Essentials_of_Entrepreneurship_and_Small_Business_Management,_Global

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 649

Although engaged employees are a key ingredient in superior business performance, just
30 percent of employees in North America are fully engaged in their work, and 18 percent actually
are disengaged.88 Research shows that disengaged employees have higher turnover, accident,
and absenteeism rates than the average employee, are more likely to steal from their employers,
and are more likely to drive customers away. Disengaged workers also are less productive than
engaged employees, costing U.S. companies between $450 billion and $550 billion a year.89
Employees become disengaged when they are disconnected from the company’s culture, when
they lack opportunities for growth and advancement, when they don’t believe the company
values, and when they believe they are not compensated fairly for their contributions. What can
managers do to improve employee engagement?

● Recognize and reward employees for top performance.

● Constantly communicate the purpose and vision of the organization and why it matters.

● Challenge employees to learn and advance in their careers and give them the resources and
the incentives to do so.

● Create a culture that encourages and rewards engagement.

Engaged employees are the drivers of innovative ideas and new customers and revenues that every
company, especially small ones, require to thrive. Research shows that companies with higher
percentages of engaged employees generate higher earnings per share than those with lower per-
centages of engaged employees.90 Figure 16.3 shows the factors that drive employee engagement.

DIVERSITY Companies with appealing cultures not only accept cultural diversity in their workforces
but embrace it, actively seeking out workers with different backgrounds. Today, businesses must
recognize that a workforce that has a rich mix of cultural diversity gives the company more talent,
skills, and abilities from which to draw. A study of the demographics of the United States reveals a
steady march toward an increasingly diverse population. In fact, demographic trends suggest that
by 2043, minority groups, including Hispanics, African Americans, Asians, and other nonwhite
groups, will make up the majority (53 percent) of the U.S. population.91 For companies to remain
relevant in this environment, their workforces must reflect this diversity (see Figure 16.4). Who
is better equipped to deal with a diverse, multicultural customer base than a diverse, multicultural
workforce?

Engagement FIGURE 16.3
Drivers
Drivers of Employee Engagement
Foundation Differentiators Leadership Brand
Reputation Aon Hewitt, a leading human resources consulting
Brand/EVP firm, has developed the following model of em-
Corporate responsibility ployee engagement on the basis of responses from
more than 7 million employees in more than
Brand Performance Leadership 6,000 companies around the world. The model shows
Senior leadership six drivers of engagement (the basics, company prac-
The BU leadership tices, the work, performance, leadership, and brand)
Work in employees’ work experience and their outcomes:
Experience Performance Say – Engaged employees speak positively about
Career opportunities the organization.
Company The Work Learning and development Stay – Engaged employees have an intense sense of
Practices Performance management belonging to the organization.
People management Strive – Engaged employees are motivated and
Rewards and recognition work to achieve success in their jobs.
The model also identifies four categories of
The Work positive business outcomes (talent, operational,
customer, and financial) that result from highly
The Basics Collaboration engaged employees.
Empowerment/autonomy
Source: From Trends in Global Employee Engagement,
Company Practices The Basics Work tasks 2011, p. 7. Copyright © 2011 by Aon-Hewitt Associates.
Reprinted with permission from Aon-Hewitt.
Communication Benefits

Customer focus Job security

Diversity and inclusion Safety

Enabling infrastructure Work environment

Talent and staffing Work/life balance

650 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

FIGURE 16.4 Percentage of U.S. Workforce 100% 3.1% 3.3% Other
90% 5.2% 9.3% Asian
Composition of 80% 12.0% 11.1% Black
U.S. Workforce 70% 15.8% 27.3% Hispanic
60% White
Source: Based on Crosby 50% 63.9% 49.0%
Burns, Kimberly Barton, and 40%
Sophia Kerby, “The State of 30% 2012 2050
Diversity in Today’s Work- 20%
force,” Center for American 10%
Progress, July 12, 2012, p. 4; 0%
Steve H. Murdock, “Popula-
tion Change in the United
States: Implications for
Education, the Labor Force,
and Economic Development,”
Hobby Center for the Study
of Texas at Rice University,
November 10, 2011, p. 59.

INTEGRITY Employees want to work for companies that stand for honesty and integrity. They
do not want to check their own personal values systems at the door when they report to work.
Indeed, many workers take pride in the fact that they work for companies that are ethical and
socially responsible. People want to work for a company that makes a difference in the world
rather than merely making a product or providing a service. Putney, a Portland, Maine, company
that makes generic drugs for pets, gives both money and time back to the local community and
gives its 57 employees paid time off to volunteer at local nonprofit organizations, including its
partner agency, the Animal Refuge League of Greater Portland.92

PARTICIPATIVE MANAGEMENT Today’s workers do not respond well to the autocratic management
styles of yesteryear. Company owners and managers must learn to trust and empower employees
at all levels of the organization to make decisions and to take the actions they need to do their jobs
well. As a company grows, managers must empower employees at all levels to act without direct
supervision. A study by consulting firm McKinsey and Company reports a strong correlation
among the quality of a decision, clarity concerning the person responsible for implementing the
decision, and that person’s involvement in the decision-making process.93

LEARNING ENVIRONMENT Progressive companies encourage and support lifelong learning
among their employees. They are willing to invest in their employees, improving their skills
and helping them to reach their full potential. These companies are magnets for the best and the
brightest young workers who know that to stay at the top of their fields, they must always be
learning. Every year, Noble-Davis Consulting, the retirement plan administration and consulting
firm, creates a budget for each employee to participate in outside training, classes, and educational
courses. To enhance employees’ skills, the company also sponsors monthly in-house workshops,
seminars, and Webinars.94

job simplification Job Design
the type of job design that
breaks work down into its Over the years, managers have learned that the job itself and the way it is designed is an important
simplest form and standard- factor in a company’s ability to attract and retain quality workers. In some companies, work is
izes each task. organized on the principle of job simplification, breaking the work down into its simplest form
and standardizing each task, as in some assembly-line operations. The scope of jobs organized
in such a way is extremely narrow, resulting in impersonal, monotonous, and boring work that
creates little challenge or motivation for workers. Job simplification invites workers to “check
their brains at the door” and offers them little opportunity for excitement, enthusiasm, or pride
in their work. The result can be apathetic, unmotivated workers who don’t care about quality,
customers, or costs.

To break this destructive cycle, some companies have redesigned workers’ jobs. The follow-
ing strategies are common: job enlargement, job rotation, job enrichment, flextime, job sharing,
and flexplace.

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 651

Job enlargement (horizontal job loading) adds more tasks to a job to broaden its scope. For job enlargement
instance, rather than an employee simply mounting four screws in computers coming down an (horizontal job
assembly line, a worker might assemble, install, and test the entire motherboard (perhaps as part loading)
of a team). The idea is to make the job more varied and to allow employees to perform a more the type of job design that
complete unit of work. adds more tasks to a job to
broaden its scope.
Job rotation involves cross training employees so that they can move from one job in the
company to others, giving them a greater number and variety of tasks to perform. As employees job rotation
learn other jobs within an organization, both their skills and their understanding of the company’s the type of job design that
purpose and processes rise. Cross-trained workers are more valuable because they give a com- involves cross training em-
pany the flexibility to shift workers from low-demand jobs to those where they are most needed. ployees so that they can
As an incentive for workers to learn to perform other jobs within an operation, some companies move from one job in the
offer skill-based pay, a system under which the more skills workers acquire, the more they earn. company to others, giving
them a greater number and
Job enrichment (vertical job loading) involves building motivators into a job by increasing variety of tasks to perform.
the planning, decision-making, organizing, and controlling functions—traditionally managerial
tasks—that workers perform. The idea is to make every employee a manager (at least one of his job enrichment
or her own job). (vertical job loading)
the type of job design that
To enrich employees’ jobs, a business owner must build five core characteristics into them: involves building motivators
into a job by increasing the
● Skill variety is the degree to which a job requires a variety of different skills, talents, and planning, decision-making,
activities from the worker. Does the job require the worker to perform a variety of tasks organizing, and control-
that demand a variety of skills and abilities, or does it force him or her to perform the same ling functions that workers
task repeatedly? perform.

● Task identity is the degree to which a job allows the worker to complete a whole or identifi-
able piece of work. Does the employee build an entire piece of furniture (perhaps as part of
a team), or does he or she merely attach four screws?

● Task significance is the degree to which a job substantially influences the lives or work of
others—other employees or final customers. Does the employee get to deal with customers,
either internal or external? One effective way to establish task significance is to put employees
in touch with customers so they can see how customers use the product or service they make.

● Autonomy is the degree to which a job gives a worker the freedom, independence, and
discretion in planning and performing tasks. Does the employee make decisions affecting
his or her work, or must he or she rely on someone else (e.g., the owner, a manager, or a
supervisor) to “call the shots”? At Intuit, employees have the autonomy to spend 10 percent
of their time working on projects they believe will benefit the company.95

● Feedback is the degree to which a job gives the worker direct, timely information about the
quality of his or her performance. Does the job give the employee feedback about the qual-
ity of his or her work, or does the product (and all information about it) simply disappear
after it leaves the worker’s station?

A study conducted by researchers at the University of New Hampshire and the Bureau of Labor flextime
Statistics concludes that employees of companies that use job enrichment principles are more an arrangement under
satisfied than those who work in jobs designed using principles of simplification.96 which employees work a
normal number of hours
Flextime is an arrangement under which employees work a normal number of hours but have but have flexibility about
flexibility about when they start and stop work. Most flextime arrangements require employees to when they start and stop
build their work schedules around a set of “core hours,” such as 10 a.m. to 2 p.m., but give them work.
the freedom to set their schedules outside of those core hours. For instance, one worker might
choose to come in at 7 a.m. and leave at 3 p.m. to attend her son’s soccer game, and another may
work from 11 a.m. to 7 p.m. Flextime not only raises worker morale but also makes it easier for
companies to attract high-quality young workers who want rewarding careers without sacrificing
their lifestyles. In addition, companies using flextime schedules often experience lower levels of
tardiness, turnover, and absenteeism.

ENTREPRENEURIAL PROFILE: Pamela Blackwell: Blackwell Consulting Services
Pamela Blackwell, president of Blackwell Consulting Services, an information technology
consulting firm in Chicago that her father Bob started in 1992, says flextime plays an important

652 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

part in attracting skilled, high-tech workers whom the company relies on for its success. “We’re

more focused on the job and delivering on client expectations than on how, when, and where our
employees work,” she says.97 ■

job sharing Flextime is becoming an increasingly popular job design strategy, especially among small
a work arrangement in companies. A recent study by the Families and Work Institute found that 77 percent of U.S.
which two or more people businesses give at least some of their employees flexible schedules, up from 68 percent in
share a single full-time job. 1998. However, 32 percent of small companies (fewer than 100 employees) offer most or all of
their employees flexible schedules, compared to just 16 percent of large companies (more than
flexplace 1,000 employees).98 The number of companies using flextime will continue to grow as compa-
a work arrangement in nies find recruiting capable, qualified full-time workers more difficult and as technology makes
which employees work working from a dedicated office space less important. Research shows that when considering
at a place other than the job offers, candidates, particularly members of Generation Y, weigh heavily the flexibility of the
traditional office, such as work schedule that companies offer.99
a satellite branch closer to
their homes or at home. Job sharing is a work arrangement in which two or more people share a single full-time
job. For instance, two college students might share the same 40-hour-a-week job, one working
telecommuting mornings and the other working afternoons. Salary and benefits are prorated between the work-
an arrangement in which ers sharing a job. Because job sharing is a simple solution to the growing challenge of life–work
employees working re- balance, it is becoming more popular. Companies already using it are finding it easier to recruit
motely use modern com- and retain qualified workers.
munications equipment to
connect electronically to Flexplace is a work arrangement in which employees work at a place other than the
their workplaces. traditional office, such as a satellite branch closer to their homes or, in many cases, at home.
Flexplace is an easy job design strategy for companies to use because of telecommuting. Using
modern communication technology such as WiFi, smart phones, texting, intranets, e-mail on-
line workspaces, and project management software, employees have more flexibility in choos-
ing where they work. Today, connecting electronically to the workplace (and to all of the people
and the information there) from practically anywhere on the planet is quite simple for many
workers. Research by market research firm Ipsos shows that 60 percent of employees around
the world would telecommute if their employers allowed it.100 The Telework Research Network
estimates that 45 percent of workers in the United States have the potential to telecommute at
least some of the time.101 However, only 4 percent of employees in North America telecommute
full-time (26 percent telecommute at least once per week), well below the global average of
7 percent (36.5 percent telecommute at least once per week).102 Telecommuting employees get
the flexibility they seek, and they also benefit from reduced commuting times and expenses,
not to mention a less expensive wardrobe (bathrobes and bunny slippers compared to busi-
ness suits and wingtips). Companies reap many benefits as well, including improved employee
morale, less absenteeism, lower turnover, higher productivity, and more satisfied, more loyal
employees. Studies show that telecommuting can reduce employee turnover by 20 percent and
increase productivity between 15 and 20 percent.103 Even though many small companies are
ideally suited for telecommuting, large companies use this job design strategy more than small
companies.104

ENTREPRENEURIAL PROFILE: Anne Wojcicki: 23andMe Anne Wojcicki, founder of
23andMe, the genetic testing service, offers her company’s 70 employees both flextime and
flexplace options. Wojcicki herself often works from home, not coming into the office until late
morning or early afternoon. She says she actually encourages people to work wherever they can
be most productive, whether it is at a café, at home, or in the office.105 ■

Motivating Employees to Higher Levels
of Performance: Rewards and Compensation

Another important aspect of creating a culture that attracts and retains quality workers is estab-
lishing a robust system of rewards and compensation. The rewards that an employee gets from
the job itself are intrinsic rewards, but managers have at their disposal a wide variety of extrinsic
rewards (those outside the job itself) to attract, retain, and motivate workers. The keys to using
rewards to motivate are linking them to performance and tailoring them to the needs and char-
acteristics of the workers. Entrepreneurs must base rewards and compensation on what is really
important to their employees. For instance, to a technician making $30,000, a chance to earn a

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 653

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$3,000 performance bonus would most likely be a powerful motivator. To an executive earning pay-for-performance
$175,000 a year, it may not be. compensation systems
compensation systems
One of the most popular rewards is money. Not surprisingly, a recent survey by the Society in which employees’ pay
for Human Resource Management reports that 96 percent of employees rated compensation as depends on how well they
either important or very important to their job satisfaction.106 Cash is an effective motivator—up perform their jobs.
to a point. Simple performance bonuses are a common reward at many companies. The closer the
bonus payment is to the action that prompted it, the more effective it will be. profit-sharing plan
a reward system in which
Some companies have moved to pay-for-performance compensation systems, in which em- employees receive a portion
ployees’ pay depends on how well they perform their jobs. In other words, extra productivity of the company’s profits.
equals extra pay. By linking employees’ compensation directly to the company’s financial perfor-
mance, a business owner increases the likelihood that workers will achieve performance targets open-book
that are in their best interest and in the company’s best interest. Pay-for-performance systems work management
only when employees see a clear connection between their job performance and their pay, however. a system in which entre-
That’s where small businesses have an advantage over large businesses. Because they work for preneurs share openly their
small companies, employees can see more clearly the impact that their performances have on the companies’ financial results
company’s profitability and ultimate success than their counterparts at large corporations. with employees.

Some companies offer their employees financial rewards in the form of profit-sharing plans stock options
in which employees receive a portion of the company’s profits. At Badger Mining, a family- a plan under which employ-
owned sand extractor located in Berlin, Wisconsin, employees participate in a generous quarterly ees can purchase shares of
profit-sharing plan. The company also offers performance-based bonuses in addition to the profit- a company’s stock at a fixed
sharing program. The result is an employee turnover rate that is virtually nil, with 95 percent of price.
employees saying they intend to retire from Badger Mining.107 A few companies have gone even
further, coupling profit sharing plans with open-book management, a system in which entrepre-
neurs share openly their companies’ financial results with employees. The goal is teach employees
how their job performances have a direct impact on profits and to give them an incentive for im-
proving the company’s bottom line. “Open book [management] gives everyone the chance to see
what we need to do to succeed,” says Jack Stack, CEO of SRC Holdings, a holding company of
26 employee-owned businesses and a longtime advocate of open-book management.108

Money isn’t the only motivator business owners have at their disposal, of course. In fact,
money tends to be only a short-term motivator. In addition to the financial compensation they
provide, most companies offer their employees a wide array of benefits, ranging from stock op-
tions and health insurance to retirement plans and tuition reimbursement. Stock options, a plan
under which the employees can purchase shares of a company’s stock at a fixed price, have be-
come a popular benefit for employees. Employees at Putney, Inc., a business in Portland, Maine,
that makes generic drugs for pets, receive stock options in the fast-growing company.109 Stock
options take on real value once the market price of a company’s stock exceeds the exercise price,
the price at which employees can purchase stock. (Note that if the fair market price of a stock
never exceeds the exercise price, the stock option is useless.) When trying to attract and retain
quality employees, many small companies rely on stock options to gain an edge over larger
companies offering bigger salaries. Stock options produce a huge payoff for employees when
companies succeed. Workers at highly successful companies such as Microsoft, Google, and Dell
have retired as multimillionaires thanks to stock options.

Benefits packages also are an important part in attracting and retaining quality workers and
achieving high productivity. A recent survey by MetLife shows that employees who are satis-
fied with their benefits demonstrate more loyalty to their employers and are less likely to leave
than those who are not. The most important benefit? Health insurance.110 Integrated Project

654 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

cafeteria benefit plan Management, a project management consulting firm based in Burr Ridge, Illinois, not only cov-
a plan under which employ- ers 100 percent of healthcare premiums for its employees and their families but also offers a
ers provide certain basic comprehensive wellness program designed to keep workers healthy.111
benefits and then allocate
a specific dollar amount In an economy in which they must compete aggressively for employees, entrepreneurs must
for employees to select the recognize that compensation and benefits no longer follow a “one-size-fits-all” pattern. The di-
benefits that best suit their versity of today’s workforce requires employers to be highly flexible and innovative with the
needs. compensation and benefits they provide. To attract and retain quality workers, creative entre-
preneurs offer employees benefits designed to appeal to their employees’ particular needs. This
diversity has led to the popularity of cafeteria benefit plans, in which employers provide certain
base benefits and then allocate a specific dollar amount for employees to select the benefits that
suit their needs best. To provide the best package of benefits most efficiently, employers should
survey their employees periodically to discover which benefits are most important to them and
then build their benefits package to include them. Online shoe retailer Zappos, which is consis-
tently listed as one of Fortune’s “Top 100 Companies to Work For,” conducts benefits surveys of
its employees throughout the year and adjusts its benefits package accordingly.112

Beyond flexible benefits plans, many small companies are setting themselves apart from
others by offering unique benefits, including the following:

● At every five-year anniversary with the company, employees at Ruby Receptionists, an
agency based in Portland, Oregon, that provides virtual receptionist services for small busi-
nesses, receive a five-week paid sabbatical during which they are encouraged to explore
some aspect of the company’s core values (“foster happiness, create community, innovate,
and practice WOW-ism”) and apply them to a goal that they might not otherwise have time
to accomplish. The company also supplements employees’ sabbaticals with $1,000 to help
them reach their goals, whether it involves traveling to a far-away land, taking a class, or
assisting a nonprofit organization.113

● ENGEO, an engineering consulting company in San Ramon, California, provides a “dream
manager,” who works with employees to help them realize their personal and profes-
sional goals, from buying a home to advancing in their careers. Employees also own a
portion of the company through an employee stock ownership plan and participate in
company-sponsored ice cream socials and chili cook-offs.114

● Employees at ClifBar, a company founded by copreneurs Gary Erickson and Kit Crawford
that makes energy bars, can scale a 22-foot-high climbing wall in the company gym. Em-
ployees also get 2.5 hours of paid time each week to work out in the gym, which is staffed
by five personal trainers. To celebrate the company’s twentieth anniversary, Erickson and
Crawford gave all 340 employees commuter bicycles.115

Many small business owners whose companies may not be able to afford benefits such as
these find other ways to reward their employees, including vacation days on their birthdays, an
occasional catered lunch (especially after completing a big project successfully), and free tickets
to a local game, movie, or performance.

