Starting a Small Business – Crowdfunding


Quickly, Congress passed the JOBS Act this year with a provision allowing companies to solicit investments from “unsophisticated” investors.  Previously, solicitations could only be made to high net worth investors.  The provisions were to become effective on January 1, 2013 pending rules to be written by the SEC.

The SEC has not written the rules yet and probably won’t by January 1.  (I don’t know if that is a permanent link.)  This delays everyone and everything related to crowdfunding.  DISCLOSURE – I plan both selling crowdfunded investments and providing consulting to businesses wanting crowdfunding.  I believe it will help boost the economy.

PROS:  Small businesses requiring up to $1,000,000 in capital will have a new source for funds.  Owners can cash out of companies without having to sell their entire interest.  Ordinary investors can find new revenue streams and investment opportunities.

CONS:  There will probably be a lot of con-men involved in crowdfunding.  Most business ventures fail and ordinary investors may not be able to handle the failure and loss of investment.  Congress will probably overturn the law once some crying Grandma appears on 60 Minutes with a sob story about losing her life savings.

Obviously, I’m in support of the law.  I signed a petition here in support of it.  I live in a depressed area that could use a capital infusion.  I’m sure there are plenty of local businesses that would get a boost from crowdfunding.  There are also plenty of local investors looking for a better rate of return than CDs and Money Market accounts.  There will be plenty of hucksters (see .com bust and real estate bust).  More importantly, there are plenty of good businesses and good business ideas that will benefit from this law.

 

Right to Work for Starting a Small Business


This is not a political post.  As I’ve said before, unions are great, as long as you already have a job.  The recent change in Michigan to a right to work state will not hurt the private sector unions in the short-term and may help them in the long-term.  This is a decent description of right to work.  Basically, the law means that you don’t have to join a union to be eligible for a job.  Michigan’s economy could use a boost.  See ratings here.  They also have one of the highest unemployment rates in the country (right behind my beloved CT.)

Right to work protection will help Michigan attract more business investment.  Unions are one more hassle for a business to consider when choosing a location.  My personal experience with unions is mixed.  Some unions understand the need for flexibility while others shoot themselves in the foot, thigh and waist by being inflexible.  But, in general, capital tends to flow to businesses that aren’t unionized.    This means that investors will view Michigan’s business climate as more friendly.  Companies involved in the auto industry may consider relocating closer to their customers in Michigan.  Business may also move out of non-right to work states like Illinois and Ohio and into Michigan.  Indiana and Wisconsin have had some success in poaching businesses from Illinois.

Increased business in Michigan will be good for both union and non-union employees.  Union shops can stay union and continue to collectively bargain for wages, benefits, work rules, etc.  Non-union shops can start or expand without the threat of the additional time and expense of negotiating with unions.

The result will be measured by a decrease in the unemployment rate in Michigan and increase in its’ GDP.  As the law is effective on April 1, 2003, it may take until Spring 2015 to demonstrate any success or failure.

 

 

Starting a small business – Marijuana


A few more states legalized possession of marijuana.  Check out this map – I can’t verify the information.  But it looks like legalization is gaining momentum.  Does this mean that you could start a marijuana business?

Farming sucks.  You need arable land, water, seed, fertilization, a strong back, hanging barns and security.  (I’m basing this on local knowledge of tobacco farms.)  You need to know what you’re doing and do it everyday.  Once, you grow it, how would you distribute it – straight to consumers, through dispensaries, etc?  Farming sucks – 20 hours a day of work and you can’t tell anyone about it.

Manufacture supplies and peripherals?  Do you know anything about making paper, blowing glass or making pottery?  It might not be enough to make a profitable go.  You’ll find too much competition on paper unless you can make organic, bleach free, etc paper.  How will you distribute the products?  Potentially, you could start a web based store for peripherals but you’ll find lots of competition.

Regulation will eventually kill you.  Shortly after legalization will come regulation.  (If it makes money, tax it.  If it keeps making money, regulate it.)  We have a huge, permanent bureaucracy in this country that is always looking to expand.  Do you think the FDA and ATFE and related agencies won’t get involved?  Do you want to compete against Pfizer or Monsanto (probably not)?

How about downstream?  Could there be pot specific munchies that you can make and distribute, especially with Hostess’ demise.  How about providing a safe place for people to consume their product?  You could teach how-to classes for wannabes and newbies.

I don’t see it as a winner unless you find a niche.  As it becomes more mainstream, the Big Boys will enter and crush you.  Good luck.

 

Strategy for innovation – Society and Culture – AEI


Strategy for innovation – Society and Culture – AEI.

I think this is all crap.  Innovation shouldn’t be affected by government.  While I agree that government should get out of the way, I believe that innovation needs more private capital.

