for commercial real-estate mortgages rose to 4.2%, amounting to $45.5 billion, for the first quarter of 2010. That's the highest default rate since 1992. Commercial real estate loans have really hurt community and regional banks, which are key lenders to small businesses. They hold just more than half of bank-issued commercial mortgages and their portfolios are likely to hurt for some time. The default trend is expected to continue through 2011, when it may hit 5.4%, before abating, according to Real Capital Analytics. Although the commercial real estate market has shown some tentative signs of life in the early months of 2010, there is little transparency about the value of many properties, says Sam Chandan, chief economist at Real Capital Analytics. Appraisals help determine price, he explains, but commercial property values are supported by other transactions in the area. To overcome the credit challenge, experts say entrepreneurs can make themselves more attractive by submitting sound financial plans that back up their income projections and intent to repay the loan. Borrowers with solid credit histories and established bank relationships are more likely to get a loan. Mr. Chandan says newer businesses can still land financing if they can bring equity to the table, especially if the borrower wants to purchase a vacant property that the bank is holding. But, he cautions, "lending standards have tightened considerably, so it will be challenging." Write to Emily Maltby at emily.maltby@wsj.com

In Gulf, Usual Loans Not an Option

Thu, 08 Jul 2010 10:14:11 EDT

By Emily Maltby Kim and David Chauvin's shrimp-trawling company has had its share of knocks, but the couple has always managed to find the necessary financing to keep their family business chugging—until now. It's been widely reported that the BP PLC deep-water oil spill has made many small businesses along the Gulf of Mexico strapped for cash. But business owners say this hardship is worse than past disasters because the usual go-to financing resources—including emergency loans—are less attractive given the uncertainty of the situation."This is really different," says Ms. Chauvin, who runs Mariah Jade Shrimp Co. with her husband. "We've been trying to figure out what plan B is, and then that gets knocked out of the water so we try plan C, and now we're down the alphabet."The shrimp company, based in Chauvin, La. (no known relation), weathered four major hurricanes in the last five years. It had sufficient savings to survive the ruinous floods that impaired the region in 2005 after Katrina and Rita. But cash reserves weren't sufficient for the 2008 devastation of Gustav and Ike, prompting the family to seek a $170,000 disaster loan from the Small Business Administration. Since the spill, the SBA has issued 142 disaster loans totaling $11 million to affected businesses in the region—a 33% approval rate, which is in line with approval rates from past disasters. The SBA is also trying to help businesses with existing SBA loans by deferring their payments, says an SBA spokesman.But this time, the Chauvins are passing on the emergency loans, since they still have the 2008 loan to repay. They say it's too risky to take on more debt when there's no indication when business will be restored. "No one knows anything," says Ms. Chauvin.For the time being, they are waiting for BP to pay the company's claim of a $6,250 loss a day, which doesn't include expenses the company is struggling to pay such as dock fees and insurance. BP has already indicated it won't compensate them for profit they anticipated making through a new processing plant they planned to open this year, Ms. Chauvin says.BP declines to comment on specific cases, says a spokesman for the oil company.Many small businesses have complained that BP has been slow to pay or has paid only a fraction of the losses. Last month, BP and the Obama administration assigned Kenneth Feinberg, who has helped resolve bureaucratic claims processes in the past, to help streamline the process.BP says it's trying to get the claims out as quickly as possible. The average wait from the time of claiming to receiving a check is around five days for individuals and eight for commercial entities, according to the spokesman. BP has paid a total of $153.5 million in claims to date.The Chauvins are also seeking money the entrepreneurial way: through new business. They've won a contract with BP for about $7,000 a day to help clean up the spill, so the company's three boats have stayed busy. "We were hoping this [spill] would go away quick," says Ms. Chauvin. "This was going to be the best year ever." Write to Emily Maltby at emily.maltby@wsj.com

And Now, the Tricky Part: Naming Your Business

Tue, 29 Jun 2010 14:05:15 EDT

By Emily Maltby Jake Schwarz, an attorney, spent months trying to settle on a name for his law firm. He considered using the founders' names, as many law firms do, but "Iida, Schwarz and Prenton" was awkward to spell and pronounce. He contemplated "Lighthouse Law Group" and "Summit Legal Partners" but thought they sounded like motivational posters. Some of the more promising names he mulled were "Consilium" and "Acuity Law Group," but he realized that half his clients, based in Japan, would struggle with the phonetics. "Literally, I was banging my head against the wall," Mr. Schwarz recalls.As many entrepreneurs can attest, deciding on a name for a new business is no easy task. One with pizzazz can set a new company apart; one that misses the mark can make a burgeoning start-up fall flat. The problem, marketing and branding experts agree, is that there is no magic bullet to picking the best name. Business monikers can run the gamut, from straightforward names that summarize the company's offerings—say, General Motors Co.—to so-called "empty-vessel" names that have no apparent association to the product or service, until they create their own meaning over time— think, Yahoo! Inc.For a small company with tight resources, a safe bet is to pick a name that's neither boring nor obscure. "If your marketing dollars are limited, opt for a more descriptive or suggestive name," says Nina Beckhardt, president and creative director of The Naming Group LLC in New YorkThe process can require some brainstorming. (Please read how entrepreneurs came up with their business names in gallery at bottom.) Alexandra Watkins, chief innovation officer at Eat My Words, a San Francisco firm that generates names and taglines for businesses, suggests using glossaries, baby name lists and rhyming dictionaries. She also encourages associative thinking, such as jotting down a list of loosely related terms or phrases that conjure up your concept. "If you want to name a clothing line, think of [names of] hip places, like London night clubs," she says. "If it's a new energy drink, look up the names of race horses." Experts don't recommend using the entrepreneur's name in most cases, as it's typically not descriptive and can limit future endeavors, such as a merger with another firm. It can also be problematic for the next owner, if the business is successful enough to sell or even pass on to the next generation. Jeb Brooks and his family, for instance, are now running the sales training firm that his father started in Greensboro, N.C., some 30 years ago. His late dad named the firm after himself, William T. Brooks & Associates and later changed it to The Brooks Group. But the name says little about the company's mission – in fact, Mr. Brooks says he has to repeat the word "sales" at least three times when pitching new clients. He'd like a catchier name, but won't likely change it "because we'd lose the recognition in our industry."One of the least effective ways to come up with a name is to "crowd source" on sites set up for that purpose, or ask too many customers, clients or even family and friends for their ideas. Both Ms. Watkins and Ms. Beckhardt caution against that strategy, arguing that too many chefs in the kitchen can clutter the process.In the end, the most successful names are the ones that are easy to say and spell, and summon an image or meaning that can last as the business grows, the experts say. Once you've narrowed the field, make sure to test the candidates out in a real-life setting. Ms. Beckhardt suggests pretending to answer the phone using the name, and typing it as a url. "HomesExchange.com could be HomeSexChange.com," she warns. "Take those precautions and get comfortable with it because you'll have to live with it for a long time."For attorney Mr. Schwarz, the months of struggling to come up with a name for his law firm finally came to an end when he stumbled upon inspiration in—of all places—the shower. As he reached for his shaving cream, the name on the label, Pacific Shaving Company, reminded him that his clients in Japan and the U.S.'s West Coast shared a common ocean border. Mr. Schwarz eventually named his firm Pacific Crest Law Partners in 2008. "The name is perfect for what we're doing," he says. Write to Emily Maltby at emily.maltby@wsj.com

For Some, Hiring Cheap Is Mistake

Wed, 23 Jun 2010 18:04:26 EDT

By Sarah E. Needleman You still get what you pay for.That's the message compensation experts have for small-business owners looking to pluck top talent at bargain rates from today's crowded job market. They warn that job hunters willing to take positions for meager salaries are likely to jump ship once the recession ends. And in the meantime, they may harbor resentment."Don't change your pay practices just because the market allows you to," says David Wise, a senior consultant for Hay Group Inc., a management-consulting firm headquartered in Philadelphia. "You still have to be within a range of competitiveness."Some business owners say it's tempting to offer potential recruits salaries lower than what they might propose in a healthy economy. "You can get people for cheap because times are tough," says Willis Cantey, owner of Cantey Technology LLC, a technology-services firm in Mount Pleasant, S.C., with eight employees. "People are desperate."Still, Mr. Cantey, who's currently looking to hire an account executive, says it makes good business sense to offer fair-market rates no matter what the job market looks like. "You got to pay people what they are worth or they will leave as soon as something better comes along," he says. "I'm looking for somebody who wants to work here for years, not a year." Business owners should also take caution to avoid the opposite extreme: Overpaying or offering candidates salaries their businesses can't sustain. "In this economy, it's critical for small businesses to carefully manage their fixed costs," says Mr. Wise. "Base salaries tend to be the single biggest fixed-cost line item." Some owners are grappling with the issue of how much to pay as they start hiring again. In May, businesses with between 50 and 499 workers increased their headcounts by 39,000, while those with fewer than 50 workers added 13,000 jobs, according to payroll company Automatic Data Processing Inc. It may behoove owners to take into account what their current staffers are earning if they previously had to reduce salaries or deny raises, says Rocki-Lee DeWitt, professor of management at the School of Business Administration at the University of Vermont. While salaries are typically negotiated in private, she says word of what a new hire is getting paid can spread fast within a small firm and turmoil can ensue. "You've got to make sure not to upset the apple cart," she says. "This is about managing fairness." To determine a reasonable rate for positions in their industry and geographic area, small businesses typically can't afford to hire pay consultants like their large-company counterparts. But some entrepreneurs say they've come up with free and low-cost alternatives to identify appropriate salary ranges, which tend to regularly fluctuate based on demand. For example, hiring managers at software provider TechSmith Corp. collect free salary survey data from trade associations they belong to, as well as contribute to at least one industry-wide study a year in exchange for a discounted copy of the results, says William Hamilton, its president. And since the 205-employee company frequently recruits recent grads from nearby Michigan State University, its hiring managers also secure pay information from the school's career center at no cost, he says. Other free resources for collecting salary data include ads on job boards, the Bureau of Labor Statistic's Occupational Outlook Handbook, and sites such as PayScale.com, Glassdoor.com and Salary.com. Business owners also can gather pay intelligence by interviewing as many job hunters as is reasonably possible and asking about their pay expectations, advises Tom Gimbel, chief executive officer of the LaSalle Network, a Chicago staffing firm. "The more candidates you meet, the more comparisons you have," he says. "See what you can get for 'x' amount of pay." Meanwhile, keep in mind that whatever number you settle on should take into account the cost of raises, he adds.Another tip from Mr. Gimbel: Exclude pay details in job ads. "If you post a salary too low you're going to discourage some really good, high-end candidates," says Mr. Gimbel. Job hunters tend to focus on base pay and ignore references to bonuses, he adds, since the latter compensation is typically tied to future performance. To be sure, many job hunters value more than just pay when considering employment, even when open positions are scarce. And while a small enterprise often can't compete with a big company's benefits package, it can typically be more flexible or accommodating when it comes to other items on a potential employee's wish list. "There's compensation and then there's everything else," says Dale Rodrigues, co-founder of Mary's Gone Crackers Inc., a Gridley, Calif., snack-food manufacturer. Selling points he emphasizes when courting candidates include the company's family-oriented culture and an upward career track, he says. "We give them something they rarely receive anywhere else and that's real, authentic opportunities to evolve and grow," he says.Sha Sha Harnik, owner of Distinctive Events, a Charleston, S.C., wedding- and corporate-event-planning business, says she asks candidates she wants to hire what matters most to them in a job so she can structure their pay offer accordingly. "A person's lifestyle and priorities are important facts to consider," she says. For example, if an attractive applicant strongly values work-life balance, she might suggest allowing this person to work from home a few days a week in exchange for a lower salary. "I have to be realistic as to what I can offer my employees," says Ms. Harnik. "I don't have lines of credit a large company has." Write to Sarah E. Needleman at sarah.needleman@wsj.com

Chamber Launches 'Virtual March' on Finance Bill

Mon, 21 Jun 2010 17:48:47 EDT

By Victoria McGrane It's the 11th hour for sweeping financial-overhaul legislation in the U.S Congress, and the U.S. Chamber of Commerce hasn't given up the fight.The Chamber on Monday launched the latest chapter of its on-going lobbying campaign, aiming to highlight the concerns its small-business members have with the legislation. But rather than flying small-business owners into town or taking out more full-page newspaper ads, this week the business lobby is breaking out the avatars.Starting last Thursday, the Chamber emailed its grassroots network asking members to create their own personalized avatars, or virtual versions of themselves. Once created, the avatar can participate in a "virtual march" on the Capitol.The push comes as House and Senate negotiators begin what's likely to be the last week of a conference committee tasked with reconciling competing versions of the financial overhaul bill. The Chamber opposes a number of provisions in the current bill, but the avatar push appears focused largely on the scope of the consumer financial-protection bureau that the bill would create.For instance, part of the message encouraging Chamber members to take part argues that the new watchdog "would be able to impose regulations on thousands of nonfinancial companies that aren't in the business of consumer finance and had nothing to do with the financial crisis." Consumer groups and Democratic supporters of that provision in the bill contend that it wouldn't capture truly nonfinancial businesses.Already, more than 24,000 avatars have gathered on a Google Maps image of the National Mall. Each is labeled with the name and location of its creator, such as "Alicia" from Sparks, Texas. Lawmakers will be able organize the avatars by state so they can see how many of their own constituents turned out for the march."Conferences are always a member-to-member play, more than a lobbyist-to-member play," said David Hirschmann, the Chamber's senior vice president. "But what they're all thinking about is what does back home think about this?" The virtual march is the Chamber's way of reminding key lawmakers what its members think, he said.Since last September, the Chamber has spent more than $3 million fighting against key aspects of the bill. Its members also have sent more than 250,000 letters to lawmakers.

Before You Moonlight...

