EXORCISING THE GHOST OF PARTNERS PAST by Cliff Ennico

Cliff Ennico

“Three years ago, I started a business with two other guys.  We set up a limited liability company (LLC), and split the ownership 40%, 40% and 20%.

The business grew for about a year but then really tapered off when the recession hit.  All three of us had to take ‘day jobs’ just to make ends meet, but we kept the business going on life support in the hopes things would get better when the economy improved.

Two years ago our 20% partner (let’s call him “Joe”) got a full-time job and decided he didn’t want to be partners with us anymore.  The trouble was he had put $25,000 into the business and didn’t want to write it off.

So, in exchange for his withdrawal from our company we agreed to pay him $25,000, plus interest, in two years.

Three months ago the two years was up.  We still owe the $25,000, plus another $250 in interest.  Our business has some sales but isn’t showing a profit and there’s no way we can make the payment.  We tried to contact Joe and offer to extend the loan for another two years in the hopes things would improve.  He hasn’t returned our phone calls, and a certified letter we sent to his home was returned to us as “unforwardable”.

So now we have a problem.  We’re pretty sure Joe doesn’t have the money to sue us to collect the debt, and even if he did, our company has no money to make the payment (fortunately, the remaining partner and I didn’t personally guarantee Joe’s loan so our houses are not on the line).

How should we deal with Joe at this point?  Can we just blow him off?”

I agree that it is highly unlikely Joe will sue you to enforce his debt, at least right now when your company has no assets.  But there are three reasons you should not “blow Joe off” in this situation:

O  in most states, the statute of limitations for “breach of contract” (such as a loan default) is quite long – sometimes as long as three to five years – so Joe has plenty of time to wait until your company is growing and making serious money before he “lowers the boom” and brings a lawsuit against you;

O  in such a lawsuit, Joe is likely to argue that the two of you didn’t run the business seriously enough, in an effort to persuade the court to “pierce the corporate veil” and allow him to go after your personal assets, even though you did not personally guarantee his loan;

O  if anyone expresses an interest in investing in your company, you will have to disclose your default on Joe’s loan and your outstanding debt to Joe as a “contingent liability” of your company – a sure “turn off” for any potential investor.

You should make every effort to find Joe and get him to the bargaining table.  His full-time employer should be able to give you a forwarding address, even if Joe no longer works there.  Hire a private investigator if necessary.

Once you track down Joe, you should definitely offer to extend the loan but will need to include some “bells and whistles,” both to make the deal more attractive to Joe and make sure you don’t find yourself in exactly the same situation two years from now.

Here are some ideas you should run by your attorney:

  • a “call” provision allowing the LLC to convert the debt back into a 20% equity stake in the company if the debt isn’t paid on time;
  • a “preemptive right” provision allowing the LLC to convert the debt back into an equity stake in the company if someone invests $250,000 or more into the company (the conversion price would be the same paid by the new investor);
  • a “net proceeds of sale” provision giving Joe 20% of the “net proceeds” (basically gross proceeds less brokers’ commission, legal and accounting fees, and other transaction expenses) of any sale of the company during the two-year period; and
  • an “equity kicker” provision giving Joe options or warrants to acquire shares in the company, in addition to the interest on his loan.

It might be that Joe is in a better position than he was two years ago and is willing to write off his $25,000 investment in your company.  If he does, though, be careful of unintended tax consequences.  The federal tax laws treat the “forgiveness of debt” as income to your company.  Since your company is an LLC, that $25,000 in “phantom income” would pass through to you and your remaining partner and you would each have to pay taxes on your share.

In fact, if Joe really hated you guys and wanted to get back at you, the best way for him to do that would be to send you notice forgiving the loan.  Hopefully he’s not reading this right now.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

When You’ve Bought a Franchise, But the Numbers Don’t Add Up – Cliff Ennico

Cliff Ennico “A partner and I invested in a franchise last year.  The franchise offers a variety of healthy foods, but focuses primarily on soups and salads.

We were offered a number of territories, but chose a large downtown area in an upscale Midwestern city.

The problem has been finding the right location for the first restaurant.  We have found a potential site, but the rent is extremely high and the landlord won’t budge.  We have ‘run the numbers’ and the bottom line is that we will have to sell about 250 soups and salads every day just to cover the rent.  My partner and I are not comfortable we will be able to achieve that sales volume anytime soon, especially in the current down economy.

The franchise really likes this location and is pushing us to start building our territory since we’ve had it for a year now.  But we do not want to ‘throw good money after bad’ building a location that won’t ever be profitable.  How can we handle this situation in a ‘win win’ way?”

Generally, the time to figure out whether a franchise is going to work is BEFORE you buy the franchise, not after.  One of the key issues you want to raise with any franchise, before you buy, is their “average breakeven”:  how long does it take the typical franchisee to generate enough operating revenue to cover its monthly operating expenses and start paying back their initial investment?  If the franchise won’t disclose this information, you should call lots of their franchisees and ask them point-blank how long it took them to “break even”.

