Your Guide to Small Business is designed to give entrepreneurs the tools they need to succeed. It’s not a “how to” book; it’s an information resource that will help identify the things one needs to do before, during and after launching a business. This publication is also available for download as a PDF file on our Publications page.

 

Part 2 - Preparing to Start Your Business

Topics Covered:

• Determining your business option and evaluating it
• Starting from scratch
• Buying an established business
• Purchasing a franchise
• Refining your business idea
• Sole proprietorship or partnership
• Incorporation
• For-profit or non-profit
• Choosing your business name
• Where to go for help
• Your business plan
• Business preparation checklist

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Determining your business option and evaluating it

"You have to go into a new business with your eyes wide open. Do as much front-end research as you can and make sure you do a comprehensive business plan, gathering real, valid information. Look before you launch."

George Wheeler
Manager
Enterprise Toronto

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. Use the following questions as a guide:

• Is your product/service something people want or need on a continuing basis—and if so, how many people are likely to want or need it (your target market) at the price you intend to charge?
• How does your product/service fit within its industry, and what is the potential for growth for both? Your industry
• Is association can help with this piece of your market research.
• Is there existing competition for your product/service—and if there is, what advantage(s) does yours offer?
• If it’s a product you’re selling, where are you going to get it and is your potential supplier reliable?
• If your product is something you’ve designed yourself, have you checked to see if something similar already has industrial design protection? If it’s something you’ve invented, have you looked into patenting it? These are things a lawyer can help you with.
• If your business is an e-business, how are you going to get your product to your customers and how will delivery affect your price?
• Is your business “location sensitive”—and if it is, are you going to be able to find an affordable location that takes advantage of your target market?
• If your business is a home-based or e-business, how are you going to ensure that your potential customers can find you?
• Is your business reliant on employees—and if so, how many will you need to start, how much will you be able to pay them, how much training will they require and how much will training cost?
• Is your business subject to more than the standard government regulation—and if so, how will that affect your start-up costs?
• How much will it cost to launch your business and where will you get your start-up money?
• How and where will you advertise your product or service—and how much will advertising cost?

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, you’ll need answers to the following questions:

• Why is the owner selling the business?
• What kind of reputation does the business have? (Check with both customers and suppliers.)
• Is the product or service being offered still in demand—and likely to stay in demand for the foreseeable future?
• Is there potential for business growth?
• Is there new competition for the business?
• Does the owner plan to open a competing business? And, most important of all:
• What do the financial statements tell you? To answer this question, you’ll definitely need help from a qualified accountant or business valuator. It might seem expensive, but it will save you money—and grief—in the long run.

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 business’s 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.

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 www.cfa.ca. You and your franchise lawyer should go over these provided documents carefully.

To determine whether or not a potential franchise is right for you, you need to determine:

• How well established is the franchisor? How many years has the franchisor been operating and how many franchises does it have? (Check with the CFA to see if the franchisor is a member in good standing.)
• Does the franchisor have a good business name?
• Are the franchisor’s business operations ones you can be comfortable with?
• Is the franchisor expanding?
• What do the financial statements tell you? You may want an accountant to review these.
• Will the franchisor choose the site or help you select an appropriate one, and is your territory exclusive? Does the franchisor sell its products through other channels?
• How expensive is the franchise to purchase?
• Does your franchisor have an arrangement for financing with a specific financial institution?
• How much will you have to pay in the way of royalties?
• How much will you have to pay for company-wide sales and marketing campaigns? Will you have input into sales and marketing strategies?

Finally, you should talk to a number of franchisees in your area and go and see their operations. Ask them:

• How long have you been in business, and how long did it take to become profitable?
• How successful is your operation?
• How much time do you spend at your operation?
• How well has the franchisor lived up to his/her obligations?
• Did the franchisor provide effective, thorough training? How about continuing management assistance?
• Have the sales and advertising costs been worth it?

Remember, whatever option you choose, you need to make sure you have enough money saved to cover your personal and household expenses until your business is successful, so you need to determine how long it will take to make the business profitable.

Refining your business idea

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)? 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)?

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 usually a good idea to 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.

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.

