Understanding business incubation

Many entrepreneurs don't have the space or desire to start a business out of their home. They may however find renting space and setting up essential support functions tough when heavy financial resources and energy are most needed for development of the business itself.

A business incubator can be the perfect solution for such a person.

Business incubators are designed specifically to help start-up firms. They usually provide flexible space and leases, many times at very low rates, fee-based business support services, such as telephone answering, bookkeeping, secretarial, fax and copy machine access, libraries and meeting rooms, business and technical assistance either on site or through a community referral system, assistance in obtaining funding, networking with other entrepreneurs.

The primary goal of a business incubator is to produce successful businesses that are able to operate independently and financially viable.

In deciding to use a business incubator, it can be suggested for you to explore the following items before making a commitment:

A. Space and Service-related Issues:
What are the charges for space and services at the incubator?
How do those rates compare to market rates locally?
What services does the incubator provide?
What are the lease requirements?
Is there room for your business to grow?

B. Quality:
What information does the incubator provide about the extent and quality of the services the incubator provides?
Does the incubator management seem to understand your business needs and can they offer on-site assistance and access to valuable contacts and community business services needed by your firm?

C. Success Rates
If the incubator has been open long enough to have a track record, what is the experience of firms who made use of the incubator for a few years and have now moved to other space?
How do the current tenants feel about the incubator?
Ask for references and check them.

D. Policies and Procedures
What are the policies and procedures of the incubator?
Are some services provided free of charge?
How long can you remain a tenant?
Is there a graduated rent structure as your firm matures or does the incubator want to take royalties or an ownership right in its tenants' businesses in return for reduced charges?
Can you leave easily if your business turns bust?
Does the incubator provide seminar or training programs in addition to other business assistance services?

E. Management
Does the incubator appear to be managed well?
Does the management appear to have good ties with and knowledge of the business community?
Does the incubator have the continuing support and commitment of sponsoring organizations? Who are these sponsors and what are their goals and reasons for supporting the incubator?

The business must be entrepreneurially sound, able to function on its own, if needed. The incubator cannot replace business initiative, personal effort and resourcefulness. There is a term used called "incubator syndrome" in which the entrepreneur allows their initiative and judgment to be replaced by those of the consultants in the center.

While the consultants may give superb advice, it is the entrepreneur's responsibility to make the business succeed.

Succession Planning for SMEs - Part 4

It is important to note that the succession plan should include an ownership-transfer component to explain how the transfer of asset ownership will be handled, including a description of the transfer mechanism (e.g. purchase, gift or bequest). One or more vehicles to hold shares or various assets could be formed, with each entity owned by shareholders who may have voting or non-voting shares. As complicated as this may sound, it may well be effective to handle and deal with a relatively large family who have fragmented or unequal interests across the Group business.

Other considerations in the transfer of ownership could include:

An explanation of the financing required, the various sources available and the preferred financing option(s) with implications to ROI and WACC.

An inventory and independent valuation of assets and liabilities;

An explanation of the tax implications of the proposed transfer process - at the individual as well as the corporate level - along with a description of how these items will be addressed

A discussion regarding the treatment of children or direct dependents not in the business;

A description of the legal agreements (e.g. employment contracts, partnership agreements, shareholder agreements, buy-sell agreements, etc.). These legal agreements should include dispute-resolution mechanisms.

Finally, to accomplish a successful family transfer you will need to have confidence in your choice of successor to the business leadership and possibly to find fulfilling places in the business for other family members.

Succession Planning for SMEs - Part 3

Grooming your successor involves training, introduction to key customers and suppliers, and managing the transition so there is minimal disruption to the business. Your successor will also need time to build the skills and knowledge he or she needs to take over the management and operations of the business.

Whereas the founder probably enjoyed both total control and 100 percent ownership, his successors and/or heirs are very likely to have to unequal share ownership, even if one among them succeeds to the management leadership. Thus, ownership of the family business tends to become more complex with the passing of time, and especially with the transition of one generation to the next.

