How to Protect Your Small Business Ideas With Business Structures

If you have the ingenuity to come up with a stellar idea, develop it into a business, and generate profits with it, you will likely have the foresight to protect that valuable entity. Here, we talk about how you can protect your small business ideas by keeping them behind the business castle wall: your business structure.

Business structures, or entities, are generally classified into one of these categories:

sole proprietorship

partnership

limited liability company

corporation

Each type has pros and cons. Here, we will consider some of those.

The sole proprietorship is an unincorporated business run by one person, and is by far the simplest form of business to operate. The reasons are straightforward:

It doesn't require much, if any, registering or paperwork

It is very easy to start, change, or close down

The value of the business (viewed by both buyers and the IRS) is based upon the skills and assets of the owner, not stock

The sole proprietorship may be a simple form, and is often best when there is limited capital and personnel, but there are distinct disadvantages:

The capital is limited to the owner's capital or what he/she can generate

The owner cannot be an employee of the business for tax purposes

There is unlimited liability for the actions and debts of the business

Liability is an issue in running any business, and increasingly so with the litigious society in which we operate. Liability is the ever-present dinosaur in the cave, ready to break out at anytime. You can't know when or why or how it may burst upon the scene of your business, but history has proven (as recent as yesterday, or any day) that IT DOES HAPPEN.

Simple can be good, but it can also be dangerous. When a sole proprietor operates, his capital, assets, and skills are what make up the business, and these assets become his payment in the event of a lawsuit. A court can freeze assets, force the sale of a residence, attach bank accounts and many other financial nightmares that you can imagine.

Fortunately, there are other business entity structures more geared to protecting your small business ideas and your thriving business.

Another of business is the partnership. It is a relationship between 2 or more persons who join together to carry on a trade or business. There are some advantages:

It involves more than one member, so it has greater potential for capital than a sole proprietorship

It combines the management skills of multiple people

It has pass through taxation

The partnership also has some disadvantages:

The authority for decision making is divided

Partners cannot be employees for tax purposes

Unlimited, joint and several liability among members

Like the sole proprietor, the partnership members can be held liable for all actions and debts of the business. In addition, there is joint and several liability, which means each partner is responsible for the actions and debts of each other partner.

It doesn't take much thought to see how this can (and frequently does) create issues. Different people have different ideals, different risk tolerances, and different methods. If one partner decides to act in a way in which another partner believes is risky, the other partners often times have no recourse but to dissolve the partnership. Because of this, many partnerships do not stay intact for long.

The limited liability company is a more flexible, and in many ways, more desirable business structure. An LLC may be treated as a sole proprietorship, partnership, or a corporation. A single member defaults to sole-proprietorship, 2 or more members defaults to partnership, and either can elect to be taxed as a corporation or a subchapter S-corporation.

Advantages are:

Flexibility: members can be individuals, other partnerships, other corporations or even other LLC's.

Management flexibility and pass through taxation

Members have limited liability for the actions and debts of the LLC

Disadvantages:

It is governed by the laws of the state

It is subject to a base annual tax (in some states) which is increased after profits rise to a specified ceiling

All members must also pay individual earning taxes

Over all, the LLC is a very clever and flexible way to set up a business, but the main advantage is the limited liability to the partners. This is an increasingly valuable quality as revenues and profits increase, because more money means higher chances of being sued. Following the old "risk and reward" equation, as the reward goes up, so does the risk.

Corporations are an advantageous way of establishing a business, but especially so when the profits and scope of operations increase. The law treats a corporation as a legal entity, similar to a person. It has perpetual life, meaning it does not pass away when the originator passes - the corporation remains a legal entity until such time it is formally dissolved.

Advantages:

The transfer of ownership is relatively simple

It is easy to raise capital and expand the business

All shareholders can be employees of the corporation, and have limited liability

Disadvantages:

Double taxation (C Corp), meaning the corporations profits are taxed and shareholders' earnings are taxed

It can be difficult and expensive to organize

The corporate officers must follow procedures, such as board meetings, corporate minutes, and others

Again, corporations are ideal for any business that has expanding operations, substantial earnings, or defined liability. Some businesses, by their very nature, encompass more risk, and some businesses are quite complex and require a more centralized structure. For these reasons and more, the corporation can be the best form of business to operate in.

3 Questions to Identify Roadblocks to Business Growth

What challenges you most about your management and leadership role as business owner? Do you think about it? Our observations suggest too many business owners work according to learned practices which they do not renew. The result is company financial performance staying well below potential. Good and reasonable performance can become a hindrance to excellent and exceptional results. It's easy to think 'we are doing OK, there's no need to change.' Consider your response to any of the following questions:

• Please explain your marketing strategy and how all the methods tie together.

• How does your business use strategic planning?

• Describe your long-term strategic plan.

• Do you have an effective written business plan or marketing plan?

• What are the key elements of your staff training and development program?

The first step to facing uncertainty and challenges is to admit there are potential roadblocks to creating business growth. The second is perhaps admitting 'I need help to remove the roadblocks'. If you take the second step to seek help, you are in the top 25% of business owners. Most resist help. A recent classroom experience at a prominent Australian University highlights this. A working student from India observed Australian business owners seem to be very independent and commonly have the view it will all work out in the end. 'She'll be right mate' still prevails. This attitude may cost your business significant profit performance.

