10 Steps to Starting a Business
Written By: Resource Nation
Step 1: Assess Your Strengths and Your Business Idea
Let’s face it, we’re not all cut from the same cloth. Some of us are great at math, some are great with vocabulary, and some are just ok at both. Knowing your strengths and weaknesses can really help you narrow down what type of business you should devote time and effort into. Self-assessment is critical in the beginning stages of starting a business.
Being an entrepreneur involves risk! You must take a risk, with your money and time, in order to be successful. Nobody is going to invest their time for you and nobody is going to just hand you the money. If you are not a risk-taker, then entrepreneurship may not be for you. This is why the self-assessment portion is so critical…you may find that the risk is not worth the reward; or, you may find the exact opposite. This is when things get exciting!
How to assess your strengths
This exercise is meant to provoke thought. You may already have a business idea; you may already know your strengths. But, you may not have thought about how to apply your strengths to a sound business plan or how to structure your future business. So, take a little bit of time and walk through the following steps.
Answer the following questions from three perspectives: Personal/Hobbies, Professional and Financial:
- What makes you happy? Sad?
- What do you enjoy doing?
- What are a couple of things that you are really good at?
- What do you have the most experience doing?
List goals (personal, financial, professional):
- Short-term goals: Goals for the next 3-12 months
- Mid-term goals: Goals for the next 1-3 years
- Long-term goals: Goals for the next 3-6 years
By now you should start to see some sort of pattern. You should also be narrowing down some sort of business idea and/or path forward. You should also start to develop some sort of ideas, based on your strengths and goals, on how you want to conduct your business (e.g., work from home, retail store, part-time, client interaction, etc…).
Assess your business idea
Now, let’s take a look at your business idea. Most people have some type of business idea that they think is wonderful and that they think could be the next Nike or Microsoft. But few people actually take the time to sit back and think about the reality of starting a business or the feasibility of their idea. The most important question to answer in this stage is, “Can this business make money?”
It’s very important not only to know yourself and what kind of business you think you would be good at, but also you need to know that your business can actually make money; enough money to support both the business and your personal expenses (i.e. house payment, bills, food, etc…).
This phase of assessment will force you to look outside yourself. You must look at similar businesses in your desired industry. Answer the following questions to the best of your ability:
• Is there a growing need/desire for the products or services that you want to sell?
• How much competition is really out there?
• Are similar businesses in my desired industry growing, slowing, or stagnating?
• Are similar businesses going out of business?
• Can I offer something that my competitors don’t? (e.g., better prices/service, new technology or way of doing things)
• Who is my target market/customer? What is the status of their economical situation, as a whole? (Macro-level)
If you find that the answers to the questions above are largely negative, then you may wish to reconsider your business idea. However, if the answers are largely positive, then you may have just found a solid business idea that can be monetized.
Tying it all together
By now you should have a good idea of what your strengths and weaknesses are and a general idea of how feasible your business idea is. You should have a general idea of how you want to work and what type of business structure you want to run. You may have even come to the conclusion that starting a business of your own will prove too difficult and that buying an existing business (link to buying a business article) is a better option for you.
Regardless of what type of business you’ve decided to start, or if you’ve decided to purchase an existing business, now is the time to take it to the next level. It’s time to start thinking about creating a plan, a roadmap for the next 6-12 months of your business. Take all of the information you’ve gathered in this stage, both about yourself and your business idea, and apply it to the next stage.
Remember, becoming an entrepreneur takes some risk tolerance, it requires you to be a self-starter, you have to be able to deal with uncertainty and have self-discipline. Most of all, you have to be willing to work hard. If you’re ready, then move on to create that business plan.
Why create a business plan?
Creating a business plan can be one of the most eye-opening times for you as an entrepreneur. Many of you will find that this stage is fun and easy, while others will find this stage hard and painful. Regardless of which group you fall into, this is a necessary stage for most businesses.
There are several reasons to create a business plan, below are just a few of these reasons:
1. To map out the feasibility of your business.
2. To present to potential financial backers when you are looking for funding.
3. To get a good idea of what kind of costs you can expect in the start-up phase and how long it will take to break-even on those costs.