For this exit strategy to work advance planning is necessary, and as far ahead as possible. You will need to address:

financial strategies for family transfer: such as shareholder agreements and the use of insurance policies and various kinds of trusts;

management strategies for family transfer: such as restructuring of the business and the use of outside advisers;

Issues of building financial security such as the owner's retirement plans and protection of the estate.

To sort out these issues, you should rely on a written succession plan approved by your board of directors with input from your family council / committee.

Succession Planning for SMEs - Part 2

Succession planning is about finding the right exit strategy when you're ready to hand your business over to somebody else. The "right" strategy is one that is compatible and gives the SME owners a sense of being worthwhile and fits their personal and business objectives. Whether you're passing the company to a family member or selling it to outside interests, keep in mind the need for valuing the business to establish a realistic fair value on your business.

Agreements can be put in place that determine how the stock or assets of the business will be owned, which is different from how the business will be managed. Day-to-day operations, control and accountability for the management of the business can be delegated by contract to those most capable of understanding and running the business.

Generally, there are three options for an entrepreneur who wishes to exit from his or her business. One involves a family transfer and the other two involve selling the business outside of the family. Collectively these are known as exit strategies, and every business should have one.

1/ First, owners must identify a vision for the business — and for themselves — through some personal soul searching and information gathering that lead to a decision.

2/ Then, once they have identified an exit, they must begin planning and executing what it will take to achieve that exit by building a succesion plan. As many SME owners are aware, the process of passing control to the next generation can be stressful and divisive. From the outset you should be considering how the ownership change will affect your spouse, your children, your relatives and business partners.

3/ Ensure the entire process is structured and open. If you do select a family transfer as your exit strategy, doing as much advance planning as possible will help you and your successor prepare to deal with management and personnel issues, plan for personal and business tax considerations and erect the proper legal framework.

Succession Planning for SMEs - Part 1

Through the course of advisory sessions and anecdotal experiences and observations, VSAPAC opines that any small and medium-sized enterprise (SME) owners have founded and built their businesses without giving much thought to what will happen when it's time to retire. Now, for most of the 165,000 business owners across SMEs, retirement is near and they must plan for the succession to new ownership and management.

VSAPAC believes that it is vital that we address the significant number of people planning to leave their business in the next few years. A smooth transition from one owner to the next will help maintain a stable Singapore economy.

Most SMEs do not survive the succession from one generation to the next. In the next 10 years VSAPAC expects the majority of current owners of SMEs will retire. Their businesses are at risk because they have not adequately prepared for the day when they will no longer be there.

Most often the preparations and planning have not been undertaken for psychological reasons, particularly the fear of family conflicts or confrontations.

VSAPAC maintains that succession planning needs to be approached as a business process that can work through the emotional issues to make the best decisions about the future of the business and its owners. That takes time and a good methodology. Succession planning involves decisions in three intertwined realms of activity: the business, the family and the owner's financial security in retirement.

Among the first questions to be asked are what the company's future prospects are and whether a family succession is feasible. Chances for success will be enhanced if you:

Involve the family trust or "committee";
Establish and stick to a clear timetable;
Have a contingency plan;
Involve independent/neutral board members outside of the family.

There are two options to be examined in choosing the successor to the business leadership: appoint a family member or appoint someone from outside the family.

It's important to realize that management and ownership are not necessarily the same. It might be best to retain family ownership while hiring an outside CEO. In such cases a senior manager already in the company might be the most suitable person. Alternatively, the best qualifications might be found in the outside world. The business culture of the SME will be an important decision factor.

>>> to be continued.

Five Reasons Why the Bankruptcy of SMEs May Be Good For You

1. Every small business that closes down reduces competition for the survivors. You will see a less crowded market where only the strong will survive.

2. Every retail small business that goes down gives you the opportunity of freed retail space, sometimes in prime locations. As stores empty out, landlords become more willing to lower rents for new tenants -- a great chance to snap up a new location at a good price.

3. Every small business that busts leaves an open niche in the market that a new entrepreneur could seize on to start a new business or add a new business line to replace that gap whilst having learnt expensive lessons faced by the previous owner.