There is a key understanding every business owner needs to grasp if consistent growth is to become normal. We all have blind spots and beliefs we hold onto and thereby restrict success, breakthrough and improvement.

Will we confront and remedy our blind spots? Gaps in vision, strategy planning, marketing plans, leadership and management practice, our experience and even how we view our own industry or product groupings can form craters of restriction.

Let me suggest 3 questions every business owner could answer to start to identify gaps and reveal blind spots. You may find the questions confronting. None of the answers are necessarily easy to find, let alone the solutions simple to implement and establish in your business. Don't put aside the questions if you are overwhelmed by the multi-faceted specifics required to instigate change and create growth. Consider the exacting specifics of research and change required in industries such as airlines, development technology, communications, security, automation, medical practice and more, where blind spots or neglecting systems can cost lives.

Q1. What time, energy and money are you prepared to invest in research, relationships and skill acquisition to begin or accelerate business growth?

Any change or adjustment will upset routines, historical practices, processes and systems, or the current lack of them. This is often the reason change and improvement is avoided. It disturbs routines, the status quo and demands careful change management. The easier part is usually discovering what is required but the high level challenge is in execution and implementation of the business plans to be introduced.

We've observed so many businesses try to create a strategic plan using basic goal-setting practices, but the day-to-day pressures pull staff back to operational and more urgent matters. There is no overriding business plan in place to maintain accountability and ensure target achievement. Strategic planning is not only the realm of large companies.

Q2. How will the required changes be achieved and what process will be used to advance all facets of a new business plan?

A Harvard Business School study found that 70 to 80 per cent of small businesses fail to see the projected return on investments due to the inflexibility or lack of strategy. Many small to medium business owners ignore or resist strategic planning for growth because it's too hard or perceived as irrelevant. Hence, there is no certainty of business practices or clarity of company purpose beyond basic revenue generation and continued existence.

A successful business plan begins where we are and moves us towards where we want to be. Strong implementation and execution must articulate how we are going to move there. Clarifying goals and expectations is part of the process and ideally should be in light of relevant product and market life cycles. Plans start with small, deliberate steps for what's important now and then create projects with longer-term specific action plans. Maintaining team focus on the desired outcome will then happen.

Q3. When was the last occasion your senior team members spent dedicated time with you as business owner to grapple with the high level thinking, leadership and creativity needed to see a breakthrough into new ways of running the business?

We worked with a company that supplied and installed a hi-tech product with increasing demand. The company had a staff of 10 people and the business was growing quickly. The director of this company argued in an elevated tone that he needed no one's help, he was self-sufficient and no person can change how they operate. He was certainly right about himself. Discussions with staff showed he was blind to the true needs in the business and most staff were cruising well below capacity. A strategic plan would have accelerated the business into exceptional growth.

Robert S. Kaplan and David P. Norton, authors of The Strategy-Focused Organization, identified in larger businesses, 85 per cent of executive teams spend less than one hour per month discussing business strategy. Too many SMEs never even mention a strategic plan. To lead a business into high-level thinking, leadership and creativity the key team must be reading, studying and keeping up to date with what is happening in their industry and business at large.

Writing A Business Plan For Success

Business plans are good for entrepreneurs starting a business who want to attract funding and established firms looking to expand into a new venture or grow their business. A business plan is a road map to the success of a business, many businesses fail every year because of improper planning. A good business plan eliminates this dilemma.

Purpose: The purpose of a business plan is to help determine the course of the business; where it should be in the future and where to place the resources in order to achieve that goal. It is a document that provides future lenders and investors with proof of the entrepreneurs' credibility. Thus, making them better candidates for funding.

Length: A Business plan wording and formatting should be straight forward and simple. The business plan should not be more than 40 pages. Summary tables and business charts should be used to make the numbers easy to read and grasp. No more than two fonts should be used. Font size should be at least 11 or 12 point size. Page breaks should be used to separate pages and charts.

Objectives: The main objective of a business plan is to establish revenue projections for the business and provide details on how the business will acquire the revenue.

BUSINESS PLAN FORMAT

A) Executive Summary

This is the first section of a business plan. This section is a brief overall summary of the business. It will define the nature of the business. The executive summary should be the last thing written. Once the rest of the components of a business plan have be written, entrepreneurs will have a clearer sense of what to write as their executive summary. The executive summary contains the following:

Mission Statement- This is where the business plan states how the customer will benefit from what the business has to offer. The business plan needs to state what products and services the company will be providing.

Objective - This is what entrepreneurs expect the business to accomplish, basically setting goals for the company.

B) Company Description

In this section, the business plan will go over a detail description of the business. The company description section contains the following:

Ownership - What type of ownership will the company be: sole proprietary, partnership, or corporation.

Location - This states where the business will be located. Office's, retail shop and any other type of facility that is associated with the business should be mentioned. A website address should be listed if the business has one.

Product & Services - What will the business be providing, will it be a service or a product?

Funding - This is where it is stated how the small business will get funded. Funding is broken down into two parts, start-up expenses and start-up assets. Start-up expenses is legal bills, renovation and leased equipment. Start-up Assets are items that the business owners will be using for the business operation. For example, cash, purchased equipment and inventory.

