What is it that makes a person want to own a business? Is it boredom with his or her existing job? Is it controlling his or her destiny? This article will walk the reader through the steps necessary to evaluate if they can be successful as a business owner.
Self-Evaluation
The prerequisite for running a successful business is being an entrepreneur. The dictionary defines an entrepreneur as “one who organizes and assumes the risk of a business or enterprise.” The most important word in this definition is risk. To be successful in business, you must have a high risk tolerance. If you do not know what risk tolerance you have, you probably do not have what it takes to succeed as a business owner.
The next thing to evaluate is the passion you have for the idea or business you want to own. If this is a new product or service and you are starting from the ground up—in other words, having no existing revenue—the passion can be quite strong, even to the extent of overpowering your business sense. Successful business owners/entrepreneurs never let their passion overtake their business sense.
The above two paragraphs are probably the most important things to evaluate in yourself before proceeding with this article. If you do not fully understand risk tolerance and passion in yourself, you don’t need to read any further.
Are you still reading? You have passed the initial “litmus test.” The next step is to put down in writing all the reasons you have to continue forward. Include pros and cons as appropriate. It is important to make a self-evaluation of your prior accomplishments. Are you methodical, setting realistic goals and then achieving them? Do you take on tasks with a positive, “can-do” attitude? Do you worry? Writing things down forces you to explain on paper what you feel in your heart and gives you a chance to go back and review what you have written. Reread and modify these reasons until you are comfortable with the decision to proceed.
Finding a Business
Businesses are bought and sold all the time. If you are looking for an established business, start with the newspaper. Seek out business brokers. Their job is to connect buyers and sellers and help them through the process. Word of mouth is a great way to find a business. Simply expressing your interest in conversations with others will get the word out.
Once you have found a potential business, you need to step back and do another self-evaluation. Do you connect with the business? If the business is a service, do you have the capabilities and desire for the service that is sold? If the business sells products, do you believe in the products you will be selling? Will you have an active or passive role in the day-to-day business? Have you had experience managing people? How do you view employees and employers in other businesses? These are just a few of the questions you need to ask yourself before you proceed. At the end of this process, if you do not have the same passion and desire to succeed that you had when you evaluated yourself at the beginning of this article, move on to another business.
Developing a Business Plan
Where do we go from here? You need to develop a business plan. There are many books that offer advice on starting your own business, but in my opinion, SCORE does the best job of offering all the tools to assist you.
SCORE, “Counselors to America's Small Business,” is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE, a partner of the U.S. Small Business Administration, has 389 chapters throughout the United States and its territories, with more than 10,500 volunteers nationwide. Both working and retired executives and business owners donate their time and expertise as business counselors.
Before we begin discussing the business plan, it is important to rely on outside people for certain tasks. Setting up a business requires a decision on how it will operate as a company—sole proprietorship, partnership, corporation or LLC (limited liability corporation). I strongly recommend you consult an attorney to assist you, as decisions made at the onset can affect your business as it matures. I also suggest you consult a certified public accountant. A CPA can assist you in due diligence if you are purchasing an existing company and can give advice on company structure from a tax point of view. These two people are very important as you start your company. Both are essential, as rules and regulations, which you may not be aware of, change on a yearly basis. Remember, your strength is building a successful company, and your efforts should be focused just on that.
If you visit the SCORE website (score.org), you will find a template for a business plan. It divides this section into several components:
- Executive Summary
- General Company Description
- Products & Services
- Marketing Plan
- Market Penetration
- Competition
- Future Growth
- Financial Plan.
There are some additional sections, but not all of them will apply to your business. It is important to put this document together in your own words, as you will refer to it when you seek out financial assistance from bankers, private equity groups or others as you move forward.
Within this document, the Executive Summary is the most vital section. In addition to the notes described in the SCORE template, this section should be used as a vehicle to express your commitment to success, your understanding of all of the components of the business—including any obstacles you recognize—and, most importantly, your passion to succeed. The effort put forth in the business plan is directly proportional to your ability to share your vision with others and show your ability to succeed as a business owner.
