Your Guide to Small Business

Part 2 - Preparing to Start Your Business

Topics Covered:

Do your research
Determine your business option and evaluate it
Determine your legal structure
Choose your business name
Define your competitive advantage
Prepare your business plan
Business preparation wrap-up

This section will help you explore, research, and refine your business concept. By following these steps, you will learn how - and why - to prepare a business plan, the all-important document that organizes the information derived from your research, and explains how you will start to operate your business.

"You may have a great idea for a new business but don't let that cloud the need for planning and market analysis. Many people are passionate about their concept and want to move ahead without actually doing the practical planning part to see if their idea is viable."
Rob Day, Consultant
Business Advisory Centre Northumberland
Cobourg

"When you are starting out, the most important thing is to have a business plan and do your research and homework to ensure there is a market for your product or service that is willing to pay for it."
Sandra Tam, Manager
Markham Small Business Enterprise Centre
Markham

Do your research

"It all starts with your business idea. You have to make sure people want what you plan to sell. One of the most common mistakes entrepreneurs make is to produce something and just hope people will buy it."
Adrian Quinn,
Kokimo Candles Ltd
Castleton

"If you don't research your idea and you're not lucky, you may step into something that puts you out of business in the first year because you didn't prepare yourself."
Mike Coon
Redline Promotions
Toronto

Aspiring entrepreneurs tend to want to jump in before doing proper research to determine if there really is a market for their product or service. The first thing you should do is a real market analysis - is there a need and enough need in the marketplace for the product or service you are offering? Do a competitive analysis, an industry scan of trends and a market evaluation. Then think about what you have to earn from the business - just like a job. How much income will you need to generate for yourself?

Once you've determined that your idea can become a viable business, there is still a great deal of up-front research involved. Some of it you can--and must--do yourself, but some of it will require expert help from an accountant, lawyer and/or business evaluator.

A good place to start your research is at your local Small Business Enterprise Centre (SBEC). SBECs offer a single point of access to important resources for entrepreneurs at all stages of their business development, including:

Free consultations with a qualified business consultant
Guidance on support programs available from all levels of government.
Review of business plans.
Up-to-date, leading-edge information and access to current resource materials including directories, trade indices and books.
Workshops and seminars.
Guidance on licenses, permits, registration, regulations and other forms and documents required to start and build a business.
Import and export information.
Information on patents, copyright and trademarks.
Mentoring and networking opportunities.
Consultations through lawyer/accountant referral services.
Internet and computer access for business research and planning.

What Small Business Enterprise Centre managers say about research:

"It's important to do detailed research and analysis. Look at statistics and information that will help give a clear answer."

Rob Day, Consultant
Business Advisory Centre Northumberland
Cobourg

"If you've determined a need in the market, and have done your financial forecasting and it looks good - then you can worry about the rules and regulations. There are plenty of resources out there to help you with the black and white stuff, but it's the grey stuff at the beginning that people often don't want to think about first."
Jane Phillips, Manager
Business Enterprise Centre Owen Sound
Owen Sound

Determine your business option and evaluate it

If you're thinking about starting your own business, you probably already have a fairly good idea of what that business will be. And you've also likely decided on whether you'll be starting from scratch, buying an established business or purchasing a franchise.

Whatever business option you choose, it's important to approach it with your eyes wide open. Do your homework. As any successful entrepreneur will tell you, the more thought and effort you put into your business in the planning stage, the more likely you are to be successful in the long run.

Starting from scratch

This is the most popular route for first-time entrepreneurs because it lets them use existing talents or skills and generally requires lower overhead and start-up costs. So, how do you go about developing your business idea and evaluating its potential for success? You do a lot of research. Complete the Starting from Scratch worksheet as a guide.

Buying an established business

There are many advantages to buying an existing business, because it usually comes with an established:

service or product
operation
clientele
location and perhaps inventory

But, buying a business doesn't eliminate all your start-up problems. Not only is it expensive to buy a business--particularly if the business is a successful one--buying one doesn't mean you won't encounter problems, and it doesn't guarantee you'll be successful.