Mon, 21 Jun 2010 13:55:38 EDT

By Shara Tibken The terrible economy is pushing lots of full-time workers to moonlight—as entrepreneurs. With money tight and layoffs a looming threat, more people are setting up side businesses to bring in extra money, often with plans to turn them into full-time jobs down the road."Over this period of time, people understand positions and jobs are not forever," says Barbara Frankel, a business and career coach and president-elect of the Career Counselors Consortium in New York. People "are more oriented toward having financial freedom."But starting a small business can be particularly challenging for people who also work full time. If you're thinking about making the leap, there are a bunch of crucial issues to consider—everything from your motives for starting the business to how you'll budget your time and how you'll square things with your current boss.Here's a look at some of those big questions.First of all, consider a very fundamental issue: Do you love what you're about to do? Since you're probably not going to see a profit for a while—and you'll likely be putting in long hours to get the operation going—you'll need to have an emotional investment in the business to keep you motivated. It should be "something that really makes you feel good and really fulfills a satisfaction and personal need you have," says Beverly Daniel, owner of CareerGrowth Group, a New York-based career-coaching business.What's more, before you commit yourself to anything, do some research and make sure there's actually a market for your idea. "Just because I like to glue toothpicks together doesn't mean anyone's willing to buy them," says Timothy Wyman, a partner at the Center for Financial Planning, based in Southfield, Mich.There are a number of ways to gauge the prospects. You might start by checking online to see if there are a healthy number of buyers and sellers. You could even get in touch with other entrepreneurs in the field to get their take.Something else for you to consider: the costs of starting and running the business. If you're doing this to make extra money, you don't want to get yourself deeper in debt. Can you start your venture with little or no up-front capital? Are there ways to keep your overhead to a minimum?"Don't go out and buy space. Lease it," says Holly Schick, deputy associate administrator in the Office of Entrepreneurial Development at the Small Business Administration. "Don't borrow money if you don't have to. Keep fixed costs low to keep yourself nimble to adjust to changes in customer base or whatever comes along. If you do need to exit the business, it's a lot easier, and you don't lose as much."You might have the drive and the resources to launch. But don't forget to weigh another important factor: Do you have time to run a small business? If you already have significant commitments to family or organizations, some part of your life will end up suffering. That's particularly true if you're starting the business during a big life change, such as a divorce or moving to another city. "That can be overwhelming and difficult, and you might not do either one well," says Ms. Daniel of CareerGrowth Group.So, work out a schedule for the hours you'll spend on the business, and see if you'll be able to manage it. And don't think you can fill all your waking hours with work. The schedule must include free time for relaxation, so you don't feel frazzled and stressed. "The key to balance is you can't work 24 hours a day, seven days a week," says Diane M. Pfadenhauer, a consultant at Employment Practices Advisors Inc., a consultancy in Northport, N.Y.What's more, you should try to head off conflicts by sharing the schedule with your family and any groups you belong to. Make sure they're on board, and if they have any objections, they can weigh in before you launch the business.Next, do what anyone starting a small business does: Write a business plan, do research on the market and figure out what licenses and other paperwork you'll need. Just because it's a side business doesn't mean you can skimp on this stuff. But don't try to figure it all out alone. There are scores of small-business organizations and colleges that can help you for little to nothing. For example, the SBA offers free online tutorials at SBA.gov/training for developing home-based businesses.Finally, don't forget that your full-time career has to come first. "If it's a side business, you need to make sure your full-time job is your priority, not to have one foot out the door," says Ms. Frankel of the Career Counselors Consortium.Before you start setting up your side job, read your employee handbook. Some specifically detail what you can and can't do in your free time and cover personal use of work resources such as company cars or BlackBerrys.Even if your company has a fairly lenient policy, set boundaries between your two jobs. Don't use your work email for your business, for instance, and don't take client calls while at the office. On the other hand, give your sideline as much attention as you can while making it clear your main focus is your full-time job. Take a lunch break, for instance, or try to leave the office on time as much as you're able. You might also see if you can change to a more flexible schedule while still putting in the same hours, such as coming in and leaving earlier.Another important preliminary consideration to bear in mind: Make sure your side business isn't too similar to your full-time gig, and there's no legal conflict with what you're already doing."If you have a job and you have some public presence in one domain, you can't think you're going to do the same thing and it's not a problem," says Judith Gerberg, president of the Career Counselors Consortium.Then there's the question of whether or not you should tell your boss about what you're doing. While some advisers recommend that you tell your employer early on and others counsel to never say anything, most agree it comes down to what sort of relationship you have with your boss."It's an individual decision, and only you know your boss and the environment—if it's entrepreneurial and would support something like that, or if it is an environment where they want employees to work 10-hour days and would view it as a distraction," says Ms. Schick of the SBA. Ms. Tibken is a reporter for Dow Jones Newswires in New York. She can be reached at shara.tibken@dowjones.com.

Services Let Start-Ups Pitch to Angels, for Free

Thu, 17 Jun 2010 10:14:56 EDT

By Scott Austin Start-ups hungry for cash are often expected to pay a fee to pitch to angel investors. But some free services are cropping up to counter the so-called pay-to-pitch model. Earlier this year, Internet entrepreneur and blogger Jason Calacanis started Open Angel Forum, which holds free pitch events in various cities where entrepreneurs selected from a pool of applicants can pitch to about 20 to 30 angel investors. At Open Angel's first event in Boulder, Co., in February, three of six companies found new investors.Another free service, AngelList, started in February by angels Naval Ravikant and Babak Nivi, vets dozens of deals before highlighting the best ones in emails each week sent free to a group of 200 investors.Messrs. Ravikant and Nivi—who also run Venture Hacks, a for-profit site that provides advice to start-ups—say they have received pitches from more than 1,000 start-ups, mostly consumer Internet companies. Of the 48 companies featured so far on AngelList, about half have received funding, they say. Marco Zappacosta, founder of Thumbtack Inc., a site that lets people book services like tutors and dog walkers, won three commitments from angels after pitching his company in March at an Open Angel Forum event in San Francisco. He then turned to AngelList and received three more commitments to close a funding round at $1.2 million in June. The service, he says, "is good at getting worthy start-ups into the inbox of investors."The free services come in the wake of recent criticism of the pay-to-pitch model, which some angel investors have argued is justified because they offer advice and should be paid for their time. Mr. Calacanis, an outspoken figure in the tech industry, last fall publicly admonished angel investment groups for charging bootstrapped entrepreneurs hundreds, if not thousands, of dollars to pitch to them.Last month, Chris Hurley shut down his Revolutionary Angels service that proposed to charge entrepreneurs $4,995 for advisory services and entry into a business-plan competition that would award $250,000 to the winner. After soliciting submissions in October, Revolutionary Angels received only 20 entries, far short of its goal of 60 participants.In retrospect, "$5,000 is a lot of money for early-stage entrepreneurs," said Mr. Hurley.But the new free services aren't entirely altruistic. Both AngelList and Open Angel give their founders inside access to companies in which they might be interested in investing, and Messrs. Ravikant and Nivi can use AngelList to indirectly market Venture Hacks' start-up guides."We're just trying to open up the way entrepreneurs and angels connect," said Mr. Ravikant, a serial entrepreneur who has founded companies such as Epinions Inc. Not all entrepreneurs have won investments. Jen Lilienstein, one of six entrepreneurs selected to pitch last month at an Open Angel forum in Los Angeles, hasn't raised any cash for her start-up, Kidzmet.com, which helps parents enroll their kids in extracurricular activities.But Ms. Lilienstein says the event was helpful because angels stuck around for hours to proffer advice. Ms. Lilienstein says she is now in "a dating phase" with investors and continuing conversations.Some pay-to-pitch services have changed their business models amid the criticism. In September, FundingUniverse LLC stopped charging a $125 fee for entrepreneurs to pitch at its events, attended by angels and loan providers like banks. The winners of its events receive a few thousand dollars in in-kind services, and sometimes, investments.FundingUniverse does, however, sell products through its website, such as a $99 online "diagnostic tool" that analyzes a business's funding prospects. "We think the services we do charge for are perfectly acceptable," says Alexander Lawrence, a partner at the company. Write to Scott Austin at scott.austin@dowjones.com

Mass. Race Highlights Health Care

Mon, 14 Jun 2010 10:17:57 EDT

By Naftali Bendavid BOSTON—High health-care costs are so sensitive in Massachusetts that when two health-care company executives suggested consumers could help by watching their weight, the Boston Herald ran a sarcastic page-one headline: "It's Your Fault, Fatso."That sensitivity has been at the forefront in a three-way race for governor, with incumbent Deval Patrick struggling to save his seat, and may offer a glimpse of how the health-care overhaul will play out on the national stage in elections to come.Four years after Massachusetts passed a health-care overhaul similar to the recently enacted national plan, small businesses are seeing their premiums rise 22% this year. People in the state have some of the highest premiums in the nation.Mr. Patrick, a Democrat, is being challenged by Charlie Baker, a Republican and former health-insurance executive, and Tim Cahill, an independent sharply critical of the state and federal health-care overhauls.But the political lessons of Massachusetts's experience aren't clear-cut. Polls show a majority in the state still support the 2006 overhaul, which has brought health coverage to more than 97% of the population, suggesting that once a system of near-universal health coverage takes root, it is hard to dislodge. Mr. Patrick reinvigorated his campaign by calling for even tighter government control of the health-care system. Earlier this year, he capped rate increases by insurance companies, to the cheers of many small businesses. He paints himself as making hard choices. "Everybody just points to somebody else: It's not us, it's the hospitals; it's not us, it's the specialists, or the doctors' practices, or the consumers," Mr. Patrick said in an interview. "Nobody's taking responsibility for it."The strains in Massachusetts suggest costs could also dog the national overhaul. "I think the Massachusetts plan covered a bunch of people and completely whiffed on the cost question," said Mr. Baker, who supported the state's overhaul but said Mr. Patrick has managed it poorly. Mr. Cahill, the state treasurer and a former Democrat, has roiled the gubernatorial race by blasting both the state and federal health-care overhauls. While he doesn't support a full repeal of the state plan, Mr. Cahill says the state can't afford to support the health coverage many people are getting.Mr. Patrick, in an energetic speech to the recent state Democratic convention, warned that his rivals would gut the state's health plan.A Suffolk University/7 News poll in late May found that Mr. Patrick had the support of 42% of voters, Mr. Baker 29% and Mr. Cahill 14%. Mr. Patrick's lead can't be attributed solely to the health issue. The governor has hit his stride with a stretch of vigorous campaigning recently, while Mr. Cahill came under withering attack in ads aired by the Republican Governors Association. But the health issue is clearly playing a prominent role in the campaign.Like the national overhaul, Massachusetts's plan features an exchange where consumers and small businesses can comparison-shop for coverage. Consumers who can't pay the whole tab themselves are eligible for subsidies. If a company has more than 10 employees, it must offer coverage or face a $295-a-year tax for each worker.In Massachusetts, a few prestigious hospitals enjoy considerable bargaining power. State and federal authorities are looking into allegations that Partners HealthCare System Inc., which operates Massachusetts General Hospital and Brigham and Women's Hospital, engaged in anti-competitive behavior. Insurers generally swallow the high prices and pass them on to people buying coverage.Partners has said it must compete for business in the state's highly competitive health care marketplace, and that it is working to help bring down costs in the state—for example, by contributing $40 million to help offset small business premiums. There is fairly broad agreement on how to fix the system. A state commission —including representatives of government, insurers, doctors and hospitals—recommended in July that Massachusetts adopt a "global payment" system. Health professionals would be paid for caring for patients over a certain period of time, rather than compensated for each test or treatment. Implementing the fixes, though, will take years. There is an election for governor in November. Mr. Patrick's answer is to cap insurance-company rate increases at 7.7% this year. Insurers say that is draconian, and have sued to reverse Mr. Patrick's action. The state recently reached a settlement with one of the insurers in the suit, Neighborhood Health Plan, allowing it to raise premiums by 7.7% for individuals and small businesses. Many prognosticators saw victory for Mr. Baker, the Republican, after a rough first term for Mr. Patrick. After his election in 2006—which made him the second African-American to be elected governor of any state, after former Virginia Gov. L. Douglas Wilder—Mr. Patrick spent about $10,000 on curtains for his office suite, garnering weeks of bad press, then was plunged into a recession and had to make tough budget cuts. Now the race is tighter. Mr. Patrick's insurance-company bashing does double duty as bashing of the Republican candidate. Mr. Baker is a former chief executive of Harvard Pilgrim Health Care, one of the state's largest insurers.Instead of caps on insurance-rate increases, Mr. Baker says the answer to rising premiums is transparency on cost and medical results—so people can see, for example, whether the high-priced Boston hospitals really outperform their lower-priced brethren.That has proved a hard sell. Mr. Baker may be getting some of the blame for the problem of costs but, unlike the governor, no credit for trying to fix it. "Obviously, anybody who is part of the health-care community and the health-insurance industry owns some piece of all the things that people don't like about how the system works," Mr. Baker said in an interview. "But I would argue that the governor owns that, too."The candidates also disagree about the state's finances. Like other states, Massachusetts is struggling with budget shortfalls. Supporters of the state health-care overhaul say its effect on the budget is almost a wash, because new subsidies are canceled out by lower costs to support hospitals' charity care. It is hard to tell, because Medicaid costs in the state are going up sharply but might have done so even without an overhaul.Mr. Cahill says the overhaul "has created a huge hole in our budget." He added, "If the federal plan is the Massachusetts plan writ large, then we should stop it, because we're going to be in the same place four or five years down the road."Mr. Patrick called such claims "a bit of a slander," adding, "Our cost issues here are not because of health-care reform. Health-care reform has added about 1% to the state budget." Write to Naftali Bendavid at naftali.bendavid@wsj.com

