This is a question that plagues many small business owners. Once their business has started to grow, and they are generating a respectable cash flow, the inevitable question of whether to lease space for their business or buy space for their business comes up. The answer of course is different for everyone. It is dependent on the amount of space you need, your comfort with continuing cash flow, and if you want to invest in real estate. If buying a facility for your business fits your needs, it can be a profitable venture.

If it does fit your needs then owning your facility will allow you to build equity in an investment over an extended period using cash flow from your business. If you borrow to buy or build your facility you will get a tax deduction on the interest you pay on the loan. You will also get a tax deduction on the building’s depreciation; however, you will have to recapture the depreciation as a gain when you sell the building. Most will suggest that you create a separate LLC to hold the real estate. This helps limit some liability for your primary entity and the primary entity will earn a deduction on its rental expense.

If your business has the cash flow to do it, being able to build long term equity in an asset, while using cash flow from the business, can be a profitable venture!

Time heals all wounds. At least that is what I’ve heard. Time also allows nagging questions to come into view. The nagging question for us has been, where in the world is this economy headed? I spend time every morning trying to understand and interpret the financial news for our small business customers. August has been a difficult month, because the talking heads on the financial news can’t seem to agree which direction we are headed. As I take a second look at this week’s economic news I feel we are beginning to get a little clarity on what to expect over the next few months.

The numbers that have gotten reported for July, and for the second quarter, have been for the most part pretty positive. Even our own Rough Air Demand Index was very positive after July. The GDP growth in the second quarter was good, and was revised upwards this week. Consumer confidence in July was very high, the trade deficit was down, personal income was up, personal spending was up, inflation was in check, and unemployment was stable. All of this data paints a picture of a pretty healthy economy.

The lingering question is what will the fallout be from the housing slowdown and the subprime mortgage mess. The concern is that as credit tightens and loan defaults accelerate, slowing consumer spending will cause overall business spending to slow. The picture that is starting to take shape now is one of a slower economy ahead, a little rough air ahead! Consumer confidence in August dropped, jobless claims were up, and some big retailers were lowering expectations for the rest of 2007. The projections are that GDP growth will slow going into the fourth quarter and carrying over to 2008.

How does this impact your business? Tightening credit markets will make it a bit tougher to raise money through borrowing. A common source of capital for small business owners just getting started is the equity in their home. There are signs that the declining home prices and tougher credit requirements are making those equity loans harder to get.  As we have been saying here, keep pushing on your business, keep your eye on the ball, and be prepared to make adjustments depending on the overall economic environment. Here is a review of some simple steps you can take:

• Have a clear picture of past revenue trends and short term revenue projections
• Watch your cash, know your needs for the next 30, 60, and 90 days
• Keep a close watch on spending and capital
• Know what you will cut if you need to
• Keep you business moving forward

In 2001, at our former family business, we were faced with a difficult environment like many businesses at that time. We had prepared ourselves early in the year for a potential downturn in the economy using some of these steps above. When we felt we needed to, we reigned in discretionary spending and capital. The economy took its toll on many of our competitors, the overall market we were in dropped 25 percent. Our efforts that year helped us grow our profits, despite a slight drop in revenues. An economic downturn is not the end of the world for your business. If you play your cards correctly, you can structure your business so you can push through a slow economy, and come out a stronger, more profitable, and more competitive business!

Someone told me once when you start a new business don’t tell anyone. Even your closest friends will doubt your ability to succeed. As a business owner and entrepreneur I know exactly what these folks are talking about. It strikes me that not many organizations want to support your start up business, everyone assumes your effort will fail, and until you prove them wrong, they maintain that assumption.

