A CFA I've recently started following wrote this article and it does a wonderful job of helping to remind us of some of the important steps that we need to perform as we start or acquire a business.
And while he addressed his advice to franchises it applies to businesses in general and is well worth the read. For I see people all the time that start or acquire businesses that they just don't understand and have no idea what the needs and demands of this business are.
But a business is like any other purchase or expense. What you are acquiring needs to fit your needs and you must be able to afford it. Otherwise you will soon find that things just aren't going to work and by then it's too late to avoid major problems.
So be sure to research and understand all aspects of any business you are looking at acquiring or starting.
That research and planning includes at least the following areas.
What does the business do and does it really fit with my abilities and interests? Remember any business you buy or start that you end up hating or finding you can't manage isn't going to work out for long and it certainly isn’t going to end as a happy experience.
What exactly are the needed funds, resources, and assets to both acquire and start this business as well as to run it day to day? If you can't come up with the money to support a business’s daily operation until it returns a sustainable profit you will finally be forced to give it up.
What are the expected returns on that investment and will that amount of return provide for your total support or will you need to continue to have other sources of income? Many people find that their new business just doesn't provide an income level that will support them without other income. If that is the case are you prepared to work two jobs or take income from savings or investments to support yourself? If so, for how long is this arrangement going to be necessary?
And last but not least…. the question that most people never address when starting or acquiring a new business.
What are your plans on how to eventually either sell or recover your equity in the business when that time comes? Everyone starting or buying a business seems to want to forget that someday you will either have to have provided for that business to continue to operate without you or it will have to be sold. The time to consider those issues is at the beginning not when the time finally arrives. That’s because it affects everything from what business structure you decide to use to run the business to how you might structure it to be able to pass it on to heirs or stockholders. And remember your children or family might have no interest in running this business once you are gone. So consider the fact that under many circumstances without planning you well may see most if not all of your owner equity going for taxes at some point in the future. And I would bet paying a big part of what you get out of your business to the tax man is not what you had in mind when you started or acquired that business.
So do your research and seek professional help before you get started as it will avoid many unpleasant mistakes and miscues. Remember good advice doesn’t cost nearly as much as it saves.
How much income do you need to support your lifestyle?
Think of it this way, if you were looking for a new job, what is your salary requirement? The process in franchising is the same approach. The concept must be able to generate the income needed to support your lifestyle. The first step is to determine the income you need from the business.
What is a suitable investment level?
There’s no sense researching concepts until you know what you can afford. If you’ve ever purchased a home, chances are your first step was to get pre-approval for a loan. Once you figured out what you can afford to invest, you search for houses or condos in that range. If you are looking at a franchise, it’s a similar process. Determine a suitable investment level, and then target your search for franchises within that range.
When do I want to open my business?
I generally advise clients to start the formal due diligence process if they want to open within six months or less. It typically takes between 30 and 45 days to determine if a franchise concept is right for you. Depending on the type of business (retail, food, etc.) it may take some time to find a location and build out the space. If your time frame is a little longer, its best to wait before formally engaging talks with a franchise.
Owning a franchise can be a fun and exciting experience. It’s normal to want to seek new information. If you’re curious, by all means start looking at different concepts to get a feel for what’s out there. Focus on the types of businesses you like. Don’t spend time seeking the details until you’ve addressed the above questions. This will save time, frustration and help you target specific opportunities to help achieve the ideal lifestyle. You want to keep your options open. A targeted approach can help achieve your goals.
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Most people who are interested in buying a franchise start the process with a Google search for info on specific concepts. Since food and coffee are part of our everyday lives, when we think “franchise”, we generally think of food and coffee concepts like McDonalds, Subway, Dunkin Donuts, etc. While these are all successful businesses, there are other options out there that may be more suitable depending on your personal interests. It’s estimated there are over 6,000 different franchises available in the United States today. Almost every industry has a franchise model actively seeking motivated people to invest in their system. If you are serious about franchising, you don’t want to limit your options. Rather than researching concepts, your best bet is to start by asking yourself the following questions: