Small Business For Dummies

Eric Tyson, MBA, has been a personal financial writer, lecturer, and counselor for 25 years. He is the author of the award-winning Personal Finance For Dummies and several otherFor Dummies bestsellers. Jim Schell has successfully launched and operated several small businesses. He has written other books and numerous columns on entrepreneurship.

Introduction 1

About This Book 2

Foolish Assumptions 3

Icons Used in This Book 4

Beyond the Book 5

Where to Go from Here 5

Part 1: Getting Started with Small Business 7

Chapter 1: Is Small Business for You? 9

Defining Small Business 10

Small (and large) business basics 10

Financial basics: The same whether you’re big or small 11

Small business: Role model for big business 12

Different people and businesses, similar issues 13

Our definition of a small-business owner 14

Do You Have the Right Stuff? 15

Getting started with the instructions 16

Answering the questions 16

Scoring the test 18

Analyzing your results 18

Identifying the Pros and Cons of Owning a Small Business 20

The reasons to own 20

The reasons not to own 21

Exploring Alternatives to Starting a Business 23

Chapter 2: Laying Your Personal Financial Foundation 27

Getting Your Financial Ducks in a Row 27

Cutting the umbilical cord 28

Improving your business survival odds 28

Maintaining harmony on the home front 29

Creating Your Money To-Do List 30

Assess your financial position and goals 30

Shrink your spending 34

Build up your cash reserves 35

Stabilize income with part time work 35

Assessing and Replacing Benefits 36

Retirement savings plans and pensions 36

Health insurance 37

Disability insurance 37

Life insurance 38

Dental, vision, and other insurance 39

Social Security taxes 39

Time off 40

Managing Your Personal Finances Post-Launch 40

Chapter 3: Finding Your Niche 43

Why You Don’t Need a New Idea to Be Successful 43

Choosing Your Business 45

Consider your category 45

Take advantage of accidental opportunities 48

Inventory your skills, interests, and job history 48

Narrow your choices 50

Go in search of fast growth 51

Take advantage of government resources 53

Inventing Something New 54

Say yes to useful invention resources 55

Run away from invention promotion firms 55

Recognizing Your Number One Asset — You 57

Chapter 4: First Things First: Crafting Your Business Plan 59

Your Mission: Impossible If You Fail to Define It 59

Writing your mission statement 60

Keeping your mission in people’s minds 61

Your Business Plan: Don’t Start Up without It 63

Using your business plan as a road map 63

Finding financing with your business plan 64

Writing Your Business Plan 65

Part 1: Business description 66

Part 2: Management 67

Part 3: Marketing plan 68

Part 4: Operations 72

Part 5: Risks 74

Part 6: Financial management plan 74

Keeping Your Plan Current 78

Chapter 5: Making Financing, Ownership, and Organizational Decisions 81

Determining Your Start-Up Cash Needs 81

Using Your Own Money: Bootstrapping 84

Profiling bootstrappers 85

Tapping into bootstrapping sources 86

Outsourcing Your Capital Needs 88

Banking on banks 89

Getting money from nonbanks 90

Exploring Ownership Options 96

You as the sole owner 96

Sharing ownership with partners or minority shareholders 98

Deciding between sole and shared ownership 99

Going public: Cashing in 100

Deciding Whether to Incorporate 102

Weighing unincorporated options 102

Considering incorporated business entities 106

Part 2: Buying an Existing Business 111

Chapter 6: Exploring Buying a Business 113

Understanding Why to Buy a Business 113

To reduce start-up hassles and headaches 115

To lessen your risk 115

To increase profits by adding value 115

To establish cash flow 116

To capitalize on someone else’s good idea 117

To open locked doors 117

To inherit an established customer base 117

Knowing When You Shouldn’t Buy 118

You dislike inherited baggage 118

You’re going to skimp on inspections 118

You lack capital 120

You think you’ll miss out on the satisfaction of creating a business 120

Recognizing Prepurchase Prerequisites 120

Business experience and training 121

Down-payment money 122

Chapter 7: Finding the Right Business to Buy 123

Defining Your Business-Buying Appetite 123

Generating Leads 125

Perusing publications 126

Networking with advisors 126

Knocking on doors 126

Enlisting business brokers 127

Considering a Franchise 130

Franchise advantages 130

Franchise disadvantages 131

Evaluating Multilevel Marketing (MLM) Firms 132

Being wary of pyramid schemes 132

Finding the better MLMs 133

Checking Out Work-from-Home Opportunities 134

Chapter 8: Evaluating a Business to Buy 137

Kicking the Tires: Doing Your Due Diligence 138