Let’s go outside the box.  Let’s introduce a 3% annual wealth tax on all accumulated wealth over $10 million.  At the same time introduce a new R&D wealth tax credit that offsets the new wealth tax dollar for dollar with each dollar invested in R&D, software development excluded.

Private capital has been misallocated for decades now.  Job growth and real GDP growth will depend on actual, tangible production.

 

Free Business Plan Review Offer


I must be crazy.  On April 16th, I posted an offer on Craigslist for a free business plan review.  I wouldn’t write it for you but give you creative criticism from the point of view of a potential investor or loan officer while also testing the feasibility of the plan.  There were NO takers.  I didn’t promote it and Northwest CT doesn’t get much traffic.

So, as part of my goal to help 1000 businesses in 2013, I’m reopening my offer to review your business plan for free.  I will sign any confidentiality agreement that you’d like.  I will review it for both feasibility – do the numbers make sense – and the likelihood of getting funding for your business.

This isn’t an offer to write a plan.  It isn’t an offer for funding.  I just want to help you be successful.  I won’t try yo sell you anything.  Email me at 2013smbizsuccess@gmail.com for more info.

 

Starting a small business Part 9


How much money do you need to start a business?

How do you make a small fortune in the restaurant business?   Start with a large fortune.  That one kills at most CPA gatherings.

Lots, to answer my first question.  When starting a business, you need to figure out what you need including capital equipment, start up costs, working capital, safety margin.

Capital equipment includes all of the tangible assets that you need – machines, furniture, computers, phone systems, copiers, resource material, and so on.  Don’t forget Leasehold Improvements if you plan to rent space.

Start up costs include things like professional fees to get your business going, building a website, branding, first round marketing and anything else to get the business off the ground.  It can also include deposits for rent, utilities, etc.

Working capital in this sense means having enough cash to pay 3 months worth of expenses without any revenue.  You’ll need to plan out monthly expenses in your business plan financials.  You should have at least three months worth of expenses in cash.  It may take a while to get customers to buy from you and pay you.  Working capital also includes opening inventory and supplies.  You can’t fix a transmission if you can’t afford the parts.

Safety margin.  Things go wrong all the time.  Survival may rely of having a few more bucks put away to handle the problems or pay for things that you didn’t originally plan.

Make a list and get prices for each.  Add it all up.  Can you find the money to pay for this?

 

Starting a small business – Restaurants – UPDATED


Just don’t.  “When I save some money (or inherit it or win the lottery), I want to start a little Uzbek restaurant where all my friends can come and hang out.  It will be like a party every night.”  How about: “I can cook so I can open a restaurant.”

A successful restaurant might be the toughest business.  King crab fishing seems easier.  I’ve had many restaurant clients.  None of them made made any money and most of them failed within a year.  It is hard 24/7/365 work.  Here’s why:

It takes a special, learned skill to plan a menu.  Food spoils, quickly.  People’s tastes are fickle.  There is plenty of competition out there.  Math skills are necessary to determine the proper inventory of food – constantly.  You need business planning skills to guesstimate how much food is needed each and every day.  This is daunting and amateurs are guaranteed to fail at it.

Margins suck.  You will be lucky to break even on food – very lucky.  Do you think McDonald’s makes any money on its Dollar Menu?  The price of your plate barely covers the food and prep costs let alone the service cost and overhead.  I used to recommend that aspiring restauranteers calculate how many plates they need to serve each hour to reach break even.  I don’t think anyone heeded that advice.  Liquor sales are used to offset poor margin on food, plus it doesn’t spoil as quickly.  That’s why a $15 bottle of wine costs you $45 at your favorite restaurant.  Even McDonald’s can make up for its Dollar Menu losses by marking up soda and McCafe drinks by 300-500% of cost.

People suck.  Restaurants need to reinvent themselves constantly to stay on top.  Restaurants are a form of entertainment.  People’s tastes in food and entertainment are constantly changing.  It takes money to constantly change the look, feel and taste of a restaurant.  If you can’t break even on food, you’ll never generate enough capital to keep up with your customers changing tastes.

Friends suck.  Don’t count on them to carry your business.  They expect discounts, especially on booze.  They know you’re marking up the Chardonnay so they expect a special price from you.  They may not realize that you’re losing money on their calamari or casually forget the last time you told them.

Competition will crush you.  There is usually room for only a few successful restaurants in any area.  Smaller towns may only be able to have one.  That local restaurant that everyone goes to all the time shouldn’t be held up as an example for success.  They have years of gut wrenching experience under their belts and low overhead that you can’t compete with.  Large chains have economies of scale, distribution systems, and planning systems to beat you on the cost of everything.  (Even with the advantages, are any of your local Quizno’s still open?)