What's more, there's just as much research involved in buying a business as there is in starting one from scratch.

So, how do you decide if the business you've got your eye on is a good deal for you? Once you've established that you could feel comfortable and knowledgeable running the business and it's something you'd enjoy doing, complete the Buying a Business worksheet.

Remember, when you're buying an established business, you're not just buying equipment and inventory. You're also buying the business's goodwill, and that's important because it affects the future success. Don't overvalue goodwill, though, because things can change when a new owner--you--takes over. Ultimately, any business is worth what you can earn from it. The most important factor to consider is whether you can make the business work for you.

Purchasing a franchise

Buying a franchise can be a good way for an entrepreneur to launch a successful business. It offers the benefits of being your own boss, while belonging to a large organization that provides you with:

a recognized product and business name
an established business method
centralized sales and marketing plans
help with training
help with choosing a location for your business

But successful franchises are expensive--both in terms of up-front purchase costs and ongoing royalties--and again, as with any other business, there's no guarantee you'll be successful. To determine whether or not a potential franchise is right for you, complete the Franchise Evaluation Checklist.

Ontario has legislation laying out disclosure requirements for franchisors. You are entitled to be provided with full business backgrounds of the franchise and its directors, audited financial statements and credit reports, among other things. Disclosure regulations can be found on the Canadian Franchise Association (CFA) website. You and your franchise lawyer should go over these documents carefully.

And remember, regardless of the way you start, you need to make sure you have enough money saved to cover your personal and household expenses until your business is successful. Therefore, it's critical to determine how long it will take to make the business profitable. Projected balance sheets, income statements, cash flow forecasts, and personal financial statements will help in this process.

Determine your legal structure

Once you've determined your business option, you'll need to decide what form of ownership your business will take. Will you go it alone (sole proprietorship) or take on a partner or partners (partnership) or come together with others to form a cooperative? Will you incorporate? And will you operate as a for-profit or a non-profit business?

Sole proprietorship or partnership

Many small businesses begin as sole proprietorships and there are clearly some advantages to being the only owner of a business, including:

It's usually easier, faster and cheaper to set up your business.
You're in complete control of the business.
The profits are yours alone.

But there are also advantages to having a partner:

There's someone to share the financial risks and the workload.
There's someone to provide skills and knowledge you may not have.

To determine which option will give your business a better chance of success, consider:

Does the business have roles for more than one owner?
Is the business likely to generate enough money to support more than one owner?
Does your potential co-owner (or co-owners) have skills that complement yours?
Can you work well with your potential co-owner(s)?
Do you share the same values?

If you decide a partnership is the way to go, you should give serious consideration to defining your relationship by way of a partnership agreement.

While you can let the relationship between you and your partner(s) be defined by provincial statute law--in which case liabilities and profits are split equally--it's highly recommended that you have a written agreement. It forces you and your partner(s) to determine your respective roles and responsibilities before you go into business together, reducing the risks for conflict later on.

A partnership agreement outlines how:

the partnership property is owned
the work is divided
the profits--and liabilities--are shared

It also spells out:

what happens to the partnership if one partner dies or withdraws, and sets up a method for buying back the partner's share

You should have a lawyer draw up your partnership agreement--and you and each of your partners should have his or her own lawyer review it before signing to make sure your individual interests are protected.

Once you've decided whether your business will be a sole proprietorship or a partnership, you need to determine whether or not to incorporate. This Q&A will help you decide whether you should operate as a sole proprietorship or partnership or a corporation.

Incorporation

Incorporation is a process by which a corporation is formed. A corporation is defined as a business venture comprising an individual, or group of individuals, treated by the law as an individual. Corporations can be private or cooperative, for profit or non-profit.