Now, let’s fast forward to the Financial Plan. If you are purchasing an existing business, this will be much easier to write, as you will have history in your favor. If the prior owner did his/her homework, s/he will be able to supply you with concrete information on past sales, expenses, profits, etc. If you are starting up a new business, you will have to make calculated guesses. Again, if you use the SCORE template, project a 3-5 Year Profit and Loss Statement. Be sure to include all components, including the payback of any outstanding loans from the purchase of a business or start-up costs. If this is a new business, be conservative on the income side and more extravagant on the expense side of the statement.
At this time, you should prepare your Opening Day Balance Sheet. This will define all assets and liabilities on Day One. You will refer to this often in the future as you follow your progress.
Now, what I consider to be possibly the most important part of the financial plan, the 3-5 Year Cash Flow Projection. This is just like your checkbook. You will start with money in your bank account on the first of the month, add all income (actual money received) and subtract all expenses (actual checks written) for the month, and project the month-end account balance. No matter what your business, people will owe you money (accounts receivable) and you will owe others money (accounts payable). Depending on the terms of payment, this is completely different from a profit and loss statement, which shows net income based on total income minus cost of goods sold. Neither the cash flow statement nor the profit and loss statement includes inventory, accounts payable or accounts receivable, which are on the balance sheet. They should be added as separate line items to the cash flow projections so you can monitor their relationship with income and expenses. Also, if your business is seasonal, your cash flow statement is going to look a lot different than if it is not.
Opening Day—this can be the most exciting time. You have just spent several months investing much time in getting to this point. Your dream has been realized. I hate to burst your bubble, but now is when the real work begins. All those sales growth predictions and financial numbers on your projections now have to be realized.
From this day forward, you will be working with the same financials, but they will be real numbers. Depending on your business, access to this data should be readily available. If you have many transactions in a day, you will want to review these at the end of each day. If your transactions are few, a monthly review may be acceptable. It is important to spot trends and adjust accordingly.
Refining Your Business
The doors are open. What do you tackle first? If this is a start-up company, you will have the chance to hire employees as needed. If it is an existing business, you are starting with employees hired by others. In my opinion, the management team is the most important key to a successful business. Bring the team together and ask their opinion on all aspects of their jobs. How do they perceive the company with a new owner (you) in place? It is important to establish an ongoing relationship with your employees, but remember, there can only be one boss—you!
As you grow your organization, some of the original employees may not be a good fit for your company. The sooner this is recognized and dealt with, the better for all concerned. For those employees you retain, it is important to be sure their job description is well defined. Communication is crucial in retaining good employees. As your company matures, you will be assigning more tasks to all of your employees. Be sure they understand empowerment and your willingness to pass this to them as you grow. Pay your employees well and they will return the favor with loyalty.
The next thing that is crucial is customer service. Your customers are as important as your employees—treat them as you would like to be treated. Give your customer an enjoyable buying experience—you want to make them feel special. Most businesses rely on word of mouth for future customers. One bad experience with your company can significantly affect future sales. Be sure your employees understand your feelings about customer service.
Cash Flow & Budgeting
Remember when we discussed the importance of cash flow in your financial plan? The sooner you develop an ongoing cash flow statement, the better you will begin to understand your money needs. Start by comparing the first-year cash flow projection with your ongoing cash flow. Depending on the amount of transactions, this can be a daily, weekly or monthly task. If you find expenses exceeding income over the time period you are tracking, you are able to reverse course and make adjustments. As we mentioned earlier, tracking cash flow as opposed to profit and loss, and keeping inventory, accounts payable and accounts receivable as separate line items in the cash flow statement gives you a place to monitor the interaction between these items and income and expenses.
As you continue to understand the cash flow of your business, it will help you plan for the future. Using this same statement, you will be able to incorporate a budget for future periods. Only when you fully understand the cash flow of your business, do you want to move on to consider growing your business.
