Your Own Business Start, Grow, Go Forth and Prosper

You’re thinking about going into business for yourself. Makes sense…. You have a great idea You will surely make a lot of money

But, here is the reality … 50% of small businesses fail in the first 5 years Most are started by equally enthusiastic entrepreneurs What will make you different?

Let’s start at the beginning. Why do businesses fail? Insufficient capital (money) Poor inventory management Over-investment in fixed assets Poor credit arrangements Personal use of business funds Unexpected growth Low Sales Lack of experience Competition Poor location SBA – Michael Amers, The Do It Yourself Business Book - Gustav Berle

So why would you try? You will be your own boss If you work hard the fruits of your labor will be yours – not someone else’s Earnings potential is much greater than if you work for someone else A new venture is exciting (some of this excitement comes from the risk) Running a business provides endless challenges and opportunities for learning SBA

Get Ready!

Let’s increase your odds of being successful A short but critical list to tilt the scale in your favor… You will need… Thorough preparation and planning Business insight A willingness to work hard A bit of luck

Should I buy an existing business, get a franchise license or start my own?

Let’s compare buying an existing business with starting your own Advantages of buying your own business –Reduced start-up cost –Potential for cash flow to start immediately –Preexisting business performance and assets offer opportunities to get financing Disadvantages –Initial purchase price (typically higher than start-up cost) –“Hidden” issues not uncovered in due diligence –Inability to implement your great ideas

How do I buy a business? There are many sources for finding profitable businesses for sale but take care Sources include: Chamber of Commerce Internet Trade associations Business Brokers Accountants Friends and family

You have a prospect. What’s next? Thorough due diligence – look into every aspect of the business Get professional help – lawyer, accountant, industry expert Components of the due diligence process: –Letter of intent – non-binding offer to purchase in order to get sensitive information –Confidentiality agreement –Review Contracts and leases Financial statements Tax returns Other documents such as: –Customer list –Inventory –Employee benefits, agreements Business environment issues such as: –Licenses and permits –Environmental –Zoning

How much should I pay? Fair Market Value – “The price at which the business would change hands between a willing buyer and a willing seller both having reasonable knowledge of relevant facts.” IRS Rev. Ruling 50-60

Valuation methods Multiples of revenue and earnings –EBITDA –EBIT –Revenue Capitalized Earning – The return on investment expected by an investor Cash Flow – Adjusted cash flow vs cash needed to support the loan payments Tangible Assets (Balance Sheet) – Values the tangible assets of the business Intangible Assets – The value of the intangible assets wanted by the buyer – goodwill of the business

You have decided on the business and the price… The next step is a sales agreement. Defines everything you plan to purchase – assets, customer list, intellectual property, goodwill, etc. You should also include related agreements – non-competes, employment agreements, agreement from suppliers and customers to transfer agreements, etc.

Let’s not overlook the option for purchasing a franchise A franchise is a legal and commercial relationship between the owner of a trademark, trade name or advertising symbol and an individual or group wishing to use that identification in business. Two main types: Product or trade name franchising Business format franchising SBA

Pluses and minuses of a franchise Advantages –Name is known –Start-up and ongoing support –Business model has a history Disadvantages –The business is not ‘completely’ yours –Growth can be capped geographically

How do I buy a franchise? As with buying an independent business, there are many sources for finding good franchise opportunities but take care Sources include: Franchise exposition Internet Accountants Friends and family

Comparing franchise opportunities How long has the franchiser been in business? How many franchises currently exist? Where are they located? How much is the initial franchise fee and what are the additional start-up costs? Are there continuing royalty payments? How much? What management, technical and ongoing assistance does the franchiser offer? What controls does the franchiser impose? What are the income and expense projections for the business? Comparison of Franchise Offering Circular

Get set!

If you buy a business or start your own you have to start fitting the pieces together You must develop (and put in writing) a strategic plan Funding needs to be finalized –Start-up costs Identify all the expenses your business will incur during the start-up phase (through the period that the business requires cash infusion) –Explore options for fund’s sourcing Determine a name Choose a legal structure Assure your ideas are protected Should find a mentor – don’t do it alone

The first step – A Strategic Plan Matching the strengths of you and your business with an available opportunity Process: Collect, screen and analyze information about the business environment Develop a clear understanding of your business model– strengths and weaknesses Formulate a clear mission, goals and objectives which include identification of the: –Niches in which you are most likely to succeed –Resource demands necessary to make your business a success

Content for your strategic plan Executive summary Market analysis Company description - including legal structure Organization structure and key management qualifications Marketing and sales strategy Service and/or product line and the key benefits Funding needs for the first 5 years and sourcing if some/all has been determined Financials – historical and prospective - Profit and Loss Statement, Balance Sheet and Cash Flow Statement

Executive Summary Concise overview of the entire plan (along with history of the company if applicable) Tells where your company is and where you are going

Go!

You have your new business. What’s next? Existing business –Transition Agreements Customer and supplier notification Employees –Begin the implementation of your strategic plan New business – Continuation of your strategic plan

Now what? Remember - Obtaining your goal will take team work, problem solving and critical thinking. Don’t go at it alone. There are people, organizations and information available to help.

Most importantly…. Have fun! You are going to spend a significant amount of your time working on your business… Learn, grow, enjoy…. It’s all part of the journey.