C) Management & Operation Plan

This section of the business plan details how the business will function on a day to day basis. It contains the following:

Management - This will be a list of the personnel that will have a managerial position and the definition of their role in the business.

Operation - This describe the process that it takes for the business to deliver the products or services to the consumer.

D) Marketing Plan

It details the small business effort's to sell the products or services to the customer base. A marketing plan will contain a list of the following items:

Industry - This lists all the players in the market; the competition, the type of products and service that they have, the strengths that they have and how they attract customers.

Potential customers - This section provides information about the individuals who will be purchasing from the business. The customer demographics will be based on the industry of the company.

Advertising- It involves promoting the products or services to the customer base. It lists the different ways in which the business will do this. For example, newspaper, radio, television, magazines, direct mail, Internet or telemarketing.

E) Finance Plan

Cash is the lifeline of a business. Without it, the business will be in jeopardy. This section will contain the following items:

Profit and Loss statement - A statement that lists the business' estimated revenue and expenses over a specific period of time.

Balance sheet - Measures the business resources (assets) and obligation (liabilities) and projected balance sheets for the first three years. The first year projections will be on a monthly basis and the second and third year projections are on a quarterly basis.

The 5 Master Steps to Business Excellence - For Sustainable, Profitable Growth!

WHY BOTHER?

Business Excellence simply means being the best you can possibly be as an organization. The intent of this article is to outline what is involved if your organization decides to undertake this never-ending journey. When implemented properly, business excellence yields immense benefits to private, public and not-for-profit organisations.

However, let me issue a warning here... as a result of running my own businesses plus facilitating or advising on practical implementations for approximately 1,000 other businesses over the past 35 years, I have found that the traditional recommended implementation approaches are just not practical enough for Small to Medium Enterprises (SMEs). This overview is therefore written for any SME aspiring to excellence and is built on 3 foundations: Simplify; Integrate; Sequence.

THE 5 MASTER STEPS - Overview

Not surprisingly after some 60 years of application and testing, there is now a high degree of alignment between the nationally advocated frameworks for business excellence from around the world. But there are 3 major problems for an SME when trying to implement any one of these frameworks:

Typically having 7-9 criteria for success, these frameworks are proving too complex for people to remember off by heart.

There is no recommended sequence for addressing all the criteria over time.

The recommended approach is to begin with a comprehensive review of the organisation's current performance against each of the 7-9 criteria and then to address the highest priority areas for improvement - but this takes significant time and money and doesn't involve all the employees.

We have found that a simplified framework is essential to integrate all the implementation activities. This framework is consistent with the internationally recognized frameworks but has only 5 Master Steps (instead of 7-9 evaluation criteria). We have also found that these 5 Master Steps should be implemented in a logical sequence. With Customer Focus as the overriding driver, the 5 Master Steps (all of which are prerequisites for Business Excellence) are:

Shared Strategic Direction

Process Design & Imnprovement

Performance Measurement & Feedback

Knowledge Capture & Leverage

Leadership & Management of Change

1: Shared Strategic Direction

With customer focus as the all-pervasive fundamental driver, the first prerequisite for business excellence is a Shared Strategic Direction - effectively enabling every individual in the organisation to 'pull the rope in the same direction'. The essence of strategy is to move everyone from where we are now to where we wish to be at some future point in time.

The evidence of great strategy is a clear and consistent pattern of decisions actually made by the organization as a whole!

2: Process Design & Improvement

Since all work is done through processes, it follows that Process Design & Improvement must be the second prerequisite for business excellence. In other words, Process Design & Improvement is HOW we will achieve our Shared Strategic Direction.

This Master Step usually yields the greatest net benefits for the organisation!

3: Performance Measurement & Feedback

As time goes by, of course we will want to know whether we are achieving our Shared Strategic Direction and whether our key processes which will get us there are healthy! Hence the next prerequisite for business excellence must be Performance Measurement & Feedback.

It works best when we measure Key Performance Indicators (KPIs) for a) achievement of our agreed Strategic objectives and b) for the health of our Key Processes that together make up 'Operations'. Best practice is to limit the resultant number of KPIs to only those that are considered to be essential. This minimizes the effort required to keep them up to date and to present the information to those accountable.

4: Knowledge Capture & Leverage

Knowledge Capture & Leverage has become increasingly important over the past 40 years as organisational assets continue to become more knowledge-based and less finance-based. There are 3 compelling reasons why an SME needs to harvest its knowledge efficiently:

Dramatic technological change (Internet; email etc) has enabled competitors to capture and leverage their knowledge with increasing ease.

Globalisation demands that we keep on top of industry developments in order to remain competitive.

Mobile Workforce - employees tend to take their knowledge with them when they leave unless we do something about it.

5: Process Design & Improvement

Finally, Leadership & Management of Change is critical because transformation towards business excellence can occur only if all your people are keen and able to participate in the changes.

Let's now further explore each of the Master Steps in the recommended implementation sequence...