The main reasons people incorporate are to:

limit their personal liability in case the business fails
enjoy certain tax advantages

You can incorporate as a federal corporation--that's usually done only if you plan to carry on business in more than one province--or as a provincial corporation. Whichever you choose, you'll have to:

pay a fee--it varies depending on whether you are incorporating federally or provincially and whether you are incorporating as a non-profit.
run your business according to certain prescribed legal requirements, which include maintaining corporate records, holding meetings and filing documents with the government

Whether or not you should incorporate is an important decision. You should consult with a lawyer and/or accountant to help you decide. (See Starting Your Business for more on how to incorporate.)

For-profit or non-profit corporations

While the majority of new entrepreneurs choose the for-profit route, there are opportunities in the fast-growing non-profit sector, particularly if you have a specific mission or mandate.

There are two principal categories of non-profit organizations:

public benefit organizations, which carry on activities that are primarily for the benefit of the public, such as the Art Gallery of Ontario or the National Ballet of Canada, and generally get their revenue from public and corporate donations, government grants, contract funding and fee-for-service programs or activities
mutual benefit organizations, which carry on activities that are primarily for the benefit of their members, such as the Ontario Crafts Council or the League of Canadian Poets, and are typically supported by their members through fees and fee-for-service programs

Some non-profit organizations choose to get charitable status, which enables them to issue receipts to donors for income tax purposes, a major advantage when soliciting donations. As well, registered charities receive certain tax exemptions.

But charities are also subject to a number of restrictions and the Canada Revenue Agency (CRA) makes a great deal of information about all registered charities available to the public, including income tax returns.

The fact is that both non-profit and charitable organizations are subject to strict regulatory requirements. Before deciding which route to take, you should consult with a lawyer with experience in the area. A lawyer will also be able to advise on whether or not to incorporate.

Cooperative Corporations

Another type of corporation you might want to consider is the cooperative. A cooperative is a business that is owned by an association of members that could include as few as three or as many as hundreds or even thousands of owners who have decided to pool their resources.

If you want to operate as a cooperative there are some advantages:

capital investment and risks are shared among all of the members
the organization benefits from the active involvement of its members
it operates under democratic control: one member, one vote.

As with any business, there are things you should consider before you incorporate:

how to resolve e potential conflict between members
ways of facilitating the decision-making process
how to ensure active participation from all members
how to create incentives to invest additional capital

As with other forms of incorporation, you can register federally or provincially depending on where you will be operating.

Choose your business name

"While I was driving one day, I said to myself, 'I can't wait until I'm off the grid.' I was feeling very confined by the energy sector and I was really just so excited to unleash myself and be free. That's where the name of my business originated."
Kris Ledoux
Go Off the Grid Inc.
North Bay

It pays to think carefully before choosing a name for your business. The message you convey and the image you project are important in today's competitive world. You may have an excellent product or service to offer, but if people can't pick you out easily in the crowd, there's a good chance you'll be overlooked. And be sure to select a name that can grow with you and that has a dot.com or domain name availability and appeal.

There are several ways to distinguish yourself from your competition. You can develop a unique logo or design for your company name, give your product or service a trade-mark (a distinctive word or phrase), or do a combination of both.

There are three types of trade-marks:

Ordinary marks are words or symbols (or a combination of these features), that distinguish the wares or services of a specific firm or individual. Suppose you opened a courier business which you called "Giddy-up." You could register the words as a trade-mark (assuming all legal requirements were met) for the service you offer.
Certification marks identify wares or services, which meet a defined standard. They are owned by one person but licensed to others to identify wares or services, which meet a defined standard. Examples are: the Woolmark design owned by Woolmark Americas, Ltd., for use on clothing and other wares and the logo of the Association of Professional Engineers.
Distinguishing guise identifies the shaping of wares or their containers, or is a mode of wrapping or packaging wares. If you manufactured candy molded to look like butterflies, you might want to register the butterfly shape as a trade-mark under "distinguishing guise".

