Starting a small business Part 5


Should I just buy an existing business instead of starting one?

Probably not.  Especially not if you’ve never owned a business before.

Intangible assets are the most valuable assets of an existing business and the toughest to value.  Intangible means assets that you can’t touch and include customer lists, patents, trademarks, brands and innovative (though not legally protected) ways of doing business.  Tangible assets are machines, furniture, land buildings, trucks, cash, inventory and so on.  Tangible assets are easier to value because there is a secondary market for just about everything – see Ebay.  The problem with intangible assets is that they are usually more valuable to the current owner than any successor owner.

Why?  Customers are usually tied to the owner on a personal loyalty level.  The customer trusts the business owner to provide the product or service at a good value.  The customer doesn’t know you and definitely doesn’t trust you.  Customer attrition rates, especially in a service business, are between 20-40% after a change in ownership.  So if your purchase price is one year’s sales, you will typically lose 20%-40% of that value during the first year.

Other intangible assets like patents, trademarks and brands are only worth the future income that they’ll  produce.  This is again a difficult calculation.  You need to understand the business and the competitive advantage provided by these assets.  How long does the patent protect you.  Is it enforceable?  Is the brand tied to the owner and face contact with the customers?  Do you have the experience, knowledge or talents to successfully exploit these intangible assets?

Employees are tangible, intangible assets.  You can theoretically but not legally touch them.  The employees may have the knowledge and experience to exploit the competitive advantages of the business.  But, take a look at Part 4 – employees suck.  Most employees are paid above their replacement value.  I’ve restructured plenty of these people out of companies acquired by my previous employer.  Employees are usually baggage.

Baggage is a big concern when buying a business.  Besides employees, you’ll have disgruntled customers or vendors.  You need to make sure that any assets are unencumbered.  You’ll need to make sure that the IRS and local tax authorities don’t have ongoing liens or investigations.  There could be product recalls or malpractice suits pending.  Environmental concerns can kill new business owners – you end up owning the last guy’s mistakes.

If you want to buy an existing business, do your due diligence and then low ball the price.  It is the only protection that you have.  Then work your ass off to reduce the number of customers that you’ll lose.

Starting a small business Part 4


Should I hire employees?

NO!  NEVER!  People suck.  Quote me on this.  The majority are fat, stupid and lazy.  Don’t believe me.  Check out the Black Friday videos on the web of people brutalizing each other to save $20 on a flat screen TV that they don’t really need.  This is probably your pool of potential employees for most service businesses (restaurants, spas, daycare, etc.)

The hiring of employees requires more math just like the math in Part 3.  A full time minimum wage employee in Connecticut will cost you a minimum of about $20,000 each year.  There are roughly 2000 business hour in a year and the total includes minimum wages, employment taxes, and workers compensation insurance.  It doesn’t include the expense of training, oversight, compliance, occupancy or capital needed to hire and maintain employees.  At a minimum, will your employee generate Gross Profit of at least $20,000 each year?  If not, DON’T HIRE THE EMPLOYEE!  Use the calculation of annual earnings multiplied by 1.2 to determine the real employment cost of each employee.  If they can’t provide at least that much in Gross Profit each year, you CAN NOT hire them.  They will lead you to bankruptcy if you don’t perform this simple calculation.

Let’s extend my example from Part 3.  If the owner wanted to hire a full time, minimum wage employee, she would have to sell about 5 snow globes each and every hour to be able to pay rent, pay the employee and buy more inventory.

There are more problems with employees than just paying them:

My town has an unemployment rate over 15%.  There are plenty of low skill jobs available in light manufacturing and service businesses like restaurants and retail.  There are also plenty of local manufacturers who can’t find skilled labor at much better pay.  Some of these businesses have to import workers from 20 or more miles away to fill open positions.  Why?  Because almost all people have a sense of entitlement.  Why should they have to be productive and responsible for 8 hours each day when the government will give them food stamps, healthcare, housing, phones and disability pay to do nothing?  Our minimum wage is $8.25 per hour.  These benefits, if eligible  will definitely exceed that per hour for doing nothing.  Slightly more industrious people will work just enough to make some extra cash and qualify for the Earned Income Tax Credit.  Do you honestly think these people will work hard enough for you to be profitable?

If you hire employees, you need to be the asshole!  Nice bosses will be bankrupt employees.  Seriously, watch those Black Friday videos again.  Do you think Steve Jobs, Bill Gates or Gordon Ramsay were nice bosses?  Don’t be an idiot.  They were/are assholes.  They had enough experience to know that people will take advantage of you whenever they can.  They knew that in order to be successful, they had to be assholes.  Good employees will recognize the necessity of this, work hard, and rarely need to see the asshole come out.  These people are few and far between.  Most people will hate you but just fear you enough to be productive.  BE THE ASSHOLE.  You’ll be much happier and successful over the long run.