The Oyster Industry's Nemesis: Water

Tue, 20 Jul 2010 22:34:30 EDT

By Jeffrey Ball HOUMA, La.—Oysters are dying in their beds in the brackish marshes of southern Louisiana, but the culprit isn't oil spilling from the Gulf. It is, at least in part, fresh water.In April, soon after the oil spill started, Louisiana officials started opening gates along the levees of the Mississippi River, letting massive amounts of river water pour through man-made channels and into coastal marshes. It was a gambit—similar to opening a fire hose—to keep the encroaching oil at bay.By most accounts, the strategy succeeded in minimizing the amount of oil that entered the fertile and lucrative estuaries. But oyster farmers and scientists say it appears to have had one major side effect: the deaths of large numbers of oysters, water-filterers whose simplicity and sensitivity makes them early indicators of environmental influences that ultimately could hit other marsh dwellers too. State officials say it's unclear to what extent the fresh water releases are responsible for killing oysters.The oyster deaths in Louisiana—which produces more than a third of U.S. oysters, more than any other state—are just the latest reminder that efforts to protect this delicate ecosystem from the oil spill could produce environmental damage of their own. Louisiana and federal officials have quarreled over an ongoing state project to build large sand berms to fend off incoming oil, with some federal officials fearful that they could actually intensify erosion. And chemicals, known as dispersants, sprayed on the oil in the Gulf to break up oil slicks might contribute to underwater oil plumes that could harm marine life, some scientists say.Some marshes have been so inundated with fresh water that their salinity has plummeted to levels oysters can't easily survive, some scientists say. Deprived, at least temporarily, of the salty water they need, large numbers of the two-shelled crop that has defined this region's economy and culture for generations are dying off—even in parts of the Louisiana coast that appear to have been untouched by the spilled oil itself.Full-strength seawater typically contains roughly 35 parts salt per thousand parts water, scientists say. Some of the southern Louisiana waters most productive for oysters contain 15 or more parts salt per thousand parts water, said Earl Melancon, a biologist at Nicholls State University in Thibodaux, La. But in recent weeks, Mr. Melancon said, some waters in the vicinity of southern Louisiana's Barataria Bay have been found to have salinity levels below five parts salt per thousand parts water. Even the hardiest oysters, he said, have trouble surviving in that."They're dead, and they're dead because of fresh water," said Nick Collins, 38, an oysterman in Golden Meadow, La., citing government measurements of reduced salinity levels in the area. Over the century that Mr. Collins's family has been growing and harvesting oysters in Snail Bay, near Barataria Bay, innumerable hurricanes have sunk some of his family's boats and ripped apart their houses, he said. But no natural storm ever decimated the Collins Oyster Co.'s about 2,000 acres of oyster beds as much as the river water unleashed in recent weeks by state officials appears to have done. Mr. Collins surveyed some of his family's oyster grounds on Friday and found cluster after cluster of empty shells flapping apart—meaning the animal inside was dead.Wholesale oyster prices at P&J Oyster Co. have risen about 20% since the oil spill started and they are likely to rise further, said Al Sunseri, president of the longtime New Orleans oyster processor and distributor. "It's Economics 101," he said, citing the laws of supply and demand.Patrick Banks, the biologist at the Louisiana Department of Wildlife and Fisheries who oversees the state's oyster fishery, said his office recently tested the waters in one of the most productive parts of Barataria Bay and found that roughly 60% of the oysters had died. In other areas of the bay, he said, the mortality level was around 10%.One die-off a few weeks ago was so extensive that visible masses of oyster meat were floating on the bay's surface. "It looked like a fish kill," said Mr. Banks, explaining the kill occurred "so fast and was so large that the predators that normally would eat up the oyster meat just couldn't keep up." He blamed the deaths on the combination of summer heat and the salinity drop triggered by the opening of the fresh-water channels, known as "diversions"—a decision made by officials in another state office who were attempting environmental triage. "The state took the measure to try to protect the interior marshes," Mr. Banks said. "These are just some of the effects of that."A spokesman for the Louisiana Coastal Protection and Restoration Authority, the state entity that oversaw both the berm construction and the river-water release, said it is "obvious" that the state's fresh-water releases reduced salinity in the oyster beds. But he said those intentional releases were just one of several factors contributing to the salinity drop; others included rain and the natural flow of the river. Linking a specific number of oyster deaths to the fresh-water releases will be difficult, he said.The authority's chairman, Garret Graves, said in a written statement that state officials "are currently evaluating all of the adverse effects associated with the oil spill and that BP PLC "is expected to pay" for all spill-related damage.A BP spokeswoman said the company is "committed to paying all legitimate claims" but declined to say whether the oyster deaths are among them. In an underlying irony, the channels that ferried the river water into the marshes, apparently killing oysters, were built over the years largely at the oyster industry's behest.Decades ago, the construction of levees along the Mississippi River effectively stopped the river from flooding adjacent land. But that meant the river's fresh water no longer inundated the marshes each spring, annual rite of ecological renewal. That sent the salinity in many marshes too high, threatening oysters.After years of wrangling between the state and the oyster industry, officials built the channels as a way to restore some of the fresh water into the marshes.This spring, when the oil spill happened, state officials saw the channels as a tool to help keep out the oil.Mr. Melancon, the Nicholls State biologist, is attempting to measure the extent of oyster deaths from the fresh-water diversions. "Have these diversions created more harm than good?" he asked. "I am not going to be the person to make that determination. But it certainly has harmed the oyster industry more than the oil." Write to Jeffrey Ball at jeffrey.ball@wsj.com

Collateral Damage in Lending

Thu, 22 Jul 2010 17:39:56 EDT

By Emily Maltby Behind the credit squeeze on small business lies the collateral gap. Many small businesses, thwarted in efforts to get loans, are saying it takes money to get money. That's because property and equipment assets have fallen in value, so businesses seeking loans are being asked for alternative collateral, often in the form of cash so that the loan is backed in case the borrower defaults. The catch for most business owners is that if they had money sitting in reserve they wouldn't need a loan.According to Kathie Sowa, a commercial banking executive at Bank of America Corp., one of the nation's largest small-business lenders, basic underwriting standards haven't changed: Cash flow must be sufficient to support the loan, and there must be a secondary source of repayment. That collateral was typically a combination of accounts receivables, inventory, real estate, equipment, and other business or personal assets.But since real-estate and equipment values have plummeted, she says, business owners who may have landed loans in the past are now falling short of having sufficient assets. Cash can make up the difference. Tony Corso, owner of Mi-Box Moving & Storage, has been tripped up by the collateral gap. He wants to buy more trucks and storage containers to meet brisk customer demand, which will increase cash flow at his two-year old business, he says. But the banks that have entertained the loan applications from Mr. Corso's West Haverstraw, N.Y., firm are willing to help finance those purchases only under conditions Mr. Corso can't afford, he says. Three banks have asked that Mr. Corso use all the assets of his business as collateral—including his accounts receivables, containers, trucks and forklifts—and sign a personal guarantee, he says. Plus, he says he would have to deposit cash into a bank account, equal to the amount of the loan, which Mr. Corso had hoped would be at least $250,000. "The loan requirements are so onerous," says Mr. Corso, who says Mi-Box pulled in $150,000 in revenue last year and hopes to break even this year. Thomas Kelly, a spokesman for JP Morgan Chase & Co., one of the banks Mr. Corso approached, adds, "We, like most banks, primarily focus our small-business lending on cash-flow analysis. If the cash flow won't support the loan, we may accept marketable securities and deposits as collateral."In other words, owners need to put cash in a certificate of deposit or an escrow account that can essentially guarantee the loan in case of default. M&T Bank Corp. echoed statements from Bank of America and Chase. "Our loan-to-value ratios and other credit standards have not changed," says spokesman Michael Zabel, adding that keeping with the standards "might be more difficult than it was before" and that cash deposits are "a possible solution."Chase and M&T declined to comment on Mr. Corso's situation."I have talked to a number of business owners who have had their loans not renewed because they don't have a compensating balance or anything to use as additional collateral," says Larry Strain, director of the Small Business Development Center at the University of West Florida in Pensacola.Cash has been a popular form of collateral in decades past, especially when asset values—such as crops for farming loans—have been uncertain, Mr. Strain explains. "But to most businesses it is foreign," he says, "because the lending environment for the last 20 years has been built on guarantees and the expectation of ever-increasing property values."In some cases, hard assets, personal guarantees and cash appear to cover the loan balance several times over. But, Mr. Strain says, the quick-sale of hard assets may amount to only cents on the dollar. "[Lenders] have to satisfy examiners and have to tie up everything the person owns," he says. "There's only so much blood in that rock." Joseph Jackson, owner of Jackson Pianos LLC in St. Louis, also has had trouble getting a loan. The business previously grew by buying commercial spaces for repair work and for a retail showroom. The business grew 35% last year and exceeded $500,000 in revenue, he says. Now he's ready to expand into a larger building, but the banks aren't willing to help this time, despite, he says, his excellent personal credit score that's between 760 and 800. He didn't disclose the names of the banks.When his regional bank, which has serviced his company for years, rejected the loan application without explanation, he says he turned to two larger lenders who told him that his cash flow was insufficient and that he should have more money in untouched accounts, though they stopped short of specifically saying how much he would need. Banks still said no as he dropped his request to $90,000 from $300,000. "We've already missed our chance on a few buildings because of this," he says, adding that when he finds the next building, "hopefully, if they ask for 20% or 30% down, I'll be ready with 40% down so it will go through." Write to Emily Maltby at emily.maltby@wsj.com

Turning Mess Into Success

Fri, 30 Jul 2010 11:19:19 EDT

By Phaedra Hise Matt Paxton could smell the building before he even saw it. The six-car garage was a tasteful addition to the house, but in the summer's early heat outside Raleigh, N.C., it was putting off a heavy stink of rotting food, mold and urine. Mr. Paxton and his five-man crew wrestled open the broken electric door to reveal an eight-foot high wall of black trash bags filling the building. The stench hit so hard that one of the crew members immediately doubled over and started vomiting. Mr. Paxton smiled and waded in. This isn't unusual work for Mr. Paxton's four-year-old company, Clutter Cleaner, which is featured on A&E's "Hoarders" and specializes in cleaning up after extreme clutterers – people who acquire so many possessions that they interfere with daily life. With just six crew members, he is one of the few independent cleaning companies that will take any job, no matter how time-intensive or hard core. Competitor 1-800-Got-Junk LLC, a Vancouver franchise also featured on the show, routinely refers the dirtiest (and often, the most emotionally complicated) jobs to him. Mr. Paxton, 39 years old, started the cleaning business in 2006, printing up $200 worth of flyers and distributing them through his hometown of Richmond, Va. Prior to that, Mr. Paxton's eclectic background included stints starting a liquid sandal soap company, designing triathlon wetsuits, and gambling in Lake Tahoe (after which, he says, his bookie broke his nose). "I gave up on jobs a long time ago," he says. "I'm unhireable. I'm an entrepreneur." Although he intended to focus on senior relocation with Clutter Cleaner, his first client was a hoarder. "We didn't know what hoarding was at that point," Mr. Paxton says. "We just knew there was stuff stacked taller than us and we couldn't get around." He charged $700 for the three-day job, which entailed emptying the man's house of an extensive collection of art, collectibles and electric trains, and arranging a giant yard sale. Today, more cognizant of the work involved, Mr. Paxton estimates he'd charge $7,000 or $8,000, his average fee. As he took on more hoarding clients, Mr. Paxton quickly noticed that the messier the job, the less likely his competitors were to take it. "I realized this was where we needed to go," he says. Not only could he charge a premium, but the emotional rewards were great. In extreme cases, clients have been contacted by authorities and are close to losing their homes or their children. Mr. Paxton has sandy brown hair and a blunt manner of speaking tempered by a wicked sense of humor. With hoarders, he also employs emotional finesse, respect and a lot of patience, as do his crew members. Many have struggled with addictions themselves, including gambling, alcohol and drugs. "We're a team of unwanteds," Mr. Paxton says. "These are guys who have failed every where else. My clients have too, and we connect." "Matt treats people as equals," says Becky, who hired him to clean the trash-bag-filled Raleigh garage, at the family house where her brother was living (Mr. Paxton is rarely hired by hoarders themselves; more often it's family members.). She prefers that the family's last name not be used to protect her brother's privacy. Becky paid about $12,000 from her parents' estate for Mr. Paxton's crew to help her brother sort through 20,000 pounds of trash for valuables and family heirlooms. "Initially my brother was standoff-ish," she says. "It was very powerful to watch how he began to let Matt into his world." In the company's early days, Mr. Paxton struggled with cash flow and decided to take a creative approach to get the company's name out. Figuring the business was perfect for television, he posted an appeal on Facebook, asking for connections. A friend of a friend pointed him toward organization guru Peter Walsh, from the television show "Clean Sweep" on the TLC channel. Mr. Paxton says the two spoke by phone in the fall of 2008, and a few months later Walsh referred Mr. Paxton to Screaming Flea Productions, which was casting A&E's "Hoarders." Producer Jodi Flynn made sure Mr. Paxton was on an early episode of the hit series. "Matt is great about taking on anything," she says. "He's not afraid to get in there and clean. Also, he's very likeable. He's a guy you would hang out with." Within 24 hours of air time, Mr. Paxton had booked a $10,000 hoarding job. He has since appeared in more than a dozen episodes and is under contract to do at least ten more for season three, which premiers in September. "The television exposure means that we don't have to advertise anymore," Mr. Paxton says. "And we don't have to explain what we do. We can sell our service in a five-second sound bite." But Clutter Cleaner is still a small business, with revenue of about $500,000 a year."Hoarding isn't going away; this is just the beginning," Mr. Paxton says. He is exploring several options for growing his business, including private-label cleaning products and Clutter Cleaner franchising. He also plans to continue the partnership with 1-800-Got-Junk, taking the most extreme jobs and referring the easier ones to 1-800-Got-Junk for a small finder's fee. Mr. Paxton prefers to keep working with clients who are, as he says, "at the extreme edges of their lives." Often, they desperately want to change but don't know how. "I get to see them smile and invite friends and family into their houses for the first time in decades," he says. "I get to help them turn their lives around."

