Too Much Too Soon?

What to do when the chains come calling. Plus: The perils of franchising.

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We make products for car enthusiasts. Sales have been solid, mostly through our website, catalogs, and licensing deals. We've been approached by several "big box" auto-supply stores, which are interested in selling one of our products. Though the deals sound good, they will require an up-front investment of about $350,000 and we'll be left holding the bag if the merchandise doesn't sell. I can raise the money, but is this 0-60 in too few seconds?
Warren G. Tracy
Almost There! Inc., Prescott, Ariz.

You're wise to pause in neutral before putting the pedal to metal. Hooking up with a chain is a huge deal, with the potential to transform your company from a low-volume specialty retailer into a national brand. What's that phrase they use in the auto industry? Oh yeah...Vrooom.

On the other hand, as you're now learning, big retail chains hold nearly all the bargaining power. Your job, before you do any bottom-line signing, is to get as much out of the relationship as possible, says Stephan Thomas, of REL Consultancy Group, a consulting firm in Purchase, N.Y. Oftentimes, large retailers will share advertising costs. Or they'll allow the product to be packaged specially for the chain, which lets you piggyback on its brand name. Perhaps they'll be willing to goose sales by offering the product at a discount during the initial rollout. "If they're interested in giving you shelf space, they're going to work with you," Thomas says.

Even the tiniest company can catch a break. Healthy Beverage Co. of Newtown, Penn., launched in January. Three weeks later, the grocery chain Safeway offered to put the company's Steap Green Tea Soda in 600 stores. "We said, 'We'd love to be your account, but we don't have the money for all those up-front costs," says co-founder Eric Schnell. A deal was struck in which Safeway waived some distribution costs and Healthy Beverage picked up some marketing and promotion expenses. The deal sent sales past the $1 million mark--almost 300% above original projections. What's that phrase they use in the beverage industry? Oh yeah...Vrooom.

I have a small retail store with a unique concept. I have been approached by people interested in opening similar stores. I would like to develop the concept into a clean "turnkey" operation, then package it, perhaps via franchises, for sale. Where do I begin?
Pam Glynn
Denver

It's great you have a unique concept, but be warned: The odds are ugly. Fewer than 1% of franchise ideas ever get off the ground, according to Francorp, a consulting firm in Olympia Fields, Ill. Before you send out the clones, ask yourself some questions. Can someone learn to operate your business in three months or less? How profitable are you? To attract high-quality franchisees, a franchise needs to generate at least $500,000 in annual revenue and earn the owner an income of at least 15%.

And if you truly love that small store of yours, prepare for a tearful farewell. "You won't be a retailer anymore," warns Mark Siebert, CEO of iFranchise Group in Homewood, Ill. "You'll be advertising, marketing, selling, and serving the needs of your franchisees, by providing them with operations manuals, training tools, and other assistance," says Siebert. "It requires a different skill set."

I just purchased a vocational training business. Government referrals drive about 70% of our revenue, and at the end of each fiscal year, business grinds to a near-halt as new policies go into effect and clients change their procedures. Should I lay off staff in order to reduce costs during the lulls?
Donna Slipher
Career Creations Institute
Tullahoma, Tenn.

Downtime happens. And cutting staff when things get quiet can cost you a pretty penny in headaches and lost productivity. Instead, take a lesson from the educators. Schools, after all, give their employees most of the summer off. Pay full-timers nine- or 10-months' salary, but spread the payments over 12 months. Make allowances for them to take part-time jobs, and offset the salary cut with low-cost perks, like training opportunities.

The same goes for customer contracts: Salvation's in the spreading. Cash-flow continuity is an issue for Mark Shay, CEO of Educational Directories Unlimited, based in Chester, Pa. He relies on universities to advertise on his Web portals. When his customers' coffers dry up at the end of the fiscal year, Shay offers 14-month contracts for the price of 12, effective at the start of the school's next fiscal year. "They get two months free, and we know we're going to get the money eventually," he says. You may be able to work out a similar deal with government agencies, and then--the signed contracts in hand--apply for bridge loans in order to make payroll during the downtime. If nothing else, you'll save a bundle in farewell and welcome-back lunches.

Looking for answers? Stumped by a thorny business problem? Let Inc. help. Send your questions to AskInc@inc.com. We'll consult with experienced entrepreneurs and savvy advisers, folks who've been where you are and figured out what works and what doesn't. If you don't like what we have to say--well, you can tell us that, too.