So, you’re thinking of going into business for yourself. You have several options available, and all involve some degree of risk. Do you want to create a start-up operation? Perhaps you are planning on buying an existing business. Or, you may be considering the purchase of a franchise operation. Each option involves some element of risk and reward. Whichever option you choose, however, owning your own business offers a chance at more freedom and greater financial rewards.
If you are planning on building your business from the ground up, you are taking a bigger risk than if you were buying an existing business or a franchise. Existing businesses and franchises have some operating history that you can use to gauge the likelihood of the success of the business. By comparison, with a start-up business, you naturally think that you will succeed, but there are fewer guarantees.
Most successful start-ups don’t actually begin with a new, innovative product. Instead, they begin with a proven product or service (start-up owners often open competing businesses in areas in which they are familiar) and become innovative after the new venture has generated some level of profit and success.
Because your start-up has no previous track record (even if you have had success in your field), you will first need to raise enough financing to make a go of it. Banks or investors will want to see a plan of attack before they will approve a loan for your start-up. Therefore, your first step should be to create a strong business plan.
The business plan
A well-developed business plan serves several useful purposes. It helps to organize thoughts and ideas about how the business should be developed. It also creates a plan of attack that will help you stay focused. And, it will assist you in getting financing. There are several important elements to a well-prepared plan:
- Strong introduction: The cover page, executive summary (essentially an overview of the plan), and table of contents will be the first elements that potential financiers or investors will see. If these aren’t strong, potential financiers may not take you seriously enough to get to the heart of your plan.
- Business description: Whether you are using the business plan to get financing or create a focus of how your business should be run, you need to present a clear vision of what your business will be. The description should include how you want your business to be positioned in your industry, what will make your business unique, the products or services that you will provide, and how you plan on pricing within the industry. Do you want to be the low-cost provider, or the high-end specialist?
- Market positioning: If you want to attract investors to your business, you need to convince them that a need in the marketplace exists for what you are proposing. This section needs to include details on the size of the potential market for your business, how your business can benefit through sales inside the market, and how you plan on succeeding against your competitors.
- Financial objectives: This is perhaps the most important part of your business plan. Here, you need to convince your potential backers or lenders that your business will make a sound investment. You’ll want to show that you have evaluated the attendant risks and rewards of your proposed business. You’ll also need to project cash needs and expected income, and present a cash flow statement.
- Other areas: A good business plan will also cover in some detail your marketing plan, a discussion of how you plan on developing products to bring to market (if the business is a manufacturing concern), and so on.
Buying an existing business
The obvious advantage to buying an existing business is that it has a proven track record of success. But that doesn’t mean that there are no possible pitfalls that you should avoid.
Perhaps the greatest problem in buying an existing business is that you might not acquire the expertise and services of the existing owners, who have often accumulated goodwill with their customers or clients. However, when a business is bought, it is not unusual for the previous owners to stay on for a period of time to assist with the transition and to make introductions to clients in an attempt to transfer some of that goodwill.
Consult qualified professionals to properly evaluate the information that the owners of the existing business may provide you. Also, make sure that the reasons why the business is on the market are true. Is the owner really planning on retiring to Florida, or is he or she just trying to escape the crushing debt that the business has accumulated over the last few years?
Also, keep in mind that you may be taking on a heavy load of debt in acquiring the business. A business that is marginally profitable may not be able to both pay off the debt service on the loan and pay you a living wage.
When you buy a franchise, you also buy marketing support, business strategy, name recognition, and assistance with site location (if it’s a retail operation), among other things.
However, you also give up some things. You will never have the final say in all decisions, because franchisors typically retain rights to ensure that your business is run their way. Also, you won’t be entitled to all of the profits of your business, because franchisors typically take a percentage as part of their fees. Finally, you may be limited in your decision-making processes (e.g., some franchisors require you to buy materials from their suppliers).
If you are thinking of purchasing a franchise, it is very important to thoroughly investigate the company. Remember, you are doing more than just purchasing a name–the franchisor is going to be your business partner. Make sure that he or she doesn’t want only your money and then move on to the next potential buyer.
Franchisors are required to disclose lots of information to potential franchisees. Do your homework. Talk not only to successful franchisees but also to ones who have failed. If several former franchisees tell you that the company didn’t fulfill the promises of the franchise agreement, beware.
Make sure every representation is made to you in writing before you purchase. Take notes of everything said to you, and have the franchisor sign off on them. That way, you will have a record of what was represented to you if things go wrong.
Business start-up costs and organizational expenses
Generally, costs that you incur prior to the time that you actually begin operating a business are treated as capital expenditures, which are part of your basis in the business. However, certain start-up expenditures may be deducted, either in the first year of business or over time (amortized).
Such start-up costs must be incurred before the business begins operation and be ones that otherwise would be deductible as a normal business expense. Certain syndication costs of marketing or selling interests in a new business cannot be deducted, and must be capitalized.
