Smart Answers January 8, 2010, 12:07PM EST

Three Options for Aspiring Entrepreneurs

Starting a business is risky. Buying an existing one or a franchise is, too, but less so. CPA Michael Eisenberg discusses the pros and cons

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Thinking about starting your own business in 2010? There are several ways to get into business ownership, each with its own pros and cons, says Michael Eisenberg, a certified public accountant in Los Angeles who has worked with small business owners for more than 30 years. He spoke recently with Smart Answers columnist Karen E. Klein about various strategies for getting into business. Edited excerpts of their conversation follow.

When people consider entrepreneurship, they often think about starting a new business. What should startup business owners consider in their planning?

A whole series of questions need to be answered, preferably in a business plan. What's your market? What's your competition? Where's your location? What's your niche? How will you reach your customers? Where will you get the funds?

All these things need to be taken into account. There are legal issues to consider, and purchasing insurance. When you're building a business from the ground up, you're taking a bigger risk than if you were buying an existing business or a franchise with some operating history.

You mention a business plan. Why do you think it's important to write one?

Two reasons: It's your road map, a way of getting you to think through all these details in a systematic way and get documentation for your answers. And if you're trying to raise money from others, they're going to want to see your business plan as well as your projected profit-and-loss statement, cash-flow statement, and other financials.

So many people charge into business with a lot of enthusiasm but not much planning.

Here's an example. We had a client, a chef, who made the best peanut brittle. We loved it because every holiday we'd get a nice tin of it. She started a business selling the brittle and did well at first with local stores, because she had the supplies and the ingredients and knew her costs. Then somebody touted her product in one of the big department stores, and she started selling to the store. This was great, until she realized she was such a small fish in such a big pond that she was the last one to get paid. The mom and pop stores paid her quickly because they were small businesses and they understood cash flow. But these big customers would stall and stall and stall until her cash flow completely dried up, and it truly became a disaster.

Did she lose the business?

Yes. But she learned from that experience and later began her own chef business, catering food for individuals. She decided not to deal with big groups but with local people, and she has made it very successful.

So anticipating that kind of trouble—and having a plan for financing or outside capital before she expanded her sales volume—might have saved her?

It might have. The point is, it's important to do the research and talk to other business owners or friends and relatives who've started businesses. They know about the problems that can crop up.

You also need to involve your accountant, because he or she will come up with a lot of points you won't think of but are crucial to understand. This is the perfect time of year to explore your options, because in the next three months many people will be seeing their CPAs to get their tax returns done.

Would you recommend working with your tax preparer or finding an accountant who specializes in startups?

I think you start with the guy who does your taxes. That's the person who knows your financial situation—sometimes better than you do. He can put the details together and unemotionally assess your situation.