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Preparing The Business Plan – Product & Market Analysis

No business can expect to be successful unless the founders and managers understand the relevant markets and develop a strategy for reaching potential users and educating them about the value of the company’s products or services.  Presumably, serious consideration of a new business would not be undertaken unless the founders have some sense that a market will exist for the company’s products and services.  However, a mere “gut feeling” is not enough, and the preliminary planning for the new business must include a comprehensive and candid analysis of market characteristics and opportunities.  In particular, the founders should be able to provide clear and substantiated answers to each of the following questions:

  • Who will be the likely customers for the company’s products and services?
  • What are the important benefits of the products or services and what specific needs will the company’s offerings meet in the marketplace?
  • What is the proposed pricing structure for the product or service?
  • What methods should be used for distribution of the company’s products to its identified customers?
  • What marketing and promotional strategies will be needed in order to reach the potential customers, including advertising campaigns and public relations efforts?
  • What ancillary products or services will (or should) the company be offering in connection with its core products and services?  For example, does the company expect to take on any warranty or service obligations with respect to its products?
  • What intellectual property rights are involved with the company’s products or services?  If intellectual property rights are essential to the company’s business, what steps have been (or can be) taken to protect the company’s position?
  • What are the critical stages of developing and selling the company’s products and services?  Are there any processes in this cycle that have not yet been completed?  If so, is there a clear strategy for getting the job done, including raising sufficient capital and recruiting the necessary personnel or business partners?
  • What procedures should be implemented for tracking the success of the company’s marketing plan and insuring continuous improvement in its products and services?

Studies have shown that successful technology-based firms demonstrate a discernable strategic focus with respect to the mode of market entry and product positioning.  In most cases, successful firms opted for exploitation of a niche market that promised sufficient returns and was perceived as being defensible and/or of less interest to major competitors.  Successful firms also selected markets that were both large and growing.  Ideally, the selected markets would be capable of rapidly embracing products and processes that provided substantial “added value” or contributed to rapid innovation in manufacturing techniques.


Start Thinking Now About Going Global Issues

Last week I was asked to provide three key practice tips relating to global business.  Not too much detail . . . just some basic thoughts that managers of small- and mid-sized companies looking to launch new business activities overseas might have in mind.  I was given only a few minutes; however, I thought the following “results” of my thought process might be of value to you:

Opportunities have expanded rapidly in foreign markets, even for the smallest U.S. businesses; however, each new market has its own unique requirements with respect to product characteristics and distribution. As a result, domestic firms must develop, almost from the time that they first launch their business, the capability to differentiate existing products to meet the needs of foreign markets and must also understand the distribution channels in those markets. In order to be effective in these areas, firms must bring in foreign market specialists and should also look for legal advisors with experience and contacts in those countries that are likely to be first on the list for global expansion.

Improvements in communications have led to broad dissemination of advertising information, thereby influencing consumer tastes and preferences in foreign markets. U.S. businesses should be mindful that information on their products and brands will be available in foreign markets even before the firm is actively engaged in selling in those markets and it is important for counsel to understand foreign trademark laws and regulations pertaining to the content and form of advertising.

Companies now need an international business plan in addition to the plans they develop for launching activities in the U.S. In determining the contents of an international business plan, there are certain guidelines that should be followed to insure that necessary information is collected and all relevant issues are considered. While there are a variety of ways to organize an international business plan, it is generally useful to begin by describing the company’s current business, including activities already conducted outside of the U.S. , and the main products or services offered by the company. The next step is evaluating the company’s current position, both in the U.S. and within the broader global industries in which the company competes. This competitive analysis is crucial to determining the content of the balance of the international business plan. For example, if the analysis points to softening of the U.S. market for the company’s products, exporting strategies should be an important part of the action items in the international business plan along with the possibility of launching product development initiatives in foreign markets. Organizational changes should also be addressed in the plan since globalization generally requires a substantial shift of resources and management authority away from U.S. headquarters. Finally, as with any other business plan, the working group should expect to prepare budgets, schedules and tactical plans.