You may elect to deduct your business start-up costs. If you make the election, you may deduct up to $5,000 of start-up costs in the taxable year in which you actively start the business. The $5,000 amount is reduced (but not below zero) to the extent that start-up costs for the business exceed $50,000. Thus, no first-year deduction is available if start-up costs exceed $55,000. The remainder of the start-up costs are amortized over a period of 180 months. If you do not elect to deduct your start-up costs, you must capitalize them.
You deduct amortized start-up costs in equal amounts over a period of 180 months. You take the total start-up costs, reduced by the amount you deduct in the year you start the business, and divide that amount by the 180 months in the amortization period. This figure is the amount deductible each month. If the business is terminated before the end of the 180-month amortization period, you may be able to deduct as a business loss any remaining start-up costs that have not been previously deducted.
For example, say you incur $52,000 of costs starting up your business before it begins operation and elect to deduct start-up costs. In the year your business actively starts, you can deduct $3,000 of start-up costs [$5,000 – ($52,000 – $50,000)]. You can also deduct the remaining $49,000 ratably over 180 months, or $272.22 a month for 180 months; your deduction for a year with 12 months of amortization would be $3,266.67.
Note: You are deemed to have elected to deduct eligible start-up expenses unless you affirmatively elect to capitalize the expenses on a timely filed federal income tax return.
Tax breaks for small businesses*
America’s entrepreneurs and small business owners continue to grow their businesses and create jobs due to unprecedented tax cuts that have been signed into law over the past few years. Here is a brief summary:
- There’s an exclusion for 100 percent of the capital gain on investments made in 2013 in certain small business stock, provided the stock was held for at least five years.
- Small businesses can write-off a portion of the cost of new equipment purchases in the year of purchase rather than depreciating the cost over time. This provides an immediate tax benefit. The limit for 2013 is $500,000. The phase-out starts when purchases for the year exceed $2 million.
- Businesses can write off the cost of their investments more quickly by allowing up to 50 percent deductions in the first year for investments made in 2013
- A business’s unused general business credit can be carried back to offset taxes paid the previous year and carried forward 20 years to offset future taxes.
- There are tax credits available of up to 35 percent of employee health care premium costs for certain small businesses for tax years 2010 through 2013. In 2014, the maximum credit increases to up to 50 percent.
- Self-employed individuals can deduct 100 percent of health insurance costs incurred for themselves and their families.
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
You’ve grown tired of commuting to a job where you sit in a cubicle and do someone else’s bidding. You’ve got a better idea, you can build a better mousetrap, you know you have the knack for being in the right place at the right time, and so you’re thinking of self-employment. But how do you determine if this is a pipe dream or an idea worth pursuing?
Can you handle it?
Whether you’re running your own business or working as an independent contractor, you’ll soon realize that working for yourself isn’t just another job, it’s a way of life.
Are you someone who likes a nine-to-five routine and collecting a regular paycheck?
When you’re self-employed, you must be willing to make sacrifices for the sake of the job. You’re going to work long hours, which means that you won’t have as much time as you used to for family or leisure activities. And if the cash flow becomes a trickle, you’re going to be the last one to get paid.
Can you get along well with all types of people?
Being self-employed is all about managing relationships–with your clients or customers, your suppliers. Perhaps with your employees, certainly with your family, and probably with your banker, lawyer, and accountant, too. If you’re the type who wants to be alone to do the few things that you’re good at, then you should do that–for someone else.
Are you a disciplined self-starter?
Being self-employed means that you’re your own boss. There may be days when you’ll have to make yourself sit at your desk instead of going for a long lunch, or (especially if you work out of your home) place those business calls instead of reading the newspaper.
Finally, do you enjoy wearing many hats?
Depending on your line of work, you may be involved in handling marketing and sales duties, financial planning and accounting responsibilities, administrative and personnel management chores–or all of the above.
Your dream come true
Think about how great it will feel to get paid to do what you’d love to do anyway. If you’re working for yourself, chances are you will be doing work that you enjoy. You will get to pick who you will work for or with. In most cases you will work with your customers or clients directly. As a result, you may have days when it hardly feels as if you’re working at all. Such harmony between your working life and the rest of your life is what attracted you to self-employment in the first place. Being your own boss means that you’ll be in control of all of the decisions affecting your working life. You will decide on your business plan, your quality assurance procedures, your pricing and marketing strategies–everything.
You’ll have job security; you can’t be fired for doing things your way.
As you perform a variety of tasks related to your work, you will learn new skills and broaden your abilities. You will even have the flexibility to decide your own hours of operation, working conditions, and business location. If you’re working out of your home, your start-up costs may be reduced. You will also experience lower operating costs. After all, you’ll be paying for the rent and utilities anyway. If the location of your work isn’t important (perhaps you’re a freelance writer or a consultant), you can live wherever you want.
If all goes well and you’re making money, chances are you can make more than you did working for someone else. And since you’re working for yourself, you may not have to share the proceeds with anyone else. The fruits of your labor will be all yours, because you own the vineyard.
