Considerations of Business Ownership

Posted on Posted in Small Business News

Starting a business can be an exacting venture offering many rewards. Enterprisers may purchase an existing business, by a franchise or start a business from scratch. However, the small business owner must be prepared and understand the basics. The first step is to analyze weather business ownership is right. Begin by evaluating your strengths and weaknesses as a potential owner and manager of a small business by considering the following questions:

Are you a self-starter?
It will be entirely up to you to develop projects, organize your time and follow through on details.

How well do you get along with different personalities?
Business owners must develop working relationships with a variety of people including customers, vendors, staff, bankers, and professionals such as lawyers, accountants and consultants.

Can you deal with a demanding client, and unreliable vendor, or a cranky receptionist if your business interests demand it?
Running you own business means you work for many people. It’s rarely easier than working for a boss.

How good are you at making decisions?
Small business owners must constantly make decisions, often quickly, independently, and under pressure. Are you willing to implement these decisions in spite of the risks involved?

How will the business affect your family?
The first few years of business operation can be hard on family life. It’s important for family members to know what to expect. You will need their continued support during this time. There may be financial difficulties until the business becomes profitable. This could take months or years. Your family may have to adjust to a lower standard of living, or put family assets at risk to grow the business.

Do you have the physical and emotional stamina and motivation to run a business?
Business ownership is a lot of work. This can wear you down emotionally, particularly when there are monthly bills coming due. Some business owners burn out quickly from the weight of responsibility resting solely on them. Strong motivation will help you survive slowdowns and periods of burnout. Can you face six or seven 12-hour work days week after week?

How well do you plan and organize?
Good planning leads to business success. Organizations of finances, inventory, schedules, and production can help avoid many pitfalls. As the owner, you must understand how well your company is doing financially. Monthly cash flow examinations are more important than projection long-term profits for keeping the company operating.

After an honest assessment of the considerations, you believe business ownership is for you, it’s time to put your ideas on paper. This is the process of writing a business plan.

Buying an Existing Business.

Buying and existing business, often a simpler and safer alternative, provides some real advantages. The business structure, operations and staffing are in place. The location is established and the business has a customer base. A new owner may decide to take a new direction or make significant changes. However, a major benefit is that cash flow is available while making these changes.

Before purchase of an existing business, an accountant and attorney should be contacted. It is important to review the financial records, operating history, and various legal issues surrounding this business entity prior to making any commitments to purchase the company.

Many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and and individual of group wishing to use that identification in a business. The two primary forms of franchising are (1) product/trade name franchising and (2) business format franchising. 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 and training that otherwise would not be available to the franchisee. The franchisee brings to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.

Starting a Business.

Finding a Niche

A market in its entirety is too broad in scope for any but the largest companies to tackle successfully. The best strategy for a smaller business is to divide demand into manageable market niches. Small operations then can offer specialized goods and services attractive to a specific group of prospective buyers.

There are undoubtedly some particular products of services you are suited to provide. Study the market carefully and you will find opportunities. As an example, surgical instruments used to be sold in bulk to both small medical practices and large hospitals. One firm realized that the smaller practices could not afford to sterilize instruments after each use like hospitals did, but instead simply disposed of them. The firm’s sales representatives talked to surgeons and hospital workers to learn what would be more suitable for them. Based on this information, the company developed disposable instruments which could be sold in larger quantities at a lower cost.

Another firm capitalized on the fact that hospital operating rooms must carefully count the instruments used before and after surgery. This firm met that particular need by packaging their instruments in pre-counted, customized sets for different forms of surgery.

While researching a new company’s niche, consider the results of the market survey and the areas in which competitors already are firmly situated. Put this information into a table or a graph to illustrate where an opening might exist for your product or service. Try to find the right configuration of products, services, quality and price that will ensure the lease direct competition. Unfortunately, there is no universally effective way to make these comparisons. Not only will the desired attributes vary from industry to industry, but there also is an imaginative element that cannot be formalized. For example, only someone who had already thought of developing prepackaged surgical instruments could use a survey to determine whether of not a market existed for them.

A well-designed database can help you sort through your market information and reveal particular segments not otherwise seen. For example, do customers in a certain geographic area tend to purchase products that combine high quality and high price more frequently? Do your small business clients take advantage of your customer service more often than larger ones? If so, consider focusing on being a local provider of high quality goods and services, or a service oriented company that pays extra attention to small businesses.

Choosing a Business Structure

When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decision about your business organization include:

  • Legal restrictions
  • Liabilities assumed
  • Type of business operation
  • Capital needs
  • Number of employees
  • Tax advantages or disadvantages
  • Length of business operation

Sole Proprietorship

This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. Many sole proprietors work form a home office. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney’s fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.

Partnership

There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. A limited partnership consists of at least one general partner and one limited partner. The limited partner’s liability is limited to the amount invested, while the general partner assumes all of the debts and liabilities of the partnership. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner’s business actions, as well as their own.

A Partnership Agreement should include the following:

  • Type of business
  • Amount of equity invested by each partner
  • Division of profit or loss
  • Partners compensation
  • Distribution of assets on dissolution
  • Duration of partnership
  • Provisions for changes or dissolving the partnership
  • Dispute settlement clause
  • Restrictions of authority and expenditures
  • Settlement in case of death or incapacitation