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Discussion in 'Small Business Helper' started by The Helper, Sep 2, 2004.
The Small Business Helper is now open Please welcome my dad to The Helpers.
Welcome! uhhh.....what is your dad's nickname on this forum? Is it Small Business Helper?
Small Business Helper Forum Active
Small business helper here, also known as The Helper's dad. It's great that this forum is now up and active. Am looking forward to getting some feedback about The Small Business Helper concept.
Feel free to jump in anytime.
Just to stir some discussion; my business teacher gave a scenario to the class a few months back:
If you were a moderately sized Acounting firm that had two million dollars in available funds for marketing and were able to get 30 seconds of superbowl commercial time for 1.5 million, would you take the deal?
I would say No.
Agree with you that it is a bad idea. Scenario is somewhat flawed... an accounting firm with two million dollars which it is able to allocate solely for the purposes of advertising is much larger than "moderately sized".
Would estimate that it would take at least 50 partners (or associates) to have been able to generate the type of revenue which would allow an advertising budget of this magnitude. This would qualify it as within the top thirty percent of accounting firms as far as size is concerned. An average accounting firm has between ten and fifteen partners and a support staff of around thiry or forty accountants.
To the reasons why it is a bad idea... accounting is a service type of business. Even with the degree of computerization nowadays it is still fairly labor intensive. It is also cyclical in nature, with a huge overload at end of year and tax time. Growth within a business of this type must be carefully planned because it takes time to bring new people into the work force.
A one chunk expenditure on national television in January, if successful, would overload an accounting firm to the breaking point at absolutely the wrong time of the year. If unsuccessful, it would be a financial disaster which would probably tear the firm apart.
The Small Business Helper
Very interesting that you mention that. I was thinking more along the lines of demographics, responsiveness, and really just the nature of the business in context of what's going on. Also, such a massive amount of money being put into something like that wouldn't gaurentee effectiveness seems a bit foolish.
On another topic, refering back to my business class, the class has been discussing the operation of a franchise lately as a form of business ownership that is seemingly less 'complicated' than a sole proprietership to operate for a young entraprenuer. I was curious as to how one would go about acquiring a franchise. I'm assuming they don't just hand them out to former managers of McDonalds who think they know what it takes. How does a process like that work if one were to consider operating such a business?
Would also agree with you that the demographics are all wrong... also, a one time expenditure of more than fifty percent of an advertising budget on a one time shot is a lot more risky than anyone with a CPA ticket would ever allow. Simply because of that alone, it would never happen.
Regarding franchises... would refer to them as a "cookie cutter" type of startup for a small business. Somebody else has already been there and done that, knows that it does work, and a good deal about how to do it.
There are good franchise deals and bad franchise deals. Generally, you get about what you pay for, except when you are dealing with a pyramid type of franchise structure. There are a lot of these out there.
If somebody is spending a lot of money advertising a franchise opportunity, TV spots, seminars, full page newspaper ads, etc... very good chance that the franchise structure is not what it seems to be and they are looking for the quick buck. They are taking advantage of being able to fool enough people long enough to make their money on the up front franchise fees and the instructional materials.
You won't see an advertisement for the good franchises, and you will also pay a lot more. I have never seen a bootstrap type of franchise opportunity which gave you a low in and a high out. Bottom line is Tanstaafl... "there ain't no such thing as a free lunch", and even then you don't always get what you pay for.
Best rule for franchise opportunities... caveat emptor "let the buyer beware".
The Small Business Helper
That's pretty interesting. I guess I was somewhat mislead with how it really works. It's great to get some feedback on these things.
My textbook seems to be quite 'crappy' even though the teacher claims it to be "college level" (I'm a junior in high school by the way). It spits out rediculous lines like "The Japanese offer the Deming Award, which is named after an American who was an expert on quality." Apparently he majored in quality...
I'm curious to know how you started out in business; all the way back to the beginning. You seem well versed in the topic. It always seems it's about 'who you know, not what you know' which admittedly makes things easier but how to get started really puzzles me. What happens after you fast forward past the loans, licencing, approvals, etc? How does one find that 'good spot', figure out that 'business that's right for them'? The oversimplified cliche answer somewhat doesn't sit well with me: Do what you like or are good at. The problems that can arise with reasoning like that are knowing whether or not I really am 'good' at a specific thing, or if that thing I like really is the right move to make?
Your insight is always appreciated
If you want to start a small business there are a number of things you need to know that when I started out in business I was ignorant of. As far as I know they aren't in any educational materials that you will be exposed to in a school, including college.
There is another school that will teach you what you need to know... but the lessons are very expensive. Some people call it the school of hard knocks. Been there, done that.
