Many people dream of owning their own business, being their own boss and making their own rules. That dream of freedom and independence is a long way from reality and many small businesses fail within the first few years leaving their owners disillusioned and in debt.
The old saying that failing to plan is planning to fail is very true when you are buying or starting up a business. Don’t be so anxious to make the leap until you make sure you have all your plans in place.
What do you need to do?
When you have found your business or have an idea for a business, the first thing you need is a business plan. Whether the business is a new start up or an existing business, you should have a clear idea of what you plan to do and where you want to be in 12 months, three years and 5 years. When planning how to set up or run your business, always include an exit strategy. Running a business is hard work and you should plan ahead to that time when you may want to move on, or simply escape.
The Australian Taxation Office have some useful information for new businesses.
Check out their small business video series at https://www.ato.gov.au/Business/Starting-your-own-business/In-detail/Tax-basics-for-small-business-video-series
The Right Financing
When figuring out how much and how to get it, you should always include working capital in your calculations. Setting up a business can be expensive but you should always include in your calculations, sufficient funds to run your business for at least a month or until you expect the cash to start flowing. Remember you will be incurring overheads from day one.
One way of ensuring that you have enough working capital to start up is to secure an overdraft. Be careful with this option as it can mean you may start your business already in debt usually secured against your home. Make sure your business plan covers how you will manage your debt.
Deciding on the right structure for you
The next thing to decide is how you will operate the business. You should consult with your accountant to determine which structure is best for you – sole trader, partnership or company. There are advantages and disadvantages to each but what is best for you will depend on your own particular circumstances and the business you intend to operate. Be certain of your choice of structure as to change at a later date will incur additional costs.
You will find more information on these structures at https://taxfiles.com.au/wp-content/uploads/2017/07/Small-Business-Guide.pdf
If you intend to operate in a partnership or in a small proprietary company, make sure you have a partnership or shareholder’s agreement in place to deal with potential problems and your exit strategy.
Planning for growth
Most people when buying a business do so with the intention of working in it. Whilst this is usually necessary in the short term, the main purpose of being in business is not to buy yourself a job but to acquire an asset that you build up to sell as a going concern. Businesses that do not grow, usually stagnate.
Always ask why the business is being sold. You may be buying someone else’s nightmare. If something is not working for the present owner it probably won’t work for you either. Don’t be afraid to change the structure of the business or the way it operates unless of course the business is an outstanding success in which case if it’s not broken – don’t fix it.
Finding a good bookkeeper is probably the best thing you can do when starting your business. Even with most up to date and user-friendly accounting software it is always best to have your accounts set up by someone who understands the intricacies of Goods and Services Tax, income tax and employee entitlements. A little care at the beginning can save you time, money and stress later.
Most small businesses lease premises and although a good lease adds real value to your business, the long term financial commitment you make when entering into a lease constitutes a significant portion of the overheads of the business.
Leases are contracts and are not easily set aside without costs or penalties but like contracts they may be negotiated. You should include the cost of leasing suitable premises in your business plan when estimating the cash -flow you will require to operate your business and provide you with a suitable return for your effort and investment. Knowing what income you must aim for to make a profit or even to break even is essential before you make any long term commitments.
Getting the right advice
During this whole process, your accountant should be your best friend. Doing your research and making sure that you do not overextend yourself will save you many sleepless nights.
So, what happens when that ‘perfect’ opportunity comes along and you must act fast or miss out? See your solicitor. Get your contract right. Negotiate the terms that you want and make your contract subject to due diligence. Make sure that you have all the information and advice you need before taking that fatal step to rags or riches. Do your business plan, see your financier talk to your solicitor and get ready for what will be the best but hardest thing that you will ever do.
This article contains general advice only and may not apply to your circumstances. For more detailed advice, come and see us at Smithfield Law.