Because trade-marks come to represent not only actual products and services, but also the reputation of the producer, they're considered valuable intellectual property. The best way to protect a trade-mark from misuse or imitation is to register it with the Trade-marks Office.

You can register electronically by filing an application for registration. Your application will go through a stringent examination process to make sure it meets all the requirements of the Trade-marks Act. This typically takes about a year.

There is a submission fee and a further registration fee if your application is successful. Registration is valid for 15 years--and only for Canada, so if you plan to do business elsewhere, you'll have to register your trade-mark there as well.

Because trade-mark registration is a complex process, you should consider hiring an experienced agent. The Canadian Intellectual Property Office (CIPO) provides information about trade-marks, as well as a list of agents.

You will also want to register a domain name if you're creating a website for your business.

Define your competitive advantage

What makes your company stand apart from its competitors? Once you answer that question and turn it into a unique selling proposition (USP), you will be able to capitalize on your strengths. Be sure to incorporate your USP into your image and marketing.

What Small Business Enterprise Centre managers say about defining your competitive advantage

"When you are starting out with your own sense of what the business is going to be, get input from others. Have some meetings with other entrepreneurs and talk to people about your idea in order to draw out your own unique aspect."
Ken Laffrenier, Manager
Enterpise Temiskaming
Temiskaming

"You don't need a degree to do research and define your competitive advantage. Start simply through observation, gathering information and being alert to what is out there. For example, if you wanted to start a restaurant, pick up the menus of the competition. Try not to be emotionally attached at the beginning in order to do the analysis. Remember, it's not about you; it's about whether there is a market need."
Jane Phillips, Manager
Business Enterprise Centre Owen Sound
Owen Sound

Prepare your business plan

"The business plan is an essential tool for the success of your business. It is a roadmap to how you will operate, to set and define how you will achieve your goal. And, if you are looking for financing from bankers or other investors, a business plan is a must. The most common mistake entrepreneurs make in business plans is to overestimate revenues and underestimate expenses. Having realistic projections is crucial."
Sandra Tam, Manager
Markham Small Business Enterprise Centre
Markham

A well-researched, well thought-out business plan is essential for a few reasons. First, it increases your chances of success by forcing you to consider every aspect of your business and it serves as an ongoing roadmap or benchmark so you can gauge your success and plan for growth. And, it's what investors, including banks, want to see in order to determine whether your business--and you--are good risks.

Simply put, a business plan is a written summary of all the activities of your proposed business. It lays out:

what your business does
how it can compete successfully in its industry
how it will run on a day-to-day basis
vital financial information including projections about income and expenses for the business and your personal financial status

Your plan should be:

concise
easy to read
complete
professional looking

It should include a number of specific elements and key points. Review our checklist on the elements of a sound business plan as a starting point and visit Canada Business for a selection of business plan templates and samples that will make it easy for you to create your own.

One last point--and it's an important one. Don't think of your business plan as a fixed document. To be effective, it should be tailored to whatever audience you're presenting it to and it should evolve with the changing circumstances of your business.

Where to go for help

There are lots of places to go for help with preparing your business plan. Probably the best place to start is your Small Business Enterprise Centre (SBEC). An SBEC consultant will go over what you need to do to and provide a professional review of your plan once you've prepared it.

Quick Tips

"Ask successful business people for input on your business plan. They are always pleased to give advice...and getting feedback from successful people is worth the effort of asking."
Markus Latzel,
Palomino System Innovations Inc.

"Your business plan should be a realistic work plan that is updated regularly. It is not cast in stone so you should go back and revisit it at least every six months."
Sandra Tam
Markham Small Business Enterprise Centre

Business preparation wrap-up

By this point, you should have determined your business:

idea
option (start from scratch, buy an existing business, purchase a franchise)
legal structure (sole proprietorship, partnership, corporation, co-operative, profit or non-profit)
name
competitive advantage

And you should have:

done your research
put together a thorough business plan that clearly summarizes your business activities

Now you're ready to begin working on all the details involved in start-up!