You suck.  Maybe, I don’t know you.  But are you willing to put in the work to make a successful restaurant.  There are no off hours let alone off days.  You need to work every day and watch everything.  I couldn’t do it.  I like the occasional hike or Sunday morning soccer matches.  You won’t get to enjoy anything until your restaurant starts making money.  By then, you’ll need to worry about how to keep it making money.

Franchises suck.  Look up Quizno’s.  I used to love their bourbon chicken (for no other reason than I really like bourbon).  I’d eat at my local Quizno’s a few times a week.  It always seemed packed at lunchtime.  Then it was less packed.  Then it closed down.  Franchises don’t guarantee success.  They take a whole lot of money upfront to purchase and start.  They also get a cut of every single sale so you have a higher break even point.  You’ll have high capital requirements, a vig, and many of the same headaches as a private restaurant.

So, still want to open a restaurant?  Sign here ____________________ acknowledging the fact that you’ve been warned.  Better yet, here’s a link to a sample business plan P&L for a restaurant.

Starting a small business Part 8


What business should I start?

Harking back to one of my early posts, does the world really need another __________?  Fill in that blank with the type of business that you are thinking of starting.  I now know that the world really didn’t another CPA firm specializing in individual tax preparation and small business accounting.  If you’re thinking about opening a “common” business, look around first.  Drive through the area where you want to open it.  Search for similar businesses on the web and in the yellow pages.  These are your competitors.  How are you going to take business from them?  Offer lower prices?  Why do you want to race to bottom of profitability?  Offer better service?  How will your potential customers know that?

Do we really need any more apps or social media products?  Here’s a Wall Street Journal blog all about software developers.  Even these guys are having a hard time finding funding as potential investors are asking themselves that question.

My original idea was to focus exclusively on consulting to manufacturers in the hopes of finding manufacturing companies that I could buy and make more profitable.  I ended up doing taxes and bookkeeping.  Again, the world didn’t need another one of those.

Here are some ideas:

Solve a problem – find a common problem and come up with an affordable solution for it.  As a misanthropic curmudgeon, I tend to drink alone but don’t always want to finish a bottle of wine on a school night.  I have not found a reliable way to preserve a bottle of red wine for more than 36 hours.  Come up with a decent solution to a common problem, whether a product or service, and you may be on your way to a business.

Increase productivity – employees suck and they’re expensive.  Find a way to eliminate employees through automation or process reduction.  PCs and Microsoft Office killed off the secretary, ATMs killed off bank tellers and automated check-out is killing off cashiers. In my last manufacturing gig, I would have loved to find a way to automate the inspection process.  It could have saved the company hundred of thousands of dollars while shortening the amount of time needed to complete an order.  Find a cost effective way to provide products or services more quickly and cheaper.

Play to greed or fear – Greed and fear are the too best motivators.  Black Friday shoppers suffer from both – greed to feed their consumerist appetites and fear of losing out.  Find a product that plays to common greed or fear and you may have a winner.

I’m not softening my stance in these last few posts.  I still don’t recommend starting a business.  Become a school teacher or a senior finance analyst at your state government.  But you’ve read this far so you must be serious.

Starting a small business – Taxes Part 1


I should be finishing a third response to the IRS for a client under audit.  The response has me so angry and frustrated that I decided to start a new thread.  By the way, I’ve had 3 clients get audited in 10 years of having my own firm.  That’s 3 out of about 3500 tax returns.  The IRS audits about 1% of returns each year some I’m either lucky or good – most likely a combination.  The first audit was due to being way to aggressive on deductions.  The second audit was because the IRS agent couldn’t figure out the Form 1040.  No lies – his supervisor admitted that I was right over the phone but decided to let her agent audit the return anyway.  The US Treasury got nothing from the audit but I had to bill my client more than $500 for my work.  Insipid.  This last audit was a no brainer.  I warned the client when I filed it.  The IRS originally wanted about $14,000.  I should have it down to less than $200 when I finally finished.  It will probably cost him about $1000 in heavily discounted fees from me.

Besides the relief of ranting, I’m telling you these stories because taxes are a large part of a business.  All three of the audits above were on small businesses or self-employed individuals.  Taxes suck.  They are complicated.  The average person (non-HGH or steroid using) probably couldn’t carry the paper version of all the forms, codes and regulations for just the IRS.  When I started studying taxes, they could fit in a duffle bag with room left over for a notebook, textbook, Mountain Dew and M&Ms.

Here’s a list of taxes that the average business must confront:

  • Federal Income tax – business or personal
  • State Income tax – business or personal
  • Social Security tax
  • Medicare tax
  • Self Employment tax if self employed
  • Federal Unemployment tax
  • State Unemployment tax
  • State and local Sales tax
  • Property tax
  • Real estate tax
  • Myriads of excise taxes (usually paid when you buy something)

I’ll address the taxes in separate posts.  Please leave any questions in the comment section.  I’ve have to get back to my audit response.