Marketing
Understanding the marketing of your business is next as you need to identify your target audience and make sure they know about your products or services. If this is a start-up company, look at your competitors and see how they market their products or services. If you purchased an existing company, how did the prior owner market the products or services? Use this information only as a guideline.
Effective marketing needs to be quantified; that is, you need to identify what marketing technique works and how much additional revenue was generated. Many businesses can tell by the increase in revenue over the marketing period. It is best to choose one market venue at a time, and then you will get feedback on the particular promotion. The best marketing tool is to have your customers tell your salespeople where they heard about you or saw your promotion. Most business growth is by word of mouth, so the longer you are in business, the more difficult it becomes to quantify.
Remember that marketing is not a science, and what works one time will not necessarily work the next. Also, depending on the age of the target audience, traditional venues such as newspapers and billboards may not work in today’s environment of internet and web access.
Finally, you will come to the point that the overall branding of your product or service becomes more important than advertising specials. As a business owner, you should never have the thought that you are selling a commodity. Something differentiates you from your competition, and it is very important that you identify this.
Differentiating Your Business
Identifying the competition was part of your original business plan. It is important to realize that this changes over time. There are always new competitors arriving on the scene, offering products or services similar to yours. As this happens, you want to evaluate your business and modify, or not, as appropriate. As new competitors surface, evaluate the difference and be prepared to tell your customers why they should continue to buy your product/service. Competition is healthy for all concerned. It forces you to continue to evaluate how you market your product and keeps you from becoming complacent.
Why would your customers want to buy from you over the competition? What makes your product/service unique? These are very important questions. What services do you offer that your competitors do not? What is different about your product that makes it stand out?
Whether you are a product- or service-based business, you need the perspective of your customer. The customer experience is as important as the product or service. If the customer has a good experience, s/he will tell others, and no matter how much you spend on public relations and advertising, word of mouth is the best way to get the word out. This needs to be continually monitored as new competitors come along.
There is no such thing as selling a commodity. You offer something your customers cannot get elsewhere.
Growing Your Business
Successful business owners are never satisfied. The need to take the business to the next level is always on their minds. This can mean expanding products and services, opening up new territories or targeting a different audience within existing territory. If a business owner becomes complacent, the overall business will feel this.
If you decide to expand into broader products and services, don’t forget how you got to this point. Sometimes it makes sense to stay focused on your core competency; deviation could affect your current business.
These are just a few of the questions you should ask as you consider taking your business to the next level:
- How will this affect your existing business?
- Are you changing your existing business model? Slightly or drastically? Expanding or refining?
- Will additional capital be required? Can you fund this through your existing business, or will you have to reach out for additional capital?
- If you went through the process of outside financing when you began your business, are you willing to do this again? What did you learn from your prior experience?
The decision to take your business to a higher level requires the same thought processes and due diligence as it did when you started your business. Anything less is preparing you for an unknown. The good thing is you now have the experience of starting a business and can learn from your mistakes.
Exit Strategy
Your exit strategy should be a consideration from the onset. What will happen when you decide to retire or do something else? If you are leaving the business to your family, do they have the desire and capability to continue with it? If not, you need to consider alternate solutions.
Remember, the time to sell a business is when it is at its strongest. If you are the only one in the family with an interest in the business, selling it to an employee may be an option. Passionate business owners who sell their business have the same desire to see their successor succeed.
If there is no employee able or willing to buy the business, then the next option is to sell to an outsider. If your business is such that it could be acquired by a competitor or someone for whom your product or services complements their business, there is probably a premium over selling the business on the open market. If you decide you must sell on the open market, it is probably best to go though a business broker. They can connect you with sellers and give advice on the appraisal process so you can get the most for your business. Just as it is important to have experienced people (attorneys and CPAs) as you do due diligence, it is just as important in the exit process.
I hope this article has given you some insight to the thought process required as you fulfill the dream of owning your own business. There are no shortcuts along the way, and the earlier you address all of the above topics, the greater your chance of operating a successful business.
Good Luck! iBi
Carl Lathrop is the owner of Rainbow Play Systems of Central Illinois,
a distributor of residential and commercial playground systems.
