How To Make A Winning Loan Proposal By Airen Amayamu

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How To Make A Winning Loan Proposal By Airen Amayamu

  1. 1. How To Make A Winning Loan Proposal (A Business Plan designed for getting a loan approved) Introduction One of the least understood concepts is how to make an effective loan presentation to a lender. A borrower is often told to create a "Business Plan" and to include various required documents. However, this generic approach may result in the loan request being relegated to a stack on the loan officer's desk and perhaps a rejection. Our objective is to share with you the secrets of selling your proposal to a lender. This is not an academic exercise but rather a professional approach that works. It's similar to the process of gathering information that you would use for an internal management business plan to provide a map to success and profit. In that case, you may want to tweak the format a bit and be more conservative with your projections. Lenders want to be assured that: Your business will repay the proposed loan. And that there are sufficient assets (collateral) to pay off the principal in the event the loan goes into default. (For an internal management business plan, you want to assure yourself, partners, stockholders and key managers that you can make a reasonable profit, pay financial obligations and achieve your stated goals.) It is your job to provide the lender with these two assurances in a clear and concise format. Lenders reject loan requests when they cannot understand the risk or the risk is greater than acceptable to them. An acceptable entrepreneur's risk is often greater than an acceptable lender's risk. Choosing the Right Lender Don't "shotgun" your loan request to many lenders. Instead, tailor it to the specific lender most likely to grant your request. Cultivate the relationship before requesting a loan. Who do you know that can introduce you to the bank's president or chief loan officer? Open a bank account before making application for a loan. It is more difficult for a lending institution to say "no" to a customer. Ask lots of questions before preparing a loan presentation. Do you finance start up companies? Do you make loans under $100,000? Under $50,000? What are your minimum collateral requirements? Do you make equipment or working capital loans? Do you have a very active SBA department? Do not hesitate to switch to a lender that can better accommodate your borrowing needs. Avoid a formal submission if there is not a good chance of being approved because other lenders may find out that you were turned down when they run a credit report.
  2. 2. The Loan Presentation A winning loan presentation has substantially more sizzle than a business plan designed as a personal planning tool. It may also use a more aggressive interpretation of the proforma operating numbers. Your loan presentation should contain several sections with extensive narrative and exhibits personalized to your situation and your lender's underwriting. Use quality white bond that is easy for the lender to copy and in an attractive type style which is easy to read. The following is a suggested table of contents that may be modified for different situations. Table of Contents Cover Letter A. Photographs B. Memorandum (Executive Summary) C. The Borrower (Description of you and your company) D. The Collateral E. The Market & Marketing Plan F. The Underwriting (Financial soundness of your plan) G. Recommendation (Summary) Motivate the loan officer to pick your presentation out of the many on his or her desk because it seems more interesting and doable than the others. The cover letter, photographs and Memorandum of salient facts are designed to do that. Cover Letter The cover letter is your first opportunity to sell your loan. Make it great! Lenders have been known to reject loans after reading a poorly constructed cover letter or one that is so impersonal that the presentation looks like it is being sent to every institution in town. Relate the cover letter to specific discussions you previously had with the loan officer and verbal understandings. The cover letter should be no more than one or two pages long. Explain how the loan will be used. Highlight the strongest aspects. Note the weak points and how you plan to overcome them. If the collateral is particularly strong, emphasize it in your cover letter. Always recommend approval of the loan as your final thought rather than meekly asking the loan officer to call if there are any questions. If you cannot recommend your loan to the loan officer, don't expect him or her to recommend it to the loan committee. If your presentation is for venture capital, you'll need to talk about an exit plan. How and when will your investors get paid back? Do you plan to go public in a few years? Or will you refinance them out of their investment? You should also discuss return on investment (ROI). How much will they get for taking the risk? And when will they get it? You can eliminate the cover letter entirely if your business plan is an internal management tool for your eyes only. However, many entrepreneurs want to share their business plan with key
  3. 3. managers and advisors so that everyone has the same vision. In this case, a cover letter is a good idea also. Photgraphs Use them! An interesting 5" X 7" on the cover of your presentation can get your proposal read first. Put lots of interesting photos inside. Get the most attractive shots you can and fully explain them. Use a professional if your own photographic skills are lacking. If real estate is the collateral, show the subject, comparables and the neighborhood. If a real estate appraisal is required, tell the appraiser to take attractive photographs too. They are notorious for taking photos showing overflowing garbage bins and water accumulations on the pavement. Negotiate with the appraiser on this issue. Show your officers, happy employees, smiling faces, machinery and equipment (if attractive). This may be the only opportunity for the loan committee to see these subjective exhibits that greatly help in selling your deal. Captions under each photograph should tell the story you want the lender to know. For example: "Our offices will be located on this well-traveled street. The landlord has given us sign privileges that assures us walk-in business and helps us to lower our advertising cost." The caption under a photo of your store shows your business and marketing skills and gives the lender confidence that you'll succeed. Another example, "Joe Smith fine- tuning our new computer system. Joe majored in Computer Science at the University of Georgia." This caption under a photo of your equipment and an employee may be a solution to your lack of computer training or show you hire quality people. Clip art and graphs used sparingly are good too. Cartoons and interesting artwork makes the lender's underwriting process more personal and enjoyable. Marketing yourself and your company well "proves" that you have the ability to market your product or service to your customers. You don't want to over do it but think outside of the box. Memorandum of Salient Facts The memorandum is also called the "Executive Summary". I call it the "memorandum" because lenders sometimes call it that when they pass it around to their loan committee. Limit it to one or two pages. It should contain the most important facts. Ask if he has an example he's willing to share with you. Ideally, you can use his format with your words. Your mission is to get the loan officer and you in a team effort in presenting your proposal to committee. This is an honest, full disclosure negotiation. You both have the same objective -- to approve a good loan. Trust is the key. Name and describe the legal entity. Explain why you chose that type of ownership. Describe your business and it's owners. Your objective is to sell to the lender the previous success of the company, its principals and officers. Enclose a biography of all the principals and key employees. Don't make them look like job resumes. Dates are not as important as the number of years of related experience you have. Awards and industry
  4. 4. recognition of your accomplishments should be noted. Avoid fluff that doesn't relate to the skills needed to make your business successful. Do a detailed sources and uses of loan funds. It should clearly describe how the requested loan will be used. List other sources of funds, your own personal contribution and how it's to be used. A simplified example is below. Sources & Uses of Funds Sources of Funds Cash from owner previously contributed $ 25,000 Additional cash from owner 30,000 Proposed loan from bank 100,000 Total funds available $155,000 Uses of Funds Working capital $ 15,000 Purchase computer & office equipment 20,000 Purchase building 120,000 Total uses of funds $155,000 Here are some things to keep in mind when preparing your startup budget and needs for working capital: Office equipment (Fax machine, computer, printers) Production equipment (if you will be manufacturing) Office or production furniture Office supplies Legal and CPA fees Insurance Business licenses or permits Lease deposits Remodeling costs Utility deposits (this can be quite large!) Salaries Shipping Advertising and promotion and the big one ... lots of working capital to carry you through breakeven The Borrower section should include market value balance sheets (not book value) on the company (showing the status before and after the loan closing) and its principals. Be sure to foot note and explain all line items including how everything can be verified (i.e. account numbers and phone numbers). Show how there is enough liquidity (cash assets) already in your company and committed by its principals to make the venture successful. The weaker the overall deal, the more of your own cash will be required.