4. To do a mock-run of your business on paper.
Sometimes it’s easier to think of writing a business plan as doing homework before the big test. As you probably found out early in grade school, if you properly prepare for a test, then the test was usually pretty easy. The same concept can apply to creating a business plan. Doing your homework, thoroughly and completely, before you launch a business can make the start-up phase of your business go much smoother and easier. It’s essentially another form of an insurance policy; you are insuring yourself against potential failure and you increase the chances of success by fleshing out many of the unknowns.
Major components of a good business plan
A good business plan will be:
- Well thought out
- Concise, clear, and structured properly
- Free of fluff and baseless assumptions
- An illustration of your abilities as a manager
- A roadmap to show that your business can turn a profit
All of this is especially true if you are seeking funding from a bank or funding from other sources, such as Angel Investors or Venture Capitalists (VC). Outside investors will want to see that the cash flow of your business will exceed the expenses and have enough money left over to allow the business to grow. Many times you will find that a Small Business Administration (SBA) loan is right for you, while at other times you may find that you need more than an SBA loan can provide…so, you must look towards more non-traditional sources like those mentioned above, Angels and VCs.
Regardless of your need for a plan, there are some major components that all people will want to see and read, even if you aren’t seeking outside funding you should still have these components. Below are some standard components of a business plan. You may find that you need to add more components; the ones below are really considered the minimum necessary.
1. Executive Summary – This section is meant to summarize the most important aspects of the plan. This is a concise overview of the business plan outlining your general idea and concept. This should not be more than two typed pages and should be written last; after the entire plan is complete. The idea here is that someone can read the Executive Summary and get a good feel for you, the business, and the plan.
2. Business/Company Description – This section describes the general make-up of your business. You should outline the history, goals and mission of your business, an in-depth description of your business and the industry, what type of business model you will operate, major assets, the present outlook and future possibilities of your business. After reading this section, people should fully understand what you are trying to accomplish and the industry you plan to operate within.
3. Product/Service Description – This section should fully outline the products or services you plan to market and sell. Make it clear how you plan to monetize this business.
4. Market Analysis – This is where you demonstrate that you fully understand the market that you are about to enter. You should outline macro-level market trends and micro-level analysis. You should write about your customers and the need that your business will serve. This section should cover your competition and how you expect to provide products or services that are better/faster/cheaper. You should really take the time to complete a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. Cite all sources of your information.
5. Strategy and Implementation – This is where you will discuss a strategy for implementing your marketing efforts and how you will get your products or services to your customers. This is typically where you will discuss your marketing goals and a timeline for implementation. You should be specific here and discuss who is responsible for these items, the budget that is allotted towards these items, and a timeframe.
6. Management Team – This section should include the background and experience of any key members of the management team. This section may only contain info about you, which is fine, but it needs to be included. Discuss the management team’s ability to run the proposed business and highlight key points of experience.
7. Financials – This should outline at least the first 2 years of financials for the proposed business. You should include a profit and loss statement, cash flow, income statement, balance sheet, break-even analysis, return on investment (ROI), explanation of business cost and profit assumptions (to back up numbers). This section will really help you flesh out how much cash you will need to start the business and when you can expect to turn a profit.
Different options for crafting your plan
Many people start out writing the business plans themselves, without much outside help. They will either buy business plan software and/or follow an outline of a business plan that they found online or received from a friend/acquaintance. Many times this strategy is fine and it suits the entrepreneur’s needs. However, many times people get frustrated and find the process more difficult than originally thought or they find that most of the information they need is not readily available.
We recommend a multi-pronged approach. We recommend that you do the first draft yourself. This is so that you get a good understanding of the market and the business feasibility. Either find a good template to work from or purchase some business plan software. After you’ve taken a first cut at it, we recommend that you seek outside help/counsel. Whether that help is from a trusted friend, family member, of professional, you should always get the opinion and review of an experienced person who is as unbiased as possible.
If you are seeking funding from a bank, the SBA, Angel Investors, or VCs, you should definitely seek the help of a professional. Many times you will find that a professional is reasonably priced for the amount of knowledge and effort you get. You cannot afford to have a sub-par business plan when seeking funding. You should talk with several professional business plan services; get different opinions and price quotes. See if you get along with the person and if you trust them. Many times, these same companies that can help you craft a solid business plan can introduce you to other funding options that you may not have considered or heard about.