Besides the wages, salaries, and attractive benefits they use as motivators, creative entre-
preneurs have discovered that intangible incentives can be more important sources of employee
motivation. After its initial impact, money loses its effectiveness; it does not have a lasting mo-
tivational effect (which for small businesses, with their limited resources, is a plus). For many
workers, the most meaningful motivational factors are the simplest ones—recognition, praise,
feedback, job security, promotions, and others—things that any small business, no matter how
limited its budget, can do. Dylan Johnson, a bartender at the Truck Yard, a unique bar in Dallas,
Texas, that includes an indoor bar and an outdoor beer garden with a tree house bar and an Air-
stream bar, says simple recognition from a manager, such as a “thank you” for staying an extra
hour or doing something beyond the normal requirements of the job inspires workers to excel.116
One recent study concludes that recognition leads to increased employee satisfaction. The study
also shows that employees who have been recognized at work within the previous six months are
more likely to be highly engaged in their work.117

Praise is another simple yet powerful motivational tool. People enjoy getting praise, espe-
cially from a manager or business owner; it’s just human nature. As Mark Twain said, “I can live

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 655

for two months on a good compliment.”* Praise is an easy and inexpensive reward for employees
who produce extraordinary work. A short note to an employee for a job well done costs practi-
cally nothing, yet it can be a potent source of motivation. Barbara Corcoran, founder of The
Corcoran Group, awarded her company’s top performers each week with colored ribbons and
annual “Salesperson of the Year” trophies as if they had just won an Olympic event. Corcoran
realized that recognition often is a better motivator than money after visiting her top salesperson’s
home and seeing a large cabinet in the middle of her living room in which she proudly displayed
the five “Salesperson of the Year” trophies she had won.118 How often have you had an employer
recognize you and say “thank you” for a job you performed well?

Because they lack the financial resources of bigger companies, small business owners must
be more creative when it comes to giving rewards that motivate workers. In many cases, however,
using rewards other than money gives small businesses an advantage because they usually have
more impact on employee performance over time. Rewards do not have to be expensive to be
effective. At ENGEO, the engineering consulting firm, employees who provide extraordinary
service to clients receive the coveted “ENGEO Rocks” traveling rock award, an actual rock
(the company provides geotechnical and hydrologic consulting services) that the outstanding
employee proudly displays at his or her work station.119 Managers are not the only ones who
can provide rewards. At Etsy, the online marketplace for handmade artisanal products based in
Brooklyn, New York, workers recognize one another’s accomplishments by sending an e-mail
to the Ministry of Unusual Business, a secretive group that rewards high-performing individuals
(and sometimes the entire company) with prizes and gifts.120

Entrepreneurs tend to rely more on nonmonetary rewards, such as praise, recognition, game
tickets, dinners, letters of commendation, and others, to create a work environment in which em-
ployees take pride in their work, enjoy it, are challenged by it, and get excited about it. In other
words, the employees act like owners of the business.

Management Succession: Passing the Torch of Leadership LO4

More than 80 percent of all companies in the world are family owned, and their contributions Describe the steps in
to the global economy are significant. Family-owned businesses account for 70 to 90 percent of developing a management
global GDP. In the United States alone, family businesses make up 90 percent of all businesses, succession plan for a
create 64 percent of the nation’s gross domestic product, employ 62 percent of the private sector growing business that
workforce, and account for 65 percent of all wages paid. Not all family-owned businesses are allows a smooth transition
small, however; 33 percent of Fortune 500 companies are family businesses. Family-owned com- of leadership to the next
panies such as Wal-Mart, Ford, Mars, Cargill, and Winn-Dixie employ thousands of people and generation.
generate billions of dollars in annual revenue.121 Family firms also create 78 percent of the U.S.
economy’s net new jobs and are responsible for many famous products, including Heinz ketchup,
Levi’s jeans, and classic toys, such as the Slinky and the Wiffle Ball.122

Unfortunately, the stumbling block for most family businesses is management succession.
Just when they are ready to make the transition from one generation of leaders to the next, family
businesses are most vulnerable. Only about 30 percent of first-generation businesses survive into
the second generation; of those that do survive, only 12 percent make it to the third generation,
and just 3 percent make it to the fourth generation and beyond.123

ENTREPRENEURIAL PROFILE: Mark Valade: Carhartt Carhartt, a maker of more than
800 products ranging from rugged canvas clothing and fire-resistant apparel to hoodies
and boots, is a family business that has beaten the odds and survived into the fourth generation
of family ownership. CEO Mark Valade is the great-grandson of Hamilton Carhartt, who started
the company in 1889 when he came up with the idea of making durable overalls for railroad
workers. Every generation of Carhartt leaders since has overcome demanding challenges such as
surviving the depths of the Great Depression and battling the influx of cheap, imported compet-
ing goods from the Far East in the 1980s. Valade says one key to Carhartt’s longevity and contin-
ued success is its consistent commitment to its core values and a focus on making the best apparel
for active workers. Valade’s daughter, Gretchen, representing the fifth generation of family own-
ership, recently graduated from college and now works for Carhartt.124 ■

*Source: Mark Twain, Letter to Gertrude Natkin, 2 March 1906.

656 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Hands On . . . How To

Make Your Small Business a Great Place to Work

Smart entrepreneurs know that although they may be the driv- a second-generation family-owned commercial printing com-
ing force behind their businesses, their highly committed and en- pany in St. Paul, Minnesota, sisters Lana Siewert-Olson and
gaged employees are the real keys to their companies’ success. Joan Siewert-Cardona, use open-book management, sharing
As a result, these entrepreneurs carefully select their employees, with employees all of the company’s financial statements and
develop their talents through training and education, and create teaching them how to read them. They say opening the com-
a culture that reflects the central role their employees play in the pany’s books allows employees to see how their jobs directly
success of their businesses. Following are 10 lessons for creating affect the company’s profits and their compensation because
a great workplace drawn from small companies that have been Ideal Printers also offers a profit-sharing plan. During a recent
recognized as some of the best places to work. recession, when business slowed, the company reduced every-
one’s pay by 10 percent (and has since restored the reduction)
Lesson 1. Take a long-term view of your business. but did not resort to layoffs, unlike many of its competitors.
Owners of small, privately held companies have a distinct Lesson 4. Teamwork counts. Managers at leading small
advantage over managers in large, publicly held firms in that companies understand that a genuine team spirit leads to
they can make decisions that are in the best interest of their innovation, unparalleled productivity, and a fun atmosphere
companies and their employees for the long haul rather than of camaraderie. They rely on team-based awards and recogni-
managing to meet quarterly financial expectations. These tion to encourage a team spirit and help employees under-
companies are willing to sacrifice short-term results for long- stand how their jobs fit into the “big picture.” At Nugget
term stability and success. The entrepreneurs behind them also Market stores, every day begins with a motivational rally,
know that their companies’ success hinges on their employ- during which team leaders and employees share important
ees, and their company cultures reflect their emphasis on their information and get energized for the day.
workers. At CustomInk, the customized T-shirt company, the Lesson 5. Investing in your employees is one of the
founders show their confidence in their employees by follow- best investments you can make. Great companies under-
ing a promotion from within policy; 65 percent of the com- stand that enhancing their employees’ skills benefits both
pany’s current managers started in entry-level positions with the employee and the business. Managers at SmartPak,
the company. Great companies also create a culture of trust an online and catalog retailer of nutritional supplements,
among their workers. Nugget Market, a small chain of grocery medicine, tack, and other equestrian supplies in Plymouth,
stores in Sacramento, California, has never had a layoff since Massachusetts, know that understanding the needs of
the father-son team of William and Mack Stille opened the horses and their riders is essential to the company’s success.
first store in 1926. Nugget Market’s employee turnover rate Although most of the company’s employees own, ride, and
(a huge expense without an invoice) is just 14 percent per show horses, not all do. SmartPak created SmartPak Univer-
year, compared to the industry average of 38.7 percent. sity, through which it offers a variety of courses to educate
its employees about horses, their owners, and their unique
Lesson 2. Recognize your company’s responsibility to
society. These leading small companies strive for more than Lana Siewert-Olson and Joan Siewert-Cardona, second-generation
profitability; they aim to make a difference in the world, both owners of Ideal Printers.
locally and globally, and they get their employees involved in
their efforts. Etsy, the Web site that provides an online mar- ZUMA Press, Inc. / Alamy
ketplace for artisans to sell their creations, recently became
certified as a B corporation, a company that meets rigorous
standards of social and environmental responsibility and trans-
parency in its operations. Employees receive 40 hours of paid
time off each year to volunteer for the nonprofit organization
of their choice. A group of employees recently traveled to
Alaska to teach artisans there how to sell their work on Etsy
as part of a program designed to help people in remote loca-
tions with limited resources become successful entrepreneurs.

Lesson 3. Honest, open, two-way communication
helps your company in good times and bad times.
Managers at these small companies recognize that good
communication is a key to building trust with employees
and to encouraging employees to participate in making
decisions that make the workplace better. At Ideal Printers,

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 657

Hands On . . . How To (continued)

needs. The company’s New Hire Start Groups are designed to take surfing lessons, snorkel, sight-see, and hang out on the
get new employees off to a good start, and its Barn Buddy beach. At Torch Technologies, recognition is not as elaborate
program pairs non-riding employees with employees who are but no less effective. CEO Bill Roark recognizes employees’
experienced equestrians to learn about horses—and to better outstanding performances with a handwritten thank-you let-
understand the customers with whom they interact. ter sent to their homes. “I get notes back from kids and wives
that bring tears to my eyes,” he says.
Lesson 6. Give your employees a real sense of owner-
ship. Every employer’s dream is to have employees who act Lesson 9. Let your employees have fun. Just because you
like owners of the company. The best way to achieve that are at work does not mean you cannot have fun. OtterBox, a
is to make them owners of the company! Stan Sheetz, the fast-growing company in Fort Collins, Colorado, that makes
second-generation owner of Sheetz, a chain of 437 con- protective cases for smart phones, e-readers, and tablets, is
venience stores in six states, believes that allowing Sheetz known for its fun-based culture. The company’s headquar-
employees to own part of the company increases their level ters features a spiral slide in addition to stairs, scooters that
of engagement. Sheetz created an employee stock ownership employees can use to get around, a self-service latte machine
plan (ESOP), and employees who work at least 1,000 hours and soda fountain, game rooms with pinball and foosball ma-
in a calendar year receive shares in the company through the chines, and aquariums. Employees participate in impromptu
ESOP based on their earnings and years of service. Even in the events such as Flash Fitness Sessions and Star Wars Starship
leading small companies that do not offer ESOPs, employees flying contests. There is a business purpose behind all of the
receive some kind of performance-based compensation, such fun. CEO Brian Thomas says the goal is to create a culture
as profit sharing or stock options. The result is an ownership that fosters innovation and inspires passion. OtterBox also
mentality and a workforce that is dedicated to making the encourages employees to give back to their community by
company successful. giving them 24 hours of paid time off each year to volunteer
at a nonprofit organization and provides weekly updates on
Lesson 7. Encourage your employees to stay healthy. nonprofits in need of help.
With health care costs rising rapidly, smart business owners
know that anything they can do to help their employees stay Lesson 10. Give your employees the flexibility they
healthy not only lowers costs but also helps their employees need for work–life balance. Small companies that offer
lead better personal and work lives. Many of the leading small flextime, job sharing, telecommuting, and other flexible work
companies pay 100 percent of the cost of their employees’ arrangements have an edge when it comes to hiring the best
health insurance. Others provide incentives for employees to workers. At outdoor retailer REI, employees enjoy flexible work
improve their health by quitting smoking, reaching and main- schedules. Many of the company’s employees are outdoor en-
taining an ideal weight, or exercising regularly. Some com- thusiasts and are committed to REI’s core values that include a
panies provide on-site exercise facilities or pay for employees passion for the outdoors. That’s why managers have no prob-
memberships at local gyms. Etsy, the online marketplace for lem with workers going out for bicycle rides, quick kayak trips,
artisans, pays 80 percent of employees’ and their families’ or taking their dogs out for a game of fetch on “Doggy Row”
health insurance premiums and encourages employees to live during “work hours” as long as the work gets done. Gener-
healthy lives by providing yoga classes (“EtsYoga”) and fit- ous benefits such as health insurance (including coverage for
ness classes (“Fitsy” and “Sweatsy”), locally sourced gourmet part-time employees who work at least 20 hours per week),
lunches every Tuesday and Thursday, and a kitchen stocked employee discounts on REI products, wellness programs, and
with healthy snacks and drinks. Employees also enjoy bringing sabbatical leaves make working at REI more than just a job.
their dogs to work.
Sources: Based on “Recreational Equipment, Inc,” Great Rated, December 30, 2013,
Lesson 8. Recognize your employees’ stellar perfor- http://us.greatrated.com/recreational-equipment-inc; Paul Wozniak, “Fort Collins
mances publicly and privately—and often. The best OtterBox Named Best Place to Work,” Tri-102.5, October 26, 2012, http://tri1025
small businesses make recognizing employees’ accomplish- .com/fort-collins-otterbox-named-best-place-to-work/; “OtterBox,” Great Rated,
ments a top priority and use a unique system of rewards April 18, 2013, http://us.greatrated.com/otterbox; “The Clymb” Great Rated,
to reinforce a positive company culture. At The Clymb, an September 12, 2013, http://us.greatrated.com/the-clymb; “Etsy – Great Perks, Great
online marketplace for outdoor gear and adventure travel in Rated, September 12, 2013, http://us.greatrated.com/etsy/great-perks; “Custom-
Portland, Oregon, employees can recognize one another’s ac- Ink,” Great Rated, August 6, 2013, http://us.greatrated.com/customink; “Sheetz,”
complishments by giving coworkers recognition cards called Great Rated, December 20, 2013, http://us.greatrated.com/sheetz; “SmartPak,”
“Fist Bumps” that are posted in the kitchen for all to see. Great Rated, February 6, 2014, http://us.greatrated.com/smartpak; “Nugget Market,”
Company founders Kelly Dachtler and Cec Annett recently Great Rated, January 14, 2014, http://us.greatrated.com/nugget-market; Todd Nelson,
took their entire staff to Hawaii’s North Shore on a “work- “Culture Helps Printing Firm Survive,” Star Tribune, December 25, 2011, http://www
cation” as a reward for achieving an aggressive business goal. .startribune.com/business/136171088.html#jlfMzZ7YOFeW2h5U.97; Gabrielle M. Blue,
Employees worked shorter days and had the opportunity to Dave Smith, and Drew Gannon, “2011 Top Small Company Workplaces,” Inc.,
June 2011, http://www.inc.com/top-workplaces/index.html; Kelly K. Spors, “Top
Small Workplaces 2008,” Wall Street Journal, February 22, 2009, http://online.wsj
.com/article/SB122347733961315417.html; and 2008 Guide to Bold New Ideas for
Making Work Work (New York: Families and Work Institute, 2008), pp. 3–6, 42.

658 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

The average life expectancy of a family business is 24 years, although some last much longer.125
For instance, the oldest family business in the world is Houshi Ryokan, an inn and spa that was built
near a hot spring in Komatsu, Japan, in 718 by Gengoro Sasakiri. Today, the forty-sixth generation
of Sasakiri’s descendants operate the inn, which can accommodate 450 guests in its 100 rooms.126

The primary causes of lack of continuity among family businesses are inadequate estate
planning, failure to create a management succession plan, and lack of funds to pay estate taxes.127
In addition, sibling rivalries, fights over control of the business, and personality conflicts often
lead to nasty battles that can tear families apart and destroy once thriving businesses. The best
way to avoid deadly turf battles and conflicts is to develop a succession plan for the company.
Numerous studies have found a positive relationship between the existence of a management
succession plan and the longevity of family businesses.

Most of the family businesses in existence today were started after World War II, and their
founders are ready to pass the torch of leadership on to the next generation. Experts estimate
that between 2012 and 2050, $27 trillion in wealth will be transferred from one generation to the
next, much of it through family businesses.128 For these companies to have a smooth transition
from one generation to the next, they must develop management succession plans. Unfortunately,
only slightly more than half of all business owners have created succession plans, and, somewhat
surprisingly, younger business owners are more likely to have a plan than older owners (see
Figure 16.5). Often, the reason for failing to develop a succession plan is that entrepreneurs are
unwilling to make tough and potentially disruptive family-oriented decisions that require select-
ing their successors. Family feuds often erupt over who is (and is not) selected as the successor
in the family business. Without a succession plan, however, family businesses face an increased
risk of faltering or failing in the next generation. Family businesses with the greatest probability
of surviving are the ones whose owners prepare a succession plan well before it is time to pass
the torch of leadership to the next generation. Succession planning also allows business owners
to minimize the impact of estate taxes on their businesses and on their successors’ wealth as well.

Succession planning reduces the tension and stress of a transition by gradually “changing the
guard.” A well-developed succession plan is like the smooth, graceful exchange of a baton between
runners in a relay race. The new runner still has maximum energy; the concluding runner has al-
ready spent his or her energy by running at maximum speed. The athletes never come to a stop to
exchange the baton; instead, the handoff takes place on the move. The race is a skillful blend of the
talents of all team members; the exchange of leadership is so smooth and powerful that the business
never falters but accelerates, fueled by a new source of energy at each leg of the race.

HOW TO DEVELOP A MANAGEMENT SUCCESSION PLAN Creating a succession plan involves the
following steps:

Step 1. Select the successor. There comes a time for even the most dedicated company
founder to step down from the helm of the business and hand the reins over to
the next generation. The entire population of the Baby Boomer generation (born

FIGURE 16.5 60% 56% 58%

Percentage of Percentage of Business Owners 50%
Business Owners
Who Have 41%
Succession Plans 40%
in Place, by Age
30%
Source: Small Business
Owner Report, Spring 2014, 20%
Bank of America, p. 8.

10%

0% 36–55 56+
19–35

Owner Age

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 659

between 1946 and 1964), some 76.4 million people, will be 65 or older by 2030,

and 60 percent of small business owners are Baby Boomers. As those Baby Boom-

ers retire (a Baby Boomer business owner retires every 57 seconds), they are creat-

ing a tidal wave of business transitions and sales as they look either to hand them

over to the next generation or sell them.129 Unfortunately, many of these soon-to-

retire family business owners who intend to turn over their businesses to the next

generation of family members have not yet identified their successors. They resist

thinking about stepping away from the businesses they have built, but in the end,

every business owner exits the company he or she created.

At age 63, Richard Branson, the brash founder of the Vir-

gin Group, a collection of about 400 companies in indus-

tries that range from air travel and wine to balloon flights

and space travel, has yet to name his successor. However,

Branson’s daughter Holly, who left a career as a doctor,

now works for the Virgin Group as a special projects man-

ager and is learning about the vast collection of companies

in the Virgin portfolio and honing her financial manage-

ment skills.130

Entrepreneurs should never assume that their chil-

dren want to take control of the family business, however.

It is critical to remember at this juncture in the life of a

business that children do not necessarily inherit their par-

ents’ entrepreneurial skills and interests. By leveling with

the children about the business and their options regard-

ing a family succession, the owner will know which heirs,

if any, are willing to assume leadership of the business. Terry Bradford/Solo/ZUMAPRESS/Newscom

When naming a successor, merit is a better standard

to use than birth order or gender. More than one-third of family business founders

say the next leader will be a woman, quite a change from just a generation ago.131

The key to selecting the right successor is to establish standards of performance,

knowledge, education, and ability and then identify the person who most closely

meets those standards.

When considering a successor, an entrepreneur should consider taking the

following actions:

● Let family members, especially children, know that joining the business is not
mandatory nor guaranteed. Family members’ goals, ambitions, and talents
should be foremost in their career decisions, and the business does not owe
jobs to people just because they are family members. Andrew Cornell, CEO
of Cornell Iron Works, a family business that started in 1828 as a blacksmith
shop and now makes overhead doors for industrial, commercial, and residential
customers, says part of the company’s success is its objective approach to hir-
ing family members. He points out that successful family businesses cannot be
homes for wayward family members.

● Do not assume that a successor must always come from within the family. Sim-
ply being born into a family does not guarantee that a person will make a good
business leader. A recent survey by PriceWaterhouseCoopers reports that
34 percent of leaders of family businesses in North America with succession
plans say the next top manager will come from outside the family.132

● Give family members the opportunity to work outside the business first to
learn firsthand how others conduct business. Working for others allows them to
develop knowledge, confidence, and credibility before stepping back into the
family business. Seventy percent of the successors who have been identified
have full-time work experience outside the family business.133

One of the worst mistakes entrepreneurs can make is to postpone naming a
successor until just before they are ready to step down. The problem is especially

660 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

acute when more than one family member works for the company and is inter-
ested in assuming leadership of it. Sometimes founders avoid naming successors
because they don’t want to hurt the family members who are not chosen to suc-
ceed them. However, both the business and the family will be better off if, after
observing the family members as they work in the business, the founder picks a
successor on the basis of that person’s skills and abilities.

