Monthly Archives: September 2015

The Ultra Common Startup Fear That Kills Businesses (and How to Overcome It)

startup idea sharingNot talking about your startup idea with people who can help you is worse than taking the risk of someone stealing it. Don’t believe it? Well, keep reading and find out why.

Here’s what happens when you talk about your idea:

  • People give you ideas on how to improve it
  • You find out where people would expect to buy it
  • You find out how much people might be willing to pay
  • You find out if anyone besides you and your mom think it is really a good idea
  • You find out if something like it already exists that you just didn’t know about
  • You find out if something like it was already tried and didn’t work out
  • You find out if it is possible to even make it
  • You find out whether or not you could actually get it in front of your intended market
  • You can decide whether or not to keep working on it without spending much time or money

Of course, by talking about it, there is a very small chance one of the people you talk to could decide they like the idea so much they want to steal it. Now, 99% of the people you talk about it with will have so much going on in their own lives, even if they wanted to steal it, they just don’t have the time, passion or money to do anything about it.

For the other 1% (or less, more likely) who might consider stealing it and would have the ability to do so, you can do several things:

  • Ask them to sign a non disclosure agreement
  • Don’t disclose all the info, only enough for them to evaluate the specific question you are asking
  • Don’t show it to someone obviously in a much better position to act on it, with a ready willingness to do so

Although, there is the risk you interpret the above list to literally and don’t show it to exactly the industry people who you most need to get an evaluation from.

The fear of theft is a mental block that many entrepreneurs have a hard time overcoming because they are so emotionally invested in their idea. But you have to try and be logical and look at the odds.

The odds of an idea being stolen are so much lower than the odds of you succeeding. Without getting valuable feedback from people who can help you take your idea and shape it into something that can actually sell, you are really handicapping your chances. Not taking the chance to test your idea is simply foolish, and drastically increases your chances of wasting your time and money on something that won’t work the way t is.

It might have worked, had you gotten responses and made changes, but now you are out of money and your ability and motivation to do it a second time is gone.

That is what happens when you don’t talk about your idea because you are worried it will get stolen: you develop it in the dark, and come out with something too expensive, or to awkward, or that not enough people want, or that can’t get to market, or any other of a million flaws, any one of which will keep it from success.

You have to get over your fear of talking about your startup idea, or else be willing to accept much, much lower chances of success.

New CapForge Compare and Contrast Advertising Plan

Bookkeeping Any Questions

This seemed like a fun way to explain our business to potential new clients. Visually, using a metaphor that hopefully makes our value proposition clear and entices the viewer to pursue more information.

Plus, it just seemed kind of fun! And no seals were harmed in the making of this ad, so it’s really win-win-win (us, our clients, the seals).

Let me know what you think! πŸ™‚

How to Quickly Analyze a Business for Sale

e_stepsIf you are looking at buying a business as a way of getting started in your own business, then you need to learn how to quickly and heartlessly tear the business apart so you know if it s worthy of any more of your time.

Once you’ve done it a few times, and learned the key questions to ask, you will be able to do it effortlessly, and it will take you only a couple minutes.

For this example, we are looking at a coffee shop that was recently listed at bizbuysell.com, which is a great place to find listings. The ad is listing number 250918, but depending on when you read this, it may no longer be around (it isn’t this is from an article I wrote years ago- the info is evergreen, however!).

It doesn’t matter, though- here are the important facts from the listing:

  • Asking: $199,000
  • Gross: $275,000
  • Cash Flow: Not Disclosed
  • Year Established: 2 years ago
  • Employees: 13
  • Facilities: 1900 sq. ft. 6497 rent + NNN
  • Reason Selling: Just had baby

There is also a lot of additional description about how they were voted best coffee house in the area, how they started a wholesale bakery division, and how they have a drive through lane, which is “unheard of” for an independent coffee shop. Don’t spend much time or give much credit to this part of any listing, however- the numbers speak much, much louder than any language telling you what a great business it is.

Now, here are what the above facts are saying about the business:

  • Asking: $199,000

Really, the price is of no concern until you figure out what the business is worth. If it worth more than the price, then you found a deal. If it is worth less than the asking price, then you either make a lower offer or walk away. The least important part of what a business is worth is what the owner is asking.

  • Gross: $275,000

This number is fairly low. Considering the business is not brand new, you can’t expect this number to go up to much more just based on people “discovering” the location. Either people have tried it and are going back to Starbucks, the coffee shop is drastically undercharging, or people just aren’t that interested in stopping by. If the business was only three months old, you might expect the sales to grow. But after two years, it should be doing more like $500K-$650K for a coffee shop this size. The only way, and that is a big maybe, to grow sales is through a big marketing push, and that is going to cost money.

The other thing not to like about this number is that it is too round. A number like $274,891 makes you think they are basing the sales on actual documentation. A round number like $275,000 probably means a combination of them taking unrecorded cash out of the business and poor tracking of sales. Sometimes people round it off because they think it looks “neater” but it always makes a smart buyer more suspicious.

  • Cash Flow: Not Disclosed

No surprise here. You can bet this business is losing money. The only question is, how much? We’ll get to that in a minute. So right here, you know the value of a business that is losing money is, at most, the current value of the actual equipment and fixtures.

  • Year Established: 2 years ago

New enough to not have much track record as a success (not that it is) but old enough that if it was going to grow into a viable business, it would have done so by now.

