Home-Based Business Start-Up Guide: Step 2 Sneak Peak: Determining What Business to Start

Determining What Business to Start from Home

BY BARBARA WELTMAN

Excerpted from: Home Business Magazine’s Home-Based Biz Start-Up Guide: Order at https://homebusinessmag.com/home-based-business-guide/

So, you want to go into business and you know you want to do

this from your home. You may have a great idea and want to run with it. Or you need help in finding the right type of business for you. Also, you may want or need to have a co-owner rather than go it alone. No worries! There are many ways to approach these important matters.

Basics for picking any business

Whatever venue you use to find the best business fit, there are certain questions you need to answer. Doing this will help put you in the right direction. ■ What are your skills, education, and abilities? Make sure that the business you are thinking about going into aligns with what you can do, or can learn to do.

■ What are your goals for being in business? Decide upfront what you want the business to do for you (e.g., provide a living, be a stimulating activity, solve a particular problem, contribute to your community).

■ What is the cost of starting the business and do you have (or can you raise) the necessary funds? This money question will clearly dictate what you can or cannot consider in terms of the type of business to go into. Many homebased businesses have a modest startup cost, but others can be pricey. website (yours or an established one such as eBay or Etsy). Just be sure that the idea makes sense for you and your situation. ■ Can you legally conduct your business from home? This depends on the nature of your business. For example, if you want to bake custom cakes, you may be able to do this from your kitchen. But you may be restricted from doing this by the rules of your homeowner’s association. Or your city or town may have health codes that bar any cooking activities in a home for commercial sale. You have to check on legal restrictions on your idea.

■ Does your idea make commercial sense? It may seem like a good idea to you, but is there a demand by customers or clients for what you want to offer? It’s highly advisable to do some market research on your idea to see if it’s viable. There are many online resources to help with this (e.g., HubSpot’s free Market Research Kit. And be sure to assess whether you can actually make money doing it. If it costs you X dollars to provide a service (your time and expenses) and you can only reasonably charge those same X dollars, you won’t make a penny no matter how many hours you work.

Pros and cons of starting from scratch:

Pros: ■ Control. What you do, how you do it, and what you can accomplish are entirely up to you. The opportunity for success is limitless.

■ What is your financial situation? Do you have enough savings (or a significant other or other person to support you) to cover your personal living expenses until the business generates money you can take out for them?

What are your existing financial obligations (do you have outstanding student loans, child support payments, a car loan, a mortgage on your home) and how will they be met while you get started? How is your personal credit rating?

If you need to borrow money to get started, it’s your FICO score that will control whether you can get a loan and what interest rate you’ll pay.

Start from Scratch

If you have an idea of the type of business you want to run from your home, that’s great. Maybe you have a professional skill, such as bookkeeping or blogging, that you can do as a business from home. Or maybe you want to care for others—children, pets—in your home. Or maybe you have an idea for a product that you can develop and sell through a

■ Flexibility. You may be able to structure your business to suit your personal and financial needs. This may be part time, seasonal, or only within the hours that work best for your situation. Cons: ■ No immediate financial rewards. When you begin from scratch, there are considerable outlays (e.g., legal fees, offset set-up costs, website design) so making money may take some time.

■ Lack of guidance. You don’t have any pre-set procedures or any structured guidance. You can, however, can get help through a SCORE (www.Score.org) or SBDC (www.americassbdc.org) office.

Before you start a business from scratch:

■ Assess your skills and abilities. While doing this is helpful regardless of how you choose to find the right business, it’s essential if you’re starting from scratch. For example, take

the SBA’s Small Business Readiness Assessment to see if you have what it takes to start a business.

■ Review your financial situation. As discussed earlier, you need to know how you’re going to pay your current rent or mortgage, food, utilities, and other personal expenses during the period in which the business is just getting started and isn’t returning enough revenue to allow for withdrawals for personal needs. Also, as mentioned earlier, if you need funding, can you swing it (based on your credit score, the required capital, and other factors)?

■ Get your idea critiqued. You may think that your idea for a business is great, but you need to be sure that there’s a market for it. Again, SCORE and the SBDC are great resources for reviewing a business idea…and both offer their services for free. Another way is to use a business broker. This is a person who acts much like a real estate agent with home sales. The broker can explain what’s available in your price range and help you do due diligence on the target business. The business broker charges a commission, which is typically about 10% of the purchase price of the business (usually paid by the seller). Be sure you find a good business broker (interview several, check references, etc.).

