Before launching into business, it helps to honestly evaluate yourself and decide if this is a good idea. Even if you are buying a ready-made business, a franchise or you are looking to launch into a start-up business, conducting an analysis can help you anticipate any challenges that may present themselves along the way. You want to give yourself the best chance of succeeding.
1. Before You Start?
Starting a new business can be hectic – so much to do, so little time to do it and so few people to help. Some people put in 18 – 20 hours a day…. trying to start up a business. At that pace you will not be able to think clearly about what you are doing, why you are doing it and can begin to make bad decisions. Your Business Plan is the key to getting it right.
However, there are some decisions you must make before you start on your plan.
Ask yourself……… What’s in it for me?
If you have a secure job, owning your own Business means you give up the following:
- A regular pay-check each week, fortnight or month
- Paid public holidays and annual leave
- Paid personal leave or sick leave
- All care and no responsibility
- No investment of your own personal money
- The ability to go home at night and not worry or stress over a business
Surely you want something from owning your own business. After all, giving up a secure job and going into the unknown must give you a return your investment – not just in terms of a financial investment, it needs to have a payback in terms of personal satisfaction. You need to know the advantages and disadvantages of owning your own business.
2. Consider why some businesses fail?
The reason so many businesses fail is due to managerial incompetence and inexperience resulting in financial problems. Simply put – many start-ups run out of cash.
Lack of Working Capital
Many small businesses fail due to the fact they are severely under-capitalized. It’s one thing to have the capital to start a new business, but you also need to make sure you have allowed additional working capital to keep paying the bills until the business has a positive cash flow.
It usually takes a reasonable amount of capital to start up a business. A fair percentage of this capital has to go towards purchasing fixed assets such as a vehicle, office equipment, display fixtures, software, website and numerous other assets. Besides allowing enough capital to purchase the equipment you need and pay for other set up costs, many people forget to set aside working capital. This is the extra money you need to keep you going until the cash starts to flow into the business.
New business owners often underestimate how long it takes for customers to pay their bills if they offer credit. Cash flow is very important. Lack of it is a very quick way to go broke.
Lack of Management Skills
Knowing how to do something ‘technically’ doesn’t necessarily mean you know how to run a successful business. If you don’t have competent management or business skills, it can lead to financial problems. This in turn can cause your business to run out of cash.
When you love what you do and what you are good at, starting a business is fun. Look at all the wonderful things you can do with your talents. Many people who are new to running their own business get carried away with doing what they love – they forget to develop and manage the business. Very soon they find themselves in “financial trouble.” You must set up good working systems that manage and control the day-to-day operations of the business.
Lack of Enough Sales Volume
In spite of having all the right systems and pricing structures in place, if you don’t have enough sales volume, your business won’t survive. Besides being profitable, you must achieve substantial sales to act as a buffer if you do go through a slow period.
Low Profit Margins
Having enough sales volume alone will not keep a business afloat. It needs to be sales that are profitable. All the sales in the world will mean nothing if your goods and services are not priced to make a profit.
3. Get it right at the start
If statistically over 50% of businesses fail within the first year and another 50% fail within three years, doesn’t it make sense to get it right at the start?
There are some key decisions you need to make right at the start.
Is your business idea a good one?
Many people start a business because they feel very passionate about something. Who really knows if a business idea is a good one? No one thought that a personal computer would take off and today we have desktops, laptops, tablets and smart phones and cloud computing.
Conducting a feasibility study and preparing a business plan is a good place to start. While this won’t guarantee your business idea will succeed, it will help you determine if you are prepared to take the risk or not.
Conduct a survey
Collecting information about the market will give you insight into the consumers mind. It helps you understand what they want. This information you collect will give you a strong foundation from which to make business decisions.
Analyze your competitors
Analyzing your competitors will give you an indication if there is a market for your goods and services. It will also help you identify if others have tried your business idea and if they were successful or failed. You will also learn if the industry is strong and in a period of growth or it might be stagnating or even declining.
Assess the risk
This will help you identify any potential risks and opportunities which could have a negative or positive affect on your business idea.
Collect and analyze the data
Check what regulations and permits apply
It’s important to identify what regulations and permits apply to your business idea. Researching this in advance will help identify other potential risks.
Consider your business management skills
To run a business, you will need to have a range of business management skills or at the very least an understanding of what it takes to own, operate and manage a successful business, including:
- Sales and marketing
- Financial management
- Personnel management
- Information technology
Consider how confident you are in each of these management areas. You do not necessarily have to manage each area by yourself, you can hire expertise or take on a business partner. You may even take on some management courses or invest in some extra training.
4. Consider if you will go it alone or with partners
If you are thinking of going into business with other people, you must first consider what each will be contributing to the business that would entitle them to become a shareholder.
What will they contribute?
Firstly, ask yourself will they be contributing cash, expertise or other assets. Secondly ask yourself, do they have the same values as you. Never underestimate the power of shared values. Thirdly, do they have the same objectives as you, and lastly as a business partnership, will you each balance the skills necessary to operate the business successfully.
Who will be the boss?
Consider how you will structure the business. Identify early on what the decision-making lines of authority are. Establish a decision making procedure from the outset so you do not become deadlocked when needing to make a decision along the way.
Consider your ability to finance the business
Consider carefully what capital you have to invest in the business that is for the long term and that you can control. For instance, if you raise capital from friends and family, they may need you to pay it back quicker or decide on a moment’s notice they want their cash back.
Consider the various business structures
How will you structure the business? As a sole trader, partnership, company or trust? This is a major decision for the structure of the business could affect your personally. Do some research into how to structure the business and if the structure will separate your personal liability from your business liabilities.