MASTER STEP #1: SHARED STRATEGIC DIRECTION

The organisation's Strategic Plan is predicated upon having an agreed high level (1-page) Process Model for the entire business of the organisation. If any of the organisation's Key Business Processes are sufficiently 'broken' to warrant being 'process reengineered' (ie from the ground up!) during the planning period (typically 3 years), then the organisation must incorporate these reengineering priorities in the Strategic Plan. This is because reengineering projects are so fundamental that they are strategic in their nature and impact.

This can be achieved readily via the following simple planning methodology reflecting the four 'perspectives' of Kaplan and Norton's 'Balanced Scorecard'(1).

The Strategic Plan is developed from the top down using a 1-page graphical format - headed by the organisation's long term, customer-oriented Vision statement.

The Finance Objective is first identified, consistent with the organisation's Vision for the planning period.

The Customer Objective(s) come next since customers are the source of the organisation's revenue that governs 'Finance' success. Customer Objectives usually address what Products / Services (new or existing) are destined for what Markets (existing or new).

The Process Objective comes next since the Key Business (value-adding) Processes deliver the organisation's goods or services to its Customers. All that needs to be done here in this simplified approach for SMEs is to identify the agreed highest priority Key Business Processes that must be reengineered (from scratch) over the planning period. By reengineering only 1-2 such processes per annum, excessive change management challenges can be avoided, while at the same time ensuring that no Key Business Process is ever allowed to get more than about 7 years out of date. Best practice suggests that every Key Business Process should be reengineered once every 7 years for competitive advantage!

Finally, the People & Infrastructure Objectives are formulated to enable the organisation's processes to be brilliant. People and infrastructure (eg IT infrastructure; factory or office accommodation) form the foundation of the Strategic Plan. This final 'People & Infrastructure' perspective can be used to address anything strategic which does not fall within one of the other three perspectives above it in the 1-page Strategic Plan.

There are several important features of this simple, direct approach to developing the organisation's 1-page (graphical) Strategic Plan:

The 'Finance' perspective is at the top because financial performance is the ultimate lag indicator for the organisation. If 'Finance' is not healthy, the organisation cannot invest properly in any of the other three perspectives.

The arrows connecting the Objectives are pivotal to the logical 'cause and effect' flow of the diagram - from the bottom (causes) to the top (effects). The lower layers of the diagram are thus prerequisites for the organisation to achieve the 'Finance' Objective(s) and hence the overall Vision.

If the Strategic Plan is to be easy for all employees to memorise (to enable day-to-day decision-making!) and keep current via monthly monitoring and review, it should contain no more than 7 (total) Objectives.

Every Objective should be about fundamental change - not about the status quo. For example, no Objective should begin with the words: "Continue to... "

Every 'layer' should contain at least 1 Objective so that the overall Strategic Plan has no logical omissions. For example, a Strategic Plan with 5 'Finance' Objectives but no Objectives in any of the other 3 layers cannot be implemented readily. Such a Strategic Plan would be naïve - akin to "an emperor without any clothes".

The 'bullet points' for the 'Process' layer simply reflect the top priority Level 1 process reengineering candidates from the organisation's agreed 1-page Process Model! To avoid over-burdening the organisation, a maximum of 1-2 process reengineering projects should be planned and executed per annum for a 3-year planning period. Ideally, every Key Business Process should be reengineered every 7 years to prevent it getting out of date.

Every Objective must be measurable via at least one (and preferably only one) KPI which should be monitored regularly to track progressive achievement of that Objective.

For each Objective, typically 6-8 Actions should be formulated and scheduled to achieve that Objective in full by the end of the planning period. Individuals should be assigned to lead (ie project-manage) each Action and an Objective Manager should also be assigned to report regularly on overall progress of the Actions and on the respective 'achievement' KPI.

For a large SME organisation, the same language and format should be used for 'cascading' the corporate Strategic Plan to all Divisions, Departments etc. This greatly simplifies the process of ensuring strategic alignment and getting employee buy-in to the overall shared strategic direction.

MASTER STEP #2: PROCESS DESIGN & IMPROVEMENT

Why is Process Design & Improvement such an important part of business excellence?

It all starts with a simple and comprehensive definition of a "process"... a sequence of activities that converts some form of input into some form of output for some customer (internal or external). Given this broad definition, it follows that all work is therefore done through processes.

Furthermore, it follows that every organisation doing work is already executing a vast range of processes.

An organisation's current processes may be described in a variety of ways. For example, some processes may be well designed - others poorly designed. Some may be well documented, and others poorly documented. Still others may be totally ad-hoc, whereas others may be carefully orchestrated. The point is that if any organisation wishes to be excellent, then it must first agree on what are its most important processes. Next it must ensure that these key processes are designed properly and then improved in order to be as healthy as possible.

In summary, proactive Process Design & Improvement is a critical competency for any organisation aspiring to business excellence. An organisation can "get by" without proactive and professional Process Design & Improvement tools and techniques (most do!), but it will never be excellent.

How Can I Sell My Business Fast?

Are you a business owner that's interested in selling your business? If so, I can only imagine one of the main questions at the top of your mind is, how can I sell my business fast? That's a very valid question and one that needs to be answered. After all, you've spent years building up your business and you're ready to cash out and you want to do it as quickly as possible. I get that, no issues there.