Another key issue is “geographic distribution.”   The perfect franchise is one that has franchisees in all 50 states and in every conceivable demographic area:  high income, low income, urban (high population density), rural (low population density), and so forth.  A franchise that is very successful in rural America may experience difficulty when it opens outlets in large cities where real estate, labor and, well, everything else is a whole lot more expensive.  Item 20 of the franchise’s Franchise Disclosure Statement (FDD) will provide this information.

Since you have already bought the franchise and selected your territory, it is too late to do this type of homework.  Here are some ways you might – might – be able to move forward with this franchise.

Show Them the Numbers.  It won’t be enough to call the franchise and say that you and your partner are getting “cold feet.”  The franchise won’t like that, and may be tempted to terminate your franchise agreement (the default section of the agreement usually allows them to do that).

You will need to make a detailed presentation – in spreadsheet format – showing them clearly that the numbers at this location aren’t likely to work.  Show them exactly how many daily, weekly and monthly sales you will need to generate at the franchise’s current price level to meet your monthly expenses at this location, and ask bluntly if any of their other franchisees has succeeded in achieving that sales level within a reasonable time after opening.

Spell Out Your Breakeven Expectations.  Now it’s time for some hardball.  You will need to state clearly that you and your partner do not want to build a location “unless there’s a better than average chance we will break even within X to Y months; if it takes much longer than that we will be looking for the exits and cut our losses.”  Ask to see the “average breakeven” figures for other franchisees, especially those in high-rent areas similar to your territory.

Renegotiate Royalties.  If the franchise is really eager for you to build a location at this site, they may be willing to temporarily waive or reduce their royalty rates and other regular monthly fees.

Renegotiate Prices.  Many franchises base their product and service prices on nationwide average price data, disregarding the fact that it costs more to operate in certain areas of the country than others.  If you are the first franchisee to operate in a high-rent urban area, you may be able to persuade the franchise to raise their price levels just in your territory.

Keep in mind, though, that you may be raising your prices so high that you discourage business.  Nobody I know, even in New York City, will pay $50 or more for a basic soup-and-salad combination (unless it’s being offered by a celebrity chef at a four-star restaurant).

Renegotiate the Territory.  If some of the franchise’s other franchisees are “breaking even” quickly in territories that don’t look like yours, you may be able to exchange your territory for another one where you will be likelier to succeed.

Exit the Franchise.  If push comes to shove, you may have to “throw in the towel” and exit the franchise empty-handed.  It will be painful, but at least you will know you have “cut your losses”.  Better luck with the next franchise.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

Notes From a Business Plan Competition Part 2 – Cliff Ennico

During the afternoon session of last week’s Business Plan Competition sponsored by The Entrepreneurship Foundation (www.entrepreneurshipfoundation.org), the focus was on “personal businesses” (retail and service concepts that weren’t likely to grow beyond a local or regional market).  Here are my “judge’s notes” on some of the more interesting business plans that were presented at the event.
Plan # 7:  “Light Show” Projection Company. The Concept:  An event company that, using special projectors, projects promotional videos, light shows and other content onto walls and other large flat surfaces. What I Liked:  A business like this has very low startup costs, and the demand is certainly there (some of the “Occupy Wall Street” protests popularized this method of broadcasting their message to commuters in New York City). What I Didn’t Like:  Because of the low startup costs, anyone can get into this business.  The future of this business is the content:  developing proprietary images and producing customized videos for each event that could be licensed to other similar companies.  Hey, this is how the movie industry began in the late 1800s! Other Concerns:  Local zoning laws may prohibit this type of production without a license, which the company will need to obtain for its clients.  Also, I had a concern that images like this could be another source of distraction for already-multitasking drivers. Plan # 8:  Letterpress Design House. The Concept:  A letterpress printing firm creating wedding invitations, marketing brochures and other small-run items for people and companies looking to create a distinctive, high-quality image. What I Liked:  Letterpress is truly beautiful, and much preferable to mass-produced invitations. What I Didn’t Like:  Each order will be for only a small quantity (100 to 300 items on average), and will require unique press plates to be prepared.  This will be both labor- and cost-intensive, and there may be issues about who owns the intellectual property rights to the plates.   Plan # 9:  “Glow in the Dark” Gloves for Bicycle Riders. The Concept:  Gloves containing multi-colored LED lights for bicycle riders who want to give “turning signals” to drivers behind them. What I Liked:  High-end bicycle riders will pay just about anything for devices that will improve their safety on the road. What I Didn’t Like:  A number of competitors are already offering LED-lit jackets and other full-body riding wear that will probably be easier to see.  Also I had questions about whether or not the LED lights would be visible in broad daylight.  If I can’t see your arm making a turn signal, having your hand light up won’t help much. Plan # 10:  Decorative Flower Pots for Fence Posts. The Concept:  A flower pot that fits neatly over a fence post. What I Liked:  The concept has the potential to be a “line” of products instead of just a “one off”. What I Didn’t Like:  This is an item that would sell best in Wal-Mart, Lowe’s and Home Depot stores.  Raising the capital necessary to produce the thousands of pots that would be necessary to satisfy these stores’ huge inventory needs will be difficult.  Also, I couldn’t see anything patentable about the product, so it is sure to generate low-cost Asian competition. Plan # 11:  iPad Application for High School Athletes. The Concept:  An iPad “app” that enables high school athletes and their coaches to upload statistics and other performance data to a cloud-based database in “real time” as an athletic event is taking place. What I Liked:  There would be huge demand for this product, especially from high school athletic programs eager to publicize their athletes’ standing to potential college recruiters. What I Didn’t Like:  High school athletes may be somewhat prone to “inflating” their performance statistics, and the “app” didn’t seem to have a reliable method for correcting or changing data once posted to the “cloud”.  Also, I wasn’t clear what the company could do for an encore once every high school athletic department in the country had invested in this technology. Plan # 12:  “Healthy Snack” Vending Machines. The Concept:  Vending machines offering all-natural, organic and other “healthy” snacks at health clubs, gymnasiums, and school cafeterias. What I Liked:  The demand is definitely there, along with a large surplus of used vending machines that can be purchased and “repurposed” at relatively little cost. What I Didn’t Like:  Several companies in California have already rolled out such a program, making it imperative that this company “get big fast” and saturate those markets in the United States that haven’t already been penetrated.  Also, organic and all-natural snacks have a much shorter shelf life than their competitors, requiring more frequent restocking of the vending machines. Another Comment:  This type of business lends itself well to a “business opportunity” model, in which entrepreneurs purchase the vending machines and the snacks from the company but are responsible for “selling” and placing the machines in health clubs and other appropriate locations within a clearly-defined territory.  
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