  5. 5. Historical and proforma operating statements must demonstrate the necessary cash flow from operations to cover debt service (the proposed loan payments) plus have an adequate cushion. The size of the cushion required will depend of the overall strength of the deal and the lender. Show cash flow available for debt service before non-cash-flow items (such as depreciation), loans to be paid off at closing and provision for income tax. Don't forget to include your own salary (be conservative here). If your salary will be temporarily deferred, show it below the cash flow available for debt service line and explain how you intend to support yourself and your family without it. Every line item should be clearly explained. All proforma line items must be justified. Use third party "proof" such as industry trade associations, Robert Morris Associates statistical publications (RMA) and Dun & Bradstreet publications. Major accounting firms also publish statistics for small businesses in many industries. Check with your local library for statistical publications you can use. Successful loan proposals include extensive narrative discussions of how and why the numbers were selected. Don't be afraid to take several pages to explain the most important line items such as revenues. Do not ask your accountant or a packager to generate your operating numbers. You must do your own research and believe the proforma is achievable. Internalize the numbers and make them part of you. Lenders reject loan requests from entrepreneurs who don't know their own deal. Many businesses fail because the owner never took the time to learn at least the basics of financial management and rely on outside help to "count their money". Unless specifically asked for, do not include income tax returns. They can raise more questions than they answer. Items on the financial statements should be grouped in the primary categories using the chart of accounts that are traditionally used in your industry. (Your accountant can help here.) Exclude meaningless financial schedules such as your check ledger or intricate details of each and every operating expense item but be prepared to produce any backup that is asked for. Include subjective information and news articles that support your projections. However, avoid using meaningless fluff that doesn't demonstrate your ability to repay the loan. An alternative is to note what documentation is available upon request. The Collateral We mentioned earlier that collateral is a secondary way of repaying the lender in the event of default. It's not very likely that a startup business will be approved by the lender with zero collateral. Sometimes lenders use the "lack of sufficient collateral" as a catch- all excuse to turn loans down. It's much more comfortable for them than to tell a customer he's an unqualified borrower, didn't save enough money or they don't like the concept. Your objective is to "prove" the value and the marketability of the collateral. Well- located real estate may be quickly sold close to the value while equipment would be liquidated at a deep discount. Lenders can tell horror stories about having to drive all
  6. 6. around town looking for collateral such as vending machines. Or not being able to sell tablecloths, knives and forks from restaurant failures. Lenders try to place a liquidation value on collateral but may be lenient if they really want to do the deal. When the collateral is weak, get the lender to focus on other aspects of your proposal that are strong (i.e. strength of the principals, large cash investment, strong cash flow, etc.). Appraisals help if they are current, credible and tell the story you want. Critique and highlight the parts that sell your deal. The Market & Marketing Plan The words "market research" are often scary to entrepreneurs even if they have advanced college degrees. They don't need to be. Your challenge is to determine if there are customers for your product or service and how will you get them to buy. Furthermore, how many customers are there, how much will they pay and how quickly will they write you a check. Understand that this is not an academic exercise. Its objective is to generate meaningful operating numbers that can be used for your proforma (projected operating numbers). Ultimately, you will have to execute your business plan and place the actual results along side of your proforma numbers to see if you are meeting your benchmarks. Providing extensive market information is simply sharing with the lender the research you did before you decided to go into business. If you did your homework, it should be easy. The market research should not look like a generic Chamber of Commerce report. Describe your competition. Explain how you plan to compete effectively. Be sure to relate the data to your company. Demographics, census tracks and traffic counts are meaningless without explaining how it will get customers in your door. Growth in your industry is only beneficial if you can relate it to increased revenues. Your market research is the basis for the proforma operating statements. Refer back to your market research when explaining line items in your operating statements. View the procedure as an upside-down triangle or funnel starting with a wide base of information gathering. Ultimately, the wide base of knowledge is narrowed down to specifically reflect your operating numbers on your proforma. Discard irrelevant information. The wide base of information is available at the library. Major accounting firms also publish operating numbers for various industries. Your accountant may be able to help you get to the right accounting firm. Each industry's trade association has operating statistics. A list of all trade associations is catalogued in a good business library. Many trade magazines publish industry statistics. A list of most trade magazines can be found in Standard Rate & Data Services (SRDS) at your library online or the print media department of advertising agencies. Use online search engines and check out web pages such as www.findsup.com and www.census.gov The more corroboration you obtain from various sources the better. Your business plan must identify the sources used. Avoid fluff that won't start your journey from the base of the triangle to your proforma.
  7. 7. This broad information may not reflect the uniqueness of your product or service, specific selling techniques, the personality and size of your company. Therefore, you need to narrow it down by making it a better fit. Perhaps the trade association or the accounting firm can refer you to some of the actual companies in your industry that may be willing to share information with you. Sometimes established companies are willing to help budding entrepreneurs who are introduced through credible channels. Your own experience may help in the narrowing process but its not nearly as credible or objective as a third party source. Narrow the operating numbers even further by talking to prospective customers and salespersons with competing companies. If you are a would-be restaurateur or retailer for example, visit every restaurant or similar retail store in the area. Tactfully question customers exiting competing establishments. How did they like the product (food)? The service? What would they like to see in the neighborhood? What do they think of your idea and how much are they willing to pay? Often you can learn from prospective sales persons you interview. Ask them to document their historic production claims with commission statements and pay stubs. What do they think of your concept? Your pricing? How would they improve it? What mistakes are their current employers (your competition) making? This anecdotal information should be weighed carefully depending upon the motives and credibility of the source. However, by interviewing enough people, a pattern of usable data begins to emerge. If possible, test the market by making actual sales calls and trying to close deals. Go to a similar market elsewhere if confidentiality is a consideration. Often you will learn more by asking a customer to put up their money than gathering hypothetical data. Of course if you are already in business, your historical numbers are important in projecting the future. Include all the details and the math. Refer back to it when footnoting the operating numbers in your proforma. This is a hands-on process and it must make sense to you. Don't hire a professional to produce a slick, generic product. It's important that you struggle through it, step-by-step. Internalize it and commit it to memory when telling the bank how you will repay their loan. Use it to share your aspirations with your partners, key managers and sales persons. Choosing the style of your proforma, chart of accounts, when to use month-by-month, quarterly or annual numbers are determined by how it is to be used. Here your accountant can help. Your banker may have certain requirements. For example, SBA wants month- by-month for the first year and then annually for the next 2 years. Some equity partners like to see 10 years of proforma. If you need help, take your market research and ask your accountant to put it in the right form or do the spreadsheets. There are many well-intentioned packagers and wanting to do your homework for you. They offer seminars, CD ROMs, books, audio or video tapes and even may do the entire process for a fee. Most of the time, their finished product is too generic and full of fluff. Their credentials may be superb, but their product is not what you need to get your loan