Pros and cons of buying an established business:

Pros: ■ You can begin business immediately, as there’s no startup time required. You essentially step into the shoes of the former owner.

■ The product or service is a known quantity. You don’t necessarily have to do the same market research you would for starting from scratch. But it wouldn’t hurt to be sure that the trend for the business and the industry it’s in is moving in the right direction. ■ The brand is established. There’s already a name, logo, and likely a website and presence on social media. You just have to maintain the brand. ■ There’s an existing customer base. You don’t have to find your first customer or your second one. There’s a customer database with contact information and, hopefully, more about their buying habits so you can continue to market to them.

■ There are set procedures for the operation of the business. There are already ways in which to function; you don’t have to create new ways unless you find that they’re necessary. ■ It may be easier to get financing as compared with a startup. Because the business has a record of profit and loss and an existing balance sheet, you may be able to get a loan more easily to buy the business than one to start from scratch. And the business itself may be able to more easily obtain funding (e.g., a line of credit or a good line on a business credit card) if necessary.

■ Proceed with care. There’s a lot to do when starting from scratch. For example, you need a name for your business and have to be sure that you can—from a legal and commercial sense—be able to use it. You need to set up your business from a legal standpoint. All of this is covered in

Step 4.

Buy an Established Business

As the saying goes, you don’t have to reinvent the wheel. Instead, you can use an existing wheel by buying an established business. When you do, you have a readymade setup to jump in and make money.

If you know about an existing business that may be for sale (perhaps you work for this business—at the owner’s home or remotely—and the owner wants to retire), that’s one easy way to find an established business for you. It’s likely that you know what’s good and bad about this particular home-based activity.

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Cons:

■ It may be more costly to you than starting from scratch.

You have to buy out the existing owner, and he or she is going to charge you for all of those “pros” just listed. The brand, for example, includes an intangible asset called

“goodwill,” which is the value of the business over and above its physical assets. ■ It still takes time to establish yourself with the existing customer base. Customers may have become used to dealing with the former owner and may not immediately take to you. ■ There are tax issues to consider, which depend on how the purchase is structured. If you’re buying assets, your ability to depreciate them depends on how the deal is structured (an accountant can explain this). ■ There may be hidden liabilities. For example, there may be outstanding lawsuits against the business from a disgruntled customer or there may be one lurking from a former employee. You may have the opportunity to buy into an existing business and become a co-owner. Whether this makes sense for you is something you need to determine. This subject is discussed later.

Before you buy an established business:

■ Review the business’s financials. If you’re considering the purchase of an existing business, be sure you (and your accountant) carefully review the business’s numbers.

What’s on the company’s balance sheet for assets and liabilities? What has been the trend in profitability and profit margin? If you don’t understand these terms, you need to

learn about them so you don’t blindly buy into a mess. ■ Engage an attorney. Be sure you work not only with an accountant to decide whether the deal makes financial sense, but also with an attorney to protect your interests in the sale and beyond. Even if you know the seller, don’t be fooled into thinking that the purchase of a business is a simple matter; it’s not.

Buy a Franchise

A franchise is a business in which the owner (the franchisor) sells the rights to another (the franchisee) to use the business logo, name, and model of operations. When you hear the term “franchise,” you may think McDonald’s or Subway. But there are numerous franchises designed to be run from home. Examples of some of the more popular ones: ■ Cruise Planners (a travel agency associated with American

Express) ■ Coffee News (a weekly newspaper distributor) ■ Bricks 4 Kidz (education programs for children) ■ The Dog Wizard (dog training service) ■ MaidPro (residential cleaning service) ■ Seniors Helping Seniors (non-medical home care) ■ Snap-On Tools (professional tools and equipment)

You can find a home-based franchise by doing your own research. Home Business Magazine lists (www.HomeBusinessExpo.com) a number of home-based franchises to consider. You may also want to consult with a franchise broker to get advice about which franchise is suitable for you.

Pros and cons of franchises:

Pros: ■ Proven system of operations. The business model has

been tested and proven to work (although there are no guarantees it can work for you in your location given your abilities). ■ Training and support. Typically, as a franchisee you receive training and ongoing support from the franchisor.