Three Best Ways to Become Eco-Friendly

Fri, 11 Jun 2010 19:01:00 EDT

By Sarah E. Needleman As images of the Gulf oil spill disaster continue to flash on TV monitors, small-business owners may be thinking about how their ventures can help safeguard the environment.Going green can be just as beneficial for small companies as large concerns. Not only is it good for the Earth, but customers and employees might request "eco-friendly" products and practices. And, adopting environmentally sound practices may even produce cost savings.For any entrepreneur with a new commitment to green, there are several simple business practices to adopt, says Greg Unruh, author of "Earth, Inc.: Using Nature's Rules to Build Sustainable Profits." One the easiest is to make a conscious effort to buy sustainable business supplies, such as energy-efficient light bulbs, recycled binders and pens with nontoxic ink. Most manufacturers "now identify products they sell that are environmentally friendly," explains Mr. Unruh, also a professor of global business at Thunderbird School of Global Management in Glendale, Ariz. "You don't have to do the research on your own." Finding green advice is also easy these days. Many sites, including Planet Green, Sierra Club and Mother Nature Network provide tips on everything from maximizing computer efficiency to ramping up office recycling efforts. Here are three more ways for small businesses to become eco-friendly: 1. Recycle and resell electronics. Parts from no-longer-functioning computers, fax machines and copiers can be given a new lease on life, even if they no longer function properly, says Ken Beyer, chief executive officer of CloudBlue Technologies Inc. in Alpharetta, Ga., which help businesses resell unwanted electronic goods. "Oftentimes the value we get is more than the fee that we charge, so it ends up being a net positive for the customer," he says. Electronics recyclers like CloudBlue also typically remove any data lingering on the parts they handle before reselling them, which can protect businesses from inadvertently exposing sensitive information, Mr. Beyer adds. Other businesses that buy old electronics include Gazelle, YouRenew and NextWorth. For a list of resources to sell or just donate unwanted electronics, check out digitaltips.org, a site from the Consumer Electronics Association. 2. Invest in renewable energy. While equipment like wind turbines and solar panels are typically pricey, federal and state government agencies are offering business owners tax breaks for installing them. For example, the Treasury Department's 1603 program awards businesses with cash payments of up to 30% off the total cost of such projects, including companies that install renewable energy equipment on behalf of clients. Business owners who've taken advantage of such incentives say they expect to make up the balance – and possibly come out ahead – by spending less on utility bills and selling renewable energy credits or any excess energy they produce to power-supply companies. For more, including downsides to renewable energy investments, see "Businesses Wait for Green Energy Payback." 3. Solicit ideas from your staff. In April, Park Howell, owner of Park & Co., a Phoenix, Ariz., advertising agency, began gathering suggestions from his 16 employees on how to make the company greener to cut costs. He did this by installing a software program from GreenNurture LLC, a start-up company in Tempe, Ariz., that allows workers to electronically submit sustainability ideas and vote on them for points. Employees can then apply those points toward the purchase of goods from more than 2,400 merchants affiliated with RecycleBank, an organization that's partners with GreenNurture. The program is available for a monthly fee of $2 per employee through January, after which that rate increases to $4 for small businesses. Mr. Howell says he plans on implementing one idea he's gotten so far right away -- to limit employees to one package of paper a year unless they can offer a compelling reason why they need more. "They'll have to petition the entire agency for another ream," he says. Write to Sarah E. Needleman at sarah.needleman@wsj.com

Smaller Players Will Find Gulf Tougher

Tue, 22 Jun 2010 10:20:01 EDT

By Ángel González The troubles of behemoth BP PLC now threaten the small oil and gas companies that helped unlock the Gulf of Mexico's deepwater business. Increased regulation and higher operating costs will likely follow the BP oil spill, clouding the prospects of exploration and production companies that don't have the financial clout of energy giants such as Chevron Corp. and Exxon Mobil Corp. Most immediately, deepwater exploration is temporarily frozen by a federal drilling moratorium, squeezing the smaller outfits and the oil field services companies that work in the Gulf. On Monday, a federal court in New Orleans began to hear the case of a group of small offshore service suppliers that sued the government to lift the ban. A ruling is expected by noon on Wednesday.Also Monday, Interior Secretary Ken Salazar changed the name of the agency that oversees offshore drilling from the Minerals Management Service to the Bureau of Ocean Energy Management, Regulation and Enforcement, as he splits up the agency to avoid "conflicting missions" of revenue collection and safety oversight. He swore in Michael Bromwich, a former Justice Department inspector general, to helm the agency, succeeding Elizabeth Birnbaum, who resigned under pressure. Meanwhile, the two-month-old spill is giving investors an eyeful of the high cost of making mistakes in the Gulf. So far, BP has spent more than $2 billion in the cleanup effort and has agreed to set aside $20 billion for economic damages, an amount that would wipe out smaller companies fielding rigs in the deepwater Gulf, such as Plains Exploration & Production Co. and Noble Energy Inc.Even if the moratorium is lifted, drilling in deep water in the U.S. will become more expensive in the long term, and some companies and investors are asking if it's worth the effort.Plains Exploration CEO James Flores said in a conference call in late May that the company was considering selling some of its hard-earned deepwater Gulf assets. "Our success has created a lot of opportunity for us, but also a lot of exposure to deep water that we may not need or can stand, with the new costs and rates and liabilities that are out there," Mr. Flores said.The spill is disrupting a business that helped build the Gulf of Mexico into one of the most productive offshore oil and gas regions in the world. In the early 1990s, relatively small players like Kerr-McGee, Ocean Energy and Unocal were acquiring acreage in deep water; their finds helped prove the Gulf's worth to bigger brethren like Chevron, Devon Energy Corp. and Anadarko Petroleum Corp., which later bought these companies at a premium. Newer generations of small players, while they mostly operate in the shadow of majors like BP and Royal Dutch Shell PLC, provide valuable capital that helps mitigate the huge costs—and huge risks—of drilling in the area. Some of these also go solo, risking big bucks for a big payoff. "BP can screw up the business for a lot of smaller companies that added a lot of value to the Gulf of Mexico," said David Heikkinen, an analyst with energy research firm Tudor Pickering Holt. Cobalt International Energy Inc. is among the companies threatened by tightening regulation. The private-equity-backed, pure-play exploration firm, which has no oil and gas production, went public in December. In late May, Cobalt said a U.S. government moratorium on drilling would delay the planned drilling of an exploratory well in the Gulf by six months. The company, which didn't return calls seeking comment, has said it will forge ahead with its program. Bill Herbert, an analyst with Houston energy investment bank Simmons & Co., is skeptical. "Cobalt's future is pretty unclear right now," he said. ATP Oil and Gas Corp., a Houston company that began focusing on deep water in 2004, expected to see its 2010 production double to at least 12 million barrels of oil and gas but has now dropped its guidance to between 9 million and 10 million. ATP didn't return calls seeking comment.In Monday's New Orleans hearing, Judge Martin Feldman of U.S. District Court for the Eastern District of Louisiana said that he would seek to rule on the moratorium "no later" than Wednesday at noon, and possibly on Tuesday, according to case manager Steve Hill.The lawsuit was spearheaded by Hornbeck Offshore Services LLC, of Covington, La. Bigger offshore drillers are also trying to overturn the moratorium. On Friday, Diamond Offshore Co., one of the largest offshore drillers in the world, filed a similar claim against the Interior Department in federal court in Houston, a sign of the growing revolt in the Gulf Coast against the ban.Most of the sector's players are waiting for the new regulations to dispel the uncertainty, and some are optimistic. Noble Energy Chief Executive Charles Davidson said at the company's annual analyst meeting in June that costs will likely rise, diminishing some of the value of Noble's deepwater investments, but that exploration in the area would hold up in the long term because the government is "well aware of the importance of the independents in the Gulf of Mexico." Noble didn't reply to a request for comment. But the rising cost of insurance premiums, longer estimated time frames for completing projects and the potential lifting of a $75 million cap on oil spill liability make the independents' role uncertain."I don't think shareholders are going to want small-cap exploration and production companies in the deep water," Mr. Herbert said. "It's cost-prohibitive, and the risks are too great." Write to Ángel González at angel.gonzalez@wsj.com

Some TARP Programs Curtailed

Wed, 21 Jul 2010 10:28:14 EDT

By Deborah Solomon WASHINGTON—The Treasury Department, under Congressional orders to shrink and end sooner the much-maligned Troubled Asset Relief Program, plans to curtail two programs originally intended to help consumer and small-business lending.Treasury officials say they plan to end a long-delayed, never-utilized $30 billion program designed to boost small-business lending and cut the amount of money available for a Federal Reserve lending program. The Treasury will also stop creating any new programs to stabilize the financial sector.The moves are expected to have minimal impact since the programs were not being used to the extent originally envisioned. The Fed's Term Asset-Backed Lending Facility, which provided financing to bolster issuance of consumer and business loans, was used less than anticipated after markets stabilized.The Treasury's small-business program, which never got off the ground, is expected to be replaced by a $30 billion lending fund. The House has already authorized the fund and the Senate could vote this week.The Treasury's steps stem from a provision of the recently passed financial overhaul requiring the Treasury to cut TARP's spending authority to $475 billion from $700 billion and cease spending on new any programs. The provision brings forward the end of the government's ability to use TARP to fund any new programs retroactively to June 25 from Oct. 3. The early end of TARP was included during last-minute negotiations between House and Senate leaders as a way to help pay for the new financial regulation. The nonpartisan Congressional Budget Office estimates it will save the government $11 billion.President Barack Obama is expected to sign the legislation into law Wednesday.There is some concern inside and outside the administration that the government could be hamstrung if financial conditions were to worsen, since the Treasury would not have additional funds at its disposal. A top Treasury official said the administration was willing to give up that flexibility to achieve a broad revamp of the nation's financial architecture."What we're really doing here is shifting from achieving financial stability through TARP to achieving it through regulatory reform and all the capacities now created through this legislation to deal with the crisis," said Herb Allison, Treasury's assistant secretary for Financial Stability. Mr. Allison said the bill's passage will "accelerate the wind down of TARP" that has already been under way for about a year. The Treasury has so far committed $535.5 billion of TARP's $700 billion to various programs. It will have to reduce those commitments by $60.5 billion to satisfy the new $475 billion limit.Treasury can continue to operate existing initiatives, including its Capital Purchase Program, which invested $205 billion into hundreds of banks, programs to help struggling homeowners and efforts to help specific companies, such as American International Group Inc. Funds repaid or profits earned must be used to reduce the U.S. debt.Republicans have assailed the move as a budget gimmick. In part, they cite the fact that the Treasury is allowed to reallocate funds among existing programs. "TARP continues to exist ... they can still spend the same pot of money, not for new purposes but on the old purposes," said Texas Republican Rep. Jeb Hensarling, who has long called for abolishing the bailout program.Some TARP initiatives have already been shuttered and others reduced from their original size. More than $198 billion has been repaid, and the government expects the bailout to cost far less than originally envisioned—about $105 billion. Tuesday, the Federal Reserve said the Treasury would reduce its commitment to backstop the Term Asset-Backed Lending Facility to $4.3 billion from $20 billion. The Fed originally authorized up to $200 billion in TALF loans but only $43 billion were outstanding when the program closed June 30.Douglas Elliott, a fellow with the Brookings Institution in Washington, D.C., said the financial sector has stabilized to the point that it is probably not an issue to end TARP early, although he added it could limit the administration's efforts to attack new problems. "Governments are good at spending money that they are authorized to spend, so even though October doesn't sound that far away, this could actually cause a change in what they do, compared with what they could have done," he said. Write to Deborah Solomon at deborah.solomon@wsj.com

CIT Prepays $1.25 Billion In Debt

Fri, 25 Jun 2010 10:51:09 EDT

By Matt Jarzemsky CIT Group Inc. prepaid $1.25 billion of debt after securitizing receivables and selling assets, relieving part of the debt burden that has weighed on the company since its exit from bankruptcy. The prepayment made Wednesday and disclosed Thursday in a filing with the Securities and Exchange Commission consisted of a $950 million mandatory portion, required under its credit agreement after the securitization of receivables and the sale of assets, and $300 million paid voluntarily by the lender to small businesses.The company had said in April that it intended to make $1.5 billion in prepayments after seeing liquidity and cash flow improve, and that total cash available to repay debt increased to $5.5 billion as of the end of the first quarter. The company has said the loan payments are eating into its profitability.The company emerged from bankruptcy protection in December and was profitable in the first quarter, beating analysts' expectations for a loss. But it exited bankruptcy protection with a $7.5 billion credit facility, the repayment of which is one of its main challenges. CIT posted a first-quarter profit of $97.3 million.The 102-year-old institution, a crucial conduit of funds to small and midsized lenders, fell victim to the credit crisis and eventually cut a deal with lenders that pushed it into bankruptcy protection. It traditionally has relied on bonds and commercial paper to raise funds, which it then lent out at a higher interest rate. That model proved weak amid the credit crisis when CIT had difficulty raising capital cheaply. In 4 p.m. New York Stock Exchange composite trading, CIT's shares fell 88 cents, or 2.4%, to $35.72. Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com

You, Too, May Be a Winner!

