Starting a Business

Explore Your Motivations and Skills

Goal: Decide that it’s worth the time and effort to move forward with this idea, or realize that starting a business is wrong for you.

Starting a business can be exciting and challenging, but it is usually the riskiest of the four entrepreneurial options. Success requires more than the desire to have your own business and be your own boss. This Step is designed to help you sort out your skills and interests, so that you make an informed decision.

Starting a business from scratch offers you the potential for great financial reward, but it could also mean that you’ll lose everything. It is a life-altering decision, especially if you have never started or run a business on your own before. And if you have spent most of your career as an employee in an organization, you should be doubly cautious to carefully examine your motivations and skills before you decide to do this.

Knowing who you are, what you want, and why you want it, will propel you in the right direction. At the very beginning of your thinking about this option, you want to do some self-examination to consider:

• Your assets (both personal and financial)

• Your lifestyle needs

• Your support systems

Assessing your motivations, skills, interests, assets and liabilities will help you get a clearer picture of why you’re drawn to this possibility, what you bring to it, and where you may want to look for experienced assistance.

It’s the rare person who has all of the skills and ability to successfully start and run a business, and you don’t want to underestimate what it takes to succeed in a business start-up. People who know themselves well (and know when to call on others for help) are the ones most likely to succeed at this.

Questions to ask:

• Why do I want to start my own business? Why am I considering starting a business from scratch rather than purchasing an ongoing business or buying a franchise? Why not work for someone else? What do I hope to gain, professionally and personally?

• Do I have all of the business skills, financial resources, and personal support to make a new business a success? What are my greatest strengths and assets? What are my most serious weaknesses and liabilities? What do I need to learn?

• Will I enjoy starting a business? Will the daily activities, challenges, and responsibilities satisfy me? Will I enjoy the lifestyle?

• How will my life be different? What will a typical day be like? A typical week? Will it be fun for me?

• How will my family, friends, business associates and others respond to this? What impact might this have on those relationships?

• What do I really know about starting a business? What reading or research have I done? Who have I talked to about this career option?

• Is this the right time in my life to pursue this option?

Define and Test Your Business Idea

Goal: You’ve described the business in a way that allows others to react to the idea.

Defining your business means more than saying that you want to sell mega widgets over the Internet, convert your home into a bed & breakfast, or start up an advertising agency. It means seeing your business idea from your customer’s point of view, not just yours. So, in addition to describing your product or service, you need to identify your target market, describe who your customers will be, and how you will meet their needs.

You also need to see what the competition is like in the field you intend to enter. If there is a lot of entrenched competition, you’ll need to be very clear on your competitive advantage. You will also need to lay out plainly why customers might move away from places where they already do business and buy from you. If there seems to be little competition, then ask yourself: why? Is this really a great untapped opportunity, or are there valid reasons why no one else is doing it? In either case, you must define what key success factors will make your business idea successful.

Your definition must also address product/service feasibility and the price/value relationship. Can it be done, and can you offer and sell it at a price people are willing to pay?

Finally, seek objective feedback from several sources to ensure that you don’t spend time, effort, and money on an idea that appeals to you but to no one else. Share your business definition with at least three experienced business people, preferably in the industry you’re exploring. (Be sure they sign a Non-Disclosure Agreement (NDA). Consider what they say seriously. Even if they’re not wild about it, the discussion can help you refine it.

As you proceed, always summarize your notes on your computer and save them. You’ll use them again when you start putting your plan together.

Questions to ask:

• What specifically are the products or services I intend to offer?

• What’s my target market (industries, organizations, locations, size, etc.) for these products or services?

• Who are my likely customers? What do they see as their needs? What will they see as the benefits of my products or services?

• Does my idea address a genuine need in the marketplace? Is there, or could there be, a demand for my product or service? Will the demand be strong enough to support a business?

• How crowded is the market? Are there many or few competitors? What will make my business unique? What will distinguish it from the competition?

• Have others tried this idea before? If so, what were the results and why?

