June 17, 2013
Answer: Although it’s true that many new small businesses go under within their first year or two, there are usually reasons that can explain their failure. If you’re aware of the pitfalls associated with the start-up of a new enterprise, you can take steps now to maximize the chances that your business will succeed.
Don’t start a business you know nothing about. If you’re a pastry chef, don’t open an auto-body shop. Your experience, skill, and knowledge of the business you wish to run are key to its success.
You’ll want to conduct extensive market research to determine if the product or service you will offer is currently in demand. Define who you’re marketing to and target your message to them. Also, consider the most favorable time to market your product or service (e.g., toys at Christmas). Of course, another key to your success is location, location, location. Finally, plan your advertising campaign and consider how you will distribute your product or service.
Pay attention to your competition. Be sure your product or service offers your customers something your competitors do not.
Set up a written business plan detailing the design of your business growth. Organize a start-up team of people who have abilities you lack. Determine how you will obtain the capital to finance your project, and be sure you have adequate capital. More importantly, make sure you have enough to live on. Many new businesses do not generate income immediately. Finally, include in your business plan an exit strategy for closing the business should things not work out as you had hoped.
Answer: To run your business successfully, you may need advice in a number of diverse areas such as fin`ancial planning, accounting, law, taxation, insurance, and investment management. For this you may have to hire one or more advisors. Before you hire an advisor, however, it is important to understand your needs, because a well-chosen advisor can point your business in the right direction and help you achieve your goals.
When looking for a particular advisor, start with a referral from someone you have worked with previously, or with word of mouth from colleagues you respect. If that doesn’t work, call a local referral agency or local professional association. Other options include the yellow pages and advertisements in the local media.
Before your initial meeting with the advisor, prepare a list of questions and topics you wish to discuss. Topics you may choose to cover include the advisor’s experience, education, credentials, licenses, area of specialization, and references. After your initial meeting with the advisor, evaluate the meeting. Ask yourself the following questions:
If you’re satisfied with the answers, you may have identified someone to help you with your business.
Answer: Though far from simple, franchising can be a good way for you to own a business with both a proven method of operation and a familiar name and trademark. Before choosing a franchise, consider your interests, experience, knowledge, and personality. Though your franchisor will likely offer managerial support and training, you will be more successful if you have an interest in or experience with the business in which your chosen franchise operates. For example, a former restaurant manager might be more successful in acquiring a fast-food restaurant than a muffler shop.
Don’t forget the fees and restrictions that come with franchise ownership. Do you mind paying royalties or relinquishing some control to the franchisor? For example, the franchisor typically can dictate things such as the style of uniforms, the way the product is presented, and even where you buy your supplies. If such franchisor control will bother you, franchising may not be for you.
When you have chosen one or more franchises in which you are particularly interested, you’ll need to examine each very closely. Your examination should include a careful review of the franchisor’s Uniform Franchise Offering Circular (UFOC), a document containing information submitted to the FTC that the franchisor is required by law to provide you with before you sign a contract. In addition, you should investigate the franchisor’s credibility by contacting other franchisees and consumer agencies like the Better Business Bureau. It may be wise to contact some franchisees who have failed, so you can get a balanced view of the risks.
Last but not least, you should seek the advice of professionals who are familiar with franchising, such as a lawyer and an accountant. They can help you understand the franchise agreement, which is usually long and complicated, before you commit to it.
Answer: That will depend on the specific type of business you want to own and the area in which you choose to operate. An existing business may offer a familiar product or service with an established base of customers, suppliers, and employees. For some people, the simplicity of starting out in an established business outweighs the disadvantages, including a higher purchase price.
However, an existing business may not be for sale in the industry, field, or region you have chosen. Some businesses that are for sale may not be good buys. For example, the equipment may be outdated, or the business may not be highly regarded in the community. The business may already have a reputation and course of dealings that could be very difficult to change, and you may be buying the seller’s headache. In other words, the reason the business is for sale may be a good reason for you not to buy it.
If you have a brand-new idea, there may be no other businesses engaging in the product or service you plan to provide. The absence of an existing business may force you to start your own from scratch. Even if a business is for sale in your chosen field or region, you may still choose to start your own for any number of reasons, including the purchase cost and your access to suitable financing.
Before deciding to buy an existing business or to start one on your own, engage in some research. Study the industry, the competition, and your target market. Consider the type of business you want, where you would like to operate, and your access to financing. Your research may indicate whether it is less costly to start your own business or to buy a going concern. As you evaluate your options, remain open to all of the possibilities.
Answer: This decision depends on several factors, such as the cost of the asset, your cash and/or credit position, and the asset’s value to you now and in the future.
In the short term, leasing an asset allows you to try out a product without making a lengthy commitment. If you find the item does not meet your needs, you are not stuck with it as you might be if you had bought it and had difficulty reselling it. For items that quickly become technologically obsolete (e.g., computers and communications equipment), successive leasing allows you the flexibility of upgrading. In most cases, a lessor (particularly of office equipment) will also provide maintenance support on the items you lease.
Buying an asset provides you with equity. But it may also require a substantial cash outlay for an outright purchase or a down payment. Certainly, obtaining credit for a large purchase (e.g., an office building) may be difficult, and credit for leases is easier to obtain.
In contrast, you will likely spend more dollars by leasing over the life of the asset than you would with a purchase, even if you consider the interest payments on a loan. This is particularly true with real estate. The interest you pay on loans to acquire real property may be tax deductible as a business expense, as may maintenance costs and depreciation on the asset. Also, even though most lease payments are fully deductible as business expenses for tax purposes, your purchase of the asset may provide greater tax relief in the long term.
As a general rule of thumb, buy the asset if it will increase in value over time and you plan to keep it more than five years. If the asset will decrease in value, lease it.
Answer: Generally, businesses experience four stages: start-up, growth, maturity, and decline.
Start-ups are businesses that have recently come into existence. Before revenues are generated, businesses in the start-up stage generally require a large investment of time, effort, energy, and money to create a stable customer base, buy inventory, and engage in other business activities. The start-up stage is generally characterized by innovation, high risk, and low profit margins.
Businesses in the growth phase can often function using their own limited resources. Ideally, during this stage, consumer demand is established and increases. Additional help is often needed in production, manufacturing, general operations, or sales in order to continue growing. The company typically experiences increasing sales and profit margins as a market is established.
Mature firms have achieved a certain amount of name recognition. Contacts are well established, sales require less effort, the business produces a reliable stream of cash, and borrowing becomes easier. At this point, intensive marketing may be needed to increase or maintain market position, and little product innovation occurs. Profit margins tend to stabilize.
Businesses in the declining phase tend to experience a shrinking market. There is usually no product innovation, costs are cut to preserve profits, and the profits that remain are usually thin.
The time it takes to reach or to pass through each stage varies by business. It is important that you properly identify the life-cycle stage of your business so that you can plan appropriately and establish realistic goals for the future.
Answer: The type of business you choose to operate will affect the specific factors you must consider when looking for a location. Some businesses need high visibility and high foot traffic, while others may not even need a sign. If you are operating a retail outlet, visibility, pedestrian traffic, and available parking may be crucial to your success. However, if your business is highly specialized (e.g., violin restoration), customers may go out of their way to find you after they learn of the service that you can offer to them.
Some of the considerations when choosing a location include:
If you are planning to run your business from your home, remember to check local zoning requirements. Some communities do not allow businesses of any type (not even private piano lessons) to operate in residential areas.