4. The current small-business shakeout is culling the weak players from the marketplace, leaving the stronger small businesses still standing. The end result should be generally healthier small businesses to partner with, and sell to, in the coming years.

5. Watching businesses go bust all around you tends to concentrate the mind of a business owner. Likely the current business cycle has helped you examine your business and become more efficient -- 66% of business owners said they have in a recent study -- putting you in good position to benefit as the economy improves.

Recommended measures
1. Compile a list of every business in your sector that's gone bust and estimated what their revenues

2. Size up their locations.

3. Ask to buy their customer lists.

4. Looked into taking over their Web sites

5. Gone to an asset auction to see if you can get equipment deals

6. Upped your marketing spend to reach the failed businesses' former customers

Evaluating a company to invest in - Warren Buffet

Warren Buffett was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage".

Indeed, while business valuation matters, "it is the future growth and prosperity of the company underlying a stock, not its current price, that is most important. A company's prosperity, in turn, is driven by how powerful and enduring its competitive advantages are."

Sustainable competitive advantage and market category leadership give a company the edge that keep competitors at bay and reap extraordinary growth and profits. Warren Buffett seeks to identify rare companies with strong competitive advantage that has a potential to grow even stronger over time. When a company is able to achieve this, its investors can be rewarded for decades.

Often, investors in high-growth companies are disappointed not because the growth projections were terribly wrong, but because the implicit assumptions that the market is making about the sustainability of these companies' competitive advantages are wildly optimistic. Warren Buffett said it best in his Fortune article (November 1999):

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

3Ss of Competitive Advantages - Jack Welch

SELF CONFIDENCE

Benefits
Self-confident people don’t need to wrap themselves in complexity and all that clutter that passes for sophistication in business. Self-confident leaders produce simple plans, speak simply, and propose big clear targets.

Challenges
The root of many of bureaucracy ills is insecurity. Insecurity makes people resist change because they see change only as a threat, never as an opportunity.

Action
Give people a voice, get them talking and listening to and trusting one another.
Cultivate self-confidence among your leaders by turning them loose, giving them independence and resources, and encouraging them to take big swings.

SIMPLICITY

Benefits
Simplicity is practically an art form with many definitions. To an engineer, it's clean functional designs with fewer parts. It means judging a process not by how sophisticated it is, but how understandable it is to those who must make it work. In marketing it means clear messages and clean proposals to consumers and industrial customers. And, most importantly, on an individual, interpersonal level it takes the form of plain-speaking, directness – honesty.

Simplicity is indispensable to a business leader's most important function: creating and projecting a clear vision.

Simple messages travel faster.

Simple designs reach the market faster.

Challenges
You can't believe how hard it is for people to be simple, how much they fear being simple.
One of the most difficult things for a manager to do is to reach that all-important threshold of self-confidence in which being simple is comfortable.

Action
Urge everyone in the company to have the courage to be simple.
Create an atmosphere in the organization where people feel not only free, but obliged to demand clarity and purpose from their leaders.


SPEED

Benefits
If you're not fast you can't win. Speed is everything. It is the indispensable ingredient of competitiveness.

Challenges
Bureaucracy is terrified by speed and hates simplicity. People have to think on their feet.

Action
Decisions at virtually every level should be made in minutes, not days or weeks.
Decisions must be made face-to-face, not memo-to-memo.
Forests of meaningless paper trails and approvals must be eliminated.
Decrease control to increase speed.
Reduce hierarchical layers to speed communication and get products to markets more quickly.

The Global Market Place

Trade is increasingly global in scope today. There are several reasons for this. One significant reason is technological—because of improved transportation and communication opportunities today, trade is now more practical. Thus, consumers and businesses now have access to the very best products from many different countries.

Increasingly rapid technology lifecycles also increases the competition among countries as to who can produce the newest in technology. In part to accommodate these realities, countries in the last several decades have taken increasing steps to promote global trade through agreements such as the General Treaty on Trade and Tariffs, and trade organizations such as the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA), and the European Union (EU).