If you have visited the Small Business Helper website here and read what I wrote, you can get an idea of what I am talking about. One of my gripes about academics is that for the most part the people who are teaching business courses have little or no practical experience in business.
Truthfully, I believe there is no practical substitute for experience. If you start a small business you will make mistakes, and they will cost you. Hopefully the price will not be too high and you will learn quickly enough to survive.
Start small, the mistakes don't cost as much. Don't mortgage your future to do it... leave your options open. You always need to plan carefully. I always evaluate any business decision based on what is referred to as the "worst case scenario". Before you make a decision you have to be ready to accept what the worst consequences of that decision might be.
Additionally, you have to design flexibility into your plan. Plan A, Plan B, Plan C, etc... based on what your analysis of the situation tells you might happen, both good and bad.
This is where most people fail... They have hindsighted themselves into failure instead of having the foresight to plan ahead. Be a pessimist when you plan... what happens is always better than the worst case. Before you decide to do something, your worst case scenario should always be a minimum survival plan that gives you several back doors to exit from, at least semi-gracefully with as few bruises as possible.
The Small Business Helper
I was curious of how much, on average, startup costs are for a business having in mind a location that is good or good enough to do well. Also, having in mind both extremes in terms of what type of business; how much would startup costs be on a bakery and how much would they be on an accounting firm assuming same location and a size that is sufficient for operations?
You also mentioned startup costs for a franchise. What is the range of those, having in mind each of the above mentioned examples?
I do not have sufficient information at hand to be able to accurately answer your questions for either a bakery, or an accounting firm, except in a general sense.
The Small Business Helper website gives a broad overview of what a small business is all about. However, there are many other factors one needs to consider with regard to the specifics of a small business venture before getting involved doing detailed financial projections for startup costs and operating expenses.
In order to determine what the startup costs of a particular type of small business are, you have to do some cost analysis and income vs. expense projections. This requires you to have at least some basic background in accounting and a fair degree of precision with numbers. The ability to use a computer spreadsheet, such as Excel or QuattroPro is something which considerably eases the difficulties involved.
One advantage to a franchise operation is that a good portion of the startup costs are already known. For people who are familiar with the type of business that the franchise involves, this reduces the level of complexity of the decision making process. However, it also means they have to trust somebody else's numbers instead of their own. Depending on their own level of competency running numbers, this can be either good, or very bad.
One of the things I have learned over the years is that any job usually grows to fill or surpass the time slot one allocates for it's completion. Likewise, any financial projections that one makes almost guarantee that at least as much money as was projected for startup costs will be spent (probably more), and the fixed cost of operations will most likely be more than what was projected. More bad news... income projections will almost always prove to have been grossly overinflated because growth projections for sales are hardly ever met.
These are some of the reasons for always basing financial decisions on the worst case scenario projection. To be frank, shit always happens, and Murphy's law rules (if it can happen, it will happen). The survival rate for small businesses is about one in ten, and these are a number of the reasons why.
The Small Business Helper
I was looking over your website and read through the Banking section. You mention that borrowing from the bank is "iffy". The ciriculum at school places a lot of emphasis on getting that loan through a business plan but my teacher who claims over 40 years of experience says that the best way to go is "OPM" - Other People's Money.
To me this sounds like a grueling, uncomfortable, and somewhat inappropriate way to deal with startup costs without risking too much of your own money. Of course the consequences of not using such a method are much worse, wouldn't borrowing money from friends and family just create even more problems in the future if the business didn't go so well? What is really the best way to get enough money to startup if the amount needed is anywhere from say $5,000 to $50,000 or possibly even more?
Borrowing money to do a small business startup is a very high risk, both for the lender and the borrower, due to the high failure rate of small businesses.
About 25 years ago I managed to lose over $80,000 in about eight months, and while the money was not actually borrowed, it was the most expensive lesson in the business school of hard knocks I ever paid for.
Fortunately I was able to get out of this situation with a whole skin, no outstanding debts, avoiding personal bankruptcy, and keeping my personal credit rating intact... but since that time I have been absolutely paranoid about borrowing money to finance anything... period.
Your teacher says that OPM is the way to go. In fact, this is often the only viable alternative due to the risk factor involved. Borrowing money from relatives is probably the most common way to finance a small business startup... and yes, you are right... if you fail it does put a black mark by your name in the family album, but at least it doesn't destroy your credit rating and/or force you to declare bankruptcy.
The experiences I've had with my daughter as she grew up also taught me a valuable lesson about money management and how it relates to other people's money. I'm a little prejudiced in her favor, for obvious reasons, but the truth is that she was very good at spending money... that is, other people's money. When it came to actually spending her own money, she was so tightfisted it was unbelievable.
