Invest In My Idea

With so many free or low-cost resources available there is often no need for costly professional services. You don’t need a lawyer to file the necessary government forms on your behalf. Similarly, with today’s range of excellent user-friendly bookkeeping and accounting software, it is not always necessary to have an accountant to set up your bookkeeping system.

 There are, however, circumstances in which it is prudent to seek the advice of a lawyer or accountant. If, for example, there is more than one person involved in the business, or if the business faces some complex legal issues, it would be a good idea to get some legal advice. Chapter 5 offers suggestions to help you choose a lawyer who is right for you. If there are some serious financial or tax consequences for your planned business, qualified accounting advice might be helpful. Chapter 9 offers help to choose an accountant.
 Your Biggest Risk

 The major downside of starting your own business from scratch is that this is the most risky approach. Approximately 80 per cent of business startups never make it past the second year of operation. This high failure rate means that banks and lenders are often reluctant to lend money to new businesses. In many cases business owners lack experience in running businesses and are driven by their own dreams of where they want to go. Without good collateral to secure their loans, most lenders will not lend money based on the owners’ hopes and dreams.

 Ready for a Daunting Challenge?

 I have always enjoyed watching jugglers demonstrate their art. It’s truly amazing how they can keep so many items going simultaneously. Perhaps my fascination stems from the fact that running a small business also requires a great deal of skill at juggling.

  Like jugglers who entertain us, owners of small businesses must keep several things going simultaneously. This is especially true when they are in the startup phase of their business operation. Like the entertainers, owners usually do their juggling alone. Certainly both entertainers and owners receive help from time to time. However, the significant portion of the work, whether juggling or running a business, is done alone.

 In both cases, this can be a daunting challenge. Especially for people who prefer to keep things simple and would rather do one thing well than handle many things competently.

 Building Block

Choosing the most appropriate thing for you to sell and providing the product to the right customers can reduce the risk. These are basic elements of a good business plan. The importance of a carefully researched and well-prepared busi-ness plan cannot be emphasized enough. Certainly, many businesses that failed had good business plans to guide them. Just as certainly, few businesses that succeeded did it without proper planning.

  Hot Tip

 Like experienced jugglers, small business owners can handle the challenge by concentrating their attention on high-priority items. For the juggler, the top priority is the item in hand. It must be removed to make room for the next highest pri-ority, the incoming item. The same approach can also work for small business owners. I like to get things off my desk and onto someone else’s as soon as possible. This gives me a sense of completion and allows me to move on to the next priority—incoming tasks.

  What About the Uncertainties?

The uncertainty is real; it cannot be denied. Proper planning and perhaps other stress-reducing techniques can often reduce it, but it can never be totally ignored. As when handling all other business liabilities, effective management can minimize potential problems. Thorough planning and comprehensive preparation are excellent stress-management techniques.

 Hey, I Want That One...Buying an Active Business

 Buying a business is like purchasing an existing house. All of the major decisions have been made. In the case of a house, you can move right in and start living there, just as the previous owners did. You might want to make some changes before moving in or you might decide to wait a while and see what it’s like living there. When buying a business, you can simply take over from the sellers and continue to do what they did; you can make some changes before you take over; or you can continue the existing operations until you decide what you would like to change and when you would like to make those changes.

 For detailed information about buying an active business see The Complete Idiot’s Guide to Buying and Selling a Business for Canadians.

 What’s Good About Buying a Business?

Buying an existing business can overcome the disadvantages inherent in starting a business from scratch. With an existing track record of profitability, lenders are more likely to give favourable consideration to financing the purchase or operations of an existing business. Assuming that the new owners will continue to operate the business in the same manner as the previous owners, it is reasonable to expect a continuation of past profitability.

 Having a history can also help alleviate uncertainty. Take, for example, the common experience of a slowdown in business activity. Without having experienced the ups and downs of business cycles, it is easy to slide into worrying about whether or not things will pick up again. It is very reassuring to be able look back at what has happened in the past and know that slow times have frequently been followed by periods of higher activity. The uncertainty— “What’s going on?”—is replaced by reassurance— “It’s part of a cycle.... Business is like that.” 

 Building Block

In most cases, it is easier to continue to manage an existing business than to create and develop a new one.

With a history of what works and what doesn’t work, it will be easier to select appropriate strategies. Instead of creating new ways of doing things, the focus will be on improving and fine-tuning existing systems, procedures, and practices.

 What’s Bad About Buying a Business?

cases there is nothing to sell. Instead of building equity, owners often take money from the business as quickly as it comes in. Apart from tangible assets, some businesses have few income-producing assets that can be transferred to purchasers.

Most small businesses reflect the personalities of their owners. In practice, this means that customers often buy from the business because they enjoy a good relationship with the owner. Once the owner leaves the business, they may change to a new business that is perhaps closer or run by someone else they know. Few businesses can honestly claim that all or even most of their customers are so loyal that they will continue to deal with the business after it has been sold.

 If finding a suitable business to buy is a challenge, completing the transaction is also a very formidable and complex task. It takes a very high level of technical skill to effectively evaluate a small business. Trained appraisers will look at everything from accounting records to employees’ histories to physical premises. Before closing a deal, accountants will examine financial statements to ensure their accuracy and reliability; lawyers will scrutinize the title to every asset being transferred. And there will be reams of paper produced, reviewed, approved, and, in many cases, signed. This work is not free nor is it low cost. It is work performed by qualified professionals and as such it can be very, very expensive.