• Is this product or service feasible? Given the anticipated costs involved, will I be able to deliver products or services at a competitive price? Will customers pay what I have to charge?

• Do I have the skills, knowledge and resources to make this business a success?

Create Your Board of Advisors

Goal: Line up three to six people who will provide straight advice on starting a business, especially in areas where your skills are less developed.

Most large organizations have a board of directors to help shape strategy and offer advice and counsel. Very few people starting a business are expert in all areas. As a result, many successful start-ups have a board of advisors, which enables the owner to tap into the know-how of people who have specialized knowledge, experience, and expertise, and are not afraid to express their honest opinions.

A board of advisors can increase your chances of success in two ways: by providing the professional advice you need to evaluate and establish a business, and by assisting in your transition to owner/operator.

Begin by identifying the kind of expertise you need, then find appropriate people to provide it. Make sure that you feel comfortable with the people you choose, as you will need to be forthright with them. And select people who will ask tough questions and openly oppose bad ideas.

You will need an attorney with start-up experience to help on business structure, licenses, contracts, copyrights, and liability issues. An experienced small business accountant can help you evaluate business strategies, cash flow projections, tax considerations, risks, revenue and expense tracking as well as insurance. You’ll also want advisors who run successful, non-competitive small businesses, particularly if they started them.

You may meet with your entire board of advisors occasionally, but you will generally call on them individually for specific advice in their area of specialty. Some of your advisors will be paid. You may trade out services with others, and some may be friends or acquaintances that you enlist for support as well as expertise. But choose wisely. Choose advisors whom you respect, trust, and will listen carefully to their advice and wisdom.

Questions to ask:

• Does the advisor have experience in an area where I need assistance?

• For advisors I do not know well, have I spoken with people who have worked with them to check out their skills and reputations?

• If the advisor charges fees, are they appropriate?

• Do I feel comfortable with the advisor? Will the person be objective, willing to say no to unsound ideas, and speak up about tough or critical issues?

• Which of the following specialties should I consider for my board of advisors?

• Accountant (experienced in business start-ups)

• Attorney (experienced in business start-ups)

• Commercial banker with small business experience

• Financial planner

• Seasoned business people

• Industry and functional experts

• Marketing consultant

• Independent sales representative

• Insurance specialist

• Consultant

• Current small business owners

• Individuals who have started businesses in the past

• Potential customers or suppliers in the industry I am pursuing

Investigate Financing

Goal: Know how much capital you have and are willing to put into the business, and where to go for more.

Some businesses are relatively easy to start, while others require hundreds of thousands of dollars just to enter the game. Many entrepreneurs tend to underestimate expenses and overestimate how quickly the business will produce income.

Let’s face it, you probably won’t see a paycheck for the first year or two. You’ll also need a cushion for unforeseen events (which are bound to happen). All of this can add up to a significant sum. Your start-up will surely fail if you go broke.

You need to take stock of your personal financial resources. Sort out your short and long-term needs, particularly your cash flow, and determine how much money you might realistically risk to establish and operate a business. Consider discussing this with your family and a financial advisor. The next step is to seek the counsel of your accountant who can recommend funding strategies and sources, if needed.

If you need to supplement your own funds, estimate how much additional capital you’ll need from investors or through loans. You’ll have to share your personal balance sheet with investors or lenders, so your finances must be well organized and your credit history clean. Naturally, investors and lenders will expect your significant participation in any financial risk.

Research lending or investment institutions to find out how they like to be approached, what kind of projects they prefer, and what kind of documents they require before considering participation. Your board of advisors may help with introductions. Speaking with potential investors or lenders early will make you better informed when you approach them with your finished proposal, and wish to line up the financing. Keep good notes of these discussions.

Questions to ask:

• What sources of capital or security do I have at my disposal (savings, deferred income accounts, credit lines, home equity loans, insurance policies, IRAs, 401Ks, houses, cars, jewelry, etc.)?

• What are my short-term and long-term personal cash flow needs? Do I have children approaching college age?