  8. 8. or to run your company. If you don't clearly understand how the information specifically gets you down the triangle to the operating numbers in your proforma, it doesn't belong in your business plan. The Underwriting (Analysis related to lender's criteria.) You may need your accountant to help you with this section. Some successful loan applicants leave it out entirely and hope that their proposal meets the lender's benchmarks. When you initially selected the lending institution, you should have determined how they will underwrite your loan. Ratios such as Debt Service Coverage (cash flow available for debt service / debt service) and Return on Assets (assets / profit) differ in importance from lender to lender. Calculate the ratios that the loan officer told you were important. Always add subjective comments focusing on ratios that exceed the required minimum. Wherever a ratio falls below the lender's minimum requirements, stress compensating strengths of your proposal (such as good cash position of the principals) and other ratios that exceed the minimum requirements. A business plan for your internal use only should modify this section to identify your risks. Underwriting is the essence of getting an approval. If your loan fails to underwrite, don't submit it. There are several other alternatives: 1. Review your assumptions and rework your numbers. 2. Try to get it to underwrite by being more aggressive with your assumptions. 3. Search for a lender that has more aggressive underwriting standards. 4. Make your loan underwrite by changing the deal. Typical changes include reducing the loan amount, raising more capital and offering additional collateral (such as a private residence). 5. Delay your loan request until your business is able to increase its revenues. Most start up companies do not underwrite well. Understand that institutional lenders are not willing to take the same risk that you as an entrepreneur are willing to take. Likewise, venture capitalists rarely provide startup capital for small businesses. Many startup businesses get loans with a partial SBA guaranty since it transfers much of the lender's risk to the SBA. Recommendation Recommending your proposal to the loan officer and the loan committee is essential. If you don't believe in it, no one else will. Your recommendation may be brief. Recap all of the strong features of the deal and state that granting your loan is prudent. In the real world, most small businesses are started with personal savings or funds from family and friends. Some government agencies help marginal proposals get funded. They don't work for deals that miss the mark by wider margins. According to a survey by Arthur Anderson Enterprise Group of businesses with up to 19 employees that got funding, the sources were: 68% bank business loans, 22% leasing, 16% vendor credit,
  9. 9. 12% credit cards, 9% private lenders, 6% personal bank loans, 3% private stock sale, 2% venture capital and 9% other. In a broader context, far less startup businesses and companies with fewer that 10 employees get loans from banks or obtain venture capital. Since the study appears to be among Arthur Anderson's clients, they may also be more profitable than many other small business concerns and better qualified to get outside funds. I hope this guide will provide you with an understanding of the process and improves the chances of getting your proposal funded. A Guide To Market Research by Jerry Chautin, SCORE Chapter 48, Atlanta GA
  10. 10. The words "market research" are often scary to small business persons -- even if they have advanced college degrees. They don't need to be. Simply stated, your challenge is to determine if there are customers for your product or service and how will you get them to buy. Furthermore, how many customers are there, how much will they pay and how quickly will they write you a check. Understand that this is not an academic exercise. Its objective is to generate meaningful operating numbers that can be used for your proforma (projected operating numbers). Ultimately, you will have to execute your business plan and place the actual results along side of your proforma numbers to see if you are meeting your benchmarks. View the procedure as an upside-down triangle or funnel starting with a wide base of information gathering. Ultimately, the wide base of knowledge is narrowed down to specifically reflect your operating numbers on your proforma. Nonrelevant information is discarded. The wide base of information is available at the library in publications such as Robert Morris Associates and Dun and Bradstreet. The business section librarian can help. Major accounting firms also publish operating numbers for various industries. Your accountant may be able to help you get to the right accounting firm. Each industry's trade association has operating statistics. A list of all trade associations is catalogued in a good business library. Many trade magazines publish industry statistics. A list of most trade magazines can be found in Standard Rate & Data Services at your library or the print media department of advertising agencies. The more corroboration you obtain from various sources the better. Your business plan must identify the sources used. Avoid fluff that won't start your journey from the base of the triangle to its ultimate objective -- your proforma operating numbers. This broad information may not reflect the uniqueness of your product or service, specific selling techniques, the personality and size of your company. Therefore, you need to narrow it down by making it a better fit. Perhaps the trade association or the accounting firm can refer you to some of the actual companies in your industry that may be willing to share information with you. Sometimes the companies are willing to help budding entrepreneurs who are introduced through credible channels. Your own experience may help in the narrowing process but its not nearly as credible or objective as a third party source. Narrow the operating numbers even further by talking to prospective customers and salespersons with competing companies. If you are a would-be restauranteur or retailer for example, visit every restaurant or similar retail store in the area. Tactfully question customers exiting competing establishments. How did they like the product (food)? The service? What would they like to see in the neighborhood? What do they think of your idea and what are they willing to pay? Often you can learn from experienced personnel you interview to fill sales positions in your company. Ask them to document their historic production claims with commission
  11. 11. statements and pay stubs. What do they think of your concept? Your pricing? How would they improve it? Sell it? What mistakes are their current employers (your competition) making? Obviously, this anecdotal information should be weighed carefully depending upon the motives and credibility of the source. However, by interviewing enough people, a pattern of accurate data begins to emerge that is useable. If possible, test the market by making actual sales calls in your market (or in a similar market if confidentiality is a consideration) and trying to close deals. Often you will learn more by asking a customer to put up their money than gathering hypothetical data. Of course if you are already in business, your historical numbers become very important in projecting the future. Include all the details and the math. Refer back to it when footnoting the operating numbers in your proforma. So far, this is a hands-on process. It must make sense to you. Don't hire a professional to produce a slick, generic product. It's important that you struggle through it, step-by-step. Internalize it and commit it to memory when telling the bank how you will repay their loan. Use it to share your aspirations with your business partners, key managers and sales persons. Choosing the style of your proforma, chart of accounts, when to use month-by-month, quarterly or annual numbers are determined by how it is to be used. Here your accountant can help. Your banker may have certain requirements. For example, SBA wants month- by-month for the first year and then annually for the next 2 years. Some equity partners like to see 10 years of proforma. If you need help, take your market research and ask your accountant to put it in the right form or do the spreadsheets You may even want to get someone to make it more presentable. One last word of caution. There are many well-intentioned packagers and academics wanting to do your homework for you. They offer seminars, CD ROMs, books, audio or video tapes and even may do the entire process for a fee. Most of the time, their finished product is too generic and full of fluff. Their credentials may be superb, but their product is not what you need to get your loan or to run your company. If you don't clearly understand how the information specifically gets you down the triangle to the operating numbers in your proforma, it doesn't belong in your business plan. FAQ - Buying A Business by Jerry Chautin, SCORE Chapter 48, Atlanta, GA.