Stages in the International Involvement of a Firm. There are indeed several stages through which a firm may go as it becomes increasingly involved across borders. A purely domestic firm focuses only on its home market, has no current ambitions of expanding abroad, and does not perceive any significant competitive threat from abroad. Such a firm may eventually get some orders from abroad, which are seen either as an irritation (for small orders, there may be a great deal of effort and cost involved in obtaining relatively modest revenue) or as "icing on the cake."

As the firm begins to export more, it enters the export stage, where little effort is made to market the product abroad, although an increasing number of foreign orders are filled. In the international stage, as certain country markets begin to appear especially attractive with more foreign orders originating there, the firm may go into countries on an ad hoc basis—that is, each country may be entered sequentially, but with relatively little learning and marketing efforts being shared across countries.
In the multi-national stage, some efficiencies are pursued by standardizing across a region (e.g., Central America, West Africa, or Northern Europe).

Finally, in the global stage, the focus centers on the entire World market, with decisions made optimize the product’s position across markets—the home country is no longer the center of the product. An example of a truly global company is Coca Cola.

Note that these stages represent points on a continuum from a purely domestic orientation to a truly global one; companies may fall in between these discrete stages, and different parts of the firm may have characteristics of various stages—for example, the pickup truck division of an auto-manufacturer may be largely domestically focused, while the passenger car division is globally focused. Although a global focus is generally appropriate for most large firms, note that it may not be ideal for all companies to pursue the global stage.

For example, manufacturers of ice cubes may do well as domestic, or even locally centered, firms.

Comparative advantage suggests trade between countries is beneficial because these countries differ in their relative economic strengths—some have more advanced technology and some have lower costs.

The International Product Life Cycle suggests that countries will differ in their timing of the demand for various products. Products tend to be adopted more quickly in the United States and Japan, for example, so once the demand for a product (say, VCRs) is in the decline in these markets, an increasing market potential might exist in other countries (e.g., Europe and the rest of Asia).

Internalization/transaction costs refers to the fact that developing certain very large scale projects, such as an automobile intended for the World market, may entail such large costs that these must be spread over several countries.

Basic Concepts of the Forex Market for Int'l Trade: What SMEs Should Know

According to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity conducted by the Bank for International Settlements, the forex market generated $3.2 trillion dollars worth of transactions each day. This makes the forex market the quiet giant of finance, dwarfing over all other capital markets in its world.

Unlike the stock market, where investors have thousands of stocks to choose from, in the currency market, you only need to follow eight major economies and then determine which will provide the best undervalued or overvalued opportunities. These following eight countries make up the majority of trade in the currency market:

United States
Eurozone (the ones to watch are Germany, France, Italy and Spain)
Japan
United Kingdom
Switzerland
Canada
Australia
New Zealand

These economies have the largest and most sophisticated financial markets in the world. By strictly focusing on these eight countries, we can take advantage of earning interest income on the most credit worthy and liquid instruments in the financial markets.Economic data is released from these countries on an almost daily basis, allowing investors to stay on top of the game when it comes to assessing the health of each country and its economy.

Yields and Returns

When it comes to trading currencies, the key to remember is that yield drives return. When you trade in the foreign exchange spot market, you are actually buying and selling two underlying currencies. All currencies are quoted in pairs, because each currency is valued in relation to another. For example, if the EUR/USD pair is quoted as 1.3500 that means it takes $1.35 to purchase one euro. In every foreign exchange transaction, you are simultaneously buying one currency and selling another. In effect, you are using the proceeds from the currency you sold to purchase the currency you are buying.

Furthermore, every currency in the world comes attached with an interest rate set by the central bank of that currency's country. You are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought.

As an example, let's look at the New Zealand dollar/Japanese yen pair (NZD/JPY). Let's assume that New Zealand has an interest rate of 8% and that Japan has an interest rate of 0.5% In the currency market, interest rates are calculated in basis points. A basis point is simply 1/100th of 1%. So, New Zealand rates are 800 basis points and Japanese rates are 50 basis points. If you decide to go long NZD/JPY you will earn 8% in annualized interest, but have to pay 0.50% for a net return of 7.5%, or 750 basis points.