Mon, 21 Jun 2010 23:56:21 EDT

By Dale Buss (Please see Corrections and Amplifications below.) A growing number of corporations, nonprofits and universities are giving small companies a chance at a big break—by holding contests.Covering a broad range of categories, from the most promising women entrepreneurs to the strongest tech ideas, these competitions offer a number of powerful lures. Some offer cash prizes that can range into the six figures. Then there are longer-term rewards, such as increased exposure and grist for future marketing campaigns. Even if they don't win, entrepreneurs often come away with valuable critiques from expert panels of judges.But there's an art to deciding which contests to enter and making the best case for your company. Here are some keys to finding, entering and winning these competitions.The best place to start looking for contests is AwardSync.com, a site that helps groups publicize their awards. Once you've focused in on some competitions, the groups' own sites can be valuable. For instance, you could scour their sites for more information about what they do—which might give you ideas about what to highlight in your presentation.At the outset, start small with awards from, say, local chapters of national organizations. This has a number of benefits. You can refine your case and practice your presentation without as much at stake. You also stand a better chance of winning a smaller contest—and judges of larger events like to see that you have some victories under your belt.Once you've homed in on some contests, network like crazy. Call previous winners to see what worked for them; more than anyone else, they'll understand why you're in the hunt—and typically they have nothing to lose because they're ineligible to win again. If you can get into the audience for an award's oral presentations, go do it one year, see what makes the finalists stand out, and then apply the next year.And don't be discouraged if you find a good contest but don't meet all the criteria. Sometimes sponsors will bend the rules. "There's often more flexibility than people appreciate, especially in the early stages," says Nell Merlino, founder of Count Me In for Women's Economic Independence Inc., a nonprofit that co-sponsors the Make Mine a Million $ Business Award with American Express Co.In her competition, for instance, she says that the judges like would-be contestants who believe in themselves and their companies. The judges might let a contestant enter who didn't meet one of the criteria, such as the minimum annual revenue, but had the initiative to ask if the rule were important, and if it could be bent."You're trying to encourage people to really go for it and grow their business," Ms. Merlino says. "If there are 10 criteria and they're missing or short on two, and they know those probably aren't the deciding factors, I would say try it."A typical competition starts with a written application, sometimes along with a business plan. It's important to make this as detailed and compelling as possible. Clearly present your product, service or idea. Underscore facts that set you apart from others in your field. Highlight the capabilities of your management team. Demonstrate a thorough understanding of your customers. Be specific. Experts say it's surprising how many entrants don't simply and thoroughly answer the questions."Show measurable, quantitative achievements such as percent growth, number of employees, new-client wins, new-product launches, growth in the customer base," says Kirsten Osolind, founder of Re:Invention Marketing, in Coronado, Calif. "Even mention endorsements that you've gotten from folks such as customers or bloggers."One caveat. In your written application, you're turning over sensitive company information, so entrust it only to highly reliable parties. Research the organizations or companies offering the prizes; if they aren't well known, make sure they can be trusted. Talk to previous applicants if possible."Don't give out a whole lot of precious information to someone who might be able to scam you or use information other than how you intended it," says Jade Boneff-Walsh, global vice president of the Entrepreneurs' Organization, an Alexandria, Va., advocacy and networking group that sponsors contests for its members.In many contests, the finalists must make at least one oral presentation. This provides the chance to make a different sort of impression on judges. Instead of winning them over with data and reasoned arguments, you can go for the gut—such as letting them know how passionate you are about your ideas or how much you care about customers. "There's a certain amount of theater involved," says Jonathan Rosen, executive director of the entrepreneurship program at Boston University, which stages contests for student-run companies and others. "How well can you get people excited about whether this is an idea worth pursuing?"But even in showmanship, humility is a good vibe. "You need some confidence and swagger and to believe in your ideas, but most judges will know if you're blowing smoke," says Tim Haynes, vice president of TechColumbus, an Ohio outfit that sponsors an award for tech entrepreneurs.After you have a victory under your belt, think about the next contest you enter and how it can serve your broader goals.For instance, Carrie Bell's award-application strategy followed her company's diversification into new markets. In 2006, she launched Madcapz LLC to retail headwear as gifts for cancer patients who'd lost their hair. When Ms. Bell targeted golf accessories as an expansion market, she sought out contests that would give her some credibility with retailers. She found, applied for and won a contest for sports and health products, the Gear Award for Excellence from ShapeYou.com, a health and fitness Web site."There was no monetary award, but it has given me lots of visibility in the golf market," says the entrepreneur in Larchmont, N.Y. "Now I'm researching awards in the tennis market and the children's market, because I'm moving into those segments also."And even if you take home a big prize, don't be afraid to enter smaller contests if you think you have a good shot at winning them and garnering greater visibility. Consider Amanda Puppo. Ms. Puppo, owner of MarketReach LLC in Hightstown, N.J., was named the area's Young Entrepreneur of the Year in 2004 by the U.S. Small Business Administration and has been a finalist for two other high-profile prizes. Now, Ms. Puppo is pivoting to smaller contests where her odds improve. "I'm not going to join another general business competition where there are 5,000 other entrepreneurs," says the 35-year-old entrepreneur. "Next year I'll probably enter the local '40 under 40' competition, where I'm more likely to win because there's a smaller pool." Mr. Buss is a writer in Rochester Hills, Mich. He can be reached at reports@wsj.com. Corrections & Amplifications Max Robinson, founder director of Kromek, a U.K.-based digital color-imaging technology company, says that having one author for a business-contest submission last year made for a more "coherent and lucid story" in the document. A previous version of this article attributed the quote to Gideon Miller, chief executive of Adaptive Imaging Technologies Ltd.

Risky 'Search Funds' Draw Dollars

Mon, 12 Jul 2010 10:51:00 EDT

By Kyle Stock "Search" funds, small pools of money that seek to buy and manage small companies, are drawing a record number of would-be entrepreneurs and a new crop of investors, though they have realized few successes.Roughly 50 search funds were launched in the last three years, with each consecutive year marking a new high, according to a study to be released Monday by Stanford University, where the idea was born almost 30 years ago. John Fowler, who profitably bought and sold a logistics company through a search fund, now is approached by one or two people a week looking to forge a similar path. "It was kind of just a little secret of Harvard and Stanford 10 years ago, but it's not a secret anymore," Mr. Fowler says. Search funds work essentially like tiny private-equity shops. One or two prospective entrepreneurs round up between $200,000 and $750,000 from friends, family and outside investors to finance the hunt for an attractive business, a process that typically takes 18 months. If a deal is reached with the owners, the search-fund principals seek second rounds of financing from their initial investors to buy the company—typically for between $5 million and $10 million. Investors accept equity stakes in the purchased business, while the search-fund principals try to expand the business, generate returns and eventually sell it for a profit. On the map of the financial world, search funds are a tiny and little-known province; only 141 such funds have been launched to date. But the recent crisis, and the fissures that it spread throughout high finance, cultivated new interest in the strategy. Investors, soured by the performance of bigger markets, were lured to this segment of businesses too small to even gain the attention of private-equity shops. At the same time, midcareer professionals facing an uncertain future on Wall Street warmed to the idea of running tiny companies for a dedicated group of backers. G.J. King, for example, left a job in Goldman Sachs Group's private-wealth management unit to study search funds at Stanford. Mr. King, 27 years old and his partner, Will Bressman, started fund raising in February as they finished business school and will start their search for a target company next month. "I feared that if I returned to a traditional job, or a place like Goldman, I would always have that what-if wonder," Mr. King said. Mr. King and other recent search-fund players have tapped into a number of investors dedicated to the strategy. Nine out of 10 search funds are now backed by "serial" investors, according to the Stanford study. The group is so small and fraternal that it has been dubbed "the search-fund mafia," a moniker that also speaks to the collective power these investors hold to bless or kill fund-raising prospectsDespite the new interest, however, the strategy is arguably riskier than ever. Nearly one-third of search funds launched to date have lost all their investors' money, compared with 28% in 2007, the last time Stanford completed a search-fund study. And just 38% of all search funds have posted a positive return, down from 48% two years ago.Average returns, skewed by a few huge successes, were roughly 37%, down from 52% in 2007. Alpine Investors, a San Francisco-based firm that buys stakes in small companies, steers clear of most search funds, though it has seen a spike in search-fund pitches. Founder Graham Weaver says the key to the strategy's success is finding the rare candidate who excels at both finding and buying a business and handling the duties of a small-scale CEO. "That's a pretty unique skill-set," Mr. Weaver says. "They're teaching themselves to be a [private-equity] firm in two years. I've been in PE for 15 years and my learning curve is still steep."The purchase of a small business is just the start of a very unglamorous race, as many search fund managers describe it. While his former classmates were cashing Wall Street signing bonuses, Peter Day was making earrings and packing boxes with coffee mugs and dog toys. Mr. Day, a 35-year-old former investment banker, has now spent seven years at the helm of Eugene, Ore.-based Oak Patch Gifts."It's kind of the business equivalent of owning a small family farm," Mr. Day says. "It's got a nice ring to it—a romance—but the day-to-day reality is very different from what people imagine."What keeps everyone in the game, searchers and investors alike, is the prospect of a home run—the huge success story on which any venture-capital model depends. Several industry-leading companies have grown from search funds, returning investors' money many times over in the process. Asurion, one of the world's largest providers of cellphone insurance with more than 5,000 employees, has grown from an $8 million search-fund acquisition in 1995. Write to Kyle Stock at kyles@fins.com

Is Start-Up Savvy in Your DNA?

Wed, 16 Jun 2010 11:51:21 EDT

By Dyan Machan Ross Staszak and Aksel Güngör have just graduated from Drexel University. Both want to start companies, and both are wondering whether to study entrepreneurship in grad school. But perhaps the question they should be asking is this: Do they have the right DNA?We've always had a hunch that entrepreneurs are a different breed, but some academics are taking that idea quite literally. Turns out, part of being an entrepreneur may be innate, and researchers are getting close to identifying genes associated with start-up savvy. According to Case Western Reserve University economics professor Scott Shane, author of Born Entrepreneurs, Born Leaders, 40 percent of the variation in the tendency to be an entrepreneur is inherited. His work puts a new spin on an age-old question: Can classroom learning really teach you how to succeed?It's an issue that's likely to cause heartburn for educators. Entrepreneurial education is a fast-growing business: In 1999, there were fewer than 100 undergraduate and graduate entrepreneurial programs, but today there are at least 700, according to the Princeton Review. And the tuition of a grad-level entrepreneur program averages nearly $40,000 a year—quite a bit to pay if Mom and Dad have already given you what it takes.There's no such thing as a start-up gene, alas, but researchers think they've found a group of personality traits that successful entrepreneurs share, including higher-than-average extroversion, openness to experience and even the capacity to be disagreeable—a useful predisposition for someone who drives hard bargains. And other research suggests that many of these qualities may be related to people's genetic makeup.To Mr. Shane's thinking, it's not a big leap from this notion to the idea of DNA-based education. People who are genetically inclined to be risk takers, for example, might be trained to evaluate opportunities differently from people predisposed to be conservative. And instructors could customize entrepreneurship education for the people who can best benefit from it. "Instead of assuming everyone is equal and will respond to education the same way," Mr. Shane says, "we will be able to look at genetic predispositions and figure out what fits."To many, the heredity-is-destiny idea is disturbingly undemocratic. Others find it intriguing. "Most people, over a beer, would admit there's probably some truth in the nature-over-nurture argument," says Josh Lerner, a professor at Harvard Business School. But, he adds, educators shouldn't restrict education to only the people deemed to have personality traits that offer the most potential. Fair enough, says Mr. Shane. But if you're a basketball coach, and one of your players is under 6 feet while another is over 7 feet, should you train them to play the positions that suit their bodies best, or should you "just ignore the genetic differences"?For students like Messrs. Staszak and Güngör, a lot of money and time ride on this debate. Mr. Staszak, an engineering major, wants to study general business first. Mr. Güngör, a business major, thinks you learn entrepreneurship "from just doing it." And the two have done it: Two years ago they launched a beverage-delivery service called Drexel Drinks. They didn't make much money, but both learned a lot about network building and hard work. So does this mean they have the right genes, if such exist? They pause, then decide to sidestep the question. "I like wearing jeans!" quips Mr. Staszak. Write to Dyan Machan at dmachan@hearst.com

Lights Out Means Lost Sales

Fri, 23 Jul 2010 12:55:33 EDT

By Sarah E. Needleman On a recent morning, Frank Christopher arrived at the New York nightclub he co-owns to find its online reservation system wasn't working. He soon learned that a power outage had occurred the night before, costing the small business, called Smoke Jazz and Supper Club, an estimated $1,500 in revenue because customers couldn't order tickets."We forgot to put a backup power supply on it," says Mr. Frank. "We learned the hard way."Power outages are a common hindrance year-round, but especially in summer when excessive use of air conditioners strain electrical systems. Despite the potential damage these can cause businesses—from data and inventory losses to halted productivity and unfavorable working conditions—experts on emergency preparedness say many small companies avoid taking proactive measures."Most entrepreneurs are very positive. They're not thinking they will ever encounter disaster," says James Rivera, associate administrator for the Office of Disaster Assistance at the U.S. Small Business Administration in Washington. Some business owners also falsely assume that insurance providers or government agencies like the SBA can help them recover losses due to power outages, Mr. Rivera adds. But that may not be the case if insurance coverage isn't sufficient or if the economic impact of the power outage doesn't fall under the government's guidelines. The last time the SBA approved business loans for an outage-related emergency was four years ago this month when the lights went out in the Queens, N.Y., area for nine days. Eighteen loans were approved for a total of $1.5 million. A study from the Pace Energy and Climate Center at Pace University Law School, meanwhile, found that businesses suffered $111 million in damages resulting from the blackout.Between January and April of this year, 35 major power outages occurred in the U.S., mostly due to unusually severe weather conditions, up from just nine during the same period in 2000, according to the U.S. Department of Energy's Energy Information Administration. The number fluctuates each year, largely based on Mother Nature. In 2009, there were 44 major power outages between January and April. Due to increased reliance on high-tech items like electronic cash registers and alarm systems, businesses may be prone to experiencing more headaches these days when the power fails than in past outages, says Jim Owens, a spokesman for the Edison Electric Institute, a Washington association that represents investor-owned utilities nationwide.But the solution for preventing outage-related damages is often relatively simple and costs less than the potential losses they help to circumvent. For example, backup energy suppliers such as batteries and generators can typically keep electrical machinery operating long enough for a business owner to wrap up a project and safely shut their equipment down. "It's insurance," says George Pauli, owner of Great Embroidery LLC in Mesa, Ariz., of the batteries he has for two sewing machines he uses to stitch logos on up to 12 shirts at a time. He says about six power outages occur in his area a year, and before he invested roughly $700 in the back-up batteries, he lost about $120 worth of inventory every time—even when the outages lasted just a few minutes—because the machines' needles wouldn't resume exactly where they left off.For businesses looking to safeguard computers during a power outage, installing protective software on each unit may prevent data from getting destroyed. Richard Grebinger, vice president and co-owner of National Tax Consultants Inc., says the accounting firm is grateful it took this precaution three years ago. A storm knocked power out for five days at part of its Merrick, N.Y., office this past spring—its busiest season—but the loss of electricity didn't bring business to a screeching halt. The firm's computers remained intact and employees were able to move them to an area in the building that wasn't affected by the storm. Mr. Grebinger estimates that the protective software saved the firm "tens of thousands of dollars" in potential damages from lost data and productivity. "It would've been a nightmare," he says.Strategies for protecting against damages caused by power failures aren't always fool-proof. Michael D. Bailey, a managing partner at Applied Cognetics LLC in Brooklyn, N.Y., says his software company uses the services of data centers around the world to ensure that applications it provides to customers are always running—even during blackouts. But a few weeks ago, one of them failed for about six hours when the power went out. "They offer a money-back guarantee, but in a situation like this, you don't want your money back, says Mr. Bailey, "you just want it to work." In hindsight, he says he should've asked the datacenter to prove it could deliver as promised. "The only way to know is to test it." Write to Sarah E. Needleman at sarah.needleman@wsj.com