  12. 12. How do I go about finding the right business and determining how much it's worth? Purchasing a profitable going concern has advantages over starting from scratch. Having an existing customer base and predictable cash flow gives you a strong advantage. Start by defining your target business. Assess your skills, financial resources and form a picture of the ideal target to acquire. Make a list of all the businesses that meet the profile even if they're not advertised for sale. Contact every owner on your list to let them know that you may be interested in buying and have the financial resources to close the deal. If you decide to use the services of a business broker be sure he or she represents you as a buyer's agent -- not the seller. The broker's track record negotiating sales of businesses that fit your target's profile should also be investigated. Valuing a business is not easy. Even professional business appraisers often disagree. Market value is the most probable price that a typical knowledgeable buyer and typical knowledgeable seller would use to transact a sale if neither are under undue pressure to sell or buy. Of course, it takes only one buyer and one seller and it's unlikely that either will be typical. Additionally, it's unlikely you'll find exact, comparable, recent sales. Value is determined by historic cash flow (revenues less operating expenses) and potential for increased revenue. Sellers want to price the business based on the future but buyers want to buy based upon the past. If they can compromise, a sale takes place. Rather than getting too hung up on the value, I recommend that you dwell on the process for gathering documentation that will tell you if the business is profitable enough to justify your investment. 1. Hire an experienced business acquisition lawyer. Ask for a checklist of all the documents you'll need to get from the seller. Your lawyer will draft the definitive purchase agreement and structure the transaction. 2. Retain a competent accountant. Your accountant will perform due diligence - the process of determining if the documentation provided by the seller is accurate. 3. Review the financial documents. Determine how much cash flow you can expect in the near term after giving yourself a modest salary. Divide the cash flow by your cash investment to get your return on investment. Is the ROI acceptable for your perceived risk? If it is, make an offer. Rely on the process work and you'll find the business that's right for you. FAQ - Buy vs. Lease by Jerry Chautin, SCORE Chapter 48, Atlanta, GA. Is it better to own or lease business real estate? Often the choice to buy or lease space is ego driven rather than making the best business decision. In my opinion, leasing is usually the better option. We've all heard stories about
  13. 13. fortunes made in real estate. But real estate can also be burdensome and may distract you from their primary mission -- to make your business successful. A lesson can be learned from major corporations who choose not to own their buildings. Here are some of the reasons. 1. Flexibility. Leasing affords more flexibility to increase or reduce space as needed. It's a lot easier to renegotiate your lease than dispose of a building in a soft market. 2. Market fluctuation. Timing the market is essential when buying and selling real estate. Professionals are better at it than novices. Too often novices buy at the top of the market and sell at the bottom. 3. Business vs. real estate needs. Business owners often make real estate buying decisions based upon the needs of their business rather than the real estate market. The best time to liquidate real estate may not coincide with the time to sell the business. 4. Managing real estate. Your business may be neglected because of real estate management distractions. Real estate management is a skill best left to professionals. 5. Your exit plan. Selling a business and real estate together may be more difficult. One will have a diminished outcome. 6. Working capital is compromised. Precious working capital will be tied up in the real estate. Lenders require a substantial down payment that could otherwise be used in your business. 7. Better tax break leasing. You can only write off interest expense (not amortization) on the mortgage while lease payments are 100% tax deductible. 8. Cash crunch. You may incur phantom income when selling your depreciated building. Phantom income is taxable profit without corresponding cash flow. 9. Financial ratios. Income to asset ratios are better when leasing than owning real estate. Some lenders consider that important. The romance of owning real estate can be compelling but leasing may be best for you. OVERVIEW OF INTELLECTUAL PROPERTY In 1787, Article 1 Section 8 of the United States Constitution was ratified. It offered a contract to all citizens. In exchange for making creations of the useful arts known, the creator will be given exclusive right to the creations for a limited time. The concept of intellectual property was born. Three types of property are known. These are real property, personal property and intellectual property. That which is owned as real property or personal property can be
  14. 14. seen and touched. What is owned as intellectual property can only be described in words on paper. For example, a book is an item of personal property that can be owned. The right to reproduce the book is intellectual property. Four types of intellectual property are recognized; patents, trademarks (including service marks), copyright and trade secrets. Patents give coverage to inventions. In broad terminology, an invention is a new, useful and unobvious article of manufacture or improvement thereto. Inventions also include composition of matter, method of fabricating a product, methods that are useful in business, ornamental design for article of manufacture and asexually reproduced plants. Inventions and patents are subject to the laws, rules and regulation set forth in Title 35 of the United States Code and in Title 37 Code of Federal Regulations Chapter I. Trademarks are used to distinguish the goods of one party from the goods of another. Service marks distinguish the services of one provider from the services of another provider. Trademarks and service marks are treated equally under law and commonly referred to as marks. Marks are subject to the laws, rules and regulations set forth in Title 15 United States Code and in Title 37 Code of Federal Regulations Chapter I. Copyright covers any original work of authorship or artistry fixed in any tangible medium of expression. Copyright provides legal protection for musical works, dramatic works, choreographic works, pictorial works, graphic works, sculptural works, motion pictures and sound recordings. Copyrights are the subject of the laws, rules and regulations set forth in Title 17 United States Code and in Title 37 Code of Federal Regulations Chapter II. Trade secrets are not subject to the United States Code, nor the Federal Code of Regulations. A trade secret is a contract between two or more people. Trade secrets will not be covered in this seminar series. A brief treatment of trademark and copyright is set forth below in detail. TRADEMARKS A trademark is a word, phrase, symbol, design, or a combination of words, phrases symbols or designs that identifies and distinguishes the source of goods (physical commodities) of one party from those of others. A service mark is the same as a trademark, except it identifies and distinguishes the source of a service (intangible activities) rather than a product. The terms "trademark" and "mark" refer to both trademarks and service marks. The trademark laws of the United States provide protection for marks. OWNERSHIP OF MARK
  15. 15. Only the owner of a mark can file an application for registration. Generally, the person who uses or controls the use of the mark, and controls the nature and the quality of the goods to which it is affixed, or the services for which it is used, is the owner of the mark. The mark could have been created by another and assigned to the owner for registration. EXAMPLES OF MARKS WHICH CAN BE REGISTERED Below are examples of marks which can be registered. • Name - an adjective which defines a specific one of a generic item, e.g., Kleenex™ Tissues • Logo - a fanciful design with or without color. • Symbol - a graphic design. • Slogan - a collection of words usually arranged in a phrase, e.g, Best in the West℠ • Color in a Mark - one, two, or more colors arranged in a distinctive pattern. • Shape - the configuration of the product or the container in which the product is packaged. • Scent or Smell - a selected or distinctive aroma impregnated into a product. • Color as a Mark - a color associated with an object or a service and creating a distinctive commercial impression. Scent, Color as a Mark and Sound can be registered as a mark, but the evidence to establish registerability is substantial. Therefore, the services of a trademark attorney is strongly urged. MARKS WHICH CANNOT BE REGISTERED Registration will be refused for the following: 1. the proposed mark consists of or comprises immoral, deceptive or scandalous matter; 2. the proposed mark may disparage or falsely suggest a connection with persons (living or dead), institutions, beliefs or national symbols, or bring them into contempt or disrepute; 3. the proposed mark consists of or comprises the flag or coat of arms, or other insignia of the United States, or of any State or municipality, or of any foreign nation; 4. the proposed mark consists of or comprises a name, portrait or signature identifying a particular living individual, except by that individual's written consent, or the name, signature or portrait of a deceased President of the United States during the life of his widow, if any, except with the written consent of the widow; 5. the proposed mark so resembles a mark already registered in the Patent and Trademark Office that use of the mark on applicant's goods or services are likely to cause confusion, mistake or deception;
  16. 16. 6. the proposed mark is merely generic, descriptive or deceptively misdescriptive of applicant's goods or services; 7. the proposed mark is primarily geographically descriptive or deceptively graphically misdescriptive of applicant's goods or services; 8. the proposed mark is primarily merely a surname; 9. matter that, as a whole, is functional; and 10. a naturally occurring scent or smell, such as the result of manufacturing perfume is considered to be functional. PREQUESITE TO USING A MARK As noted above, a proposed mark that is likely to cause confusion, mistake or deception within the same class cannot be registered. Use of such a mark can also result in litigation initiated by the holder of the registered mark. Therefore, a search of registered marks should be made prior to adopting and using a mark. A free search can be conducted at the site web of the Trademark Office. On the web, go to www.uspto.gov and click on Trademarks. When the page appears, click on "Main" near the top of the left column to display the home page of the Trademark Office. First, it is necessary to determine the class in which the goods or services belong. In the right column, near the bottom, click on FAQ's - questions & answers". When the page appears, scroll down to "What are the different classes of goods and services" under the heading "Application Process". Each class of goods and services will be listed with an international class number, i.e., "IC". Now return to the Trademark home page and, near the top of the right column, click on "Search" to display types of searches. Select "New User Form Search (Basic)". Enter the proposed mark in the box that appears and click on "Submit Query". Do not enter the generic name of the goods or services into the box; only enter the proposed descriptive mark. This will provide a list of similar marks. Click on each to determine the IC number. If a confusingly similar term within the same class or a related class is found, devise another mark. The absence of a confusingly similar federally registered mark does not necessarily indicate that the proposed mark can be used without restriction. It may, for example, be registered and in use within a state. It is also possible that a confusing similar mark is being used without benefit of either federal or state registration. The user, therefore, has common law rights within the area in which the mark is used and can take action against a confusing similar mark being used within the area. The search may disclose marks that are labeled as "Dead". This indicates that the registration of the mark was not renewed as required by law. However, the mark may still be in use under common law.