This can be true for your family, your friends, and the community. Our local governments will spend billions of tax dollars trying to attract major companies (large employers) to our geographic region. They are all looking to bag the elephant or get the big win. Banks generally do not want to lend you any money until you have some, and many times suppliers will not take your new venture seriously. I find this odd considering that facts. Half of the GDP in this country is created by small businesses, those companies with less than 500 employees. More than half of the private sector workforce works for a small business, and where do you think the majority of new job growth comes from, that’s right, small business. With these facts it strikes me that if local governments spent more time and money educating and supporting entrepreneurs and small businesses they would win in the long run.

Regardless, here is a good resource from the Small Business Administration for creating a plan for your start up business.

What would you do if a major disaster fell upon your business? If you woke up this morning and went to your office or your plant, and discovered it had been destroyed by a fire, a flood, or a tornado would you have a plan for the survival of your business? Last week I wrote about emergency preparedness and provided some resources for preparing your business for an emergency. Today we will discuss creating a disaster recovery plan for your business.

We believe there are three major pieces to creating a disaster recovery plan. They involve preparing your business for a potential disaster, creating a plan to help restart your operations, and knowing how you will deal with the aftermath.

Preparing your business for a potential disaster involves thinking about the probable and the improbable. The idea is to train your employees what could happen and what each of them will do in the event a disaster strikes. Once you have a plan for what people should do and where they should go, you should practice, practice, practice. Drill the process into everyone’s head, you could be saving lives. Some key points in creating the first piece of a disaster recovery plan are:

• Identify potential disasters for your business
• Create a safety and response team
• Create an evacuation procedure and identify who will make sure everyone is out of the facility
• For tornadoes, identify tornado safe areas of your facility
• Put an emergency kit in each of these areas, flashlights, radios, batteries
• Identify and train those who will render first aid before emergency workers arrive
• Designate who the spokesperson for the business will be in the event of a disaster
• Review your insurance coverage before a disaster strikes
• Practice your disaster drills on a regular basis

In the immediate aftermath of a disaster, once the extent of the damage has been determined, there needs to be a process to get the business up and running again. There will be a delicate balance here that involves the emotional well being of your employees and their families, and the financial health of the business. A business owner must be sensitive to both and create a plan that ensures the health of both the employees and the business. Some keys to this stage are:

• Have an understanding of the financial implications of restarting operations
• Create a crisis counseling plan for employees and their families
• Know where your business will go if you cannot occupy the same facility
• Have a plan for getting phones, computers, and production back up and running
• If you are a manufacturing business identify resources that can help you procure inventory quickly
• Have someone designated to talk to customers and suppliers and keep them informed

The final stage of any disaster recovery plan is dealing with the long term aftermath. A major disaster can obviously impact your business operations in the near term. It can also create a source of frustration for the business for many years. You need to have a plan for dealing with the aftermath of a disaster, after the business is up and running. There may be long term implications.

• If there are going to be legal issues, make sure you designate where you will go for legal support
• Depending on the disaster there may be new regulatory issues to deal with, have someone designated to deal with these issues
• Make sure you assess the overall financial impact
• Have a process for reviewing what went right and what went wrong

A good disaster recovery plan involves being prepared, practicing, and knowing how you intend to recover.

As if the swirling winds of the economy have not been confusing enough, GDP estimates for the 2nd quarter have been revised upward to 4%. This is an increase from the original estimate of 3.4%. Remember this data does represent what happened in the past, and we know past performance is never a predictor of future results. The bottom line is a stronger GDP number is positive news; however, it may not reflect the full impact of the subprime meltdown we have seen so much of in August. Next week’s employment numbers for August may help to give us a better feel for the overall direction of the economy.

There is no employee that cannot be replaced. We have all heard that same sentiment expressed. Typically we hear this just about the time a key employee quits to go work for a competitor, retires, or is disabled. In the past I subscribed to this theory. I thought that over time we could replace anybody, and many times the person we replaced them with would do better. This was not one of my better management theories!