Above all, seek professional advice from your accountant, attorney or business consultant about the pros and cons of each type of business structure. You want to ensure you have all the facts before risking your personal assets. This can vary from country to country and state to state.
5. Should you buy an existing business or start your own?
Another decision you are faced with before you start out is to decide whether to “start your own business from scratch or buy an existing business” You need to consider the advantages and disadvantages of each option before making a decision:
Buying a business
When you buy a business, you have bought someone else’s dream. You are buying what they started, their location, equipment, inventory, customers, staff and goodwill if any. It can be easier for you buying an established business, but it can also be fraught with risk if you don’t do your due diligence first.
The initial advantage of buying a business is that you receive the immediate income from sales. It also saves you setting up the business, buying the equipment and stock. The risk of failure is less than starting your own business but unless you do your due diligence, you don’t necessarily know what you are buying.
Before buying an existing business, consider the following.
- Do you know the business’s current value?
- Do you know the business’s future prospects?
- Have you analyzed the financial reports?
- Do you know which taxes apply to that business?
- Have you considered associated intellectual property issues if any?
- Are you aware of your legal obligations?
- Are you aware of your obligations to existing employees if any?
- If a lease is involved can this be transferred into your name?
- How long is the lease for?
Having a good understanding of the history of the business and current trends and economic conditions will give you some indication of the current value and future prospects of the business.
Analyzing the financial records is critical to the decision making process. This will help you determine the ongoing viability of the business. Be sure to look at sales, cost of sales, expenses, overheads, liabilities, product liabilities and warranty obligations. Also look at trends both in terms of sales, customer retention, employee retention along with industry trends.
Beware of a business owner selling the business who states – “I don’t put everything through the books because I take cash out of the business.” Ask yourself what might they be hiding. Your bank or financier will certainly not care – they will only look at the financial records as they are presented. They will not take into consideration any cash arrangements – they will only be interested in declared income and expenses.
An Existing Business is for sale for a reason. Make sure you know what that reason is!
6. Buying a Franchise
Buying a franchise means that you have bought the right to a business system, run that business and sell a prescribed product or service. While a franchise teaches proven systems and processes, not all franchises are viable and buying a franchise does not automatically guarantee success.
Before investing into a franchise consider the following.
- How long have they been operating and are they successful?
- Is the brand highly recognized?
- Are they reputable and financially strong?
- What are the terms and conditions of a franchise arrangement?
- How robust is their training and development?
- You can get into business with limited experience
- You take advantage of the franchisors experience
- The franchisor may offer some financial assistance
- A bank or investor may be more likely to lend money if the franchise is a well-known and successful one
- A known name can bring you instant customers and brand loyalty
- The layout and design on your premises is proven
- You receive proven training and support
- You have to submit to the franchisors standard operating procedures and product mix
- You have to share a percentage of the profits with your franchisor
- You may have to buy equipment and products through the franchisor which you may be able to source at a cheaper rate
- Lack of freedom to meet local competition head on
- The contract may favor the franchisor over the franchisee
- If the franchisor makes mistakes you may have to bear the burden
7. Consider why you want to own a business?
There must be an advantage to owning your own business if you are going to leave a secure job and invest your own money and time. It’s a risk no matter how you look at it. Surely the smart thing to do is to ask yourself “why do I want to own my own business?”
You are the boss!
You get the power to control all the business activities around you. You have the ultimate authority to make all the decisions associated with the business.
You get to keep the profits!
If your business becomes successful, you make money. The more you develop and grow your business, the more money you can potentially make unlike a salary, which is generally fixed. The more profitable your business – the more money you make which depends on how well you perform.
You can’t be fired!
You are the boss so no one can fire you or force you to retire.
You have freedom!
Freedom to work the hours you want, freedom to be as innovative and creative as you want, freedom to locate the business where you want and freedom to sell what you want.
You have job satisfaction!
Because the business is all yours – you are more likely to enjoy what you are doing, enjoy long hours if you choose to, enjoy working as hard (or as little) as you like. You feel a sense of achievement because you are doing it for you and no-body else.
You work with who YOU want to!
You don’t have to work with people you may not like. However, there are also disadvantages to owning your own business.
8. What are the disadvantages?
It requires a reasonable amount of capital to start up a business. If it fails – you could lose your investment and depending on the structure of your business – you could lose everything you own.
Depending on how well the business goes, you can’t always guarantee yourself a regular income – especially in the start-up phase while you wait for the business to cash flow positively. If you go through quiet periods where business is slow, and periods where business is great – you could experience fluctuations in your income accordingly.
Like most things in life – you get out what you put in. If you want your business to succeed, especially in the first year – you need to put in long hours of work. This can be tough on your family or home life and indeed your health if you don’t look after yourself.
Owning a business is not without stress and worry. You might worry about meeting budgets, having enough cash flow, making sales, keeping staff and customers happy, meeting deadlines, having the right equipment.
You carry the burden
If you are a sole operator, you might not have anyone to discuss problems with, or bounce ideas off. You might not know if you are making the right decisions. As such you carry the burden alone.
If you are in business with your spouse or other family members, this may put a strain on your relationships.
Finally….Owning and operating a business can be very rewarding. Don’t underestimate doing your research and always remember, if you fail to plan, you may be planning to fail.
On a final note
When you do your research before starting a business you are far more likely to succeed
In a Nutshell
Before starting your own business consider the following:
- Ensure you have enough working capital to get you through the start-up phase
- Ensure you have the requisite management and leadership skills
- Ensure you pricing is competitive and profitable
- Drive your sales
- Conduct your research and analyze your skill-sets
- Consider the business structure (sole proprietor, partnership, LLC or trust) and seek professional advice
- Analyze if you should start a business from scratch, buy an existing business or buy a franchise
- Consider the advantages and disadvantages
- Plan to succeed