Notes From a Business Plan Competition Part 1 – by Cliff Ennico

Cliff EnnicoEach year the Entrepreneurship Foundation (www.entrepreneurshipfoundation.org) hosts a business plan competition in New Haven, Connecticut.

“Teams” from universities throughout New England submit business plans to the competition, and the 25 best are selected for an all-day “pitch” session to a three judge panel consisting of a venture capitalist, an angel investor, and (ahem) myself. I was privileged to judge the 14th annual Connecticut Business Plan Competition (as the event is called) last week.  I judge several business plan competitions throughout the country, and I find a lot of “teams” come up with similar ideas.  So, for those of you readers who are studying entrepreneurship and want to know how judges look at your team’s business plan, here are my handwritten notes on some of the ideas presented at last week’s competition. Plan # 1:  Online Dating Service.   The Concept:  a website that combines the two most common ways couples meet — finding potential partners online who are friends-of-friends. For a small monthly subscription fee, customers upload their Facebook profiles to the site, and people who think someone’s Facebook friend is “hot” can contact that someone for an introduction. What I Liked:  Online dating is too scary for most people, yet people are reluctant to “matchmake” online by recommending their friends to potential dating partners.  This is a “Goldilocks” solution that resolves both problems. What I Didn’t Like:  Too much competition from Match.com, eHarmony.com, and other sites.  Also, if a customer’s Facebook friend doesn’t want to make herself available for online dating, there is no way for the friend to “opt out” of the site’s database (other than “defriending” the customer). Plan # 2:  Skills Certification for Online Hiring: The Concept:  a website where people seeking specific jobs can take an online examination “certifying” them for particular job skills.  The results are published online, so employers seeking specific skills can see how a candidate scored on the examinations for those skills. What I Liked:  From an employer’s perspective, this is a great idea, as it helps them determine if someone claiming to have a particular skill actually has it. What I Didn’t Like:  Several competing sites already test candidates for proficiency in skills that can be quantified (such as knowledge of a particular computer programming language).  It will be difficult if not impossible to come up with an examination that effectively tests skills that cannot be quantified (for example, negotiating and other interpersonal skills). Plan # 3:  “Reviews” Website for Senior Caregivers. The Concept:  A website where senior citizens living at home and their families can rate their in-home caregivers and local caregiver agencies. What I Liked:  There’s a real need for a service like this. What I Didn’t Like:  There’s no way to determine if the reviews are fair or accurate.  Also, I wasn’t sure if anyone would be willing to pay for the service, meaning it would have to rely almost entirely upon advertising revenue. Plan # 4:  Attachment to Video Game Device. The Concept:  A laser attachment for the currently existing motion sensing technology for the Sony PlayStation 3 device called “The Move”. What I Liked:  Third party point of view (POV) videogamers are fanatics who will spend money on anything that will give them a competitive edge. What I Didn’t Like:  Because the attachment must be compatible with the device’s technology, Sony or the device manufacturer would probably have to “authorize” the attachment, and they will want money for that.  Also, nothing prevents Sony or the device’s manufacturer from developing a laser attachment on its own. Plan # 5:  “Parkour” Course.   The Concept:  The development of “parkour” courses, fabricated from abandoned buildings where enthusiasts practice high-risk stunts within safe environments (“parkour” is a gymnastic form of free-running originally designed for the French military, where people rush through urban obstacles as quickly as possible using abnormal movements). What I Liked:  Nobody in the United States is doing this (there are several courses in France and the U.K.). What I Didn’t Like:  “Parkour” is virtually unknown in the U.S., even among extreme sports enthusiasts, so the market size will be extremely small and may not sustain even a small course.  Also, because the nature of “parkour” is to deal with unexpected obstacles as they crop up, the course will need to be changed frequently, at significant expense, so that participants cannot “learn” the course too quickly. Plan # 6:  Device That Eliminates Loose Change. The Concept:  A debit card attachment that automatically deposits loose change into the customer’s account at the point of sale. What I Liked:  The device eliminates coins and encourages saving. What I Didn’t Like:  The customer would still receive bills in change so it’s not a perfect “cashless” solution.  Also, the customer would be required to present two cards at the point of sale instead of one, increasing the time necessary for the cashier to process each transaction.   More next week . . .