Let's first start by saying, some brokers will tell you, it will take them 1 year. yup, 12 long months to sell a business. I mean really? That's a long time and there is not 1 business owner that is going to wait one year to sell their business. Brokers will try to "force" you into signing a year long agreement that states you give them the right to make an attempt to sell their business within a 1 year time period.

That's a really long time. As a business broker, I would lose total interest trying to sell a business for a year. The name of the game is to get the business sold and get it sold fast. I would not be surprised if in a few years business brokers will tell their clients that it's going to take 18 months or even a lifetime agreement.

The reason why it takes a long time to sell a business is because business brokers allow themselves a long to sell the business. Give someone 6 months to do something and they'll take every bit of that 6 months to do it. If brokers would give themselves 90 days, guess how long it would take to sell? Yes, you guessed it. 90 days.

When you decide to sell your business, make sure, your business is taken to the marketplace immediately. Make sure the business broker is marketing the business for sale everyday. Make sure the broker has a consistent flow of business buyers in addition to providing to with weekly updates as it relates to the buyers that the broker has met with and presented your business to.

By now you're probably wondering what does this have to do with the original question. Just hold tight, we're going to get to that.

So, to answer the question, the answer is, it depends. Yup, it depends on the broker
that you hire. When selecting a business broker, you clearly want to ask them how long is it going to take to sell my business and what is their process for marketing your business.

There has to be an active marketing plan in place. There is no one size fits all to selling a business. If you ant to sell your business as fast as possible, you must first start with finding a business broker that is willing to sign a 90 day selling agreement.

Just remember to do your part as a business owner. If the business broker needs any sort of paper work, be sure to get the broker the paper work as fast as you can. Time is valuable when trying to sell your business. You want to ride the momentum that you've built up and do let the broker slack off. You can get the business sold in 90 days or less.

Why Should I Use A Business Broker?

You've come to the decision that buying a business or selling your business is the path that you want to take. The best piece of advice, although biased, I can offer is to retain the services of a business broker or business transfer adviser. Although business brokers usually work on behalf of the seller, there are sell-side business brokers and buy-side advisers. Even if you're a buyer and you decide not to retain the services of a business broker or transfer adviser, you'll receive the benefits because a business broker is working with the seller.

The broker is sort of like a clamp that holds things together as the business buyer and seller progress through the business transaction. Below I'm going to explain to you how both business seller and business buyer can and will benefit from the services of a business broker:

Let's meet-

The good thing about the business broker is, the profession requires face to face meetings. Even though the broker is getting paid by the business seller, the buyer has to meet with the broker in order to view the business as well as so the broker can determine if the buyer is a compatible buyer for the business.

The meeting will be an interview style meeting. Some of the questions that will be asked by the broker are:

1- Can you go into detail about your background?

2- Have you ever purchased a business

3- Do you have easy access to the cash to buy a business?

4- Can you show proof of proceeds on a recent bank statement?

5- How soon are you willing to make a purchase?

In addition to the question and answer portion, you'll also be given a personal financial statement to fill out and return. Be sure you return this information as soon as possible.

What usually takes place after this meeting is, the business broker will than present compatible business to the buyer. So come prepared with a recent bank statement showing the cash. Time is of great importance. Strike while the fire is hot and move with swiftness.

Expect for the broker to ask you to sign a non-disclosure agreement. The business seller wants to ensure that the word about the business being for sale is kept quite.

As the buyer, you'll get to see very general financial information about the business of interest and others in the business broker has other businesses available. If you decide that you have serious interest in any of the businesses that are presented, the broker will provide you with more in-depth financial date and also arrange for you to see the business in person.

The broker will act of the best point of contact for the buyer. Any questions or concerns that the buyer may have, the broker can answer all questions concerning the business.

How the business broker helps the seller-

If you're the owner of a business and you've decided to sell, one of the best services that you can retain are the services of a business broker. The broker will oversee the entire process while you continue to run your business.

The business broker will interview all of the buyers. This service by itself is worth the broker fee. Business brokers usually have access to a database of buyers that they've acquired over the years. These are buyers that have identified themselves are compatible and financially capable of buying a business. Having access to a list of buyers will speed up the process and help get the business sold while it's still "hot."

The business broker will especially prepare a marketing plan for the business in question. A sales prospectus will take time to prepare but your broker will provide you with this required document. In addition, the broker will structure the deal as well as assist the completion of the paper work.

Many owners don't know how much their business is worth, therefore the broker can assist you with pricing your business. Te pricing of the business is just a starting point. The buyer will get an official appraisal. Between the 2 numbers, the negotiations will start there. Also, you want to ensure that your business is properly priced. You don't want it to be overpriced not under priced A business that is priced right WILL SELL. The ultimate price of the business will be determined by what it sells for or as brokers like to say-the marketplace.

Top 3 Reasons Small Businesses Fail

Before You Say "I Do"

Before you say I do, before you make the investment, before you hang the sign, before you set up the company, there is something that you should know. Small businesses are similar to a marriage - no one goes into the venture thinking that it won't work out. Yet a significant portion of small businesses fail. According to the Small Business Administration, as many as 30 percent of small business startups fail within the first two years of the honeymoon - and up to 50 percent within the next three years. Do the math and you'll come up with a staggering 80 percent failure rate among small businesses within the first five years. The odds are stacked against you, but our business model is based entirely on helping small business owners maximize growth. To avoid the pitfalls that cause other businesses to fail, you've got to understand what business failure is, the reasons why small businesses fail and what it will take to be part of the remaining 20 percent that achieves success.