ENTREPRENEURIAL PROFILE: Irwin and James Monroe Smucker: J. M. Smucker
Company J. M. Smucker Company, the well-known maker of jams and jellies, has had
five CEOs since James Monroe Smucker started the company in Orrville, Ohio, in 1897, and
every one of them has been a member of the Smucker family. Well before Paul, the grandson
of founder J. M., stepped down from the company’s helm in 1961, he named both of his sons,
Timothy and Richard Smucker as co-CEOs. Timothy and Richard currently are grooming their
sons, Mark Smucker and Paul Smucker Wagstaff, to become the fifth-generation coleaders of
the company. Mark and Paul, both in their early forties, have held a variety of positions in the
company and currently are in charge of two major divisions. “We would like for them to share
the CEO job,” says Richard, “but it’s not a fait accompli.”134 ■

Step 2. Create a survival kit for the successor. Once he or she identifies a successor,
an entrepreneur should prepare a survival kit and then brief the future leader on
its contents, which should include all of the company’s critical documents (wills,
trusts, insurance policies, financial statements, bank accounts, key contracts, cor-
porate bylaws, and so forth). The founder should be sure that the successor reads
and understands all of the relevant documents in the kit.

Step 3. Groom the successor. Typically, founders transfer their knowledge to their suc-
cessors gradually over time. The discussions that set the stage for the transition
of leadership are time consuming and require openness by both parties. In fact,
grooming a successor is the founder’s greatest teaching and development respon-
sibility, and it takes time and deliberate effort. To create ability and confidence in
a successor, a founder must be:

● patient, realizing that the transfer of power is gradual and evolutionary and that
the successor should earn responsibility and authority one step at a time until
the final transfer of power takes place;

● willing to accept that the successor will make mistakes;
● skillful at using the successor’s mistakes as a teaching tool;
● an effective communicator and an especially tolerant listener;
● capable of establishing reasonable expectations for the successor’s

performance; and
● able to articulate the keys to the successor’s successful performance.

Grooming a successor can begin at an early age simply by involving children
in the family business and observing which ones have the greatest ability and in-
terest in the company.

ENTREPRENEURIAL PROFILE: Rudolph, Tommy, and Thomas Young: Young Office
Young Office, an office supply and furnishings business in Greenville, South Carolina, is
in its third generation of family ownership. Thomas Young, who became CEO in 2008, began
working in the business as a child, joined the company full-time as a sales representative after
graduating from college, and gradually worked his way up the ladder. His father, Tommy,
started working at Young Office as a warehouse employee and truck driver, learning the busi-
ness from his father, Rudolph, who founded the company in 1953. Thomas’s father, Tommy,
invested years preparing Thomas to take over the family business, which each successor has
reinvented to accommodate changes in the marketplace. When asked about his success,
Thomas is quick to credit his father for teaching him the nuances of the business and then
stepping away to allow him to lead the company according to his vision, which is built on the
bedrock of the company’s values he learned growing up.135 ■

Step 4. Promote an environment of trust and respect. Another priceless gift a founder
can leave a successor is an environment of trust and respect. Trust and respect on
the part of the founder and others fuel the successor’s desire to learn and excel and

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 661

build the successor’s confidence in making decisions. Developing a competent suc-
cessor typically requires at least 5 to 10 years. Dan Cathy, now Chairman and CEO
of Chick-fil-A, the highly successful chicken sandwich chain founded in 1967 by
his father, Truett, started working in the family business at age 9. He joined the
company full-time after graduating from college, starting as a director of opera-
tions, where he opened 50 new stores. Over the next several years, Dan moved
up the ranks as vice president of operations and senior vice president. In 2001, he
became president and CEO. In 2013, as part of a long-planned succession, Dan as-
sumed the mantle of chairman of the board from his then 92-year-old father.136

Empowering the successor by gradually delegating responsibilities creates an
environment in which all parties can objectively view the growth and development of
the successor. Customers, creditors, suppliers, and staff members develop confidence
in the successor. The final transfer of power is not a dramatic, wrenching change but a
smooth, coordinated passage. Founders must be careful at this stage to avoid the “med-
dling retiree syndrome” in which they continue to report for work after they have of-
ficially stepped down and take control of matters that are no longer their responsibility.
Doing so undermines a successor’s authority and credibility among workers quickly.

Step 5. Cope with the financial realities of estate and gift taxes. The final step in de-
veloping a workable management succession plan is structuring the transition to
minimize the impact of estate, gift, and inheritance taxes on family members and
the business. Entrepreneurs who fail to consider the impact of these taxes may
force their heirs to sell a successful business just to pay the estate’s tax bill. Re-
cent tax legislation may reduce the impact of taxation on the continuity of family
businesses. Currently, without proper estate planning, an entrepreneur’s family
members incur a painful tax bite that can be as high as 40 percent (or more if the
state also imposes an estate tax) when they inherit the business (see Table 16.8).

TABLE 16.8 Changes in the Estate and Gift Taxes

As the following table illustrates, Congress is constantly tinkering with the often punishing structures
of estate and gift taxes. The federal estate tax is actually interwoven with the gift tax; the impact of the
two taxes began differing in 2004. Congress repealed the estate tax originally in 2010 but reinstated it in
2011. The following table shows how the exemptions and the maximum tax rates for the estate and gift
taxes have changed over time.

Year Estate Tax Exemption Gift Tax Exemption Maximum Tax Rate

2001 $675,000 $675,000 55%
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 Tax repealed $1 million 35% (gifts only)
2011 $5 million $1 million 55%
2012 $5.12 million $5.12 million 35%
2013 $5.25 million $5.25 million 40%
2014 $5.34 million $5.34 million 40%

However the federal laws governing estate taxes may change over the next few years, entrepreneurs
whose businesses have been successful cannot afford to neglect estate planning. Even though the federal
estate tax burden has eased somewhat, some states have increased their estate taxes.

Source: Based on data from the Internal Revenue Service, United States Government.

662 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

buy-sell agreement Entrepreneurs should be actively engaged in estate planning no later than age 45;
a contract among those who start businesses early in their lives or whose businesses grow rapidly
co-owners of a business may need to begin as early as age 30. A variety of options exist that may prove to
stating that each agrees to be helpful in reducing the estate tax liability. Each operates in a different fashion,
buy out the others in case but their objective remains the same: to remove a portion of business owners’ as-
of the death or disability sets from their estates so that when they die, those assets will not be subject to
of one. estate taxes. Many of these estate planning tools need time to work their magic,
so the key is to put them in place early on in the life of the business.

BUY-SELL AGREEMENT One of the most popular estate planning techniques is the buy-sell
agreement. A buy-sell agreement is a contract that co-owners often rely on to ensure the continuity
of a business. In a typical arrangement, the co-owners create a contract stating that each agrees
to buy the others out in case of the death or disability of one. That way, the heirs of the deceased
or disabled owner can “cash out” of the business while leaving control of it in the hands of the
remaining owners. The buy-sell agreement specifies a formula for determining the value of the
business at the time the agreement is to be executed. One problem with buy-sell agreements is
that the remaining co-owners may not have the cash available to buy out the disabled or deceased
owner. To resolve this issue, many businesses purchase life and disability insurance for each of
the owners in amounts large enough to cover the purchase price of their respective shares of
the business.

ENTREPRENEURIAL PROFILE: Larry Jaffe and Bob Gross: Jaffe and Gross Larry Jaffe
and Bob Gross, co-owners of Jaffe and Gross, a successful jewelry store in Dayton, Ohio,
failed to create a buy-sell agreement backed by insurance for their business. When Gross died sud-
denly of a heart attack, Jaffe did not have enough cash to purchase Gross’s share of ownership in
the business. Gross’s heirs, who inherited his shares of the business, had no interest in operating
the jewelry store, and without a buy-sell agreement or a succession plan in place, the 27-year-old
company folded. Jaffe has since launched his own jewelry store, Jaffe’s Jewelers, but admits that
things would have been much easier had he and Gross taken the time to create a succession
plan.137 ■

trust LIFETIME GIFTING The owner of a successful business may transfer money to his or her children
a contract between a (or other recipients) from the estate throughout his or her life. Current federal tax regulations
grantor (the company allow individuals to make gifts of $14,000 per year, per parent, per recipient that are exempt from
founder) and a trustee in federal gift taxes. The recipient is not required to pay tax on the $14,000 gift he or she receives,
which the grantor gives and the donor must pay a gift tax only on the amount of a gift that exceeds $14,000. For instance,
the trustee assets (e.g., husband-and-wife business owners could give $1,680,000 worth of stock to their three children
company stock) that the and their spouses over a period of 10 years without incurring any estate or gift taxes at all. To be
trustee holds for the trust’s an effective estate planning strategy, lifetime gifting requires time to work, meaning that business
beneficiaries (e.g., the owners must create a plan for using it early on.
grantor’s heirs).
SETTING UP A TRUST A trust is a contract between a grantor (the company founder) and a trustee
revocable trust (generally a bank officer or an attorney) in which the grantor gives to the trustee legal title to assets
a trust that a grantor can (e.g., stock in the company) that the trustee agrees to hold for the beneficiaries (the founder’s
change or revoke during his children). The beneficiaries can receive income from the trust, the property in the trust, or both
or her lifetime. at some specified time. Trusts can take a wide variety of forms, but two broad categories of trusts
are available: revocable trusts and irrevocable trusts. A revocable trust is one that a grantor can
irrevocable trust change or revoke during his or her lifetime. Under present tax laws, however, the only trust that
a trust in which a grantor provides a tax benefit is an irrevocable trust, in which the grantor cannot require the trustee to
cannot require the trustee return the assets held in trust. The value of the grantor’s estate is lowered because the assets in an
to return the assets held in irrevocable trust are excluded from the value of the estate. However, an irrevocable trust places
trust. severe restrictions on the grantor’s control of the property placed in the trust. Although recent
changes in tax laws have eliminated certain types of trusts as estate planning tools, business
owners use several types of irrevocable trusts to lower their estate tax liabilities:

● Irrevocable life insurance trust (ILIT). This type of trust allows business owners to keep
the proceeds of a life insurance policy out of their estates and away from estate taxes, free-
ing up that money to pay the taxes on the remainder of their estates. To get the tax benefit,

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 663

business owners must be sure that the business or the trust (rather than the owners them-
selves) owns the insurance policy. The primary disadvantage of an ILIT is that if the owner
dies within three years of establishing it, the insurance proceeds become part of the estate
and are subject to estate taxes. Because the trust is irrevocable, it cannot be amended or re-
scinded once it is established. Like most trusts, ILITs must meet stringent requirements to
be valid, and entrepreneurs should use experienced attorneys to create them.

● Irrevocable asset trust. An irrevocable asset trust is similar to a life insurance trust except
that it is designed to pass the assets (such as stock in a family business) in the parents’ es-
tate on to their children. The children do not have control of the assets while the parents are
living, but they do receive the income from those assets. On the parents’ death, the assets in
the trust go to the children without being subjected to the estate tax.

● Grantor retained annuity trust (GRAT). A GRAT is a special type of irrevocable trust
and has become one of the most popular tools for entrepreneurs to transfer ownership of
a business while maintaining control over it and minimizing estate taxes. Under a GRAT,
an owner can put property (such as company stock) in an irrevocable trust for a minimum
of two years. While the trust is in effect, the grantor (owner) retains the benefits associated
with the assets in the trust (e.g., the voting rights associated with the stock) and receives
interest income (calculated at a fixed interest rate that is determined by the Internal Rev-
enue Service [IRS]) from the assets in the trust. At the end of the trust, the property passes
to the beneficiaries (heirs). The beneficiaries are required to pay a gift tax on the value of
the assets placed in the GRAT. However, the IRS taxes GRAT gifts only according to their
discounted present value because the heirs did not receive use of the property while it was
in trust. The primary disadvantage of using a GRAT in estate planning is that if the grantor
dies during the life of the GRAT, its assets pass back into the grantor’s estate. These assets
then become subject to the full estate tax. A GRAT is an excellent tool for transferring the
appreciation of an asset such as a growing company to heirs with few tax implications.

ENTREPRENEURIAL PROFILE: Mark Zuckerberg: Facebook Mark Zuckerberg, founder
of Facebook, and seven other major shareholders in the company recently created GRATs
that will save an estimated $240 million in estate taxes in the future. By setting up a GRAT with
3.4 million pre-IPO shares of Facebook stock valued at just $1.85 per share, Zuckerberg alone will
avoid nearly $68 million in estate taxes (at current estate tax rates).138 ■

Establishing a trust requires meeting many specific legal requirements and is not something
business owners should do on their own. It is much better to work with experienced attorneys,
accountants, and financial advisers to create them. Although the cost of establishing a trust can
be high, the tax savings they generate are well worth the expense.

ESTATE FREEZE An estate freeze minimizes estate taxes by having family members create two estate freeze
classes of stock for the business: (1) preferred voting stock for the parents and (2) nonvoting a strategy that minimizes
common stock for the children. The value of the preferred stock is frozen, whereas the common estate taxes by creating two
stock reflects the anticipated increased market value of the business. Any appreciation in the classes of stock for a busi-
value of the business after the transfer is not subject to estate taxes. However, the parent must pay ness: preferred voting stock
gift taxes on the value of the common stock given to the children. The value of the common stock for the parents and nonvot-
is the total value of the business less the value of the voting preferred stock retained by the parent. ing common stock for the
The parents also must accept taxable dividends at the market rate on the preferred stock they own. children.

FAMILY LIMITED PARTNERSHIP Creating a family limited partnership (FLP) allows business- family limited
owning parents to transfer their company to their children and lower their estate taxes while partnership (FLP)
still retaining control over it for themselves. To create an FLP, the parents (or parent) set up a strategy that allows
a partnership among themselves and their children. The parents retain the general partnership business-owning parents
interest, which can be as low as 1 percent, and the children become the limited partners. As to transfer their company
general partners, the parents control both the limited partnership and the family business. In other to their children (lowering
words, nothing in the way the company operates has to change. Over time, the parents transfer their estate taxes) while still
company stock into the limited partnership, ultimately passing ownership of the company to their retaining control over it for
children. themselves.

664 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

One of the principal tax benefits of an FLP is that it allows discounts on the value of the
shares of company stock the parents transfer into the limited partnership. Because a family busi-
ness is closely held, shares of ownership in it, especially minority shares, are not as marketable
as those of a publicly held company. As a result, company shares transferred into the limited part-
nership are discounted at 20 to 50 percent of their full market value, producing a large tax savings
for everyone involved. The average discount is 40 percent, but that amount varies, depending on
the industry and the individual company involved.

Because of their ability to reduce estate and gift taxes, FLPs have become one of the
most popular estate planning tools in recent years. The following tips will help entrepreneurs
establish an FLP that will withstand legal challenges:

● Establish a legitimate business reason other than avoiding estate taxes—such as transfer-
ring a business over time to the next generation of family members—for creating the FLP
and document it in writing.

● Make sure that all members of the FLP make contributions and take distributions according to
a predetermined schedule. Owners should not allow FLP funds to pay for personal expenses
nor should they time partnership distributions with owners’ personal needs for cash.139

● Do not allow members to put all of their personal assets (such as a house, automobiles,
or personal property) into the FLP. Commingling personal and business assets in an FLP
raises a red flag to the IRS.

● Expect an audit of the FLP. The IRS tends to scrutinize FLPs, so be prepared for a thor-
ough audit.140

Developing a succession plan and preparing a successor require a wide variety of skills,
some of which the business founder will not have. That’s why it is important to bring experts into
the process when necessary. Entrepreneurs often call on their attorneys, accountants, insurance
agents, and financial planners to help them build a succession plan that works best for their par-
ticular situations. Because the issues involved can be highly complex and charged with emotion,
bringing in trusted advisers to help improves the quality of the process and provides an objective
perspective.

LO5 Exit Strategies

Explain the exit strategies Most family business founders want their companies to stay within their families, but in some
available to entrepreneurs. cases, maintaining family control is not practical. Sometimes, no one in the next generation of
family members has an interest in managing the company or has the necessary skills and experi-
ence to handle the job. Under these circumstances, the founder must look outside the family for
leadership if the company is to survive. Whatever the case, entrepreneurs must confront their
mortality and plan for the future of their companies. Having a solid management succession
plan in place well before retirement is near is absolutely critical to success. Entrepreneurs should
examine their options once they decide it is time to step down from the businesses they have
founded. Entrepreneurs who are planning to retire often use two strategies: sell to outsiders or
sell to (nonfamily) insiders. We turn now to these two exit strategies.

Selling to Outsiders

As you learned in Chapter 6, selling a business to an outsider is no simple task. Done properly,
it takes time, patience, and preparation to locate a suitable buyer, strike a deal, and make the
transition. Advance preparation, maintaining accurate financial records, and timing are the keys
to a successful sale. Too often, however, business owners, like some famous athletes, stay with
the game too long until they and their businesses are well past their prime. A “fire-sale” approach
rarely yields the maximum value for a business.

A straight sale may be best for those entrepreneurs who want to step down and turn the reins
of the company over to someone else. However, selling a business outright is not an attractive

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 665

exit strategy for those who want to stay on with the company or for those who want to surrender
control of the company gradually rather than all at once.

ENTREPRENEURIAL PROFILE: Michael and Joseph Orseno: CVM Companies After
investing more than 25 years leading CVM Companies, a maker of industrial fans in Carol
Stream, Illinois, brothers Michael and Joseph Orseno, both members of the Baby Boom genera-
tion, grew tired of their 70-hour workweeks and decided to sell their business. Although the
brothers had children, none were interested in taking the reins of CVM Companies. Within weeks
of putting the company up for sale, the Orsenos provided information about their business to
70 potential buyers before receiving four offers, one of which they accepted. ■

Selling to Insiders

When entrepreneurs have no family members to whom they can transfer ownership or who want
to assume the responsibilities of running a company, selling the business to employees is often
the preferred option. In most situations, the options available to owners are a leveraged buyout
and an employee stock ownership plan.

LEVERAGED BUYOUTS In a leveraged buyout (LBO), managers and/or employees borrow money leveraged buyout
from a financial institution and pay the owner the total agreed-on price at closing; then they use the (LBO)
cash generated from the company’s operations to pay off the debt. The drawback of this technique is a situation in which manag-
that it creates a highly leveraged business. Because of the high levels of debt they take on, the new ers and/or employees bor-
management has very little room for error. Too many management mistakes or a slowing economy row money from a financial
has led many highly leveraged businesses into bankruptcy. institution to purchase a
business and then use the
If properly structured, LBOs can be attractive to both buyers and sellers. Because they get money from the company’s
their money up front, sellers do not incur the risk of loss if the buyers cannot keep the business operations to pay off the
operating successfully. The managers and employees who buy the company have a strong incen- debt.
tive to make sure the business succeeds because they own a piece of the action and some of their
capital is at risk in the business. The result can be a highly motivated workforce that works hard
and makes sure that the company operates efficiently.

EMPLOYEE STOCK OWNERSHIP PLANS Unlike LBOs, employee stock ownership plans employee stock
(ESOPs) allow employees and/or managers (i.e., the future owners) to purchase the business ownership plan
gradually, freeing up enough cash to finance the venture’s future growth. With an ESOP, (ESOP)
employees contribute a portion of their salaries and wages over time toward purchasing shares of an arrangement in which
the company’s stock from the founder until they own the company outright. In leveraged ESOPs, employees and/or managers
the ESOP borrows the money to buy the owner’s stock either all at once or over time. Then, using contribute a portion of their
employees’ contributions, the ESOP repays the loan over time (with pre-tax dollars), using the salaries and wages over
shares of the company’s stock as collateral for the loan. An advantage of a leveraged ESOP is time toward purchasing
that the principal and the interest the ESOP borrows to buy the business are tax deductible, which shares of a company’s stock
can save thousands or even millions of dollars in taxes. Transferring ownership to employees from the founder until they
through an ESOP is a long-term exit strategy that benefits everyone involved. The owner sells the own the company outright.
business to the people he or she can trust the most, his or her managers and employees, and the
managers and employees buy a business they already know how to run successfully. In addition,
because they own the company, the managers and employees have a huge incentive to see that
it operates effectively and efficiently. One study of employee stock ownership plans in privately
held companies found that the ESOPs increased sales, employment, and sales per employee by
2.4 percent a year.141 Approximately 10,900 ESOPs operate in U.S. companies, and they involve
10.3 million employee owners. In half of the companies, the ESOP controls a majority of the
ownership.142

ENTREPRENEURIAL PROFILE: Tom Hirons: Hirons & Company Tom Hirons, who in
1978 founded the advertising and public relations firm that bears his name, created an
ESOP through which he will transfer ownership to his 29 employees over several years. At 61,
Hirons did not want to sell the company, based in Indianapolis, Indiana, to outsiders. The ESOP
allows him to gradually make the transition out of his business and put it into the hands of the
people who contributed so much over time to make it successful.143 ■

666 SECTION IV • PUTTING THE BUSINESS PLAN TO WORK: SOURCES OF FUNDS

Chapter Summary by Learning Objective

1. Explain the challenges involved in the pursuit of a set of core values that everyone in the
entrepreneur’s role as leader and what it takes company can believe in. Small companies’ flexible
to be a successful leader. structures can be a major competitive weapon.

