Starting Up a Small Business Concerns

In a previous article I dug a bit deeper into small business volatility but it is worth mentioning again especially in the context of getting a business started. Small business exists because large business has carved out a method to meeting the needs that doesn’t reach everyone in a market place. In other words small business is small business because large business has deemed the pursuit of such market places not worth the effort. Large businesses seek opportunities that exist in well-established mature markets. These would be markets that yield smaller margins but are also less volatile. Consequently this leaves the more dynamic and volatile markets for the small businesses. This is part of why small businesses don’t last long, they compete in an ever changing market place.

So, what does this mean for you? It means that the opportunities that will exist for you and the business you aspire to open will be opportunities that require quality and custom solutions quickly. This also means there will be a good deal of work involved in order to gain market share for you niche. Abandon any idea of providing a single product or service, you will need to diversify your products/service, customers, and possibly industries. To combat the ebb and flow of the small market place you will need diversify all aspects of your company.

Alignment

Ok, now that you understand a little about the realities of the small business market place the next thing to look into is how well your potential business aligns with who you are. In the beginning stages of a business the founder is the business and the business is the founder. To offer the most value the business should be the embodiment of you and you should be the embodiment of the business. The realization of a single opportunity should not be the only deciding metric for starting a business. As an example; A few years ago I had the opportunity to start a frozen yogurt shop in my town that would have been modeled after a profitable model that was doing well in other cities. I did my homework and found that for $40,000.00 I could have everything I needed to open the doors and start selling yogurt. I decided against it for two reasons, 1. I live in a four season’s area and I did not want to have a feast or famine demand and 2. I am not that crazy about yogurt. Now, the opportunity was there, and since then many of these shops have opened, but I didn’t want to invest 80 hours a week into a frozen yogurt business.

Market Positioning

So you have an idea that aligns with who you are, and you have come to understand the nature of the small business market place, how are you going to position your product or service? How are you going to meet the needs of the customer? The answer is somewhat laid out above, but because of the nature of the small business market place you will need to become a high quality, quick turnaround company. Small businesses have the advantage in small volume custom areas. Your competitive advantage will be your ability to cater to the specific needs of your customer. As a small business you have no business competing on price.

Margin

You are your business, and chances are you do not have much capital behind you. This means that achieving a positive cash flow situation as quickly as possible is key. Cash is king and without it you don’t have a business. The upside is small volume high quality work demands top dollar. That’s right, by being a small business you are competing in a large margin arena. The mark up on your products and services can and should be high. The market will let you know when you are too far out of range, but a healthy profit margin is to be expected with small businesses. Individuals that fail to understand this begin to lower their prices in hopes of gaining some sales but what they don’t realize is they are diluting the market and putting themselves out of business. So, don’t be afraid to charge for your work!

Growth Strategy

The last thing I will mention for those looking to start a small business is that a growth strategy is imperative. You need to have an idea of where you are going if you ever expect to make it as a business owner. By nature small businesses should only remain small for a while, if you company is not growing it is dying. Markets mature, customer needs mature, and guess what… your business should also be maturing. Knowing where your business is headed will allow you to take the appropriate measures today to set up for tomorrow’s market. A growth strategy can be vague. You don’t need to define every variable, but you should use your intuition to determine where you should position your company.

Limited Liability and Getting Started With Business Formalities

Business Attorneys are often asked how limited liability works, because this is often one of the greatest advantages to forming an entity that offers this type of protection (limited liability partnership, limited liability company, corporation, etc). Limited liability basically protects the business owner for the negligence of his or her employees. In other words, the limited liability status of a company does not protect the business owner from liabilities that are a result of his or her personal negligence. Company owners that actually take part in the daily activities of a business should be aware of this fact; because this makes almost as though the business is a sole proprietorship.

Limited liability, on the other hand, is one of the biggest advantages of forming a corporation, or LLC, even if it only protects the business owner from his or her employee’s negligence. While any employee’s misconduct is likely outside the scope of employment, and would not make the business owner liable, the limited liability status is important for protecting the business owner’s personal assets. Failure to form the business properly might result in the business being recognized as a partnership, where the business owners would be joint and severally liable for the business’ debts (including judgments against the business); A Business law expert is useful for ensuring that your business is formed and operated properly.