VCs Stretched on Many Boards

Thu, 29 Jul 2010 09:53:30 EDT

By Scott Austin Entrepreneurs looking for sage advice from their investors say they're encountering a problem: Some venture capitalists, stung by the economy, are juggling too many companies.As the troubled economy elongates the average time it takes for a young company to find a buyer or hold an initial public offering, venture capitalists—who often sit on the boards of start-ups they invest in—are sticking around longer, even as they join more boards. This means the hands-on guidance an experienced investor can bring to a start-up may become diluted. Dharmesh Shah says he was wary of venture capitalists who sat on more than 10 boards when he was raising money for his online marketing start-up HubSpot Inc."I definitely saw that as a negative signal," says Mr. Shah, who co-founded the Cambridge, Mass., company and also serves as its technology chief. "It's really hard for a VC to be excited and step up to bat for all 15 companies in the portfolio."On average, venture investors sit on 4.4 boards, although in some cases that number may be rising, according to a survey conducted late last year by the National Venture Capital Association and VentureSource, a unit of Wall Street Journal owner News Corp. More than half of the survey's investors expect their board seats to increase in the next two years.At venture firm New Enterprise Associates in Menlo Park, Calif., partner Forest Baskett now sits on 20 boards—more than he'd anticipated. "That's partly because we've been through a pretty long dry spell of IPOs and exits," he says. "I've been continuing to invest on a regular basis, and my existing portfolio has kind of stacked up."Mr. Baskett says that serving on multiple boards hasn't diminished his ability to be there for any one company. Rather, he just needs to keep a closer eye on time commitments, scheduling board meetings a year in advance, for instance, so they don't overlap, he says. But investors and entrepreneurs say it is difficult to keep tabs on so many companies at once. Four is the ideal number of board seats, according to venture-backed chief executives in the survey."If you're on more than 10 boards, there's just no way that you're good at all of them," says Randall Lucas, who spent five years at venture firm Voyager Capital before joining Seattle start-up Revenue Loan LLC this year. "What happens when a company hits a rough patch and you're not showing up to board meetings because you doubled down on your winners?"Mr. Lucas says investors who are spread too thin commonly ask less-experienced associates to fill in, or simply vanish for months. That can damage relationships and prompt some entrepreneurs to wonder what they're getting for equity they've given up, he says. When doling out money, most venture capitalists demand a board seat—sometimes two—in order to maintain control. The amount of time they devote can be especially vital to first-time entrepreneurs, who need direction or want to tap into a venture investor's vast network. Bob Davoli, a respected investor at Sigma Partners in Boston who sits on 19 boards, plays down the numerical count. "There is no ideal number," he says. "If you have five boards, and every single company is going under, and you have 19 boards and everything is going smoothly—guess who's going to spend more time with their companies?" Mr. Davoli recommends entrepreneurs do reference checks to "find out what type of a guy he really is on the board." Some entrepreneurs say they're not taking chances. HubSpot's Mr. Shah has raised $33 million in venture capital, and the start-up's three venture board members sit on fewer than 10 boards."My odds of getting access to the best people in a VC's network go up the smaller number of deals they have," he says. Write to Scott Austin at scott.austin@dowjones.com

Big Firms Win in Small-Business Bill

Thu, 29 Jul 2010 10:13:54 EDT

By Martin Vaughan A Senate bill promoted as a boon to small businesses includes significant tax benefits for large companies, too.The costliest provision in the bill is a tax break for companies that make large capital purchases, including airlines and telecommunications firms.The "bonus depreciation" tax break expired at the beginning of this year, and the bill would extend it for equipment purchased in 2010, permitting firms to write off 50% of the cost of equipment this tax year, rather than over a longer period.The provision would reduce federal revenue by $5.5 billion over the next 10 years.Small businesses are less likely to benefit from bonus depreciation, because they can already write off 100% of equipment costs up to $250,000. The Senate bill proposes to increase that limit to $500,000."A really large firm, or medium-sized firm will be more interested in bonus depreciation," said Alan Viard, an economist at the American Enterprise Institute, a conservative think tank.Still, small businesses could benefit. Purchases of heavy equipment such as might be used by a farm or a tool-and-die shop could exceed the expensing limits for small businesses.Senate Democratic leaders are trying to bring the $15.5 billion bill to a final vote this week. So far they have been unable to resolve differences with Republicans on what amendments should be allowed, preventing the bill from going forward.Mr. Obama and congressional Democrats have put small-business proposals at the center of their efforts to revive a still-sluggish economy. The package is one of a handful of initiatives that still have a chance of being completed before November's elections."We need to keep investing in our small businesses," Mr. Obama said Wednesday during a stop at Tastee Sub Shop in Edison, N.J. "America has always been a place where if you've had a good idea…you can see it through and you can succeed."At the same time, trade associations for large U.S. companies successfully lobbied for several proposals to be included in the bill. One provision would help large life insurers.It would allow individuals to split tax-deferred annuities in two. That would allow them to begin receiving annuity payments on part of their savings while not losing the benefits of tax deferral on the rest.The feature would make annuities marketed by life insurers more attractive to consumers. "It will make it easier for a lot of annuity owners to access lifetime income while continuing to build their nest eggs," said Frank Keating, president and chief executive of the American Council of Life Insurers, in a written statement.The provision itself is attractive to lawmakers because it raises revenue in the short term, providing nearly $1 billion to help offset the cost of other items.The bill would also provide cellphone-service providers, including Verizon Communications Inc., a change they have sought, simplifying the tax treatment of employer-provided cellphones. The provision would clarify that cellphones aren't a taxable fringe benefit. That would also help small businesses by eliminating the need to keep detailed call logs of employee's phone use."Congress is doing the right thing by doing away with this anachronism," said David Fish, a Verizon spokesman. "Employer-issued wireless devices are no longer luxury fringe benefits, they're important business tools."In addition, the bill includes more than a dozen tax breaks tailored specifically to small firms."There is a lot in the bill that will be helpful," said Bill Rys, tax counsel for the National Federation of Independent Business. He mentioned specifically the higher limits for small business expensing, and a proposal to give self-employed people the same tax breaks for health insurance that employees now receive.As proposed by Mr. Obama, the bill would eliminate capital-gains taxes on the sale of certain small business stock. The bill would also increase Small Business Administration loan limits and provide $30 billion in loans to community banks for small-business lending. Write to Martin Vaughan at martin.vaughan@dowjones.com

Leave the Business to the Kids? Maybe Not

Thu, 10 Jun 2010 10:42:32 EDT

By John Warrillow When Brian France took over as the CEO of Nascar, he completed a feat that may be even more difficult than winning the Daytona 500: he successfully stewarded his granddaddy's business into the third generation of family ownership.According to McKinsey & Co., less than one in three family businesses survive to their third generation of family ownership. Why do so many family business transitions fail? Successful business owners often give their kids everything they didn't have growing up. They sacrifice so that kids can attend better schools, with tutoring and extracurricular activities. Then they pay for a postgraduate degree in law or business. All of that coddling may do wonders for the kids' polish but often seems to do nothing to sharpen their kids' entrepreneurial instincts. The drive to succeed comes from wanting something you don't have. Many business owners have done a great job giving their kids everything—except the hunger they need to scratch and claw their way to building a successful business. Gordon Parker, an accountant with Parker Simone in Mississauga, Ontario, has seen the ugly side of family businesses. Often, "the kids come into the business with a sense of entitlement," which alienates and discourages staff, he says. Even worse, the children of owners can lack leadership skills. "In many ways, they are insecure because they have never achieved anything on their own," he says.Brain surgeons spend four years in an undergraduate program and another four years at medical school. You'd think that after eight years of postsecondary education, they'd be ready to treat patients, but even after all of that schooling, they still spend five more years as a resident and a few years as a fellow before they perform their first lobotomy. No matter how smart, experience trumps education.Most family business patriarchs or matriarchs have spent years becoming the technical expert in their field. Their kids are 20 or 30 years behind them on the learning curve. Despite having the right genes and attending the best colleges, they have still experienced only a fraction of what the business owner has in a 30-year career. I asked Gordon what his advice was for parents considering passing their business on to their kids. His answer was emphatic: Don't do it. "Sell your business, and if you still want to give your kids something, give them money in your estate to start a business. Not only will your kids be better adjusted; you won't sabotage your business."Ironically, I think the best way to pass your business to your children— and to make sure they appreciate it—is to run your business as though you're planning to sell it to a third party. That way you will have the full catalog of options available to you: pass a valuable business to your kids, sell to management, sell to a third party or install a CEO.To turn your company into one you can sell, focus on the products and services you can teach your employees to deliver. And make sure you document your own unique procedures. For example, there is a small hamburger shop two hours north of Toronto called Webers. Paul Weber Sr. started his business in 1963 to be a respite for tired and hungry city dwellers escaping to summer retreats. On a typical Saturday this summer, Webers will serve 800 hamburgers an hour—yet Mr. Weber himself will be nowhere in sight. In 1989, he passed the business to his son Paul Junior, who's been able to successfully continue the eatery in part because of systems his father created. The Weber family has documented every part of the business, right down to the way they entertain customers when lines stretch clear across the parking lot. And they've got the ordering process down to a science, sending fresh-faced runners to the back of the line to ring up customers' burger orders and make change, instead of waiting for people to get inside. This simple ordering procedure is not ground-breaking on its own. But when you combine it with hundreds of other small systems delivered consistently, you build a valuable business that can run without Paul Weber Sr. himself flipping the patties anymore.

Tight Budgets Limit States' Small-Business Programs

Thu, 01 Jul 2010 13:00:35 EDT

By Emily Maltby A number of states have stepped in to help cash-strapped entrepreneurs get access to credit, primarily by providing incentives to banks to lend more. But there's a problem: The programs have been so popular that many states—already operating under tight or depleted budgets—may have trouble meeting the demand. In Colorado, interest from banks and their small business customers is "growing exponentially," says Cris White, executive director and chief executive of the Colorado Housing and Finance Authority, which administers the state's $2.5 million Credit Reserve program. "There is a likelihood that a year from now we could be out of money."Through the program, Colorado banks can tap the state funds to bolster their reserves, making it less risky to extend credit to business owners. Nine lenders have jumped on board and have collectively drawn $300,000 from the program, allowing them to lend more than $3.6 million. Mr. White says about 250 small businesses will benefit by the time funds are exhausted.Other states have programs with similar goals. Delaware allows business owners to use state funds to defer existing lines of credit for two years. In New York, business owners can get business counseling and then resubmit their previously rejected loan application to the "Credit for Success: Second Look" program. If it fits the underwriting standards, a group of local banks will pitch in to finance the loan.In Maryland and New Jersey, the states partially guarantee eligible small-business loans so that the bank won't take the full loss if the borrower defaults.The plight of the states' small-business programs was cited in a May report by the Congressional Oversight Panel, a watchdog for government bailout funds, which said states are severely constrained by tight budgets. Declines in state spending for the fiscal 2009 and fiscal 2010 calendars were "unprecedented," according to a June report of state budgets from the National Governor's Association and the National Association of State Budget Officers. Forty states decreased expenditures for the 2010 year, which the report attributes to declining tax revenues—about 12% since 2008—from fewer sales and lower personal and corporate incomes. Although the economy grew in late 2009, state finances can take months and sometimes years to recover, which may be particularly true in this recession given the high unemployment levels. For the fiscal 2011 year, state budgets may increase slightly, according to the report, totaling $635.3 billion. But that figure is still 7.6% below the $687.3 billion spent in fiscal 2008. Christian Johansson, secretary of the Maryland Department of Business and Economic Development, which oversees the state's loan-guarantee program, has urged Congress to allocate federal dollars toward the states' efforts. One bill under consideration—which has passed in the House but not yet the Senate—would send $2 billion in federal funds to states that want to launch credit access programs like the one Maryland runs."If Maryland had a share of the $2 billion—if we could have $40 million—that money would have a tremendous impact on small businesses," says Mr. Johansson. Meanwhile, Mr. White is trying to demonstrate the success of Colorado's program so that the state will place a high priority on renewing its funds."The more capital that's flowing out, the more jobs are created—and that means more taxes," he says. Write to Emily Maltby at emily.maltby@wsj.com