A business plan is only as good as the effort put into it. Take the time to craft a solid business plan. Map out your business and determine the feasibility before you sink a lot of money and effort into it. Once you’ve written a solid plan, it’s time to get the financing you need.
Financing Your Dream
Financing your start-up business can prove to be one of the most stressful times in actually getting your business off the ground. There are few businesses that can be started with little or no money. The fact is that you must have some sort of financing in place in order to launch your business. This section is designed to outline the different financing options and to discuss the pros and cons of each option.
Many different financing options
Below is a list of the major financing options that most entrepreneurs have to choose from:
• Bootstrapping – Personal savings, credit cards, and other forms of personal funds
• Friends and Family
• Debt Financing
• Angel Investors
• Venture Capital
Let’s dig into each of these areas a little further.
Bootstrapping is one of the most common methods used to finance a new business. This is where an entrepreneur uses his/her own funds to finance their business. These funds can come from a variety of sources, such as personal savings, credit cards, home equity lines of credit, or by selling off other assets to free up needed cash. This is by far the easiest way to get money; however, it can also be the riskiest.
• Nobody will be looking over your shoulder and criticizing your business’s financial decisions.
• You maintain full control of the company because you don’t have to give up partial control in order to receive financing.
• You can get the business up-and-running much quicker since you don’t have to rely on outside funding.
• If the business fails, then 1) you risk losing your personal savings or 2) you risk having to pay back credit card and/or home equity line of credit money on business expenses that you no longer reap any rewards from.
• Oftentimes, using personal funds inhibits a business’s ability to grow since funds are usually limited.
Friends and Family
This funding option can be tricky. Many of us know a friend or family member who has a good amount of money set aside. It’s often very tempting to try and talk friends and family into financing your business. You must walk a tight rope when going this route; you don’t want to exploit the trust these people have in you, but you want to get the financing you need for your business. It can be a slippery slope if the business goes downhill…these people are some of your closest allies, but borrowing funds from them can put a strain on your relationship. Typically you offer to repay these people over a given amount of time or you give them equity in your company.
• No heavy duty contracts to sign. Many times these funds come without a contract at all. You should still draw up a simple contract to make both parties feel more comfortable.
• Flexible loan terms. Your friends and family are usually willing to defer loan payments until you can actually afford them.
• Availability of funds. Usually these types of funds are readily available.
• If you cannot pay back the funds or if the business fails, then this can put a serious strain on your relationship.
• You probably cannot tap this source for more funds if you need them; usually a limited amount of funds available.
This funding option is usually aimed at very specific types of businesses or business owners. Grant money is often set aside for businesses who fill a specific need either through the products or services (e.g., technology or science) or through the demographic of the business owner (e.g., minority, veteran, woman). Grants are usually aimed at furthering existing, specific businesses…not for starting up a new business.
• Free money – Typically no interest or payback terms
• Can be very difficult to get. People are often misled by the ease of getting a grant (usually by someone offering to help them navigate the process for a fee). Generally speaking, getting a grant for a new, start-up business is very difficult if not impossible.
• Tight restrictions on how you can use the money and what the money is to be allotted towards.
• Application process can be very intimidating and competitive.
This type of financing requires a business owner to get loans from an organization or institution in order to launch the business. Getting a loan for a start-up business can prove to be a very difficult and involved process. Banks typically won’t lend money to brand new start-ups, which forces budding entrepreneurs to look towards SBA backed loans. The SBA loan process can be difficult and is best navigated with the help of a professional. It is best to talk with several banks and loan officers in order to compare services and rates.
• Can get favorable or lengthy pay-back terms. This depends upon the source of the loan, but generally speaking you can get a repayment term of 5-10 years.
• Don’t have to give up equity in the business to get a loan, just have to make timely payments.
• Can be difficult to get. Most banks require at least 2-years of operational history in order to approve a loan.
• Loan packages will be scrutinized very closely to determine the business’s ability to repay the loan. You must have a solid business plan and be able to back-up the numbers. Loan officers will look for market analysis, projected sales/profit, and explanations of where you found your research.
• You may have to provide collateral for the loan such as your home or other tangible assets.
• You will have to pay interest on the loan.
