What are your skills?

All of us have skills in one area or another, and obviously your particular skills need to be taken into account when deciding on a business to buy. At the most simplistic, if you have worked in a certain type of business for someone else, say a hairdresser’s or confectioner’s for example, you probably have most of the skills needed to run a similar business yourself. If, on the other hand, you have worked in a job that has not provided you with particular skills relevant to running a small business, you will need to consider businesses that do not require skills only acquired after years of training. Consider what skills you would have the capability and aptitude to acquire quickly.

What skills and aptitudes are required?

Some businesses require only generalised skills, and others more specialised ones. It is impossible to give a comprehensive list, but here are some examples to illustrate the point. Running a small sandwich bar or ‘greasy spoon’ is very much like running an overgrown family kitchen. That’s not to say that it is easy, but learning to scale-up what you already do at home would be relatively straightforward. On the other hand, running and la carte restaurant is a totally different ball game. If you have been a chef, then fine. However, if you will have to rely on employing a chef, then you are taking a huge risk. What happens if the chef leaves overnight without warning? It would take years, if ever, for you to be able to step in and take over the kitchen at short notice.

Running a small convenience store is generally straightforward, but like the a la carte restaurant, you could not consider buying a specialist butcher’s shop unless you are trained.

Slightly less obvious is accounting requirements. A retail business, where the customer pays at the point of sale, is fairly easy to run with a simple cash book. However, if you are running a business-to-business trade, where your customers expect trade credit, then you are going to need to run ledgers with your customers’ accounts, send out statements and follow up by phone, letter and in person to chase late payment.

If it is the type of business where it is necessary to submit detailed quotations, is your English good, your maths OK and are your fingers quick on the keyboard?

In summary, when you consider types of businesses, think about how you will need to be spending your day, and whether you can manage or learn all the tasks you will have to undertake. Possibly your partner will be able to cover your weak areas.

What are the physical demands?

One factor which is easily overlooked is the physical demands that many businesses place on their owners/operators. If you have been working in an office, sitting at a desk all your working life, when you run a shop standing on your feet all day you may find that you have terrible back pains.

In the pub, when you had planned that your husband would be responsible for changing the beer barrels, if a regular is waiting for a bitter and hubby is at the bank, you are going to have to do it yourself.

All retail and restaurant/cafe type businesses, as well as many others, involve a considerable amount of physical work. Man or woman, you need to consider whether you are ready for this and whether you are going to be able to cope with the physical demands that may be involved over a sustained period.

How much risk is involved?

All businesses involve a certain degree of risk. However, some businesses are more inherently risky than others. You need to decide:

• What risks can you handle, given your aptitudes and skills?

• How much risk are you willing to take?

For the purposes of this discussion, risks can be broadly categorised as external risks and internal risks.

External risks

External risks refer to risks external to the business itself. These risks are largely outside your control once you have bought the business, and can include all or some of the following;

Location

Some businesses are very sensitive to location (hotels or general retail, for example). You can obviously check what you think of the location before you buy, but there can always be environmental changes after you have bought the business that you could not have anticipated, and which fundamentally affect the business. Your hotel, which was nicely situated on a busy road, is now in a back street due to the new bypass. The handy public car park next to your convenience store has been sold to big supermarket. It could be even simpler – the council decides to put double yellow lines in front of your parade of shops,

Technology

Changes and enhancements to existing technology could affect your business. Many small garages are unable to service some of the latest cars which have sophisticated computer and electronic systems.

New gizmos may appear and reduce the demand for your services. Digital cameras are increasingly reducing the demand for photograph development and printing, for example.

Competition

Apart from the increasing trend towards out-of-town major outlets, maybe someone will just decide to open up in competition just down the road.

Fashion

Some things just simply fade.

Customer loyalty

Sometimes customer loyalty is lost when a business changes hands.

Internal risks

Internal risks are essentially within your control, provided you have the aptitude and attention to detail to exercise it. Such risks could include:

Stock

Do you have the intuition to stock the right items, the hot sellers, or might you end up with shelves of unwanted items?

Financial control

Sometimes staff can think up the most ingenious ways of slipping cash out of the till or stock into their handbags. You need to consider which are the risks involved in the type of business you are considering, and which of these risks, given your circumstances, you are prepared to take.

Remember – if you are to be a businessperson you have to be prepared to take some risk. Why not? It could be that you are actually taking more risk by being an employee. Hundreds of people are losing jobs through no fault of their own every day of the week!

How much will the business cost?

To take the extreme, if you have a maximum of $10,000 in ready funds to invest, it is hardly worth looking at nursing homes or hotels, for example. On the other hand, a leasehold flower shop may be a realistic possibility.

Trade publications

Most businesses have trade publications. Find out which are the best ones for the types of businesses you are thinking about buying. Read a few issues. They are generally a good source of information, not only for commentary on the major concerns currently affecting that business sector, but will also contain advertisements for specialists in stocktaking, financing and so on.

Talk to business owners

It is a good idea to talk to business owners in the sectors you are targeting for their thoughts. Do not be shy about this; most business people are only too happy to talk about their business to prospective owners, as long as you make it clear that you are not about to open up nearby and put them out of business, of course! However, most business transfer agents (agents who act for owners wishing to sell their business, accountants, bank managers or solicitors can give you contacts if you prefer.

Having read this article, sit down and consider all the issues. This should give you the ideas and questions to put to them, and, as the conversation develops, the least you will gain will be confirmation that your expectations are correct. But, more likely, you will learn a lot of new aspects to running that type of business that you would have never thought about on your own.