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—for federal incorporation it’s $200 or $250 depending on whether or not you do it online. The fee for provincial incorporation is $360 (for non-profit organizations the federal incorporation fee is $200; the provincial fee is $155 for standard service or $255 for expedited service)
• 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. (More on how to incorporate in the section on starting your business.)

For-profit or non-profit

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.

Choosing your business name

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.

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

There are three types of trade-marks:

• Ordinary marks are words or symbols (or a combination of these features), that distinguish the names or services of a specific firm or individual. Suppose you opened a courier business, which you called “Giddy-up”, ten could registered the words as a trade-mark (assuming all legal refinements where 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.

The submission fee is $250. If your application is successful, there’s an additional fee of $200 for a certificate of registration. 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. You can find a list of agents on the Canadian Intellectual Property Office website, where you can also find more information on trade-marks in general.

If you’re creating a website for your business, another thing you’ll want to take into account is your domain name. You can register any domain name you want, as long as nobody else is already using it. Before you choose a domain name, check to be sure it’s not the same—or confusingly similar—to another business’s trade-mark or trade name.

For more information on registering a domain name, check out the Internet Corporation for Assigned Names and Numbers (ICANN). The site also includes contact information for the nine ICANN-accredited registrar companies in Canada.

Registration fees vary depending on the company and the length of time you choose, and what kind of domain registration you want, for instance, .ca, .com, .org,.net.

Where to go for help

Clearly, whichever business option and business form you choose, there’s 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, by way of an accountant, lawyer and/or business evaluator. (More about getting expert help coming up in the start-up section.)

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

• Internet and computer access for business research and planning
• free start-up consultations with a business consultant
• review of business plans
• consultations through their lawyer/accountant referral service
• up-to-date information from a variety of sources geared to the needs of the entrepreneur
• access to current resource materials, including directories, trade indices and books
• workshops and seminars
• import and export information
• guidance on licences, permits, registration, regulations and other forms and documents required to start and build a business
• information on patents, copyright and trade-marks
• mentoring and networking opportunities

Your business plan

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. Finally, 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:

• an executive summary/business description that provides:
  • the name and location of your business
  • the form of ownership (sole proprietorship, partnership, corporation)
  • details on the product/service you intend to offer
  • the reasons your product/service is needed
  • the advantages your product/service has over the competition
  • what expertise you and any partners bring to the table
• an industry and marketing analysis that includes:
  • information about the industry you’re entering and how your business fits into it (market share)
  • a profile of your potential customers
  • an estimate of how many potential customers are in your market area
  • your business location considerations, if applicable, and how your location relates to marketing
  • details on your major competitors, and the advantages your product/service has over theirs (convenience, service, performance?)
  • pricing for your product/service and how you determined it
  • a description of how you plan to advertise or promote your product/service
• an operational plan that addresses:
  • a general description of the day-to-day operations of your business, including hours of business, days open, seasonality of business, suppliers and their terms etc.
  • the products and services you’ll need and who your suppliers will be
  • key management background and experience
  • your employees, including their responsibilities and duties and any training requirements
  • any required licences, permits
• a financing plan that outlines:
  • costs of any business licences/permits, legal advice, insurance
  • costs of office rent, supplies and equipment
  • costs of any employees you will hire
  • amounts and sources of start-up financing
  • a cash flow forecast
  • sources of financing, including your personal net worth
• contact information for your lawyer, accountant, insurance agent or broker

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.

You can also check out the Canada-Ontario Business Service Centre (COBSC) website. COBSC’s interactive business planner walks you through the process of developing a business plan by:

• showing you what to include
• providing a format for writing your plan
• helping you identify where you can get information you may be missing and helping you collect it
• preparing financial projections for you

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.

Spotlight on… Kokimo Candles

“It all starts with your business idea,” says Adrian Quinn, owner of Castleton-based Kokimo Candles. “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 knows what he’s talking about. From the start, Kokimo Candles was a successful business. Today, it employs up to 20 people who produce more than one million candles a year, which are sold in 2,000 stores across Canada and the U.S.

So, how did Adrian come up with the idea of manufacturing candles? When he was in grade 12 he went on a holiday and, by chance, took a tour of a candle factory. The owners allowed him to experiment with their wax and make a few candles—and just like that, he’d found his future business.