Just like someone whose marriage has ended in divorce, failed small business owners often blame anyone but themselves. They look for factors outside their control as scapegoats for the downfall of their business endeavors. They blame the economy, the government, their partners or their employees, just to name a few. If you dig a little deeper, the real root of the problem can often be revealed in a lack of business acumen, inadequate resources or insufficient capital. Without exception, these issues are ultimately the responsibility of the small business owner.

Lack of Business Acumen

Making the transition from an employee to a small business owner can be extremely difficult. The disciplines that you have developed as an employee are totally different than what you will need when you step into the owner's shoes and start running the show. The reality is that many owners' expertise lies in accounting, law, medicine or some other discipline unrelated to day-to-day operational concerns. Don't assume that you can just open a business and find clients or patients lining up outside your door. It takes skill and experience to drive business your way. Identify the areas where you lack expertise and look for consultants, partners, professional services or employees to fill in the gaps.

Inadequate Resources

For small business owners, relationships mean everything. The right relationships result in a strong foundation, but incompatible or incomplete teams translate to inadequate resources. What team resources can you leverage to balance your own strengths and weaknesses? Too often, new business owners attempt to do it all themselves. This strategy may work in a one-man operation for someone whose goal in life is to only work by himself, for himself. Unfortunately, it's an ineffective strategy for running a full-scale business. Instead, you need the right team and the right advisors. One of the most powerful tools you can use to increase your chances of success is to learn where to turn to get the right resources to fit the needs of your business. That won't necessarily mean consulting with your best friend or hiring a former co-worker. Your selection process should extend beyond friends and family. Looking for the lowest price may also not be the best decision-making criteria. The truth is you get what you pay for. Locating and utilizing the best resources possible is one of the keys that will differentiate your future between dissolution and success.

Insufficient capital

The number one reason why marriages fail is because of money issues, and small businesses are no different. The amount of capital available to you at the time you establish your new business is a critical determinant of the success or failure of your business. Simply put, your available capital is the sum of your cash, lines of credit or trade credit for the business. For most start-up businesses, the costs incurred within the first two years far outweigh income - except in the case of acquiring a business that provides income on day one.

One of the largest and most common problems is muddying the line between business expenses and personal expenses. Separate your personal life from the business. Resist the temptation to remove cash from business accounts to satisfy a shortfall in your personal budget. While it's true that the business should provide income to the owner, too-frequent personal withdrawals cause undue hardship. Plan withdrawals that are sufficient to maintain your household needs and stick to the plan.

Valuing a Business for Sale - An Imperative Guide

I often get asked for a "rough idea" of what a business is worth.

It's an interesting question, but not one that can be answered in any meaningful way without drilling down into the specifics of the business because in the real world, the valuation of a business has many variables including industry types, differing market sectors and individual levels of profit and risk that make any 'prophecy' of business asset valuation as reliable in outcome as taking a trifecta bet at a race track.

This is particularly true in relation to a privately owned small business valuation whether the business is incorporated as a private company or operates as a sole trader.

Apart from their annual Tax Return, privately owned businesses in Australia, are not obliged, to lodge financial reports with any statutory body or publish any details of their activities in the public domain.

With publicly listed entities (companies listed on a stock market) there is more data for a business valuation company to analyse in the form of share prices, price to earnings ratios, historical performance and annual reports. Comparisons can be made between these indicators to determine a range of valuation metrics.

Private businesses, however, are as different as fingerprints - no two businesses are the same because they are generally 'built' around the needs of the business Owner. Business analysis and valuation of private businesses must therefore, in addition to a study of the financials, include a detailed Risk Assessment and take into account the Return on Investment that the business makes for the Owner and the Cost of Capital to buy the business.

What to Look at When You Want to Value a Business for Sale?

Commonly, many SME (Small to Medium Enterprises) business asset valuations focus on the 'Return on Investment' (ROI). This is usually expressed as a percentage (%) and is a measure of the Risk to an Owner versus the Return. For a privately held business in Australia this should be between 20% and 50%. The closer to 20% the more 'secure' the business investment - the closer to 50% the more 'riskier' the investment.

A business valuation report that demonstrates a ROI under 20% indicates that it would be unlikely to generate an investment (or a Bank would not lend the funds to purchase) - quite simply the return would not be enough (because of the liquidity - or ease of conversion to cash) to warrant the investment and a return of over 50% would indicate that there are significant risks which would be outside of the comfort zone of most investors and financiers.

As a general rule, private businesses and the valuation of companies in the private space tend to be based on historical financials with the valuation of intangible assets based on the adjusted net profit (before tax) - called EBIT (Earnings before Income Tax)

Adjustments are made to the Accountant prepared financials to 'add back' any expenses to the business profit which are discretionary to the owner(s) personally, plus 'book' expenses like depreciation of P&E and any abnormal 'one off' expenses like a non recurring bad debt to arrive at the real Net Profit (before tax) of the business.

It is multiples of this Net Profit, tempered by the Risk profile of the business and the ROI percentage which will determine the Value of the business.

