Choosing the Right Business
STARTING WITH A GOOD IDEA
Some people are very clear about what business they want to start. Others first decide that they want to start a business, then they decide which business will work for them. If you are in the latter group, you should begin the process by thinking about who you are, what you enjoy doing, and how you really want to spend your time.
You should also spend some time reading and learning about what new businesses people are starting and the upcoming trends that you can capitalize on. Be open to new possibilities.
The following web site should assist you in developing and generating good business ideas as well as evaluating your ideas.
Online Small Business Workshop: Starting with a Good Idea
STARTING YOUR BUSINESS FROM SCRATCH
This is the route chosen by most first time entrepreneurs. Risk tends to be the highest in new businesses, but they offer the individual the greatest amount of personal freedom in determining company direction, new markets, or development of a new product or service.
Starting a business requires spending time on planning and clearly understanding how it will operate. Since most businesses start modestly, with low overhead and minimal staff, the owner/manager very often must be all things to the business. This means working long hours, having a clear understanding of all business aspects of the new enterprise and being willing to follow a predetermined course. Failure to do so often leads to a breakdown in basic business functions, loss of control of the business direction, and an inability to determine where the company stands in the marketplace. Such circumstances can lead to business failure at a very early stage. It is important that the individual recognize personal limitations and thoroughly plan and understand the new business. This will greatly enhance the chances of success. In the end, a successful entrepreneur, having started from scratch and succeeded, will gain great satisfaction from the experience and achieve that level of freedom originally sought.
Some things to consider about starting from scratch:
Advantages
1. Potential lower overhead and lower start-up costs.
2. Greatest personal freedom.
3. Ability to enter new markets or introduce new products.
4. Ability to change business practices or direction quickly.
Disadvantages
1. Greatest risk.
2. Requires significant personal and business planning.
3. Clientele must be developed.
From "Starting a Business in Ontario".
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FORMS OF BUSINESS
What form of Business Organization?
Sole Proprietorship:
Advantages
1. Low start-up costs.
2. Greatest freedom from regulation.
3. Owner in direct control.
4. Minimal working capital requirements.
5. Tax advantages to small owner.
6. All profits to owner.
Disadvantages
1. Unlimited liability.
2. Lack of continuity.
3. Difficult to raise capital.
Partnership:
Advantages
1. Ease of formation.
2. Low start-up costs.
3. Additional sources of venture capital.
4. Broader management base.
5. Possible tax advantages.
6. Limited outside regulation.
Disadvantages
1. Unlimited liability.
2. Lack of continuity.
3. Divided authority.
4. Difficulty in raising additional capital.
5. Hard to find suitable partners.
Corporation:
Advantages
1. Limited liability.
2. Specialized management.
3. Ownership is transferable.
4. Continuous existence.
5. Legal entity.
6. Possible tax advantages.
7. Easier to raise capital.
Disadvantages
1. Closely regulated.
2. Most expensive form to organize.
3. Charter restrictions.
4. Extensive record keeping necessary.
5. Double taxation.
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BUYING AN EXISTING BUSINESS
For the first time business owner, an existing business offers many advantages such as an established clientele, a business method, perhaps inventory and premises, and in some cases, a reputable name. One very important question must be answered however: why is the business for sale?
Before purchasing a business, insist on reviewing financial statements from previous years (up to five years), and obtain lists of clients/customers and suppliers. All leases and outstanding contracts must be reviewed. It is recommended that professional advice be sought to help complete the transaction (i.e. get an accountant to review financial information and a lawyer to review leases etc.), in order to prepare the purchase agreement.
The two most important questions to ask are why is the business available and what is its true worth? The latter is a bit easier to answer with the help of professional advice/assessment. While this will be an added expense, an intelligent appraisal can go a long way to saving thousands of dollars.
Why the business is for sale and how good a risk it is are more difficult questions to answer. It is most important that as many questions as possible be answered before the transaction is complete.
Why do I want to buy this business?
Why does the owner want to sell?
Does the business have a future?
Will I feel comfortable and knowledgeable in operating this business?
Is all the information about the financial and customer aspects of the business readily available and willingly turned over by the seller?
Advantages
1. Limited risk.
2. Significant personal freedom.
3. Established service/product, clientele, method of operation, staff and name.
4. Cash flow is being generated.
5. Relationship established with suppliers and banks.
Disadvantages
1. Product/service may be obsolete or market shrinking.
2. No growth potential.
3. Accounts receivable may be too high or uncollectable.
4. Seller may have hidden reasons for selling that have resulted in business deterioration over a period of years.
From "Starting a Business in Ontario".
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FRANCHISING
Franchising is a marketing technique used by many companies to distribute products and services. The franchiser supplies the product or service as well as providing ongoing training and support to the franchisee, who makes it available to the public. Franchisers come in a variety of sizes and market experience, some are large and well established organizations, other are small companies that have started quite recently. It is imperative that the franchise is thoroughly investigated by the potential buyer, their lawyer and accountant.
The following information is meant as a guideline only:
• Check the franchiser's credit background with Dunn and Bradstreet and your banker.
• Check that the Better Business Bureau has not received any major complaints against the franchise.
• Check the franchiser’s most recent financial statements.
• Request a list of all franchisees, their locations and telephone numbers. Call and discuss their successes and profitability with the franchiser.
• Obtain a full set of legal documents from the franchiser (the franchise agreement, registered user agreements, leases/sub-leases, assignment agreements). Ask for a copy of the trademark application/registration. A franchise lawyer will review the franchise agreement and all applicable documentation.
• Have an accountant review all costs and projections to determine the bottom line. An accountant will also determine if the franchiser is financially stable. An accountant will also advise you of favourable and unfavourable tax implications with respect to the franchise agreement itself.