 The reason for the close examination of a business to be purchased is to avoid as many skeletons in the closet as possible. The accountants will look for potential financial problems while the lawyers will look for possible legal difficulties. Some, but not all, of these skeletons can be removed before completing the transaction. Legal liabilities to employees, suppliers, and customers can usually be identified and either resolved or arrangements made to cover potential liability. But what about the lingering resentment of a disgruntled employee who might want to sabotage the computer system? Or the unhappy customer who is telling friends and acquaintances about the bad service he or she received? A proud banner proclaiming “Under

Apart from the seller promising that there have been no material misrepresentations (lawyer-speak for “lies”), you get no guarantees along with the purchase. There is nothing to ensure that customers will continue to buy from the business after the sale.

 There is also no guarantee that the market for the goods or services of a business will continue to be strong after the sale of a business. Had you purchased a tobacco farm when the general public was becoming increasingly concerned about the health risks of smoking, you wouldn’t have been able to get your money back when you couldn’t sell your products.

 And don’t forget possible future tax implications that might arise on the purchase of a business. When all is said and done, buying an existing business is a very complex, time-consuming, and expensive undertaking.

 What About Buying a Franchise?

 Franchising is one of the most popular approaches to getting into business. Approximately 1100 Canadian franchise organizations operate almost 75 000 outlets, with a new franchise opening every one hour and forty-five minutes.

 Buying a franchise is roughly comparable to buying a condominium. Condo owners have legal title to their property, but the use and enjoyment of their property is subject to many rules and restrictions. These rules regulate the use of common facilities such as parking and recreational facilities.

 Franchisees likewise have legal ownership of their businesses, but the operation of these businesses is subject to rules and restrictions contained in the franchise agreement. Agreements regulate everything from location and physical setup to approved suppliers and marketing.

 Essentially a franchised business operates following standard practices and procedures that have been developed by the franchisor. The franchisor owns these practices and procedures and grants a licence to the franchisees to use them. Franchises cover business operations such as food service (Tim Hortons and Subway, for example), retail sales (Radio Shack, Shoppers Drug Mart), and maintenance and cleaning services (Student Works Painting and Molly Maid).

 The Good News About Franchises 

When you buy a franchise, you purchase more than just the use of the name. You buy a way of doing business that has proven to be successful. And with this way of doing business, you also acquire the experience of knowing what works, what doesn’t work, and how to fix things that do not work well. As a result, many startup problems can be avoided and operational difficulties can be resolved quickly and efficiently, minimizing potential damage. In this regard, buying a franchise is like purchasing an existing business: There are established practices in place that help ensure the smooth operation of the business on an ongoing basis.

With many franchisees purchasing the same goods from the same suppliers, franchise operations have tremendous purchasing power. As a result, their buyers can often negotiate lower prices on bulk purchases than can nonfranchised operations. In practice, the buying power is comparable to a large retail chain, but exercised by a collection of small businesses. When passed on to individual franchisees, these savings can significantly reduce the cost of goods sold, increasing the profitability of the franchise. This increased profitability contributes to the decreased risk as outlined above.

 One of the greatest advantages of franchising is the marketing support of the franchisor. Fanchisors derive their income from the sale of franchises, from supplying their franchisees, and by way of royalties on franchisees’ sales. Thus, the more successful their franchisees are, the more successful they will be. National marketing programs help ensure the ongoing profitability of individual franchisees. Once again, this increased profitability resulting from national marketing programs helps reduce the risk for franchised businesses. Independent businesses simply do not have the resources to undertake marketing programs and activities comparable to those of their franchised competitors.

Practice, this gives the franchisee very little control over how things are done. For control freaks and creative entrepreneurs, it can be very difficult to follow standard and often inflexible practices and procedures. These types of owners would likely be better suited to starting their own businesses from scratch.

 In order to sell franchises, franchisors make many promises to potential and existing franchisees. Unfortunately, not all of these promises are kept. Some broken promises arise from cash flow problems such as higher-than-expected costs, lower-than-projected revenue, or franchisees going out of business. Other promises might have been made simply to encourage potential franchisees to sign on the dotted line. Regardless of motivation, the outcome is the same: Promises are broken and, as a result, franchisees experience losses of some kind. Not all of these losses can be recovered from the franchisor.

 Buying and operating a franchise can be a very costly undertaking. In many cases, accountants and lawyers are involved in evaluating a potential franchise, preparing the application, negotiating the agreement, and helping arrange the financing. As mentioned earlier, these professional fees can be very costly.

 Franchise fees can also be very high. It is not uncommon for these fees to be in the hundreds of thousands, perhaps even millions of dollars. And these are fees that must be paid or financed before even one dollar of revenue is generated! Once the business is up and running, ongoing royalty fees will have to be paid to the franchisor. Running a franchised business demonstrates the principle that it takes money to make money.

 The Least You Need to Know

•  Starting from scratch gives you total control to build your business however you choose.
•  Starting from scratch can be very risky and a major challenge. Buying a business allows you to continue an existing business.
• There are no guarantees that an existing business will continue to thrive after you have purchased it.
•  When you buy a franchise you are buying an established way of running a business. Buying and operating a franchise can be very costly.