But whilst most people ask for a private or corporate business valuation, what they really want to know is the PRICE.

Value and Price can be two very different numbers.

What is the Difference between 'Value' And 'Price' when You Want to Value a Business for Sale?

In the valuation of companies where the reason for the valuation is for the re distribution of shares for a Management Buy In, the price conclusion must relate to the market (is the sales market for this type of business up or down?) so that a base price can be determined at that point in time even though there will be no actual "sale" of the business.

Similarly, in business valuation for divorce where there could ultimately be an external transaction to sell but in some cases one party wants to retain ownership of the business and buy the other party out. In this case both parties want to know the 'Fair Market Value' of the business so they can settle even though the business is not actually being sold.

In essence, 'Value' can be entirely based on hypothetical theory whereas 'Price' in the true sense can only be based on "what the market will pay".

Paul Nielsen is a graduate of Chicago's Loyola University School of Business Administration and is a Certified Mergers and Acquisitions Advisor (CM&AA).

He holds qualifications in Australia as a Certified Practicing Business Broker (CPBB) from both the REIQ & AIBB, is a Certified Machinery & Equipment Appraiser (CMEA), Licensed Real Estate Agent, Licensed Second Hand Dealer and Accredited Sponsor of the Australian Small Scale Offerings Board.

When Starting A Small Business

Starting a business has been an integral part of the American dream for hundreds of years. This is the segment of the business world that has helped this country grow during its infancy, and it has been a mainstay in helping to keep the American economy afloat ever since. With all of the changes that all of this growth during the years has brought, the most important thing a person needs when starting a small business is knowledge. The amount of training and assistance that is available is staggering to say the least. What you need is to focus on what type of business you plan on operating, and find the assistance and training that is applicable to that field.

The time involved to get trained will depend on the type of business you want to have, and whether you plan on having someone train you or you plan on training yourself. Either way, you want this to be comprehensive in that it should cover everything from starting your business, maintaining it and then possibly selling it out when you want to retire. Everything involved may seem overwhelming at first, but it will all be worth it when you see the success starting to overtake the hard work you put in to make it a success.

The training you get and any assistance that comes with that training is going to be the foundation on which your business is built. From here, what you will need to get is a business plan. You can keep the plan in your head and just do it, or you can write it down in a professional manner. The latter of those 2 options is preferable for at least 2 reasons. One, having it all written will keep the ideas you have fresh for years to come. Your business, be it large or small, is going to be complex because it involves so many things. From where the business is going to be, how many employee's you plan on starting with, advertising, marketing, and the list goes on.

The second, and possibly most important reason, is that a professionally written business plan is key to getting a loan to help get your business up and running. Now, if you have your own capital this isn't going to be necessary. Nor would writing down your plan for the purpose of securing a loan, but again, writing down your plan is beneficial. There have been many times when people start their own business with certain things in mind, only to have those certain things change in time. The business world can be very fickle and your own plans may have to change to keep up with the external changes that have a direct or indirect influence on your business.

Having all of the applicable business licences is a legal necessity and something you definitely need to plan on getting. The reason this fact is being pointed out after the financial aspect is that some people tend to put the cart before the horse. Securing a loan is typically not contingent upon having the required licences to legally operate the business. However, getting the required licences would be pointless without the cash to get the business up and running. If need be, if the licensing procedures are costly, you can always take out 2 separate loans. One to get the licensing you need, and then when that is taken care of, secure a second loan for the business itself. With small businesses though, this is typically unneeded as many licences can cost as little as ninety-nine dollars.

Once you have the capital and the legal obligations taken care of, you need to come up with a name for your business and register that with the state where the business is head-quartered. When starting a small business this is kind of a no-brainer because you, typically, will only have one location. Some people though, when starting out, will have their main offices in one state while having another portion of the business, like a distribution centre for example, in another state. With this being the case, you need to register your business name in the state where the business originates from.

Your business name needs to be filed for the obvious legal reasons, but it also needs to be filed because it would be rather hard to advertise and market your business without one. Hopefully, this aspect of your business is a part of your plan because, without it, no other part of your plan is likely to work. This should also be a part of the budget that was included in your start-up loan. The main reason new businesses fail is because they fail to get the word out. Focusing on the best ways to do this should have been a part of the training you received at the outset.

Adding to these musts when starting your new business, is to actively retain legal advice. You will want to do this to get advice on contract and documents, as well as ongoing consultation and representation as you build and protect your business. One way to do this, without enormous cost, is to purchase a small business legal plan. You can usually find one that will provide the essentials for a start-up business, as well as ongoing advice as your business matures.

Aside from the training, the business plan, the loans, the licensing, and the small business legal plan, perhaps the most important thing you need to start your own business is patience. The old parable about the tortoise and the hare is true. Especially in the business world. No one gets rich quick, at least not legitimately, so slow and steady really does win this race. The rule of thumb to go by is to expect to be in business for 5 years before turning enough of a profit to live comfortably on. This is why many financial institutions that give out loans to small businesses like to see a 5 year plan. They know as well as anyone that 5 years is typically how long it takes to turn a liveable profit.