Cons:

■ Ongoing royalty fees. A part of every dollar you take in must be remitted to the franchisor because this is a royalty arrangement. You are never free of the franchisor. ■ Significant investment requirements. Of course, there is a range for the money required to obtain a franchise, but it is usually greater than starting a business from scratch or buying a business opportunity (discussed next). ■ Restrictions on business operations. Because you carry the franchisor’s name, you must adhere to company rules. You must buy products from a set vendor and do things in a set way; you don’t have the flexibility to.

Before you buy a franchise:

■ Review the Uniform Franchise Offering Circular (UFOC).

This document is supposed to reveal key information about the franchise—its history, past litigation and bankruptcies, and employees—and what becoming a franchisee means to you, including all of the fees and costs (such as ongoing royalties) and rules and restrictions for operating your franchise. ■ Consult an attorney. Franchises are subject to federal and state regulations. You want a legal pro to make sure that you’ve received all required disclosures and that you fully understand your rights and responsibilities for this undertaking.

Invest in a Business Opportunity

Think of a business opportunity as a business in a box. It’s a pre-packaged business concept that you pay money to use. Typically, a business opportunity presents you with the idea for the business and the equipment or materials to conduct it. How you run your business is up to you. Once you pay for the business opportunity, there’s no continuing payment or royalty to the seller (as there is with a franchise). Types of business opportunities. There are different types of business opportunities that you might consider: ■ Direct selling. Here you have a line of products that you sell directly to people (think Tupperware parties and door-to-door Avon sales). Direct selling may also involve recruiting others to also sell, where you then receive money based on what they sell.

■ Dealers or distributors. Here you purchase the right to sell a particular company’s products without using their trade name (it may be makeup but it won’t be Avon). If you become a distributor, you sell the products to other dealers. If you become a dealer, you sell directly to consumers or retailers.

■ Licensees. Here you do use the name of the company that’s given you the right to use its product line, along with its methods and equipment. You may be taught the method, but then you’re on your own.

■ Vending machines. Here the seller provides the machines and may even help you find locations for them. Then it’s up to you to restock the machines. You can find business opportunities through the web. Home Business Magazine lists a number of home-based business opportunities to consider.

Pros and cons of business opportunities: Pros:

■ Proven system of operation. If the business opportunity has been around for a while and used by others like yourself, then it’s likely to be a viable type of business. ■ Less cost to get started than a franchise. It may only take a few hundred or a few thousand dollars paid to the seller to get started. ■ No ongoing payments to the seller. Unlike a franchise, royalty payments are not required. Once you pay the upfront cost, the business is yours. ■ Free help in some cases, such as legal advice, advertising, and other support. Depending on the particular business opportunity, you may receive some guidance to get you started.

Cons:

■ Lack of training and guidance. For many business opportunities, you may be on your own from day one. Certainly, there is no ongoing help. ■ Modest return on investment. No matter how hard you work, the nature of the business opportunity may be such that making money is limited.

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Checklist for Determining How to Start a Business from Home

Questions

Have you assessed your skills, education, and abilities?

Have you determined your goals for going into business?

Do you know the cost of getting started?

Do you have the fnancial ability to start up or buy a business?

Do you have the fnancial resources to pay personal living expenses until the business is viable?

Have you assessed your idea for starting a business from scratch?

Do you want to buy an existing business?

Have you considered buying a franchise?

Do you want to buy a business opportunity?

Do you want/need to have a co-owner?

Yes No N/A

Before you invest:

■ Do your research. Unfortunately, there are some scam business opportunities out there. Make sure the one you are considering isn’t among them. Do a Google search of reviews or testimonials about the seller. Check out the seller with the Better Business Bureau (BBB) (www.bbb. org) You should also check the seller with D&B (www.dnb.com) to learn about the seller’s financials. ■ Consult an attorney. Make sure you understand any legal obligations to the sale. In some states, the sale of a business opportunity is regulated. If you’re in one of these states, be sure that all the rules are satisfied.

Go it Alone or with a Co-Owner?

Being in business all by yourself can be a lonely and challenging activity. Every buck stops with you. There’s no one to share responsibility with. Going into business with another person offers many advantages over going it alone. But there are considerable drawbacks to consider.