Preparing the Business Plan – Collecting Information

Business planning begins with information.  As noted above, one important part of the strategic value of the business planning process, and the formal written business plan that emerges from that process, is the knowledge that the founders and the other senior managers acquire while they are collecting the information needed to prepare the plan.  Moreover, timely and complete information on all relevant aspects of the company’s projected market and products and services is required in order to obtain the support of investors, banks and other prospective business partners.  If the business plan fails to convey an understanding of the data that is most relevant is assessing the viability of the business concept then it is likely that the venture will fail due to its inability to attract the necessary resources from its environment.  In addition, the steps taken to identify the best sources of information for the initial business plan should also serve as a foundation for creating a permanent system for collecting additional information in the future that can be used to measure the progress of the business and to make refinements to the strategic business plan as the company moves forward and environmental conditions change.

The outline of the contents of the business plan presented below should provide a guide as to the scope and amount of information that will be needed in order to prepare the plan.  In general, the process should begin with an examination of the industry sector(s) where the company hopes to compete with its products and services and, in particular, the specific markets within those industries that the company intends to target initially and in the future.  Sector analysis should include a review of the overall performance of the sector in relation to the general economy and the collection of current and reliable information on forecasts, growth trends, and environmental factors.  Market analysis focuses on the specific stakeholders that the company will need to include within organizational domain and should include customers, suppliers, distributors and competitors.  Customer information is obviously critical and the company must be able to collect the data necessary to answer several basic questions—who are the customers, where are they located, what are they currently doing to solve the problem addressed by the company’s products or services, and how might they use the company’s products and services as an alternative solution.  Information should also be collected on the current and projected spending habits of the customer base.  With regard to competitors the goal is to collect enough information to understand their strengths and weaknesses and how they operate within the target market.  In order to do this the company must gain access, legally, to information regarding competitors’ product lines, customer base, manufacturing and distribution strategies, and financial condition.

Presumably, the founders and senior managers will have sufficient experience in the industry to allow them to get a good reading on the initial risks and costs associated with the proposed venture.  However, there are a wide variety of other sources of planning information that might be useful in certain instances.  For example, national governmental agencies (e.g., U.S. Small Business Administration and the Department of Commerce) spend large sums of money on research and a number of government publications can provide statistics on the size of relevant markets and expenditures for research and development, manufacturing, marketing, and human resources.  Government publications can be particularly useful when the business is planning on a significant volume of foreign sales activity.  Local agencies, as well as nonprofit organizations, also provide assistance to persons interested in starting up a new business and can guide the founders and senior managers to information specific to the geographic area where the business will be organized.  Trade associations may be able to provide a substantial amount of current information on business resources that are very industry and niche specific and can also provide an overview of relevant laws, regulations and competitive conditions. Finally, financial information released by listed companies involved in the same line of business may also be useful in putting together long-term projections and analyzing the ratios between income and expense items that might be set as goals for the new business.  While information is abundant, there may be situations where the specific kind of information necessary for a particular part of the business plan is not available or is not sufficiently updated to provide readers with a current picture of all the relevant issues.  This does not, however, mean that an issue should be ignored; it simply means that the founders and senior managers should make note of the shortcomings in the information base and how they might impact the decisions that need to be made during the strategic planning process.

While collection and assessment of information for use in the business plan is often a heavily quantitative process that involves a substantial amount of sophisticated statistical analysis, the founders and senior managers should not ignore the value of “business intelligence” that can be obtained through old-fashioned personal surveys.  Before finalizing the business plan and circulating it to prospective business partners the founders should make direct contact with key parties within their developing organizational domain to gather further information and test some of the assumptions that may be guiding their thinking regarding the strategic planning process.  For example, the founders and senior managers should visit sales outlets operated by potential competitors and also talk informally with prospective customers to find out directly what there concerns and requirements might be with respect to the proposed products and services to be offered by the company.  Input from these personal survey techniques may be used as part of the formal business plan and, perhaps even more importantly, can be referred to as a sign of credibility in one-on-one meetings with potential investors and business partners who should appreciate the fact that the founders and senior managers are not relying solely on the library to define the vision for the company.


