Acquiring a New Business Q&A

What type of new business should I start?

Only you can fully answer this question. But as a hint: it should be something that you're passionate about. Although starting and building a business will be work, lots and lots of work, it should be an endeavor that you'll not consider completely as work. Having a deep personal interest in the product or service that you'll be offering will make it much easier for you to apply yourself diligently to making your dream come true. But don't rush the process; allow a good amount of time for careful deliberation of your choices. You don't want to find yourself – only three months down the road – wishing that you'd opened a delicatessen instead of the car wash that you ultimately chose.

Are there any low-risk, high-income businesses to choose from?

Looking for the easy road to riches, eh? Well, be warned that no endeavor is absolutely risk-free. Generally speaking, however, service businesses tend to require less upfront financial investment than other types of industry. For instance, unless you're talking about drop-shipping products via the Internet, most wholesale, retail, or manufacturing businesses typically demand substantial investments in some type of inventory – whether it be raw materials, equipment, furnished goods, office or warehouse space, or some combination of these. Because service businesses focus on, well, providing services of some type, they do not generally require the material stockpile – at least not in the same inventorial context – of the other businesses mentioned. (But even if you're able to sidestep a large bulk of such a financial outlay, if you're really committed to success you're going to need to invest a great deal of your personal time and energy. There's really no way around that.)

Additionally, service businesses are less likely to be affected by large, powerful, national companies. And, depending on what you provide, service profit margins can be extremely high, even with a relatively small number of sales. But it must be noted that this is more the exception than the rule, and although you may not reach the personal financial status of the Trumps or Rockefellers with a service business, you'll also run less risk of working at the local fast-food joint after a business failure.

How can I learn about the business I want to go into?

The best way to learn about virtually anything is by doing, and this is no exception. There's absolutely no substitute for actually working in the industry or business you're interested in. And you don't necessarily need years of experience in upper management to prepare yourself; quite the contrary. Even a short stint in an entry-level position will likely teach you volumes more than you'd learn by just research or reading, and give you a much better handle and perception of how the business actually operates.

Alternatively, if you're buying an existing business, you might consider requesting the seller to stay on temporarily (perhaps in an advisory or consultancy capacity) to show you how the organization operates. However, you should include any such agreements in the purchase contract, including a clause to hold back a portion of the payment until you've been properly trained to run the business.

Lastly, if there are any trade associations affiliated with your particular business industry, contact them for information materials or possible training seminars that may be available to help you get started on the right foot.

When I start my business, should I keep my current job or quit and work in the business full-time?

This is a very common question. If you're starting a small and generally uncomplicated business, it would probably be best to keep your current employment for the time being. With a simple business, such as lawn care or even a small retail store, you can probably hire people to do the bulk of the basic work for less than what you're making at your current employment, thereby freeing you to handle the more critical business tasks of finding jobs and quoting prices or developing marketing and promotional programs, which you can accomplish in the evenings and on weekends. Keeping your steady and reasonably well-paying job can alleviate quite a bit of stress and uncertainty, because new business cash flows have a general tendency to start slowly and are notoriously erratic and unpredictable.

I often hear the term "business strategy." What is it, and how do I get one?

Many people just decide in their minds that they're going to be the "best." And while that's certainly a noble and admirable goal, it's not a strategy. A business strategy is the way that you develop for your business to present itself as the best option for your existing and future customers. For example, if you decided to stick with that car wash you opened earlier, you could employ the strategy of providing add-on premium services such as hand drying, high-gloss waxing, and interior shampooing and detailing to not only boosts your profits but also to more distinctly separate you from your competition. Such services might also allow you to raise your basic car wash prices, as well.

To devise a strategy for your business you'll need to do some research, and commit it to paper in the form of a solid business plan. Study the market that you're entering, as well as the underlying industry as a whole. Take a good, long look at your customers and, by all means, evaluate your competitors, too. Assess the customers' needs and how they're being met (or not being met) by the goods or services currently available; i.e., the competition (or your own offerings, if your aim is to improve them). Evaluate the strengths and weaknesses of all competing companies, including your own. By identifying these factors, you'll get a good idea of the direction you should take to position your product or service in such a manner that it becomes clearly apparent to the customer as the most appropriate choice to meet their need. Having a great business strategy is the heart of every business, and it can turn lackluster performance into noteworthy success.

One final word on attempting to be the best: again, although commendable, it's unrealistic and generally unwise. It's not likely that you'll be absolutely stupendous in everything; no one is. A more prudent business aim might be to strive, of course, to be good across the board but to identify one or two areas that substantially differentiate you from the competition and press for perfection there.

