Martin Bazylewich

Hello Everyone,

I’m currently on vacation in Canada. Normally I’d like to upload a new post for the Small Business File, but the nature of my travels has me in different places and without normal ammenities that help in making a regular e-column come to ‘print’. That’s code for my two year old has greater luggage requirements than me, so I had to leave the laptop at home in favour of a set of toy construction vehicles, a portable DVD player and his favourite story books. There is a silver lining to leaving the laptop at home — it means I have a chance to keep both of my eyes open for great small business opportunities and ideas from Canada that may just work in the Philippines. Thanks for your understanding, and I look forward to uploading a new post in a couple weeks time.

Last week in the Small Business File’s inaugural “They Did It” column there was a reference to how Ivy’s Vine Resort was formed as a partnership that included foreign and local participation in the running of the business. That mention is the inspiration to this week’s column on what are some of the keys to developing and nurturing a successful business partnership in the Philippines.

Partnerships hold the promise of great potential for business success. They combine talents and resources that may not be possible otherwise. But they also have the potential to be a nightmarish business structure and the source of constant headaches if not developed properly. Previously we discussed the advantages and disadvantages of a partnership and how to go about forming one [see Monday, July 28th's, Ownership Structure and Formation of a Small Business]. What follows are some considerations to help realize the benefits of partnerships and limit some of the key problems.

A first consideration should be a determination if the overall goals and personalities of the main partners are similar and compatible. While it is fine and often beneficial for there to be some degree of difference in relation to goals and personalities, in general it helps if the main business goals are the same. A good friend of mine backed out of a partnership intended to expand the reach of the business because he found out early enough that the ultimate goals of his potential partner were too different from his own. My friend wanted to build his business up and expand it, while the partner wanted to build the business up and sell it.

Likewise, it helps if the personalities of the partners are fairly compatible because nothing slows down the progress of a business like constant divisions and disagreements. Such divisions can hamper not only the attainment of strategic business goals, but can be harmful in achieving efficient and effective day-to-day operations and procedures. For example, another business colleague of mine opened up a business with his brother-in-law. My friend wanted to abide by all the rules and regulations expected of him and the business, but the brother-in-law was only interested in making as much money and as quickly as possible. This of course created a huge problem, because any legal trouble for the business could harm both partners financially in the form of fines and penalties. More importantly, the big difference in personalities posed a greater risk to the foreign businessman, as any legal problems could also jeopardize his immigration status in the Philippines! The result was a formal termination of the partnership after a great deal of time and expense had already been committed. If they had recognized their personality differences earlier and the conflicts it would cause, perhaps they would not have spent as much time, money, and energy as they both did.

A second consideration should be a clear understanding of what strengths and weaknesses each partner brings to the partnership, and what the division of labour and responsibilities of each partner will ultimately be. I’m not referring to the legal definitions such as equity participation and liability. These issues will be clearly spelled out in the articles of incorporation or partnership agreement that is submitted to the SEC. What I am referring to is more personal. You and your partner(s) should be able to list down exactly what benefits each brings to the business, and similarly list those assignments each should have limited involvement in with the business because others are better suited to those tasks. By listing down strengths and weaknesses, it becomes easy to agree on a division of labour for the partnership. Each partner can explicitly ’see’ what they need to do and what others need to do to make the partnership work. This division of labour helps with the next consideration involving conflict.

Conflict within the partnership should be expected as it is only natural that there will be some disagreements from time to time. Even if you have personalities that don’t clash and have established a clear division of responsibilities, there will invariably be some issues that bring about disagreement between partners. Successful partnerships almost always decide on a means of conflict resolution at the very beginning of the partnership. Your business can become sidetracked over even small conflicts, especially if egos get involved. This is disruptive at the very least, and can cause a successful business to dissolve entirely in extreme cases. If you and your partner(s) establish a system for resolving conflicts at the outset, you can evade any potential decision ‘land mines’ that could cause severe strains in the partnership. For example, you might agree beforehand that one partner has the final say on decisions in one area of the business and you in another. You may also decide to have a rotating leadership so that every year you alternate as to who has the final say on difficult business decisions. No matter what system you do decide on, the important thing to remember is that a system is in place to keep the business moving in a positive direction.

