Steps to starting a small business
Everyone has dreamed of owning a business. At one time or another, we all have ideas that come into our minds but never quite make it into the marketplace. It has been said that an entrepreneur can best be defined by the following thought. All people have great ideas while in the shower. Most of us get out of the shower and forget about them. The entrepreneur is the person who gets out of the shower and acts on those ideas. However, you will increase your chances of success if you ask some tough questions before acting.
Examining your personal objectives
Begin with examining why you want to start a business. People come to business ownership for a variety of reasons. They want to "be their own boss\', "build a future", "follow the American dream", and \'earn lots of money".
Finding a business
Starting and growing a business involves a great deal of decision making. Now you are faced with three alternatives: start up a brand new business, buy an existing business or buy a franchise. Each has benefits and drawbacks. Some of the differences in these choices are requirement investment capital, chance of survival and expected profit. Examine the advantages and disadvantages of each option before taking the entrepreneurial leap.
Developing your own business
There are advantages to developing your own business. Generally, it costs less up front to start a business than to buy one and you can make use of your creative talents in developing something unique. You can address unexplored markets. You are free to choose your own location and develop your own management style and policies and you will not be buying the problems and flaws of an existing business. Most people who start their own businesses are good at what they do. They have used their talents and creativity to develop something unique. They manufacture provide or sell a good product or provide a good service. But a successful entrepreneur has to provide a good product or service and understand how a business works.
There are certain inherent risks in developing your own business. You have to start from scratch. You are responsible for choosing a legal structure, location and record keeping system. You must get licenses and permits. You develop your customer base, management and organizational systems and marketing plan, at times, this can seem overwhelming. The purpose of this chapter is to take the mystery out of business start up. You will see that a business starts and develops in a logical order. Understanding how a business works is one way to increase your chances for success.
Buying an existing business
There are some advantages to buying an existing business. It may be the only way to get a good location in the area where you want to do business. You can save some of the time, work and money that go into the start up phase of business development. Often, you are able to make use of the seller\'s invested capital. Many sellers will finance a large part of the sale for a lower interest rate than a lending institution would offer. An existing business already has an organizational plan and operating system in place. The customer base is already established. Often, the seller will consult with the buyer on the management of the company.
There are a number of ways to find businesses for sale. Trade associations and neighborhood business groups are usually the first to know a business that is for sale and about the business performance and reputation. Business brokers are a good professional resource for information on available properties, locations, markets and financing. They can represent sellers or buyers and are paid a percentage of the sale price. The "Business Opportunity" advertising section of a newspaper will have local listings. Bankers, the chamber of commerce and other professional people within the community often know people who are selling or about to sell a business. When you find a business you are interested in, determine why it is for sale. There may be serious business problems such as new competition, relocation of the primary customer base, obsolescence of a product line or cash flow problems that have prompted the sale. Study the business and research its market carefully. Study the trends of the specific business. Learn about the competition, surrounding neighborhood, local business community and current customer base.
An experienced and independent accountant can help you analyze the seller\'s financial statements and tax records in order to determine profitability and purchase price. Do not take the word of the seller\'s accountant. Evaluate the seller\'s projections for future growth and performance. In an eagerness to sell, the owner might make claims that are over inflated. If you have difficulty getting the financial information you need, it might be wise to move on to another opportunity. When you buy a business, you purchase a number of tangible and intangible assets. You want to know what you will be purchasing and its current value before you set a price and close a sale. You want to know if any of the company\'s assets have been pledged as collateral for outstanding debt. It is wise to hire an appraiser to determine the value of the assets being purchased.
These items may include the following:
Accounts payable and other liabilities
Accounts receivable
Building
Business name
Business clientele and customer list
Consulting agreement with seller
Covenant not to compete
Credit relationships
Equipment
Furniture and fixtures
Inventory
Lease agreements
Liabilities and liens
Personnel
Trademark, copyright, patent
Unpaid taxes
Buying a franchise
Many small business owners have minimized their risks by investing in a franchise. Franchising is a plan of distribution where an individuality owned business is operated as a part of a large chain. The products and services offered are standardized. The company gives the individual dealer the right to market the franchisor\'s product or service and use the franchisor\'s trade name, trademarks, reputation and way of doing business. The franchise agreement usually gives the franchisee the exclusive right to sell in a specified area.
In return, the franchise agrees to pay to the franchisor a fee and a percentage of gross sales.
You may wish to explore the advantages of this means of business ownership. You will be able to start your business under a name and trademark that is already accepted by the public. You may be able to receive training and management assistance from people who are experienced in your type of business. You may also be able to obtain financial assistance from the franchisor. Often, equipment and supplies must be purchased from the franchisor. You could receive savings through the franchisor\'s quantity purchasing of products, equipment, supplies and advertising materials. Some franchisors will guide you in day-to-day operations until you are proficient. Often, the franchisor provides management consulting on a continuing basis. The usually includes help with recordkeeping. National and regional promotions by the franchisor will help your business. The immediate identification may franchise operations enjoy can bring resold customers to your door.
You should also look at some of the disadvantages. Because of the required standardized operations, you cannot make all of the rules. You often lose the freedom to be your own boss and to make most of the decisions. The franchisor usually charges a royalty on a percentage of gross sales and that royalty fee must ultimately come out of your profits. On the other hand, the franchisor does not usually share your losses. You may be restricted in establishing selling prices, introducing new products or services and dropping unprofitable ones, thus limiting your ability to be competitive. Franchisors require specific reports and you may consider the time and effort spent in preparing them to be burdensome.
Making the decision to franchise is not matter to take lightly.
Before entering into a franchise contract do the following:
Examine your interests and abilities.
Consult a directory of franchise opportunities.
Narrow your options.
Talk to franchisees.
Contact the Federal Trade Commission.
Consult a lawyer and an accountant before signing a franchise contract.
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