  17. 17. A "Full Search" to determine state registration and common law rights, conducted by a trademark attorney, is strongly recommended to determine the availability of a proposed mark. INITIAL PROTECTION Rights in a trademark or a service mark can be established based on legitimate use of the mark. Immediately upon creation, the mark should include the appropriate notation, "TM" for goods and "SM" for services. Examples of each are shown below. STARR℠ Reality Services STARR™ Home Building A trademark and the notation can be placed in any manner on the goods or on containers of the goods or the displays associated with the goods or on tags or labels affixed to the goods. If the nature of the goods makes such placement impracticable, the trademark can be placed on documents associated with the goods or the sale thereof. A service mark notation should be used and displayed in the sale of services or the advertising of services. DATES OF USE The date of first use anywhere is the date when the goods were first sold or transported or the services were first rendered under the mark, if such use is bona fide and in the ordinary course of trade. The date of first use can be anywhere and includes local, national, intrastate, interstate or any other type of use including commerce between the United States and a foreign country. The date of first use in commerce is the date when the goods were first sold or transported, or the services first rendered, under the mark in a type of commerce that may be lawfully regulated by Congress, if such use is bona fide and in the ordinary course of action. Generally, this means use across a state line. REGISTRATION A mark must be currently in use in commerce to obtain a federal trademark registration. A trademark or service mark can be registered by a company or an individual. A federal trademark application can be filed online at www.uspto.gov. A mark can also be registered by use of a paper mail-in form obtainable from the Trademark Office. Regardless of the method used to file a federal trademark application, it is strongly recommended to use the services of a qualified trademark attorney. The basic filing procedures are set forth briefly below. On the Trademark home page, top center, click on "File" near the top of the right hand column. This will access a page entitled "Trademark Electronic Application System".
  18. 18. Before proceeding with the application process, under the heading This will display a page entitled "TEAS TUTORIAL" which provides instructions for using the TEAS form for filing on line. Returning to the "Trademark Electronic Application System" page, under "Forms", click on "ELECTRONIC FILING TIPS" for further information concerning filing on-line. Again returning to the "Trademark Electronic Application System" page, under "Forms", click on "File for a NEW Mark". This will bring up another page entitled "Trademark Electronic Application System". The box at the top of the page is entitled "Trademark/Servicemark Application, Principal Register". Read the instructions in this box and then click on "Trademark/Servicemark Application, Principal Register" at the top of the box. This will display a page entitled "Selection of Application Type". The application can be filed by either the TEAS Form or the TEAS Plus Form. The filing requirements for the TEAS Plus Form are substantially stricter than the requirements for the TEAS Form and should be used only by a trademark attorney. Accordingly, it is recommended that an applicant filing his/her own application use the TEAS Form. To file using the TEAS Form, read the corresponding instructions, check the small box adjacent the title, TEAS Form, and then click on "CONTINUE" at the bottom of the page. This will display a page entitled "TRADEMARK/SERVICE MARK APPLICATION, PRINCIPLE REGISTER". Read the instructions at the top of the page. Fill in the requested information and click "CONTINUE" at the bottom of the page. This will bring up a page entitled "Trademark/Service Mark Application, Principal Register". The mark, if a name or slogan, should be registered in plain block type. The owner of the mark can then use the mark in any stylized form. It is important that the owner of the mark secure rights to the mark, and not limited to any particular style. Therefore, click the box entitled "Standard Characters" and type the words in the box provided. A drawing of the mark and a specimen are required to accompany the application if the mark is a logo, symbol or includes color. For submission of a stylized, design or color mark, refer to "TEAS Electronic Filing Tips". Complete the form and then click on "Validate Form" at the bottom of the page. The Trademark Office provides for filing on line. Read the instructions concerning "electronic signature" and sending payment. After the Certificate of Registration is received, replace "TM" or "SM" with ®. INTENT TO USE Marks that are currently in use in interstate commerce can be the subject of a "Principle Register" application filed with the USPTO. If the mark is not currently in use in interstate commerce, but it is contemplated that the mark will be used in the future, the mark can be the subject of an "Intent to Use" application filed with the USPTO. This will reserve the mark for a specified time.
  19. 19. To file an "Intent to Use" application, follow the instructions above. On the TEAS Form noted above, check on "Intent to Use". A drawing must be submitted. A "Statement of Use" must be filed within a specified time. Under "Basic Facts About Trademarks", click on "Additional Requirements For 'Intent to Use' Applications". The Trademark Office requires a filing fee to accompany an Intent to Use application. Later, a fee is required to file a Statement of Use. BENEFITS OF REGISTRATION The specific benefits accorded a mark registered with the USPTO are: 1. constructive notice to the public of the registrant's claim of ownership of the mark; 2. a legal presumption of the registrant's ownership of the mark and the registrant's exclusive right to use the mark nationwide on or in connection with the goods and/or services listed in the registration; 3. jurisdiction of the federal courts to uphold the registrant's claim to the mark; 4. registration can be used as a basis for obtaining registration in foreign countries; and ability to file the registration with U. S. Customs and Border Protection to prevent importation of infringing foreign material. PROTECTING A MARK AFTER REGISTRATION To protect a mark after registration, several important guidelines should be followed when using the mark in advertising, literature, displays and signs, product packaging, labels, business documents and correspondence. The following are general guidelines: 1. Use the mark consistently, as each deviation may create a new, different mark. 2. Use the mark continuously and do not abandon the mark. File Notice of Continued Use at required times. www.uspto.gov/teas/eTEASpageC.htm 3. Prevent others from using your mark improperly. 4. Prevent others from using and registering confusingly similar marks. File a Notice of Opposition. tess2.uspto.gov/tmdb/tmep/1500.htm#_T1503 5. Maintain your mark by filing, at the appropriate time, "Affidavits of Continued Use" or "Excusable Nonuse". On the Trademark Office home page, center column under "Keep a Trademark Registration...", click on "Maintaining a registration" for information. www.uspto.gov/teas/eTEASpageC.htm 6. Register the mark with the U.S. Customs & Border Protection to prevent importation of infringing products. Instructions are set forth at the end of this paper under the heading "United States Government". COPYRIGHTS
  20. 20. Copyright is a form of protection provided by the laws of the United States for original works of authorship or artistry including literary, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural and audiovisual creations. "Copyright" literally means the right to copy. This protection is available to both published and unpublished works. AUTHORSHIP Only the author or those deriving their rights through the author can rightfully claim copyright. The author may be the creator of the work. In the case of works for hire, the employer and not the employee is considered the author. Copyright law defines a work for hire as: 1. a work prepared by an employee within the scope of his or her employment; or 2. a work specially ordered or commissioned. WORKS PROTECTED BY COPYRIGHT Copyright protection subsists in original works of authorship fixed in any tangible medium of expression which can be perceived, reproduced or otherwise communicated. Works of authorship include the following categories: 1. literary works, including computer programs; 2. musical works, including any accompanying words; 3. dramatic works, including any accompanying music; 4. pantomimes and choreographic works; 5. pictorial, graphic and sculptural works; 6. motion pictures and other audiovisual works; 7. sound recordings; 8. architectural works; and 9. vessel hull design works. WORKS NOT PROTECTED BY COPYRIGHT Several categories of material are generally not eligible for federal copyright protection. These include: 1. works that have not been fixed in a tangible form of expression (for example, choreographic works that have not been noted or recorded, improvisational speeches or performances that have not been written or recorded) 2. titles, names, short phrases and slogans; familiar symbols or designs; mere variations of typographic ornamentation, lettering or coloring; mere lists of ingredients or contents; 3. ideas, procedures, methods, systems, processes, concepts, principles, discoveries or devices as distinguished from a description, explanation or illustration; and