Clients often wonder what causes court not to recognize limited liability; this is known as piercing the corporate veil. Traditionally piercing the corporate veil is a remedy the court uses after considering certain factors. To avoid the risk of having your company’s limited liability status go unrecognized it is important that the business adhere to corporate formalities. Corporate formalities are those things which are usually done when conducting a legitimate business. This includes adequate record keeping, keeping the business owner’s personal funds separate from the operating funds of the business, acting in accordance with bylaws (for a corporation) or an operating agreement (for a LLC) for the business in question, and treating the company’s assets as though they were your own. An experienced lawyer usually prepares these documents for record keeping purposes and can help ensure that the company is staying compliant. The other thing to avoid is what is called undercapitalization, and is often found where businesses fail to properly maintain adequate insurance coverage in the case of any possible misfortune. The main point here is that the business was not formed as a limited liability entity to avoid potential business debts arising from judgments against the business.

Because businesses are formed under State law, a business attorney can also advise on the advantages of forming the LLC in different states which can have certain benefits. Some of the benefits fall into different categories like more developed case law, or more developed statutes. Owners of large companies surely take advantage of being able to form an entity in different places; this is the reason you see many large corporations that where incorporated in Delaware.

The business formation process can be an very challenging, and one may find regulations, permits and contracts totally confusing. However, all of these are not illogical obstacles towards establishing your company as they are just part of the many requirements that allow authorities to monitor or keep track of every business formation occurring in one place while informing the government that has jurisdiction.

It is greatly important for any business to have its contracts undergo contract review. Contract review is important and is basically done to ensure that each contract is detailed, well-crafted and skillfully negotiated as the contracts protect the business and prevent legal battles and potential lawsuits. Few things must be considered when undergoing contract review.

Ask – Do not hesitate to ask rather than simply signing off a contract. This is a good way for you to understand the risks or get a better deal.

Read – Take time to read the entire contract before signing to avoid unanticipated issues. Always remember that once you have signed, you will be legally bound to all the terms in your contract, whether or not you have read and understood them; the law imposes upon individuals a duty to read the contracts they sign.

Discuss – Address potential problems that may arise. It would be best if you have discussed possible problems along with negotiated resolutions before you sign the contract.

Define – Every word in the contract counts and the best contracts are the least confusing ones. Specify each detail and discuss. Every detail tackled and orally agreed upon by both parties should be put in writing; failure to do so can be detrimental should a legal conflict arise.

Innovate – Contract negotiations don’t have to involve money at all times. Parties involved may include services, a side service, co-promotion, small project partnership or possible contracts to perform in the future.

These particular business dealings often include the services of a business attorney who could stand as a part of the business team dedicated to legal matters. A business law attorney has expertise that enables him to explain the legalities and limitations of the different business practices of a company. The attorney will also be aware of standard contract provisions that can be included into a contract to protect the parties.

If you are after a smooth start in your business endeavors, dealing with the legalities first would be the best thing to do. It would be more favorable if you have already settled all these legal issues prior to officially opening and running your business. That will most likely help you face less legal battles in the future, if any. Often times, people start a business together and the terms are not clear from the outset; it usually is not until the business is turning a profit that the owners decide to determine what the terms should be; Do not let this happen to you, contact an attorney before you get the business going.

How to Buy and Sell a Business By Garrett Sutton

This book is part of the Rich Dad Advisor family. This is a HOW TO: on Buying and Selling a Business. As part of the Rich Dad philosophy the goal is to create wealth. One excellent way to do that is through a business. Business’s, by far have the most potential for wealth creation than any other means. Once your business is successful then you can hold your money in Real Estate. Garrett dives into more details and I will share my personal stories of success and ass chaffing’s as well.

Why is this important to me? As you may know, I ask this question as if I am sitting in your shoes. Am I investing my time in learning or burning 6 minutes on crap? So with that enlightening philosophy here is why this book is important.

1. Businesses create wealth – Have you ever heard of Domino’s Pizza? The original founder of that company was an orphan by the name of Tom Monahan. The legacy continues with Domino’s being in every major country in the world. The amount of wealth and economic value created is vast.

2. Businesses fail – You need to get educated on real world pitfalls because the odds are against you when you start a business from scratch. 90% of Businesses fail in the first 5 years and 90% of the 10% fail in the next 5 years. Without financial education, you will get your ass kicked.

Why Buy a Business?
1. Cash Flow – A successful business generates monthly cash flow. As you know, cash flow is everything. Think about blood in your body. When it stops flowing, you die. The same holds true in business. Strong cash flow allows you to compound the business value and create more growth.

2. OPM – There is nothing better than creating an infinite return. When you sell something for $100,000 and make a big profit that is great but when your customer sees a $500,000 savings from your offering that is even better.

