Business Law 101 / Starting a New Business

By Albert L. Kelley

Let’s start with initial planning. While it is helpful to know what type of business you want to start, it is not always required. Many business people start as investors, buying an available business, even if they have no experience in that field. This is often seen in the restaurant industry. Although the restaurant industry is extremely complicated and has a high failure rate, many people believe they have the ability to succeed (According to a 2016 study, restaurants have the third failure rate among all sectors, and the main reason for failure is incompetence). For those willing to do the work and study the industry, knowledge of the industry is not required. You can often put clauses in the purchase agreement requiring the seller to assist with the transition and provide basic training.

If however you are planning on starting the business from scratch, failure to know the industry in advance is a recipe for failure. So this is where you make your first decisions: Do you want to start a business from scratch or buy an existing business? And do you know anything about the type of business you want to open?

There are countless issues to consider when making these initial decisions.

1. Do you want to open a particular type of business? If not, you can simply look for any business that is for sale. But if you want to open a particular type of business, your options may be too limited to do anything but open your own.

2. Does the business you want open already exist? If not, you have no choice but to open your own business.

3. If so, is the business for sale? If there are no businesses in your industry listed for sale, you may be required to start your own.

4. How much are you willing to invest? If you want to buy an existing business, how much will it cost? There is an old adage that everything is for sale at the right price, but the right price might be too high. Plus, there are operational costs that need to be added to the initial purchase price. If you are interested in starting your own business, there are start-up costs that must be considered. You must ensure that you have enough capital to cover the business through opening and preferably for the first several moths of operations until the business can cover its own costs. Aside from the issue of not being able to cover the cost of the business, there are legal reasons for this question. If a business is undercapitalized, the Courts can allow creditors or others with lawsuits against the business to pierce the corporate veil and sue the owners directly. More on that later.

5. Intangibles. With purchasing an existing business, you are also buying that business’ goodwill- the business’ reputation. The goodwill may be different than expected, resulting in a higher or lower value. There may be actions in the prior business that will not become apparent until later that will have an effect on the reputation. Also, if a person is willing to sell an existing business, you should wonder why they are willing to sell. Is the business not as successful as they imply? Are there unstated problems? Employee issues? Landlord issues? If starting your own business, how long will it take to build up goodwill? How will you attract new customers? How easy will it be to get financing?

As you can see, the initial planning is not simple. Yet, it need to be done, and done in detail. Otherwise, you may be throwing your investment money away.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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