• Check to see if the franchiser has financing arrangements with a specific bank or discuss your eligibility with your banker for various loan programs/franchising programs.
• The Canadian Franchise Association offers valuable advise and assistance. The Association publishes a booklet entitled "Investigate Before Investing".
Canadian Franchise Association
5399 Eglinton Ave. W., Suite 116
Toronto, Ontario, M9C 5K6
Tel: (905) 695-2896 or 1-800-665-4632
Fax: (905) 695-1950
www.cfa.ca
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LOCATION
Whether you are establishing a new business or purchasing an existing one, location is an important variable to consider. This may appear obvious, but it is very often neglected and is rarely part of the entrepreneur's business plan. Yet market strategy may evolve directly as a result of business location. Also, location cannot be decided by purely economic/business considerations. It is important to consider the residential, social and cultural opportunities of the community. This will have an impact on attracting future employees to your company or on reaching the target audience for your product or service.
There are many factors that will influence the location you choose. Proximity to market areas, sources of raw materials or supplies needed, transportation systems and facilities, and the availability of a skilled labour force are but a few to consider.
Ask yourself: is it a growing community? What are the demographics of the community?
The following is a short checklist of factors you should consider when deciding where to locate your business:
Zoning:
Present zoning and future zoning?
If it must be re-zoned, what time span is involved and at what cost?
Building:
Outside and inside appearance?
Layout, lighting, heating, floors, acoustics, comfort, waste disposal, parking, landscape, snow removal?
Outside storage - is it permitted?
Transportation:
Shipping doors? Truck access?
Any truck-road restrictions?
Is there a truck terminal nearby?
Is rail or air important?
Is it on a bus route for your staff?
Utilities:
Check your power supply, water, sewers, gas.
What does each cost?
Are they adequate?
What would be required to upgrade them to your requirements?
Taxes:
Present and future assessment for property taxes and business taxes.
Lease:
Has it been checked by your lawyer?
Is it too short or too long?
Any options available?
Who pays to have the lease drawn?
What are you responsible for?
What is the landlord responsible for?
Approvals:
Will all government regulatory bodies approve your use of the building? (i.e. zoning, health, fire marshal, transportation, environment, labour, etc.)
Protection:
Are there regular police patrols?
What kind of fire protection?
Hydrants nearby?
Sprinkler system?
Night guard?
Any history of vandalism?
Neighbourhood:
How stable is it?
Getting better or getting worse?
Are you compatible with the neighbours?
Will you enjoy living nearby?
Restrictions:
Are there protective covenants that will limit your sales?
Any legal easements on your property?
Can you grow physically in size?
Suppliers:
Are you near them? Is it important?
Can you get quick service when something breaks down?
Your customers:
Who are they? Age, sex, income bracket.
Where do they live, play, shop?
What motivates them to buy your products?
How often do they buy? Seasonal?
Cash or credit?
Can you afford to carry accounts receivable?
Your competition:
How big, how old, how strong?
What percentage of the market do they have?
What advantages do you have?
What advantages do they have?
What percentage of the market will you get
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IS THERE A NEED FOR YOUR BUSINESS?
The following is a guide to determining the need for a particular type of retail business in a community. The information has been obtained from the United States Department of Commerce, Census Bureau, and represents American averages. A caution in using these statistics: they are meant as a guide only. These are U.S. figures, which very often reflect larger metropolitan areas and may not be consistent with trade areas and practices in Ontario. They should not be used as the sole basis for determining the type of business to establish or the kind of community in which the business should be established.
Number of Inhabitants to Support Store (by selected kinds of business):
Food Stores
Grocery stores 1,914 / Meat & fish (seafood) market 28,529 / Fruit stores, vegetable market 85,856 / Candy, nut, confectionery stores 50,721 / Dairy product stores 109,007 / Bakery products stores 12,493
Eating, Drinking Places
Eating places 675 / Drinking places (alcoholic beverages) 4,567
General Merchandise
Department stores 23,187 / General merchandise stores 7,371 / Variety stores 20,307
Apparel, Accessory Store
Family clothing stores 13,113 / Shoe stores 6,856 / Women's clothing specialty stores and furriers 4,326 / Children's, infants'-wear store 45,251 / Men's and boys' wear 16,387 / Furriers and fur shops 327,022
Furniture: Home Furnishings, Appliance Dealers
Furniture 7,854 /Home furnishing stores 7,726 / Household appliances, radio and TV stores 26,181 / Computer and software 46,906 / Record and tape stores 32,191 / Musical instruments 61,479
Automotive Groups
Passenger car dealers (new & used) 10,463 / Passenger car dealers (used only) 13,661 / Gasoline service stations 2,422 / Tire, battery, accessory dealers 6,515 / Boat dealers 53,442 / Household trailer dealers 90,261 / Motorcycle dealers 71,151
Lumber, Building Materials
Lumber and building materials dealers 10,042 / Paint, glass and wallpaper stores 25,037 / Hardware stores 13,436 / Nurseries, lawn and garden supply 23,494
Other Retail Stores
Drug and proprietary stores 5,298 / Jewellery stores 9,085 / Book stores 19,793 / Stationery stores 58,720 / Sporting goods and bicycle stores 10,941 / Florists 9,329 / Cigar stores and stands 172,700 / News dealers and news stands 112,866 / Camera and photographic supply stores 84,687 / Luggage and leather goods stores 133,759 / Hobby and toy stores 23,488 / Gift, novelty and souvenir stores 7,362 / Catalogue and mail order 32,816 / Vending machines 39,912 / Pet shops 35,625 / Optical goods stores 18,014
Source: Bureau of the Census, US Department of Commerce 1992 Retail Trade: General Statistics - United States
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