● Leadership is the process of influencing and inspiring ● Job design techniques for enhancing employee
others to work to achieve a common goal and then motivation include job enlargement, job rotation,
giving them the power and the freedom to achieve it. job enrichment, flextime, job sharing, and flexplace
(which includes telecommuting).
● Management and leadership are not the same, yet both
are essential to a small company’s success. Leadership ● Money is an important motivator for many workers
without management is unbridled; management with- but not the only one. The key to using rewards such as
out leadership is uninspired. Leadership gets a small recognition and praise to motivate involves tailoring
business going; management keeps it going. them to the needs and characteristics of the workers.

2. Describe the importance of hiring the right 4. Describe the steps in developing a
employees and how to avoid making hiring management succession plan for a growing
mistakes. business that allows a smooth transition of
leadership to the next generation.
● The decision to hire a new employee is an important
one for every business, but its impact is magnified ● As their companies grow, entrepreneurs must
many times in a small company. Every new hire begin to plan for passing the leadership baton to
a business owner makes determines the heights to the next generation well in advance. A succession
which the company can climb—or the depths to plan is a crucial element in successfully transfer-
which it will plunge. ring a company to the next generation. Preparing
a succession plan involves five steps: (1) select the
● To avoid making hiring mistakes, entrepreneurs successor, (2) create a survival kit for the successor,
should develop meaningful job descriptions and (3) groom the successor, (4) promote an environ-
job specifications, plan and conduct an effective ment of trust and respect, and (5) cope with the
interview, and check references before hiring any financial realities of estate taxes.
employee.
5. Explain the exit strategies available to
3. Explain how to create a company culture that entrepreneurs.
encourages employee retention.
● Family business owners wanting to step down from
● Company culture is the distinctive, unwritten code their companies can sell to outsiders or to insiders.
of conduct that governs the behavior, attitudes, rela- Common tools for selling to insiders (employees or
tionships, and style of an organization. Culture arises managers) include LBOs and ESOPs.
from an entrepreneur’s consistent and relentless

Discussion Questions

16-1. What are servant leaders? 16-8. Why is there a need to conduct a background check
16-2. What behaviors do effective leaders exhibit? on potential candidates?
16-3. Why is it so important for small companies to hire
16-9. Job enrichment involves building motivators into a
the right employees? What can small business own- job by increasing the functions that employees per-
ers do to avoid making hiring mistakes? form. Identify the five core characteristics used to
16-4. Identify the guidelines to help entrepreneurs become enrich employees’ jobs.
employers of choice and hire winners.
16-5. What are the most common causes of a company’s 16-10. Employees who are fully engaged in their work
poor hiring decisions? take pride in making valuable contributions to the
16-6. What is company culture? What role does culture organization’s success. They derive personal satis-
play in a small company’s success? What threats faction from doing so. How can entrepreneurs help
does rapid growth pose for a company’s culture? to improve employee engagement?
16-7. Some entrepreneurs have migrated to creative recruiting
in order to support their growing businesses. Provide 16-11. Entrepreneurs should examine their options once
some examples of these offbeat recruiting techniques. they decide it is time to step down. What are the
options available to an entrepreneur who plans
to retire?

CHAPTER 16 • BUILDING A NEW VENTURE TEAM AND PLANNING FOR THE NEXT GENERATION 667

Beyond the Classroom . . .

16-12. Visit a local business that has experienced rapid generation. Do they intend to pass the business
growth in the past three years and ask the owner along to a family member? Do they have a manage-
about the specific problems he or she had to face ment succession plan? When do they plan to name
because of the organization’s growth. How did the a successor? Have they developed a plan for mini-
owner handle these problems? Looking back, what mizing the effects of estate taxes? How many more
would he or she do differently? years do they plan to work before retiring?

16-13. Visit a business outlet within your campus vicinity. 16-17. Entrepreneurs say they have learned much about
Interview the manager and ask about his or her hiring leadership from the movies! “Films beg to be
process. Has the manager ever made a hiring mis- interpreted and discussed,” says one leadership
take? How did the problem get rectified? Is there a consultant, “and from those discussions business-
job description for every position in the organization? people come up with principles for their own jobs.”
A recent survey of small company CEOs by Inc.
16-14. Ask the owner of a small manufacturing operation to magazine* resulted in the following list of the best
give you a tour of his or her operation. During your movies for leadership lessons: Apollo 13 (1995),
tour, observe the way jobs are organized. To what The Bridge on the River Kwai (1957), Dead Poets
extent does the company use the job design concepts Society (1989), Elizabeth (1998), Glengarry Glen
of job simplification, job enlargement, job rotation, Ross (1992), It’s a Wonderful Life (1946), Norma
job enrichment, flextime, and job sharing? Based on Rae (1979), One Flew over the Cuckoo’s Nest
your observations, what recommendations would you (1975), Twelve Angry Men (1957), and Twelve
make to the owner about the company’s job design? O’Clock High (1949). Rent one of these films and
watch it with a group of your classmates. After
16-15. Find Fortune’s “100 Best Companies to Work For” or viewing the movie, discuss the leadership lessons
Inc.’s “Top Small Company Workplaces” issue. Read you learned from it and report the results to the
the profiles of the companies included on the list and other members of your class.
develop a list of at least five ideas you would like to
incorporate into the company you plan to launch. * Leigh Buchanan and Mike Hofman, “Everything I Know about
Leadership, I Learned from the Movies,” Inc., March 2000, pp. 58–70.
16-16. Contact five small business owners about their
plans for passing their businesses on to the next

Endnotes

Scan for Endnotes or go to www.pearsonglobaleditions.com/Scarborough

Appendix
The Daily Perc Business Plan*

This sample business plan has been made available to users of 4.3.1 Distribution Patterns 674
4.3.2 Competition and Buying Patterns 674
Business Plan Pro®, business planning software published by 4.3.3 Main Competitors 674
4.3.4 Industry Participants 675
Palo Alto Software, Inc. Names, locations, and numbers may 5.0 Strategy and Implementation Summary 676
5.1 Strategy Pyramid 676
have been changed, and substantial portions of the original 5.2 Value Proposition 676
5.3 Competitive Edge 676
plan text have been omitted because of space limitations and 5.4 Marketing Strategy 676
5.4.1 Promotion Strategy 677
to preserve confidentiality and proprietary information. 5.4.2 Distribution Strategy 677
5.4.3 Marketing Programs 677
You are welcome to use this plan as a starting point to 5.4.4 Pricing Strategy 678
5.5 Sales Strategy 678
create your own, but you do not have permission to resell, 5.5.1 Sales Forecast 678
Chart: Sales by Year 678
reproduce, publish, distribute, or even copy this plan as it Table: Sales Forecast 679
5.5.2 Sales Programs 680
exists here. 5.6 Milestones 680
Table: Milestones 681
Requests for reprints, academic use, and other dissemi- 6.0 Management Summary 681
6.1 Management Team 681
nation of this sample plan should be e-mailed to the mar- 6.2 Management Team Gaps 682
6.3 Organizational Structure 682
keting department of Palo Alto Software at marketing@ 6.4 Personnel Plan 682
Table: Personnel 682
paloalto.com. For product information, visit our Website: 7.0 Financial Plan 683
7.1 Important Assumptions 683
www.paloalto.com or call: 1-800-229-7526. Table: General Assumptions 683
7.2 Key Financial Indicators 683
Copyright © Palo Alto Software, Inc., 1995–2012 Chart: Benchmarks 684
7.3 Break-Even Analysis 684
All rights reserved. Table: Break-Even Analysis 684
7.4 Projected Profit and Loss 684
1.0 Executive Summary 669 Table: Profit and Loss 684
Chart: Profit Yearly 686
1.1 Objectives 669 7.5 Projected Cash Flow 686
Table: Cash Flow 686
1.2 Mission 669 Chart: Cash 687
7.6 Projected Balance Sheet 687
Chart: Highlights 670 Table: Balance Sheet 687
7.7 Exit Strategy 688
1.3 Keys to Success 669 Table: Cash Flow 689

2.0 Company Summary 670

2.1 Company Ownership 670

2.2 Start-Up Summary 670

Table: Start-Up 670

Table: Start-Up Funding 671

2.3 Company Locations and Facilities 671

3.0 Products 671

3.1 Product Description 671

3.2 Competitive Comparison 671

3.3 Sourcing 672

3.4 Technology 672

3.5 Future Products 672

4.0 Market Analysis Summary 672

4.1 Market Segmentation 672

Table: Market Analysis 673

Chart: Market Analysis (Pie) 673

4.2 Target Market Segment Strategy 673

4.2.1 Market Trends 673

4.2.2 Market Growth 674

4.2.3 Market Needs 674

4.3 Industry Analysis 674

*“The Daily Perc,” from Business Plan Pro. Copyright © 1995–2012 by Palo Alto Software, Inc. Reprinted with permission.
668

APPENDIX • THE DAILY PERC BUSINESS PLAN 669

1.0 Executive Summary in this strategy is that competitors could establish a foothold
in a community before the arrival of TDP, causing a poten-
The Daily Perc (TDP) is a specialty beverage retailer. TDP tial drain on revenues and a dramatic increase in advertis-
uses a system that is new to the beverage and food service ing expenditures to maintain market share. Knowing these
industry to provide hot and cold beverages conveniently risks—and planning for them—gives TDP the edge needed
and efficiently. TDP provides its customers the ability to to make the exit strategy viable.
drive up and order (from a trained Barista) their choice of a
custom-blended espresso drink, freshly brewed coffee, or By year 3, we estimate a net worth of $1,075,969, a cash
other beverage. TDP offers a high-quality alternative to fast- balance of $773,623, and earnings of $860,428, based on
food, convenience store, or institutional coffee. 13  drive-throughs and four Mobile Cafés. At that point, a
market value of between $3.5 million and $8.6 million for
The Daily Perc offers its patrons the finest hot and cold the company is reasonable. At present, coffee chains are
beverages, specializing in specialty coffees, blended teas, trading in multiples of 4 to 10 times earnings. Using the
and other custom drinks. In addition, TDP will offer soft midpoint of that range (7) provides an estimated value of
drinks, fresh-baked pastries, and other confections. Season- $6 million by the end of year 3.
ally, TDP will add beverages such as hot apple cider, hot
chocolate, frozen coffees, and more. The figure on page 670 summarizes the forecasts for
TDP’s sales, gross profit, and net income for the first three
The Daily Perc will focus on two markets: years of operation.

The daily commuter. Someone who is traveling to or 1.1 Objectives
from work, shopping, delivering goods or services, or The Daily Perc has established three objectives it plans to
just out for a drive. achieve in the next three years:

The captive consumer. Someone who is in a restricted 1. Thirteen drive-through locations and four fully booked
environment that does not allow convenient departure Mobile Cafés by the end of the third year
and return for refreshments or where refreshments
stands are an integral part of the environment. 2. Gross profit margin of 45 percent or more

The Daily Perc will penetrate the commuter and captive 3. Net after-tax profit above 15 percent of sales
consumer markets by deploying drive-through facilities and
Mobile Cafés in highly visible, accessible locations. The 1.2 Mission
drive-through facilities are designed to handle two-sided The Daily Perc’s mission is threefold, with each being as
traffic and dispense customer-designed, specially ordered integral to our success as the next.
cups of premium coffee in less time than is required for a
visit to a locally owned café or one of the national chains. ● Product mission. Provide customers the finest quality
beverages in the most efficient way
In addition to providing a quality product and an
extensive menu of delicious items, we will donate up to ● Community mission. Support the local communities in
7.5 percent of revenue to local charities to increase customer which we operate
awareness of and loyalty to our business and to generate
good publicity coverage and media support. ● Economic mission. Operate and grow at a profitable
rate by making sound business decisions
The Daily Perc’s customer service process is labor in-
tensive, and TDP recognizes that a higher level of talent is 1.3 Keys to Success
essential to success. The financial investment in its employ- There are four keys to success in this business, three of which
ees will be one of the greatest differentiators between TDP are virtually the same as in any food service business. It is
and its competition. For the purpose of this plan, the capital the fourth key—the Community Mission—that gives TDP
expenditures of facilities and equipment are financed. We the extra measure of respect in the public eye.
will maintain minimum levels of inventory on hand to keep
our products fresh and to take advantage of price decreases 1. The best locations, characterized by highly visible,
when they should occur. high traffic counts, and convenient access

The Daily Perc anticipates an initial combination of in- 2. The best products, featuring the freshest coffee beans,
vestments and short- and long-term financing of $365,670 cleanest equipment, premium serving containers, and
to cover start-up costs. This will require TDP to grow more most consistent flavor
slowly than might be otherwise possible, but our growth will
be solid, financially sound, and tied to customer demand. 3. The friendliest servers who are well trained, cheerful,
skilled, professional, and articulate
The Daily Perc’s goal is to become the drive-through
version of Starbucks between the mountains, eventually ob- 4. The finest reputation that generates word-of-mouth
taining several million dollars through a private offering that advertising and promotes our community mission and
will allow the company to open 20 to 30 facilities per year charitable giving
in metropolitan communities in the North, Midwest, and
South with populations of more than 150,000. The danger

670 APPENDIX • THE DAILY PERC BUSINESS PLAN

Forecasted Highlights

$6,000,000

$5,000,000 Sales
$4,000,000 Gross Margin
Net Income

$3,000,000

$2,000,000

$1,000,000

$0 Year 1 Year 2 Year 3
–$1,000,000

2.0 Company Summary Table: Start-Up Expenses and Assets $3,500
Start-Up $4,950
The Daily Perc is a specialty beverage retailer. TDP uses a Requirements $65,000
system that is new to the beverage and food service indus- Start-Up Expenses: $12,300
try to provide hot and cold beverages conveniently and effi- Legal $8,520
ciently. TDP provides its customers the ability to drive up and Office Equipment $7,200
order from a trained Barista their choice of a custom-blended Drive-Through Labor (6 months) $3,700
espresso drink, freshly brewed coffee, or other beverage. Drive-Through Finance Payment (6 months) $54,000
TDP offers a high-quality alternative to fast-food, conve- Drive-Through expenses (6 months) $5,600
nience store, and institutional coffee. Land Lease (6 months) $4,000
Vehicle Finance (6 months) $5,000
2.1 Company Ownership Administration Labor (6 months) $173,770
Web Site Development and Hosting
The Daily Perc is a limited liability company. All member- Identity/Logos/Stationery $25,500
ship shares are currently owned by Bart and Teresa Fisher, Other $35,000
who intend to use a portion of the shares to raise capital. Total Start-Up Expenses
$0
The plan calls for the sale of 100 membership units in Start-Up Assets: $131,400
the company to family members, friends, and private (angel) Cash Required $191,900
investors. Each membership unit in the company is priced Start-Up Inventory $365,670
at $4,250, with a minimum of five units per membership Other Current Assets
certificate, or a minimum investment of $21,250 per investor. Long-Term Assets
Total Assets
When TDP completes its financing, Bart and Terri Fisher Total Requirements
will maintain ownership of 51 percent of the company.

2.2 Start-Up Summary

The Daily Perc’s start-up expenses and funding are shown in
the following tables and charts. The majority of these funds
will be used to build the first facility, pay deposits, and provide
capital for six months of operating expenses, initial inventory,
and other one-time expenses. The Daily Perc also will need
operating capital for the first few months of operation.

APPENDIX • THE DAILY PERC BUSINESS PLAN 671

Table: Start-Up Funding $173,770 drive-through in the Colonial Square Shopping Center will
$191,900 serve as the commissary for the first mobile unit.
Start-Up Funding $365,670
Start-Up Expenses to Fund The demographic and physical requirements for a drive-
Start-Up Assets to Fund through location are the following:
Total Funding Required
● Traffic of 40,000+ cars per day on store side
Assets
Noncash Assets from Start-Up ● Visible from roadway
Cash Requirements from Start-Up
Additional Cash Raised $166,400 ● Easy entry, preferably with a traffic light
Cash Balance on Starting Date $25,500
Total Assets ● Established retail shops in area
$0
Liabilities and Capital $25,500 The founders identified TDP’s first location with the help of
Liabilities $191,900 MapInfo’s Spectrum Location Intelligence Module, a map-
Current Borrowing ping and geographic analysis software package that enables
Long-Term Liabilities $9,000 users to visualize the relationships between demographic
Accounts Payable (Outstanding Bills) $131,400 and traffic count data and geography to produce maps that
Other Current Liabilities (Interest Free) show the best locations for businesses. We will use this soft-
Total Liabilities $0 ware to choose the company’s future locations in the met-
$0 ropolitan area. As TDP expands into other cities, managers
Capital $140,400 will supplement the insight that MapInfo provides with the
Planned Investment tools in ZoomProspector, another useful location analysis
Partner 1 tool, to identify the cities that are most likely to be home to
Partner 2 other successful TDP locations.
Partner 3
Partner 4 $10,000 3.0 Products
Partner 5 $10,000
Partner 6 $10,000 The Daily Perc provides its patrons the finest hot and cold
Partner 7 $10,000 beverages, specializing in specialty coffees and custom-
Partner 8 $11,500 blended teas. In addition, TDP will offer select domestic soft
Partner 9 $10,000 drinks, Italian sodas, fresh-baked pastries, and other confec-
Partner 10 $11,500 tions. Seasonally, TDP will add beverages such as hot apple
Partner 11 $10,000 cider, hot chocolate, frozen coffees, and more.
Partner 12 $11,500
Other $10,000 3.1 Product Description
Additional Investment Requirement $11,500
Total Planned Investment $11,500 The Daily Perc provides its customers, whether at a drive-
Loss at Start-Up (Start-Up Expenses) $97,770 through facility or at one of the Mobile Cafés, the ability to
Total Capital custom-order a beverage that will be blended to their exact
Total Capital and Liabilities $0 specifications. Each of TDP’s Baristas will be trained in
Total Funding $225,270 the fine art of brewing, blending, and serving the highest-
($173,770) quality hot and cold beverages with exceptional attention
$51,500 to detail.
$191,900
$365,670 Besides its selection of coffees, TDP will offer teas, do-
mestic and Italian sodas, frozen coffee beverages, seasonal
specialty drinks, pastries, and other baked goods. Through
the Web site and certain locations, TDP will market pre-
mium items bearing the TDP logo, such as coffee mugs,
T-shirts, sweatshirts, caps, and more.

2.3 Company Locations and Facilities 3.2 Competitive Comparison

The Daily Perc will open its first drive-through facility on The Daily Perc considers itself to be a player in the retail
Manchester Road in the Colonial Square Shopping Center. coffeehouse industry. However, we understand that competi-
We will locate 12 more drive-through facilities through- tion for its products range from soft drinks to milk shakes to
out the metropolitan area over the next three years. The adult beverages.

672 APPENDIX • THE DAILY PERC BUSINESS PLAN

The Daily Perc’s primary competition will come from The Daily Perc’s primary desire will be to listen to its
three sources: customers to ascertain which products they want and to pro-
vide them.
1. National coffeehouses, such as Starbucks and Panera

2. Locally owned and operated cafés 4.0 Market Analysis Summary

3. Fast-food chains and convenience stores The Daily Perc will focus on two markets:

Two things make TDP stand out from all its competitors: 1. The daily commuter. Someone traveling to or from
The Daily Perc will provide products in the most con- work, out shopping, delivering goods or services, or
venient and efficient way, either at one of the two-sided just out for a drive
drive-through shops or at one of the Mobile Cafés. This
separates TDP from the competition in that its customers 2. The captive consumer. Someone who is in a re-
won’t have to find parking places, wait in a long lines, stricted environment that does not allow convenient
jockey for seats, and clean up the mess left by previous departure and return while searching for refreshments
patrons. The Daily Perc’s customers can drive or walk or where refreshment stands are an integral part of the
up, order their beverages, receive and pay for them and environment
quickly be on their way.
4.1 Market Segmentation
The second differentiator is TDP’s focus on providing
a significant benefit to the community through a 7.5 percent The Daily Perc will focus on two different market segments:
contribution to customer-identified charities, schools, or commuters and captive consumers. To access both of these
other institutions. markets, TDP has two different delivery systems. For the
commuters, TDP offers the drive-through coffeehouse. For
3.3 Sourcing the captive consumer, TDP offers the Mobile Café.

