Start-ups

Arnie Herndorf came into my office and laid out several sheets of paper on my desk. “What’s this?” I said.

“It’s my business plan. I’ve decided to make the big leap and go off on my own. There’s a fellow at the firm who wants to join me. The idea is that we’ll be 50-50 partners. I’ve been thinking about it for a long time. I’ll be 40 next year. I feel like I’d better do it now, or else I never will.”

“Why do you want to do it at all?” I asked.

“I’ve been with the same firm for 10 years,” Arnie said. “I have some frustrations that I know will never be resolved. I’m strong technically and I’m also pretty good at sales, but since I’m not one of the original crew, I know I’ll never be treated like one of them.”

“But why right now?” I asked.

Arnie grinned. “I made a contact a couple of months ago, and it’s going to turn into a pretty big job. If I bring it to my firm, it won’t make much of a difference, but it will support me for the first six months on my own even if we charge a little less than the market rate. So it’s a good time to make the split.”

“I see a cash contribution from you in the business plan, but none from your partner.”

“Warren doesn’t have much in the way of savings. Neither of us will be able to take a draw for a while, so he’s using his cash to live on. We’ve worked together for two years, and the chemistry is good. Warren is a productive worker. He could use a little more experience in some areas. …”

“Sounds like a bit of a follower,” I said. “How is he on the sales side?”

“He’s more of a technical guy.”

“Looking at the business plan, your revenues start about one month after you set up the business and they increase dramatically six months later.”

“That’s right. I’m projecting a constant flow of work starting around then. We’ll need the first little while just to let people know we’re in business.”

“How are you going to do that?” I asked.

“The usual,” Arnie said. “We’ll have a couple of wine and cheese parties at our office. I’ll take everyone I ever met out to lunch. There’s a lot of work out there, if you price it right. I’m sure we’ll get our share.”

“I see the plan goes for 24 months. What happens after that?”

“Probably more of the same. It’s hard to project out past a couple of years.”

“I have a couple of areas of concern,” I said. “Your business plan shows revenues and expenses, but no balance sheet. You’ll need furniture and equipment. Usually it is much cheaper to buy that stuff rather than rent or lease it, but you don’t seem to have planned for that. You’ll want to begin with a bank line of credit, even if it’s secured by personal assets in the beginning. The cash receivables you project may come in later than you expect. You should redo the projections based on cash flows in and out — not income statements. That means you’ll reflect asset purchases as a cash outflow; and receivables collected, shareholder advances to the company and bank loans as a cash inflow.

“I’d like to see a much stronger focus on marketing in the business plan,” I continued. “You’ve mentioned low prices a couple of times –“

” — Just while we get started,” Arnie said.

“Yes, but once you begin to sell yourself as a discounter it’s difficult to charge full price. You need to think about how you intend to position yourself in the marketplace, and that shouldn’t be as a low cost producer. I’d also like you to rethink the arrangement with your future partner. If he’s not going to carry the full financial burden of the partnership, he shouldn’t get 50 per cent ownership. He might start as an employee or as a minority partner. He shouldn’t be subsidized by you.

“Also you should consider if he’s the right person to begin the company with. Once he’s in, you can assume he’ll be there forever, and I think you should feel that your partner brings you more than just labour and an ability to get along. And,” I continued, “I think you might subject the whole idea to a tough reconsideration. I just don’t want you to go into business because you have some problems and you see a decent job coming along. I’d like to feel that going off on your own was more inevitable than that. You need to take your initial decisions very seriously. After all, they will have an important impact on the next 20 years of your life.”CCE

Hank T. Bulmash, C.A., MBA is a principal in Bulmash Cullemore chartered accountants of Toronto.