On the other hand . . .
When you’re self-employed, particularly if you’re starting your own business, you may have to take on a substantial financial risk. If you need to raise additional money to get started, you may need a cosigner or collateral (such as your home) for a loan. Depending on how much or little work you can line up, you may find that your cash flow varies from a flood to a trickle. You will need a cash backup so you can pay your bills while you’re waiting for business to come in or waiting to be paid for completed work. Since you will have to pay your own creditors first. This means that sometimes you may eat cereal instead of steak.
Remember that you’re not making any money if you’re not working.
You don’t have any employer benefit package. This means that it’s going to be hard for you to go on vacation, take a day off, or even stay home sick without losing income. It also means that you will have to provide your own health insurance and retirement plan. Remember, that you can choose your clients or customers, but you can’t control their expectations or actions. If you don’t come through for them you might not get paid for your work.
You’re going to have to take care of everything yourself.
From figuring your taxes to watering the office plants. You will probably need some new skills, such as bookkeeping and filing quarterly taxes. You can learn to do these things yourself–many software programs are designed just for this market. Or you can hire others (e.g., an accountant) to take care of them for you. However, you may find that you’re spending more time on the business of being in business for yourself than you are on the work that attracted you to self-employment in the first place.
The bottom line
If you can work long and hard, tolerate risk and stress, cope well with potential disaster and failure, and work well alone and with others, then perhaps self-employment is right for you. If not, then perhaps you should keep that job in the cubicle.
Contact us today and set up a consultation with one of our advisors. Let us help you set up the right current financial strategies so that you can achieve your goals for yourself and your future.
The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
Employee benefits plans are no longer just to entice people to work for you. They also need to work as retention plans or tools that encourage people to stay with your company long term. If your company has professionals that are talented, experienced, and a good fit, you want to do what it takes to keep them on board. How do you do that?
Structure a Plan that Meets Their Needs
An employee retention plan is designed to discourage key talent from leaving your business. How do you give them what they need to stay?
- Determine where you stand in your organization. Discuss with your employees if they feel valued. Is there solid communication present and is it accessible for all employees?
- Is there a good work/life balance within your company? It’s important for people to have access to the time and benefits they need to support their family’s needs.
- Does your leadership encourage open communication and positive interactions? Is there good transparency in the operations of the company?
- What is your company doing to improve employee health, such as providing fitness incentives, a solid health benefits package, and a healthy office lifestyle?
- What about compensation? Does the compensation you are paying to your employees match or beat the industry average? Pay remains one of the top reasons people leave companies.
- Think about company culture. Does your culture promote diversity and make people feel welcome? Is it a high-stress situation or a place people actually want to be?
- Do you have a solid 401(k) or another type of retirement plan in place for your employees? Do they know what it is, utilize it, and receive matching benefits from your company?
- Are there solid training and advancement opportunities within the business?
All of these factors play a role in what your employees think of your business. People will seek out new opportunities if they do not feel valued and motivated. At the same time, they need a solid benefits package and good compensation to afford to work with your company.
Ready to Learn More About Employee Retention Plan Creation?
At Sterling Financial, our team of dedicated professionals is here to help you craft a benefits plan that is going to ensure your employees want to remain at your location. Take a closer look at the options available to you when you give us a call.
What are your goals for your career? You may have specific goals for the types of positions you hope to hold or titles you plan to have by specific dates in your life. And, consider your financial goals. Do you plan to have $1 million in the bank by the time you are 40? When considering your career goals and your financial future, determine if they align. How does one impact the other?
How Your Career Will Impact Your Finances
Take a closer look at a few key ways that your employment will impact your long-term financial planning.
#1: Your Tax Requirements Will Change
As your income increases, your taxes will increase as well. It’s important that your financial plan takes into consideration the changes to your take home pay and investments. Also, keep in mind that your tax deductions will be impacted the same way. Your financial planner can help you make adjustments to help reduce your tax obligations while still keeping your income in line.
#2: You May Need More Education
Some employers require individuals to complete a master’s or doctoral degree before advancing further in a company or holding specific titles. You may need to expand your education to achieve this. You’ll need to plan for this additional educational expense later in life so as to keep the costs low.
#3: Align Your Planned Position with Income
Being realistic about the income you will earn at each stage of your career path is important. While using the Department of Labor’s website to estimate your earnings is one step, it is also important to be realistic. You may earn less than expected.
Finally, you need a backup plan. Sometimes, the biggest financial risks occur when you cannot or do not achieve the biggest career goals you set out to obtain. More so, you may change your career path along the way. Economic conditions may play a role as well. It’s essential to work closely with a financial planner to lay out a path with alternatives.
Are You Ready to Find the Alliance of Your Goals?
It’s a fantastic time to start financial planning alongside your career goals. We can help at Sterling Group. Contact us today to learn more about the ways we can help you achieve your financial plan that fits your lifestyle.