The Daily Perc purchases its coffees from PJ’s Coffee. It Commuters are defined as anyone in a motorized ve-
also has wholesale purchasing agreements for other prod- hicle traveling “from point A to point B.” The Daily Perc’s
ucts with Major Brands, Coca-Cola, Big Train, Al’s Famous principal focus will be on attracting commuters heading to
Filled Bagels, L&N Products, and Royal Distribution. or from work and those on their lunch breaks.

The drive-through facilities are manufactured by City Captive consumers include those who are tethered to
Stations, and the Mobile Cafés are manufactured by Tow a campus environment or to a restricted-entry environment
Tech Industries. where people’s schedules afford limited time to make pur-
chases. Examples include high school and college campuses,
Fulfillment equipment suppliers include PJ’s Coffee, where students have limited time between classes, and corpo-
City Stations, Talbert Ford, and Retail Image Programs. The rate campuses, where the same time constraints are involved.
Daily Perc’s computer equipment and Internet connectivity
are provided by NSI Communications. The following table and pie chart reflect the number of
venues available for the Mobile Cafés and the growth we
3.4 Technology expect in those markets over the next five years. For an es-
timate of the number of Captive Consumers, we multiplied
The Daily Perc’s delivery system uses state-of-the-art, two- the total number of venues by 1,000. For example, in year 1,
sided drive-through facilities to provide convenience and ef- we estimate that there are 2,582 venues at which we might
ficiency for its clientele. An architectural exterior diagram of position a Mobile Café. That would equate to a captive con-
the drive-through building can be found in the appendix (not sumer potential of 2,582,000 people.
included in this sample plan).
Similarly, there are more than 2,500,000 commuters in
The Daily Perc also has designed state-of-the-art the metropolitan area as well as visitors, vacationers, and
Mobile Cafés that will be deployed on high school and col- others. Some of these commuters make not just one bever-
lege campuses, on corporate campuses, and at special events. age purchase a day but, in many cases, two and even three
beverage purchases.
3.5 Future Products
The chart also reflects college and high school campuses,
The Daily Perc will offer products that reflect the chang- special events, hospital campuses, and various charitable or-
ing seasons and customers’ changing demand for bever- ganizations. A segment that the chart does not show (because
ages. During the warm summer months, TDP will offset it would skew the chart greatly) is the number of corporate
lower hot beverage sales with frozen coffee drinks as well campuses in the metropolitan area. There are more than
as soft drinks and other cold beverages. The Daily Perc 1,700 corporate facilities that employ more than 500 people,
will also have special beverages during holiday seasons, giving us an additional 1,700,000 potential customers, or a to-
such as eggnog during the Christmas season and hot apple tal of 2,582 locations at which we could place a Mobile Café.
cider in the fall.

APPENDIX • THE DAILY PERC BUSINESS PLAN 673

Table: Market Analysis

Market Analysis Growth Year 1 Year 2 Year 3 Year 4 Year 5 CAGR
1% 1.23%
Potential Customers 80 81 82 83 84
Public High School 0% 0.00%
Campuses 0% 88 88 88 88 88 0.00%
Private High Schools 0% 77 77 77 77 77 0.00%
College Campuses 3% 99 99 99 99 99 2.25%
Golf Courses 2% 43 44 45 46 47 2.01%
Special Events 362 369 376 384 392
Nonprofits with $500K+ 0% 0.00%
Budgets 1.10% 100 100 100 100 100 1.10%
Hospital Campuses 849 858 867 877 887
Total

CHART: MARKET ANALYSIS (PIE)

Public High School Campuses

Private High Schools

College Campuses

Golf Courses

Special Events

Non profits with $500K+ Budgets

Hospital Campuses

Source: Based on data from the National Coffee Association.

4.2 Target Market Segment Strategy 4.2.1 MARKET TRENDS Nearly 20 years ago, a trend toward
more unique coffees began to develop in the United States.
The Daily Perc’s target market is the mobile customer who There had always been specialty coffee stores, such as Gloria
has more money than time and excellent taste in the choice Jeans and others, but people began to buy espresso machines
of a beverage but no desire to linger in a café. By locating the for their homes and offices. Coffee tastings in stores became
drive-throughs in high-traffic/high-visibility areas, these cus- popular, and later espresso bars began to appear. Then along
tomers will patronize TDP and become our regular guests. came Starbucks, the quintessential bastion of upwardly
mobile professionals who wanted to take control over how
Our Mobile Cafés will allow TDP to take the café to their beverages were made.
the customer! By using the community support program that
TDP is instituting, we will make arrangements to visit high Since Starbucks arrived on the scene, people have be-
schools, college campuses, or corporate campuses once or come more pressed for time. The same customers who
twice a month. (We also will offer to visit these facilities for helped push Starbucks’s sales to nearly $10 billion are now
special games, tournaments, recruiting events, or corporate rushing to get their kids to soccer practice and basketball
open houses.) We will return a portion of the revenue from games, running to the grocery store, and trying to get to
each beverage or baked goods sold to the high school or col- work on time and back home in time for dinner—or to get
lege, allowing the institution to reap a financial reward while to the next soccer game. Yet they still have the desire for that
providing a pleasant and fulfilling benefit to their students refreshing, specially blended coffee each morning.
or employees.

674 APPENDIX • THE DAILY PERC BUSINESS PLAN

Recently, we have seen the introduction of beverage 4.3 Industry Analysis
dispensers at convenience stores that spit out overly sweet,
poorly blended cappuccinos in flavors such as French vanilla Consumers in the United States drink 450 million cups of
or mocha, and consumers are paying as much as $3.00 for coffee per day and spend $40 billion a year on coffee-based
these substandard beverages. drinks. The coffee industry in the United States has grown
rapidly in the United States over the last five years. Sales of
The market is primed for the introduction of a company specialty coffees are growing at a rate of 20 percent per year.
that offers a superior quality, specially blended product in Even general coffee sales have increased, with international
a convenient, drive-through environment at a price that is brands such as Folgers, Maxwell House, and Safari coffee
competitive with national coffeehouses. reporting higher sales and greater profits. The United States
is the leading coffee-consuming nation in the world, and the
The Daily Perc is a member of the National Coffee As- coffee industry is reaping the rewards.
sociation and the National Specialty Coffee Association.
These two trade associations provide useful information on 4.3.1 DISTRIBUTION PATTERNS The café experience comes
the relevant trends in the industry, information for making from the Italian origins of espresso. The customer enters a
comparisons to other companies on financial performance, beautifully decorated facility surrounded by wondrous aromas
and educational workshops and seminars. and finds himself or herself involved in a sensory experience
that, more often than not, masks an average product at a
4.2.2 MARKET GROWTH The 183 million Americans who premium price. However, the proliferation of cafés in the United
drink coffee consume 146 billion cups of coffee per year. In States proves the viability of the market. It is a duplication of
addition, more than 173 million people in the United States the same delivery process as currently exists in Europe.
drink tea. According to industry statistics, the consumption
of coffee and flavored coffee products is growing rapidly, 4.3.2 COMPETITION AND BUYING PATTERNS There are four
and 34 percent of coffee drinkers go to “premium” coffee general competitors in TDP’s drive-through market. They
outlets to purchase their beverages. are the national specialty beverage chains, such as Starbucks
and Panera; local coffeehouses—or cafés with an established
The segment of the market we are targeting is the clientele and a quality product; fast-food restaurants; and
commuter, and the number of people who commute to convenience stores. There is a dramatic distinction among
work is increasing by about 6 percent per year. In the the patrons of each of these outlets.
metropolitan area, as with many metropolitan areas in
the country, there is a migration away from the cities as Patrons of Starbucks or of one of the local cafés are
people choose to live in quiet suburban areas and drive to looking for the “experience” of the coffeehouse. They want
work in the city. the ability to “design” a custom coffee, smell fresh pastries,
listen to soothing Italian music, and read a newspaper or visit
The United States is home to 128.3 million commut- with a friend. It is a relaxing, slow-paced environment.
ers. Using census data, we estimate that more than 2.5 mil-
lion commuters drive to and from work each day in our Patrons of fast-food restaurants or convenience stores
defined market. In addition, research shows that 54 percent expect just the opposite. They have no time for idle chatter
of Americans drink coffee every day and that the typical cof- and are willing to overpay for whatever beverage the ma-
fee drinker consumes three nine-ounce cups of coffee per chine spits out—as long as it’s quick. They pay for their gas
day. Nearly 65 percent of coffee consumption takes place in and are back on the road to work. Although they have ability
the morning, 30 percent occurs between meals, and 5 per- to differentiate between a good cup of coffee and a bad one,
cent occurs between meals. Therefore, TDP has a significant time is more valuable to them than quality.
daily target for its beverages, particularly during the morn-
ing drive time. Competitors of the Mobile Cafés on campuses include
fast-food restaurants (assuming that they are close enough so
4.2.3 MARKET NEEDS The United States is a very mobile that customers can get there and back in the minimal allotted
society. With the introduction of the automobile, we became a time), vending machines, and company or school cafeterias.
nation that thrived on the freedom of going where we wanted The customers in this environment are looking for a quick,
when we wanted. The population of the United States is convenient, fairly priced, quality beverage that allows them
315 million people, and there are more licensed vehicles in to purchase the product and return to work, class, or other
the country than there are people. The population’s mobility activity.
has created a unique need in our society for products
available “on the go.” Competitors of the Mobile Cafés at events such as festi-
vals and fairs include all the other vendors who are licensed
Our market is made up of consumers who have busy to sell refreshments. Attendees of these events expect to pay
schedules, a desire for quality, and adequate disposable in- a premium price for a quality product.
come. As much as they would like the opportunity to sit in an
upscale coffeehouse and sip a uniquely blended coffee bev- 4.3.3 MAIN COMPETITORS The Daily Perc has no direct
erage and read the morning paper, they don’t have the time. competitors in the drive-through segment of the market in
However, they still have the desire for a uniquely blended the metropolitan area. The Daily Perc will be the first double-
beverage as they hurry through their busy lives. sided, drive-through coffeehouse in the city. However, we

APPENDIX • THE DAILY PERC BUSINESS PLAN 675

face significant competition from indirect competitors in the with similar depth to that of TDP is Quikava, a wholly
form of traditional coffeehouses, convenience stores, fast- owned subsidiary of Chock Full ‘o Nuts. However, Quikava
food outlets, and other retailers. has limited its corporate footprint to the East Coast and the
Great Lakes region.
National Chains: In 2013, Starbucks, the national leader,
operated more than 11,400 retail outlets in the United States In the drive-through specialty beverage market, TDP
(and nearly 8,400 foreign outlets) that generated operating has a competitive edge over these competitors, including
revenue of $14.9 billion, which represents an increase of Quikava, because of the following:
12  percent over 2012. The average annual revenue for a
Starbucks outlet is $754,000, or $89,558 in revenue per ● Mobile Cafés
employee.
● Consistent menu
Panera Bread had revenues of $2.11 billion, an increase
of 12.2 percent over 2012. Annual sales at the average Panera ● Community benefit
Bread outlet are $2.5 million. Coffee beverages are not the
primary focus of Panera Bread’s menu. ● Quality product

Despite its name, Dunkin’ Donuts’s primary emphasis ● Supply discounts
is on selling coffee. The company has more than 11,000 out-
lets worldwide, 7,000 of which are in the United States. Con- ● Valued image
structing a Dunkin’ Donuts retail store costs about $500,000,
and average sales at a Dunkin’ Donuts outlet in the United ● Greater product selection
States are $845,000. The company’s stronghold on market
share is greatest in the Northeast, where it originated. Fast-Food and Convenience Stores: Most national fast food
chains and national convenience store chains already serve
The Daily Perc believes it has a significant competi- coffee, soda, and some breakfast foods. The national fast-
tive advantage over these chains because of the following food chains understand the benefits and value that drive-
benefits: through service provides customers; 70 percent of the typical
fast-food outlet’s sales come from drive-through customers.
● Drive-through service In addition, nearly 80 percent of the growth in the fast-food
industry in the last five years has come through outlets’ drive-
● Superior customer service through windows. Customers who buy coffee at fast-food and
convenience stores shop primarily on the basis of price rather
● Community benefit than quality and, therefore, are not TDP’s primary target
customers. The Daily Perc’s advantage is that the quality of
● Mobile Cafés the products it sells is much higher than those sold at fast-
food and convenience stores. Soft-drink sales for the typical
● Greater selection quick-serve store account for a large portion of beverage
sales. The Daily Perc believes that the quality of its products
● Higher product quality and the convenience of speedy drive-through service give it a
competitive edge over fast-food and convenience stores.
Local Cafés: The toughest competitor for TDP is the
established locally owned café. The Daily Perc knows the Other Competition: The Daily Perc understands that once it
quality and pride that the local café has in the products their has entered the market and established a presence, others will
customers purchase. Local cafés typically benefit from their try to follow. However, TDP believes that although imitators
loyal, highly educated customers. The quality of beverages will appear, they cannot duplicate its corporate mission,
served at an established café surpasses those of the regional organizational design, or customer value proposition. The
or national chains. Daily Perc will constantly evaluate its products, locations,
service, and mission to ensure that it remains a leader in the
The competitive edge TDP has over local cafés is based specialty beverage industry in its market segment.
on the following:
4.3.4 INDUSTRY PARTICIPANTS There is only one national
● Drive-through service drive-through coffee franchise operation in the United States
that poses a threat: a subsidiary of Chock Full ‘o Nuts called
● Supply discounts Quikava. Quikava operates primarily on the East Coast and in
the upper Great Lakes region. The East and West coasts and
● Mobile Café even some Mountain and Midwest states have smaller local
drive-through chains such as Caffino, Java Espress, Crane
● Consistent menu Coffee, Java Drive, Sunrise Coffee, and Caffe Diva. However,
other players in the premium coffee service industry include
● Community benefit Starbucks, Gloria Jean’s, Caribou Coffee, Panera Bread, and
locally owned and operated coffee shops or “cafés.”
● Quality product

Drive-Through Coffeehouses: There are no drive-through
specialty beverage retailers with a significant market
presence in the central United States. The only company

APPENDIX • THE DAILY PERC BUSINESS PLAN

5.0 Strategy and 3. Demonstrated how TDP appreciates their loyalty and
Implementation Summary patronage by donating money to a meaningful cause

The Daily Perc will penetrate the commuter and captive 5.2 Value Proposition
consumer markets by deploying drive-through facilities and
Mobile Cafés in highly visible, high-volume, accessible lo- The drive-through facilities provide a substantial value
cations. The drive-throughs are designed to handle two-sided proposition because our customers do not have to find park-
traffic and dispense customer-designed, specially ordered ing places, exit their vehicles, stand in long lines to order,
cups of specialty beverages in less time than required for a pay premium prices for average products, find places to sit,
visit to the locally owned café or one of the national chains. clean up the previous patron’s mess, and then enjoy their
coffee—assuming that they have sufficient time to linger
The Daily Perc has identified its market as busy, mobile over the cup.
people whose time is already at a premium but who desire a
refreshing, high-quality beverage or baked item while com- The Daily Perc’s concept is that the customer drives up,
muting to or from work or school. places an order that is filled quickly and accurately, receives
a high-quality product at a competitive price, and drives
In addition to providing a quality product and an exten- away, having invested little time in the process.
sive menu of delicious side items, TDP pledges to donate up
to 7.5 percent of revenue from each cup sold in individual The Daily Perc is also providing a significant commu-
drive-throughs to the charities that its customers choose. nity value on behalf of customers who patronize TDP. For
every purchase a customer makes from us, TDP will donate
5.1 Strategy Pyramid up to 7.5 percent of each sale to a local charity selected by
our customers.
The Daily Perc’s strategy is to offer customers quality prod-
ucts, convenient accessibility, and a community benefit. To 5.3 Competitive Edge
execute this strategy, TDP is placing the drive-throughs and
Mobile Cafés in well-researched, easily accessible locations The Daily Perc’s competitive edge is simple. TDP provides a
throughout the metropolitan area. The Daily Perc is pric- high-quality product at a competitive price in a drive-through
ing its product competitively and training the production environment that saves customers valuable time.
staff to be among the best Baristas in the country. Prices for
TDP’s products are at or slightly below the national average. 5.4 Marketing Strategy
Through coupons and display ads at its locations, TDP will
involve customers in community support efforts by donating The Daily Perc will be placing its drive-through facilities
a portion of each sale to a charity of their choosing. in highly visible, easily accessible locations. They will be
located on high-traffic commuter routes and near shopping
In so doing, TDP has accomplished the following: centers and concentrations of complementary retail shops
to catch customers who are traveling to or from work, go-
1. Provided a customer with a quality product at a com- ing out for lunch, or venturing on a shopping expedition.
petitive price The drive-throughs’ design is very unique and eye-catching,
which will be a branding feature of its own.
2. Provided customers with a more convenient method for
obtaining their desired products As the following chart indicates, TDP’s target audience
skews older.

70% Coffee Consumption by Age-Group 69%
60% 63% 64% 60+
50% 50%
Percentage Drinking Coffee 40%
30%
20% 25–39 40–59
10% Age-Group
0%

18–24

APPENDIX • THE DAILY PERC BUSINESS PLAN 677

Therefore, TDP will implement a low-cost advertising 5.4.2 DISTRIBUTION STRATEGY The Daily Perc will locate its
campaign that includes traditional advertising media, such drive-through facilities in high-traffic areas of the city where
as drive-time radio and a few strategically located outdoor it knows working commuters will be passing. Our first outlet
ads. However, because a significant portion of our target will be located at the corner of Main Street and Broughton
customers is younger than 40, we also will use social media Road, which has a traffic count of 42,200 cars per day.
tools extensively.
The Daily Perc will also make arrangements for the Mo-
The Daily Perc will rely on building relationships bile Cafés to be at as many schools, businesses, and events
with schools, charities, and companies to provide signifi- as possible every year to promote TDP to new customers.
cant free publicity through its community support program.
When TDP makes charitable contributions to these institu- 5.4.3 MARKETING PROGRAMS
tions, they will get the word out to their students/faculty/
employees/partners about TDP. Word-of-mouth advertising Distinctive Logo: Our logo, “Papo,” is a very happy and
has long been one of the greatest advertising techniques a conspicuous sun. The sun touches every human being every
company can use. In addition, we will encourage the media day, and TDP wants to touch its customers every day. Papo is
to cover the charitable aspects of TDP, giving the company already an award-winning logo, having won the “New Artist
the opportunity for more exposure every time TDP writes a Category” of the 2013 Not Just Another Art Director’s Club
check to a nonprofit organization. (NJAADC).

The Daily Perc will use social media marketing tools Distinctive Buildings: The Daily Perc is using diner-style
such as Twitter and Facebook as well, particularly to pro- buildings for its drive-through facilities and has worked
mote the locations of its Mobile Cafés. We will send tweets closely with the manufacturer to make the building distinctive
to our followers to alert them to the location of our Mobile so that it is easy to recognize and functional.
Cafés. We also will post the Mobile Cafés’ locations on
Facebook. The Mobile Café: The Mobile Café will be a key marketing
tool for TDP. The similarities between the Mobile Cafés
5.4.1 PROMOTION STRATEGY The long-range goal is to gain and the drive-through facilities will be unmistakable. The
enough visibility to expand the TDP brand into other regions exposure that these units provide is difficult to measure
and generate inquiries from potential inventors. To do that, directly but is extremely important to the company’s growth.
TDP must employ the following: The Daily Perc will negotiate visits for its mobile units at
schools, hospitals, companies, and special events. A portion
● A public relations service at $1,000 per month for the of all sales made while at these locations will go to a nonprofit
next year to generate awareness of TDP among news- entity of the organization’s choice. The organization will
papers, magazines, bloggers, and reviews. We antici- promote its presence to its constituency and encourage
pate that the school fund-raising program will generate them to frequent TDP’s drive-through establishments to
a publicity on its own and eventually will minimize— support their charitable cause. This will give those patrons
or even eliminate—the need for a publicist. an opportunity to taste the products and become regular
customers of the drive-through facilities. The Mobile Cafés
● Advertising expenditures of $1,000 per month focused will also appear at community events, such as fairs, festivals,
on drive-time radio and strategically selected bill- and other charitable events.
boards. The Daily Perc will experiment with different
stations, keeping careful track of results. We will select Advertising and Promotion: In the first year, TDP plans
billboards that are near our existing locations to serve to spend moderately on advertising and promotion, with
as reminders of our locations for passing motorists. As the program beginning in June, prior to the opening of the
with the school fund-raising program, TDP expects its first drive-through. This would not be considered a serious
storefronts and signage to be a substantial portion of advertising budget for any business, but TDP believes that
our advertising. the exposure will come from publicity and promotion, so we
will spend most of the funds on a good publicist who will get
● A social media presence on Facebook, Twitter, and the word out about the charitable contribution program and
YouTube. We can use these tools to reach our target how it works in conjunction with the Web site. The Daily
customers at very little expense. We will promote daily Perc also believes that word-of-mouth advertising and free
specials on selected items on Facebook and Twitter and beverage coupons will be better ways to drive people to the
will post videos of our Best Barista Contest on You- first and second locations.
Tube. We also plan to involve our customers through
a contest that offers free coffee for one year to the In the second year, TDP will increase the budget be-
customer who posts the best YouTube video promoting cause it will need to promote several locations, with particu-
TDP. We also will sponsor a “Fan of the Day” contest lar emphasis on announcing these openings and all the other
by randomly drawing one person who likes TDP on locations. The Daily Perc will continue to use publicity as
Facebook to receive a free cup of coffee and announc- a key component of the marketing program because TDP
ing the winner on Facebook and on Twitter. could be contributing more than $70,000 to local schools
and charities.