An angel investor is typically an affluent individual, or group, who provides financing for a business start-up. This financing is usually exchanged for equity/ownership in the business (equity financing). Angels typically bear a lot of risk when investing in a start-up business; therefore they require a high rate of return. This return is normally given back to the Angels when the business achieves its exit plan (i.e., through an initial public offering or an acquisition by a larger company). Angels are typically not interested in providing small sums of money and prefer to invest sums of $1MM and up. Angels are typically looking for a return on investment (ROI) of 10 times or more when objectives are reached.
• No need to make monthly payments to Angel Investors.
• Angels are typically very experience business men and women who bring more than just money to the table. They offer an invaluable pool of resources, advice, contacts, and experience to the business owner.
• Angels understand the business cycle and they know that it takes years to achieve the stated business’s exit plan.
• Angels only invest in businesses with significant upside.
• Angels will do a very in-depth analysis of your business plan and management team. These items must be up to par or you will find it very difficult to get money from an Angel.
• Angel investors are very hard to find. If you do find them, then it can be difficult to get in front of them to make your pitch. If you get the chance to make your pitch, then it better be good…because you most likely won’t get a second chance.
• You give up equity in your company.
• You will be required to provide financial and business reporting on a regular basis to Angels. This can cause stress and can take time away from other duties.
Venture capital (VC) is a type of private equity aimed at providing businesses with the needed funds for future growth. VC money is typically exchanged for a certain amount of ownership in the company (equity financing). There are venture capitalists who invest their own money into businesses and there are venture capital funds, which are pooled investment funds (from various sources) and are professionally managed.
Many budding entrepreneurs misunderstand VC funding and loosely throw around the term “VC”. In reality, VC funding is VERY hard to get. VC firms only want to invest in large projects that have to potential to be huge (e.g., they want to invest $10MM into a business that can be taken to $100MM++). Also, VCs typically will not invest in a brand new start-up business. VCs prefer that a business has already gotten through the start-up phase and is ready to enter the growth phase. VC firms may look at 1000 deals in a year, but only choose to fund 10. That’s right, about 1% of deals that go in front of VCs get funded. Of this 1%, VCs are looking to hit a home run with 1-2 of them. This home run can be very profitable for the firm and justifies additional expenditures in other deals.
• VCs have the money, expertise, and resources to help take your business to the next level and beyond.
• VCs typically have access to millions of dollars in available funds.
• VCs will typically require that you give up anywhere from 40-60% ownership of your business.
• They may require that you remove key managers and replace them with people of the VC’s choosing.
• They prefer to invest in businesses that are established and well past the start-up phase. They want to invest in a business that is ready for fast growth, not a business that needs two years before it’s ready to sell products.
• VCs will put your business plan under a microscope for the highest level of scrutiny you can imagine. You must have every part of your plan dialed-in and justified. They will want to see an aggressive growth strategy and a clearly defined exit plan.
Step 4 Forming Legal Entity
Forming a legal entity for your business is a great idea. A properly structured legal entity can offer your business certain protections from liabilities and other matters. It is best to choose a legal entity early in the start-up process so that you don’t have to worry about it later and so that you can receive the benefits from the beginning.
In forming an entity, you can choose from a variety of structures: an S-corporation, a C-corporation, a limited liability company (“LLC”), a sole proprietorship, a limited partnership, or a general partnership. However, almost all businesses now use either the corporate or LLC form. In making this choice, you should consider a number of tax and non-tax issues. Without knowing more about the specific plans and goals, it is difficult to convey everything that you should consider, therefore, we strongly recommend that you consult the advice of a professional; either a qualified lawyer, CPA or both. It’s always good to talk with several different individuals to get different points of view and opinions. The following paragraphs are a general introduction to the different types of issues to consider with the various forms and are greatly oversimplified.
1. Limited Liability.
Corporations and LLCs both have limited liability, which means that the owners are generally not personally responsible for the obligations and liabilities of the entity. The exceptions to this rule are the same for corporations and LLCs: Owners are personally liable (a) if they act as guarantor of the entity’s debt, (b) if there is alter ego liability (i.e., creditors pierce the corporate veil), or (c) if they order, authorize or participate in company wrongdoing. The primary difference is that LLCs usually do not require annual meetings and other corporate formalities, which eliminates one factor used to find alter ego liability.