I’ve hired people but fired many more.  I enjoy the firing, except when regretting the hiring.  Fire quickly and hire very, very slowly.  Do the math.  If the potential employee will not produce enough Gross Profit, don’t hire them.  If the employee stops producing the required Gross Profit, fire them.  All of the restructurings that I’ve been responsible for were undertaken to save the company.  I’ve never laid off a person and then missed them later.  It is NOT PERSONAL, just business.  Businesses can’t stay in business if its employees are not productive.

NEVER HIRE FAMILY!  I used to go to a family owned diner where 3 generations owned and operated it.  It seemed to work for them.  It might be because each generation grew up in the business and understood the need to work hard and collaborate.   Odds are that family employees will be your worst employees.  Family members may have a deeper sense of entitlement than strangers.  They may feel that you owe them because they’re family   How would you feel about firing your brother, mother or father-in-law.  The hassle probably isn’t worth the money.  Avoid hiring family members.

Consider outsourcing.  Rarely will you find a business that needs an employee for exactly 40 hours each week,  Only non-experienced government technocrats believe in the 40 hour work week,  If you have more business than you can handle (bully for you), or need specialties and services that you can’t provide, consider outsourcing.  You should end up only paying for what you need without the burden of employees.  Maybe restaurants can’t outsource french fry flippers but there’s no reason why I can’t outsource bookkeeping or simple tax return preparation.  I always recommend outsourcing before hiring employees.  You will still have to manage outsourced activities but you’ll have more flexibility and end up spending less money than having employees.  My biggest regret in business is not following my own advice on this.  I never should have hired employees.

If I sound sarcastic, I’m not.  My advice is based on more than 20 years of experience with over 100 business including my own.  If I sound angry, I’m not.  I’ve learned to separate emotion from business decisions – you should too.  If I sound cynical, good.  Healthy doses of cynicism and skepticism will save you money and sanity.

Starting a small business Part 3


Thank you virginiaplantation for liking my previous posts.  You have inspired me to continue.  I hope the posts either help people fix their businesses or prevent them from losing their savings while starting one.

 

Is failing to plan really planning to fail?  YES!  Without a business plan or tons of blind luck, your business will fail.  Would you drive to a new place without looking at a map or using GPS?  Did you jut say yes?  Really, you’ve just heard of a new Tamil restaurant opening in a town that you’ve never been to before and you would blindly jump into your Prius and head for it?  Be honest.  You would call up iPhone maps and hope that they have the correct directions.

Starting and running a business works the same way.  You need a plan or budget to guide you.  Not only does it guide during the year, it also lets you measure your success or failure and correct the course along the way.  Building a business plan before starting a business will even let you determine profitability before spending any of your hard earned capital.

I briefly had a client that opened a Christmas themed store.  She wanted to sell all kinds of Christmas ornaments and decorations year-round.  She plopped down a bunch of money on first and last month’s rent and an opening inventory of balls, snow globes, Santas and so on.  She hired my firm after opening up and spending all this money.  She didn’t have a plan.  She did drain all the money out of her 401k and second mortgage to start the store because banks wouldn’t lend her any money.  That should have been her first hint.  I can’t believe that the local banks didn’t recommend that she work with an accountant or other resources before starting the store.

I only met her once and gave her a hypothetical.  I asked her how many snow globes would she need to sell each month to just pay rent –  not utilities, property taxes, or any profit.  I just wanted to demonstrate the effort required for her to be able to buy more snow globes and keep the doors open.  She didn’t know.  She would sell the globes for $10 and they cost her $5 each so her Gross Profit per globe was $5.  Her monthly rent was $1,500.  She was open 5 days per week for about 8 hours each day.  5 days a week is roughly 20 days per month.  So, $1,500/$5 equals 300 globes.  She would need to sell 300 globes every month to just pay rent and buy more globes, at current costs.  Divide the 300 globes by 20 days and she would have to sell 15 globes each day of each month to pay rent.  Getting more anal, divide the 15 globes by 8 hours and she needed to sell 2 globes every single hour of every single day to pay rent.

I asked her if she could identify a list of people who would come in and buy 2 globes each hour.  Her eyes glazed.  I may have thrown too many numbers at her too quickly.  Later, she asked to only work with one of my assistants.  She fired us after the first quarter of work and closed down two months later.  She never payed for the work we did.  She probably lost over $20,000 so I didn’t really try to collect the money she owed me.