Human nature being what it is, we probably convince ourselves that everyone can be replaced so we don’t have to deal with the fear of losing a key person. I like many business owners had to learn the lesson the hard way. Several years ago when I was CEO of Hyde Park I had a marketing manager that was right in synch with my promotions strategy and was doing a tremendous job of executing that strategy. This person quit and I was never able to get us back to where we were from a promotions standpoint. Our execution in this area was never quite the same, and I believe our customers noticed.

The question for a business owner is what can I do to protect against the loss of a key employee? If the loss is an owner or someone that has a major impact on the health of the business there is the possibility of keyman insurance. For the loss of a key manager, or staff, there are some things you can do to try to prevent those losses, and some you can do to prepare. To be prepared we suggest:

1. Create a depth chart- Using your organization chart identify your key employees and who could replace them.
2. Understand their jobs – Spend time with your key people to understand what they really do. Make sure you have a clear, accurate job description, not just the one in the file so you can pass ISO 9000. One that is a true indication of what they do.
3. Know their strengths – Good people are hard to find, stars are even harder to find. Once you have one, develop a list of their strengths. You must understand what makes them a great performer.
4. Do a simulation – Create a simulation of what you would do in the event that key employee is gone. How would you train their identified replacement, what would your expectations be, and how could the replacement be taught to perform like the person leaving.
5. Don’t fool yourself – This is what many of us do. You will lose a key employee, and it will challenge your business. If you accept these facts then you can prepare and be better prepared when it happens.

The sale of Home Depot’s HD Supply division to a group of private equity players, and a discussion I had recently with a client had me reflecting on my days in the industrial automation and electrical distribution business. Our old business, Hyde Park Electronics, which we sold in 2003, is a manufacturer of ultrasonic sensors. These sensors are used to help control processes in manufacturing plants, so I have been around the electrical distribution and industrial automation markets for many years.

After seeing an article on the HD Supply buyout I began to wonder what the credit market turmoil impact would be on the electrical distribution and industrial automation business. If you recall HD Supply was Home Depot’s distribution business and was made up primarily of acquisitions, the largest being the acquisition of Hughes Supply in 2006. Home Depot has said they are selling this division in an effort to raise cash for a stock buy-back program. I can’t help but think there is a bit more to it than that. A big segment of this business is electrical distribution products, a product that is highly dependent on new home construction and remodeling. Since the housing market is not showing any signs of a quick recovery I wonder about the overall health of this business in the near term. It strikes me that things could get more challenging in the electrical distribution world before they get easier.

The question is will this spillover into the industrial automation markets? Year to date results in that segment indicate no; however, if there is an economic fallout from the housing market, the broader economy has not felt it fully yet. I looked at four major players in electrical distribution and industrial automation and they are all doing quite well this year. Their average year over year revenue growth is almost 12 percent. I could only find one player that was down, and they serve a niche of the automation market, they were down 15 percent. That could be an anomaly. The bottom line is that there has been no slowdown in the electrical distribution or automation markets.

Common sense does tell me that there is strong possibility this will not hold. The real turmoil in credit markets had been bubbling below the surface all year. We did not see this start to boil until August. If the housing market slowdown impacts consumer spending, I would expect an overall impact in broader areas of the economy. For our clients in electrical distribution or industrial automation, a slowdown in consumer spending could have an overall negative impact on revenue. I think back to 2001 when the economy slowed and the overall impact of that slowdown on the electrical distribution and industrial automation markets.

As we have been saying to our clients, continue to push on your growth plans, but be prepared for what may be ahead! 

This is not a huge surprise, but the Conference Board reported today that their consumer confidence numbers dropped to their lowest point in the last twelve months. Once again, this is just another data point giving us an overall picture of the economy. We suggest to all of our clients to keep plugging away at your business, but have a plan for what you will do if an economic slowdown occurs and if it impacts your business.

For some tips on creating a contingency plan, see my post from last week.

