Starting with a Good Idea: Forty Concepts for a Small Business (Concepts 1-5)

Welcome to the Canada Business audio workshop. This 6 part series will help you with basics of starting and growing your business and will cover some of the most challenging aspects of business ownership.

In this introductory episode we will discuss 5 of the Forty Concepts for a small business.

1. Buy an existing business

When you buy an existing business, you are assuming responsibility to an existing customer base. Buying a business this way, you are most concerned with the ability of the business to continue to earn profits. The price you choose to pay for this business, therefore, is more related to the business' past profit earning record. One commonly accepted way of evaluating this business is projecting its profits for the next three years based on its last three years and discounting the present value (using present value tables) to this year. This suggests that you expect to get your investment back within three years.

You may also choose to buy a business that is not doing well, believing that you can use your knowledge and talents to make it succeed. Then the value you would place on it would have more to do with the replacement value of the assets of the business (plant, equipment & inventory) taken against what is shown on a current balance sheet, to be the book value of the assets and liabilities.

In some cases, you may wish to buy a business and resell it quickly; your success here would depend on your ability to identify businesses which can be turned around quickly and resold at a profit. You are particularly concerned with the balance sheet and the specific liquidity aspects revealed by it. This is what happens when the assets of a business are purchased from a receiver or a bankruptcy. Then you can either do a sort and a further liquidation sale, or you can pick up the pieces and attempt to build a new business from them.

Most people negotiating a buy/sell agreement for a business use the above methods in some combination. You negotiate for assets based on their worth to you. Beyond the asset value, you pay for inventory against cost figures (not retail dollars) and according to how current that inventory has been kept. You sort the inventory into current stock, slow sellers and dead stock. You shouldn't pay for someone else's mistakes i.e. dead stock. Slow sellers stock you might offer 50 cents on the dollar on cost, and for current stock, you pay near cost.

How To Do It

As a first step, learn about the process by seeking out books which explain how to buy a business. Pay special attention to the reason why the person is selling the business. To find businesses available for purchase:

• check newspapers for classified ads under Business Opportunities or similar headings
• contact commercial real estate agents
• read ads in trade publications
• attend trade shows
• talk to people in the trade, visit businesses which interest you, to observe their operations
• and talk to business professionals (lawyers, accountants and bankers) to see if they know of any firms which might be for sale.

Check out businesses you would like to operate looking for owners who want to retire or sell for other reasons such as boredom, partnership disagreements, divorce or poor health.

Look for businesses which are not doing well, and which your talents, knowledge and energy could make successful. Beware of businesses which are in a shrinking marketplace (e.g. typesetting printer businesses).

Identify and talk with potential customers to determine their need for your product. Before entering into negotiations to purchase a business, talk to your banker, accountant and lawyer.

Key Questions

• What existing businesses could I buy and operate?
• What types of businesses am I interested in?
• What types of businesses would I enjoy operating?
• What businesses could I run, based on my previous experience?
• What funds are available to me for the purchase of a business?

2. Buy a franchise

Buying a franchise involves buying the rights and support systems to own and operate a business that has been designed by someone else. It is a common way of establishing a business.

Usually, franchise networks are based on a successful business established in one original location. Franchise outlets may then be established in other locations. Each location uses the same company name, operating system, purchasing procedures and management system, and benefits from general advertising campaigns. Each franchise outlet receives varying degrees and types of franchise supports.

Some Examples

Many fast food outlets such as McDonald's Burger King and Kentucky Fried Chicken are franchise operations.

Other common types of businesses which may be franchised are real estate agencies, restaurants, hair salons, building supply outlets, dry-cleaners, picture-framing shops, lawn maintenance services, fast printing services, quick photo processing outlets, automobile repair and parts shops, sports equipment stores, computer stores, video rental outlets, home security firms and machine vending services.

How To Do It

Find and read publications relating to franchising, to learn about its advantages and disadvantages. Good sources of information include local libraries, as well as Canada Business.

Identify types of franchise operations you would like to explore by:

• reading newspaper and magazine advertisements and franchise trade journals;
• joining franchise trade associations; and
• noticing franchised businesses in other locations which may work in your area.

Work at a franchise outlet of a business which interests you.

Attend franchise trade shows.

When you have selected the type of franchise which most interests you, identify and talk with potential customers to determine their need for your products or services.

Talk with a few franchisees for information on being part of a franchise operation.

Key Questions

• What kind of business would I like to own as a franchise?
• Is there a market for the product or service I would be offering?
• Can I obtain that franchise for my area? How?
• Will my previous business experience support the type of franchise operation I prefer?

3. Franchise your business

Franchising is one alternative for expanding a successful, existing business. Franchises are generally of two varieties. The franchisee purchases the rights to a single location or buys a master franchise to develop an area (i.e. multiple locations which may then be sub-franchised within a given geographic territory).

When a business is franchised, a contractual relationship (joint venture) is set up between the successful established business (the franchiser) and the hopeful buyer (franchisee) of a specially prepared copy for sale and lease of this successful business. This copy is based on the key elements of the original concept that are necessary to duplicate the success of the original business in any number of new locations. This copy kit will often include a sub-lease on a location, immediately identifiable changes to the building's exterior, a complete package of leasehold improvements, a furniture and fixtures assortment (all complete with logos and trademarks), an initial inventory package, an initial training package and an on-going support system comprised of accounting, promotion and general expertise in all aspects of the business management.

