Starting A Business – 7

Michael Lodge – listen to my PodCast   You can also listen to me on IHeart Radio.

This is brought to you by Lodge & Co. – a business and tax advisory firm for small business and start-ups.  Visit our website at www.lodge-co.com and learn more about us and what we can do for you.

Over the next few days you and I are going to talk about starting a business.  What is the process we need to go through and questions we need to ask, and the planning that needs to be done.  We will go through the step by step process.​

I am providing you with a lot of resources as you start looking at data that will affect your startup.  You need to know where to go to find the information that you need.

TYPES OF BUSINESSES

One of the first decisions you will make is the type of business you will open. Before making your decision, explore the opportunities that are available like a home-based or online business.

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​Green Businesses

Green businesses not only benefit the environment, but also use eco-friendly business practices as a means to market their products. Learn more about how to get certified as a green business.

The explosion of organic and eco-friendly products on retail store shelves is more than just a passing fad. It’s big business. This reality presents opportunities for environmentally minded entrepreneurs ready to start their own small business.
Successful green businesses not only benefit the environment, but also use green business practices as a means to market their products
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​Startups & High Growth Businesses

Startups commonly are technology-based businesses and have high growth potential. Learn more about how to start, run and expand a startup or high growth business.

In the world of business, the word “startup” goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That’s because investors are looking for the highest potential return on investment, while balancing the associated risks.
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Home-Based Businesses

Many well-known companies like Apple and Ford started as home-based businesses. Learn more about how to set up a home-based business and what you need to know to comply with laws and regulations.

What do Apple Computer, Hershey’s, Mary Kay Cosmetics, and the Ford Motor Company have in common? These well-known corporations all started out as home-based businesses. In fact, more than half of all U.S. businesses are based out of an owner’s home.
Starting a home-based business has many rewards as well as challenges.
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Online Businesses

I will pay more attention to this because so many clients are now starting E-Commerce businesses.  Establishing a business presence on the Internet can be a great way to sell and market goods and services. Learn more about how to start and manage an online business.

Establishing a business presence on the Internet can be a lucrative way to sell, market, and advertise your business’s goods and services. The following topics provide details on how to start and manage an online business.

Start a Business

Regardless of where you choose to operate your business, certain general requirements always apply. Before you can begin completing specific online business steps you must follow the basic rules for starting a business. Use these tools and resources to help take you from preparing your business plan and to becoming a successful business owner.

Register a Domain Name

A domain name is the web address of your online business. Choosing and registering a domain name is the first step to starting an online business. After you’ve chosen the name you’d like to register, the process is simple and cost-friendly. Where to register your name is up to the discretion of individual businesses.

Be careful to avoid possible security risks by becoming aware of potential scams. The Federal Trade Commission issued a consumer alert about Domain Name Registration Scams.

The Internet Corporation for Assigned Names and Numbers is the non-profit corporation that has technical oversight of Internet protocol address space allocation, protocol parameter assignment, domain name system management, and root server system management functions. It provides current news on issues surrounding domain names.

Select a Web Host

A web host provides you with the space and support to create your website. Choosing the host that best suits a business is up to the discretion of that business. Costs and abilities, such as site maintenance, search registration, and site development, vary from host to host but it is important for it to be both reliable and secure.

Design Your Website

The website of your online business is extremely important to its success. Because you don’t have a physical location, this is considered your “store front”. Websites can be designed personally, by hiring someone to work as your site designer, or by using an independent design firm.

Be sure to comply with U.S. trademark and intellectual property laws. The same laws and regulations apply to online businesses as regular businesses. Search for trademarks currently in use to avoid infringing on another company’s rights on your website.

Begin Advertising and Marketing

Similar to the traditional market place, online businesses cannot be successful without customers. For online businesses, these customers come in the form of site visitors or viewers. Generating the highest amount of traffic possible on your website will create the highest chance that those visitors will become customers. Register with search engines and use keywords that will drive the most traffic to your site.

Advertising and marketing on the internet is regulated very similarly to the real world, and many of the same rules apply. The Federal Trade Commission has created several guides to help online businesses comply with these regulations.

Comply with Online Business Regulations

Online businesses must comply with special laws and regulations that apply only to them. A lawyer that specializes in internet law can assist businesses with all aspects of starting and operating an online business. Contact an expert at the Federal Trade Commission for more information.

Find State and Local Compliance Information

In addition to Federal requirements, businesses must know and comply with state and local laws and regulations. Select your state, county, and city to determine what’s required of your online business.