Control Freak No More: Picking No. 2

Thu, 10 Jun 2010 18:50:44 EDT

By Sarah E. Needleman After years of growing their ventures, many small-business owners end up like Eric Poses – calling all the shots and rarely getting a moment's rest. "I do everything," says Mr. Poses, president of All Things Equal Inc., a Miami board-game company he founded in 1996 that today earns about $2 million in annual sales. "I'm still making all the decisions, which takes up a lot of my time."For owners who've built their businesses from the ground up, letting go some control to a second-in-command can be nerve-racking. But experts warn that there are potentially worse consequences to maintaining a tight grip on an enterprise, including burnout and problems stemming from unexpected emergencies, such as if an owner suddenly falls ill. Sandy Hansen, owner of AgVenture Feed & Seed Inc. in Watkins, Minn., understands those dangers all too well. She was thrust into entrepreneurship in 2003 when her husband, the feed-supply company's original owner, died of leukemia. He had never appointed a top deputy in the nearly 20 years he ran the business, nor did he create a succession plan. "He didn't get around to it," says Ms. Hansen. "We were in near bankruptcy for three years trying to learn information only he knew." The business has since rebounded, she adds.Some owners avoid recruiting a No. 2 because they have difficulty trusting someone to become close to their business, says Daniel M. Murphy, co-founder of The Growth Coach, a business-coaching franchise system based in Cincinnati. But oftentimes owners reach a point where they realize they just can't keep at it alone."Invariably an owner will hit a wall where they feel overworked and like a prisoner to their business," says Mr. Murphy. "They need to let go."In general, a No. 2 is responsible for overseeing day-to-day operations, such as employee schedules, customer or client issues and other basics, he says. With these responsibilities out of the way, business owners can focus on the big picture: growing their enterprises, says Mr. Murphy. "The chief executive is the person with the vision who makes sure there is a plan in place to get there," he says. "Their job is to create jobs for other people. They're leaders, not doers."A business owner's sidekick should ideally have skills and a working style that are complementary to what the business owner possesses, says Robert M. Donnelly, professor of entrepreneurship at St. Peter's College in Jersey City, N.J. "Don't expect the person to be as good as you at what you do," he says. "You're really hiring a No. 2 to be good at the things you're not." Joanna Horobin, chief executive of Syndax Pharmaceuticals Inc. in Waltham, Mass., says she has a second-in-command who works at a calculated, detailed pace, whereas she tends to keep up a steady, swift momentum. "Without somebody like Bob, I run the risk of my big ideas missing people and not getting translated," she says of her No. 2. "I have more of a relentless leadership style."Now is an ideal time to hire a top lieutenant due to the high number of professionals who are unemployed, says Mr. Murphy. "There's such great talent out there that's affordable," he says.Just make sure to do your due diligence in choosing this person by checking references and preferably investing in a background investigation of him or her, adds Mr. Murphy. "This is a critical hire," he says, given the high level of responsibility and trust required of a top lieutenant.Business owners may also want to consider grooming an insider for the right-hand position. For Kate Koziol, owner of Chicago-based K Squared Communications Inc., the right candidate became apparent a few years ago when a new client flew into a panic while she was vacationing and couldn't be reached. A midlevel staffer at the public-relations firm stepped in and quickly resolved the matter. "It was a true test because it just happened and she made the best of it," says Ms. Koziol, adding that she's been prepping the employee for the No. 2 job ever since.Another sign that an employee might make a good deputy is if he or she is always acting in the company's best interest without any prompting, says Jamie Damato Migdal, owner of AnimalSense Canine Training and Behavior Inc. in Chicago. She says she recently appointed a staffer who regularly demonstrates this kind of behavior as her second-in-command. "She really shows great initiative and an understanding of what happens around here," says Ms. Damato Migdal of her chief aide. "She's looking out for me, the staff and the bottom line." Write to Sarah E. Needleman at sarah.needleman@wsj.com

Sam's Club to Offer Loans Up to $25,000

Tue, 06 Jul 2010 17:01:13 EDT

By Karen Talley Wal-Mart Inc.'s Sam's Club will begin offering loans of up to $25,000 to members in an effort to set itself apart from other warehouse chains and build goodwill to bring in more business.The loan program, which Sam's Club calls the first of its type, is aimed at boosting business for a Wal-Mart unit that is trying to raise its profile among the small businesses that make up a good deal of its clientele."Access to capital is a major pain point for our members and the small business Main Street community," said Catherine Corley, vice president of membership at Sam's Club. "We believe this pilot program is a step in the right direction to help fuel small business growth."The move comes as Wal-Mart aims to reinvigorate sales gains at its Sam's Club warehouse stores. The retailer closed 10 of the stores in January and let go of 10,000 demo staff as it switched to an outside vendor. Most of the staff was hired back by the vendor, spokeswoman Kristy Reed said. The operation is in the midst of remodeling stores, planning to complete 60 to 80 by the end of January.The loan program will focus on minority-, women- and veteran-owned businesses, as well as very small enterprises. "It works well with us because that is who many of our members are," Ms. Reed said. The program is structured so that Sam's Club isn't directly involved with banking – something its parent has made a run at – but rather, an outside lender is handling the logistics, Reed said. Sam's Club makes $50 per funded loan."It seems like a traditional program done in a unique way," said Carl Tobias, Williams Professor at the University of Richmond School of Law. "It benefits Sam's by potentially adding members and can aid existing members."Still, "you have to question if customers will turn to Sam's Club if something goes awry" in the customers' relationships with the lender, Mr. Tobias said.Sam's Club is testing the online program with Superior Financial Group LLC, a Small Business Administration lender. Club members who qualify would receive loans between $5,000 and $25,000. In a November survey, Sam's Club said nearly 15% of its business members reported being denied a loan to run their operations, up from 12% in April 2009.Sam's Club members who apply for a small business loan online during the pilot will receive $100 off the application fee and a 7.5% annualized interest rate, which Sam's Club said is a 25-basis-point discount. The loans carry 10-year terms and no penalty for early repayment.Sam's Club said that while the majority of its small business loan pilot program will be delivered online, the company will test some in-club communication and other marketing efforts to reach business members and small business owners. Sam's Club is not currently looking at expanding the services, Ms. Reed said.Representatives at other major warehouse clubs, Costco Wholesale Corp. and BJ's Wholesale Club Inc., were not immediately available for comment.Wal-Mart shares are up 2.5% to $49.16. Write to Karen Talley at karen.talley@dowjones.com

Silly Bandz Seek to Stretch Popularity

Mon, 12 Jul 2010 12:07:51 EDT

By Emily Maltby BCP Imports LLC, maker of the Silly Bandz bracelets that have become an accessory de rigueur on elementary school playgrounds, is the latest small company looking for a way to extend its appeal with pint-sized customers.Retailers selling the packs of 24 bracelets for $5 to $7 a pop cannot keep them in stock, and the company has had to hire more than 350 employees since October, according to founder Robert Croak. Silly Bandz have generated more than $100 million in annual sales, he says.But keeping Silly Bandz on kids' wrists—and radar screens—won't be easy, some say. Gene Murtha, the former head of Main Street Toy Co. in Simsbury, Conn., sees similarities between Silly Bandz and Slap Wraps, the fad his old company developed.Slap Wraps were long pieces of fabric-covered metal that coiled into a bracelet when slapped on the wrist. Like Silly Bandz, they were both a fashion accessory and a bartering chip on the playground. The craze ballooned in 1990 but burst the next year.Mr. Murtha, who blames the bust in part on a falling out between the company's partners, says he should have capitalized on the fad by branching out."A smart business plan is to take a product and develop it into a brand," says Mr. Murtha, now chief executive of the teddy bear company Gund, a division of Enesco LLC in Itasca, Ill. He recommends that Silly Bandz make more "silly" things to avoid being a one-hit wonder.Mr. Croak is already moving in that direction, by selling Silly Necklaces and Silly Buttons.Still, through the decades plenty of toys developed by small companies—think Pet Rocks and Pogs—became all the rage but failed to maintain long-term appeal. Kids, who determine the fate of such products, can be fickle consumers."In six months, a child's view of life has changed dramatically," says Wendy Liebmann, chief executive of WSL Marketing Inc. in New York, which conducts research on retail strategy. "For a child to be absorbed in something, that means that you need to constantly reinvent it."Some companies have managed to parlay a passing trend into a sustainable hit through licensing opportunities. After creating the Teenage Mutant Ninja Turtles comic book in the late '80s, Mirage Studios Inc. managed to ink enough deals to turn its half-shelled heroes into action figures, television stars, and characters on towels and bedspreads. The Turtles even experienced a relatively recent comeback following the "TMNT" movie three years ago.Others have tried marketing ploys. Ty Inc., a once-small firm that experienced explosive growth with its flagship product, Beanie Babies, kept the consumer frenzy going by promoting its creatures as must-have limited editions."Part of the appeal is if it's hard to find," says Tim Walsh, a toy historian in Sarasota, Fla.Some companies try follow-up toys. In the late '90s, Tiger Electronics, a midsize company in Vernon Hills, Ill., enjoyed mercurial success with Giga Pets—animated, electronic characters in a hand-held device that kids could control. According to Marc Rosenberg, who was head of marketing for the firm at the time, as the toy's popularity died out, the company introduced a new kind of pet: Wide-eyed creatures called Furbies that could communicate with each other. Hasbro Inc. launched Furby in 1998, shortly after acquiring Tiger Electronics.Silly Bandz's Mr. Croak says his small company is adapting to consumers' transient tastes by taking suggestions from Twitter and the Silly Bandz's online fan page—options entrepreneurs of the past didn't have. Most of the colors and designs being developed today, he says, are generated from the hundreds of suggestions he receives each week. He is also trying to secure licensing deals to spread the craze into other markets, such as school supplies, board games and smartphone applications. And taking a page from Beanie Babies, Silly Bandz's Spring pack of butterflies, bees and tulips, has been retired, and won't return with the same shapes.Still, there are skeptics who think the Silly Bandz brand isn't strong enough to last. In order to draw a new wave of children, a product needs to change the way they play, says Gary Cross, professor of modern history at Penn State who specializes in consumption, childhood and leisure issues. "It's not clear in what way [Silly Bandz] are transformative," he says. "Fads that are built around schools and peer association have been around a long, long time and those things have come and gone." Write to Emily Maltby at emily.maltby@wsj.com

Three Minutes to a Million

Thu, 17 Jun 2010 13:40:16 EDT

By Emily Maltby Rupila Sethi knew how much would be riding on the next three minutes. As she stood at the podium Tuesday at the Make Mine a Million $ Business Competition in Newark, N.J., she reminded herself to speak from the heart, rather than notes. Her goal was to communicate to the judges why her construction company, Aerial Design & Build Inc., was worthy of winning the competitionDespite her nerves, Ms. Sethi kept her composure through the presentation. She conveyed to the audience why her firm was successful, what challenges were ahead and how she was planning to push Aerial Design to the next revenue level. After she finished, Ms. Sethi breathed a sigh of relief and smiled as she returned to her seat. "My heart was pounding out of my chest!" she exclaimed afterward. Elevator pitches, commonly delivered at business competitions and at investor meetings, are typically one-to-three minute speeches that hit on key elements such as the company's business model, revenues and growth strategies. The name stems from the hypothetical situation of sharing an elevator ride with an investor. In that tight span of time, a business owner would have to recite the business concept quickly, while staying focused on the essentials that entice investors to learn more. A winning elevator pitch should illustrate – without business jargon – what the business does, who it targets, and why it's unique. The pitch should encompass the progress made to date, including revenue growth and other milestones. It should address future outlook, such as the challenges the company faces, and how the competition's prizes or an investment would be used. And it should explain to potential investors exactly what kind of return to expect.Delivering a solid elevator speech also takes practice and nerve control, as the 14 finalists in the Make Mine a Million competition learned. The event, which has been held 20 times since 2005, is open to women whose businesses are at least two years old and earn more than $180,000 in annual revenue. The day before this week's competition, each contestant got a chance to shake out all the bugs at a dress rehearsal in front of voice and business coaches. (Please see below gallery on how contestants improved their pitches.)During the warm-ups, criticism was at times harsh. Nell Merlino, CEO of the nonprofit Count Me In for Women's Economic Independence, one of the organizations behind the event, made all the women rethink their deliveries, to better convey their businesses' missions while also demonstrating entrepreneurial passion. "If you can't tell it, you can't sell it," Ms. Merlino said. "The difference between success and staying where you are is being able to tell your story." Of course, spinning the right tale isn't easy. Many of the contestants had a common problem – they knew their businesses so well that they talked about minutia and back history that didn't hold the audience's attention. Being able to strip away the "extraneous stuff" is key when refining a pitch, Ms. Merlino said. "That's why it's so important to [rehearse] with somebody else that can really listen for the essence of what your business is." Voice coach Hilary Blair and business coach Bill Dueease also helped the contestants adopt the right poise and attitude. In some cases, the coaches even advised the women what to wear, based on the entrepreneur's business or industry. They encouraged some contestants to include an anecdote that demonstrated their love of their work. "What's the favorite sales experience you had?" Ms. Merlino asked a contestant who owns a toy store. "We've got to feel that."To another contestant, who owns a Latin-cuisine company, she asked, "What are your top-selling products? Describe them to me. Make my mouth water."After honing their presentations according to the feedback, the business owners were ready to roll. As for Ms. Sethi, her final pitch encompassed nearly all the advice she had received. Unlike the dry run, she made sure to mention her recognizable clients and projects (Paul Smith and the Trump Towers), stress key words that illustrated her firm's qualities (on time, on budget, good quality) and point out what offerings set her apart from competitors (using eco-friendly construction materials). Ms. Sethi was one of the seven business owners who walked away with the grand prize. She will now receive free business coaching, financial training, publicity opportunities and products, such as a rewards card with 50,000 redeemable points from American Express Co., a founding sponsor of the Make Mine a Million competition. All the prizes are intended to push the businesses to the $1 million mark in annual revenue. But those who did not win tangible prizes walked away with valuable advice. "I know these women will go back and not only change what they say today," Ms. Merlino said. "They're [also] going to change their marketing materials, what they say on their website, and what they say the next time they go to a sales meeting, because they now understand what worked and what didn't." Ms. Sethi agrees. "I've taken so much from the judges and all my co-participants. I've just learned so much." Write to Emily Maltby at emily.maltby@wsj.com