In return for providing this turn-key, proven success package , the franchiser expects a franchise fee and will expect to participate in the day-to-day profits of the business itself by means of a royalty (normally, anywhere from 2% on the gross sales revenue to 50% of the net depending on the nature of the business and the degree of involvement required of the franchiser). It is also not uncommon for franchisers to expect from 3% to 5% of a franchisee's revenues to be contributed to a national or international cooperative advertising and promotion budget to promote the entire conceptual entity and corporate identity (product, logos, signage etc.). In theory, then, the purchaser of the franchise package owns their own business, but in practice the franchise contract removes any creative freedom from the operation of that business.

Franchisers can often generate additional revenues by purchasing inventory and supplying stock to all the franchisees. A margin on the purchased stock or a service charge to the franchisees is quite common.

Licensing the rights to manufacture products against a proprietary design or process patent is a common form of manufacturing franchise. Common to the construction industry sub-trades such as roofing, gutters, etc. is the licensing for a territory of the rights to a certain product and application of that product arrangement.

Some Examples

A successful restaurant sold franchises so that similar restaurants could be developed in other cities to form a chain.

An accountant developed a straightforward and inexpensive system for doing tax returns. He then offered the system to licensed accountants as a territory franchise using his recognized name.

Coca-Cola wholly owns all its coke syrup formula plants ,but franchises its bottling plants. The local bottling plant (franchisee) buys the logos, the bottling machinery, the bottles and the syrups from Coca Cola; it develops its own clients, pays for its own factory and delivery trucks and co-shares advertising expenses with the franchiser.

How To Do It

Prepare a detailed analysis of your successful business: Is there some aspect of uniqueness to your business that is responsible, in large part, for the success it has enjoyed? Clearly identify it. Relate the gross revenues to the gross expenses to show where the profitability is realized.

Prepare a descriptive location analysis of the key elements of your market area that have contributed to the success of your present location. Prepare an interior floor plan for one or two standard location sizes. What size and configuration works best for your business?

Finally, create a master business procedures manual to take someone step-by-step through your day-to-day business operation and prepare the accompanying financial supports (i.e. cash flow projections, start-up costs, working capital requirements). Franchise offerings are usually promoted through franchise brokers (professional sales agents), trade association newsletters, business opportunities trade fairs or trade magazines.

4. Identify opportunities arising from your current business

You can uncover new business opportunities by analysing your current business operations and finding new directions for your activities. Such opportunities could arise from either the strengths or the weaknesses of the business. To provide new opportunities, strengths can be expanded and weaknesses can be corrected.

Some Examples

An organization had a huge mailing list of customers, but did not use the mailing list for advertising. They recognized the weakness and contracted with an agent specializing in direct mail lists to computerize the list. The list is used to advertise the firm's own products, and the firm receives a rental fee when others rent the list.

A radio station was especially strong in talented people and state-of-the-art equipment. They capitalized on this by creating syndicated sports and public affairs programs that they marketed to other stations.

An aircraft manufacturing firm had a fibreglass division which was underused when airplane sales were down. Instead of closing the division or laying people off during those periods, the company asked the division to research additional products it could produce. A unique bathtub was designed and marketed, and became so successful that a new company was formed to produce it.

How To Do It

Take an inventory of your human, physical and other operating assets to identify those which are currently underused. These assets may be:

• land, equipment;
• facilities, patents;
• products;
• systems;
• cash;
• credit;
• licences;
• knowledge;
• skills;
• experience;
• contacts;
• reputation;
• market position, methods of distribution locations;
• or trademarks.

Identify the strengths and weaknesses of your business by considering:

• areas in which the operation excels/falls short;
• areas in which the operation is innovative/non-productive;
• compliments/criticisms paid by customers or other people, and company
• strengths/weaknesses identified by them; and
• areas in which your firm is weak and in which competing firms or industry leaders are strong

Use external consultants to review your strengths and weaknesses.

Design strategies to improve your strengths, reduce weaknesses or turn weaknesses into strengths.

Key Questions

• What strengths can we use as a basis for expansion? How?
• What weaknesses can be corrected or turned into strengths? How?
• What new opportunities can be identified after considering current strengths and weaknesses?

5. Identify the Full Scope of your Business

Sometimes businesses fail to identify the full potential scope of their operations, when considered in a context of the generic category of their business. For example, book publishers are in the information business, soap companies are in the cleaning business, and trucking firms are in the transportation business. Defining the business in a clear and complete manner can lead to the identification of additional business opportunities. For example, soap companies can expand their product lines to include other items that can clean.

Some Examples

The publisher of a community newspaper realized he was in the information business and began to publish a newsletter as well.

A firm of chartered accountants realized they were in the business of financial control tools. They expanded their regular accounting activities by hiring a financial controller who serves several small companies on a fee-for-service basis. Their "rent-a-controller" service is a success.

Managers of a neighbourhood food store recognized that they were in the convenience business. They began to provide other "convenience" products, services and features, such as delivery service, 24-hour opening, easy parking, hot snacks and even video rentals.

How To Do It

Ask yourself what general type of business you are operating.

Look at the services and products you provide to identify which general categories they fit.

Examine the identified general categories. Then think of other types of products or services in those categories which you are not providing, and consider whether you could expand your operation to offer these additional items.

Talk to potential customers to find out whether there is a demand for the additional products or services.

Key Questions

• Into what general category or categories does my current operation fit?
• What other products or services could fall into the same category?
• Could I expand my operation to offer these additional items?
• Is there a market for the additional products or services?
• What potential customers would purchase the product or service I want to provide?

This concludes our introductory episode of the Canada Business audio workshop series, for further information on anything discussed in this episode please contact the Canada Business service centre near you by calling 1-888-576-4444.

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