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Spotlight on Walden // May 22, 2012

Before You Buy: Considerations for Future Small-Business Owners

Small businesses can make a big impact. In fact, according to the Small Business Administration’s Office of Advocacy, there are more than 27.5 million small businesses in the United States and small businesses accounted for 65% of the 15 million new jobs created between 1993 and 2009.

In recognition of National Small Business Week, Spotlight on Walden spoke with seasoned business and technology executive Dr. Bruce Huang to get his advice on what future entrepreneurs should know about purchasing a small business and how to determine if it is a good investment.

With more than 23 years of business experience, Dr. Huang specializes in general management, product strategy, and strategic marketing. He is a former IBM executive who has also started several of his own successful businesses. As a core faculty member in the School of Management’s Master of Business Administration (MBA) program, he has been providing his expertise to students for more than a decade.

Has there been an increase in small business startups over the last few years?

Over the past five years, we’ve seen an increase in people purchasing small businesses and franchises. Surprisingly, this can be attributed to the recession, as enterprising job seekers seize the opportunity to capitalize on their talents and become small-business owners. However, the truth is that investing in a small business can be risky, and it can be very difficult to turn a small business venture into a success. In fact, more than 50% of small businesses fail in the first five years. This means that the eager entrepreneur needs to ensure he is making a sound business decision before purchasing a small business.

What should potential small-business owners consider before making the decision to purchase a small business or franchise?

Potential business owners need to remember that their small business is a lifetime investment and also a lifetime liability. The first thing a person should ask before purchasing a small business is, “Do I have passion for this industry and am I willing to make a long-term commitment?” Secondly, research the potential business investment. Who are your customers? Where is your location? What are your assets, including equipment and supplies? Who are the people working for you? It’s critical to do your research and look at the value of the business.

What do you mean by “look at the value of the business”?

People often make rash decisions based on passion, and while having passion for the business is good, it can also cause people to make bad investment decisions. You need to think like a CFO in terms of cash flow and determine if the business is worth it. Determine the future cash flow that will be generated in the next five to 10 years, and, if it is less than the capital investment, decide if this is really a sound business investment. Understanding the net present value of future cash flows given inflation and interest on potential loans is very important in making the decision to purchase a small business or franchise.

For someone considering purchasing a small business or franchise, what role does higher education play in being a successful business owner?

By pursuing higher education programs such as Walden’s MBA program with a specialization in Entrepreneurship, professionals can gain valuable hands-on experience in launching a new business. The capstone project in the program is designed to give students an opportunity to develop and fine tune their business plan and new venture idea. Students can engage their colleagues and faculty members to gain new perspectives, explore innovative ideas, and build a diverse network that will no doubt prove to be beneficial should they actually make the decision to become a small-business owner.