Preparing the Business Plan – What’s the Point?

As a general rule, small firms do not have the resources needed to create and maintain a separate strategic planning function.  Instead, the planning process will usually be handled by the founders and other senior managers.  Obviously these people are typically overwhelmed with “doing,” as opposed to “planning,” and there will be a strong temptation to put off preparation of a formal business plan, even a short one, or outsource the project to a consultant or other outside party (e.g., a lawyer or an accountant).  However, it would be a serious mistake for the founders and senior managers to avoid becoming personally involved and invested in creating the initial business plan for their company.  While the primary goal of the business planning process is the end product—the tangible business planning document—the journey itself provides the participants with an invaluable opportunity to collect information and knowledge about the proposed business and grapple with and resolve the fundamental issues that need to be addressed in order to determine the best way for the company to operate and compete in its chosen markets.  In fact, the process of drafting the business plan is the time to make sure that all of the members of the start up group are convinced about the validity of the business concept and fully committed to becoming the initial “investors” in the company ready to devote their full time and effort to executing the plan.  Participation in the business planning process is also important for the following reasons:

  • The business plan will become the primary means of communication to potential investors, banks, advisors and other potential strategic partners who will be asked to provide some level of support to the new business.  As such, it is essential for the founders and senior managers to devote the necessary time and effort to ensure that the plan is clear, complete and accurate and that it conveys the right message to obtain the needed support.
  • The process should lead to clear and specific goals relating to the operation and development of the business.  While the ultimate dream of the start up group may be to create a multi-billion dollar global company the journey must begin with smaller incremental steps that will keep the company and its employees focused on what is needed right now to keep the business rolling and progressing.  The planners should include near-term goals that are realistic and achievable and reach agreement on an objective basis for measuring progress toward those goals.
  • By compiling, analyzing and documenting the information needed for the initial business plan, the members of the start up group will get a good feel for the elements that need to be included in their permanent strategic planning function once the company grows to the size where it can afford to create and maintain a dedicated planning business unit.  Put another way, the process should uncover the key data points for monitoring the business and the company can begin to take steps to make sure that the necessary data is continuously collected by the company’s information systems.
  • The lessons learned in the business planning process can be applied to other important activities and thus provide the founders and senior managers will tools that can be used to make informed business decisions about new projects and investment opportunities.  For example, before aggressively courting a new customer the management team should prepare a “mini-business plan,” often referred to as a “business case,” for the proposed business arrangement that documents and analyzes the rewards and costs of doing business with the customer and evaluate the burdens placed on all departments with respect to servicing the customer.  The business case can then be evaluated against the larger goals of the company laid out in the business plan and, if accepted, can be used as a guide for evaluating the customer relationship once it begins.

While the optimal situation, for the reasons listed above, is for some form of business plan to be in place when the company is formally launched, the reality tends to be that the strategies of many firms tend to emerge as the business develops.  Even if that is the case the leaders of the company must at least have some general frame of reference regarding the issues that will need to be considered when determining which activities of the small start-up team must take priority.  Absent a formal plan the soundest approach may be to follow the process outlined above—continuous analysis and evaluation of the environmental forces that will influence the scope and design of the company’s “organizational domain” and the strategies that the company will need to adopt to manage and mitigate these forces.  At some point, however, attention will need to be paid to the basic elements of the formal strategic plan and related processes, which include not only a written business plan but also incorporates training and recruitment plans, external communications, relationships with customers (i.e., product and service plans) and other key business partners, and internal rules and procedures to ensure compliance with applicable laws and regulations and monitoring of activities against budgets and milestones that may be established during the planning process. 