“ I liked the idea of making candles because candles were something I knew people wanted,” he says. “Candle-making was also something I knew I could be good at and I could do without having to make a major financial investment.”

With a loan of $4,000 from his father, Adrian set up business in the barn in his parents’ backyard. Before long he was selling candles to his classmates and doing the rounds of the retail craft shows in southern Ontario.

He did well for the first three years, re-investing nearly everything he made back into the business, which grew steadily. But Adrian knew that if he was to make it really big, he would need to carve a niche for himself. The idea came one day when he was eating a Life Saver.

“ Life Savers are colourful and refreshing and it hit me. Why not make colourful candles with fruit fragrances?”

It didn’t take long for Adrian to discover that the public liked the idea as much as he did. His business grew an astounding 500 per cent the year he launched Candy Candles—and he’s never looked back.

Spotlight on… Mine Source

“ When you’re launching a new business it’s important to get the outside help you need,” says Mark Alexander, Sales Manager of Sudbury-based Mine Source Inc.

Mark speaks from experience. In January 2003 he and his partners—his brother and father—launched minesource.com, a unique website boasting the world’s largest source of used mining and mineral processing equipment. They did it with help from the Business Development Bank of Canada’s (BDC’s) e-strat program.

The idea for the web-based business grew out of the company’s original business, Mindecom, a mine decommissioning service established in 1989.

“Mindecom was responsible for physically closing a mine and putting the land back to its original state, or as close to it as possible,” explains Mark. “In the process, Mindecom acquired everything left behind, including all the equipment, which it would then try to sell.”

It was a successful business, but by 2001, the company was facing a ballooning equipment database and a saturated Canadian market. That’s when the partners came up with the idea of creating a website that would manage the database and match buyers from all over the world with equipment.

“We knew everything about the mining equipment business,” says Mark. “But we also knew that when it came to developing and building a site that would deliver the results we wanted we needed outside expertise.”

The partners spent six months developing a solid business plan and, with the help of BDC’s e-strat program, they spent another year developing the website.

The result is minesource.com, a user-friendly site where clients interested in purchasing mine equipment can search anonymously, access free quotes and even add their own equipment to the database free of charge.

Also key to the site’s success has been its monitoring system, which tracks the quality and quantity of traffic, providing important feedback on who is visiting, how long they’re spending on certain pages and where and when they’re leaving.

“ BDC has the experience to really understand and translate the mentality of our target market,” says Mark. “We were able to tap into that knowledge and make our site really perform.”

Spotlight on… Palomino System Innovations Inc.

Markus Latzel was working as a researcher at York University’s Centre for Vision Research when he was asked to create a website for the centre. In the process, he came up with WebPal, a content management system that allows any staff member to maintain a corporate website within minutes.

Markus was convinced there was a large market for WebPal, but he needed funding to get it to market—and to get funding, he knew he’d have to have a solid business plan.

His first step was to go online and find out as much as he could about how to prepare a business plan.

“Creating my first business plan wasn’t easy,” he says, noting that the challenge was not to get lost in the idea itself.

“A business plan is much more than your idea. That’s just the first page. You have to translate your idea into a business model,” he says. “You need to show how you’ll sell your product, who your competition is and why your product is better than theirs, how you’ll market it, what your distribution channels and profit margins are, where you’ll get employees. You have to address everything—for your own sake as much as for your funding sources.”

Once he had a draft done, Markus asked all the successful business people he knew for advice. “Entrepreneurs would be wise to ask for help with their business plans,” he says. “People are always pleased to give advice and believe me, getting feedback from successful people is worth the effort.”

As a result, Markus made some changes to his plan and tailored it to each of the audiences he was targeting—government, angel investors and venture capital firms.

It worked. He was awarded $100,000 by the Ontario Centres of Excellence (OCE) and $20,000 by the Institute for Robotics and Intelligent Systems—enough to get his business up and running. Palomino is now a thriving business with clients in Canada and the U.S.

Business preparation checklist

By this point you should have determined your business:

• idea
• option (start from scratch, buy an existing business, purchase a franchise)
• form of ownership (sole proprietorship, partnership, corporation)
• name

And you should have 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.