Why take on a co-owner?

There are many benefits to having an additional set of hands on board. Here are some benefits to consider: ■ Skills and knowledge. Each partner may bring a different set of personal attributes to the business. One may be a talented graphic artist who provides the core skills for a graphic design business, while the other may have financial talents and provides money management for the business.

■ Financial burden. Starting alone means having to shoulder the full financial cost of starting up. For some homebased businesses, the initial cost may be modest. But where startup capital is considerable, having a co-owner reduces the burden for each owner.

■ Work-life balance. Sharing the business load with another owner can enable you to have time off for personal matters. You may more easily attend a child’s school play or take a vacation, which may be difficult or impossible when you’re the sole owner.

Why not take on a co-owner?

While the benefits to having a co-owner are compelling, there are drawbacks that shouldn’t be overlooked. ■ Decision-making isn’t unilateral. You can’t make decisions on your own; you and your co-owner must agree (except where each has responsibilities delineated in a

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legal agreement (discussed later)). It does make it more cumbersome to operate. ■ Share the profits. The flip side to sharing the financial burden is the requirement for also sharing the profits (see legal agreements below). ■ Styles and goals. For co-ownership to work in the long term, owners need to discuss upfront their styles of work and their long-term goals for the business. If one owner is an early bird while the other is a night owl, this work style may be great…or it could be problematic, depending on the situation and how owners view these different styles. If you take on a co-owner, protect yourself. It’s not required by law, but as a practical matter it’s essential that you and your co-owner enter into a legal agreement. This legal document spells out various matters to help you and your co-owner (or co-owners) run the business. ■ For a partnership: Use a partnership agreement ■ For a limited liability company: Use an LLC partnership agreement (same as a partnership agreement but the language is tailored to LLC owners who are called managers) ■ For a corporation: Use a shareholder agreement For purposes of the discussion on legal agreements for co-owners, we refer to “partners,” but the same information applies to shareholders.

Making the Decision

If you’ve answered “yes” to whether you are prepared to get started, decided on the way in which you want to begin, and determined whether you want a co-owner, then you’re ready to go. It’s time to start making plans…as you’ll see in Step 3.

Remember that a partnership is like a marriage…’til death do you part. But like in a marriage, divorces do occur and couples that had the foresight to sign a prenuptial agreement usually have an easier time splitting up property and assigning responsibilities to one or the other. So have that foresight and get that partnership agreement not only to help run the business, but also to determine what happens when the partnership ends.

The partnership agreement should address: ■ Ownership. A partnership doesn’t have to be 50-50.

Decide upfront the percentage of ownership interest

each partner has, based on what each contributes to get the business started and what each will bring to the table, such as talent, connections, management of daily operations, etc. (“sweat equity”). This percentage can be used to control the allocation of profits. Or the agreement can provide for an allocation that does not reflect the percentage of ownership; it depends on what you and your partner wants. ■ Decision-making. This can be tricky when there are two co-owners; a stalemate on important matters can result.

So think about this in advance and put a resolution in your partnership agreement. Perhaps one partner is responsible for decisions on day-to-day matters while the other handles long-term concerns, such as signing contracts, leases or taking loans. The agreement should provide a way to resolve disputes (e.g., requiring mediation for major issues that you can’t settle on your own). ■ Death, disability, divorce, or retirement. What happens when one partner experiences a major life change or dies? Can the business continue? Do spouses have a right to succeed to any interest in the business? How will the outgoing partner (or his or her estate) be compensated?

These and many other questions should be addressed.

Crafting a partnership agreement or shareholder agreement isn’t a DIY activity. You need the help of a knowledgeable attorney who can make sure that your concerns are properly addressed, given your situation and the state that you’re in. But if you want to save on legal fees by drafting your own agreement and then having it reviewed by an attorney, there are templates you can use for partnership agreements (search Google for templates for “shareholder agreements”) from such sites as LawDepot.com, RocketLawyer.com, and FormSwift.com

Legal agreements and other formalities are discussed further in Step 4.

Barbara Weltman

Barbara Weltman is an attorney, prolific author, and a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at BigIdeasForSmallBusiness.com. She has been named one of the Top 100 Small Business Influencers five years in a row and has won numerous awards for her blog. You can follow her on Twitter @Bigideas4SB.