Strategies and suggestions for the preparation and content of business plans are abundant and there is no single correct way to proceed; however, it is fair to say that the group involved in preparing the plan will need to collect and organize the necessary information; perform an initial product and market analysis to understand the requirements of the company’s target base of customers; survey the competitive and technological environment in which the company will be operating; prepare a financial analysis, including budgets and projections; perform a risk analysis that includes testing of the key assumptions underlying the goals and objectives of the plan and identification of alternative strategies for dealing with unforeseen scenarios; and, finally, prepare the formal document in a way that clearly communicates to the anticipated audiences all necessary information regarding the company’s proposed business activities, including its products and services, and its strategies in key areas such as research and development, manufacturing, sales and distribution, finance and human resources.


KPI for Legal Departments

Legal organizations of all types—corporate law departments, law firms, and government law departments (i.e., federal, state, county and local)—are implementing procedures designed to measure and improve their performance and ensure that their activities are aligned with the overall performance and strategic objectives of their larger organizations or, in the case of law firms, clients.  Simply put, the legal profession is now attempting to measure law department and law firm performance in the same way that businesses have been measuring performance in other important functional areas such as sales, accounting, human resources and information technology.

One example of how this trend is emerging is the creation of the Open Legal Standards Initiative (OLSI), which has partnered with the Association of Corporate Counsel and The Corporate Legal Standard, Inc. to develop standardized business process and metrics classification systems for the legal profession that will allow for more effective benchmarking of important pre-selected performance metrics, generally referred to as “key performance indicators” or “KPI”.  In order to understand how KPI can be developed and used in the legal area it is important to briefly discuss a few key definitions.  First, there must be agreement on the meaning of the term “metrics”.  A “metric” is generally understood to be a standard of measurement and that can be used as a way for quantitatively assessing the efficiency of performance with respect to a particular process.  In order for a metric to be useful, however, there must be full agreement in advance as to how the relevant data will be collected, organized and displayed.  Second, metrics cannot be used in isolation and results must be evaluated against pre-agreed standards.  This exercise is referred to as “benchmarking” and in the legal area requires comparison of the KPI of one legal organization to comparable organizations (e.g., data from one law department is compared to data of other law departments of similar size).  The information necessary for benchmarking is usually collected from larger surveys conducted by consultants and/or trade organizations.  Finally, it is likely that a large number of “performance indicators” can be identified; however, the focus must be on those that are truly “key” and worthy of significant management attention.  Two points need to be made on this issue—KPI must be easily understood by interested stakeholders, such as other departments within a corporation, and recognized as being compatible with the overall strategy of the organization; and KPI must be limited to those areas that can create the most value for the organization.  If doing a particular thing very well does not create significant value it is a nice thing; however, it is not something that should be considered part of the KPI.

The OLSI has suggested 25 top KPI for law departments broken out into seven main categories—general law department metrics; litigation matters; non-litigation matters; intellectual property matters; external legal spending; knowledge management; and compliance.  The general law department metrics include the total expenses of the law department in an absolute sense and as a percentage of the total revenues of the company.  Litigation, non-litigation and intellectual property matters all track the number of active matters as well as the volume of new and closed matters.  Particular emphasis is placed on “process efficiency,” such as the average cycle time to resolve or close new matters.  External legal spending is related to the general law department metrics described above by its focus on total fees for outside counsel and other legal vendors and is further broken down into litigation, non-litigation and intellectual property matters.  Knowledge management (KM) attempts to track how successful the law department has been in capturing existing knowledge and re-using it as opposed to paying for the creation of the same knowledge all over again.  Specific KPI in this area look at how efficient the department has been in storing and organizing electronic or hard copies of documents and research and how often the department engages in KM-specific reviews of closed matters (i.e., what did we learn so we can do it better and more efficiently the next time).  Compliance-related metrics include the number of ethics line/hotline calls, cycle time to resolve ethics line/hotline reports, and overall employee awareness of compliance program procedures and activities.  With respect to public companies awareness is measured by reference to Sarbanes-Oxley and exchange listing requirements that mandate distribution of a code of conduct or ethics to employees.