By considering the above suggestions prior to entering a partnership, you should safeguard yourself from a number of difficult headaches that can really impede your small business’ start-up and long-term success. I am sure a number of readers would like to receive even more tips on how to create a successful partnership agreement and working environment.  Comments and suggestions from those actively involved in partnership agreements would be greatly appreciated.

“They Did It” is a new column that will appear on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. “They Did It” columns will showcase businesses developed by foreigners and OFW’s and provide insights into why they have proven to be successful right here in the Philippines.

This week is the first “They Did It” column. This inaugural post examines the efforts of a Canadian entrepreneur, who along with his Taiwanese wife, have established a resort on Carabao Island, just 10 minutes ride away from the pristine white sand beach of Boracay.  Trent and Ivy own an English Language School in Kaohsiung, Taiwan, and have since added a beach resort in the Philippines to the portfolio of businesses they own or are are involved in.

Name: Trent Widdup and his wife Ivy

From: Canada and Taiwan

Residence: Kaohsiung, Taiwan and Carabao Island, Philippines

Business Name: Ivy’s Vine Resort

Business Description: A full-service beach resort with bar, restaurant and dive shop located in Lanis, Carabao Island. Ivy’s Vine is a 10 minute pump-boat ride from Boat Station 3 on Boracay Island. Carabao Island is fast becoming the quiet alternative to the frenzied developments on Boracay, yet remains only 10 minutes away from the action. At Ivy’s Vine, visitors can go diving, hiking, kiting, caving or sailing when they are not enjoying the beautiful white sand beach. For more information visit: ivysvineresort.com

Q: Can you give our readers here at LiP’s Small Business File some background history about how and why you opened up a resort on Carabao Island?

A: My wife and I were thinking of setting up a place for many years, so we made annual trips to the Philippines.  Taiwan is close (an hour and twenty minute flight from Kaohsiung to Manila), so it seemed like the right choice for us. After four years of travelling to different potential locations throughout the Philippines, we decided on Carabao Island for a number of reasons. Carabao’s proximity to Boracay was a big reason. From our beach, you look directly at Boracay, one of the most popular tourist spots in the whole country. Another reason was that a trustworthy friend of mine had been doing business with our new, local partner for many years. Lastly, the continual investments and improvements in infrastructure to help tourists get to Boracay was also a big benefit as getting to Carabao is easily done from Boracay. When we put together all of the reasons and benefits to developing our resort in Carabao, we felt the opportunity was there and we took a chance.

Q: What aspects of running a resort do you like the most? How about the least?

A: What I like best about running a resort is meeting people from around the globe. They all provide their unique insights on life and the future of mother earth. The least attractive part in running a resort is finding the right personnel. Having a local partner with family wanting jobs at the resort but perhaps not all the qualifications needed can make the selection process difficult at times.

Q: What are your keys to success thus far?

A: I think the main key to success when running a resort is customer satisfaction. The internet is a great advertising tool and having a good web page is important, but word of mouth and repeat customers are also important keys to prolonged success. Most people who visit us have only a limited time for their vacation, so if you provide them with a memorable experience it will only help to increase your future customer base.

Q: What are your biggest challenges in running a resort?

A: For us the biggest challenge is getting supplies to out resort and keeping our prices competetive. We strive to provide the best possible product at an affordable price.

Q: What are your future plans for the resort?

A: There are always plans for the resort. Every year we like to see improvement in some aspect of what we are doing. There is always constant upkeep, but incremental improvements give us optimism that business and life at the beach will keep getting better and easier in the future.

I would like to thank Trent and Ivy for providing us with some insights into what it is like to run a successful resort here in the Philippines. Future “They Did It” columns will showcase other individuals and their businesses and hopefully provide encouragement to others by demonstrating that running a small business in the Philippines is not only possible, but can be rewarding as well!

Bigger isn’t always better.

In fact, when it comes to starting a business, smaller usually makes more sense. This idea is especially important to remember if you are a foreigner attempting to open a business in the Philippines. Magazines, newspapers and books always note that most entrepreneurs tend to ‘think big’. Extolling the virtues of thinking big by those who have taken their businesses to the highest of heights makes for good sales. But usually these same publications gloss over the fact that most successful entrepreneurs almost always start small. This brings up the question for most foreigners wanting to open a business in the Philippines: ’Just how small should my small business be?’