  • Employees: 13

Knowing the number of employees gives you a decent gage of how busy a place is, and also what the labor costs are running. It may also suggest that a place is overstaffed or understaffed depending on the sales volume. This coffee shop seems very overstaffed. The average Starbucks has 12-15 employees, yet they do three times the business this coffee shop does.

Why does this place need so much staff? Is it the drive though? More likely, bad (lazy) management, and the decision to have an in house bakery. Labor cost in a coffee shop should run 30% of total sales tops- less is better. For sales of $275,000, labor should cost no more than $82,000. At this place, assuming the average worker gets $8, works 25 hours a week, and costs an extra $.20 for every dollar paid (payroll taxes, etc.) they are spending $162,400. Wow.

  • Facilities: 1900 sq. ft. 6497 rent + NNN

This is another profit killer. They are paying over $3 a square foot for space, plus whatever the triple net costs are (NNN), which may be easily another $1,000 a month. That makes the annual rent of $89,964 over 32% of their total sales. Rent should be around 5%, and never over 10% of your sales in a restaurant if you ever hope to make any money. This may be a deal killer, because even if you can fix other problems with the business, if you can’t get the rent down to something you can live with, it just isn’t ever going to make money, period.

  • Reason Selling: Just had baby

No doubt this is true, however, the fact that this business appears very likely to be losing money hand over fist might be another reason for wanting to sell!

Now that we have two major parts of our data, the labor and rent, we can do a quick final math check to take a guess at the total losses of this business. Food cost for this particular coffee shop may be around 20%, since they are making their own baked goods.

Normally it would be higher because most coffee shops buy baked goods wholesale and then mark them up. This cuts labor costs but reduces the amount of money they make on each sale. But, lets be generous and assume they are spending $.20 of each sale on their cost of goods sold (COGS). That means, of $275,000 in sales, they are spending $55,000 in COGS.

Here’s a table of their expenses:

Coffee Shop Results
Sales 275,000
COGS 55,000
Labor 162,400
Rent 90,000
Other Expenses 82,500
Profits(Loss) (114,900)

In the table above, the “other expenses” are everything else you spend money on in running a business, and that figure is reasonably estimated at around 30% of total sales. This business may be somewhat higher or lower than that, but that is what a typical owner would spend.

The final analysis of this business is that it doesn’t appear to be a very good candidate for purchase. Our estimate is that it is losing close to $10,000 a month. Even if we are wrong by half, it is still losing over $60,000 a year! And since they told us the rent, and they told us how many employees they have, and we have a pretty good idea what food costs are, then we aren’t going to be off by too much.

Even if you took over and cut half the staff to make the labor reasonable, you are still stuck with a business that has an unsupportable rent and no real prospects for significant growth. Coffee shop competition is tight, and this may just not be a great location.

It doesn’t matter if they have a drive through, an in-house bakery or how many awards they’ve won, if the business isn’t providing a profit to the owners, and it has no reasonable chance of being turned around, then it isn’t a business worth considering buying for virtually any potential buyer.

The Importance of Timing in Starting a Business

picasso die undoneThere are right now literally millions of people telling themselves they are going to start their own business just as soon as the time is right.

Many of them are fooling themselves, and they are never going to start a business.

The excuses they tell themselves, however, sound like valid reasons to wait. Some of the most common are the following:

  • I don’t have enough saved yet
  • I don’t have an idea for what to start
  • I am waiting until I move
  • I am waiting to finish school
  • The economy isn’t right
  • I will if this promotion doesn’t come through
  • I will after my next vacation
  • I am waiting until I find the perfect location
  • I am waiting to finish building my invention/new product
  • I don’t want to start because someone might steal the idea

So, why aren’t these good reasons to wait? Shouldn’t you have enough money, or finish school, or wait for the economy to pick up?

The answer is no. And the reason is that there are so many things that will affect the success of your business that waiting for a few pieces of the picture to be perfect will not make it any more likely to succeed in the long run. But what will definitely make it not succeed is never getting started.

If you don’t have enough saved yet, then start something small enough that you can start right now, and use the money and experience you gain from that to then do what you really want to do.

The experience you pick up from running your own business, even a tiny one, will be worth ten times the value of the actual cash. And very often, by the time people have the money to start what they thought they wanted, they have changed their minds. So waiting for the money to save up really becomes a pointless exercise.

Not having an idea for what to start is also a poor excuse in the final analysis. You don’t have to love what you start- if there isn’t a business that you would love to do, then simply pick something you wouldn’t mind doing. Once you have it started and successfully going, you can delegate the work to others and put the cash into something you may enjoy more.

There are no shortage of ideas for businesses to start, and it is easy enough to take one, improve on it or make it work for your area or specific situation, and get started.

Most of the other excuses listed are simply that- ways to put off doing something that may seem kind of scary, risky, complicated or all three. The way to overcome this is the same way you beat analysis paralysis- by reducing the risk portion down to nothing, so you are no longer concerned about failing, and you can just get started and see what happens.

If you have doubts about how to overcome any particular situation that may be causing you to wait, post it in the forum for ideas on how to get around it. But in virtually every case, the time to start a business is right now, and waiting any longer than that is just wasting time.

Don’t let your dreams fade into the sunset. Start now. The rest you can worry about later!