3. OPE /OPT- Usually when you start out in business, it is in the S – Quadrant of the cash flow quadrant. This means you have effectively created yourself a job. Where the real growth comes in is when you can recruit and lead people behind your cause. Once that happens then you learn to multiply your companies effectiveness because you are leveraging OPE & OPT (Other people’s expertise and time)

4. Tax Advantaged – With a business, you are able to generate income, pay all your expenses and then pay your taxes. The government sets it up this way because they know that business is the key to a successful economy. If you are an employee then you generate income, pay your taxes and then pay your expenses. There is at least a 30% difference in the two approaches. That is a big compound deal over time.

As you can see, a business affords many benefits. I will highlight some of the tools that Garrett outlines in the book and then go off on a tangent and talk about different business ideas and why some businesses are much better than others.

How to Buy and Sell a Business is packed with great information. This really is a HOW TO so I suggest you read it if you are buying or selling a company. For the sake of time, I will touch on three areas.

1. Team- Your team and the depth of your bench will dictate your success. Do not be pennywise and pound foolish with stuff. You need a good CPA, Lawyer and coach. If you look at the best football teams, they have strength, endurance and tactical coaches for every position on the field. They have to work together to win the Super Bowl. The organization with the best TEAM will always achieve more than the one super star with an army of pawns. Think of TEAM as TOGETHER EVERYONE ACHIEVES MORE.

2. Agreements- These are very important when buying and selling a business. Things like NDA’s, Confidentiality and NON-COMPETITION agreements are critical in the evaluation stages of any business venture. Once a deal is in progress then you want to be familiar with Asset Purchase Agreements, Stock Buy Back agreements and Consulting Agreements. These all make a difference on how you structure the deal and affect taxes for both parties. Another detail you want when you BUY a business is a performance clause. I purchased a company and looked at the maintenance revenue and offered a fair price. Come to find out the person I was dealing with was not honest with the numbers. In the first three months, half the revenue was NOT realized and because I did NOT put a performance clause in the agreement, I received everything but the kiss. Needless to say I had to bust my ass to break even on the deal and then grow it.

One bad deal like this can cause a ton of stress and problems so GET EDUCATED!!!!!! I rather have you learn from my mistakes instead of making them.

3. Financials- These are a business’s report card. You need to be able to read financial statements and dig into the areas and ask a TON of questions. This is important because financial shenanigans can be hidden really well in a pretty financial statement. Cases in point, Enron, Tyco, WorldCom and I.O.U.S.A!!!!

There are different types of businesses and some are stronger than others. Warren Buffett is a big believer in easy businesses. He rather have a great business that can succeed with average management then a really hard business that needs a magician to make it work. This is why he invests in food companies like SEES Candy and Dairy Queen and NOT in car companies like GM. There are two differentiators here. One is moat which is competitive advantage and the other is capital investment. Every other year, car companies have to plow all their investment into the next car model. Dairy Queen simply needs to invest in more cash producing assets or give the money to their owners. If you are looking to go into business, spend some time on business types. I will profile more of these in future tutorials.

Real World Examples

1. If you hate paying too much for something then you will hate my two stories. There is an old saying in poker that if you don’t know who the idiot at the table is then you are the idiot. Well in two cases, I really screwed up in purchasing businesses. The first business I purchased was 15 years ago (I am still paying it.) The mistakes I made here were several:

1. I did not get a real valuation of the company.
2. I had no idea how to read financial statements.
3. There was a real estate component to the deal and I did not value that.
4. I was way too excited to get the deal done – emotional bliss can lead to intellectual bankruptcy.
5. I was the tuna negotiating with sharks. All of these things were my fault. My second fiasco was the deal I talked about earlier where I did not put a performance clause in the contract. This was a huge debacle. These were my two highlighted DUMB ASS moments. They were both MY FAULT!!!!

2. I never like to end a review on a bad note so I will profile some good stuff. I purchased an IP (Intellectual Property) company for 10% of revenue. This is unheard of in the software world. This deal came out of the blue and the team we acquired is excellent. The lesson here is that if you are looking to buy a company, call on really large companies that are spinning off divisions. The best deals I have ever gotten are from big publicly traded companies that need to get assets off the books at the end of a quarter. I have done this twice and it is like buying dollars for $.10 cents. Think about it. If you have a company that does a billion dollars in revenue, do they care if they sell a company for $50,000 or $200,000? Not really, this does not even make a blip on their financial statements. If I can impart any advice, it would be to look for these types of opportunities. These can make you feel like a Magnificent Genius but real world business has a way of punching you right I the forehead so never keep your head in the clouds.

There is a ton of great resources in Garrett’s book. I recommend highly the Appendix sections if you are buying or selling your business. Another key differentiators as well would be to approach a big company. The amount of money you will pay or receive is night and day. If somebody wants me to buy their business, I am going to negotiate hard on the price but if they go to a large company, an extra zero means nothing to them. Keep this in mind.