While there is no easy answer to this question, there are two typical answers offered by most foreigners who have been in business in the Philippines.  The first and most frequently supplied answer usually goes something like: ‘don’t waste your time and money’, or ‘you just can’t make money in the Philippines, so there’s no point starting at all’. Interestingly, these are the same comments you would normally get from concerned friends, colleagues, and family members if you mentioned you were going to start a business in your own country. Starting and running a business in your home country is hard enough. Starting a business in a foreign country raises even more concerns and prompts most to urge for even greater precaution.

A second answer from foreign business owners in the Philippines is typically less dire than the above answer, but still tempered with a call for restraint: ‘You should start out by being just big enough’. Now what does that really mean? Well, it means start out as small as possible given the demand for your product or service. Starting out ‘just big enough’ is more prudent than ‘going for scale’, because doing so limits the size of your initial investment, meaning a reduction in unnecessary risk and freeing up more of your resources to ride out rough patches after you have opened for business. Furthermore, by starting out ’just big enough’ you leave yourself in a better position to start over again if your venture performs poorly. [Remember in my last article how I discussed the need for a back-up plan? Well, starting small, or 'just big enough', helps you retain the ability to start over again and learn from a failed venture if you aren't so successful at first.]

Bottom line: Starting ‘just big enough’ almost always means a slower path to success, but it is also generally a safer way to build both a sustainable business and an enduring career as an entrepreneur.

Starting small has other concrete advantages. Starting smaller limits the size of any mistakes made, and just ask any foreign business owner in the Philippines and they will confirm that every entrepreneur makes mistakes at start-up. By consciously trying to start up small, you avoid the biggest mistake many foreigners make when opening a small business. What is that biggest mistake? Throwing money at any problems faced! By focusing on keeping your initial investment small, you also force yourself to be creative when solving problems, and this is a habit worth learning from the start for any entrepreneur.

How then can you keep your initial investment small enough to be ‘just big enough’? For starters you should decide to purchase only those items of equipment that are absolutely necessary to get your business started. There is absolutely no need to spend precious resources on items or equipment that is not used on a day-to-day basis unless it is absolutely critical to your final product or service delivery. It is better to stock up on a back-up piece of essential equipment than purchase equipment or make improvements that do little to add to your initial sales. Remember, you can always add ‘window-dressing’ later on after you have established consistent and stable cash flow.

A second tip is to avoid debt as much as possible. I can’t emphasis this enough. There is nothing worse than having to make interest and principal payments before you have even made a sale! Most small businesses opened by foreigners fail because of under capitalization and this combined with debt repayments at high interest rates absolutely kill foreign started small businesses no matter what the market niche. 

Finally, use only a small portion of your nest egg to open a small business in the Philippines. If you don’t follow this last tip, you not only risk putting your entire family at risk if you are unsuccessful, but you also severely limit any chance of starting up a new venture in the future. No matter how successful you become, when you look back on things, chances are you’ll be glad you started ‘just big enough’!

Who’s really in charge and where does the peso actually stop in your small business?

The answer to these questions can only be found when you formally organize and legally register your small business. In the Philippines, for-profit small businesses can be legally opened in three ways. They can be formed as a sole proprietorship, as a partnership, or as a corporation. Each form is different in its characteristics, advantages, and disadvantages. The form you choose will not only determine the amount of paperwork and cost involved in forming your business, but also other things like the amount of government regulation you will be exposed to, the manner in which you will be taxed, the way in which profits or losses can be used or dispersed, and the liability incurred by different individuals listed as owners, partners, or shareholders in the business.

A sole proprietorship is the easiest form of business to register in terms of documentary requirements and costs involved. Foreign nationals cannot form a sole proprietorship on their own, but if married to a Filipino, then the business may be registered and opened in the Filipino spouses’s name. The requirements involved in registering a sole proprietorship include filing your business name with DTI, registering for tax purposes with BIR, and securing some basic local government permits (i.e. mayor’s permit), all of which are easily obtained. The total costs vary depending on the municipality and kinds of permits needed, but a sole proprietorship is by far the cheapest and quickest way to go for most small businesses.