The OLSI Top 25 is certainly a useful list and many, if not all, of the items should be included when selecting the KPI for a legal department.  However, consideration should also be given to including additional KPI that focus on the level of service provided by the legal department, the level of teamwork and morale within the legal department, the contribution that the legal department makes in the context of pre-selected strategic projects, and the performance of the legal department in relation to pre-approved budgets.  For example, with respect to service levels the legal department can and should be evaluated on how readily the legal department can be reached by other departments seeking legal services (i.e., “accessibility”) and how often requested legal services are obtained on a timely basis (i.e., “turnaround”).  There is, however, one important caveat in focusing on these measures—are the expectations of the other departments reasonable?  If other departments are treating a relatively minor issue as “urgent” and disrupting the workflow of the legal department on matters that should clearly have a higher priority it is not fair to the legal department to absorb criticism with respect to poor turnaround on minor issues which are of little or no value to the company as a whole.  With respect to pre-selected strategic projects, such as negotiation of an important new contract or management and disposition of major litigation, the legal department should be judged on how well it does in attaining planned results and its overall contribution to the successful completion of the project.  Other departments should be asked how satisfied they are with services provided by inside and outside counsel on these projects.

Legal departments are sometimes asked to suggest KPI without an understanding of how they will impact the day-to-day operations of the department and the lives of the lawyers and other personnel who work within the department.  This mistake should be avoided and management should take the time to fully explain how metrics and benchmarking will be used.  At an operational level, tracking of litigation and non-litigation matters allows the law department to do a better job of staffing and budgeting and thus realize savings and create value based on more efficient processes.  In addition, KPI should be used to establish goals and objectives for further improvement; however, the goal should not simply be to achieve a “better score” but should be supported by specific “next actions” that can be understood, implemented and measured.  Finally, and not unimportantly, KPI should be tied to meaningful incentives in order to motivate the members of the legal department to strive for improvements and avoid acting in a way that will adversely affect the score on a particular KPI.  Since KPI can and should be a means to incentive behavior the infrastructure of the company (i.e., the organizational design) should be set up in a way that allows the legal department to have a reasonable level of control over the activities that are being measured and other departments should not be allowed to create obstacles that will prevent the legal department from pursued its goals and objective with respect to its own unique KPI.  In turn, the KPI of the legal department should be aligned with the actions that other departments are expected to take in order to achieve their KPI.


Characteristics of Innovative Companies

Emerging companies are often distinguished from the broader set of entrepreneurial activities by focusing on the significant level of “innovation” associated with their business models.  A number of different definitions and explanations of innovation have been offered by academicians and commentators.  For our purposes, it is useful to think of innovation as the process of successfully acquiring and implementing new ideas within a business organization.  As suggested by this formulation, new ideas can be developed and created internally, or can be borrowed or purchased from other organizations.  New ideas are not confined to new products and services, but also include new or improved processes that enhance productivity or reduce costs associated with manufacturing or distributing existing products.  Put another way, innovation involves firms doing new things in new ways to increase productivity, product development, sales and profitability, including finding new ways of identifying the needs of new and existing clients and making and marketing products that satisfy those needs. 

Researchers have attempted to identify those firms that have been most successful at innovation, and to describe and explain those business practices that tend to be associated with innovative companies.  Among the key factors are the following:

  • Innovative companies have strong leaders that are able to clearly articulate a vision for the business, set targets and create and maintain open relationships with all stakeholders (i.e., customers, investors, suppliers and employees).
  • The most innovative companies have extensive knowledge of the marketplace, the needs of customers, and the strengths and weaknesses of their competitors.
  • Innovative companies seek and retain extraordinarily qualified personnel, provide them with the proper amount of resources and general direction, and then allow them to make and pursue their own specific strategies for achieving the agreed goals.
  • The organizational environment of an innovative company emphasizes integration of multiple disciplines and functions and teamwork, goal sharing, and full and effective communication of goals and objectives throughout the firm.
  • Technology is used effectively throughout the organization, including small changes in design, production processes and customer services.
  • The organization strives and plans for continuous and constant innovation, as opposed to isolated new ideas, to improve and enhance products, services and productivity.
  • Innovative firms strive for strong brand recognition and rapid introduction of new products and services into the marketplace.
  • Innovative companies have systems for collecting information about, and learning from, customers, competitors and unrelated businesses around the world.