2. Management and Control.
The control structure is important externally (for predictability and ease of transacting business with third parties) and internally (to govern the relationship among the owners and management). Generally, corporations have a highly centralized management structure. The shareholders elect the board (oversight and strategic decision-making) and the board appoints the officers (day-to-day control). The shareholders themselves may or may not be involved in holding management roles. This formal corporate structure is time tested and easily accepted by third parties in most business transactions. On the other hand, an LLC has almost total flexibility in its control structure. An LLC may be member-managed, which basically means its members exercise direct control. Alternatively, an LLC may be manager-managed, which means that one or more managers exercise the control. If manager-managed, it can be very loosely structured or, less frequently, it can be structured just like a corporation with directors and officers. Since LLCs are relatively new, they are less predictable in the business and legal world, and third parties may not be as readily willing to accept certain LLC management actions.
3. Cost and Complexity.
At the simplest level, which costs most depends on the circumstances. As a very general rule, corporations cost less in legal and accounting fees to initially organize, but cost more to maintain over time. This is because LLCs are more flexible in their applicable internal rules, which often results in more upfront analysis and preparation; whereas simple corporations are generally more predictable and consistent. The reason that simple LLCs generally cost less to maintain is because LLCs generally do not require formal shareholder and board meetings and minutes, and they do not require separate taxable entity tax returns. However, when corporations introduce voting restrictions, multiple classes of stock, etc., they can quickly become more complex than LLCs to form. Conversely, when new members are added to LLCs, the costs of amending or restating the Operating Agreement can be more than the annual corporate formality costs. In either case, buy sell agreements should be created and generally cost the same for both corporations and LLCs.
4. Default Rules.
For both corporations and LLCs, state laws are set up to provide “defaults” if the Articles or other documents do not express certain rules. For example, unless specified otherwise in the Articles or written agreement (a) the voting and inspection rights of LLC members are legally presumed to be nontransferable without the majority consent of the other members; whereas (b) for corporations, all of the rights of ownership are presumed to be transferable and no consent of the other shareholders is required. Because corporations have been around longer, many businesspersons are familiar with the corporate default rules, whereas the default rules for LLCs may create some surprises. This is the reason most business attorneys create long LLC Operating Agreements – so that the default rules are largely covered in the contract and the members are not forced to refer to the applicable statutes to understand their rights and obligations.
5. Tax Issues.
Tax issues are very complex and important, so each founder should consult with his own independent tax advisor. However, at the broadest level, there are four tax choices available – to be taxed as a partnership if there are at least two owners, a sole proprietorship if there is one owner, a C Corporation, or an S Corporation. Assuming qualification under the Subchapter S rules, (a) LLCs can elect to be taxed under any of these alternatives, and (b) corporations can elect to be taxed as either a C Corporation or an S Corporation. An entity can elect Subchapter S status only if there are less than 75 shareholders, the shareholders are individuals or certain trusts, the shareholders are U.S. citizens or resident aliens, and there is only one class of stock. Many operating businesses that select LLC status over corporate status do so for tax purposes because they cannot qualify as an S corporation.
6. Capital Contributions.
If all of the founders are contributing cash, this is not an issue for you. Otherwise, you should be aware that an LLC is more flexible than a corporation on what can be legally contributed in exchange for the ownership interest. For an LLC, you can purchase membership interests in exchange for money, property, services rendered or a binding commitment to contribute any of these. However, corporate law generally prohibits the issuance of stock in exchange for a commitment to contribute property or services, and only permits the issuance for stock in exchange for a promissory note if the note is adequately secured (by collateral other than the stock) or if the note is issued by an employee in connection with a stock purchase or stock option plan.
There will definitely be other factors that are relevant to your particular situation, and nothing in this article is intended to address any specific legal inquiry or substitute for independent legal advice. Since each situation depends on its own unique circumstances, the bottom line is to have your particular business situation evaluated by professionals before you form the company, rather than relying on the advice of non-professionals.
Don’t let the formation of a legal entity intimidate you; just understand the differences and, with the assistance of your professional advisor, pick the right entity for you and your situation. After you are on the road to getting an entity set-up, it is time to start thinking about the look and feel of your business; and it’s time to start thinking about how to brand your company.