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

Crowdfunding and the New Federal Jobs Act by Cliff Ennico

Cliff EnnicoAs I am writing this, a new law called the “Jumpstart Our Business Startups Act” (J.O.B.S. for short) has passed both houses of Congress and is sitting on the President’s desk awaiting signature.

Among other things, the law will change the federal securities laws to make it easier for small companies to raise capital from total strangers by “crowdfunding” – soliciting small investments from hundreds (sometimes thousands) of individual investors and their retirement accounts through online advertising.

Up to now, there have been two major regulatory roadblocks to “crowdfunding” in the United States:

  • the Securities and Exchange Commission (S.E.C.) requires a startup company to go through the cumbersome initial public offering (IPO) process if it intends to sell more than $1 million in securities by “general solicitation or general advertising” (basically any means of mass communication, including the Internet); and
  • even though offerings of less than $1 million are exempt from this requirement, the securities laws (known as “blue sky laws”) of most states impose additional restrictions on these small offerings – for example, in Connecticut, the proposed sale of securities to more than 10 people (whether or not Connecticut residents) triggers a requirement that the company file a detailed business plan with the state Department of Banking.

The new J.O.B.S. Act opens the door to crowdfunding in two major ways:

  • it states clearly that offers and sales of up to $1 million in securities may be sold by “general solicitation and general advertising” as long as certain conditions are met (more on those later); and
  • it expressly overrules state “blue sky laws” that are inconsistent with the federal law.

So small companies looking to raise capital should be breaking out the Champagne, right?

Not so fast . .

The J.O.B.S. Act imposes a few conditions on “crowdfunding”.  Here are the most important:

  • the amount of each individual’s investment is limited to $2,000 or 5% of the individual’s annual income or net worth, whichever is larger, if the individual’s annual income or net worth is less than $100,000;
  • the amount of each individual’s investment is limited to $100,000 or 10% of the individual’s annual income or net worth, whichever is less, if the individual’s annual income or net worth is $100,000 or more;
  • the transaction must be accomplished exclusively through a “funding portal” that is registered with the S.E.C.;
  • the company files an offering statement with the S.E.C. and delivers copies to each investor; and
  • the company agrees to file an annual report on its operations and financial condition with the S.E.C. and delivers copies to each investor.

The offering statement must contain the following information:

  • the company’s name, legal status, physical address and website address;
  • the names of its directors and officers (for a corporation) or managing members (for a limited liability company), and each person owning more than 20% of the company’s securities;
  • a description of the company’s business and its anticipated business plan;
  • a description of the company’s financial condition, including tax returns and financial statements reviewed by the company’s president (for offerings of up to $100,000), financial statements reviewed by an independent accountant (for offerings of $100,001 to $500,000) and audited financial statements (for offerings of $500,001 to $1 million);
  • a description of how proceeds of the offering will be used;
  • “the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount”;
  • the offering price of the securities and the method the company used to set the price;
  • a description of the company’s ownership and capital structure and “the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties”; and
  • such other information as the S.E.C. may require by regulation.

In other words, companies desiring to use the “crowdfunding” option will have to go through much of the paperwork involved in an initial public offering (IPO), although on a streamlined scale, and will have to file annual reports with the S.E.C. just like public companies do.

Presumably, entrepreneurs setting up “portals” for crowdfunded offerings will help their customers with the necessary paperwork and monitor each customer to ensure compliance with the law.  But those entrepreneurs will have to wait a while.  First, the S.E.C. will have to develop rules for companies wishing to register as “funding portals” (the law gives the S.E.C. 270 days to do this).  Next, the S.E.C. will have to review and approve applications by companies seeking “portal” status.  You just know those first few applications will take a while to work through the system.

In short, while the J.O.B.S. Act is a step in the right direction, don’t hold your breath that your company will be able to “crowdfund” any time soon.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

To Resell, or Not To Resell, That Is the Question – by Cliff Ennico

Cliff Ennico“I am a recent immigrant to the United States from [for purposes of this column, we will refer to the reader’s country of origin as “Whereverland”].

I am the owner of an online retail store targeting a niche market of Whereverland people living in North America. We sell our stuff exclusively online, in the Whereverland language, and I have a team of graphic designers that is making sure that all our designs are unique.