Some of the most common specific strategies for innovation include the following:

  • Frequent implementation of new management techniques;
  • Implementation of skill development and education programs for employees and managers;
  • Regular introduction of new technologies, generally no less frequently than every three years;
  • Constant and systematic benchmarking through regular comparison with the best companies in their industry and elsewhere;
  • Significant investment in customer-focused product design and in quality-based manufacturing equipment and processes;
  • Regular changes in the organization of work and administration, typically made in conjunction with introduction of new products and/or technologies;
  • Allocation of a significant share of turnover, generally at least 10%, to development and introduction of new products and processes; and
  • Collaboration with universities and other research centers to identify technologies which can be converted into profitable products and processes.


Entrepreneur’s Skills Inventory

While starting and operating a business, particularly a business that expect to grow rapidly, is a team effort, each member of the founding team should not move forward without closely and carefully analyzing and evaluating his or her personal skills, strengths and weaknesses and then comparing them to the skills and other attributes that are expected to be necessary in order to successfully operate the chosen business.  If a founder is not strong in a particular area, he or she must be mindful of the fact that the weakness needs to be addressed by recruiting qualified individuals to work with the business, either as an employee or as a key outside consultant.

Sales and Marketing: The first area to consider is a founder’s skills with respect to sales and marketing.  In addition to the ability to set and execute sales and marketing strategies, the founder will need to be able to manage a group of sale representatives and communicate with customers to handle complaints and solicit feedback on the company’s products and services.  The founder will also be involved in launching and managing advertising campaigns and negotiations with prospective distributors.

Financial Management: Many entrepreneurs find themselves unequipped to deal with preparation of budgets and financial statements.  This is one of the main reasons that a controller or chief financial officer is one of the first positions filled on the management team.  Among the tasks that will need to be handled are billing procedures, negotiations with vendors and customers regarding payments and credit terms, and tax payment and reporting requirements.

Human Resources: A founder needs to understand his role as an employer and as the leader and motivator of the company’s human resources.  While entrepreneurs may have exceptional vision regarding the creation and implementation of new technologies, they often have little or no background in managing other people.  The founder needs to think about whether he or she is a good judge of people.  Consideration also needs to be given to whether the founder is able and willing to train employees and communicate the founder’s vision for the business.  Finally, the founder must be prepared for the unpleasant task of disciplining and firing employees.

Organization and Management:  The founder’s organizational and management skills should also be evaluated.  It is one thing to develop an innovative technology, product or service; however, the work will generally be of little importance unless the founder has the discipline to develop a long-term strategic plan for the business and establish realistic goals and milestones.  Entrepreneurs often run into trouble in delegating specific tasks to others in the organization.  However, it is essential that the founder strike the proper balance between directing employees and leaving them free to pursue the best method for achieving a particular objective.

Stress Management: Starting a new business can be a stressful experience.  The founder needs to assess his or her ability to manage risk and, possibly, failure.  He or she needs to be prepared for long hours and hopefully will have the capacity to both work alone and interact well with the group of other founders.  It is also important that founders have the support of their families in the effort.


Achieving Success as a US Manufacturer

Bring It Home, an article that appeared in the September 2007 issue of Entrepreneur, included research data that indicates that domestic entrepreneurship in the manufacturing area is up even as total manufacturing employment in the US continues to decline.  The article provides a few tips on launching and maintaining a successful US manufacturing business even as foreign firms in China and elsewhere continue to use their low-cost labor advantages to erase the smokestacks that drove US economic growth in the late 19th Century and through most of the 20th Century.  Interestingly, while manufacturing skills are obviously important, the winners are likely to be those firms that are able to package and market some of the specific advantages of using an onshore production partner.

