Top 5 Advantages of Starting Your

Starting a business is risky. It’s the reason why everyone doesn’t have one. It can require thousands of dollars of investment just to get off the ground. 9 out of 10 of all new businesses fail in the first year. Before any profit is made, things like product inventory, incorporation, advertising, employees, accounting, insurance, licenses, commercial space etc. have to be paid for.

Enter the internet..

The digital world has taken away a lot of the risk of starting the business of your dreams. There are still start-up expenses involved in the beginning but they are not nearly as high as starting a brick and mortar business. License and incorporation fees are going to have to be paid online or offline but most of the other expenses can be avoided in the early stages by starting with your online presence.

If it can be sold in a store it can be bought online and shipped to the customer’s home. At the very least it will add an additional revenue stream for the business. There are plenty of advantages to starting a but here are my top five.

1. There is no immediate need for full-time in-house employees.

What makes online business so powerful is its scalability; meaning you do a little bit of work for a greater result. With automation tools you can have a lot of your tedious data entry tasks done without you even thinking about it. With PayPal you can accept payments online through your website without you even knowing a credit card was entered.

If you are selling digital products that are to be downloaded then there is no need for pre-ordered inventory or commercial space, thus eliminating the cost of rent.

For when you actually need the assistance of a real human, sites like oDesk.com and Elance.com make it possible for you to outsource work to people on a for hire, monthly or even a full-time basis.

Things like insurance and security are needed for online as well as online but securing intellectual property stored online in the cloud is a lot less expensive than doing the same for merchandise in a store that is susceptible to theft or fire

2. You have the freedom to travel.

There is no need for a physical location in most cases so there is no need to stay in one place. If you need to pack up and move your company to another state where there is more opportunity, it can be as simple as packing up your laptop and accessories and leaving. With a physical ‘brick and mortar’ business, it would be a little more difficult to relocate. You will most likely be constrained to whatever lease agreement you may have in place.

As you know, business and tax laws vary from state to state. Having your operation online gives you the freedom to choose where you want your business to be incorporated. You would have to have some sort of address established in the state but it doesn’t have to an actual store. There are a few states who’s laws work best for the traveling internet entrepreneur. *I am not an accountant or a business lawyer so please consult one before getting started.*

3. The whole world has access to what you’ve got to offer.

You aren’t limited to your immediate geographical area anymore. You aren’t limited to ANY geographical area for that matter. Offering your products and services online opens your business offering up to the edges of the world. The internet doesn’t sleep and there are billions of people online looking for solutions to their problems, while YOU are sleeping.

4. You are at the fingertips of a growing online market.

The internet definitely isn’t going anywhere anytime soon as more and more people are gaining access to an internet connection or a smart phone every second. E-commerce is following the same trend as more and more people are becoming comfortable making purchases online and from their mobile devices. From a consumer’s standpoint, making purchases from the comfort of your own home can save you a lot of time, and for certain products, shame or embarrassment.

5. You can inexpensively test your market.

Not every brilliant idea translates into a consumable product or service. And as you know, the failure rate of new businesses is very high. Another advantage of starting a is the ability to gauge interest without actually having the product readily available for sale. One example of this that I’ve seen a lot is a preview or ‘beta’ page with a prototype of a product where people can sign up to ‘be the first to know’ when the product is made available. This can be done with a food product, a clothing line, an app, pretty much anything. It’s a great way to gauge interest before you go all in with a final product.

You don’t need $10,000 to start a business anymore..

There are hundreds of ways to make money online and frankly, who can afford NOT to open up shop to the billions of people on the internet. There are still a lot of traditional brick and mortar businesses that are not providing their products and services online, constraining themselves by business hours and management of on premise staff.

All you need is a website, a product or service and consistent potential-buyer traffic to that website. No permits, no city council meetings, no weather constraints and depending on where you live, no off duty police officer.

Recommended reads: ‘The Four Hour Work Week’ & ‘The $100 Startup’

Business Brokers – How to Choose the Right One

The vast majority of small businesses are sold without the assistance of business brokers.

But if you do decide the hire a broker, here are some suggestions on how to pick the right one and how to structure the agreement in your favor.

What Business Is The Broker Actually In?

In many states there is no training or certification needed to become a business broker. In other states, brokers are required to hold a real estate license.

In these states it’s common to find real estate agents that do business brokering as a side business. If you deal with a broker who is also a real estate agent, make sure that being a business broker is more than just his hobby.

You will pay a pretty penny for the broker’s expertise and experience – you should make sure they have that experience when it comes to selling businesses and not just experience selling houses.