It never ceases to amaze me how people can be fascinated at folks who go the extra mile to provide great service. A story in the Wall Street Journal today talks about a pilot for United Airlines and how he goes the extra mile for his passengers. In small business this is a way of life. If you are not willing to go the extra mile for your customers then you will not likely be around long. It does not matter if you are a small manufacturing company, a restaurant, an accountant, or a consultant, as a small business owner if you do not reinforce great service then you will probably not maximise the potential of your business. For small businesses great customer service is not the exception, it is the norm.

An article in the Wall Street Journal  yesterday about a debate in Congress over the revamp of our patent system caught my attention. It caught my attention for two reasons.

The first reason was that the debate appears to be between a business coalition which includes folks like Microsoft and Cisco, and the AFL-CIO. The business coalition believes the revamped legislation will reduce litigation and judgments, the AFL-CIO believes it will risk U.S. jobs by making it easier to copy U.S. goods. It struck me that it did not appear that small business was represented in this debate. If we are represented it was not discussed. I will do additional research on this legislation and see if I can help all of our clients understand it and any possible impact on their business.

The second reason the article caught my attention was that many times in small business, intellectual property protection becomes a “nice-to-have.” It can be expensive and confusing, here are some basics and some ideas for your business.

There are three basic ways to protect intellectual property, depending on what you are trying to protect. The first is a copyright. Copyrights protect authorship. Whether it is music, literature, web site material, or other written material, a copyright helps prevent others from using the material without permission from the author. It is secured automatically upon creation of the material, although it can be registered with the Library of Congress, which provides some additional protection.

If you want to protect a logo, a name, or a symbol you will need trademark protection. Registering your trademark helps prevent any other person or organization from using that mark. Pretty critical if you are investing in building your brand or brand identity. As a small business owner you will certainly not want anyone “borrowing” your logo for their own use, or trying to counterfeit your product or service by using your identity. Trademarks are typically renewable for as long as you want.

For the business owner that is trying to protect a product design or process, patent protection is the way to go. It takes longer to get patent protection, there are over 300,000 patent applications per year at the U.S. Patent and Trademark Office. Obtaining a patent helps you protect your design by theoretically preventing other’s from using it. Since the patent process does take considerable time, you can use the term “patent pending” while in process. This does provide some protection. Most patents will protect you for up to twenty years.

Naturally there is a cost to all of these. There are some online resources like www.legalzoom.com, which can help; however, I cannot attest to them since I have not used them in the past. I suggest finding a good local attorney that specializes in intellectual property. You may pay more, but they should get the job done right. Copyrights and trademarks are generally pretty easy decisions in terms of what and how to protect. Patents become a little tougher. All of them are only as good as your willingness to protect them. It is up to the holder to defend the patent, trademark, or copyright. If you lack the resources, time, or initiative to protect your intellectual property then you will be fair game. Also, remember, if you are doing business overseas, you will need to obtain additional protection where you are doing business.

Going after patent protection is not an easy decision. Not only must you decide if you are willing to spend the money to protect your patent, you must also decide how much public disclosure can hurt your product. Remember, once a patent is granted, it is posted online and available for the whole world to see. It does not take a tremendous amount of engineering to find a way to create a similar product without violating the patent. If you do not have the resources to go after an infringing party then you may want to reconsider patent protection.

In my previous life I was in the automation industry. I remember an ugly patent fight between two of our competitors that left one struggling for several years. The smaller competitor had designed a product with a unique feature. They patented their design and moved ahead. Customers loved the new feature, today it is a standard on many similar products. A larger competitor copied the design, not exactly, but just enough. The smaller competitor decided to sue the larger competitor in an effort to protect their new feature. Unfortunately for the smaller competitor the hearing was held in a jurisdiction that was not friendly to them. The end result was they spent $1,000,000 fighting to protect their patent and lost. A real horror story for a small business and one that forces you to think about the best ways to protect your intellectual property. 

For detailed information on copyrights, trademarks, and patents visit www.uspto.gov.