Since many schools are focusing on training service-oriented graduates, recruiting skilled production workers and manufacturing managers can be challenging; however, the flip side is that since there are fewer domestic firms looking for such employees the competition in the labor market is less intense.  The key is to focus in on schools that continue to offer manufacturing-related training programs.  As for managers, companies should explore bringing in experienced hands from larger firms that have decided to shut down US operations in deference to foreign competition.

With larger manufacturing firms shutting down, smaller new companies often find there is little or no domestic competition in their particular geographic area or industry sector. As such, these companies can offers themselves as a unique, local alternative to distant foreign manufacturers and focus on building personal relationships with the customer.

By being “local,” US manufacturers can quickly learn the specific requirements of their customers and position themselves as being the best solution for customized items and quickly implementing new designs.  The ability to provide quick turnaround, in relation to foreign manufacturers, is a tremendous value proposition for US companies that often can win the business at higher prices that customers are willing to pay for responsiveness.

Fledgling manufacturers would do well to focus on niche markets that the competition prefers to ignore.  For example, the best strategy may be to concentrate on small- to medium-sized customers that require customization and avoid markets where cost is the primary factor or larger customers that require high volumes that would exceed the relatively modest production capabilities of an emerging US manufacturer. 

US manufacturers can add value, and enhance their profit margins, by importing raw and semi-finished materials from low-cost foreign suppliers and then integrating them into the customized finished products that they sell for their US customers.  The customers will be willing to pay a premium for having someone else deal with the uncertainties of working with foreign vendors.

In order to convince US customers to “buy USA,” domestic manufacturers need to create and execute a solid marketing program that communicates the specific advantages of working with a local firm.  As noted above, building and maintaining strong relationships with key customers is essential and clearly distinguishes the domestic firm from a foreign competitor that is rarely seen in person.  Post-sale support and strong warranty service are also important “value adds” that can win a bid and seal a long-term business partnership.


Interns for Your Emerging Company

Emerging companies often establish internship programs as a cost-effective way to find additional help for general administrative activities and specific projects for which the intern may have particularly useful training and experience.  Internships are often made available to the students and may or may not be sponsored by a university or other type of academic institution.

If the company intends not to pay the intern it is important to consider whether or not the internship will nonetheless be characterized as an employer-employee relationship, which means that the intern must be paid at least the minimum wage and may also be eligible for other benefits mandated by federal and/or state law for employees.  If companies want to have a higher level of certainty that interns will indeed by treated as interns under the labor laws the following guidelines from the federal Fair Labor Standards Act should be taken into account when structuring the intern’s activities and responsibilities:

  • While interns may be trained in the use of the specific equipment the company uses in its business the equipment must be similar to the equipment that would usually be available in a vocational school.
  • The decision to bring an intern on board should not displace or replace any regular employees of the business.
  • The intern must be specifically informed, and should acknowledge in writing, that he or she is not entitled to a regular job at the end of the internship period.
  • Both parties should acknowledge in writing their understanding that the intern is not entitled to received wages for receiving training during the internship period.
  • Any training provided to the intern must be primarily for the benefit of the intern.
  • The company should not derive any “immediate advantage” from the internship and the work performed by the intern.

The key to making sure an internship is characterized as such is structuring the activities as an “educational experience,” rather than a poorly disguised strategy for obtaining free help.  It’s OK if the business gets some benefits out of the internship; however, be sure that training and educating the intern is the top priority.  If you work with a university to obtain interns they will usually have their own specific criteria regarding the activities of the intern that must be satisfied in order for the intern to receive academic credit. For example, students from a public policy program are usually limited to internships that provide them with an opportunity to research substantive legislative or policy issues.  By following the university’s guidelines companies can generally be comfortable that they will not run afoul of the labor laws.