Learn Federal, State, and Local Tax Requirements

Online business are required to follow the same federal, state, and local tax laws as regular businesses. If you are operating your online business in a state that charges a sales tax; or levies a gross receipts or excise tax on businesses you may have to apply for a tax permit or otherwise register with your state revenue agency. Online businesses are responsible for collecting state and local sales taxes from their customers when applicable, and paying these taxes to state and local revenue agencies.

Understand International Trade Laws

Operating internationally requires many additional considerations from finding overseas markets and suppliers to shipping and tax regulations. Follow international trade laws for online business to be sure you are in compliance with all regulations.

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Franchise Businesses

Franchises can provide an opportunity for ready-made business success, but they also come with a variety of challenges. Find out what you need to know before purchasing a franchise.  We will go deeper into this subject because so many go out and purchase a franchise.

Want to be your own boss, but not willing to take on the risk of starting your own business from scratch? Franchising can be a great alternative if you want to have some guidance in the start-up phase of the business.

What is Franchising?

A franchise is a business model that involves one business owner licensing trademarks and methods to an independent entrepreneur. Sometimes, franchises are referred to as chains.
There are two primary forms of franchising:

  • Product/trade name franchising

Franchisor owns the right to the name or trademark and sells that right to a franchisee

  • Business format franchising

Franchisor and franchisee have an ongoing relationship, and the franchisor often provides a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing

Before Investing in a Franchise

Before you decide to franchise, you need to do your research. You could lose a significant amount of money if you do not investigate a business carefully before you buy. By law, franchise sellers must disclose certain information about their business to potential buyers.  Make sure you get all the information you need first before entering into this form of business.
To learn more about franchising opportunities, visit Federal Trade Commission Bureau of Consumer Protection.
The decision to purchase a franchise involves many factors. To help you explore if franchising is right for you, consider the following questions:

  • Do you know how much you can invest? 
  • What are your abilities?
  • What are your goals?

Franchising Strategy

You need a strategy before investing in a franchise. Doing your homework about the franchise first will help you gain a solid understanding of what to expect as well as the risks that could be involved.

  • Be a Detective In addition to the routine investigation that should be conducted prior to any business purchase, you should be able to contact other franchisees before deciding to invest. You can obtain a Uniform Franchise Offering Circular (UFOC), which contains vital details about the franchise’s legal, financial, and personnel history, before you sign a contract.
  • Know What You are Getting Into Before entering into any contract as a franchisee, you should make sure that you would have the right to use the franchise name and trademark, receive training and management assistance from the franchisor, use the franchisor’s expertise in marketing, advertising, facility design, layouts, displays and fixtures and do business in an area protected from other competing franchisees.
  • Watch Out for Possible Pitfalls: The contract between the two parties usually benefits the franchisor far more than the franchisee. The franchisee is generally subject to meeting sales quotas and is required to purchase equipment, supplies and inventory exclusively from the franchisor.
  • Seek Professional Help The tax rules surrounding franchises are often complex, and an attorney, preferably a specialist in franchise law, should assist you to evaluate the franchise package and tax considerations. An accountant may be needed to determine the full costs of purchasing and operating the business as well as to assess the potential profit to the franchisee.

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​Buying Existing Businesses

For some entrepreneurs, buying an existing business represents less of a risk than starting a new business from scratch. While the opportunity may be less risky in some aspects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase.

If you have decided to buy an existing business, you will want to be sure you are making the right choice in your new venture. Only you can determine the right business for your needs; however, the following topics can help guide you make the best decision.

The Steps to Starting

There are many different types of businesses to buy. Take these steps to narrow down the list of potential businesses you may want to purchase.

1. Identify Your Interests If you have absolutely no idea what business you want to invest in, first eliminate businesses that are of no interest to you.

2. Consider Your Talents Being honest about your skills and experience can help you eliminate unrealistic business ventures.

3. List Conditions for Your Business Consider if a business has a condition that is unfavorable to you, such as location and time commitment.

4. Quantify Your Investment Finding profitable businesses for sale at reasonable prices can be difficult.   Ask yourself why this business is for sale in the first place.

Advantages to Choosing an Existing Business

There are many favorable aspects to buying an existing business such as drastic reduction in startup costs. You may be able to jump-start your cash flow immediately because of existing inventory and receivables.

Disadvantages to Choosing an Existing Business

There are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Also, be aware of hidden problems associated with the business like debts the business is owed that you may not be able to collect.

Doing Due Diligence

As you become a business owner, there are items that need to be addressed before entering into any business agreements or transactions.

