Hidden Expenses Growth-Hungry Startups Need to Be Aware Of

image 1One of the most prominent definitions of ‘startup’ term was coined by Paul Graham, a programmer, entrepreneur and an essayist. While most other theoreticians tried to connect ‘startup’ word with advanced technologies or newly founded companies, he said that startup enterprises are those that are designed to grow fast. This fast company growth is in most cases (but not exclusively) fueled by advanced tech and innovative business strategies. Achieving fast and continuous growth is not always easy. It is often fettered by various unpredicted circumstances and hidden costs.

Employees

Regularly employed workers require a lot of spending. Depending on the country or state law, companies need to pay for sick leaves, vacations, health insurance, and taxes. Companies that have less than 10 workers pay the most expensive health insurance. These costs are the reason why many startups decide to outsource parts of their business or to hire freelancers to do most of the tasks.

Another very important point when it comes to human resources and office management, is that startups need talented employees, who will get the job done. In some cases they can rely on outsourcing agencies or talented freelancers, but if they want to make their company attractive to the top experts in their niche, they need to add a lot of benefits (like high 401(k) share), clean and secure work environment and even employees stock ownership programs, that include handing out company shares to most effective and agile employees.

Rent

Most startups begin their lifecycle in founder’s home or in a work hub. When business starts growing startup owners need to rent new office space. This is a very difficult period, since entrepreneurs are still not sure about their business’s potential, but they need to work and cover increasing client orders. That’s why these companies are stranded in between small and big business models, which makes them an eligible pray for money-craving property owners. At this moment company’s business is too small for taking a mortgage loan or building their own premises and too big to work from home or a work hub. This means that the money company is giving for rent is not getting them any equity, which is why entrepreneurs should decide to shift to mortgage or building their own space, as soon as possible.

Utilities

Utilities’ costs can be quite high. In most cases they are as high as the cost of leasing office space. Many companies decide to pay several utilities’ costs in a bundle, which makes them less harmful to their budgets. Phone and internet costs usually come in bundle packages.

Another great cost that concerns utilities is when something gets broken. Companies that work in service and production industry are especially sensitive to these situations and installation failures can seriously damage their customer loyalty and revenue figures. That’s why these companies need to have employees who are familiar with commercial plumbing market and services, and react immediately and fix the problem.

Tech

All new businesses need to spend money on latest gadgets. Without advanced tech they would never stay competitive in the harsh business world of today. Most tech comes with 2 year warranty, but if used for business purposes computers, phones, printers, modems and scanners usually last much shorter.

Most businesses require smartphones, computers, printers and plenty latest software packs. In addition to this they might also need scanners, modems, fax machines and many different niche-specific gadgets and production equipment. On top of all these costs companies also need to pay for maintenance of their systems and hardware, which can be quite expensive.

All these costs can drastically hurt startup businesses, which is why entrepreneurs need to include them when determining company’s budget for the next fiscal year. Although entrepreneurs should be optimists about their business growth, pessimism definitely eliminates certain risks when it comes to company expenses and finances.

Derek is a writer from Australia. He likes exchanging business and success tips with bloggers and enriching his experience in order to deliver informative articles. One of his hobbies is interior design. To fulfill his passion, he blogs regularly at Smoothdecorator.

The Importance of Proper Office Design and Organization on Employees’ Output

3Everyone who has ever worked in a company that has more than one employee knows how important human relations are for creating a healthy and productive working environment. And it is human relations that have been considered as the most important factor for business success.

However, the latest studies showed that almost 90 percent of people in one way or another express discontent with the physical environment they work in. Such high negative percentage surely is alarming and is something employers should not neglect nor leave to chance. Let us discuss the importance an office design and organization has on productivity and output of employees.

There are no universal solutions

This premise is the starting point of any proper office design and internal office space organization. Different job descriptions ask for different solutions. For example, if the company is based on teamwork the focus needs to be on providing design and organization that supports it. The team rooms need to be ample, located at the center of action in the building and easy to reach.

On the other hand, if the success of the company depends on individual performances and team meetings are scarce, then the focus is on providing optimal conditions for an uninterrupted individual work and team rooms, which serve only for occasional meetings and results announcements, should be located at the edge of business premises.