678 APPENDIX • THE DAILY PERC BUSINESS PLAN

In the third year, TDP will double its advertising and 5.5.1 SALES FORECAST In the first year, TDP anticipates
promotion budget, with the majority of the advertising bud- having two drive-through locations in operation. The first
get being spent on drive-time radio to reach our commuting location will open on July 15. The second drive-through will
target audience. As in the previous years, TDP will get sub- open six months later. The Daily Perc is building in a few
stantial publicity from the donation of nearly $200,000 to weeks of “ramp-up” time for each facility while commuters
local schools and charities. become familiar with its presence. The drive-throughs will
generate 288,000 checks in the first year of operation.
5.4.4 PRICING STRATEGY The national average price for a
cup of brewed coffee is $1.38, and the average price of an In the second year, TDP will add two more drive-
espresso-based drink is $2.45. The Daily Perc’s pricing will throughs, and in the third year, TDP will add an additional
be slightly below those of the national chain coffeehouses but nine drive-through facilities. The addition of these facilities
very similar to those of local cafés to reflect the value-added will increase the revenue from drive-throughs with a to-
feature of immediate, drive-through service and convenience. tal of more than 1,000,000 checks in the second year and
Costs to make a 6-ounce cup of coffee are as follows: 2,675,000 checks in the third.

Coffee $0.25 In addition to the drive-throughs, TDP will deploy one
Cup, lid, and sleeve 0.22 mobile unit in the fourth quarter of the first fiscal year and
Milk 0.21 expects this mobile unit to generate 10,000 checks at an av-
Total $0.68 erage check of $2.45 (including baked goods).

Additional ingredients add anywhere from $0.02 (sugar) In the second quarter of the second fiscal year, TDP will
to $1.08 (mocha syrup) to the cost of a single 6-ounce cup of deploy its second and third mobile units and expects all three
coffee for a total cost that ranges from $0.70 for a basic cup mobile units to generate a total of 150,000 checks in the sec-
of premium coffee to $1.76 for a café mocha. ond year. In the third fiscal year, with the addition of a fourth
mobile unit, TDP expects to generate 264,000 mobile unit
5.5 Sales Strategy checks.

We will rely on several in-store sales strategies, including The Daily Perc also will generate revenue from the sale
posting specials on high-profit items at the drive-up win- of “The Daily Perc” T-shirts, sweatshirts, insulated coffee
dow. The Daily Perc also will use a customer loyalty pro- mugs, prepackaged coffee beans, and other items. The Daily
gram that awards a free cup of coffee to customers who have Perc is not expecting this to be a significant profit center, but
accumulated the required number of points by purchasing it is an integral part of the marketing plan and an important
12 cups of coffee. Customers also can earn points by tell- part of developing our brand and building product aware-
ing others about their purchases at TDP on Facebook, Twit- ness. The Daily Perc expects revenues from this portion,
ter, and other social media sites. The Daily Perc will also which will begin in the second fiscal year, to reach as much
develop window cross-selling techniques, such as the as $3,000 per month in the third fiscal year.
Baristas asking whether customers would like a fresh-baked
item with their coffee. We forecast total first year unit sales will reach
298,402 cups. The second year will see unit sales increase
to 1,177,400 cups. The third year, with the addition of a sig-
nificant number of outlets, we will see unit sales increase
to 2,992,000 cups.

$6,000,000 Sales by Year Drive-through #2
$5,000,000 Year 2 Drive-through #3
$4,000,000 Drive-through #4
$3,000,000 Drive-through #5
$2,000,000 Drive-through #6 & #7
$1,000,000 Drive-through #8, #9, & #10
Drive-through #11, #12, & #13
$0 Mobile Café #1
Year 1
Year 3

APPENDIX • THE DAILY PERC BUSINESS PLAN 679

Table: Sales Forecast

Sales Forecast Year 1 Year 2 Year 3

Unit Sales 202,913 300,000 325,000
Drive-Through 1 85,489 300,000 325,000
Drive-Through 2 0 275,000 325,000
Drive-Through 3 0 150,000 325,000
Drive-Through 4 0 300,000
Drive-Through 5 0 0 450,000
Drive-Throughs 6 and 7 0 0 450,000
Drive-Throughs 8, 9, and 10 0 0 225,000
Drive-Throughs 11, 12, and 13 10,000 0 66,000
Mobile Café 1 0 60,000
Mobile Café 2 0 45,000 66,000
Mobile Café 3 0 45,000 66,000
Mobile Café 4 0 0 66,000
Web Site Sales/Premium Items 2,400 3,000
Total Unit Sales 298,402 1,177,400 2,992,000

Unit Prices Year 1 Year 2 Year 3
Drive-Through 1 $1.85 $1.90 $1.95
Drive-Through 2 $1.85 $1.90 $1.95
Drive-Through 3 $0.00 $1.90 $1.95
Drive-Through 4 $0.00 $1.90 $1.95
Drive-Through 5 $0.00 $1.90 $1.95
Drive-Throughs 6 and 7 $0.00 $1.90 $1.95
Drive-Throughs 8, 9, and 10 $0.00 $1.90 $1.95
Drive-Throughs 11, 12, and 13 $0.00 $1.90 $1.95
Mobile Café 1 $2.45 $2.50 $2.55
Mobile Café 2 $0.00 $2.50 $2.55
Mobile Café 3 $0.00 $2.50 $2.55
Mobile Café 4 $0.00 $2.50 $2.55
Web Site Sales/Premium Items $0.00 $11.00 $12.00

Sales $375,389 $570,000 $633,750
Drive-Through 1 $158,154 $570,000 $633,750
Drive-Through 2 $522,500 $633,750
Drive-Through 3 $0 $285,000 $633,750
Drive-Through 4 $0 $585,000
Drive-Through 5 $0 $0 $877,500
Drive-Throughs 6 and 7 $0 $0 $877,500
Drive-Throughs 8, 9, and 10 $0 $0 $438,750
Drive-Throughs 11, 12, and 13 $0 $0 $168,300
Mobile Café 1 $24,500 $150,000 $168,300
Mobile Café 2 $0 $112,500 $168,300
Mobile Café 3 $0 $112,500 $168,300
Mobile Café 4 $0 $0
Web Site Sales/Premium Items $0 $26,400 $36,000
Total Sales $558,043 $2,348,900 $6,022,950
(continued)

680 APPENDIX • THE DAILY PERC BUSINESS PLAN

Table: Sales Forecast (continued)

Sales Forecast Year 1 Year 2 Year 3
Year 1 Year 2 Year 3
Direct Unit Costs $0.64 $0.61 $0.59
Drive-Through 1 $0.64 $0.61 $0.59
Drive-Through 2 $0.00 $0.61 $0.59
Drive-Through 3 $0.00 $0.61 $0.59
Drive-Through 4 $0.00 $0.61 $0.59
Drive-Through 5 $0.00 $0.61 $0.59
Drive-Throughs 6 and 7 $0.00 $0.61 $0.59
Drive-Throughs 8, 9, and 10 $0.00 $0.61 $0.59
Drive-Throughs 11, 12, and 13 $0.64 $0.61 $0.59
Mobile Café 1 $0.00 $0.61 $0.59
Mobile Café 2 $0.00 $0.61 $0.59
Mobile Café 3 $0.00 $0.61 $0.59
Mobile Café 4 $0.00 $6.50 $6.50
Web Site Sales/Premium Items
$191,750
Direct Cost of Sales $129,864 $183,000 $191,750
Drive-Through 1 $54,713 $183,000 $191,750
Drive-Through 2 $167,750 $191,750
Drive-Through 3 $0 $91,500 $177,000
Drive-Through 4 $0 $265,500
Drive-Through 5 $0 $0 $265,500
Drive-Throughs 6 and 7 $0 $0 $132,750
Drive-Throughs 8, 9, and 10 $0 $0 $38,940
Drive-Throughs 11, 12, and 13 $0 $0 $38,940
Mobile Café #1 $6,400 $36,600
Mobile Café #2 $0 $27,450 $38,940
Mobile Café #3 $0 $27,450 $38,940
Mobile Café #4 $0 $0 $19,500
Web Site Sales/Premium Items $0 $15,600 $1,783,010
Subtotal Direct Cost of Sales $190,977 $732,350

5.5.2 SALES PROGRAMS member in the regional and local chambers of commerce,
food service associations, and two national coffee asso-
Corporate Tasting Events. The Daily Perc plans to ciations. The exposure and education that these organiza-
host at least one tasting event for customers each quarter. In tions provide is outstanding, but equally important are the
addition, TDP will adjust its menu to reflect the changing contacts and opportunities made available for deploying a
seasons in the flavors it served. Mobile Café—or even two—at a special event.

Drink Coupons. At fund-raising events for schools and 5.6 Milestones
corporate events, we will give away drink coupons as door
prizes or awards. These giveaways are inexpensive and en- The Milestone table reflects critical dates for occupying
courage new customers to come in to claim a free beverage headquarters, launching the first drive-through and sub-
and bring a friend or buy a baked item or a package of our sequent drive-throughs as well as deploying the mobile
premium coffee. The drive-through units will also distribute units. The Daily Perc also defines our break-even month,
coupons for special menu items or new product introductions. our Web site launch and subsequent visitor interaction
function, and other key markers that will help us measure
Chamber of Commerce and Professional Member- our success.
ships. Because of the need to promote its drive-through lo-
cations and its Mobile Café services, TDP will be an active

APPENDIX • THE DAILY PERC BUSINESS PLAN 681

Table: Milestones

Milestones Start Date End Date Budget Manager Department
Milestone 6/1/2015 8/15/2015 $5,600 COO Marketing
Launch Web Site 8/31/2015 COO Administration
Open First Drive-Through 7/15/2015 12/31/2015 $105,400 COO Finance
First Break-Even Month 12/1/2015 2/1/2015 $0 COO Administration
Open Second Drive-Through 12/15/2015 3/30/2016 COO Administration
Receive First Mobile Unit 3/1/2016 6/1/2016 $105,400 COO Marketing
Launch Web Site Voting 5/1/2016 6/1/2016 $86,450 COO Administration
Open Third Drive-Through 4/15/2016 9/1/2016 $12,500 COO Administration
Receive Second and Third Mobile Units 7/15/2016 2/1/2017 $105,400 COO Administration
Open Fourth Drive-Through 12/15/2016 2/1/2017 $172,900 CIO MIS
Install Point-of-Sale System 12/1/2016 5/15/2017 $105,400 COO Administration
Occupy Headquarters 4/1/2017 6/1/2017 $21,000 COO Administration
Open Fifth Drive-Through 4/15/2017 6/1/2017 $45,000 Equipment Administration
Receive Fourth Mobile Unit 4/15/2017 9/15/2017 $105,400 COO/Director Management
Open Drive-Throughs 6 and 7 7/15/2017 12/15/2017 $86,450 COO/Director Management
Open Drive-Through 8, 9, and 10 10/15/2017 3/1/2018 $210,800 COO Administration
Open Drive-Throughs 11, 12, and 13 1/15/2018 6/1/2018 $316,200 COO Management
Expand to Kansas City 1/15/2018 9/1/2018 $316,200 CFO Finance
Open First Franchise 10/31/2017 1/1/2019 $176,943 CFO Management
Initiate Exit Strategy 10/1/2018 $45,000
Totals $100,000
$2,122,043

6.0 Management Summary of Jones International, Inc., for the last four years. Jones is
a $4 million company that retails vitamins and other nutri-
The Daily Perc will maintain a relatively flat organization. tional products. During her four years with Jones Interna-
Overhead for management will be kept to a minimum, and tional, Mary has written numerous corporate policies and
all senior managers will be “hands-on” workers. We have directed the financial reporting.
no intention of creating a top-heavy organization that drains
profits and complicates decision making. Mr. Tony Guy will perform the duties of corporate
events coordinator on a part-time basis. Tony has more than
At the end of year 3, TDP will have four executive po- five years of experience in business-to-business sales. Last
sitions: chief operating officer, chief financial officer, chief year he sold more than $250,000 in sales of promotional ma-
information officer, and director of marketing. There will terial to corporate and educational clients.
be other midmanagement positions, such as district manag-
ers for every four drive-throughs and a facilities manager to Mr. Chuck McNulty will fill the position of warehouse/
oversee the maintenance and stocking of the Mobile Cafés trailer manager. Chuck has been working for Nabisco, Inc.,
and the equipment in the drive-through facilities. as a service representative for more than 10 years; before
that, he was involved in inventory control for a Nabisco
6.1 Management Team factory. His experience in account services, merchandis-
ing, and inventory control is a welcome addition to the
The Daily Perc has selected Mr. Barton Fisher to perform the TDP team. Chuck will use his knowledge to establish in-
duties of chief operating officer. Bart has an entrepreneurial ventory and warehouse policies. The warehouse manager
spirit and has already started a company (NetCom Services, is responsible for the inventory of all products sold by
Inc.) that was profitable within three months of start-up and TDP. In addition, knowledge of regulations and health re-
paid off all of its initial debt within six months. Bart’s ex- quirements are important. Chuck will be responsible for
perience, leadership, and focus and three years of research ensuring that TDP maintains proper levels of inventory. He
in specialty drinks and drive-through service make him the will work closely with the mobile and drive-through Baris-
ideal chief operating officer for TDP. tas to make sure that all of the products they sell are fresh,
appetizing, and available in the appropriate quantities at
Ms. Mary Jamison will fill the position of bookkeeper the right time.
and office manager. Mary has been the business administrator

682 APPENDIX • THE DAILY PERC BUSINESS PLAN

6.2 Management Team Gaps none of which will be in operation for the entire year. The
total head count for the first year, including management,
The Daily Perc will require several additional management team administrative support, and customer service (production)
members over the next three years. We will hire one district employees, is 15. The payroll expenditures are shown in the
manager for every four drive-throughs. These district manag- following table.
ers will oversee the quality of the products sold, the training of
the Baristas, inventory management, and customer satisfaction. In the second year, with the addition of two drive-
Eventually, the goal is to promote from within, particularly from throughs and two mobile units, TDP will add customer ser-
our Mobile Café and drive-through teams, for these positions. vice personnel, its first district manager, and some additional
support staff at headquarters, including an inventory clerk,
By the beginning of the third year, TDP will have hired equipment technician, and administrative support staff. The
three key senior managers: a chief financial officer, a chief head count will increase by nearly 100 percent in the second
information officer, and a director of marketing. We will dis- year to 29, causing a significant increase in payroll expense.
cuss the roles of each of these managers in subsequent sec-
tions of this plan. In the third year, we will see the most dramatic growth
in head count—180 percent over year 2—because of the ad-
6.3 Organizational Structure dition of nine drive-throughs and another mobile unit. Total
payroll for the third year will reflect this increase as well as
The organization will be relatively flat; most of TDP’s em- the significant increase in the senior management team with
ployees are involved in production, and our goal is to maintain the addition of a chief financial officer, a chief information
a small core of qualified managers who empower employees officer, and a director of marketing. The Daily Perc also will
to make decisions that are in our customers’ best interest. add two more district managers and a corporate events sales
executive. Total personnel will reach 81.
There are three functioning groups within the company:
production, sales and marketing, and general and adminis- The chief financial officer will be brought in to man-
trative. For purposes of this plan—and to show the details of age the growing company’s finances. The chief information
adding senior-level management—TDP has broken manage- officer will be responsible for the expansion of our exist-
ment down as a separate segment, but it is an integral part of ing point-of-sale computerized cash register system that will
the general and administrative function. make tracking and managing receipts, inventory control, and
charitable contributions more robust. Ideally, this person
Production involves the Baristas, or customer service will have both point-of-sale and inventory control experi-
specialists, who will be staffing the drive-throughs and Mo- ence that will allow him or her to provide real-time sales and
bile Cafés and blending the beverages for the customers. inventory control information for accurate decision making
The sales and marketing staff will coordinate the promotion at every level in the company. In addition, the chief infor-
and scheduling of the Mobile Cafés as well as the promo- mation officer should begin building the foundation for an
tion of the drive-throughs and the Community Contribution Internet-based information system that will support franchi-
program. General and administrative personnel will manage sees in the future.
the facilities, equipment, inventory, payroll, and other basic,
operational processes for the company. The director of marketing will be charged with manag-
ing the relationships with advertising agencies, public rela-
6.4 Personnel Plan tions firms, the media; keeping the TDP Web site current; and
coordinating the company’s social media marketing efforts.
The Daily Perc forecasts its first year to be rather lean be-
cause we will have only two locations and one mobile unit,

Personnel Plan Year 1 Year 2 Year 3

Production Personnel $135,474 $439,250 $1,098,650
Drive-Through Team $9,400 $172,800 $225,600
Mobile Café Team $0 $77,000
Equipment Care Specialist (Headquarters) $0 $22,000 $24,000
Other $12,000
Subtotal $144,874 $646,050 $1,425,250
Sales and Marketing Personnel
District Manager (Four Drive-Throughs) $0 $22,000 $77,000
Corporate Events Sales Executive $0 $0 $36,000
Director of Marketing $0 $0 $72,000
Other $0 $0
Subtotal $0 $0
$22,000 $185,000

APPENDIX • THE DAILY PERC BUSINESS PLAN 683

Personnel Plan Year 1 Year 2 Year 3

General and Administrative Personnel $24,500 $46,000 $54,000
Bookkeeper/Office Administrator $7,000 $42,000 $48,000
Warehouse/Site Manager $0 $12,000 $42,000
Inventory Clerk $0 $12,000
Other $31,500 $6,000 $156,000
Subtotal $106,000
Other Personnel $66,000 $78,000
Chief Operating Officer $0 $72,000 $96,000
Chief Financial Officer $0 $0 $84,000
Chief Information Officer $0 $0
Other $0 $0
Subtotal $66,000 $258,000
Total People 15 $72,000
Total Payroll 29 81
$242,374 $2,024,250
$846,050

7.0 Financial Plan ● No unforeseen changes in public health perceptions of
its products.
Although we forecast a loss of about $29,000 for TDP in
its first year of operation, the company’s long-term financial ● Access to equity capital and financing sufficient to
picture is quite promising. Because TDP is a cash business, maintain its financial plan as shown in the tables.
its cash requirements are significantly less than other com-
panies that must carry extensive amounts of accounts receiv- Table: General Assumptions
able. However, because our process is labor intensive, TDP
recognizes that we must hire employees with more talent. General Assumptions Year 1 Year 2 Year 3
The financial investment in our employees will be one of the 8.00% 8.00% 8.00%
greatest differentiators between TDP and its competitors. In Short-Term Interest Rate 9.00% 9.00% 9.00%
this plan, we assume that we are financing the cost of our Long-Term Interest Rate 0.00% 0.00% 0.00%
facilities and equipment. These items are capital expendi- Tax Rate (LLC)
tures and will be available for financing. We will maintain a
minimum of inventory to ensure the freshness of our coffee 7.2 Key Financial Indicators
products and baked goods and to take advantage of price de-
creases when and if they occur. The following chart shows changes in key financial indica-
tors: sales, gross margin, operating expenses, and inventory
The Daily Perc forecasts that the initial combination of turnover. The expected growth in sales exceeds 250 percent
investments and long-term financing will be sufficient with- each year. The Daily Perc forecasts its gross profit margin
out the need for any additional equity or debt investment in year 1 to be 40 percent; by year 3, we expect it to reach
other than the purchase of additional equipment and facili- 45 percent.
ties as it grows. This strategy will require TDP to grow more
slowly than might be otherwise possible, but the company’s Projections for inventory turnover show that TDP
expansion will be solid, financially sound growth based on will maintain a relatively stable amount of inventory in its
its success in meeting customers’ needs. warehouse so that it has no less than one week of inventory
on hand but no more than two weeks of inventory so that
7.1 Important Assumptions products stay fresh. The only time we will consider holding
larger stores of inventory is if there is some catastrophic
The following table shows the underlying assumptions used event that would cause shortages in the supplies of its
to build the financial forecasts for TDP: coffees or teas.

