Finance & Grow Your New Business. Angie Mohr

and that the value can be transferred to others through sale of the business or inheritance. The unfortunate reality is that over 80 percent of small businesses do not survive into the next generation but die with their owners.

      What Kind of Business Should I Start?

      The three major types of businesses are manufacturing, retail/wholesale, and service. There are pros and cons to running each type of business, as well as financial considerations. Let’s have a look at the characteristics of each one.

      Manufacturing business

      Manufacturing involves purchasing raw materials and adding labor and specialized machinery to create a product to be sold to customers. An example is a furniture manufacturer. This type of business would buy lumber from a sawmill, as well as nails, screws, glue, and varnish from a supplier. It would then have its employees use saws, drills, and other tools to turn the lumber into tables, chairs, and other furniture.

      A manufacturing environment usually requires a hefty upfront investment in the equipment that will be used in the manufacturing process. Manufacturers also tend to need more highly skilled workers than, for example, a retail business. For these reasons, it is very difficult to start up a manufacturing business on a small scale and expand as you go along.

      One of the main benefits of this type of business is that it can service very large customers with very specialized products. For example, a manufacturer can supply the entire North American auto industry with injection-molded fan vents.

      Retail/Wholesale business

      Retailing and wholesaling involves the purchase and resale of products. A retailer sells the products to the final consumer while the wholesaler is simply an intermediary, selling the product to another business that will ultimately sell it to the final consumer.

      Almost every store that you can think of is a retailer. For example, a bookstore will purchase books from the publisher and display them for sale in the store. An example of a wholesaler is an importer that purchases teapots from Japan and sells them to stores, usually in large quantities.

      Operating a retail business generally requires rented or purchased display space and therefore requires incurring the fixed costs of running that space right from the beginning. For example, if you wanted to run a variety store, you would have to rent (or buy) a storefront location where customers can drop in during your open hours. On top of that, you will have to invest in the store’s inventory, which is usually the largest cost to a retailer. The inventory can cost upward of $100,000 depending on the size and scope of the store. For these reasons, retail businesses are usually quite capital intensive and need financing from the beginning.

      Wholesalers, on the other hand, generally don’t have to deal with the headaches of display spaces, but they do have to maintain an inventory in a warehouse. Therefore, a wholesale business needs to incur the fixed costs associated with operating a warehouse as well as the cost of purchasing the inventory, which tends to be in larger quantities than a retailer. This also generally requires financing from the beginning.

      Service business

      A service business encompasses any type of business where the item purchased is not a tangible good but instead is “something that is done.” Some examples of service businesses are law and accounting firms, lawn-care businesses, auto shops, and spas.

      Service businesses in general require less equipment than manufacturers do, and practically no inventory. Therefore, these types of businesses are generally easier to start on a small scale and require less start-up capital. In fact, service businesses account for the majority of all small businesses in North America.

      Service businesses tend to be smaller and more local than manufacturers or wholesalers, because services are provided by people and are generally not able to be shipped by parcel post. It can be logistically difficult to provide services over a wide geographic area. However, business services such as website design, accounting, and data processing are becoming the exception to this rule with the ever-expanding use of email and the Internet.

      Case Study

      Craig Sesco knew from the time he was six years old that he wanted to run his own business some day. His father had owned and operated an Italian bakery since before Craig was born and Craig learned to be an entrepreneur through many years of working in the bakery, doing everything from kneading dough to running the ovens to ordering from suppliers, and, eventually, bookkeeping and cash flow forecasting.

      Now Craig was 27 and he felt it was time to strike out on his own. He knew that his father had started his business by doing something he loved and that he was lucky that his passion coincided with consumer tastes, but Craig wanted to pursue a different model. He wanted to determine his best chance for commercial success and build a successful business around that.

      The first process that Craig went through was to determine his personal goals. He had married his long-time love, Marnie, two years ago and they had just bought a small house for themselves and their new baby. Craig knew that he didn’t want to work the crazy hours his father still put in everyday: up at 4:30 a.m. to start the stone ovens and never falling into bed before 11:00 p.m., after reconciling the day’s receipts, preparing the bank deposit, and planning for the next day’s purchases. Craig wanted to balance his work time with family time but still wanted to build and run a financially successful business that he could sell by the time he was 50.

      Through his analysis, Craig also determined that he didn’t want to run a business with huge start-up costs and large inventory levels to manage. He wanted to start small and gear up slowly as he built up more internally generated revenues.

      Craig started to list the types of businesses he thought he might be successful at.

      Eight Questions to Ask Yourself

      Before you make a final decision as to what type of business to open, make sure that your personal goals and business goals are synchronized by asking yourself the following questions.

       1. What are my personal financial goals?

      If you want to retire a millionaire in ten years time and you are going to open a small shoe-repair shop, you may not be able to meet your goals. Analyze where you want to be in five or ten years. Do you want a larger house? Be able to travel the world? Have your retirement fully funded? You’ll save yourself much grief down the road if you make sure that the type of business you start will provide you with the money you need for your intended lifestyle.

       2. Will this business allow me to have the freedom I want to pursue other things?

      If you start a business that is based around you being there all the time, you may not be able to pursue some of your personal goals or even to spend the time to plan and strategize for your business. Having a business that can be systematized to run without your constant presence will allow you more freedom.

       3. Is the product or service easily marketable?

      Starting a business that has a product or service that is understandable and needed by a large segment of the population is by far easier than developing a new product or service and having to both familiarize potential customers with it and, at the same time, convince them that they need it.

       4. What are the barriers to entry for this industry?

      Some industries are more difficult than others to “break into.” For an extreme example, it would be incredibly difficult to start up a new auto manufacturing company to compete with Ford or Daimler Chrysler. Likewise, it would be almost impossible to set up a new company to provide telephone service to the Eastern seaboard. In both of these examples, the start-up costs are monumental (design, manufacturing equipment, and showrooms in the first instance and switching stations and telephone