Everything counts

When it comes to employees’ output, office design and organization are of outmost importance. Every factor counts to a different extent and however small their contribution may seem at first glance, they produce a cumulative effect. Lighting needs to be suited to the type of work that is being done, desks and chairs ergonomic, air of high quality and pleasant temperature, noise minimal and clutter nonexistent, to name just the major ones. Therefore, it is highly recommended to give all of them proper attention.

Open office plan or not?

Open office plans gained increased popularity in the last decades based on certainty that they create a healthier office atmosphere and thus increase communication between employees and boost their productivity. However, there are more and more studies that prove quite the opposite. Without taking any sides, one thing is certain, office design and organization highly influence productivity and consulting the employees on how they feel in the present setting will provide crucial guidelines for future actions.

Meeting room tables

Office design has a strong impact on executives as well. Although they have private offices furnished to their preference the problems occur in meeting rooms and this is where improvements need to be made. The usual order of things is that the larger the company the larger their meeting rooms are. This correspondingly transfers to the size of boardroom tables resulting in them being too large for the number of people sitting behind them.

The importance of proper office design and organization on employees’ output

By using ones that are properly dimensioned, the executives present will sit closer to each other, their communication will be clearer and less prone to misunderstandings, resulting in more productive and efficient collaboration and easier decision making.

Once again, a proper office design and organization is of utmost importance when it comes both to employees’ and executives’ output. The sooner the full notion of it is taken, the better the business results will be.

Derek is a writer from Australia. He likes exchanging business and success tips with bloggers and enriching his experience in order to deliver informative articles. One of his hobbies is interior design. To fulfill his passion, he blogs regularly at Smoothdecorator.

Why the “Aha Moment” in Entrepreneurship May be Overrated and What to Look for Instead

just get started quoteIf you spend any time at all reading about or researching entrepreneurs you will very soon come across people discussing the “Aha! moment”.

This is usually synonymous visually with the light bulb going off over someone’s head (do a google image search for good idea and see what happens). In person it’s a look on your face that’s a cross between accidentally stepping in a big puddle and finding out you just got first prize.

This is a completely legitimate moment and one that many entrepreneurs are familiar with and can readily identify as happening in their own business journey.

The problem I see is that what many new or aspiring entrepreneurs don’t realize is that this is neither a requirement for success nor a sign of a really good business idea. If you think you need to have this kind of moment and you are disappointed it hasn’t happened yet, fear not.

You Don’t Need to Break the Mold

The problem with the Aha moment is that it is not a fully formed idea. It may not even be half an idea. It’s just the shock and surprise you get when you think you’ve just discovered a gap in that market that you can fill in a financially rewarding way.

But that gap may be more your imagination than reality or it may already be full up and you just aren’t aware of it. Or there may be a good reason no one is filling it.

The reality is most successful businesses are just slight derivations or no derivation at all from existing businesses. There is no Aha moment when someone decides to open another auto repair shop or medical billing business, but that doesn’t mean these can’t be really prosperous businesses.

The successful businesses that do break the mold are usually the result of numerous pivots from whatever the original idea was after it ran into the brick wall known as reality.

And even those aren’t that different.

People make money writing books about Blue Ocean strategies and Zero to One concepts that suggest entrepreneurs should be way outside of the box when they launch their businesses. But there are very, very few businesses that meet those criteria and if you are waiting around for the inspiration required to be one of those you may never get off the ground.

On the other hand, if you start something similar to what other people are doing, but you can do it a little better in a lot of small ways, or a lot better in one important way, you can prosper immediately.

The Real Aha Moment

I think the real Aha moment is when you discover that you can be successful in any number of ventures and none of them have to be earth shatteringly unique or different to succeed. In fact, you are much more likely to be successful by starting something in a field you already know well and figuring out how to do it better than the competition.

The real A Ha moment is when you make your first sale, and the idea becomes a reality. That’s the proof that you can actually do it instead of just talking about it or having ideas.

If you have a sudden lightning bolt of inspiration by all means look into it and see if it’s something that is viable and you can build a business around.

But if you haven’t had a revelation yet and you were waiting for one or thought you needed one to be able to get started, stop right there. Readjust your thinking.

The big idea entrepreneur is mostly a myth. Just start with what you know and can do well and look for a way to build a business around that you can enjoy starting and building. Then start. Period. You see what I’m saying? Aha!

