Business Planning Start-Up Guide
We all go into business to follow a dream and make a better living. Most go into business without thinking about how they’ll sell or unwind a business. Businesses end in two ways: they are either sold or they go out of business. The best case scenario is to make a handy profit for all your work and worry. The worst case is bankruptcy.
Since you’re reading this, my goal for you is to prepare for a strategic exit. A strategy that includes honor. Hopefully, you found a good business and you’ll make it to profitability and growth. In the preamble, I said you’re business will end in two ways. That’s true, but there are subsets to those two: you’ll either sell, unwind, go bankrupt or die.
This Is the Business Cycle
Most businesses will go through these stages:
- The Grind – This starts on day-one and lasts as long as it has to (3 to 12 months may be a good estimate). You make yourself do things that are uncomfortable. You need customers and you find ways to get them.
- Growth – Once you get sufficient customers your sales grow. You’ve figured out what works and what doesn’t. It’s nice to see the sales coming in. This may start at month 3 and last one or two years (or more).
- The Gold – Eventually, you get to a spot where you are adding new products or product lines (service lines). You may even be opening up new stores. This is the phase you can finally pay yourself.
- Exit – You’re cashing out or retiring. Worse, you didn’t make it through the grind or growth stages and you’re “unwinding” or (worse) going bankrupt.
How You Start
If you are bootstrapping your business (little capital or cash), you’ll have to be creative with your money and customer acquisition tactics. Too many use their suppliers and their home’s equity as banks. Both are not sustainable or favorable options for bootstrapping start-up businesses. Odds are good that you’ll loose your house and steal from your suppliers (bankruptcy).
A lot of small start-ups are cursed with very little capital or cash. This is a catch 22, because you need cash to start a business but you need it to start a business. If this is you, save a little more or at the very least, find a product or service that you can sell online or from home. Keep you overhead to a minimum and keep you day-job, if at all possible. Grow slowly and reinvest your revenue back into the company. Don’t be tempted to pay yourself.
If you have equity in real estate or have cash to spare, you can start with a product and then add another until you make a multi-product (service) business. If you have sufficient funds, you can plan EXTREMELY well and go for it. Perhaps, you can buy a “going concern” business. If you are well capitalized, you are fortunate. However, there’s nothing like the necessity of bootstrapping to encourage innovation, efficiency, and hustle.
If this is you, really get you ducks in line and put these steps (or other author’s) in to practice. You are in a fortunate position to really do well. You have the cash to get products, advertise, and even employees or contractors.
If it will go wrong, it will. Keep that in mind. Whether you have capital or not, don’t use debt or at least use very little of it. Use your cash wisely and be mindful of it. Debt makes you a slave to the debt holder. If you cannot make your payments, they can sue you (your business) for any and all you assets, whether secured or not. Bankruptcy is a stressful process. In the end, you may loose everything, including your marriage (if not single).
How Much Is A Business Worth
Most business sell for two the three times their annual cash flow. So, a $100,000 business (net before taxes and debt service), depending on its industry and potential, will sell for $200,000 to $300,000. A business in a declining industry, will sell on the low end (or a less); and businesses in a promising industry will sell on the high end (or more).
The problem with local, small businesses is finding a buyer. Moreover, you’ll not likely find a cash buyer. Financing will be difficult for a buyer; because, banks may loan on the real estate and inventory, but it will require between 20 to 50 percent down. No traditional lender will loan on “good will” or the customer base of a business – which is ironic, because it’s that active customer base where the sales and revenue come from. If you have a sell-able business, be open to owner financing.
The Small Business Administration
A word about the Small Business Administration financing. I don’t recommend it. There are a lot of horror stories surrounding the SBA loan program. They often back relatively business that investors wouldn’t. But keep in mind, if you pledged any of your assets as collateral for your loan, bankruptcy will not wipe out the lien on that property. They’ll take you home, your car and anything you used as collateral.
My rule is this: government programs should be avoided at all costs. Government is about rules and policy. Their rules limit your flexibility and steer you in their direction. Not yours.
Sell Out: Maximize Sales and Revenue and Minimize Expenses
This is how to get the most out of a for-sale business. However, a good investor will notice the bump in sales and revenue and then look at your expenses. Where are you cutting corners? Where are you deferring maintenance? Is you equipment or physical plant in disrepair?
Most cash-flow business (see Phase II, Step 1) will simply sell out their inventory and end. Some have a systems that generates good revenue and can be sold. The scalable business, if done properly, can be sold. The danger with scalable business is bankruptcy in the “lean” years. They often grow too rapidly and acquire too many expenses and too much debt.
Sell Off: Sell Assets and Close Doors
This is common for small business, especially those that are home based. If they have assets they sell them. This may bring in a nice “payday” if the asset is includes expensive equipment or real estate.
You may not have known, it when you started, but you were essentially in a cash-flow business. The business wasn’t scalable beyond you and your small group. You had a good ride and now it’s time to hang up the ropes! You were a success! It’s also an honorable way to unwind a business.
Go Bankrupt: Screw Everyone You Know
When you go bankrupt, you are exiting with loss of honor; and if you have any honor to begin with, a devastated personal self-worth. Sometimes this happens to the best of us. If that’s you. I’m sorry to hear that.
However, for those without honor, this is way too common: they’re serial bankrupters. If this is you, stop it. Figure out how to do it right next time or get a job! If you ever become successful, pay back all those you stole from!
Sometimes the economy changes abruptly (think 1929 or 2008). Save a depression or severe economic downturn, this likely happened because you didn’t do your homework first or you simply took too great a risk.
Other times, you may not have gotten out of a dying industry soon enough. Sometimes you have to know when to exit before it gets too late. A late exit may be because of denial. Often, these folks refused to accept that their business is dying. Sometimes, they didn’t know where to turn.
If this is your personality type, know it and prepare while you can. Sometimes you can exit and take your skills to another industry or become an well-paid employee. If you have industry or customer contacts, you are valuable. If you don’t have a marketable skill, it may be time for retraining.
An Unexpected Death
This happens to all of us. Sometimes in old age and sometimes because of a sudden illness or accident. Since most don’t know when we’ll die, it’s best to prepare today. If you have a family or others that depend upon the company’s earnings, set up plan now. Build it into your business when its growing.
If you have a profitable business, prepare your spouse or children to run it when you’re gone. Make sure you talk to a lawyer about inheritance taxes and methods to leave your estate to your loved ones. The super rich rarely pay inheritance taxes because they’ve setup a business trusts that easily transfers “ownership” to their heirs. I put ownership in quotes because control is often better than ownership. That’s often their strategy.
At best, have a deliberate leadership succession plan. One that starts today. Think of the plan as an internship for your children or spouse. Perhaps your plan is to sell your business when you leave this world. Set it up in advance so your family is protected.
Know your limitations to start with. If you’re starting a business to sell, then you have an end goal. One that is doable in many industries. If your business is not scalable or it’s solely a cash-flow business, know that in advance and remember that. When it’s time to exit, unwind in a responsible manner. Plan into your business a succession a method to take care of you family upon your death.