Sunday, March 2, 2014

Buying a Home Based Business Part 1: What Is a Home Based Business?

image This article was written by Mike Capsuto, SCORE Orange County Business Mentor

People are selling their home based businesses for a variety of reasons – lack of time, wanting to retire, health issues, or just to cash out. This provides many opportunities for the entrepreneur who wishes to leave the corporate world and be their own boss. The asking price for these businesses ranges from less than a few thousand dollars to over a million dollars.

The advantages of buying an existing business are operations can start from the first day; there are existing customers and vendors; immediate cash flow from receivables and easier financing opportunities. Disadvantages are a lack of knowledge transfer and a lack of trust by suppliers and customers given to the new owners. These can be remedied by having a well planned transition period with the existing owner.

There are many misconceptions to what defines a home based business. This article will address that question. Subsequent articles will address the following questions:

• What is the right business for me?

• Where can one find a home based business for sale?

• How does one set a value to a business?

• What are the sources for financing?

Information in this article is provided for general educational use only. No responsibility is assumed for any problems associated with the use of its content. One should seek the advice of their financial and legal counsel in every step of purchasing a business.

What is a Home Based Business?

A home-based business is any enterprise for which the principal administrative and managerial activities take place within an individual's personal residence. Only a portion of the residence has to be used as long as there is no other fixed location where one can conduct substantial administrative or management activities of your trade or business. The following are a few examples that meet the criteria of administrative or managerial activities:

• Billing customers, clients, or patients.

• Keeping books and records.

• Ordering supplies.

• Setting up appointments.

• Writing reports.

• Processing orders and managing inventory

In addition to location, home businesses are usually defined by having a very small number of employees. Home businesses generally lack street frontage, customer parking and advertising signs. Such activities are mostly prohibited by residential zoning regulations.

One does not need to meet customers or clients at their home in order to be classified as a home based business as illustrated by the following examples:

• A self-employed plumber spends most of the time at customers' homes and offices installing and repairing plumbing. There is a small office at home that is used regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. This business meets the definition of a home based business.

• A second example is a of a home-based business is that of a self-employed anesthesiologist who spends the majority of time administering anesthesia and postoperative care in local hospitals. The doctor uses a room at home to conduct the following activities.

• Contacting patients, surgeons, and hospitals regarding scheduling.

• Preparing for treatments and presentations.

• Maintaining billing records and patient logs.

• Satisfying continuing medical education requirements.

• Reading medical journals and books.

This medical practice meets the definition of a home based business.

• A third example is a web based retailer that sells computer products from their online store. The products are sent to a local warehouse where it is distributed to buyers. The owner uses part of the home to:

• Process orders and billing customers.

• Tracking and ordering inventory

• Bookkeeping

This also meets the definition of a home based business.

The IRS has specific requirements that must be met in order to deduct part of your home's cost and expenses for tax purposes. It's important to understand the rules, compute the deductions correctly, and keep accurate records to substantiate those deductions. Contact your tax adviser or refer to IRS Publication 587 at http://irs.gov/ for guidance.

Having a home based business creates the personal satisfaction that comes from following your own vision, with income only limited by ones potential.

(Editor’s Note: Watch for Part 2 of Mr. Capsuto’s article in next month’s newsletter)