Questions To Ask

If you hire a broker you will be working with them closely for months to come; they will have access to your most confidential business records; the amount of money you put in your pocket at closing will be influenced heavily by the quality of work they do.

Therefore, you absolutely must check them out.

Here are some questions you should ask any prospective broker before hiring him:

1. How long have you been a broker?
2. Have you ever owned a business?
3. How many businesses similar to mine have you helped sell?
4. Can I see a blank version of your Listing Agreement?
5. What percentage of you income comes from brokering and how much from real estate (If applicable)

Ask them to provide you with references from previous clients. Then, I suggest you do something very unusual: Actually call the broker’s references!
I know a lot of people ask for references just to see how the person will react when asked (and to see if they actuality have any). But you can learn a lot about the broker’s reliability and professionalism by talking to people who dealt with that broker when they were in the exact same spot you are in.

Business Broker Fees

There are two benefits a broker can provide the business seller. First, he can locate potential buyers while maintaining the seller’s confidentiality. And second, a broker will qualify these potential business buyers so the seller saves time by not having to deal with weak prospects.

The big negative of dealing with a business broker is his fee, which averages 10-12% of the sale price. This fee is charged to the seller.

There is also a minimum fee. A very small business will pay a flat amount, typically $8-$10,000, instead of the commission. For a business worth $50,000 this minimum fee actually works out to be a higher percentage than the 10-12% industry average. But as a matter of practice, brokers usually won’t be interested in your business unless the asking price is above $100,000.

These fees are the reason most business owners choose to sell their business themselves and rely on their lawyers and accountants for the professional assistance they need.

The Broker Agreement

If you decide to use a broker you’ll be asked to sign a broker agreement which will detail the his fees. If possible, have your agreement include the following clauses:

Timing of Payments – Have it written into the agreement that the broker’s fee will be paid at the time you receive the purchase price – not at the time the sale is closed. This way, if you finance part of the sale price over a number of years, you pay the business broker as you get the money, not all up front.

Length Of Agreement – Your listing agreement should be for a limited time. If the broker locates the buyer within that time he gets paid. Be careful of lengthy agreements that lock you in with one business broker for more than 6 months. If he doesn’t produce, you want to be able to try other options. A 6 month business broker agreement is the longest you should allow. However, because selling a business can be a lengthy process, 3 months is usually too little time for the broker to find the right buyer. Try to settle on something between 3 and 6 months. If after six months, you haven’t closed the deal but you think the broker has done a good job, you’re always free to extend the agreement. But you want to be free to decide on an extension 6 months from now, not today.

Broker’s Guarantee – Include a paragraph stating that if you find the buyer, you don’t have to pay the commission. Without this clause, the broker is usually paid no matter who locates the buyer. Before signing any listing agreement, it is best to have your attorney review it to make sure your interests are protected.

SEC Changes Course and Allows Business Brokers to Receive Commissions on Business Stock Sales

Prior to 1985, the SEC did not consider the sale of a business structured as a stock sale to be a sale of securities under the securities laws. This was known as the Sale of Business Doctrine. As a result, the penalties and rules that apply to securities sales did not apply to the sale of a business, and business brokers and merger and acquisition brokers were able to receive commissions in connections with those sales without being registered as a broker dealer. This changed in 1985 when the Supreme Court of the United States took the position that the sale of a business structured as a stock sale was indeed the sale of securities. As a result, business brokers and merger and acquisition brokers were prohibited from earning commissions in connection with those sales unless they were registered as a broker dealer. This created substantial implications for business brokers and mergers and acquisition brokers, especially where a transaction started out structured as a sale of assets and then during the course of negotiations, the transaction was restructured to be a sale of stock. In that case, business brokers and merger and acquisition brokers that were not registered as broker dealers were theoretically prohibited from earning a commission, simply because the structure of the transaction had changed. This result was often thought of as unfair in the industry.

The ABA task force on private placement broker dealers noted in its year 2000 final report that the broker dealer registration process involved significant costs as well as a regulatory model that is not the right size to accommodate the particular role played by business brokers in connection with the sale of a business. The requirement to register as a broker dealer is a lengthy process and there are substantial costs and fees, together with start up and first year expenses, including legal, accounting, and operating costs that can equal several hundred thousand dollars. Persons effecting one or several transactions a year simply cannot bear this financial burden. These firms do not hold customer funds or securities and generally they merely introduce the parties to one another and transmit documents between the parties. They do not participate in structuring or negotiating these transactions or otherwise advise the parties. Both buyers and sellers in this type of transaction are typically represented by legal counsel who can assist with due diligence, draft the transactional documents and advise their clients on structure, tax considerations and contractual provisions and there are remedies, both contractual and by operation of law, that are available to the parties in these types of transactions.