Bottom line here is that the best way to get money for your own business startup is to earn it and save it. With sufficient discipline in your spending habits, a good work ethic, and the ability to accumulate capital, however slowly, you can do it all on your own. Also, these same habits will carry over into your business and help you there as well. Believe me, budgeting for a small business is no different than budgeting for a single person or a family. If you can't save money on your own, in my opinion you have no business being in business in the first place.
The Small Business Helper
tbshelper (a.k.a Small Business God),
I must say, that was very insightful . I read a bit on your suggestions about taxes. This is often a shakey topic. Once again, I'll refer back to my teacher who says that the government knows most people don't pay all their taxes (in businesses) but never suggests that you should never get too greedy. Pay most, he says, but if you get too greedy, you'll get scewed in the long run...he noted that he speaks from experience. From many places I have heard that it's practically impossible to pay all your taxes, especially when you first start out. You mention that if you can't handle paying them all, you won't survive anyway. With all this is mind, what is really the best way to handle such steep taxes? Also, how should taxes be dealt with in a cash business?
On every page of my web site (The Small Business Helper) there is an invitation to come to this forum for answers to questions about more specific information than is given there. You seem to be taking full advantage of this opportunity. Hopefully, I am helping you at least in some small way.
You may have noticed that there is no B.S. or beating around the bush in anything I say. Lots of times you probably won't like hearing it, but to the best of my ability, it is the truth, straight up, the way it really is out in the world of business. This does not make me a small business god, just an honest person who is really interested in helping other people to succeed in small business. No axes to grind, or hidden profit motives. There is nothing for sale here, only information and advice.
Regarding taxes... would never advise anyone to evade taxes. This is not ethical, and it is also illegal. However, there is a difference between tax evasion and tax avoidance. Evasion is illegal... but tax avoidance is entirely legal and also highly desirable.
One of the huge advantages of a small business operating as a DBA is the ability to structure it so as to take full advantage of all the legal tax avoidance methods that are available, and there are more than a few.
Would advise your teacher not to talk about methods of tax evasion, or how to "handle" taxes in a cash business. People who are willing to do this kind of thing are also the kind of people you don't want to do business with, or be in business with. This is how that situations like ENRON get started.
The Small Business Helper
You're advice is more helpful than you can imagine. Many times the answers to some of these simple questions leave me wondering if the person I asked actually knows. Your lack of BS is always appreciated.
At the moment, I have no questions but I'll post back as soon as I get confused about something (which won't take too long ).
Today, my teacher said something quite odd again. "Don't start a sole proprietorship or a partnership, it's too risky, I don't care what anyone says, there's no point...register as a corporation"...'limited liabilities...yatta yatta...not as risky.' You mentioned that your specialty wasn't corporations but I'm sure you can answer this: is my teacher justified in saying that? Is there any negative effect to owning a closed corporation over a sole prop or partnership? Is a sole prop worth the risk when a closed corp offers the same opportunities but...better?
The issue of choosing between forming a corporation or just a dba/sole proprietorship is not based solely upon risk and possible liability.
The only real plus to forming a corporation is that you can limit the risk of being sued for some sort of product liability, lack of performance, or breach of contract. Additionally, if you have employees, their avenue for any type of legal action is the corporation, and not you, personally.
Having said that, let's apply this to the real world of business. The only people who really make money out of a lawsuit are lawyers. Before anybody actually decides to sue you, they have to look at what the likely outcome would be for that course of action.
If you are a small business just getting started it is not likely that your risk of personal liability is that great. Bottom line, you don't have a lot of money so it's unlikely that anybody is going to spend a lot of money on lawyers to sue you... they really wouldn't get that much out of it, except the satisfaction of winning in court. They would have to pay their lawyers anyway, and if you don't have it, they can't collect it.
This is one of the situations that is blown out of proportion in order to justify extra accounting expense and legal fees for a business startup. I do not recommend that you start up a small business by forming a corporation. Start small, with a DBA, and feel your way up the ladder.
As soon as the business takes off, if it does, you will have money, assets that you need to protect. At this time it makes sense to incorporate so as to have that limitation of liability. Additionally, you have the money to be able to afford it.
The Small Business Helper
My teacher once again reiterated that there is no reason to start a sole prop or partnership and never to do it. He says there's no reason and if it fails they go after your stuff...in an S-Corps, you can just walk away. In regards to startup costs for incorporating (lawyer fees, forms, etc), you should be able to afford them or else you shouldn't be in business. He furthur challenged anyone to name one disadvantage to having an S-Corps over a sole prop or having anything other than an S-Corps. Is he right? or is there something you can think of to prove him wrong?