Examining owners’ and key employees’ backgrounds 138

Finding out why the owner is selling 141

Surveying the company culture 142

Inspecting the financial statements 145

Uncovering lease contract terms 151

Evaluating Special Franchise Issues 151

Thoroughly review regulatory filings 151

Evaluate the franchiser’s motives 152

Interview plenty of franchisees 152

Understand what you’re buying and examine comparables 153

Check with federal and state regulators 153

Investigate the company’s credit history 154

Analyze and negotiate the franchise contract 154

Chapter 9: Negotiating Terms and Sealing the Deal 155

Valuing the Business 156

Exploring valuing methods: Multiple of earnings and book value 156

Getting a professional appraisal 158

Tracking businesses you’ve explored that have sold 158

Tapping the knowledge of advisors who work with similar companies 159

Consulting research firms and publications 159

Turning to trade publications 159

Enlisting the services of a business broker 160

Developing Purchase Offer Contingencies 160

Allocating the Purchase Price 162

Doing Due Diligence 162

Think about income statement issues 163

Consider legal and tax concerns 164

Moving Into Your Business 164

Part 3: Running a Successful Small Business 167

Chapter 10: The Owner’s Responsibilities in the Start-Up and Beyond 169

Dotting Your i’s and Crossing Your t’s: Start-Up Details 170

Buying insurance 170

Paying federal, state, and local taxes 172

Negotiating leases 172

Maintaining employee records 173

Getting licenses and permits 174

Signing the checks 174

Outsourcing: Focus on What You Do Best 174

Surveying the most commonly outsourced tasks 175

Figuring out what to outsource 176

Simplifying Your Accounting 177

Introducing some common systems 178

Choosing the system that’s right for you 184

Controlling Your Expenses 185

Looking at fixed and variable expenses 186

Understanding zero-based budgeting 187

Managing Vendor Relationships 188

Dealing with Bankers, Lawyers, and Other Outsiders 190

Bankers 190

Lawyers 192

Tax advisors 194

Consultants 195

Governments 196

Chapter 11: Marketing: Products, Pricing, Distribution, Promotion, and Sales 197

Marketing in a Nutshell 198

Tackling Product and Service Development 199

Pricing: Cost and Value 201

Developing your pricing strategy 201

Picking the right price 204

Distribution: Channeling to Customers 205

Direct distribution of products 205

Indirect distribution of products 209

Deciding on distribution 210

Promotion: Spreading the Word 210

Networking (It’s not what you know . . .) 211

Recognizing the power of referrals 212

Online marketing 213

Media advertising 219

Publicity 225

Sales: Where the Rubber Hits the Road 227

Pitting in-house versus outsourcing 227

Becoming a sales-driven company 229

Chapter 12: Tapping Technology 233

Making the Decision: Cloud-Based versus Internal Server 234

Improving Your Business’s Efficiency 235

Managing your time 235

Providing supplemental web services 236

Lowering your administration costs 237

Scanning and managing inventory 238

Managing finances 238

Expanding Your Research Possibilities Online 239

Brainstorming business ideas 239

Finding and obtaining financing 240

Buying a business or franchise 241

Chapter 13: Keeping Your Customers Loyal 243

Retaining Your Customer Base 244

Getting it right the first time 244

Continuing to offer more value 245

Remembering that company policy is meant to be bent 245

Learning from customer defections 246

Recognizing and practicing customer service 248

Dealing with Dissatisfied Customers 252

Listen, listen, listen 252

Develop a solution 253

Chapter 14: Managing Profitability and Cash 255

Cash Flow: The Fuel That Drives Your Business 256

Making Sense of Financial Statements 259

The profit and loss statement 259

The balance sheet 262

Turning the Numbers into Action 265

Understanding Key Ratios and Percentages 266

Return on sales (ROS) 267

Return on equity (ROE) 267

Gross margin 268

Current ratio 268

Debt-to-equity ratio 268

Inventory turn 269

Number of days in receivables 269

EBITDA 270

Managing Your Inventory 270

Collecting Your Accounts Receivable 272

Finding paying customers 272

Managing your accounts receivable 273

The Three Ways to Improve Profits 274

Decreasing (or controlling) expenses 275

Increasing margins 278

Increasing sales 280

Chapter 15: Learning from the Experiences of Others 281

Utilize Mentors 282

Finding your mentor 282

Building the mentor-mentee relationship 283

Network with Peers 284

Form a Board of Advisors 285

Reaping the benefits of a board 285

Forming your advisory board 286

Find a Partner 287

Join a Trade Association 289

Find a Business Incubator 291

Locate a Small Business Development Center 291