  • Obtain all Licenses and Permits Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the state in which the business is located.  Use SBA’s licenses and permits finder tool to get a listing of federal, state and local permits and licenses you will need to run your business.
  • Zoning Requirements: Zoning requirements may affect the type of business that you are intending to operate in a particular area. Visit the Basic Zoning Laws for more information about zoning and to ensure your business is abiding by all laws in your area.
  • Environmental Concerns: If you are acquiring real property along with the business, it is important to check the environmental regulations in the area. Visit EPA’s Small Business Gateway for more information.

Determining the Value of a Business

There are a number of different methods to determine a fair and equitable price for the sale of the business.  Here are a few:

  • Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
  • Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
  • Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.
  • Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
  • Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.

For more information, read SCORE’s article on How to Value Your Business.

Doing Research for Purchasing a Business
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation. The following list includes important information you want to include when researching the business you want to buy.

Letter of Intent:  The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.

Confidentiality Agreement:  A confidentiality agreement indicates that you will not use the information about the seller’s business for any purpose other than making the decision to buy it.

Contracts and Leases:  If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.

Financial Statements:  Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not accept a simple financial review by the business itself.

Tax Returns: Review the business’s tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.

Important Documents:  Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.

Professional Help:  A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.

Sales Agreement for Buying a Business
The sales agreement is the key document to finalize the purchase of the business. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill. If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it.

Checklist for Closing On a Business
The closing is the final step in the process of buying a business. Keep in mind that you should have legal counsel available to review all documentation necessary for the transfer of the business.

The following items should be addressed in a closing:

  • Adjusted Purchase Price This will include prorated items such as rent, utilities, and inventory up to the time of closing.
  • Review Required Documents These documents should include a corporate resolution approving the sale, evidence that the corporation is in good standing, or any tax releases that may have been promised by the seller. Check with your local department of corporations or Secretary of State for more information.
  • Signing Promissory Note In some cases, the seller will have back financing, so have an attorney review any note documentation.
  • Security Agreements A security agreement lists the assets that will be used for security as a promise for payment of the loan.
  • UCC Financing Statements Uniform Commercial Code documents are recorded with the Secretary of State in the state you will be purchasing your business.
  • Lease: If you agree to take over the lease, make sure that you have the landlord’s concurrence.  If you are negotiating a new lease with the landlord instead of assuming the existing lease, make sure both parties are in agreement of the terms of the new lease.
  • Vehicles: If the purchase of the business includes vehicles, you may have to complete transfer documents for the vehicles. Check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
  • Bill of Sale: The bill of sale proves the sale of the business. It also explicitly transfers ownership of tangible business assets not specifically transferred on their own.
  • Patents, Trademarks and Copyrights: If there are any patents, trademarks and/or copyrights associated with the business, you may need to complete the necessary forms as part of the transaction.
  • Closing or Settlement Sheet The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing.
  • Covenant Not to Compete It is a good idea to have the seller sign an agreement to not compete against the business. This will help prevent any interference from the previous owner.
  • Consultation/Employment Agreement: If the seller is agreeing to remain on for a specified amount of time, this documentation is necessary for legal purposes.
  • Complete IRS Form 8594 Asset Acquisition Statement This document will indicate how the purchase was allocated and the amount of assets, which are important for your tax return.
  • Bulk Sale Laws: Make sure that you comply with bulk sale laws, which govern the sale of business inventory.

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Self Employed & Independent Contractors

Being a self-employed or an independent contractor can offer small business owners flexibility as well as challenges. Learn about the pros and cons of both and how you can get started.

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Women-Owned Businesses

Learn about the wide range of federal programs available to help women owned small businesses start-up, grow and succeed

SBA provides resources to help women entrepreneurs launch new businesses, grow their businesses and compete in the global marketplace. With our online resources, financing opportunities and Women’s Business Centers, they are able to help you succeed.

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Veteran-Owned Businesses

Starting a small business is a tremendous opportunity for veterans. The federal government has programs specifically for veterans and the military community.

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People with Disabilities

Starting a business can be a great opportunity for those with disabilities because of benefits such as work flexibility. Learn more about government programs for disabled small business owners.

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Young Entrepreneurs

Millennial entrepreneurs are the key to our nation’s economic future. Learn about federal government resources to help aspiring small business owners succeed.

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Encore Entrepreneurs

Are you nearing retirement and exploring new business opportunities? Now is the time to explore the possibilities.

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Minority-Owned Businesses

SBA is a strong advocate of minority and special audiences, and we know doing business with the government, also called government contracting, can be a very lucrative endeavor for small businesses.
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Native Americans

Information on programs that are designed to help Native American entrepreneurs start, grow and manage their businesses.