● A slow-growth economy but no major recession.

684 APPENDIX • THE DAILY PERC BUSINESS PLAN

Benchmarks

11.0 Gross Margin % Operating Expenses Year 1
10.0 Year 2
Year 3
9.0
8.0 Inventory Turnover
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

Sales

7.3 Break-Even Analysis are in the general and administrative (G&A) area, which to-
tal 23 percent of sales. G&A includes expenses for rents,
Assuming average revenue per unit of $1.87 and fixed oper- equipment leases, utilities, and payroll for all employees.
ating costs of $19,457 per month, TDP estimates its break-
even point to be $29,580 per month. This is the equivalent of Sales increase by nearly 400 percent in the second year
selling 15,817 cups of coffee per month, or 527 cups per day. because of the addition of two more drive-throughs and two
more Mobile Cafés. Although operating expenses double
Break-Even Analysis 15,817 in the second year, TDP forecasts a net profit of $217,000,
Monthly Units Break-Even $29,580 which represents a net profit margin (net income ÷ sales)
Monthly Revenue Break-Even of 9.24 percent. In that same year, TDP will make substan-
Assumptions: $1.87 tial charitable contributions in the communities in which it
Average Per-Unit Revenue $0.64 operates.
Average Per-Unit Variable Cost $19,457
Estimated Monthly Fixed Cost The third year is when TDP has the opportunity to
break into markets outside the metropolitan area. The Daily
7.4 Projected Profit and Loss Perc will open nine additional drive-through facilities in the
third year, which will increase sales faster than production
The Daily Perc is expecting dramatic growth in the next costs, which improve the company’s gross profit margin.
three years, reaching strong sales and a healthy gross profit Several expenses increase substantially in year 3, including
margin by the end of its first year of operation. Expenses advertising, charitable donations, and payroll (because TDP
during the first year will, however, produce a net loss of will add several key management team members). Once
about $29,000. again, the company’s two largest expenses are production
costs and G&A expenses. However, the G&A expenses de-
Aside from production costs of 60 percent, which in- crease from 23 percent of sales in year 1 to 18.5 percent of
clude actual purchases of products and commissions for sales in year 2 and 15.0 percent of sales in year 3. By year 3,
sales efforts, the single largest expenditures in the first year operating efficiencies push the company’s net profit margin
to 16 percent.

Pro Forma Profit and Loss Year 1 Year 2 Year 3
$558,043 $2,348,900 $6,022,950
Sales $190,977 $1,783,010
Direct Cost of Sales $144,874 $732,350 $1,425,250
Production Payroll $646,050
Sales Commissions $1,416 $35,234 $90,344
Total Cost of Sales $337,267 $1,413,634 $3,298,604

APPENDIX • THE DAILY PERC BUSINESS PLAN 685

Pro Forma Profit and Loss Year 1 Year 2 Year 3
$220,776 $935,267 $2,724,346
Gross Margin
Gross Margin % 39.56% 39.82% 45.23%
Operating Expenses
Sales and Marketing Expenses $0 $22,000 $185,000
Sales and Marketing Payroll $18,000 $36,000 $72,000
Advertising/Promotion $1,000 $15,000 $22,000
Web site $4,000 $7,500 $15,000
Travel $3,332 $70,467 $180,689
Donations $26,332 $150,967 $474,689
Total Sales and Marketing Expenses
Sales and Marketing % 4.72% 6.43% 7.88%
General and Administrative Expenses
General and Administrative Payroll $31,500 $106,000 $156,000
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation
Leased Offices and Equipment $21,785 $92,910 $196,095
Utilities $0 $6,000 $18,000
Insurance $19,800 $41,100
Rent $9,640 $32,620 $63,910
Payroll Taxes $12,570 $50,400 $126,000
Other General and Administrative Expenses $16,800 $126,908 $303,638
Total General and Administrative Expenses $36,356
General and Administrative % $0 $0
Other Expenses: $0 $434,638 $904,743
Other Payroll $128,651
Consultants 18.50% 15.02%
Legal/Accounting/Consultants 23.05%
Total Other Expenses $72,000 $258,000
Other % $66,000 $0 $0
Total Operating Expenses $0
Profit before Interest and Taxes $24,000 $36,000
EBITDA $12,500 $96,000 $294,000
Interest Expense $78,500
Taxes Incurred 14.07% 4.09% 4.88%
Net Income $233,483 $681,605 $1,673,431
Net Income/Sales ($12,707) $253,662 $1,050,915
$9,078 $346,572 $1,247,010
$16,165 $36,639
$77,102
$0 $0 $0
($28,872) $217,023
$973,812
-5.17% 9.24% 16.17%

686 APPENDIX • THE DAILY PERC BUSINESS PLAN

$1,000,000 Profit Yearly
$800,000 Year 2
$600,000
$400,000
$200,000
$0

Year 1 Year 3

7.5 Projected Cash Flow With sufficient initial financing, TDP anticipates no
cash flow shortfalls for the first year or beyond. In year 1,
As in any business, managers must manage cash extremely the months of March and May produce the greatest cash
carefully; however, TDP has the benefit of operating a cash drains because TDP will incur the cost of adding second
business. Forecasts show that the business generates positive drive-through and a second mobile unit. In addition, TDP
cash flow, even in year 1. The greatest challenge that TDP experiences heavier-than-normal cash disbursements in
faces in managing cash flow results from the seasonal dips December and January because accounts payable come
in coffee sales during warm weather, but TDP will attempt due then.
to offset those declines by adding seasonal menu items, such
as iced cappuccinos, iced mochas, and others.

Pro Forma Cash Flow Year 1 Year 2 Year 3

Cash Received $558,043 $2,348,900 $6,022,950
Cash from Operations $558,043 $2,348,900 $6,022,950
Cash Sales
Subtotal Cash from Operations $0 $0 $0
Additional Cash Received $0 $0 $0
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $181,463 $253,970 $729,992
New Other Liabilities (interest Free) $0 $0 $0
New Long-Term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-Term Assets $739,506 $2,602,870 $6,752,942
New Investment Received
Subtotal Cash Received $242,374 $846,050 $2,024,250
Expenditures $273,191 $1,236,069 $2,880,058
Expenditures from Operations $515,565 $2,082,119 $4,904,308
Cash Spending
Bill Payments
Subtotal Spent on Operations

APPENDIX • THE DAILY PERC BUSINESS PLAN 687

Pro Forma Cash Flow Year 1 Year 2 Year 3

Additional Cash Spent $0 $0 $0
Sales Tax, VAT, HST/GST Paid Out $1,500 $2,000 $5,000
Principal Repayment of Current Borrowing
Other Liabilities Principal Repayment $0 $0 $0
Long-Term Liabilities Principal Repayment $26,469 $27,000 $50,000
Purchase Other Current Assets
Purchase Long-Term Assets $0 $0 $0
Dividends $191,850 $429,700 $1,356,993
Subtotal Cash Spent
Net Cash Flow $0 $0 $0
Cash Balance $735,384 $2,540,819 $6,316,301

$4,122 $62,051 $436,641
$29,622 $91,673 $528,315

Cash

$40,000 Net Cash Flow
$30,000 Cash Balance
$20,000
$10,000

$0
($10,000)

Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11
Month 12

7.6 Projected Balance Sheet expects to build a company with strong profit potential and
a solid balance sheet that will be asset heavy and flush with
The Daily Perc’s projected balance sheet shows a significant cash at the end of the third year. The Daily Perc has no plan
increase in net worth in year 2, at which point the company to pay dividends before the end of the third year; instead,
will generate an impressive 90.5 percent return on invest- the company will use the cash it generates to fuel its growth.
ment (ROI). As the financial projections indicate, TDP

Pro Forma Balance Sheet Year 1 Year 2 Year 3

Assets $29,622 $91,673 $528,315
Current Assets $35,159 $134,826 $328,253
Cash
Inventory $0 $0 $0
Other Current Assets $64,781 $226,499 $856,568
Total Current Assets (continued)

688 APPENDIX • THE DAILY PERC BUSINESS PLAN Year 1 Year 2 Year 3
$323,250 $752,950 $2,109,943
Pro Forma Balance Sheet $21,785 $114,695
$301,465 $638,255 $310,790
Long-Term Assets $366,246 $864,754 $1,799,153
Accumulated Depreciation $2,655,721
Total Long-Term Assets $49,724 $106,240
Total Assets $7,500 $5,500 $248,402
Liabilities and Capital $0 $500
Current Liabilities $0 $0
Accounts Payable $57,224 $111,740
Current Borrowing $286,394 $513,364 $248,902
Other Current Liabilities $343,618 $625,104 $1,193,356
Subtotal Current Liabilities $225,270 $225,270 $1,442,258
Long-Term Liabilities ($173,770) ($202,642)
Total Liabilities ($28,872) $217,023 $225,270
Paid-In Capital $22,628 $239,651 $14,381
Retained Earnings $366,246 $864,754 $973,812
Earnings $22,628 $239,651 $1,213,463
Total Capital $2,655,721
Total Liabilities and Capital $1,213,463
Net Worth

7.7 Exit Strategy enter high-potential markets with copycat concepts before
TDP can expand into those markets, resulting in lower
There are three scenarios for the investors and managers to revenues and a dramatic increase in advertising expenditures
recover their investment, two of which produce significant to maintain market share. Understanding these risks—and
returns on each dollar invested. planning for them—gives TDP the edge required to make
this scenario work.
Scenario 1: The Daily Perc becomes extremely successful
and begins selling franchises. When one considers the wealth Scenario 3: By the third year, the growth and community
that successful franchisers such as McDonald’s, Wendy’s, support for TDP is creating a buzz in cities beyond the
Five Guys Burgers and Fries, and others have created, the metropolitan area. Competitors such as Starbucks or
potential to franchise a well-run system is considerable. Quikava will realize the value proposition that TDP offers
However, developing a franchise can be extremely costly, its customers and identify the company an attractive target
takes years to build, and can be diminished by a few for buyout.
franchisees who fail to deliver the consistency or value on
which the founding company has built its reputation. Taking a conservative approach to valuation, we es-
timate that TDP would be valued at $7.5 million. Assum-
Scenario 2: The Daily Perc becomes the drive-through ing that all 250 units of ownership in TDP are distributed
version of Starbucks, obtaining several million dollars to investors, a cash purchase of TDP would net each unit
through a private offering that allows the company to open $30,000. With each unit selling at $4,250, that price consti-
20 to 30 outlets per year in the region of the country between tutes an ROI of 705 percent over the three years. However,
the mountain ranges in both metropolitan and micropolitan any buyout will most likely involve a cash/stock combina-
communities. This is the preferred exit strategy of the tion, which is preferable because tax consequences of the
management team. The danger with this exit strategy is that transaction for the sellers would be more favorable than in
once TDP becomes successful, competitors will attempt to an all-cash deal.

Pro Forma Cash Flow Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Cash Received $0 $0 $0 $32,375 $42,637 $44,769 $42,530 $42,637 $77,144 $85,167 $95,392 $95,392
Cash from Operations $0 $0 $0 $32,375 $42,637 $44,769 $42,530 $42,637 $77,144 $85,167 $95,392 $95,392
Cash Sales
Subtotal Cash from Operations 0.00% $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Additional Cash Received $0
Sales Tax, VAT, HST/GST Received $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
New Current Borrowing $0
New Other Liabilities (Interest Free) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
New Long-Term Liabilities $0
Sales of Other Current Assets $0 $0 $5,300 $0 $0 $0 $0 $0 $98,184 $0 $77,979 $0
Sales of Long-Term Assets $0
New Investment Received $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Subtotal Cash Received
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Expenditures
Expenditures from Operations $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Cash Spending
Bill Payments $0 $5,300 $32,375 $42,637 $44,769 $42,530 $42,637 $175,328 $85,167 $173,371 $95,392
Subtotal Spent on Operations
Additional Cash Spent $5,500 $5,500 $5,500 $16,000 $18,100 $17,050 $18,800 $19,500 $28,624 $30,700 $38,200 $38,900
Sales Tax, VAT, HST/GST Paid Out $112 $3,349 $2,987 $7,228 $10,030 $17,719 $27,251 $24,342 $26,320 $54,407 $46,831 $52,615
Principal Repayment of Current $8,849 $8,487 $23,228 $28,130 $34,769 $46,051 $43,842 $54,944 $85,107 $85,031 $91,515
Borrowing $5,612
Other Liabilities Principal Repayment
Long-Term Liabilities Principal $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Repayment $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $500 $1,000
Purchase Other Current Assets
Purchase Long-Term Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Dividends $2,500 $3,116 $0 $5,166 $0 $0 $0 $0 $0 $7,216 $0 $8,471
Subtotal Cash Spent
Net Cash Flow $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Cash Balance $0 $0 $0 $0 $0 $0 $0 $0 $105,400 $0 $86,450 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$8,112 $11,965 $8,487 $28,394 $28,130 $34,769 $46,051 $43,842 $0 $92,323 $0 $100,986
($8,112) ($11,965) ($3,187) $3,981 $14,507 $10,000 ($3,521) ($1,205) $160,344 ($7,156) $171,981 ($5,594)
$17,388 $5,422 $2,236 $6,217 $20,724 $30,724 $27,203 $25,998 $33,826 $29,622
$14,984 $1,390
$40,982 $35,216

689

Case 1

Panda Sunglasses

How Should a Start-Up Business with dedicated to making Panda Sunglasses a success. After test-
a Social Mission Market Its Sunglasses ing sales of their sunglasses online, the trio began applying for
with Bamboo Frames? spots in various trade shows geared toward accessories. One
of the shows they applied to was the prestigious ENK Inter-
Vincent Ko showed his entrepreneurial potential in high national trade show, which attracts more than 250,000 buyers
and press members from across the globe. Companies that are
school in Rockville, Maryland, when, as a young hockey accepted to the juried show find sales leads that generate total
player, he invented a drying rack for hockey pads that he sold sales of more than $1 billion. Mills sent Ko an e-mail in which
to his teammates, then on eBay, and finally on a Web site for he joked that they would be willing to set up in a broom closet
the company he created. A few years later, while attending at ENK if their application were accepted. Ko forwarded that
George Washington University in Washington, D.C., Ko and e-mail to executives at ENK, who responded with, “We’ll find
two friends, Luke Lagera and Mike Mills, were inspired by you a booth instead.” At the ENK show, Ko says he and his
the growing social entrepreneurship movement and the suc- cofounders, fresh out of college, created a booth that featured
cess of companies such as TOMS shoes, a company founded a giant bamboo backdrop that attracted a great deal of atten-
by Blake Mycoskie that donates a pair of shoes to some- tion. At one point, they struck up a conversation with three
one in need for every pair it sells. One day while walking women, who they learned were buyers from the retail chain
through the Georgetown shopping district, the friends no- Nordstrom. The trade show opened many doors for the young
ticed a display of sunglasses and decided to create a business company, and less than two years after starting, Panda Sun-
that would market cool sunglasses and provide eye examina- glasses was generating annual sales of $350,000.
tions to someone in need for every pair sold. In keeping with
the idea of a socially responsible company, Ko suggested Questions
that they make their sunglasses frames from eco-friendly
bamboo, a lightweight, sturdy wood that grows extremely 1. How can social entrepreneurs such as the founders of
fast. Having grown up in China, Ko was familiar with the Panda Sunglasses use their companies’ social missions
properties of the renewable wood and knew that it was the to attract customers and promote their businesses?
perfect material from which to make sunglasses frames.
2. How should the founders of Panda Sunglasses define
They created a company, Panda Sunglasses, and set out a unique selling proposition for their company that
to find companies that could make the product they envi- resonates with customers?
sioned. Ko knew bamboo was the most commonly used wood
in China, so the team began looking for a company in China 3. Write a brief memo to the founders of Panda
to manufacture the frames to their specifications. Not only Sunglasses outlining a bootstrap marketing plan
did they find a Chinese wood shop that would make their for the company.
sunglasses frames, but they also located a Chinese eye wear
manufacturer to produce the polarized lenses. Pairing the two 4. Use the business model canvas to illustrate Panda Sun-
companies gave them their unique, stylish sunglasses, which glasses’s business model. Can you identify other revenue
float. They created a Web site and began selling them at $120 streams that could support the company? How can the
a pair. Through a connection that Lagera had, the young company strengthen its relationships with customers?
entrepreneurs found an ideal partner in the Tribal Outreach
Medical Association (TOMA), a nonprofit organization that 5. How should the founders of Panda Sunglasses use
provides eye examinations and other health services for tribal social media to market their company and its products?
communities. They quickly reached a deal: For every pair of What can they do to increase the traffic to and generate
Panda Sunglasses sold, the company would pay for one eye more sales from their company’s Web site?
exam through TOMA.
Sources: Based on Nancy Dahlberg, “Start-up Spotlight: Panda,” Miami
The entrepreneurs’ next challenge was to market their Herald, June 29, 2014, http://www.miamiherald.com/2014/06/29/v-print/
unique sunglasses and their potential to help people in need. 4207736/startup-spotlight-panda.html; Olga Khazan, “Panda Glasses
They knew that without sales, their effort at “conscious capi- Are TOMS Shoes for Your Face,” Washington Post, May 24, 2012, http://
talism” would be for naught. None of the three cofounders www.washingtonpost.com/blogs/on-small-business/post/panda-glasses-
had any experience in the retail industry, but they learned are-toms-shoes-for-your-face/2012/05/23/gJQAsOPhlU_blog.html;
quickly on the job. The young men had just graduated and Alicia Ciccone, “Vincent Ko, Panda Sunglasses: Sustainable Bamboo
took “regular” jobs to pay their bills, but they remained Eyewear That Gives Back,” Huffington Post, May 25, 2012, http://www
.huffingtonpost.com/2012/05/25/vincent-ko-panda-sunglasses_n_1544043
.html; “Panda Sunglasses Are More Than Meets the Eye,” Asian Fortune,
April 25, 2014, http://www.asianfortunenews.com/2014/04/panda-
sunglasses-are-more-than-meets-the-eye/; Zach Gordon, “Alums’
Business Aims to Help the Needy,” The Hoya, May 17, 2012, http://www
.thehoya.com/alums-business-aims-to-help-the-needy/.

690

Case 2

Oxitec

Should a Company Be Able to Release A local real estate agent collected more than 117,000 sig-
Genetically-Altered Mosquitoes into natures on a petition she posted on Change.org against the re-
the Environment? lease of the genetically-altered mosquitos in the Florida Keys.

Oxitec, a British biotech company founded by Dr. Luke Advocates of the plan pointed to the research conducted
by Oxitec that has been published in peer-reviewed scien-
Alphey, develops innovative approaches for insect-borne dis- tific journals, which highlights the problems associated with
eases and agricultural pests plaguing developing countries. traditional spraying with insecticides. The use of the altered
mosquitos cannot move ahead until the FDA gives its formal
Oxitec developed a new approach to tackling the approval.
mosquito-borne disease dengue fever. There are 50 million
to 100 million cases of dengue fever every year, with a death Local residents also are concerned about the ecologi-
rate of about 2.5 percent. There is no treatment or vaccine cal impact of Oxitec’s approach to insect control. They ar-
for dengue fever; patients are treated for their symptoms and gue that officials should take a wait-and-see approach by
the disease must run its course. Many pests are becoming observing the ecological impact of the treatment used in the
resistant to insecticides, and concerns are growing over the Cayman Islands.
long-term environmental and health impact of consistent use
of insecticides. Using advanced genetics, Oxitec breeds and Questions
releases “sterile” male mosquitos of the disease-carrying
species. The company claims that this new approach is a 1. Is it ethical for a company to expose people to prod-
highly targeted form of biological control that is safe to other ucts that have not been definitively proven to be safe?
species, causes no lasting impact on the environment, and is Explain.
cost-effective. In 2010, Oxitec released 3 million genetically
altered mosquitos into the Cayman Islands, resulting in a re- 2. Is it ethical for community leaders to put citizens at
ported 80 percent reduction in the incidence of dengue fever. risk for a deadly disease, such as dengue fever, when
there is a proven approach to reducing the impact of
In 2009 the Florida Keys suffered an outbreak of dengue the disease? Explain.
fever. Although no one died from the outbreak, 93 people
became ill in Key West. To avoid future outbreaks, the Florida 3. How should companies test the safety of products
Keys Mosquito Control District decided to contract with before they are introduced? Explain.
Oxitec to release its genetically altered mosquitos in the
Florida Keys. Key West would be only the fourth location 4. Create a detailed diagram of all of the stakeholders
worldwide to use this approach to control the local mosquito of Oxitec. How is each of the stakeholders affected by
population. Oxitec’s actions? Explain. What conclusions can you
draw from this analysis?
Some critics raised concerns about releasing genetically
altered mosquitos into the environment. Others questioned 5. Describe the business model of Oxitec using the
the ecological impact of removing insects from an ecosys- Business Model Canvas. What recommendations
tem. These critics argued that no one knows the impact on might you make for the company’s business model
animals that feed on these mosquitos and cannot know what going forward?
other organisms may move in to fill the ecological void once
the mosquitos are gone. The Florida Keys Environmental Sources: http://www.oxitec.com/; The World Health Organization, “Den-
Coalition wrote to Florida Governor Rick Scott, asking him gue and Severe Dengue: Fact Sheet,” November 2012, http://www.who.int/
to stop Oxitec, pointing out that “. . . biting female mosqui- mediacentre/factsheets/fs117/en/; Maria Cheng, “GM Mutant Mosquitoes
toes could inject an engineered protein into humans along Fight Dengue Fever in Cayman Islands,” Huffington Post, November 11,
with other proteins from the mosquitos’ salivary gland. 2010, http://www.huffingtonpost.com/2010/11/11/gm-mosquitoes-fight-
Oxitec has yet to conduct or publish any study showing dengu_n_782068.html; Chris Sweeney, “Genetically Modified Bugs
that this protein is not expressed in the salivary gland and Glow Red and Self-Destruct, but Can They Keep Away Disease?”
therefore cannot be passed on to humans.” Broward Palm Beach NewTimes News, Thursday, May 31 2012, http://
www.browardpalmbeach.com/2012-05-31/news/genetically-modified-
bugs-glow-red-and-self-destruct-but-can-they-keep-away-disease/;
“Oxitec Wants to Release Genetically Modified Mosquitoes into Florida
Keys,” Huffington Post, July 16, 2012, http://www.huffingtonpost
.com/2012/07/16/oxitec-mutant-mosquitoes_n_1676344.html.