  21. 21. 4. works consisting entirely of information that is common property and containing no original authorship (for example, standard calendars, height and weight charts, tape measures and rulers and lists or tables taken from public documents or other common sources). INITIAL PROTECTION Copyright is a form of protection provided by Title 37 of the United States Code to the authors of original works of authorship or artistry. This protection is available to both published and unpublished works. The original author can transfer the rights of ownership to another. The owner of copyright has the exclusive right to do and to authorize others to do the following: 1. to reproduce the work in copies or phonorecords; 2. to prepare derivative works based upon the work; 3. to distribute copies or phonorecords of the work by sale or other transfer of ownership, or by rental, lease or lending; 4. to perform the work publicly; 5. to display the copyrighted work publicly; and 6. in the case of sound recordings, to perform the work publicly by means of a digital audio transmission. To do any of the above without permission of the owner is an infringement of the rights of the owner and is subject to litigation. It is permissible, however, to record any material received by a television set. The material thus recorded cannot be duplicated, sold, rented nor given to another. MARKING The creator of a work has vested interest in the work, automatically, upon creation of the work. Neither publication nor registration is required. The absence of marking or registration does not compromise the protection. However, it is advisable to register a work as soon as possible, and to give notice to the public by affixing the copyright notice to the work immediately upon completion of the work. Although not required, the notice for visually perceptible copies should contain all the following three elements: 1. the symbol © (the letter C inside a circle), or the word "Copyright" or the abbreviation "Copr"; 2. the year of first publication; and 3. the name of the owner of the work. Example: 2006 © John Doe
  22. 22. If the work is subsequently updated or revised, the date of the last revision should also be included. Intermediate revision dates are not to be included. Example: 2006, 2007 © John Doe A phonorecord is the physical object in which works of authorship are embodied. The word phonorecord includes cassette tapes, CDs, LPs, 45 rpm disks, and other similar formats. The notice for phonorecords embodying a sound recording should contain all the following three elements: 1. the symbol $#8471; (the letter P inside a circle) 2. the first year of publication; and 3. the name of the owner of the copyright. Example: ℗ 2002 ABC Records REGISTRATION Registration of a work is a relatively simple procedure which can accomplished by the owner. The Copyright Office home page provides links to several informative pages which should be reviewed prior to beginning the registration process. The Copyright Office is an entity of the Library of Congress. The Copyright Office is accessed by going to www.loc.gov and then clicking on "Copyright Office" to display the home page. At the top of the page are several bars providing links to various subjects. On this bar, click on "Publications" to access a page which, in the upper left column, displays the headings "Circulars and Brochures" and "Forms". First click on "Circulars and Brochures" to bring up more than five dozen titles, each addressing many related subjects. After obtaining any necessary information, return to the preceding page and click on "Forms". Several application forms are available on line. Each form is dedicated to a specific type of work. The several forms and the corresponding type of work relevant to each are set forth below. • Form TX - literary works including fiction, nonfiction, poetry, reference works, directories, catalogs, advertising copy, compilations of information and computer programs. • Form PA - performing arts, whether preformed live or recorded, including musical works, dramatic works, pantomimes, choreographs, motion pictures and other audiovisual works. • Form SR - sound recordings including music, spoken or other sounds and the underlying musical, dramatic or literary work embodied in the recording. • Form VA - two or three dimensional works of art including fine, graphic and applied art, photographs, prints, art reproduction, maps, globes, charts, technical drawings, diagrams, models and architectural works.
  23. 23. • Form SE - serial works and periodicals including newspapers, magazines, newsletters, annuals and journals. • Form MW - patterns or integrated circuits fixed on a computer chip. • Form D-VH - vessel hull designs. The Copyright Office provides detailed instructions for completing the form. When selecting a form, click on the desired form "with instructions". This will access two pages of instructions and two pages of the form to be completed. At the top of the first page of instructions are several headings which provide helpful information. The first heading, "When to Use This Form", lists all material that can be registered with the selected form. The Copyright Office is very user friendly and lists contacts under the heading "For Further Information". Other useful information is located under the respective titles. Next are the detailed instructions for completing the form. Each instruction is set forth in detail under a heading. The first heading, for example, is designated "SPACE 1: Title". The first entry of the form is entitled "Read the instruction and then enter the data in the appropriate space". An application for copyright must be accompanied by a deposit consisting of copies or phonorecords representing the entire work for which registration is to be made. Special deposit requirements exist for some types of works. The following are examples of exceptions to the general deposit requirements. A motion picture deposit requirement is one complete copy of the motion picture and a separate description of the contents. A literary work, dramatic or musical work published only on a phonorecord, the requirement is a complete phonorecord. Computer program requirement is a visually perceptible in source code of the first 25 pages and the last 25 pages of the code. CD-ROM format requires one complete copy of the material, that is the CD-ROM, the operating software and any manuals accompanying it. Works reproduced in three-dimensional copies, identifying material such as photographs or drawings are required. If confusion exists concerning the deposit requirement for a work, write or call the Copyright Office and provide a description of the work to be registered. The current fee associated with each application form can be found by clicking on "Copyright Fees" under the heading "Circular and Brochures". The fee must be in the form of a check or money order. Credit cards are accepted only if the application is filed in person in the Copyright Office. The three elements of the application, completed form, copy of work and fee, must be sent in one envelope. At the moment, the application cannot be filed online. Online registration is among the goals of the reengineering program of the Copyright Office.
  24. 24. The time the Copyright Office requires to process an application varies, depending on the amount of material the Office is receiving. If the application is in order, the certificate of registration will be received approximately 4 months after submission. The requirements for registration are: 1. a completed application form; 2. a deposit, a copy of the work; and 3. the current filing fee. The Copyright Office is "user friendly" and willing to answer questions and to assist anyone making application to register a work. Contact information is set forth in the upper right corner of each form. PROTECTION AFTER REGISTRATION In general, copyright registration is a legal formality intended to make a public record of the basic facts of a particular copyright. Copyright law provides several inducements or advantages to encourage copyright owners to make registration. Among the advantages are the following: 1. registration establishes a public record of the copyright claim; 2. before an infringement suit may be filed in court, registration is necessary; 3. if made before or within 5 years of publication, registration will establish prima facie evidence in court of the validity of the copyright and of the facts set forth in the certificate; 4. if registration is made within 3 months after publication of the work or prior to an infringement of the work, statutory damages and attorney's fees will be available to the copyright owner in court actions, also the infringement is considered a criminal offense with court imposed penalties; and 5. registration allows the owner of the copyright to record the registration with the United States Customs & Border Protection for protection against importation of infringing copies. Refer to "United States Government" at the end of this paper. DURATION OF COPYRIGHT Copyright law has adopted the basic life-plus-seventy system, which is in effect in most other countries. A work that is created (fixed in tangible form) is automatically protected from the moment of creation and is given a term lasting for the author's life plus an additional 70 years after the author's death. In the case of a joint work prepared by two or more authors who did not work for hire, the term lasts for 70 years after the last surviving author's death. For works made fore hire, and for anonymous and pseudonymous works (unless the author's identity is revealed in Copyright Office records) the duration of copyright will be 95 years from first publication or 120 years from creation, which ever is shorter.