Leveraging Returns

The forex market also offers tremendous leverage - often as high as 100:1 - which means that you can control $10,000 worth of assets with as little as $100 of capital. However, leverage can be a double-edged sword; it can create massive profits when you are correct, but may also generate huge losses when you are wrong.

Clearly, leverage should be used judiciously, but even with relatively conservative 10:1 leverage, the 7.5% yield on NZD/JPY pair would translate into a 75% return on an annual basis. So, if you were to hold a 100,000 unit position in NZD/JPY using $5,000 worth of equity, you would earn $9.40 in interest every day. That's $94 dollars in interest after only 10 days, $940 worth of interest after three months, or $3,760 annually. Not too shabby given the fact that the same amount of money would only earn you $250 in a bank savings account (with a rate of 5% interest) after a whole year. The only positive over having the bank account earn you interest is that the return would be risk free.

The use of leverage basically exacerbates any sort of market movements. As easily as it increases profits, it can just as quickly cause large losses. However, these losses can be capped through the use of stops. Furthermore, almost all forex brokers offer the protection of a margin watcher - a piece of software that watches your position 24 hours a day, five days per week and automatically liquidates it once margin requirements are breached. This process insures that your account will never post a negative balance and your risk will be limited to the amount of money in your account.

Carry Trades

Currency values never remain stationary and it is this dynamic that gave birth to one of the most popular trading strategies of all time, the carry trade. Carry traders hope to earn not only the interest rate differential between the two currencies, but also look for their positions to appreciate in value. There have been plenty of opportunities for big profits in the past. Let's take a look at some historical examples.

Between 2003 and the end of 2004, the AUD/USD currency pair offered a positive yield spread of 2.5%. Although this may seem very small, the return would become 25% with the use of 10:1 leverage.

During that same time, the Australian dollar also rallied from 56 cents to close at 80 cents against the U.S. dollar, which represented a 42% appreciation in the currency pair. This means that if you were in this trade - and many hedge funds at the time were - you would have not only earned the positive yield, but you would have also seen tremendous capital gains in your underlying investment.

The carry trade opportunity was also seen in USD/JPY in 2005. Between January and December of that year, the currency rallied from 102 to a high of 121.40 before ending at 117.80. This is equal to an appreciation from low to high of 19%, which was far more attractive than the 2.9% return in the S&P 500 during that same year. In addition, at the time, the interest rate spread between the U.S. dollar and the Japanese yen averaged around 3.25%.

Unleveraged, this means that a trader could have earned as much as 22.25% over the course of the year. Introduce 10:1 leverage, and that could be as much as 220% gain.

Carry Trade Success

The key to creating a successful carry trade strategy is not simply to pair up the currency with the highest interest rate against a currency with the lowest rate.

Rather, far more important than the absolute spread itself is the direction of the spread. In order for carry trades to work best, you need to be long a currency with an interest rate that is in the processes of expanding against a currency with a stationary or contracting interest rate. This dynamic can be true if the central bank of the country that you are long is looking to raise interest rates or if the central bank of the country that you are short is looking to lower interest rates.

In the previous USD/JPY example, between 2005 and 2006, the U.S. Federal Reservewas aggressively raising interest rates from 2.25% in January to 4.25%, an increase of 200 basis points. During that same time, the Bank of Japan sat on its hands and left interest rates at zero. Therefore, the spread between U.S. and Japanese interest rates grew from 2.25% (2.25% - 0%) to 4.25% (4.25% - 0%). This is what we call an expanding interest rate spread.

The bottom line is that you want to pick carry trades that benefit not only from a positive and growing yield, but that also have the potential to appreciate in value. This is important because just as easily as currency appreciation can increase the value of your carry trade earnings, currency depreciation could erase all of your carry trade gains and then some.

Getting to Know Interest Rates

Knowing where interest rates are headed is important in forex trading and requires a good understanding of the underlying economics of the country in question. Generally speaking, countries that are performing very well, with strong growth rates and increasing inflation will probably raise interest rates to tame inflation and control growth. On the flip side, countries that are facing difficult economic conditions ranging from a broad slowdown in demand to a full recession will consider the possibility of reducing interest rates.