Choose Your Business Structure, Part 1

Good morning. My name is Brian Hodak. I am a CPA and I work for Wamhoff Financial and Accounting. Thank you for joining us.

What I’d like talk about today involves starting a new business venture. As it happens, a friend of mine, we’ll name him DJ, is resolved to start his own bar business. So without mentioning real names and places, this and my following discussions will be something of a case study. I invite you to follow DJ and me as we work toward opening day.

So this session is the first in a series of seven (7) sessions that will track the developments in pursuit of opening the doors for DJ’s new business venture.

As it happens, I have over 30 years’ experience working with hundreds of small business clients, to include start-up, growing and mature businesses. Additionally, I’ve worked with dozens of restaurant and bar clients. In fact, my very first client was a restaurant and bar.

So let’s say DJ has over 20 years’ experience in the bar and restaurant business and knows virtually every aspect of service operations meaning, he can price and prepare food and drinks, he can attract and entertain customers and he can staff and manage the kitchen and front floor operations. Additionally, DJ identified a property, within a certain city’s limits, available for rent, he has secured a financing commitment for, say, $100,000 and he has a plan for his business in mind.

At this juncture, I should note that there are many non-for-profit organizations that could assist DJ in creating a formal business plan document. For instance, the SCORE Association is a nonprofit association comprised of thousands of volunteer business counselors throughout the United States.

SCORE members are trained to serve as counselors, advisors and mentors to aspiring entrepreneurs and business owners. Their services are offered at no fee, as a community service. For our purposes, let’s assume DJ decides against creating a formal business plan document.

Then, the first question I have is: Assuming the property is a suitable location for attracting customers, is the business location likely to be approved by any regulatory bodies that require licensing? The fact is, in the eyes of civic leaders, not all vacant commercial properties are considered suitable for all businesses. In particular, establishments that serve alcohol are subject to a higher level of civic scrutiny before all of the required licenses and permits are issued.

My first suggestion to DJ is for him to contact the appropriate city officials to learn if any city ordinance restricts issuing the licenses needed for operating a bar in the preferred location.

[Now, if DJ had opted to create a formal business plan, my role here would be to review and assess, and perhaps update, the plan…]

Once it is established that all of the required licenses and permits are attainable, the second question I have is: is the financing commitment sufficient for the business to reach a break-even point, the point before the business turns its first profit?

Now, if there’s a perfected means that can be used to answer the above question, I haven’t discovered it, yet. So, we’re going to create a break-even analysis report, identify any costs we can, and supplement our revenue figures and the unascertainable cost figures with reasonable assumptions.

For example, we can determine the monthly rent figures. We can reasonably estimate pre-opening construction, equipment and licensing costs. We can budget for staffing, taxes and most other costs like costs of sales. However, in a startup business, what cannot effectively forecast is revenues. But, we can determine is what revenue is needed to keep the bar in business. And, if DJ concludes that that revenue figure is attainable, then we can move ahead.

In a more formal arrangement, DJ would have started with a formal business plan document before he secured a financing commitment. One of the many objectives of a formal business plan is to identify the financing commitment needed to fund the new business. Here though, we have a financing commitment in place, so we’re working to determine how much business it will fund. While perhaps not the ideal situation, DJ is anxious to proceed.

In preparation for my next meeting with DJ, I prepared a not-all-inclusive checklist of forty-seven (47) steps that DJ will have to take before he can open the doors on his business. I will publish that checklist in my next session.

But, I am out of time for now. Next session, I will also begin to address some of the legal and tax consequences of business formations. Stay tuned…