Ask them what key factors there are to making the business successful or not. All businesses, without exception, have a few key factors that you have to get right for the business to, do well. For example, some of the key factors in the success of Pizza Hut are:

• Consistent product quality and price.

• Speed of service.

• Easy parking.

• Clean environment.

This sounds obvious, but a considerable degree of skill goes into ensuring that your pizza and chips are exactly the same whichever restaurant you go to. However, it is the knowledge that you can be assured of this that encourages you to go to Pizza Hut time and again, so it is vital for them to get this right. Other examples are:

• Pubs: (Keeping the beer in good condition; Keeping sticky fingers out of the till.)

• Convenience stores: ( Keeping the food fresh and presentation good.)

• Flower shops: (Avoiding undue wastage.)

The key factors in your particular business could concern presentation to the public or more internal factors, like financial control or avoiding undue stock losses, for example. By speaking with existing owners you should gain a good feel for what these critical factors are, and be able to assess whether you have the ability or willingness to make sure that you get them right.

Consultancies

Businesses such as insurance brokers, advertising agencies, graphic designers, IT consultants are often built up through personal relationships that go back over a long time. The same applies to hairdressers. As such there is often a real risk that once the current business owner leaves, a significant number of clients will decide it might be a good time to look around at alternatives.

In many such businesses there is a similar risk in relation to key employees. Instances where employees leave, either to start on their own or to join a competitor, and take clients with them, are commonplace. Practices such as graphic designers or advertising agencies, for example, where the employee works very closely with the clients and has an in-depth knowledge of their likes and dislikes, are particularly vulnerable in this respect. Often if you lose the employee you lose the client, even if the employee doesn’t take the client with him, because it was solely for the skill or imagination of that employee that the client used this firm.

If you are thinking of buying a business of this nature, you will need to consider these risks very carefully and, if necessary, consider ways in which you can reduce them. You may need to contract the vendor to stay on in an advisory capacity for a period after take-over, and/or incentives key employees. You could also consider negotiating to defer part of the purchase price, making it only payable if sales meet projected targets over, say, the first two years after takeover.

It is never possible to eliminate the risks entirely and for that reason these types of business rarely sell for high prices unless they are large practices where the risks are widely spread over a large client base and workforce.

Unless you are experienced, you should obtain specialist advice about valuing such businesses and negotiating contractual terms. The relevant professional institute should be able to offer help in this respect.

Myth Number 1 – The home office deduction is a red flag for an audit.

Twenty years ago, this might have been true, simply because it was unusual. Now, the home business seems to be almost as popular as home ownership! Millions of individuals operate some kind of business activity out of their homes. Others telecommute, and deduct their home office expense as an itemized deduction. The home office deduction is no longer an automatic flag for an audit.

The key to avoiding an audit is reasonableness. The IRS uses computer analysis on all tax returns. Any deduction that is excessive on your income and the benchmarks for your industry may be questioned.

Bottom line: Deducting a portion of your home expenses as a cost to operate your home-based business is expected!

Myth Number 2 – If I take a home office deduction, I can deduct all the costs of my home.

You deduct a portion of your home expenses as a home office expense based on the square footage of your home office space. If you have a 2000 square foot home, and a 200 square foot office, you could deduct 10% of your home expenses.

Unless you operate a day care center, your home office space must be exclusively used for business. Your kitchen will not qualify as home office space simply because you use the table to complete paperwork. If you use the space for personal and business, it does not qualify.

The easiest way to keep track of this is to designate a room or rooms for home office purposes. If you don’t have a complete room to use as office space, use furniture to separate the personal part from the business space.

Of course, there is an exception to this rule. If your business is wholesale or retail and you do not have any other fixed location, you can include any space you use for storage of inventory or product samples as part of your home office. This space does not need to be used exclusively, but must be used regularly, and be suitable for storage.

Bottom line: Calculate the square footage you use exclusively for business and the square footage of your storage space for inventory to determine your home office deduction.

Myth Number 3 – I can only take the home office deduction if I work at home exclusively.

Old rule! Congress expanded the home office deduction to allow business owners without any other fixed business location to take a home office deduction regardless of the number of hours they spend at home. If you provide services to customers or clients at their location, you can still qualify for the home office deduction. You simply must use your home office for administrative and management duties.

Bottom line: You can deduct your home office as long as you don’t pay for other office space to run your business.

Myth Number 4 – The home office deduction will make me lose my tax exclusion on the sale of my home.

The rules have changed here, too. If you use 10% of your home for business purposes, you no longer have to recognize 10% of the gain on the sale that could have been excluded if you meet the requirements for the sale of your principal residence.

What you do need to do, however, is include any depreciation deduction you took in prior years as a taxable capital gain. You still benefit, because your capital gain rate is most likely lower than your ordinary income tax rate. You are able to take the original depreciation deduction at ordinary income tax rates, and bring it back into income when you sell your home at the lower capital gain rate. Your depreciation deduction can also reduce your self-employment taxes.

Bottom line: You can still save taxes overall by taking the home office depreciation deduction each year.

Operating your business from home is a very smart move financially for the new or small business owner. You can save yourself thousands of dollars in rent by operating at home rather than renting business space.

But the cost of housing your business is an expense, and should be treated that way. You would not hesitate to deduct rent expense for your business. Treat your home business expense the same way. The tax money you save can be used to grow your business, or even to fund your family vacation! Talk to your tax preparer if you have more questions, and get ready to take that home office deduction on your next tax return!