Is buying an existing business safer than starting my own? All things being considered, it would probably be a reasonably safe assumption. An existing, profitable business usually already possesses marketing avenues and established customers. And with established customers comes a built-in degree of sales momentum. Consider how dramatically and quickly you might be able to boost overall performance and earnings if you redirected and focused the energy necessary to get a fledgling business off the ground into an existing operation.

How about if the business is only one year old?

Here, now, is a somewhat different circumstance. Keep in mind that when you purchase a business, (not counting its tangible assets) what you're really buying is the goodwill and forward sales momentum that have been built up from that established method of commerce. Even if the year-old business has been profitable, how much true goodwill or market position could it really have established in the short time of its existence? Furthermore, you should ask yourself (and probably the seller, too) if it's such a great opportunity, why is it being sold so quickly? If the seller has his or her eye on another business venture, then it stands to reason that the new one is more attractive than the current business, right? You have to determine the actual reason that the seller wants to dispose of it. And if it's a service business, you'll need to ascertain how much of a role the seller's personality or personal contacts have played in the success of the operation.

Are existing businesses priced realistically?

Quite often, they're not. What many owners fail to realize is that a business is a much less liquid asset than even a house. After all, how many people are going to be actively looking for just the size, type, and location of any particular seller's small business? As such, most sellers have a significantly inflated opinion of what their business is actually worth. There are very few small businesses that sell for anything close to what their owners initially ask, and many go for half (or even less) of what was hoped for.

What is a "non-compete clause" and should I use one?

Yes, if you're buying an existing business, it would probably be a very good idea to have the seller signed a non-compete clause. Also known as a covenant not to compete (or CNC), this contract will prevent the seller from opening up another similar business and competing directly with you. Typically, there are time and/or geographical restrictions included in the agreement. For example, a CNC might restrict the seller from operating (or possibly even being employed in) a similar competing business for one year after the sale or within a radius of twenty-five miles of the business that was sold to you. This would prevent the seller from quickly regaining market position (at your expense) with a new business through inside industry or market knowledge, reputation within the industry, or personal contacts.

Should I buy a franchise?

If you've got very little experience in business management, then buying a franchise could be a better choice for you than starting an organization for scratch. Franchises (such as McDonald's, Subway, Dollar Tree, etc.) typically include all training and training materials as a part of their business package. So you won't be going it alone, which is a good thing. But franchises usually also carry a pretty hefty price tag, so unless you or someone you know is made of money, you'll need to consider financing. It should also be pointed out that just because a franchise will set you up and provide virtually everything you need to operate your new business, it isn't a foolproof road to success and riches. It will still require lots of hard work.

The franchiser typically will sell you the rights to a franchise for a specific fee (again, a rather lofty specific fee) over and above the actual cost of setting up the business for you. You'll then have to pay the franchiser ongoing periodic payments based on a percentage of the business's sales – that's sales, not profits. Additionally, most franchisers also provide supplies and services to the franchises, and they require their purchase. In other words, if you own, for example, a McDonald's franchise, you'll have to use the McDonald's company's supplier; you won't be able to contract with someone else. You may also have to pay a percentage of local, regional, or national advertising costs. So, although owning a franchise may probably be the closest thing to guaranteed business success, you'll pay for it – heavily.

If you're interested in starting your own franchise, here is a place to help you find franchises and businesses for sale.

What about venture capital to start my business?

It's a possibility, but to be brutally honest, unless you know someone who knows someone, venture capital is a long shot at best. If you're starting from scratch and inexperienced, it's really not very likely that you'll even be given marginal consideration. Venture capitalists are overwhelmingly predisposed to highly experienced entrepreneurs, well-developed businesses, and extraordinary growth potential in a relatively short amount of time. So if your idea doesn't include a pill for turning tap water into 93-octane gasoline or something equally fantastic, frankly, it's not likely.

Venture capitalists place great emphasis on highly experienced or highly trained people when evaluating a funding proposal. Even if you feel that your idea is a "can't miss," you'll greatly increase your chances by including on your management team someone who's personally known by the investor, or someone with a recognizable name. In this area of financing, it truly is not what you know, but who you know.

Venture capitalists fund only a very minuscule percentage of the thousands of proposals that they see. They're most impressed by people who've already participated in previous start-up projects that were highly successful. If this isn't available, they look for people with extensive and relevant experience in the particular field that have committed themselves to key positions within the endeavor.

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