What I would also like to do is sell brand name apparel and accessories back in Whereverland as I know that there is a huge demand for designer names. My question is; do I have the legal right to resell branded items if I purchase them from a liquidator or a major department store, all of whom are licensed to sell and/or distribute these branded products?”

The short answer is “it depends, but in most cases you won’t be able to do this without the manufacturer’s permission.”

What you are seeking to do in Whereverland is an example of what is increasingly known as “retail arbitrage” – buying merchandise at retail from a brick-and-mortar outlet and then reselling it online at an even higher price to people (such as the citizens of Whereverland) who cannot find that merchandise locally and who will pay a significant premium over retail for it.

“Retail arbitrage” is generally legal, but I think you will encounter some difficulties if you follow this plan.

Manufacturers – especially those dealing in “luxury goods” such as designer-label apparel – are notoriously concerned with controlling their channels of distribution.  They see themselves as having an “image” to protect, and will want to be sure your website measures up to that “image”.  If you fail to meet their uncompromisingly high standards, you may find yourself facing a lawsuit from the manufacturer for “trademark infringement” (using their intellectual property without permission) or “misuse of trade dress” (selling their merchandise in such a way as to “cheapen” their image in the marketplace).  Since I’m assuming you do not have the financial resources to withstand such a lawsuit, you probably will have to fold your business as part of any settlement with the manufacturer.

Why would a manufacturer do this when all you are doing is creating a new market for their merchandise they should be happy to have?  Because many manufacturers – particularly in the apparel industry – offer exclusive rights when they sign distribution agreements with department stores and other retailers.  These resellers are expressly prohibited from selling at wholesale (or for resale), and your activities may inadvertently put them in breach of their contracts with the manufacturers.

There may be other reasons as well – for example, an exclusive agreement with a regional distributor who has the exclusive right to sell in Whereverland but hasn’t yet exercised that right.  Such a distributor will not look kindly upon your “invading his turf” and will complain to the manufacturer, triggering a lawsuit.

If you suspect these manufacturers do not have distribution outlets anywhere in Whereverland, your best course of action is to contact the manufacturers directly, explain what you are trying to do, and offer them for a one-year “trial license” to sell their merchandise on your website to Whereverland citizens and expatriates living in the United States.  The license should be exclusive for the one-year period, with the understanding that either party may terminate the relationship after the first year on reasonable notice (I would suggest at least six months) to the other party.

By offering this arrangement, you ensure that you have the legal right to sell brand-name merchandise to the Whereverland community.  You will also increase the odds of your becoming the leading online destination for Whereverland shoppers, as luxury-goods manufacturers tend to “cluster” on websites that also distribute other lines of luxury merchandise.  If this happens, you will have considerable bargaining leverage to “lock in” your suppliers for longer periods at more favorable terms.

The manufacturer, for their part, gets the opportunity to develop a new market for their merchandise quickly and with limited risk (if things don’t work out they can always terminate after one year), and without compromising any of their existing agreements with U.S.-based online retailers.

To land your first license, I would recommend preparing a PowerPoint® presentation detailing the size and quality of the Whereverland market, the desirability of reaching that market, and your expertise and position as a leading marketer to Whereverlanders.  You should be prepared to provide Web traffic statistics on your existing Whereverland customer base, along with comparable data for other websites targeting this market.

Failing that, you should consider offering your services as a consultant to the manufacturers on all things Whereverland, helping them market directly to that community.  By demonstrating your knowledge of the market and your expertise in reaching them, you will establish credibility with these companies and make yourself a more attractive candidate for a distribution deal in the future, if not today.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

The Lorax, The Once-ler, The Environmentalist and the Entrepreneur by Cliff Ennico

Cliff Ennico

As you are reading this, the hot new children’s movie is a 3D-CGI film adaptation of Dr. Seuss’ book “The Lorax.”

For the record, I am a lifelong fan of Dr. Seuss (the late Theodore Geisel, who died in 1991 at the age of 87).  I had all his books as a kid, and actually had the chance to meet him — albeit only for a few minutes — when I was an undergraduate at Dartmouth College, also his alma mater. And I loved every one of his books – except this one. Written towards the end of its author’s life, “The Lorax” is a preachy environmental fable without humor or a happy ending.  Of all Dr. Seuss’ books, it is probably the most controversial. For those not familiar with “The Lorax,” here is a short plot summary (for a more detailed one, see http://en.wikipedia.org/wiki/The_Lorax):

A young boy living in a polluted world visits an elderly hermit known as “The Once-ler” and asks how the world got that way.  The Once-ler answers that once the world was beautiful, containing a wide variety of happy animals that lived among beautiful “Truffula trees.”  The Once-ler cut down the trees, because they were excellent material to make products he invented called “Thneeds.”  The “Thneeds” became a huge marketing success, forcing him to expand his factory and cut down more Truffula trees.

