Starting a small businessWhen you have self-discipline and a product or service you can sell, starting your own business can be both profitable and fulfilling. Before you start, consider the following:
- Determine what skills and expertise you possess that you can use in your business. You don't need a unique idea or invention to start a small business.
- Begin exploring your idea by first developing a written business plan. Such a plan should detail your product or service, how you're going to market it, your potential customers and competitors, and the economics of the business, including the start-up costs.
Of all the small-business investment options, starting your own business involves the most work. Although you can do this work on a part-time basis in the beginning, most people end up running their business full time — it's your new job.In most people's eyes, starting a new business is the riskiest of all small-business investment options. But if you're going into a business that uses your skills and expertise, the risk isn't nearly as great as you may think. Many businesses can be started with little cash by leveraging your existing skills and expertise. You can build a valuable company and job if you have the time to devote to it. To begin your own business, check out the latest edition of Small Business For Dummies (Wiley).
Purchasing a small businessIf you don't have a specific product or service you want to sell but you're skilled at managing and improving the operations of a company, buying a small business may be for you. Finding and buying a good small business takes time and patience, so devote at least several months to the search. You may also need to enlist financial and legal advisors to help inspect the company, look over its financial statements, and hammer out a contract.
Good businesses don't come cheap. If the business is a success, the current owner has already removed the start-up risk from the business, so the price of the business should be at a premium to reflect this lack of risk. When you have the money to buy an established business and you have the skills to run it, consider going this route.
Although you don't have to go through the riskier start-up period if you buy a small business, you'll likely need more capital to buy an established enterprise. You'll also need to be able to deal with stickier personnel and management issues. The organization's history and the way it works will predate your ownership of the business. If you don't like making hard decisions, firing people who don't fit with your plans, and getting people to change the way they do things, buying an existing business likely isn't for you.
Some people perceive buying an existing business as being safer than starting a new one. Buying someone else's business can actually be riskier. You're likely to shell out far more money upfront, in the form of a down payment. If you don't have the ability to run the business and it does poorly, you have more to lose financially. In addition, the business may be for sale for a reason — it may not be very profitable, it may be in decline, or it may generally be a pain in the neck to operate.
Investing in a small businessIf you don't want the day-to-day headaches of being directly responsible for owning and managing a business but you do like the idea of profiting from a successful one, then investing in someone else's small business may be for you. Although this route may seem easier, few people are actually cut out to be investors in other people's businesses. The reason: Finding and analyzing opportunities isn't easy.
Are you astute at evaluating corporate financial statements and business strategies? Investing in a small, privately held company has much in common with investing in a publicly traded firm (as is the case when you buy stock), but it also has these differences:
- Private firms aren't required to produce comprehensive, audited financial statements that adhere to certain accounting principles. Thus, you have a greater risk of not having sufficient or accurate information when evaluating a small, private firm.
- Unearthing private, small-business investing opportunities is harder. The best private companies that are seeking investors generally don't advertise. Instead, they find prospective investors by networking with people such as business advisors. You can increase your chances of finding private companies to invest in by speaking with tax, legal, and financial advisors who work with small businesses. You can also find interesting opportunities through your own contacts or your experience within a given industry.
Consider investing in someone else's business only if you can afford to lose all of what you invest. Also, you should have sufficient assets so that whatever money you invest in small, privately held companies represents only a small portion (20 percent or less) of your total financial assets.