Picture this: Your client, a pharmaceutical executive, wants to meet with you. They are excited. They want to quit their high-paying job with incredible benefits to follow their dream of opening a cupcake shop. You sit back in your chair. Words fail you.
Yes, owning your own business is the American Dream. From the point of view of your practice, this is great news. They are about to become a much better client! Now there are two sets of returns and plenty of filings related to the business. But as their accountant, you realize this could also be a trainwreck in the making. What does your client need to know?
Why Do People Decide to Start a Business?
Let’s not douse them with cold water. This is the time to ask simple questions while talking in terms the general public understands. They may be a whiz at pharmaceutical R&D. They may understand earning and managing personal money are different skills. But now, they are talking about entering an entirely different world.
Start by asking: “Why do you want to do this?” so you can learn your client’s motivation. People start their own businesses for a variety of reasons: They want to be their own boss, build something from the ground up, make more money or take on several roles and do things their own way.
It would be good for all concerned to know what’s motivating your client. Your cupcake entrepreneur may tick all four of the above boxes.
What Do the Statistics Tell Us?
Colder water may be coming. You’ve heard the statistics are very sobering. You also know great tech companies were started in dorm rooms or home garages. If success is measured by survival, how many small businesses make the grade? Data from the Bureau of Labor Statistics, as reported by Smallbusinesstrends.com (3) tells the following story:
Considering 100 percent of businesses started in 2014:
- 80 percent made it to 2015
- 70 percent made it to 2016
- 62 percent made it to 2017
- 56 percent made it to 2018
Ever the optimist, you point out they have a better chance of success of five years out.
What are the Most Profitable Businesses to Start?
Your client wants every bit of luck on their side. This is a good time to talk about which businesses have been the most profitable to start. Sageworks (now abrigo.com) highlighted 15 areas with high net profit margins in 2016. (4) The top five are:
- Accounting, tax preparation, bookkeeping and payroll services
- Legal services
- Lessors of real estate
- Outpatient care centers
- Offices of real estate agents and brokers
Don’t see cupcakes. Your client’s business idea doesn’t fit into any of these categories.
What Do I Need to Know About Franchising?
Your client goes deeper into explaining their idea. You are surprised to learn there are cupcake franchises out there! They think this might be a safer route. They see the line at the McDonald’s take-out window on Saturday mornings as they drive to their local True Value hardware store. They get their hair cut at Hair Cuttery. They stop at 7-11 on the way home. They want to take the franchise route.
It’s tempting to see a business model that works and say, “Me too!” However, it’s more complicated then they likely realize. Franchise owners are following sets of rules and buying inventory through the company.
In 2016, Forbes talked about things to consider before buying into a franchise. (5) These include assessing if you have the personality to work within a regulated environment, studying the industry, taking an inventory of your strengths and determining if they match the skills needed to run the franchise. There are other considerations, too.
Why Do Small Businesses Fail?
You hope your client succeeds but know that the 56 percent five-year business success rate has a lot of other factors influencing that number.
So, why do some businesses fail? Why do business owners throw in the towel? Investopedia.com (6) lists four major reasons:
- Inadequate Capital: They may have enough money to get the business started, but not enough to keep it running until it becomes profitable.
- Inadequate Management: Some people are great at sales but lousy managers. They don’t know how to keep an eye on the bottom line, keeping expenses in check.
- Inadequate Business Plan: They haven’t thought through “Why is this going to work?” and “what if” contingencies.
- Inadequate Marketing Budget: They seriously underestimate what it costs to get on the radar of your target audience.
Owning your own business is part of the American Dream. Your client needs to enter this next stage of their life with their eyes open. By the end of these simple conversations, you have learned their motivation, looked at the statistics, identified those businesses more desirable to start and cautioned them on the reasons why startups often fail. At this point, your seasoned executive, eager to strike out on their own, is grasping the difference between having an idea for a business and actually having a plan. You’ve been supportive, yet cautionary.