The Lorax, a small orange creature who spoke “with a voice that was sharpish and bossy,” warned the Once-ler that the trees are the environment he and his fellow creatures need to survive.  The Once-ler ignored him, and soon the land became polluted, the animals fleeing to more hospitable areas and the Truffula trees dwindling until there were none.  Deprived of its key raw material, the Once-ler’s factory was forced to close, and the Lorax disappeared, leaving the Once-ler to view the ruins of his enterprise with remorse. The book closes with the Once-ler giving the boy the last Truffula tree seed and asking him to plant it so the trees, and perhaps also the Lorax, will return. It is no secret that Hollywood producers love stories that present the profit motive in a negative light – think “Wall Street” or, come to think of it, just about every recent Hollywood movie that has a villain.  It is also no secret that Hollywood producers also love “David and Goliath” stories with environmental themes – think “A Civil Action” or “Erin Brockovich”. But “The Lorax” takes Hollywood’s traditionally anti-capitalist, anti-business posture to a new level. In Dr. Seuss’ book, the Once-ler character is never depicted.  You see only his arms and legs, which are enough to conjure up the image of a green, shriveled up thing similar to the Grinch and other Dr. Seuss bad guys.  In some cartoon versions of “The Lorax”, the Once-ler is depicted as a stereotypically pot-bellied capitalist (picture the “Monopoly” man wielding an ax). But in the new movie, the Once-ler is depicted as a young, attractive Silicon Valley type entrepreneur (see http://seuss.wikia.com/wiki/The_Once-ler) – a basically decent guy who sincerely believes his “Thneeds” will help people live better, more satisfying lives and who isn’t particularly greedy or self-centered.  The Lorax’s enemy now is not capitalism, Wall Street, or corporate greed, but the entrepreneurial spirit. Children’s books (and movies) are extremely dangerous things.  Most authors (and producers) of these choose not just to tell a story, but to send a “message” or otherwise try to indoctrinate young people in a certain point of view.  And children, especially the young ones likely to love Dr. Seuss stories, are impressionable and trusting enough to accept these messages as gospel truth.   We are all shaped, emotionally and mentally, by the books and movies we devoured as children.  If you saw the Disney movie “Bambi” as a child, how do you feel about hunting for sport? Please don’t get me wrong:  nothing, and I mean nothing, is more important than preserving the environment.  What good is a healthy economy if people can’t breathe the air?  Teaching children the importance of preserving the environment is a desirable, even noble, goal. And, let’s face it, if history is any guide, industrial enterprises have not been great stewards of the environment.   But sending small children the message that profit-oriented businesses creating products that people want and need inevitably destroy the environment and hurt small, fuzzy, cute creatures will not help create the innovators and entrepreneurs America will desperately need –in great numbers – to survive the next century.  

That message will instead create only nasty, irritating, opinionated creatures like the Lorax himself, speaking “in voices both sharpish and bossy.”

We need children’s books and movies that present a more balanced message – that a free-market economy and a healthy environment are not mutually exclusive, and that profit-oriented businesses can solve environmental problems as well as create them.  

As the Once-ler says, “unless someone like you cares a whole awful lot, nothing is going to get better, it’s not.”

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

DISASTER RECOVERY MADE SIMPLE by Cliff Ennico

Cliff Ennico“I am a lawyer who works in a small town in the Midwest.  A tornado struck last week, for the first time in over 30 years, and my office was destroyed.

I have insurance which will replace most of my office furniture and equipment, but the worst part was that my computer hard drive was destroyed, containing all of my client’s information and contracts and at least five years’ worth of e-mails.  There is no way I will be able to replace that information without spending thousands of dollars on a ‘data recovery service.’

Going forward, what are some of the things I should be doing to prevent this from happening again?”

In a word, “ouch.”

According to the U.S. Department of Labor, 40 percent of all businesses that experience a “disaster” go out of business within the next five years.  In this data-driven age, you need to take steps to protect your critical, irreplaceable information.

Much has been written about the need for businesses to have a “disaster recovery plan,” but many small businesses don’t have the time or the money to put a full protection program into place.

If that’s your situation, here is what you need to do.

Be Redundant.  We know that our computer data is intangible – you cannot see it, touch it or smell it.  But your data DOES have a very specific location.  It lives on a computer server somewhere – either the hard drive on your desktop PC or laptop, or someone else’s computer server somewhere in “the cloud.”  Either way, if something happens to that server, your data could be destroyed.

The key to protecting your data is to make sure it exists on two or more servers at the same time – what computer specialists call “redundancy.”  That way, if disaster strikes one server, the “copy” on the other server still exists and can be accessed.

There are online services such as Carbonite (www.carbonite.com) and Mozy (www.mozy.com) that will automatically back up your computer hard drive once each hour, day or week and create a duplicate copy of your data on a remote server.

The same goes for your Website content.  Whenever my computer pro updates the content on any of my Websites, I always ask for a backup CD or DVD of the entire site.  It costs an extra $20 to $30, but this way if my Internet service provider’s server is knocked out, I can contact another ISP and get the entire Website back up in less than 24 hours.