691

Case 3

Source Outdoor

Should a Small Company’s Business supplier was to manufacture those items himself. He cleared
Model Include a Channel of Distribution out a section of the company’s warehouse, purchased $60,000
That Competes with Its Retail Customers? worth of equipment, including metal lathes for forming
curved table legs and other parts, welding torches, grind-
Entrepreneurs never know when a business idea will come ers, and an oven for warming vinyl. Soon Source Outdoor
was making much of the same furniture in his converted
to them. Gerald Shvartsman came up with the idea for his Miami warehouse that he had been importing from China but
wicker and outdoor furniture business, Source Outdoor, in the quality of the products was much higher. In addition,
2009 when he went shopping at several Miami, Florida, Shvartsman could now fill orders much faster (shipments
stores for outdoor furniture for the balcony of his apartment. from China took months to arrive) and could offer custom-
Shocked by the high prices of couches, wicker chairs, and designed finishes and cushions, a feature that was appealing
chaise lounges, Shvartsman decided to open a business that to many of his interior designers, decorators, and retail furni-
imported low-cost, high-end outdoor furniture. He found a ture store customers. Although Shvartsman wants to expand
low-cost supplier in China and placed an order. When the the percentage of his company’s products made in-house, he
four containers arrived, Shvartsman unloaded them him- realizes that he will have to continue to import items that are
self and then switched roles, becoming his company’s one- labor-intensive, such as handcrafted woven wicker furniture,
man sales force and calling on every furniture store within from China and other countries with low labor costs.
a 60-mile radius. Within a few months, every store that he
had visited had some of Source Outdoor’s furniture in their One day, Shvartsman received a call from one of his
showrooms or were selling from his company’s catalog. best retail customers who complained about Source Outdoor
selling directly to customers at the Florida home show. The
To expand his company’s reach, Shvartsman began sell- store owner said Source Outdoor was taking potential sales
ing through local interior designers and decorators and to ho- from his store and all of the other nearby stores to which
tel and condominium owners at discounts of 50 percent of the Shvartsman sold. He realized that similar calls from other
normal retail price. After working with one online furniture retail customers were likely to come and began weighing his
retailer, he began filling orders (by drop shipping) for other options. The home show sales were important to his com-
online retailers. Like the brick-and-mortar retail stores he pany and generated impressive profit margins. So far, he had
supplied, Shvartsman offered online furniture retailers dis- encountered none of the retail stores he supplied at the home
counts of 60 percent off retail prices. In addition, six or seven show. Shvartsman was able to move slow-selling merchan-
times each year, Shvartsman would haul a truckload of his dise at attractive margins, but was doing so worth alienat-
overstocked merchandise and sell it directly to the public at a ing his primary customer base, the retail furniture stores that
large Florida home show. Most of the sales to the public were carried his company’s products?
at full retail price, generating impressive profit margins of
more than 300 percent. By 2011, Source Outdoor’s sales had Questions
reached $4.4 million; in 2013, they doubled to $9 million.
1. Is Shvartsman’s entrepreneurial story typical of the
As Source Outdoor’s sales volume increased, Shvartsman way that other entrepreneurs come up with the ideas
began to notice that his manufacturer in China was shipping for their businesses? Explain.
aluminum chairs and tables that had flaws, such as discol-
ored metal coatings, mismatched fabrics on cushions, and 2. Use the business model canvas to illustrate Shvartsman’s
weak metal supports. Because he had built his company on business model. Do you notice any areas that require
the premise of selling high-end, quality furniture at moder- strengthening?
ate prices, he knew that the quality problems could threaten
Source Outdoor’s reputation and success. Shvartsman decided 3. What advantages and disadvantages did Shvartsman
that the best way to address the quality problems with his encounter by “reshoring” some of his company’s
manufacturing?

692

CASE 3 • SOURCE OUTDOOR 693

4. Should Source Outdoor consider exporting its prod- Sources: Based on Douglas Hanks, “Furniture Importer Likes Flexibility
ucts? If so, what steps should Shvartsman take to of ‘Made in Miami,’” Miami Herald, April 28, 2013, http://www
develop an export strategy? .miamiherald.com/2013/04/28/3368540/furniture-importer-likes-
flexibility.html; John Grossman, “A Wholesaler Finds Himself in
5. Refer to the “Channels,” “Customer Segments,” and Competition with Retail Clients,” New York Times, April 24, 2013, http://
“Revenue Streams” segments of the business model www.nytimes.com/2013/04/25/business/smallbusiness/reconciling-retail-
canvas that you created in question 2. Do you see any success-in-wholesale-business.html?pagewanted=all; John Grossman,
potential conflicts? “A Wholesaler Decides to Abandon His Most Profitable Sales Channel,”
New York Times, May 1, 2013, http://boss.blogs.nytimes.com/2013/05/
6. Write a one-page memo to Gerald Shvartsman explain- 01/a-wholesaler-decides-to-abandon-his-most-profitable-sales-channel/
ing how you recommend that he resolve the issue that ?_php=true&_type=blogs&_r=0; Ashley D. Torres, “Source Outdoor
the retail store owner raised over Source Outdoor’s Has Expansion Plans for South Florida,” South Florida Business Journal,
direct sales to customers at the Florida home show. April 19, 2013, http://www.bizjournals.com/southflorida/news/2013/
04/19/source-outdoor-looks-to-expand.html.

Case 4

Father and Son Pizzeria

Should the Owner of a Pizzeria Remodel sauce that he used on his pizzas. He began making 40 quarts
and Expand, Move to a New Location, or a week that sold out quickly. Then he began making 120 or
Focus on Selling the Restaurant’s Popular more quarts a week to satisfy customer demand. Profit mar-
Red Sauce Through Retail Outlets? gins on the quarts of sauce, which he sold at $8.99 per jar,
were higher than those on the items on the pizzeria’s menu.
When Carlos Vega was in high school, he worked part-time
Vega faced an important decision in the life of his busi-
at a small pizza shop, Father and Son Pizzeria, in Guttenberg, ness. He could expand his pizzeria by adding a second story
New Jersey, where he learned the value of hard work. As a at the current location, move to a larger building down the
young man, Vega demonstrated entrepreneurial tendencies, block that had room for more tables, or turn his focus to
operating a disc jockey business on weekends, launching an selling jars of his red pizza sauce, which he was market-
Internet dating service (that he sold), and flipping houses. ing on the side as Jersey Italian Gravy. If he chose to focus
After graduating from Montclair State University with a de- on selling his sauce, he knew that he would have to learn a
gree in business administration, Vega went to work in his new set of skills concerning food manufacturing, packaging,
family’s printing business for several years before taking jobs and shipping. He also knew that the pizza sauce market is
with KPMG and Thomson Financial, where he managed the crowded, highly price-sensitive, and dominated by several
company’s printing operations. large brands. His local market tests showed that customers
would buy his Italian gravy, but would that translate into
Many years later, Vega stopped by Father and Son Pizzeria profitable sales across a larger geographic area where the
to buy a pizza and began talking with his former boss, who still tiny business had no name recognition? In addition, would
operated the business but wanted to retire. The founder’s son he be able to get the product onto the shelves of enough
had no interest in taking over the business, and the founder stores to make a difference?
confided to Vega that he did not want to sell the business to
just anyone. Before he knew it, Vega bought the tiny pizzeria, Questions
which was housed in just 900 square feet of space and had
room for only eight tables. Vega immediately expanded the 1. Analyze the advantages and the disadvantages of each
menu to include a broad range of Italian dishes and a line of of the three options that Carlos Vega has identified.
desserts, began accepting Internet orders, added credit card
sales, and introduced “take-and-bake” pizzas that customers 2. Based on your analysis in question 1, write a short
could pick up and bake at home. He also tweaked the recipe for memo to Vega explaining which of the three options
the pizzeria’s red sauce, known by the locals as “gravy,” that he he should pursue and why.
had learned to make as a teenager working there.
3. Suppose that Vega chooses to relocate his business.
One problem facing Vega was that Father and Son Should he expand his analysis of potential sites beyond
Pizzeria had no liquor license. Acquiring one would cost the central business district of Guttenberg? What crite-
$250,000, and Vega doubted that, with just eight tables, sell- ria should he establish for screening potential sites?
ing alcohol would generate enough revenue to offset the cost
of the license. Nearby competitors not only had liquor li- 4. Suppose that Vega chooses to focus on selling his red
censes but also operated from larger buildings and had their sauce. Work with a team of your classmates to brain-
own parking lots, which allowed them to generate more storm ideas for a unique selling proposition (USP)
sales. However, the biggest problem the small pizzeria faced that Vega could use to market the sauce effectively.
was more difficult to solve: no parking lot and a location in
a densely populated six-block central business district where 5. If Vega focuses on marketing his red sauce, what steps
parking spaces were scarce. It was as if the little business should he take to protect the Jersey Italian Gravy brand
were caught in a small three-square-mile trap. Vega was name he has been using?
making the best of the location, however, and the small res-
taurant was generating a profit, albeit a meager one. Sources: Based on John Grossman, “A Business Owner Seeks an
Alternative to Seven-Day Weeks,” New York Times, January 1, 2014,
Vega spotted another business opportunity as grow- http://www.nytimes.com/2014/01/02/business/smallbusiness/a-business-
ing numbers of customers asked to purchase the classic red owner-seeks-an-alternative-to-working-seven-day-weeks.html; John
Grossman, “For a Former Pizzeria Owner, It’s All Gravy,” New York
Times, January 7, 2014, http://boss.blogs.nytimes.com/2014/01/07/
for-a-former-pizzeria-owner-its-all-gravy/.

694

Case 5

Jimmy Beans Wool

Can an Online Yarn Retailer Get of the company’s marketing staff to eight and hired a chief
Its Groove Back? technology officer to allow Doug to focus more on expand-
ing the company.
In 2002, Laura Zander, a former software engineer, decided
The Zanders were confident that the changes they had
to turn her recently acquired knitting hobby into a business. implemented would increase sales. However, the company’s
She and her husband, Doug, who also has a background in sales growth evaporated, and then sales began to decline,
technology, invested $30,000 of their own money to open all while expenses increased. Laura soon realized that they
a 500-square-foot knitting store, Jimmy Beans Wool, in were spending too much money to spread the Jimmy Beans
Truckee, California, a small town of 14,000 people near the Wool message. The company was headed for a cash crisis;
Lake Tahoe resort area. To expand the reach of their busi- the Zanders stopped drawing salaries and had to meet pay-
ness, the Zanders built a Web site and used social media and roll for their employees out of their savings. They had to get
instructional videos to drive traffic to the company’s Web Jimmy Beans Wool back on track.
site. As evidenced by Jimmy Beans Wool’s tag line, “Your
local yarn store—online,” Laura’s strategy was to offer The Zanders put their growth plans on hold and be-
the same personalized customer service that she offered in gan to look closely at what had made their business suc-
the store online. She wrote newsletters to keep customers cessful and what it had become. Jimmy Beans Wool had
up to date on trends, fashions, and techniques and created lost its small, family business feel and was operating like
1,100 free instructional videos made in a simple, friendly, a big, impersonal corporation. Employee morale was flag-
homespun style that resonated with her target customers. ging. The Web site had been neglected, and its bounce rate
The videos are posted on YouTube and on the company’s had increased. Jimmy Beans Wool’s search engine optimi-
Web site. Internet sales soon made up 98 percent of the zation strategy was outdated and ineffective, and its social
company’s total sales. As the company grew, Laura added a media presence had faded without Laura’s attention to drive
customer service line that customers could call to have their it. Overall, the Zanders realized that in the midst of their
questions answered by a friendly, well-trained employee. growth plans, their company had lost touch with the peo-
ple who were most important—its customers who loved to
By 2005, Jimmy Beans Wool had grown so much knit. To revitalize their business, the Zanders faced several
that Doug quit his technology job and began working for important questions: Should Jimmy Beans Wool become a
the business full-time. By 2007, annual sales had reached $100 million company? Should they drop their line of fabric
$1 million and in 2013, sales had grown to $7 million. Con- and stick to selling wool and knitting supplies? Should the
sultants told the Zanders that Jimmy Beans Wool could company build its brand online, perhaps by focusing on in-
become a $100 million business, and that became the co- ternational sales, or should it open other retail stores around
preneurs’ goal. They decided to add fabric to their product the country, perhaps by franchising? The Zanders hired a
line, investing $150,000 in inventory, with the anticipation consultant and found themselves and some of their employ-
that fabric sales would double the company’s revenue within ees sitting before a whiteboard ready to generate potential
three to five years. The Zanders also decided to create a flag- ideas for solving the company’s problems.
ship retail store in Reno, Nevada. The 20,000-square-foot
store housed the company’s offices, warehouse, and retail Questions
space. Laura began to move out of her day-to-day role in
the business, leaving those tasks to the company’s rapidly 1. Is the Zanders’s dilemma—expansion goals causing
growing staff, to become the “face” of Jimmy Beans Wool the company to lose the character that made it success-
and its spokesperson. The Zanders also embarked on several ful in the first place—a common one that entrepreneurs
rather costly marketing initiatives, including partnerships face? Why?
with the United States Ski and Snowboard Association and
the National Institutes of Health. They also doubled the size 2. Assume the role of the Zanders’s consultant. What ad-
vice would you offer them concerning the fundamental
questions they have about their business?

695

696 CASE 5 • JIMMY BEANS WOOL

3. What steps should the Zanders take to redesign their Sources: Based on Adriana Gardella, “Seeking Even Faster Growth, an
Web site and to get their company back on the first E-Commerce Company Stumbles,” New York Times, April 2, 2014, http://
page of search results for the three largest search www.nytimes.com/2014/04/03/business/smallbusiness/seeking-even-
engines? faster-growth-an-e-commerce-company-stumbles.html; Adriana Gardella,
“Jimmy Beans Wool Decides to Get Back to Knitting,” New York Times,
4. What should the Zanders do to address their company’s April 9, 2014, http://boss.blogs.nytimes.com/2014/04/09/jimmy-beans-
cash flow problems? What steps can they take to avoid wool-decides-to-stick-to-its-knitting/; Angela Haines, “Goat Farms,
cash flow problems in the future? Wool, and Making a Living at What You Love,” Forbes, March 6, 2012,
http://www.forbes.com/sites/85broads/2012/03/06/goat-farms-wool-
5. Write a brief report for the Zanders outlining your rec- and-making-a-living-at-what-you-love/; Laura Zander, “Jimmy Beans
ommendations for getting their business back on track. Wool—Made a Fortune Spinning Yarn,” The Story Exchange, 2014,
http://thestoryexchange.org/laura-zander-jimmybeanswool/.

Case 6

James Confectioners—Part 1

Squeezed by Rising Costs, a Confectioner about the impact of the rapidly rising cost of the base choco-
Struggles to Cope late, however. Bad weather in South America and Africa, where
most of the world’s cocoa is grown, and a workers’ strike dis-
Telford James and his wife, Ivey, are the second-generation rupted the global supply of chocolate, sending prices upward.
There appears to be no relief from high chocolate prices in the
owners of James Confectioners, a family-owned manufac- near future. The International Cocoa Organization, an industry
turer of premium chocolates that was started by Telford’s trade association, forecasts world production of cocoa, from
father, Frank, in 1964 in Eau Claire, Wisconsin. In its 50 years, which chocolate is made, to decline by 7.2 percent this year.1
James Confectioners has grown from its roots in a converted Escalating milk and sugar prices are squeezing the company’s
hardware store into a large, modern factory with sophisti- profit margins as well. Much to James and Ivey’s dismay, James
cated production and quality control equipment. In the early Confectioners’s long-term contracts with its chocolate suppliers
days, all of Frank’s customers were local shops and stores, have run out, and the company is purchasing its raw materials
but the company now supplies customers across the United under short-term, variable-price contracts. They are concerned
States and a few in Canada. Telford and Ivey have built on about the impact these increases in cost will have on the com-
the company’s reputation as an honest, reliable supplier of pany’s financial statements and on its long-term health.
chocolates. The prices they charge for their chocolates are
above the industry average but are not anywhere near the Ivey, who has the primary responsibility for managing
highest prices in the industry even though the company is James Confectioners’s finances, has compiled the balance
known for producing quality products. sheet and the income statement for the fiscal year that just
ended. The two financial statements appear below:
Annual sales for the company have grown to $3.9 million,
and its purchases of the base chocolate used as the raw ma- 1“Cocoa Forecasts,” International Cocoa Organization, May 27, 2009,
terials for their products have increased from 25,000 pounds http://www.icco.org/about/press2.aspx?Id=0ji12056.
20 years ago to 150,000 pounds. The Jameses are concerned

Balance Sheet, James Confectioners December 31, 20xx Assets

Current Assets $ 161,254
Cash $ 507,951
Accounts Receivable $ 568,421
Inventory $ 84,658
Supplies $ 32,251
Prepaid Expenses $ 1,354,536

Total Current Assets $ 104,815
Fixed Assets $ 203,583
Land $ 64,502
Buildings, net $ 247,928
Autos, net $ 40,314
Equipment, net $ 661,142
Furniture and Fixtures, net

Total Fixed Assets

Total Assets $ 2,015,678
Liabilities
Current Liabilities
Accounts Payable $ 241,881
Notes Payable $ 221,725

(continued) 697

698 CASE 6 • JAMES CONFECTIONERS—PART 1 Liabilities
$ 141,097
Line of Credit Payable $ 40,314
Accrued Wages/Salaries Payable $ 20,157
Accrued Interest Payable $ 10,078
Accrued Taxes Payable $ 675,252

Total Current Liabilities $ 346,697
$ 217,693
Long-Term Liabilities $ 564,390
Mortgage
Loan $ 776,036

Total Long-Term Liabilities $ 2,015,678

Owner’s Equity $3,897,564
James, Capital
$ 627,853
Total Liabilities and Owner’s Equity $ 2,565,908
$ 3,193,761
Income Statement, James Confectioners $ 568,421

Net Sales Revenue $ 2,625,340

Cost of Goods Sold $ 1,272,224
Beginning Inventory, 1/1/xx
+ Purchases $ 163,698
Goods Available for Sale $ 155,903
− Ending Inventory, 12/31/xx $ 74,065
Cost of Goods Sold $ 74,043
$ 381,961
Gross Profit $ 38,976
Operating Expenses $ 58,463
$ 23,385
Utilities $ 15,590
Advertising
Insurance $ 986,084
Depreciation
Salaries and Benefits $ 119,658
E-commerce $ 1,248
Repairs and Maintenance
Travel $ 120,906
Supplies
$ 1,106,990
Total Operating Expenses
$ 165,234
Other Expenses
Interest Expense
Miscellaneous Expense

Total Other Expenses

Total Expenses

Net Income