Finance & Grow Your New Business. Angie Mohr
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• Reasonable expectation of increasing profit over time
Characteristics of a hobby:
• Tailored to the needs of the hobbyist
• Incurs high costs compared to potential return
• Designed based on desires of the hobbyist
• Enjoyment garnered from performing the service
• Little or no expectation of increasing profits over time
A sound business is always centered on its customers. The reason for its existence is to serve its customer base, and customer satisfaction is the measure of its success. An entrepreneur who builds and manages a small business derives his or her pleasure from the process of providing the product or service as opposed to the actual provision.
Let’s use a deep sea diving outfit to demonstrate the difference between a business and a hobby. Maria owns a boat and several sets of dive gear. She has been doing deep sea diving almost all of her life and she wants to take others out to teach them how to do it. If this is simply a hobby for Maria, she will take people out to dive sites that she particularly enjoys and will purchase dive equipment and other supplies without regard to analyzing the cost versus the benefit of such expenditures. She will set hours that are convenient to her and will only book tours during that time. The enjoyment that she gets is in the actual diving itself. She wants to share her hobby with others and has no interest in hiring others to perform the work or in growing or selling the business.
On the other hand, if this is a true business, Maria will spend time upfront “crunching the numbers”: calculating her break-even point by figuring out how many tours she needs to book to cover the capital cost of the boat and its related maintenance, as well as the dive equipment. She will research what tourists are most interested in when they book a diving tour and will adjust her availability to the most popular tourist seasons. If the growth potential is present to allow it, she will most likely hire another experienced diver in order to be able to run more tours. The enjoyment that Maria will get from building this business is in seeing it grow and serve its customers. She will know that she is building something that will outlast her and that she can sell when she wants to pursue other ventures.
It’s definitely true that many successful entrepreneurs have translated their personal interests into highly successful businesses, and potentially, you can too. However, it’s always important to make sure that your reasons for starting the business extend beyond the pure enjoyment of doing what the business does.
It’s Not Always about the Money
Now that we’ve discussed why you should be extremely careful in trying to make your hobby your business, it’s important to make the point that you can still have a hobby. Not everything you do has to produce profit. In fact, the most fun part about a hobby is that you do not have to worry about things like profitability or the satisfaction of others. Trying to turn your hobby into a business may not only be unprofitable, but may also make you end up hating the hobby. Entrepreneurs and small-business owners need to have more interests than just their businesses in order to maintain a balanced lifestyle. If you do nothing except keep your nose to the grindstone in your business all day, everyday, think about what an uninteresting person you’d be!
Chapter Summary
• Entrepreneurs are continually assessing potential ventures to see if they would make profitable businesses, but they run the risk of trying to turn a purely pleasurable pastime into an unprofitable business.
• Although many successful small-business owners have parlayed their personal interests into successful businesses, many more build and grow a business without a personal interest in the underlying activities of the business.
• Businesses are always run for the benefit of the customers, whereas hobbies are undertaken for the benefit of the hobbyist.
• Small-business owners should still pursue hobbies and personal interests to maintain a balance between their personal and business lives.
3
Build or Buy?
Is it better to build a business from the ground up or to purchase an existing business? This chapter outlines the considerations.
Introduction
If you want to become a small-business owner, there are two ways to do it: you can either build a business from the ground up or you can buy an existing business. Each strategy has its pros and cons. The strategy that’s right for you will depend partly on your motivation for being a small-business owner and partly on cash flow considerations.
If your motivation for starting a small business is that you derive pleasure from building something from nothing, you are more likely to garner that pleasure from building your own business, although you may also take pleasure in buying a business and molding it into your image. On the other hand, your interests may lie more on the managing side and you would therefore prefer to walk into an existing business and begin to run it.
Cash flow also plays a part in your decision. If you are purchasing goodwill along with the net assets of the business, you will be paying more than if you simply purchase assets and start from scratch. Buying an existing business is usually the more expensive option. However, a business that is already up and running may provide you with profits and a management income earlier. This may offset the initial cost. When you build a small business from scratch, it may take months or even a year before you hit the break-even point, much less make profit that you can put in your pocket. In the meantime, you will be investing a large amount of your time building the enterprise without remuneration, and this is a cost that you must figure into your calculations as well.
Let’s look at the pros and cons of building a business from scratch versus those of buying an existing business.
Building a Business from Scratch
When you build a business from scratch, you will start with nothing but the tiniest grain of an idea. You will spend months or longer mapping out that idea, running cash flow scenarios, doing market and competitive analysis, writing a business plan and a management operating plan, and working on the business’s vision and mission statements. You will be meeting with bankers, accountants, lawyers, and financial planners as you build your external advisory team.
Case Study
It was then that the perfect business quite literally fell into Craig’s lap. It was his second wedding anniversary and he had taken his wife out for dinner at an upscale French bistro. As they were enjoying their desserts, the power went out, an occurrence that was becoming all too common on the Eastern seaboard where they lived.
There were auxiliary lights in the bistro, just enough for Craig to see most of the patrons leaving, despite the servers’ quick efforts to light candles on every table. The server looking after Craig and Marnie’s table told them that some were leaving because they were uncomfortable with the blackout and some because the bistro couldn’t accept credit cards because its system worked solely on electricity. Craig sipped his wine and contemplated the money that the restaurant was losing because of the blackout, when, quite unexpectedly, the busboy tripped in the aisle and dumped a half-eaten plate of gnocchi in Craig’s lap.
“I’m so sorry,” the busboy said, cleaning up the mess. “I couldn’t see where I was going. I hate these blackouts.”
Craig wondered aloud to Marnie how many businesses were facing the same problem at that moment along the Seaboard. Business was being lost because of the lights not being on. Craig then recalled an article he had recently read in the paper about a new company