THE KISS PRINCIPLE IN MICROBUSINESS

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CHAPTER 10

HOW WILL MY BUSINESS BE ORGANIZED?

Up to now, I have used a very broad brush to paint my business picture. I have not determined if I am to start the business from scratch, buy an existing business or buy a franchise; will my business be a sole ownership, a partnership or an incorporated company?

Before I make a decision, I must find out what each alternative method of starting a business implies? What are the advantages or drawbacks for each type of business? I must also decide if, at first, I should incorporate or not?

1. What method of starting a business should I choose?

a)   start from zero?

b)   buy an existing business?

c)   buy a franchise?

To choose wisely, I will have to consider the advantages and drawbacks of each method and then decide which way suits me, considering only my particular or personal circumstances.

a) Should I start my business from scratch?

Advantages

- It will cost me less to start from nothing.

- I can decide how fast I want to go, how fast I want to develop my business, I am more in control.

- I can choose where the business will be located.

- I can reinvest my first profits in my business, instead of repaying outside debtors.

 

Disadvantages

- I may have to be patient at first, start-up is usually slower.

- I may have trouble finding financing, as lenders, such as banks, will be reluctant to deal with a business they consider unproven.

- If I do find a lender, I may have difficulty in protecting my personal assets from seizure in case of failure.

- At the beginning, I will face risks and uncertainties, which might include no credit, erratic sales, little or no cash flow, difficulty with deliveries, etc. However, if I persist, these drawbacks will disappear, when I prove the viability of my business as well as my determination to succeed.

My next step, before I make any decision, is to consider the purchase of an existing business.

b) Should I buy an existing business?

Advantages

- From an existing, functioning business I will get an immediate cash flow.

- Past performance of the existing business makes it easier to forecast my future sales and profits.

- Business relationships are already established with customers and suppliers.

- Lines of credit, loans can be much easier to get with an existing, proven business.

- It is easier to shelter my personal assets from failure with an existing, proven business, because the business itself may offer enough of a guaranty to lenders.

Disadvantages

- I may have to pay more for an existing business than what I would like, because of such things as goodwill, older equipment included in the sale, etc.

- I am locked into a site for my business.

- I acquire a name and reputation that will be difficult to change.

- Once the transaction is completed, I may find part of the inventory to be obsolete.

- I must be aware that the "clientele" I am supposed to buy (usually termed as goodwill) may or may not be loyal to me, as the new owner.

If I decide to buy a business, to make sure I get what I pay for, and, that I do not get into contractual agreements without knowing what I am doing, I will consult a professional to find out:

- Why is this business for sale?

- How much is the business really worth compared to the asking price?

- Are there any legal or contractual obligations involved in buying this business (titles to property, loan or mortgage agreements, contracts of any kind, other legal or financial implications) that I should be aware of and understand, before I decide to purchase this business and, especially before I sign any agreement.

Next, I will consider the purchase of a franchise as another method of starting my business.

c) Should I buy a franchise?

Advantages

- There is already an established reputation with clients. The product or service is already known, goodwill exists.

- I acquire the right to use a name or trade mark already known in the market.

- As part of the price, I have access to know-how in management, production techniques, cost control, publicity, and other knowledge I can use to successfully run a franchise.

- Sometimes I may have access to financing through the franchiser.

Disadvantages

- I will have a limited scope of action. The franchising agreement spells out very strict rules and penalties for me.

- The initial purchase price of a franchise can be quite expensive.

- The ongoing royalties I must pay for doing business under a franchising agreement can also be quite high.

- The franchising agreement can limit prices, sales, the number and type of products I can sell, where I can buy my supplies, the type of accounting and controls I must use, opening and closing hours, days, what type of containers or uniforms I can use and where I must buy them, etc.

In buying a franchise, like buying a business, I will need the advice and guidance of a professional on my side. It is most important that I understand exactly what my rights and obligations are under the franchising contract. To do this, I must have someone competent to explain the terms used in the agreement.

 

2. What legal form will I choose for my business? To choose wisely,

I must first outline the choices I have, describe what these choices mean to me and my business and make my choice according to what suits me and helps me reach my goals.

There are three basic choices in front of me, they are sole ownership, partnership and incorporation.

a) Sole ownership through registration.

This consists of registering my business with the Court and declaring my ownership, the name of my business and the address where the business will operate from.

Advantages

- It costs very little to register a business.

- It declares to anyone interested that I am in business.

Disadvantages

- I am personally liable for all debts or liabilities of my business.

- I cannot shelter my personal assets from my personal or business creditors.

- Banks or other lenders are reluctant to lend money or extend a line of credit to registered entrepreneurs.

b) Partnerships

Advantages

- There are more persons to share the risks.

- There are more persons to invest in the business.

- Lenders will extend credit more readily to a partnership.

- There will be more talent in a partnership and management tasks can be shared.

Disadvantages

- All partners are equally and severally responsible for business debts and liabilities.

- Unless a partnership agreement has been signed between the partners, if one or several partners should want to withdraw, the partnership is automatically dissolved. The dissolution of a partnership can be very messy.

- Individuals cannot shelter their individual assets, unless the agreement of partnership stipulates a limited partnership, where some or all the partners limit their participation and risk.

Before going any further, here is a list of information I must have, before I enter into a partnership agreement with anyone.

The financial situation of my partners to be. What do I know of their honesty? How about their emotional stability, do they panic? Do they get along well with people, do they get along with me? What kind of personality does each have? Are they compatible with each other, with me? What kind of experience does each have? To what extent will it benefit the business? Is there too much of one type of experience among them? Their capacities? Are they proven or are they all novices? Are they willing to share the responsibilities of running the business or part of it? When I submitted my ideas for this business, who was enthusiastic and who was lukewarm or negative? Who offered positive suggestions or criticisms? Finally, am I in a position to pick and choose my business partners? Can I look elsewhere?

At this point, I should consult my lawyer, to have him draw up a partnership agreement, stating all the items I want covered in it. Once I have a copy, I will convene all my potential partners and submit the agreement for their approval and critique, then with their consent, I will have the final agreement drawn up for their signatures. We will also decide when we will sign the agreement.

c) A limited corporation

Advantages

- A limited corporation is a legal entity, a legal person, and, as such, is responsible directly for it's business debts and liabilities.

- Shareholders in a corporation limit their risk to the amount of money they have invested in the shares of the corporation. A shareholder owns one or more shares of the corporation.

- A shareholder can shelter his personal assets from the business' creditors. His liability is limited to the number of shares he owns.

- Banks and lenders will loan money more readily to a corporation, because it has assets of it's own.

- If a shareholder were to die or quit, it is much more simple to value his shares and buy his estate out. The corporation is not dissolved when a shareholder leaves.

Disadvantages

- The cost of incorporating a business is more expensive than the other alternatives.

- In a small corporation, with few assets, a bank or lender might ask for additional guaranties through the personal assets of the shareholders, before lending any money.

- Corporations are more highly government regulated

Here again, my lawyer will guide me, when I choose to incorporate my business. He will make me aware of my rights and duties under the laws governing corporations. I will also consult my accountant to set up the accounting books, to learn about corporate tax benefits and to follow his advice on financial and tax matters. Once I have made my choice, I will have the necessary papers drawn up and will technically be in business. I may now turn my attention to the more practical aspects of running my business.

WORKSHEET 10

WORKSHEET 11