There are also services such as FinalHost.com, and software products such as Wget (www.gnu.org/software/wget), that will help you create duplicate websites (called “mirror sites”) and update them regularly.

Backup, Backup, Backup.  Most of us know enough to back up our “My Documents” folder at least once a week, or once a month.  But that’s not nearly enough.  If you use Microsoft Office, you should be backing up all your Word, Excel, and PowerPoint files at least once a day.

If you are 100% dependent upon e-mails (and who isn’t these days?), these should be backed up daily as well.  If you use Microsoft Outlook, it’s fairly easy to “send” all of your e-mails to a backup CD – the process takes about five minutes.  I would recommend you do a “cumulative” backup (all of your e-mails) instead of an “incremental” backup (just the e-mails that have accumulated since the last backup) – that way if your computer crashes you won’t have to download multiple backup files.

Even if you use a “cloud” e-mail service such as Gmail, Hotmail or Microsoft Network, you should back up your e-mails at least once each week using a backup utility designed specifically for that “cloud” service:  for example, Gmail-Backup (www.gmail-backup.com) for Gmail users, or Thunderbird (www.mozillamessaging.com/en-US/Thunderbird) for Hotmail users.

Don’t forget your smartphone: search “[the name of your phone] backup utility” for a list of backup solutions for your mobile data.

Separate Your Backups.  The dumbest backup mistake is to leave the backup CD or DVD next to your computer.  If your backup CD or DVD is in the same place as your computer hard drive, they will likely both be destroyed if a disaster strikes.

Keep your backup CDs or DVDs at home, in a safe deposit box, or in some other remote location.  If you have time, make two backup CDs or DVDs and keep each of them in separate locations, as the likelihood of a disaster striking all three locations at the same time is extremely low.

Find the Time.  Yes, all of this takes time, a few minutes a day.  But it may possibly save your business.  Pick a time each day, such as 12 noon, stop whatever you’re doing, and back up your hard drive.  Don’t wait until the end of the business day to back up.  You will be tired, or rushing to get out the door, and the temptation to put this vital chore off until the next day will be tough to resist.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

Building A Successful “Authorized Rep” Program by Cliff Ennico

Cliff Ennico

“My wife and I have started a line of all-natural cosmetics.  We launched our website a while back, and have received several inquiries from customers who love our products so much they want to become sales representatives for us.

Both of our mothers were ‘Avon ladies’ when we were children so we know a little bit about how this works.  What are some of the legal issues we will face in setting up a ‘rep’ program similar to Avon’s?”

Back in the day, when the Baby Boomers were young, every neighborhood had at least one “Fuller Brush man” or “Avon lady” selling products door to door in their spare time.  Interestingly, the model appears to be coming back with the increasing popularity of social media websites such as Facebook and LinkedIn.  A lot of companies are looking to pay people for recommending and selling their products to their friends, neighbors, family members and acquaintances, and even established companies have “affiliate programs” where people can receive commissions for selling the company’s products on their own websites.

Here are some of the legal issues you will need to consider when setting up a “rep” program:

Decide Whether Your Reps Are “Agents” or “Distributors”.  There’s a big difference.  An “agent” generates orders for your products.  You fulfill and ship each order, and collect the money directly from the customer.  Then, every couple of weeks or once each month, you pay your rep a percentage of the sales made each month.

A “distributor,” on the other hand, buys your products directly from you, at a discount, then resells them to the customer.

The benefits of an “agent” program are:

  • you know who your customers are, and can build a customer list, enabling you to sell more stuff directly to them;
  • you know your customers are getting good service, because you are providing it.

The benefits of a “distributor” program are:

  • you get paid up front, with fewer orders and returns;
  • your rep handles any collection issues.

Make Sure Your Reps Are “Independent Contractors.”  While you can set guidelines for your rep’s conduct (for example, you can prohibit them from making any statement about your products you haven’t authorized), you cannot – CANNOT – direct and control their activities.  That makes them “employees”, requiring you to withhold taxes from all commissions and other amounts you pay them.

Your reps must be able to set their own hours.  Also, “repping” your products should not be their only job.  If you sense a rep is working full-time selling for you, you might ask them to form a corporation or limited liability company (LLC) for their business as legal entities generally are not considered employees for tax purposes.

Make Sure You Are Not Setting Up a “Franchise.”   If you allow your reps to conduct business under your trademark, or require them to pay an upfront fee to become your rep, operate within an exclusive territory, or comply with detailed rules as to how and when they may sell your products, there’s a risk the Federal Trade Commission may view your rep program as a “franchise,” requiring you to comply with a complex set of disclosure and other legal requirements (http://en.wikipedia.org/wiki/Franchise_Rule).

Make Sure You Are Not Setting Up a “Network Marketing” Program.  If, in addition to paying your rep a commission on products they actually sell, you also allow them to hire other reps and pay them a commission on all sales these “sub-reps” generate, you are starting to look like a “network marketing” program.