If this all sounds like a lot of work, well, it is. But with education, planning, organization and patience it doesn't have to be hard. The rewards of owning your own business and being your own boss far outweigh the time and effort it took to become successful. There are many places online and, you can go to get testimonials from people who have "been there, done that", and succeeded. I wish you good luck and much success with your new business.

Your Business Can Access Working Capital

The number one reason that businesses fail is due to insufficient capital (they run out of cash). According to Bloomberg 8 out of 10 business owners fail within the first 18 months. Another 50% fail in the first 5 years. Other reasons businesses fail include; lack of experience, bad location, entering over saturated markets, over investment in fixed assets, unexpected growth and poor credit arrangements. Let's add one more to the list; not knowing where to go to access working capital.

Most businesses owners invest their own personal money to keep the business going. Some will go to friends and families. Some will try the bank. But if you don't have a lot of assets to pledge, a proven track record, a good credit rating or are not yet profitable, the chances are the bank is going to turn you down. So where do you go to get a loan to take your businesses to the next level?

There are private companies that will provide a loan to a business that has daily cash flow, as long as some basic requirements are met. A business owner does not have to pledge assets or have a great credit rating. There are viable financing alternatives, to receive business funding that are not considered loans. Business funding programs do exist where you are not required to pledge assets, have great credit or a long proven track record. A word of caution, do not expect to get the same rates you would get from a bank. These private lenders are taking on more risk than a bank, so a higher return on their investment is expected. Some of the available business financing options include, a Merchant Cash Advance, a Small Business Loan, Purchase Order Financing, Invoice Factoring and Supply Chain Financing.

Merchant Cash Advance

If your business accepts credit cards and debit cards there is a program called a Merchant Cash Advance that has very high approval rates. A business owner does not have to sign personally or have good credit. A Merchant Cash Advance is not a loan but rather a purchase of your future credit card / debit card receipts. The advancer will buy a future amount of credit card receipts / debit card receipts at a discounted rate. A small portion of a businesses daily sales will be taken by the advancer until the amount is re-paid. Typical payback is 6 to 10 months.

Small Business Loan

There is a small business loan available for business owners. The lender is more concerned about a company's daily cash flow then about credit ratings and the ability to pledge assets. The business owner does not have to sign personally. This small business loan has very high approval rates, with some basic requirements for funding. The lender will take a small fixed amount of daily sales until the loan is repaid. The term of the loan is one year.

Purchase Order Financing

Has your business been working on landing a large contract? Congratulations you just received that long awaited purchase order. As you admire your new conquest you see some small print with the words Net 30, 45 or 60. Your business may have a cash flow issue. Vendors and payroll may have to be paid before you receive payment from your customer. If your business does not have enough available working capital or access to working capital to wait to get paid before you have pay your vendors and staff then what do you do? If your purchase order is from a reputable company then your business may be able to receive a cash advance against that purchase order. The purchase order itself is a legal agreement to purchase a product or service from your company. A lender will know that the customer will pay as long as you fulfill your end of the contract and advance you enough money to ensure you meet your contractual obligations. A lender will be concerned with the customer's ability to pay, and your ability to fulfill the contract. They will not be as concerned about a businesses credit rating or the pledging of additional assets.

Invoice Factoring

A company can be profitable and still go out of business due to poor cash flows. What a profound statement. A cash flow gap can be created when a customer pays slower than a company has time to pay its employees and vendors. The company is waiting for customers to pay before it can pay its own expenses. This can be a very serious situation and cause a profitable company to go out of business. Fortunately there is an alternative financing solution called Factoring of Invoices.

Factoring invoices is a business financial transaction where by a business sells its accounts receivable (invoices) to a lender (factoring company) at a discount. For this type of business financing there are three parties involved. One is the company that provides the service or goods to the customer, two is the factoring company that will provide the company with an advance, and three is the end customer that received the goods or services. When the company provides goods or services to the end customer an invoice is created. That invoice is then purchased by a factoring company at a discount. The factoring company will advance the company a large portion of the value of that invoice.

The end customer will then pay the factoring company directly the value of the entire invoice. When the end customer pays the invoice, the factoring company will send the remaining amount of the invoice minus a small fee to the company that factored the invoice. Consider the following scenario: A company completes a service or sells goods to an end customer that typically takes 30 days to pay. Almost immediately after the transaction happens a factoring company will advance the company a large portion of that invoice. The company now has most of its funds available, almost immediately, to pay it's suppliers, complete payroll or what ever else they would like to do with the funds. Once the end customer pays the invoice the remaining amount is forwarded to the company minus a small fee. Factoring of invoices can help out tremendously with cash flows, especially if a company is in a growth period. Factoring companies are not as concerned about the companies credit rating as they are more concerned about the customers ability to pay.

Reverse Factoring or Supply Chain Financing

This method of business financing is much like invoice factoring. The difference is, traditional factoring is when a supplier chooses to factor the invoices to their customers but with reverse factoring or supply chain factoring, the customer initiates the factoring to help their suppliers to finance their receivables. Reverse Factoring or Supply Chain Financing can be an effective way to improve your cash flows. The benefit to both parties is that the company providing the goods or services can get the outstanding value of their invoices paid very quickly and the ordering company can delay the payment of the invoices, thus improving their cash flow position.