The Basics of Starting a Business with Absolutely Nothing

laddersMany people hold off on starting a business because they figure they don’t have the money to start. But you don’t need money at all to start. In fact, the less you start with, the less you have to lose!

So starting with nothing should really make you pretty fearless!

I’ve always loved the brief story here of a guy who literally had nothing but a borrowed ladder to start with, yet was able to create a multi-million dollar business.

He didn’t even own the freakin’ ladder!

How is that possible? Was it all just luck?

Here’s how his story goes:

In 1987, Gary Schoeniger was broke and deep in debt. He had no cash. He wasn’t even sure he had any marketable skills. One thing he did know?

That he had no choice but to be a success. He was out of options.

So, one day he got into his 1972 Dodge with the banged-in door, borrowed a ladder that he strapped to the roof, and then went house to house offering to clean gutters.

From those lean and virtually hopeless beginnings, he eventually built the business into a multi-state, multi-million dollar construction management firm. But Gary says, along the way, he made every mistake in the book and would do a number of things differently if he could do it all over.

To me, this is incredibly inspiring. And it shows that most of the barriers people have to actually accomplishing their goals are self inflicted.

The Concept of Value

There are lots of things you can do to start a business when you don’t have any money. The key is to understand the concept of value, and realize what you can offer that is valuable. Usually, this is time, but it may also be skill.

Time is most common, since if you have no money it probably means you aren’t working, and therefore you have at least 40 hours free that would otherwise be filled with a job. So, all you have to do is trade your time for money, doing something someone else considers to be not worth their time relative to what they would have to pay you.

The guy in the story above used his ladder to clean gutters. This is a job most people don’t enjoy doing, so he was able to trade his time for their money to do the job. There are lots of jobs like this- cleaning the garage, pulling weeds, detailing cars, painting and so on.

To get started in any of these, you simply have to go out and solicit the work. Granted, this isn’t going to earn you a huge income at first, but as soon as you have developed a reputation, and gotten some money together, you can reinvest some of the profits in creating a more professional appearance, hiring a helper, etc. so you can grow into a full fledged business.

The other attribute you may have in starting from nothing is a skill. The idea is the same, but instead of trading your time directly in unskilled labor, you are selling your time to provide a solution. This may be something as simple as tutoring or teaching piano lessons, to something more complex like doing website design or computer programming. There are no shortage of places online to sell your skill, including by geography (craisglist) or by skill type (writer’s markets, programmer job boards, etc).

The advantage of selling a skill is that you can often command a higher hourly rate, so you will make more money faster than selling unskilled labor.

If you don’t have a skill, you can certainly spend some of your time learning a skill you can sell while you are still selling your unskilled time.

There main point is that no matter what your current startup capital situation, there is no reason you can’t start a business and grow it. You can always move onto something you would rather being doing later, when you have more cash to spend on launching that particular business.

What If You Have Money to Start With?

OK- so what if you have plenty of money to start a business- does any of this concern you? Well, it certainly could. How much faster would you reach your financial goals if you owned two successful businesses instead of one? Would owning two reduce your risk and diversify your portfolio so that if one ever ran into trouble with one you would have another to fall back on? Certainly.

Therefore, if you wanted to start a second business, and instead of using your own time, hire someone to do the work, you can still start very inexpensively. And, you can grow faster if you have more cash to spend, or you can simply let the second business build on it’s own while you run the first business.

Knowing how to start a successful business that can grow into a large healthy business even though it started with next to no capital investment is something that should interest every serious entrepreneur, whether they decide to try it out right away or down the road. Considering there is so little risk and potentially a very good reward, I don’t see any reason not to give it a try if you have an idea for a no cost startup you’d like to try.

External Business Risks- What They Are, How to Spot Them

When most people think of business risks they think of bad things that can happen to the business that are about the business. What if we open the restaurant and everyone hates the food? What is we start a website and we can’t get any traffic?

These are internal risks and need to be addressed in the course of planning to launch a new business. Internal risks are the ones that are under the control of the founder and based on decisions that are made about how the business will work and what it will be.

cat-halloween-costume-400x359If you decide to start a business selling ultra-high end costumes for cats, in Haiti, and it doesn’t work out, that’s on you. You ignored the utter lack of market demand, market size, price fit, competition and the fact that there is no way to effectively market those goods.

Plus, that’s just a really dumb idea. It was completely avoidable if you had half an ounce worth of common sense.