You can find business plan templates all over the web.  Just type business plan template into Google.  I don’t necessarily endorse any specific one.  I used to teach the Fast Trac methodology.  You can find their take at entrepreneurship.org.  Regardless of the template, you should use one that breaks down into how many customers/sales you need each month just to break even.

Be wary of glad handling mooks that “help” with creating a business plan, tell you to “follow your dreams” and never give any negative feedback.  (You’ll find them at places like score.org.)  You should really find a misanthropic curmudgeon who shoots your plan and dream through with enough holes to render it transparent.  Skepticism will protect your savings and your sanity.  Trust me.

 

 

Starting a small business Part 2


Really, I can’t emphasize this enough – DON’T START A BUSINESS!  You’ll go broke, destroy your marriage, and hate your life.

If that doesn’t dissuade you, you’ll need to start making a list of customers.  Do this before starting a business.  Building on the first post, you need to know your customers before you can figure out if you can cover your costs.  In other words, the last post gave you a formula to figure out how many transactions you need in order to pay the rent.  Now that you know the number of transactions, you need to figure out the number of customers.

McDonald’s and other fast food franchises have figured out how many households are needed in an area in order to supply enough customers for a profitable restaurant.  I believe that Dunkin’ Donuts uses 10,000 households as its’ threshold for a new restaurant. Are they expecting 10,000 customers?  No, they have other formulas to determine how many of these households will be customers and whether they’ll spend enough to provide for a new restaurant.

You need to take a similar exercise.  Start building a list and include how much that list will generate in monthly and annual revenue.  Too much work?  Fine, go ahead and fail.  No one will care that you took out a second mortgage and cashed out your retirement plan.  Maybe your old boss will take you back.

 

Starting a small business? Part 1


Why?  Don’t you like sleep, sanity and savings?  All three things are gone once you start a business.  Don’t take my word for it.  Ask any business owner.  Go to your local restaurant, car lot or mechanic.  Ask them how much fun they’re having.  Be warned – they might unload on you.

So if you still want to start a business, here’s some advice.  Figure out what your biggest expenses will be on a monthly basis.  Come up with a number.  Rent and/or employee costs will probably be the biggest amount.  Now figure out how much you’ll make on each transaction after any direct cost of the transaction.  This is your gross profit.  If this is too much work for you, either STOP or find someone to help you do it.  If you’ve stopped, you’re smarter than you look.  If not, divide your largest expense by the gross profit per transaction.  The result is how many transactions you need to have each month just to pay one expense.

If you can’t find enough customers each month to cover this one number, forget it.  Keep your day job or government benefits.  If that sounds harsh, wait and see what happens when banks, creditors and the IRS come after your failed business.

 

 

Should I start a business?


NO!

Are you considering starting a business or buying an existing business?  As a small business accountant, whose livelihood depends on small business clients, my advice is DON’T.

There are different challenges to starting a business versus buying an existing one so I’ll focus on starting a business. You need to ask yourself and answer the following questions:

  1. Does the world really need another massage therapist, tattoo parlor, auto mechanic, whatever you want to be?
  2. What separates my business from all of the other businesses out there?
  3. Do I know what business I’m really in?
  4. Am I comfortable working twice as many hours for half the pay of the average tenured schoolteacher?

Here are my answers for you:

  1. NO!  The world probably does not need another business like yours.  Look around.  How many existing businesses already offer your product or service?  They already have all of the advantages especially the most important advantage of customers.  This leads to Question 2.
  2. Unless you can come up with a differentiation, YOU WILL FAIL!  Even with a new big idea – a true entrepreneur – you need something big that separates you from your competition.  Not only do you need the differentiation, you need your customers to recognize and value it.  That brings me to Question 3.
  3. You are in the marketing business.  Regardless of what service or product you actually deliver, all businesses are in the marketing business.  If you don’t know marketing or are afraid of marketing, YOU WILL FAIL!  Marketing is acquiring customers and getting them to stay repeat customers.  Read some Dan Kennedy BEFORE starting a business.  No Customers = No Business.
  4. Facts matter.  The average schoolteacher works far less and makes far more than the average business owner.  There is no down time.  No one gets summers off.  You are responsible for paying all your bills and trying to have something left over for yourself, your retirement and your healthcare.  If you want a safe, comfortable career, become a school teacher or other government employee.

If I sound bitter, you are delusional.  This is the hard truth of business – most people fail.  The lucky few get too much credit and publicity.  If I haven’t talked you out of it, good luck.