  25. 25. FAIR USE EXCLUSION One of the rights accorded to the owner of copyright is the right to reproduce or to authorize others to reproduce the work. However, under certain circumstances, the work can be used without the consent of the owner. This right is subject to certain limitations known as the doctrine of "fair use". The list of the various purposes for which the reproduction of a particular work may be considered "fair use" includes criticism, news reporting, teaching, scholarship and research. Four factors to be considered in determining whether or not a particular use is considered "fair use" are: 1. the purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes; 2. the nature of the copyrighted work; 3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. the effect of the use upon the potential market for or value of the copyrighted work. UNITED STATES GOVERNMENT PROTECTION AGAINST IMPORTATION OF INFRNGING MATERIAL The United States Federal government provides protection against importation of material that would infringe a registered trademark, service mark or copyright. To obtain this protection, after the certificate of registration is received, the owner should register with the United States Customs and Border Protection (CBP). The United States currently has 327 ports of entry. The CBP inspects all incoming shipments. For this protection, go to www.cbp.gov.. When the home page of the CBP appears, enter "Intellectual Property" into the search box near the top of the page and click on "GO" to display a page of links. Click on "U.S. Customs and Border Protection - Import" to display a page entitled "Intellectual Property Rights". When the page appears, click on "Intellectual Property Rights e-Recordation (IPRR) Online System" to access a page entitled "CBP IPR Enforcement". Read the instructions and at the bottom of the page select either "TRADEMARK" or "COPYRIGHT". The registration number is required to proceed. PUBLICATIONS The federal government has printed many publications containing useful information concerning intellectual property. All are available to the public. Some are free and many can be read online.
  26. 26. United States Patent and Trademark Office. On the web, go to www.uspto.gov to access the Patent and Trademark Office home page. At the top of the page, click on Site Index. When the list appears, scroll down and click on "Products and Services Catalog". On this page are links to three informative pages. The links, which appear in the upper left side are: "Catalog Index", "Trademark Products", and "Trademark Services". United States Copyright Office. On the web go to www.loc.gov and click on Copyright Office. When the Copyright Office home page appears click on "Publications" at the top of the page to display a page entitled "Publications from the U.S. Copyright Office" and then click on "Circulars and Brochures". Then click on "Information Circulars and Factsheets". This will display a list of titles of informative brochures. Click on any title for the complete brochure. Starting A Small Business by Jerry Glen, Starting and managing a business takes motivation, desire and talent. It also takes research and planning. Like a chess game, success in small business starts with decisive
  27. 27. and correct opening moves. Although initial mistakes are not fatal. it takes skill, discipline and hard work to regain the advantage. To increase your chance of success, take the time up front to explore and evaluate your business and personal goals. Then use this information to build a comprehensive and well-thought-out business plan that will help you reach these goals. The process of developing a business plan will help you think through some important issues that you may not have considered yet. Your plan will become a valuable tool as you set out to raise money for your business. It should also provide milestones to gauge your success. Getting Started Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business are: • You want to be your own boss. • You want financial independence. • You want creative freedom. • You want to fully use your skills and knowledge. Next you need to determine what business is "right for you". Ask yourself these questions: • What do I like to do with my time? • What technical skills have I learned or developed? • What do others say I am good at? • How much time do I have to nun a successful business? • Do I have any hobbies or interests that are marketable? Then you should identify the niche your business will fill. Conduct the necessary research to answer these questions: • Is your idea practical, and will it fill a need? • What is your competition? • What is your business advantage over existing firms? • Can you deliver a better quality service? • Can you create a demand for your business? The final step before developing your plan is the pre-business checklist. You should answer these questions: • What business are you interested in starting? • What services or products will you sell? • Where will you be located?
  28. 28. • What skills and experience do you bring to the business? • What will be your legal structure? (see overview as follows) • What will you name your business? • What equipment or supplies will you need? • How will your company's business records be maintained? • What insurance coverage will be needed? • What financing will you need? • What are your resources? • How will you compensate yourself? Your answers will help you create a focused, well-researched plan. Your business plan should serve as a blueprint. It should detail how the business will be operated, managed and capitalized. Types of Business Organizations When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decisions about your business organization include: • Legal restrictions. • Liabilities assumed. • Type of business operation. • Earnings distribution. • Number of employees. • Tax advantages or disadvantages. • Length of business operation. The advantages and disadvantages of a sole proprietorship, partnership or corporation structure follow: Sole Proprietorship. This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner of the business has absolute authority over all business decisions Advantages: • Easiest to get started. • Freedom of action. • Maximum authored. • Tax advantages in very small firms, • Social Security advantages to owner. 3. • Unlimited liability of owner.
  29. 29. Disadvantages • Illness or death endangers or ends business. • Growth limited to personal ambition. • Family or personal affairs easily mixed with business. Partnership. There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. In Florida, a limited partnership limits the personal liability of each partner to their capital investment. Control of the business is shared by the partners. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions as well as their own. A partnership agreement should include the following: • Type of business. • Amount of equity invested by each. • Division of profit or loss. • Partners' compensation. • Distribution of assets on dissolution. • Duration of partnership. • Provisions for changes or dissolving the partnership. • Dispute settlement clause • Restrictions of authority and expenditures. • Settlement in case of death or incapacitation. Advantages • Two or more heads better than one. • Additional sources of capital. • Better credit rating than corporations of similar size. Disadvantages • Death, withdrawal; or bankruptcy of one palrtner. • Difficulty in dissolving partnership. • Debt of one partner becomes the debt of all partners. • Growth inhibited by size of partnership. • No clear line of authority. Corporation. A business may incorporate without an attorney, but legal advice is highly recommended. The corporate structure is usually the most complex and more costly to organize than the other two business formations. Control depends on stock ownership.