What is External Risk

External risk, on the other hand, comes from things you can’t control but that may tank your business.

Some external risk, although it can’t be controlled, can be foreseen. For example, if you are thinking about starting a business that takes advantage of a regulatory loophole it is foreseeable that at some point that loophole might get closed. If it does and you didn’t plan for that, it’s still on you.

It’s fine if your plan was to just exit the business as soon as the loophole closed- that is a plan. If you find yourself going bankrupt however, when the loophole closes because you just didn’t think the good times would ever end, that is on you.

For most businesses, the risks of foreseeable external risks are easily mitigated by addressing large markets with proven demand. These are not the types of markets that dry up overnight or suddenly shift in a way you won’t be able to react to if needed.

But that said, if your business in any way relies on external conditions outside your control, you need to be aware of what they are and have a viable contingency plan in place to address them.

One example of this might be relying on Google for your business sales based on a particularly good ranking in their search engine. You have no control over where they decide to rank you and they can switch you any time they want. If you don’t have a backup or alternative source of traffic that still makes economic sense for your business you could be in big trouble in a big hurry.

Another example is selling products that are similar to products that have been banned or regulated or are likely to be as soon as the legislators get around to it. This has happened to clients of ours who were selling products tangentially related to Kratom, which became the target of DEA and FDA investigations and subsequently banned from being sold in some states. This was a very foreseeable risk given the nature of the product and the controversy surrounding it.

Foreseeable external risk is something that you need to be aware of and factor into your plans if you want to have true peace of mind in launching your startup. Otherwise, even if all the other pieces fit, you could be torpedoed by an external factor you failed to take into account.

Unpredictable External Risk

External risk you can’t see coming is something that fortunately doesn’t happen very often but it can ruin an otherwise good day. Not too long ago there was a story on the news in San Diego about a business which, after working on launching for six months, had a pipe break the day of their grand opening which ruined their entire inventory and destroyed their building. Ouch.

Other examples of this kind of thing are having a key employee suddenly poached by a competitor, having a key vendor or key customer get acquired by another business and your expected deal or supply go away or change drastically or having a new technology suddenly arrive on the scene which bypasses or obsoletes your solution overnight.

There are not many defenses against this kind of bad luck except to try and have as many plan B’s and backup sources as possible for anything you can. On the other hand, if you spend all your time trying to plan for every possible contingency you will never actually get started and most of them will never come to pass anyway.

The good news is this kind of external business ruining risk is rare and generally unlikely to happen to you. The bad news is there is not much you can do about it. Which means there isn’t much point in worrying about it, right?

Plan for what you can and then go and launch your business. If you get blindsided by something that you never could have seen coming then just pick up and move on with a new idea. And if you’ve planned right and luck is with you, you are going to have a great business that will be successful from the beginning.

A $100 Billion Idea, Yours for the Taking: Uber-ized Driverless Electric Cars!

I had written a post earlier about how sometimes entrepreneurs shoot themselves in the foot by not discussing their ideas in order to validate the demand and market and competition, etc.

The reality is the idea is usually 1% or less of the value of the total- the rest is execution.

Here’s a perfect example. I was talking with a friend and somehow got onto the topic of Uber and electric cars and then driverless cars.

After thinking about it for less than two minutes, we jointly decided this was a fantastic hundred billion plus dollar business concept.

These are the advantages of having our transportation system largely converted to on demand electric cars that drive themselves:

  • Cut traffic in half or more as most cars now carry at least two people or more instead of one
  • No need to own a car- just buy a subscription based on your need- always have a car available any time to take you anywhere
  • Dramatically reduce (virtually eliminate) accidents because there are fewer cars on the road and none driven by drunks, tired people, distracted people or inexperienced drivers.
  • Safe independent transportation solution for the elderly who would otherwise be stuck home or driving unsafely
  • Increase productivity because now many more people can work during their commute
  • Drastically reduce carbon emmissions
  • Increase emergency response times because of less traffic and cars that will get out of the way
  • With so many cars available you won’t have to wait long to go anywhere and you can go virtually point to point (or pay a premium to ride single with no pick ups or drop offs if you are in a hurry)
  • Meet new people and connect socially with others you wouldn’t have otherwise met
  • Safer for motorcyclists, bike riders and pedestrians
  • No more train vs car accidents
  • Safe, reliable, cheap transportation becomes available to everyone increasing access to jobs and housing and other resources that may have been previously out of reach or too hard to get to

You can probably think of more. We didn’t even get into having freight trucks built using the same type of system. Or UPS/FedEx delivery vans using the system. Or the USPS. And so on.

