By Jeffrey I Fialky, Esquire
Bacon Wilson P.C.
According to an AARP survey, about 15 percent of baby boomers expect to own a business in retirement. Sometimes the motivation is financial; sometimes entrepreneurs are simply pursuing the next adventure. Whatever the reason, starting a small business can be exciting and rewarding.
The business plan
Good business planning is an essential first step for all would-be business owners. This plan includes a description of the business and how it will be marketed, financed, and managed, and is required for bank financing. Even when financing is not necessary, creating a business plan is important, allowing the business owner to examine the feasibility of the idea. Regardless of prior experience, he or she should consult and review the plan with accountants, lawyers, and even friends, family, or colleagues with business experience. Often, the necessary objectivity comes from asking truly difficult questions to measure potential success.
Which business model to choose
There are three primary ways to start a business: purchase an existing business, become a franchisor, or start a brand new business from the ground up.
The benefit of purchasing an existing business is that you are buying a proven model. The existing business will have financial records, employees, equipment, contracts, and vendors, all of which will be transferred to the new owner. The downside is that the cost is often significant and may require bank financing.
Buying a franchise also entails purchasing a business model with a proven track record. This model gives the franchisee the right to own and operate the franchise, and franchisors often provide some assistance to ensure profitability and smooth operation. Many franchises are lucrative and successful, but buying a franchise requires careful consideration. Franchises are generally costly, often including an initial fee, royalties, and sometimes, marketing fees due over time. Since franchisors require uniformity across locations, franchisees are often subject to very specific restrictions on daily operations.
The third business model – starting a brand new business – is most appealing to entrepreneurs, as it allows the owner the highest level of control. Starting a new business demands a rock-solid business plan. Unlike purchasing an existing business or a franchise, there is no roadmap by which to forecast expenses and revenue. If successful, however, a new business owner will enjoy 100 percent of their success, as well as freedom from the restrictions that often come with the purchase of an already-operational company.
Financing
All new businesses require start-up capital. Most startups have little or no credit and no proven record, so bank financing is not normally an option. New businesses often rely on “bootstrap,” or external financing. The most frequent source of bootstrap financing is the business owner’s own financial reserves, or that of friends or family. Another finance option may include negotiating favorable trade credit from vendors. Once a business has demonstrated some success, it may have the cash flow to sustain some form of bank financing, including Small Business Administration loans.
Entity formation
When starting a small business, the owner must consider what type of tax and legal organization will be the best fit. There are various types of legal entities, but two are especially suited to small businesses.
In its simplest form, a business may be a sole proprietorship, meaning that it operates under the name of its owner. Forming a sole proprietorship requires no separate legal entity, but simply commences at the start of business activities. This form of business entity is cost effective, but exposes the business owner to unlimited liability. This means that liabilities of the business will extend to the personal assets of the owner.
Another choice is to form a limited liability entity, such as a Limited Liability Company (LLC), which typically offers some level of protection for owners. Forming an LLC requires registration with the Secretary of the Commonwealth and should be done only after consulting with an attorney, to maximize both asset protection and tax planning.
Whether you are considering the purchase of a local business, a franchise, or the startup of your own venture, proper planning will help you proceed with confidence and find success.
Jeffrey I. Fialky is a shareholder with the regional law firm of Bacon Wilson, and a member of the firm’s corporate, commercial, and municipal departments. He specializes in sophisticated business, financing, and commercial real estate transactions.
Contact Jeff at 413-781-0560, or via email: JFialky@BaconWilson.com