The “network marketing” label is generally bad for branding, as it is associated in the public mind with cheap, shoddy goods and aggressive sales tactics.  If not carefully monitored, a network marketing program can degenerate into an illegal pyramid scheme (i.e. your reps will be making more from hiring sub-reps than they do actually selling your products).  There’s also a greater chance that a rep will hire sub-reps without making 100% sure they are “independent contractors”.

Watch Out for the FTC’s “Endorsements and Testimonials” Rule.  There’s a good chance your reps will want to advertise and promote your products on their websites, Facebook and LinkedIn pages, and other social media channels.

In 2009, the Federal Trade Commission adopted a detailed set of rules governing endorsements by consumers, experts, organizations and celebrities (www.ftc.gov/os/2009/10/091005revisedendorsementguides.pdf).  While intended to apply primarily to professional product reviewers, the FTC guidelines prohibit your reps from promoting your products without disclosing that they receive money or other compensation for doing so.

Make Sure You Don’t “Cannibalize” Other, More Profitable Distribution Channels.  Finally, keep an eye on your future growth plans.  If it becomes possible for you to sell your products to department stores and other big customers through long-established retail distributors, they will not want to compete with a small army of individuals selling door-to-door or on eBay.  They will want you to terminate your rep program, and that won’t be either easy or pleasant.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

Cold Calling That Might, Just Possibly, Work by Cliff Ennico

Cliff EnnicoGUEST POST By Cliff Ennico

“I run a one-person consulting service that provides marketing, public relations and other image and branding consulting services to large corporations.

I generate most of my new business through personal networking.  The problem is that personal networking is extremely time-consuming.  Even when I do get an appointment with a decision maker at a large corporation, everything I suggest is often shot down with responses such as ‘we’ve already tried that’, ‘we already have someone doing that for us,’ and so forth.

While I plan to continue my networking program, I’m thinking that I may also want to do some ‘cold calling’ on some of these companies, for example by sending them e-mail newsletters and other ‘news release’ communications that may generate interest.

What do you think of that idea?”

Frankly, not much.

Frequent readers of this column know that I am no fan of “cold calling” of any kind.  It is a waste of your time, and an insult to the people you are trying to sell.  When you cold-call, you are hoping that the person you call just, possibly, at that very moment, have a need for your services.

Having said that, I recognize that it’s difficult sometimes to resist the temptation to reach out blindly to a company or other potential client with whom you (or anyone in your network) have a personal relationship.

Let’s say, for example, you read a newspaper or magazine article about a great new company in Silicon Valley that has created a killer software application for mobile phones.  You know that you can help them build their brand awareness but there’s no time to work your way through your LinkedIn contacts to get to someone at that company.  The opportunity is immediate, and the time to strike is now.

Here are some techniques that might, just, possibly work.

First of all, forget about e-mail.  Sending someone you don’t know an e-mail message of any kind is spam, period.  We’ve all got spam filters on your computers, and there’s always the “delete” key, which can be struck several times a second after a quick glance at the message heading.

You need to put together a short presentation and overnight it, via Federal Express, UPS or other overnight courier, to the CEO of the company.

The cover letter of the presentation should reach out and grab the CEO by the throat – if you don’t get his or her attention within five seconds, the ballgame’s over.

Here’s a suggestion:  “I was intrigued by the recent article about your company in XYZ Magazine, so I took a look at your website.  While it’s obvious you are building a world-class business, there are several things you could be doing a lot better.  Specifically, . . . “

Then, list some specific issues with their website that require improvement.

Yes, this is aggressive and “in your face”.  But most CEOs I know will stop whatever they’re doing and read the specifics out of curiosity.  You have gotten their attention and, if your arguments are compelling, you might just get a callback (perhaps from the company’s existing web design firm once the CEO forwards your letter to them).

A friend of mine is a marketing consultant who specializes in direct mail campaigns – what most of us might call “junk mail”.  When she receives a piece of junk mail that doesn’t work, she sends it back to the CEO of the company that sent it, along with a short letter pointing out what doesn’t work, why she would never respond, and offering her services to help improve the company’s direct mail image.  Believe it or not, she sometimes gets responses from these companies wanting to know more about her and what she does.

Once you have gotten the prospect’s attention, there is no need for further direct mail approaches.  You would schedule a meeting with the company CEO and handle it the same way you would a networking contact.

Here’s another idea:  identify a new, “hot button” issue your corporate clients are facing, and offer the CEO some free advice on how to deal with it.

For example:  “Many companies are worried that their employees are saying bad things about them, or disclosing confidential information about their operations, on Facebook, LinkedIn, and other social media websites.  I am willing to visit your corporate headquarters and meet with you and your senior officers, without charge, to discuss ways you can deal with that challenge without damaging employee morale or depriving them of their constitutional rights to freedom of speech.  If you are impressed with what I have to say, I would ask that you reimburse my airplane ticket, but otherwise you would have no obligation to me.”

By offering your corporate clients a no-risk, no-lose proposition, you are quite likely to get a positive response.  And if they’re not impressed and refuse to reimburse your plane ticket, well, it’s usually tax deductible . . .

Cliff Ennico, a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.

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