The idea is not the issue here. It is big enough to be attractive to venture capital and certainly big enough to create one of the largest companies in the world (or several) who can be the ones to enter and succeed in the market.

The challenge is the execution. You will have to overcome huge hurdles to pull this off:

  • Liability issues and insurance company acceptance
  • Government regulation limiting access to the roads
  • Objections from incumbent services
  • Local government interference
  • Complaints from citizens fearful of technology on the roads
  • Objections from people who think you will want to take their cars away
  • Public fear of the concept any time there is a crash, scare or malfunction (which will happen occasionally)
  • Figuring out how to properly monetize this and make it appealing and viable at the same time

And I’m sure these are just the tip of the iceberg.

That said, I wouldn’t be at all surprised if this happens in my lifetime and becomes the defacto method of getting around. Carbon fuels are running out and there are simply too many people to give everyone their own car indefinitely- you can only widen roads and freeways so much.

This solution makes sense and will be huge for someone, somewhere in the not too distant future. They will just need to pull it off. Which is where all the real work starts.

Four Reasons Your Company NEEDS to Stay in Good Standing

staying compliantCongratulations! You’ve had your business for almost a year (maybe more!) and the roller coaster ride has been exciting, challenging and rewarding. With all of the effort you put into working on and in your business, it’s important you maintain your company’s good standing status in the state (jurisdiction) of creation and/or the states where you are qualified to do business.

Each jurisdiction has its own annual requirements and it is imperative you meet each obligation to stay in good standing. Failure to fulfill the state(s) annual requirements can carry some steep consequences:

  1. You could lose your name: You’ve built your business and brand identity around your carefully chosen name. It’s a part of you, your company and your culture. It may even be the envy of some of your competitors. If your entity falls out of good standing, in many jurisdictions, the name is no longer legally protected. That jealous competitor could swoop in and form a new entity under YOUR name. You would no longer be able to operate under that name and would be forced to change your name or operate under a different legal structure (e.g. a doing-business-as d/b/a) to continue in that jurisdiction. Aside from that headache – think about the cost of rebranding your company with a new name!
  1. Publicly defunct status: You’ve spent months working on an important partnership and you’re ready to close the deal. The potential partner has a great feeling about you and just needs to wrap up the final details. When he checks the public records of your company, he finds the entity is defunct (the legal term will vary by jurisdiction). Deal aborted, opportunity lost.
  1. Extra fees, time and aggravation: As a business owner, every penny counts. More importantly, every minute counts. If your entity falls out of good standing, it will cost you both time and money to come back into good standing. Depending on how your company is set up and where you are doing business, you may have to reinstate/re-incorporate and/or re-qualify. Oftentimes, the state will assess penalties for doing business while in a “defunct status”. Missing an annual filing or tax payment can add up to an abundance of fees rather quickly.
  1. Potential legal trouble: Legally forming your company as a corporation or limited liability company (LLC) was the first of many smart decisions you made in this venture. By doing so, you took steps to protect your personal assets from potential loss and facilitated the opportunity to take advantage of specific business tax planning and savings practices. Falling out of good standing “pierces the corporate veil” and causes you to lose those legal protections you created.

What can you do to ensure you stay in compliance? One step is to make sure you fully understand the state requirements and tie them into your accounting and corporate maintenance procedures. Another way is to engage the services of a professional service company who specializes in keeping companies active. Many of these service companies offer compliance services, such as Compliance Verification Service (automated alerts) or Compliance Filing Service (automated filing) for a nominal fee. By utilizing a service company for these services, you can rest assured your company is going to maintain an active status.

About the Author: Kyle Buzzard is Director of Client Development at Incorporating Services, Ltd.(IncServ). IncServ is a full-service registered agent and corporate services company providing administrative, legal support and related services to the entrepreneurial community. A former business owner and consultant with a passion for entrepreneurs and small businesses, he is an advocate for smart outsourcing and insourcing that allows business owners the freedom to grow their companies. If you need help with compliance, or simply have questions about growing your business, Kyle can be reached at pr@incserv.com or 302-531-0702.

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! 🙂

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.