So, you're thinking of going into business for yourself. You have several options available, and all involve some degree of risk. Do you want to create a start-up operation? Perhaps you are planning on buying an existing business. Or, you may be considering the purchase of a franchise operation. Each option involves some element of risk and reward. Whichever option you choose, however, owning your own business offers a chance at more freedom and greater financial rewards.
If you are planning on building your business from the ground up, you are taking a bigger risk than if you were buying an existing business or a franchise. Existing businesses and franchises have some operating history that you can use to gauge the likelihood of the success of the business. By comparison, with a start-up business, you naturally think that you will succeed, but there are fewer guarantees.
Most successful start-ups don't actually begin with a new, innovative product. Instead, they begin with a proven product or service (start-up owners often open competing businesses in areas in which they are familiar) and become innovative after the new venture has generated some level of profit and success.
Because your start-up has no previous track record (even if you have had success in your field), you will first need to raise enough financing to make a go of it. Banks or investors will want to see a plan of attack before they will approve a loan for your start-up. Therefore, your first step should be to create a strong business plan.
Buying an Existing Business
The obvious advantage to buying an existing business is that it has a proven track record of success. But that doesn't mean that there are no possible pitfalls that you should avoid.
Perhaps the greatest problem in buying an existing business is that you might not acquire the expertise and services of the existing owners, who have often accumulated goodwill with their customers or clients. However, when a business is bought, it is not unusual for the previous owners to stay on for a period of time to assist with the transition and to make introductions to clients in an attempt to transfer some of that goodwill.
Consult qualified professionals to properly evaluate the information that the owners of the existing business may provide you. Also, make sure that the reasons why the business is on the market are true. Is the owner really planning on retiring to Florida, or is he or she just trying to escape the crushing debt that the business has accumulated over the last few years?
Also, keep in mind that you may be taking on a heavy load of debt in acquiring the business. A business that is marginally profitable may not be able to both pay off the debt service on the loan and pay you a living wage.
When you buy a franchise, you also buy marketing support, business strategy, name recognition, and assistance with site location (if it's a retail operation), among other things.
However, you also give up some things. You will never have the final say in all decisions, because franchisors typically retain rights to ensure that your business is run their way. Also, you won't be entitled to all of the profits of your business, because franchisors typically take a percentage as part of their fees. Finally, you may be limited in your decision-making processes (e.g., some franchisors require you to buy materials from their suppliers).
If you are thinking of purchasing a franchise, it is very important to thoroughly investigate the company. Remember, you are doing more than just purchasing a name--the franchisor is going to be your business partner. Make sure that he or she doesn't want only your money and then move on to the next potential buyer.
Franchisors are required to disclose lots of information to potential franchisees. Do your homework. Talk not only to successful franchisees but also to ones who have failed. If several former franchisees tell you that the company didn't fulfill the promises of the franchise agreement, beware.
Make sure every representation is made to you in writing before you purchase. Take notes of everything said to you, and have the franchisor sign off on them. That way, you will have a record of what was represented to you if things go wrong.
Business Start-up Costs and Organizational Expenses
Generally, costs that you incur prior to the time that you actually begin operating a business are treated as capital expenditures, which are part of your basis in the business. However, certain start-up expenditures may be deducted, either in the first year of business or over time (amortized).
Such start-up costs must be incurred before the business begins operation and be ones that otherwise would be deductible as a normal business expense. Certain syndication costs of marketing or selling interests in a new business cannot be deducted, and must be capitalized. For more information, see IRS Publications 535 and 583.
You should talk with a tax advisor about the tax deductions available for your start-up costs, as well as a variety of tax breaks available for small business owners, including for new equipment and health-care coverage.
As you consider becoming a business owner, it would be beneficial to talk with a Farm Bureau financial advisor about your options and long-term business planning.