Step 5 Branding Your Business
Creating a brand for your new business can be one of the most important things you do that can add lasting value. A strong brand adds a whole new dimension of value to your business. Generally speaking, people associate a strong brand with quality. When you go shopping at the grocery store you are more likely to purchase Coca Cola as opposed to the generic soda because of the brand name associated with Coca Cola. The same concept applies to just about every industry out there.
A brand is a collection of names, images, and ideas that personify your services, products, or business. Some of these items are your business name, logo, web site design, slogan…all of these contribute to establishing your brand. These should be a cohesive message aimed at creating customer loyalty. Ultimately you want your customers to prophesize your brand message to all of their friends and family.
Below are some of the main items associated with a business brand. All of these items should be approached with your target market in mind.
Name, Slogan, and Website Domain
Choose your company name carefully and strategically.
Business Logo and Image
Your business should have some sort of memorable logo; you want it to stick out in people’s minds.
Getting the right help
Don’t skimp when it comes to getting a good logo/website designed or when hiring someone to print your business cards. You don’t want your high school aged nephew to design the website that will represent the face of your business to customers. People expect to see professional work when they visit your site or when they see your business card, don’t turn them off immediately by having low-quality work. Hire a reputable designer; someone with experience and a portfolio of example work. There are lots of great companies out there who are very affordable. Talk with several different companies and individuals; look at their portfolios and compare prices/services. Be sure and convey to them exactly what you want; tell them if you don’t like the direction they’re taking you. Most of all, be sure and have a coordinated brand message aimed at your target market.
Step 6 Marketing a Business
After you’ve established your business entity and brand, it’s all about marketing! Marketing your business correctly, in the right places, can be a boon to your bottom line. If you don’t market your business, in some fashion, then you will not attract the volume of sales leads that you need to be successful.
Marketing is all about getting your message in front of your target audience and providing them with a compelling reason to contact you. Your target market should be clearly defined at this point (if not, then you should go back to the planning stage and define your target).
There are an infinite number of ways to market your business. There are also ways to market your business which are proven to be more effective in attracting customers and which easier on the wallet. Below we will discuss several effective, and proven, marketing strategies.
The shift to marketing via the internet is in full swing. Money is flowing out of traditional ad space in favor of online marketing. Online marketing can be highly effective in pinpoint targeting your customers and in keeping costs low.
Email marketing is one of the most cost-effective ways to market your business. Over the years this practice has been abused, which has led to the implementation of numerous restrictions.
Step 7 Selling Your Product
In the beginning stages of your business you may discover that finding qualified leads is difficult and time consuming. Therefore, you have to rely on more aggressive tactics such as prospecting and cold-calling. Before you begin the process of reaching out to your target market, you should outline how you want to communicate your message to people. You should have a good idea of what points you want to get across to potential customers and how you will spin your pitch so that they see value in your products or services. Below are some general guidelines for succeeding with the sales process.
Step 8 Business Organization
Many entrepreneurs fail to properly organize their businesses before they actually get up and running; this can prove to be a costly mistake. You want to set-up your business organization as early in the process as possible so that when you get too busy with the actual running of your business you won’t have to stop and worry about setting up the foundation.
For the purpose of this article, business organization refers to setting up all of the necessary back end systems so that your business can operate efficiently. The most common organization is in the form of accounting, bookkeeping, banking, IT, securing office space, business insurance, and accepting credit card payments. It is important to address these items early so that you have the proper time to dedicate to each area and to talk with multiple companies so that you can compare services and prices.
Step 9 Business Employees
Many businesses start off with just the owner and maybe a couple of key partners. However, many businesses need employees right off-the-bat. Finding quality employees who are trustworthy, qualified, and who represent your company well can be difficult. Fortunately, there are many options out there where you can find the help you need.
This article focuses on how to find the right employee, what type of employee is right for you (i.e., 1099 vs. employee), how to get the help you need, and necessary areas to address when hiring employees (e.g., setting up payroll and taxes).
Step 10 Business Efficiency
OK, so you’ve gotten through the start-up maze and you are now running your business day-to-day. Now your focus should be on running as efficiently as possible, improving your systems, and adding profit to the bottom line. There are many challenges that will present themselves on a daily basis; this article will focus on how to deal with some of those challenges and how to stay positive and focused.