Rarely does a week go by that you don't read or hear a story about corporate restructuring or layoffs. With job security going the way of black and white TV's and cheap gasoline, many corporate refugees see the risk of starting a new business as relatively tame. And what of the 'start up risk'? A recent stud-y released by the Bureau of Labor Statistics shows that 66% of all businesses started in 1998 were still in business after 2 years, and 44% were still in business after 4 years.
Many budding entrepreneurs are bombarded with offers of outside assistance in seeking to purchase a business. Brokers, attorneys, and others all can have a role in the process. But what factors are critical when considering a business purchase? Unlike buying a house, there are no certified business inspectors who will point out potential hazards or defects in a business. To improve your chances of being one of the 44% still in business in 2009, here are some critical things many business owners have, unfortunately, learned the hard way:
1. Every business has its flaws. The best candidates will have flaws that lend themselves to your particular expertise. Some businesses have well kept financial records but are weaker in developing new markets. Others may not even have monthly financial statements. Having a team in place: an accountant, an attorney and an advisor familiar with due diligence issues, while costing you up front, will save you money in the long run.
2. You will need to be a generalist. For many entrepreneurs, the prospect of being the IT staff, the receptionist, the marketing department and CEO is daunting. Budget some funds for outsourced expertise in the functional areas that you don't want or don't like to do. For example, there are many firms who offer outsourced IT assistance at reasonable rates.
3. Don't ignore the little things. Consider the age and condition of office equipment, monthly utility bills, or maintenance records for company vehicles. One business owner purchased a distributorship, and learned after the sale that all employees were using 10 year old computers that crashed regularly. It was an added cost that he hadn't counted on.
4. Cash flow is king. Even if you have already put together some projections for your new venture, go back and do them again using a best case and worst case scenario. Understand when customers typically pay, and when suppliers expect payment. If there is a large gap, make sure you can obtain a line of credit that can bridge that gap. If you are not familiar with building projections and spreadsheets, seek assistance through KC Sourcelink, (
www.kcsourcelink.com) or consider hiring an advisor to help.
5. Look for a banking relationship, not a loan. Getting the best rate, or the best terms is important. However, having a relationship with a banker who knows your business, takes time to listen, and can provide a measure of flexibility in both good times and bad is invaluable. Take the time to evaluate the entire range of banking services and make your decision based on the entire package. Bankrate is a great online resource to evaluate banks and provides a wealth of banking information at bankrate.com.
If you are considering joining the ranks of small business owners, know that it can be very rewarding, both financially and personally. To maximize those rewards, make sure you take time to understand the risks as well.
About the author:
Donna Gordon is owner of Investment Resources, a firm dedicated to helping small business owners evaluate and strengthen their businesses through research and planning. She has over 10 years experience helping business owners improve their profitability. Donna can be reached at 816-304-7958, or dgordon@investmentresources.biz
