1. Weigh up the risk

If, like many other Australians today, you are thinking of starting up a business or buying an existing business, with a redundancy or superannuation lump sum cheque, you should first take stock of your assets. Be aware that only one in five small businesses survive to celebrate their fifth anniversary and without careful asset planning, you could be placing at risk everything you have accumulated.

2. Create a safety net

Before setting up the business, list the assets you do not want to put at risk, such as your home, car and enough of your capital to provide a safety net if your venture does not succeed. These assets should be quarantined from any potential business liability by placing them in the name of your spouse or in the name of a separate trust or company. If the spouse holds the assets, he or she should not become a director of the Business Company, should never sign personal guarantees and should never allow the assets to be used as security.

3. Do a feasibility test

A useful measurement of the feasibility of a business is to evaluate living expenses against the capital requirements of the business. For example, assume that your annual living expenses are $45,000 gross and you need to invest $120,000 in the business. Write down the return you could achieve on $120,000 in a secure investment – say, a bank term deposit or a debenture. A rate of 7.0 percent would yield $8,400. At a minimum, the business should be able to return to you an amount that is equal to the combined total of your cost of living expenses plus the return on $120,000 if you were to invest it. Therefore, in our example, the business would need to provide you with a surplus revenue of at least $53,400 ($45,000 cost of living plus $8,400) to be financially worthwhile.

4. Measure the business

Is the business capable of producing your minimum profit requirement (which, in our example is $53,400). You can find the answer by calculating the average profit of the business as a percentage of its sales. Assume that the profit is 12 percent. To generate $53,400 a year, the business would have to achieve sales of $445,000 ($53,400 ÷ 12 percent = $445,000).

5. Test the concept

If you are planning to start a new business – for example as a consultant – put your concept to the test. Write out a one-page summary, nominating a scale of fees. Present your summary to a number of trusted contacts, whose profiles are similar to those of potential clients, to test their reaction. They may say they would not pay $100 an hour for the proposed service, but would pay $80. This test is likely to tell you whether there is a genuine market for the proposed business and whether the concept needs modifying.

6. Have a fallback position

Measure your capital resources against the time it will take to get the business established. You may calculate, for example, that it will take three months of marketing your services before you begin to earn an income. How much of your capital will this non-earning period eat up? Your objective is to determine how long you can afford to commit to the business before pulling the plug if it does not work. Set aside a portion of your capital to finance you through a job search in the event of business failure.

7. Check the figures

If you are planning to buy an established business, take a cynical view of the vendor’s turnover and profit claims. Insist that the vendor provide you with audited financial statements for the past three years. Enlist your accountant to go through the figures and give you a report. Make your own survey of the business, by observing its trading activities at different times on different days of the week and by taking discreet soundings of existing clients and suppliers.

8. Beware of liabilities

Closely examine the liabilities of the business, including taxes and mortgages. How much is outstanding? To whom is it owed? When is it due? What is the status of any franchise agreements, leases or hire purchases of plant or equipment? The vendor’s obligations must be clearly defined in the sales agreement so that you do not get any unpleasant surprises after taking over the business.

9. Work to a budget

Budgeting is a crucial ingredient in the formula for success. Calculate operating costs down to the last cent, including your own labour. Count the cost of overheads, materials, wages and rent, interest on loans, government charges and levies. A properly detailed budget will reveal what prices should be set to enable the business to pay all expenses and to yield a profit.

10. Take out insurance

Make provision in your budget for adequate insurance on yourself and the stock, plant and equipment in your business. Take independent, professional advice on which policies are most appropriate for your circumstances.