Three Options for Aspiring Entrepreneurs
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. Another option is to buy an existing business and take over its operation. What are the pros and cons there? Buying an existing operation is probably less risky because it presumably has a track record and is a known commodity. You already have a name and a market to step into. The issue here is, can you as the buyer continue in the same way as the previous owner? Business is very people-oriented, very service-oriented. Some people don't have the personality to deal with the public on a daily basis. Customers will be looking for bargains, returns, making complaints, and you have to have a smile on your face because they're your customers and they're right and you're wrong. If you work for a big corporation in a cubicle all day, are you going to be able to handle that? Aside from assessing your own fitness as a business owner, what about assessing the financial health of the company you're going to buy? There's a lot to it. A lot of drilling down through the profit-and-loss statement, looking at gross revenue, salary, and expenses. Are they buying supplies from a neighbor or cousin who won't give you the same rate? What kind of lease do they have, and is it transferable? Or will you be buying property along with the business? Are you obligated to pay out all the money they owe, or can you negotiate on existing obligations? You need to bring in someone very familiar with business transactions to help you evaluate the opportunity. You want to ask why the person is selling this business. There are good, legitimate reasons, but is the owner really planning to retire, or is he or she just trying to escape the crushing debt the business has accumulated? A business that is marginally profitable may not be able both to pay off the debt service on the loan and to pay you a living wage. Another popular option is purchasing a franchise. Is this, at least theoretically, the least risky choice? It is easier to get started because there's a known brand, for the most part. And when you buy a franchise, you also buy marketing support, business strategy, and assistance with site location. The franchisors have the process nailed down. But you're paying for all that, both up front and ongoing, so you need somebody familiar with this kind of transaction working for you. The franchisor has done this a thousand times and has its own attorneys; you're at a big disadvantage if you don't have an advocate. One advantage, especially right now, is that franchisors may be willing to finance new purchases. The question is, what will they charge you? What will they demand of you? If the franchisor's not willing to finance the transaction, where will you get the money? Another potential downside to franchising is that you'll never have the final say in all business decisions, because franchisors typically retain rights to ensure your business is run their way. Again, the research is all-important. Absolutely. Thoroughly investigate the franchisor, which is going to become your business partner. And talk to other franchisees—not only the successful ones but also the ones who have failed. If several former franchisees tell you the company didn't fulfill the promises of the franchise agreement, beware.