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Selecting a Business that Fits

Starting a business can be an exciting and rewarding experience.  However it must be pursued for the right reasons or it is destined to fail. 

It is important that you select a business that blends with your interests, skills and expectations.  The business must also fill a need.

 

Finding a Niche

The secret to starting a successful business is to “Find a Need and Fill it.”  There are many needs and many potential businesses available.  Before you invest a lot of time, energy and money in starting a new business venture, ask yourself several key questions.

  1. Is the business idea practical and will it fill a need?
  2. Can you make a profit?  That is to say, can you sell your product or service to enough people and at a price that gives you a margin of profit?
  3. Can you out perform your competition?

If you can answer yes to these questions and you are willing to provide incredible customer service, you are on your way to starting and operating a successful business. 

Learn more about finding a niche….. http://www.sba.gov/starting_business/startup/findniche.html

 

Why Some Small Businesses Fail

In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and insight.  You can also improve your chances of success by understanding and avoiding some of the pitfalls --- problem areas encountered by others. 

Inadequate Planning – There is no substitute for good planning and adequate due diligence.

Lack of Specific Experience – Just because a particular business seems like it might be fun to operate, does mean you have the necessary skills to be successful.  You should work in a business similar to what you plan to start, before actually starting the business.  On the job training will give you a good foundation. 

Insufficient Capital – Many businesses fail because preparations were not made to have available sufficient funds to operate the business over an extended period of time.

Poor Location – Never underestimate the advantages of a good business location and the disadvantages of a poor location.

Inadequate Market Understanding – It is really all about the customer.  It is important that you fully understand who your customers are and what they want in the way of products and services. 

Marginal Customer Service – Again, it’s all about the customer.  Poor customer service is a recipe for failure, while incredible customer service can be your ticket to success.

There are other business pitfalls to watch out for however, the ones just described are perhaps the most important.

SCORE Counselor – discusses avoiding business failure (15 – 30 seconds)  

 

Starting Fresh or Buying an Existing Business

Once you make the decision to become an entrepreneur, the next decision you have to make is if you want to start the business from scratch or buy an existing business.  There are advantages and disadvantages to both approaches. 

Starting a New Business from Scratch

Advantages

  • Everything is new.  There is a sense of birth or new-beginning in a business without a history or pre-disposed image. 
  • It is easier to be more creative with a business that is being built from the ground up.

 

Disadvantages

  • There is a greater risk in starting a brand new business.
  • It may be more difficult to raise money for a new business without any kind of a track record.

 

  • Like anything new, it takes time to work-out the bugs.

Buying an Existing Business

Advantages

  • It is easier to buy a turn-key business then it is to start something new.
  • Cash-flow may be available immediately because of existing inventory and it may be easier to raise new capital for a business with a proven track record.
  • Pre-existing customer goodwill may benefit the business.
  • The seller may be willing to finance the sale of the business. 

Disadvantages

  • Many businesses are offered for sale because they are not profitable or pending changes could significantly stifle growth or reduce sales.
  • The business may have a bad reputation that is hard to overcome.
  • You may have to settle for things about the business, such as the location, that you do not like

 

Franchising May be an Option

An important step in the small business start-up process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision. Because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

What is Franchising
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards.

Franchising is based on mutual trust between the franchisor and franchisee. The franchisor provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisees bring to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:

  • Product/trade name franchising; and
  • Business format franchising.

In the simplest form, a franchisor owns the right to the name or trademark and sells that right to a franchisee. This is known as "product/trade name franchising." An example might be a local hardware store selling True Value products and using the national True Value brand as a way to help define the store. 

The more complex form, "business format franchising," involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.  Examples of this franchising approach include: Jiffy Lube, McDonalds, Curves, Midas Muffler and many others. 

A note of caution:  Franchising may seem like an easy way to go into business, but there are pitfalls with this form of business ownership as well.  Step carefully, and by all means, do your homework in properly checking out any franchise you might consider.

Learn more about franchising …… suggested links

 

Checklist for Buying a Business

Before you buy a business, you should prepare yourself to make informed decisions based on facts.

Step  1.  Learn the Facts

  • Why is the business for sale?  This is an important question.  Does the seller know something about upcoming competition or traffic changes that could negatively impact the business?
  • How long has the business been on the market?
  • Specifically, what does the asking price include in the sale: inventory, property, building, goodwill, equipment, etc.?
  • Does the business have a good reputation?  If yes, why? If not, why?
  • Do you understand the local market and competition?
  • How could you improve this business?
  • Could future zoning, demographic and/or other proposed changes impact the business?

Step  2.  Gather Pertinent Financial and Legal Information

  • Review financial statements and history of the business.
    • Request 3 years of applicable Federal tax returns
    • Obtain business income statements and balance sheets for the last 3 years
    • Obtain recent state sales tax records
    • Secure a current listing of all inventory
    • Obtain applicable business agreements, leases, franchise agreements, employee benefits plans and other legal or binding agreements

Step  3.  Make Informed Decisions

  • Review and carefully analyze all gathered information with someone experienced in buying a business
  • Make certain the business, if purchased, will provide a sufficient return on investment (ROI)
  • Negotiate an acceptable sales price (again do this with an expert)