A business registered as a sole proprietorship has some key advantages that make it a very appropriate option for small business owners. The biggest advantage is that once registered, the business becomes an extension of the person who registered it. What do I mean by that? Well, legally, there is no distinction between the person and the business. This means that a sole proprietor is the ultimate owner, and all decisions made rest solely with the owner. All decisions made and any profits gained by the business can be used at the discretion of the registered owner. In other words, a sole proprietorship places all the power and responsibility in the owners’ hands and rewards the owner with all the potential gains to be made. The major drawback is in terms of liability. While a sole proprietor can reap all the potential rewards of being sole owner, he/she must also bear unlimited liability for the business. Philippine law does not distinguish between business and personal assets when you form a sole proprietorship, so personal non-business property can be exposed to litigation in the event of a case being filed against the business. Another drawback to consider is that you will not have access to the resources a partnership or corporation provides (i.e. additional skills and expertise, financial backing, etc.).

Partnerships and corporations offer different sets of advantages and disadvantages. Both need to be registered with the SEC and this means a great deal more in terms of documentation and fees to get set up. Partnerships have two or more owners and therefore require a different kind of legal arrangement. In the case of a partnership, at least one partner must assume unlimited liability, while other members can assume proportional liability. Partnerships operate according to a binding contract that outlines who is involved, what is contributed by whom, and how profits and losses are proportionately shared. Partnerships are an attractive option in a number of cases. You have the advantage of pooled resources, which can mean financial contributions and/or technical contributions. People new to a market can form a partnership as a way of entering the market and tapping local knowledge and contacts to help give the company an edge it may not otherwise have if it had chosen to enter the market on its own. For foreigners, a partnership can be especially appealing because it can mean having a local point person that is capable of handling ‘front-office’ issues, while the rest of the partners concentrate on ‘back-office’ issues. There are disadvantages to partnerships. Sole proprietorships allow complete control over decision-making, but in a partnership, members must be willing to share decision-making or agree to have a managing partner that handles all but certain decisions entertained by the partnership. You are also limited to a proportion of any potential profits. And finally, you could encounter tensions in the partnership if there is disagreement over company direction, especially when expansion or contraction is an issue facing the company.

Corporations are yet another option in business formation. The most appealing aspect of a corporation is that the business becomes its own separate entity that is distinct from its stockholders. What this basically means is that the corporation assumes its own liabilities and cannot transfer these liabilities to the stockholders. As an investor in a corporation, you are only risking your investment and cannot be held personally liable for any wrongdoings of the company beyond what you invested. There is however a great deal of paperwork to be completed when forming a corporation. Articles of incorporation need to be formulated, the fees involved in setting up a corporation are much higher than other business forms, yearly reporting records must be made and submitted to the SEC, taxes are higher than those paid by sole proprietorships, a board of directors needs to be established, etc. In short, opening a corporation has the advantage of limiting liability, but adds on a lot of complexities to running a business that may not be worth the time and effort for a truly small business operation.

So which form of ownership do most foreigners choose when organizing their small business? Generally speaking, those married to a Philippine national choose the sole proprietorship route, with their spouse being the person ultimately responsible for the company. This is done for most small businesses because there is little or no need to go through the elaborate expense of forming a corporation for small or hobby businesses. That being said, when very large amounts of capital are involved, the formation of a corporation is usually chosen. Foreign nationals can legally own a proportion of a corporation, and this way they can be assured they will retain ownership of at least a portion of the business and have legal standing. There are other reasons to choose to open a corporation, such as being able to apply for an investor’s visa and being able to repatriate funds relatively easily.

When you do decide to register your business, keep in mind the above advantages and disadvantages. Every small business has different needs, especially at start up. Your business may grow to be hugely successful, but that doesn’t mean you need to start out as a corporation. It is completely plausible for a business to start out as a sole proprietorship and evolve into a corporation. You can always go through the process of incorporation after you have grown your small business and your needs change.

Good luck, and no matter what form you choose, always remember to follow the reporting and tax requirements appropriate to the type of business you ultimately choose to form!