Give SCORE a Try 292

Tap into Small-Business Information 292

Part 4: Keeping Your Business in Business 295

Chapter 16: Finding and Keeping Superstar Employees 297

Assembling a Top Team 298

Hiring hints 299

Mastering the interview process 303

Training: An Investment, Not an Expense 305

Motivating: Pay and Performance Issues 306

Designing a compensation plan 308

Get SMART: Goal-setting that works 310

Writing performance expectations 313

Reviewing an employee’s performance 314

Parting Company: Firing an Employee 317

Designing Flexible Organization Charts 319

Valuing Employee Manuals 321

Turning the Tables: Characterizing Successful Employers 323

Flexibility: The bending of rules 323

Accountability: Where the buck doesn’t get passed 324

Follow-up: The more you do it, the less you need it 325

Chapter 17: Providing Employee Benefits 327

Seeing the Real Value in Retirement Plans 327

Getting the most value from your plan 329

Convincing employees that retirement plans matter 332

Deciding Whether to Share Equity 333

Stock and stock options 334

Employee Stock Ownership Plans (ESOPs) 335

Buy-sell agreements 336

Including Insurance and Other Benefits 336

Health insurance 336

Disability insurance 340

Life insurance 343

Dependent care plans 343

Vacation 344

Flexible hours 344

Flexible benefit plans 345

Chapter 18: Handling Regulatory and Legal Issues 347

Navigating Small-Business Laws 347

Suffering through Start-Up Regulations 349

Complying through licensing, registrations, and permits 349

Protecting ideas: Nondisclosures, patents, trademarks, and copyrights 356

A business prenup: Contracts with customers and suppliers 359

Laboring over Employee Costs and Laws 360

Chapter 19: Mastering Small-Business Taxes 361

Getting Smarter about Taxes 363

Reading income tax guides 363

Using tax-preparation software 364

Hiring help 364

Keeping Good Financial Records Leads to Tax Benefits 367

Knowing (And Managing) Your Tax Bracket 368

Staying on Top of Employment Taxes 369

Be aware of your benefit options 369

Stay current on taxes 369

Report your work with independent contractors 370

Hire your kids! 371

Spending Your Money Tax-Wisely 372

Take equipment write-offs sensibly 372

Don’t waste extra money on a business car 373

Minimize entertainment and most meal expenditures 373

Grasping the Tax Implications of Your Entity Selection 373

Chapter 20: Cultivating a Growing Business 375

Recognizing Growth Stages 376

The start-up years 376

The growth years 377

The transition stage 377

Resolving Human Resources Issues 379

Identifying important HR concerns 379

Dealing with HR issues in three stages 380

Addressing Time-Management Issues 381

Choosing Your Management Tools 383

Management by objective 385

Participatory management 385

Employee ownership 385

Quality circles 386

Total Quality Management 386

Reengineering 386

Open-book management 388

Troubleshooting Your Business Challenges 388

Filling out a troubleshooting checklist 388

Taking the five-minute appearance test 389

Redefining Your Role in an Evolving Business 391

Making the transition to manager 392

Implementing strategic changes 393

Part 5: The Part of Tens 397

Chapter 21: Ten Mistakes You Don’t Want to Make 399

Failing to Use Financial Statements to Manage Your Business 399

Failing to Prepare an Annual Budget 400

Failing to Utilize Your CPA 401

Failing to Understand How Marketing Applies to Your Business 402

Hiring Too Quickly 403

Taking Too Long to Terminate Nonperforming Employees 403

Assuming That Your Employees Are Motivated by the Same Things You Are 404

Considering Training to Be an Expense and Not an Investment 405

Failing to Take Advantage of Available Resources 406

Failing to Maintain an Up-to-Date Organization Chart 406

Chapter 22: Ten Tips for Small-Business Success 409

Focus on the Execution 409

Assemble a Team of Superstars in Game-Breaker Positions 410

Work Hard, Get Lucky 411

Realize the Difference between Profits and Cash 412

Hire for Attitude, Teach Skills Later 413

Create an Exit Strategy 414

Grow or Die — There’s No In-Between 415

Prepare for the Transition to Manager 415

Develop an Insatiable Appetite to Learn 416

Do What You Love 417

Chapter 23: Ten Ways the 2017 Tax Reform Bill Benefits Small Business 419

Corporate Income Tax Rate Reduction 420

. . . and (Some) Simplification 420

Individual Income Tax Rates Reduced 420

20% Deduction for Pass-Through Entities 421

Better Equipment Expensing Rules 422

Increased Maximum Depreciation Deduction for Automobiles 422

Limited Interest Deductions 423

Reduced Meal and Entertainment Deductions 423

Elimination of Health Insurance Mandate 423

Revised Rules for Using Net Operating Losses 424

Index 425