  30. 30. Persons with the largest stock ownership control the corporation, not the total number of shareholders. With control of stock shares or 51 percent of stock, a person or group is able to make policy decisions. Control is exercised through regular board of directors meetings and annual stockholders meetings. Records must be kept to document decisions made by the board of directors. Small, closely-held corporations can operate more informally but keeping minutes of company meetings cannot be eliminated entirely. Officers of a corporation can be held liable to stockholders for improper actions. Liability is generally limited to stock ownership, except when fraud is Involved. You may incorporate as a "C" or "S" corporation. The "S" corporation is limited to thirty-five (35) shareholders and may be taxed at the individual tax rates. Advantages • Limited liability for stockholders.. • Continuity. • Transfer of shares. • Easier to raise capital. • Change in ownership need not effect management. Disadvantages • Heavier taxes with "C" corporations. • Management control limited by charter. • Less freedom of activity' • Legal formality. • Expensive to start. Business Plan Outline The following outline of a typical business plan can serve as a guide. You can adapt it to your specific business. Breaking down the plan into several components helps make drafting it a more manageable task. Introduction . Give a detailed description of the business and its goals. Discuss the ownership of the business and the legal structure. List the skills and experience you bring to the business. Discuss the advantages you and your business have over your competitors. Marketing. Discuss the products/services offered. Identify the customer demand for your product/service. Identify your market, its size and locations, Explain how your product/service will be advertised and marketed. Explain the pricing strategy. Financial Management. Explain your source and the amount of initial equity capital. Develop a monthly operating budget for the first year. Develop expected return on
  31. 31. investment and monthly cash flow for the first year. Provide projected income statements and balance sheets for a two-year period. Discuss your break even point. Explain personal balance sheet and method of compensation. Discuss who will maintain accounting records and how they will be kept. Provide "what if" statements that address alternative approaches to any problem that may develop. Operations. Explain how the business will be managed on a day-to-day basis. Discuss hiring and personnel procedures. Discuss insurance, lease or rent agreements, and issues pertinent to your business. Account for the equipment necessary to produce your products or services. Account for production and delivery of products and services. Concluding Statement. Summarize your business goals and objectives and express your commitment to the success of your business. Once you have completed your business plan, review it with a friend or business associate or a Service Corps of Retired Executives (SCORE) counselor. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your lender. The business plan is a flexible document that should change as your business grows Guide To Writing A Business Plan 1. Name of Firm. State the legal name of the business. 2. Owner or Owner-To-Be. State owner(s) name(s), as well as the form and percent of ownership. 3. Information on the Business
  32. 32. • a. Type of Business and Product or Service. o State the general and specific nature of the business (i.e.,general -energy-, specific - oil, solar, wind: or general - food; specific restaurant, catering, farming, ice cream parlor, bakery). o State the type of business(manufacturing, service, construction, wholesale, retail,other). o State the company's goals and electives. o Describe your products and/or services. o State who buys the product/service and who the final users are (briefly here, because youwill be discussing your customers very thoroughly under Market Analysis o Describe how the product/service is sold to customers (walk-in stores,sales representatives, mail order catalogs, telephone orders, etc.). o Describe how and where buyers get the product/service (walk-in stores, mail, delivery, etc.). o Comment on Quality of product/service. o Estimate average price of produce/service. • b. History. o If new, say so. If existing, discuss age of business, prior owners, how acquired and length of time operated by you, image or reputation, number of employees, last year's sales volume and profit and any significant events that have affected the company's development • c. Offices/Plant o Give addresses and description of area and building. o State whether rented, leased or owned. If rented or leased, state from whom and under what conditions. o Describe access to building (major roads/freeways, walking, parking,etc.). Is the location convenient for customers? o State business hours. State size of facility (square footage). • d. Personnel o For the present and future: State the number of employees, type of labor needed (skilled, unskilled, etc.), source of labor (especially minorities, handicapped, veterans or other socially or economicallydisadvantaged groups), timing of hiring (or layoffs). o Comment on the quality of the staff and their job descriptions. • e. Economic/Accounting o Describe how the business will make money. o State how prices are or will be determined and by whom. o State what financial records will be kept and by whom. • f. Inventory o Describe what inventory, raw materials and/or supplies the business uses. o List your suppliers - name, address, type and percent of supplies furnished, length of time you have been buying from each, reliability andfrequency of purchase. o How easy or difficult is it to get necessary supplies? o If it is difficult, how will you deal with potential or actual shortages?
  33. 33. o Are the prices of your supplies steady or fluctuating? If fluctuating, how do you feel deal with changing costs? • g. Legal o State form of business (sole proprietorship, partnership, corporation) and status (already formed or in process of formation). o State licensing requirements (type and licensing source) and status (notyet applied, applied and pending, obtained). o State zoning requirements and status (verified, OK, rezoning). State insurance requirements (type, source) and status. o Have building codes been complied with? o State any health code requirements. o Describe any other laws and regulations that affect the business. o Describe lease, if any. Trademarks, patents, licenses and copyrights should be checked for legality. • h. Future Plans o What are your plans for the future (maintain, expand, diversify, sell,etc.)? 4. Market Analysis • a. Customers (Market) o What is your market, or, who are your customers (wholesalers, retailers,consumers, government, etc.)? o Why does this market need your product/service? Is your product/servicea fad or continuing need; being phased out or created by new technology? o List the characteristics of your average customers: age, location (market area), average income/sales, sex, lifestyle (family or single), working, and other important information. The more you understand about your market, the better you can sell to it. o What do customers like and dislike about your product/service or business? o Estimate the size of the market (in terms of the number of customers). o Estimate how much the total market will spend on these or similar products/services in the next year • b. Environment o Describe any environment factors (economic, legal, social or technological) that affect your market or product/service. Environment factors are those that have significant effects on your operation, but over which you have no control, i.e., county growth, rising energy prices, etc. • c. Competition o Discuss your competition: number of competitors (direct and indirect), type of company (i.e., product or service), location, age, reputation, size (sales or customers), market share. o Estimate how much of your product/service the competition will provide in the next year.
  34. 34. o List competitors (names and addresses) and discuss their product/service features, price, location/distribution, reputation/image, market share, size, age, product/service, quality, and marketing strategy. • d. Competitive Advantages and Disadvantages o Discuss how your product/service meets market needs and how you compare with the competition in terms of product/service features, location/distribution, price, other. o Compare your estimates of the market's demand and the competition's supply. The relationship of supply and demand will affect your marketing and sales strategy, i.e., high demand with low supply usually means less competition and less advertising. Conversely, low demand and high supply indicates a very competitive situation and a need for extensive marketing. • e. Projections o Give your projections in terms of the number of customers or items sold or contracts obtained, etc. 5. Market Strategy • a. Sales Strategy o Present your marketing strategy. Tell how you will get the edge on your competition and get customers. This is your action plan to get business. o Your product/service will sell because one or more of the following is attractive: features, pricing (high, medium or low), distribution system (limited, widespread, etc.), and promotion. • b. Promotion Strategy o Describe how you plan to promote your product/service. State how you will promote: advertising, direct mail, personal contacts, sponsoring events or other (word-of-mouth, trade associations). o If you plan to advertise, state what media you will use: radio, television, newspaper, magazines, telephone book yellow pages, and/or other (billboard, etc.). o State why you consider the media you have chosen to be the most effective. o State the content of your promotion or advertising: what your product/service is, why it is attractive, business location, business hours, business phone number, and other. When you are designing your advertising, remember you are selling to satisfy someone's need. o Refer back to your Market Analysis on need. 5. Management • Why have you chosen this type of business? For key management personnel, include the following: resumes, personal financial statements, tax returns for the last three years, and personal family budget.
  35. 35. • Describe prior experience that qualifies management to run this type of business. • State why you feel you can run this business. State how much time management will devote to running this business. Discuss local contacts who may assist you in your business. 7. Financial • a. Sources and Uses o Describe the project to be financed. o State where the money to pay for the project will come from (sources) and show in detail how it will be used (uses). The most common uses are equipment, leasehold improvements, inventory and working capital. • b. Statements - Historical and Projected o If business is an existing one, include business tax returns and financial statements for the last 3 years. o Financial statements should include:  Balance Sheet  Income Statement  Accounts Receivable and Aging  Accounts payable and Aging  Debt Schedule  Reconciliation of Net Worth o For both existing and new business, project the following financial statements for the next three years (monthly for first year, annual for second and third):  Operating (or Income) Statement with explanation (sales, expenses, profit)  Balance Sheet  Reconciliation of Net Worth  Cash Flow with explanation  Break even Analysis

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