The Credit Crunch That Won't Go Away

Mon, 21 Jun 2010 13:58:35 EDT

By Emily Maltby Where's the money?The economy is on the mend. The government has launched a boatload of programs to get small businesses financing. President Barack Obama has urged banks to give the companies a "third and fourth look" before rejecting them for loans.Yet entrepreneurs are still struggling to land credit. Only half of small businesses that tried to borrow last year got all or most of what they needed, according to a survey by the National Federation of Independent Business. In the mid-2000s, 90% of businesses said they got the loans they needed.What's going on here? Why is the credit crunch alive and well when it comes to small businesses?Part of the problem is that most of the government programs created to address the problem have focused on Small Business Administration loans, which total less than 10% of overall lending to small companies. But there's a wider issue at work. Banks and the government are trying to avoid repeating the mistakes that led to the subprime meltdown. It's a perfectly understandable goal—but it's freezing up financing.Federal regulators, for instance, say they want banks to make prudent loans, even as the pressure to give out credit grows. Some banks, meanwhile, think many more businesses are bad risks these days, and they don't want to damage their balance sheets by making questionable loans.There's also lots of finger-pointing. Some bankers say loan volume is down because demand is down; small businesses, they argue, are wary of taking on debt in uncertain times. Other bankers accuse regulators of pressuring them to curb lending, while regulators say banks are just making them the fall guy.Stuck in the middle are entrepreneurs. During the downturn, many of them lost their credit lines and couldn't get access to other sources of financing, such as home-equity loans. Now that things are looking up, they're frustrated that they can't get the financing they desperately need. So, many of them are curbing expansion and hiring plans—and that, in turn, may be slowing the nation's recovery and keeping unemployment high. Julio Valencia is one of those frustrated owners. In the past eight months, he has tried working with four large banks to land a $500,000 credit line for his young business. He has been turned down each time, he says, because JTI Landing Systems, which fixes landing gear for commercial aircraft, doesn't yet have three years of financial history to show the banks.Mr. Valencia, along with his business partner, have exhausted personal cash and retirement savings for start-up purchases and payroll. If his Las Vegas company can't land funding, it can't expand—and may even have to close, he says. "If we don't have the cash flow to support our employees, well, no one works for free," Mr. Valencia says.The lending freeze stretches back to 2007, when the nation plunged into recession. In the first quarter of that year, more banks were tightening standards for small-business loans than loosening them, according to the Federal Reserve's quarterly Senior Loan Officer Opinion survey of large lenders. By October 2008, the percentage was up to 84%—roughly where it is today.Along the way, of course, the housing bubble burst. Banks suffering from heavily weighted real-estate portfolios compensated by reducing—and in some cases eliminating—credit lines, while raising interest penalties. What's more, the secondary markets, where many lenders bundled their SBA loans and sold them to investors, clamped shut, so banks couldn't get enough capital to make new loans.Every potential borrower suffered, but small businesses were particularly hard hit. In 2009, small-business loan portfolios at big banks dropped by 9% from the previous year—more than double the 4.1% drop for their entire lending portfolios, according to a recent Congressional Oversight Panel report. At the smallest banks, small-business lending portfolios fell 2.7%, while overall portfolios fell 0.2%.Heeding Mr. Obama's call to increase lending, a few big banks have made ambitious pledges. Bank of America Corp., for one, announced a goal of lending $5 billion more to small companies this year than last. Some small banks are making efforts, too. Lani Hayward, executive vice president of communications at Umpqua Holdings Corp.'s Umpqua Bank, in Portland, Ore., says the bank has gone "a touch further in extending credit" through its MainStreet Lending program, which gives applicants who would otherwise be rejected another review.Ms. Hayward says about 30% of the loans that move through that program get approved. Still, she says, "it's not like we are opening the coffers. For the regulators' sake and our own sake, there needs to be a gatekeeper."Some banks, particularly smaller lenders, say they want to lend more. But they say they're being pressured to be more selective by too-strict regulators, who have stepped up oversight to ensure banks are well capitalized and have balanced loan portfolios. For instance, the Independent Community Bankers of America, a Washington-based advocacy group, announced as part of its 2010 policy priorities that it would urge a "more measured approach from overzealous bank examiners so that they do not further exacerbate the current economic downturn and community banks' ability to aid recovery efforts."Regulators, though, say they haven't been urging banks to adopt overly rigorous standards—they simply want the banks to be prudent. "Sometimes the regulators are a convenient excuse for banks who really don't want to tell borrowers they can't make the loan," says Timothy W. Long, senior deputy comptroller and chief national bank examiner at the Office of the Comptroller of the Currency in Washington. "Deciding which borrowers the banks should lend to is not part of our examination process. We tell them to lend in a safe and sound manner."He says the effort has worked. Banks are underwriting more carefully, he says, and marginal borrowers aren't getting the overly favorable terms they often did before the recession.Some bankers, mostly at large institutions, argue that their standards—and federal oversight—haven't gotten stricter. "What has changed is the financial condition of most small businesses," says Kathie Sowa, a commercial-banking executive at Bank of America. "Few small businesses have not been impacted" by the downturn.The bankers say few creditworthy candidates are walking through their doors despite signs of economic recovery. The requests banks are getting these days are "disproportionately from businesses that we would have a difficult time lending to with confidence we'd get the money back," says Marc Bernstein, who heads small-business lending at Wells Fargo & Co.Some bankers also argue that loan volume is down because many businesses are choosing to go without funding. They say many owners don't want to take on additional debt during uncertain economic times and are opting to rein in spending and shave overhead. "Demand has been down," says Maria Coyne, executive vice president of business banking at KeyBank, a national lender operated by Cleveland-based KeyCorp.Ms. Coyne believes that lending won't bounce back to the levels of years past because borrowers realized the dangers of assuming too much debt. "We saw America deleverage by hundreds of millions of dollars, and businesses did the same thing," she says. "They hunkered down. They got refocused."Are small companies actually seeking fewer loans? It depends on whom you ask. Through the recession, the National Federation of Independent Business consistently reported in monthly surveys that the credit crunch was not the biggest issue for its constituency, because so many owners weren't seeking loans. Other small-business advocacy groups such as the National Small Business Association offer a different view. Although lower demand "may be a small part of the equation, the decrease in loans is more likely related to the terms and availability of such loans," said the association's 2009 end-of-year report.As for the quality of borrowers these days, many businesses have undeniably become less creditworthy because of reduced sales, tighter cash flow, and lower credit scores from debts and slashed credit lines. But most business owners, like Mr. Valencia, don't view themselves as risky investments.His company pulled in $2 million in sales last year, he says, and has received interest from some large international airlines. With credit access, he adds, JTI could hire 100 employees in the next four years. Without it, the company has had to shave its staff of 12 down to four."We spent quite a bit of money to procure machines and equipment," says Mr. Valencia. "I have the experience. I know what we're capable of doing."Mr. Valencia says he is having trouble with cash flow, often a red flag for bankers. But he adds that the problems are stemming not from his financial mismanagement but instead from his customers who have been slower to pay—a point he thinks banks fail to take into consideration.So far, efforts from the administration to spur small-business lending have fallen flat.As part of last year's stimulus package, for instance, the SBA enhanced its loan-guarantee program, which gives banks more confidence to lend by reimbursing them in the case of default. The program eliminated loan fees for borrowers while increasing the maximum guarantee amount to 90% from 75%.But such programs haven't proved as popular as hoped, in part because many banks are disenchanted with SBA lending programs. Particularly for community lenders, programs are too paperwork intensive and require personnel that banks can't afford. Streamlining the programs was one of the banks' top requests at a roundtable meeting with Mr. Obama in December.Last week, the House passed a $30 billion initiative for community banks to borrow from the government at low rates. President Obama, who announced the idea last October, is encouraging the Senate to quickly pass the program into law. The president has also asked legislators to pass a regulatory overhaul and raise the limits on SBA loans.There are other proposals on the table. Among other Democrats, New York Congresswoman Nydia Velázquez, who heads the House Small Business Committee, has proposed expanding the SBA's disaster-loan program, which issues loans directly to businesses in areas that have been hit by catastrophes. The agency, she says, could underwrite loans to small businesses that have not been able to get funding from banks. The SBA has vehemently opposed this idea, arguing that it lacks the infrastructure to take on such a task and would not want to compete with the lenders that use their loan products.Other proposals center on nontraditional lenders that don't work like banks and have more flexibility in lending guidelines.Some politicians, such as Yvette Clarke, another House Democrat from New York, want to expand a Treasury Department fund that supports Community Development Financial Institutions. These groups, usually nonprofit microlenders, often have a mission to target people who don't qualify for traditional loans, provided the borrowers can ameliorate the risk. For instance, some CDFIs will lend to less-creditworthy people if they enroll in financial-education courses.Similarly, the Small Business Intermediary Lending Pilot Program Act of 2009, sponsored last year by Sen. Carl Levin, a Michigan Democrat, would authorize the SBA to make direct, low-interest loans to 20 nonprofit intermediary lenders, which would then use the money to make loans of up to $200,000 to eligible small businesses.Another proposal targets credit unions, which have boosted their lending through the recession. Legislation in both the House and Senate would let these nonprofits lend 25% of their assets, up from 12.25% under current law.Meanwhile, Mr. Valencia and other hopeful borrowers continue to pound the pavement in search of financing. Until they can procure it, the promise of full recovery may continue to be out of reach. "There are millions of us that are trying to get this economy back to where we were," says Mr. Valencia. "The government is not creating programs to support start-up businesses. It's irritating." Ms. Maltby is a staff reporter in The Wall Street Journal's New York bureau. She can be reached at emily.maltby@wsj.com.

In Sports, Managing the Team Is Often a Family Affair

Fri, 16 Jul 2010 11:53:17 EDT

By Sarah E. Needleman For the New York Yankees, it's a new era of family control as the late George Steinbrenner's sons Hal and Hank are left to manage the iconic baseball team. Many other sports entities are also family-controlled businesses, including football's Pittsburgh Steelers, basketball's Los Angeles Lakers and auto-racing's Nascar. Wealthy families often invest in sports teams to diversify their holdings, leave their personal stamps on the communities they live in, or bankroll something they enjoy. In less common cases, such as Nascar, the enterprise itself was started by the family's patriarch. But behind the trophies, championship rings and glitzy photo opportunities, family-run sports enterprises have much the same concerns of any family business—namely, how to turn operations over to young heirs with success. Only about one-third of family businesses survive the transition to first- or second-generation ownership, according to the Family Firm Institute of Boston. When it comes to succession planning, most family businesses "do a poor job," says Wayne Rivers, president of Family Business Institute, a consulting firm in Raleigh, N.C. "They're so busy running their closely held companies that they don't see this as a separate project and don't devote the time to it." Of course, families that own lucrative sports enterprises typically have access to the best advisors and business strategists. But the process of prepping sons, daughters or other relatives to run the show often still requires a deft personal touch that only a family member can provide. Greg Miller, who now leads basketball's Utah Jazz, remembers the day in January 2007 when his father summoned several family members for what would become routine weekly meetings. "I remember my dad handed us a four-subject collegiate-ruled spiral-bound notebook and he said, 'You guys are going to want to take notes,' " he recalls. "And the succession process formally began."Mr. Miller took the helm when his father died last year, and now serves as chief executive of Larry H. Miller Group of Companies, which owns the team and other assets. The weekly meetings continue to this day, and make it easier to map out businesses strategies and address inevitable family disagreements. "My brothers are not afraid to call me to the carpet, so to speak, if they see something they don't like," says Mr. Miller. Recently, the Millers began inviting third-generation family members to join the meetings once a month. "It's important that they get exposed to the thought process behind the decisions that are made," says Mr. Miller, a father of six and grandfather of a newborn. "We talk in these meetings often about our philosophy as a family, that there is no entitlement allowed and everyone has to work for everything they get."Similarly, Clark Hunt of the Kansas City Chiefs says he began learning the ropes long before his father, Lamar, died in 2006 and left him in charge. In 1989, he got his first job within the family enterprise, a financial-analysis position at Unity Hunt Inc., which oversees the Chiefs and other family assets. "That was the first time [my father] really gave me responsibility to work side by side with him," says Mr. Hunt, adding that he had previously earned a bachelor's degree in business from Southern Methodist University.Mr. Hunt says his father transferred ownership of the Chiefs to him and his three siblings in the 1990s as a gift to avoid higher taxes down the road. In a related matter, many family businesses are closely watching the federal estate tax, which is set to be reinstated in 2011 at 55% for individuals with assets valued at $1 million or more after being temporarily eliminated this year. In the case of the Yankees, Mr. Steinbrenner potentially saved his heirs a tax bill of about $600 million."You need to be as prepared as you possibly can for a transition to the next generation," says Mr. Hunt. "It's not something that should be put off. It should be planned and communicated to all family members."To be sure, some younger generations of family-controlled sports businesses lack the desire to take over the helm, as was the case for the Washington Wizards, which were sold last month to Monumental Sports & Entertainment. The basketball team was previously owned by Irene and Abe Pollin, whose two children opted against ownership several years ago, according to a spokesman. Mr. Pollin died in 2009 at 85 years old.There are also some sports enterprises controlled by families with few or no children. The Sacramento Kings, a basketball team owned by the Maloof family, is run by two brothers who lack offspring. Two more brothers don't have children, although a sister (not involved with team) has three sons. Joe Maloof, one of the siblings who manages the Kings, says he hopes they'll inherit it one day but that they're too young to discuss the prospect just yet."We will never sell that team," he says, adding that the family had relinquished control of another sports franchise, the Houston Rockets, in 1982. "We regretted it the day we sold it." Mr. Steinbrenner, who died Tuesday morning at the age of 80, began planning for the transition of control of the team he bought from CBS in 1973 to his sons about four years ago, according to Yankees spokeswoman Alice McGillion."He's a tremendous loss, but in terms of the operations of the franchise, it will be business as usual," says Ms. McGillion. "We're very confident that the right plans are in place." Write to Sarah E. Needleman at sarah.needleman@wsj.com

House Readies Capital-Gains Bill

Wed, 09 Jun 2010 16:31:17 EDT

By Martin Vaughan WASHINGTON—A bill to eliminate capital-gains taxes on many investments in small businesses could come to the House floor as early as Thursday. The bill builds off of proposals from President Barack Obama aimed at giving small businesses more access to capital so they can hire workers and invest. It also would establish a $30 billion lending facility managed by the Treasury Department. House lawmakers are readying the bill for a vote as early as Thursday, House Majority Leader Steny Hoyer (D., Md.) said. A companion Senate bill is also on a fast-track and could be considered this month. Under current law, investors may exclude 75% of their gains from capital-gains taxes for small business stock purchased before Jan. 1, 2011, and held for five years. The House bill would increase that exclusion to 100% and extend it for an additional year, through the end of 2011. It also would ease IRS penalties on small businesses for failing to disclose their use of certain employee-benefit plans the IRS has branded tax shelters. Those provisions are being combined with the small-business lending bill for a total cost of around $7 billion, House Ways and Means Committee Chairman Sander Levin (D., Mich.) said Wednesday. That cost will be offset so the bill will not worsen the deficit. The bill will raise money through an Obama proposal to curb the use of grantor-retained annuity trusts by the wealthy to avoid estate taxes. It would also shut down the use of a cellulosic biofuels tax credit by the paper industry. Write to Martin Vaughan at martin.vaughan@dowjones.com