On January 31, 2014, the SEC changed its mind about these matters and issued a long awaited no action letter permitting certain merger and acquisition brokers to receive commissions in connection with the sale of a business even where the sale is structured as a stock sale.

Under the new interpretation, merger and acquisition brokers are permitted to facilitate acquisitions, mergers, business sales, and business combinations on behalf of buyers and sellers of privately-held companies and receive commissions in connection with the transaction. Moreover, the letter does not limit the amount or type of compensation that a merger and acquisition broker may receive, and it does not limit the size of the privately-held company. The letter also permits merger and acquisition brokers to advertise the sale of a privately-held company and include in such advertisements a description, general location and price range of the business.

For purposes of this letter ruling, a privately-held company is one that does not have any class of securities registered or required to be registered with the SEC under Section 12 of The Exchange Act or to which it is required to file periodic reports under Section 15(d) of The Exchange Act. Also the company must be a going concern and not a shell company.

As is so often the case in these matters, there is a catch. In this case, the catch is that the relief available under this no action letter is only available if the transaction satisfies ten (10) very specific conditions.

Those conditions are as follows:

1. The “merger and acquisition broker” must not have the ability to bind a party to a merger and acquisition transaction. A “mergers and acquisition broker” for the purpose of the letter is a person engaged in the business of effecting the securities transaction solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or business combination involving securities or assets of the company, to a buyer that will actively operate the company or the business with the assets of the acquired company.

2. The merger and acquisition broker must not directly or indirectly through any of its affiliates provide financing for the merger and acquisition transaction. The merger and acquisition broker may assist the purchaser in obtaining financing from an unaffiliated third party but they must comply with all applicable legal requirements and disclose to their client, in writing, the receipt of any compensation in connection with the financing.

3. The mergers and acquisition broker is prohibited from having custody, control or possession of or otherwise handling funds or securities issued or exchanged in connection with the merger and acquisition transaction or other securities transactions for the account of others. The merger and acquisition transaction cannot involve a public offering. Any offering of securities must be conducted in compliance with an applicable exemption from registration.

4. No party to a merger and acquisition transaction may be a shell company, other than a business combination related company.

5. If a merger and acquisition broker represents both the buyer and the seller in a transaction it must provide clear written disclosure of the potential conflict to the parties it represents and it must obtain written consent from both parties to the joint representation.

6. A merger and acquisition broker may only facilitate a merger and acquisition transaction with a group of buyers if the group is formed without the assistance of the merger and acquisition broker.

7. Buyers or a group of buyers in a merger and acquisition transaction must control and actively operate the business acquired with the assets of that business. In this regard, control will be considered to be achieved if the buyers have the power directly or indirectly to manage the company or the policies of the company through ownership of securities by contract or otherwise. Under the view of the SEC, a buyer could be considered to actively operate an acquired company simply by possessing the power to elect executive officers and approve annual budgets or by service as an executive or other executive manager, among other things. The necessary control will be presumed if at the completion of the transaction the buyer or group of buyers has the right to vote 25% or more of the class of voting securities; has the power to sell or direct the sale of 25% or more of a class of voting securities; or in the case of a partnership or limited liability company has the right to receive, upon dissolution 25% or more of the proceeds from the dissolution, or has contributed 5% or more of the capital to the transaction. In addition, the buyer or a group of buyers must actively operate the company or the business acquired with the assets of the company.

8. No merger and acquisition transaction can result in the transfer of interests to a passive buyer or a group of passive buyers.

9. Any securities received by the buyer in the merger and acquisition transaction will be restricted securities within the meaning of Rule 144(a)(3) of The Securities Act.

10. A merger and acquisition broker must meet the following conditions:

(a) The broker has not been barred from association with a broker dealer by the SEC or any state or self-regulatory organization.

(b) The broker must not be suspended from association with a broker dealer.

These rules make very clear who will be entitled to the exemption provided in the no action letter. As a result of these changes, business brokers and merger and acquisition brokers will no longer have to worry whether or not they will be able to receive their commission in the event that a transaction is ultimately cast as a stock purchase. The SEC’s actions in this instance are grounded in an understanding of the realities of the typical sale of business transaction. The truth is that those transactions are structured on the basis of accounting or tax considerations, and not on the application of federal securities laws. The sale of a business between sellers and buyers of privately-owned companies are qualitatively different in virtually every respect from traditional retail or institutional brokerage transactions.

We are encouraged that the SEC recognized these distinctions. This decision will clarify a tricky area of the law and provide appropriate relief to business brokers and mergers and acquisition brokers who work in this area.