• What percentage of my current net worth am I willing to put at risk?

• Should I use an accountant or financial planner to suggest the best ways to organize and leverage my personal financial picture?

• Will I need loans from individuals, institutions or the franchiser?

• How long a payout period do I anticipate before I’m able to start taking money out of the business?

• If I am considering going into business with a partner or investors, do I know what their goals are? How will define our roles and responsibilities? What about control issues and voting rights?

• What will an investor or lender want from me?

Choose Your Market Niche

Goal: Tell three potential customers about your idea, and get favorable reactions.

The one and only thing essential to the success of any business is the customer. Someone must purchase your product or service, or you go out of business. Of course, one of the benefits of starting your own business is that you can exercise some choice over who your customers will be by designing a business that caters to a specific market.

In Step 2, you took a preliminary look at your target market, potential customers and their needs. Now it’s time to do some research in depth so that you can confirm or refine your business definition. Then you can focus your business on a specific, clearly defined market.

You need to know as much about your industry and the demographics and psychographics of your customers as possible. Study and identify the major trends that are having or could have an impact on the kind of business you intend to start. Try to get a handle on how long your products and services will be viable in the market you’ve targeted.

Get a broad and detailed view of the market as a whole, and your local market. Talk with people in your target markets, consultants in those markets, leaders of professional or trade associations, and with potential customers and suppliers. Read the trade journals and search the Internet for additional information.

Depending on your business, you may wish to conduct surveys or interviews with potential customers to gather more concrete data about the buying habits, price points and reactions of real potential customers for your products or services. Try to get at least three potential customers to comment. If necessary, refine your business definition based on the feedback and information you pick up.

Questions to ask:

• What is my target market? Can I make a list of prospective customers?

• How would I describe my individual customers (age, income, education, gender, geography, specific background, interests, attitudes, etc.)

• What are my customers’ needs? What are their wants?

• What do they buy now to meet the need I will fill? What else might they buy?

• What do they pay? What will they pay?

• When, why, and how do they buy?

• What are the major trends that will have an impact on my potential customers and my business? What is likely to have an impact on the need for these products/services in the future? What could the market look like five years from now?

• How often do they change vendors for this product or service, and why?

• Which market niche should I choose to focus on as I get my business started?

Select Your Site/Location

Goal: Identify an appropriate location for your business.

For many businesses location can mean the difference between success and failure. Retail outlets and hospitality businesses such as restaurants, hotels, hair salons, and plant nurseries, location is everything. Small service businesses and individual practitioners sometimes use a prestigious address to create the right image and impress customers and clients. Sometimes a residential address or post office box is appropriate, and sometimes it’s not.

If you are opening a retail operation, location will be a primary concern. Keep in mind that a less desirable location with a less expensive lease may end up costing more by the time you add in advertising and promotion costs required to generate traffic. Higher location cost can sometimes be offset by additional foot traffic by the store front, by favorable image creation, or by savings in advertising.

If you rent, remember that leases are always negotiable. Since leases can be a major cost of doing business, you’ll want to involve your accountant and a Commercial Real Estate Agent/Broker to assist you in negotiating the lease agreement.

If you plan to operate your business from your home, remember to research local zoning restrictions and required insurance. Should you determine that your home office doesn't work for meeting clients and suppliers, then consider renting an office or conference room (as needed) with a local shared office space provider.

Take your time researching locations before making a commitment. Visit competitors’ locations and analyze why they chose to locate where they did.

Questions to ask:

• How important is foot traffic to my success? Will I depend on people walking in to my business? On vehicle traffic? Is parking available?

• Is there a particular office park, strip mall, covered mall, collection of fast food restaurants, or commercial thoroughfare I should be located in, on or near?

• How do I want my target market to perceive my business? What image do I want to project? What location will help establish and maintain that image?

• What kind of advertising expense is implied by the different locations I’m looking at (if applicable)?

• Where have my competitors set up their businesses? Why did they choose their locations?

• What impact will the locations I am considering have on my customers? How will they find me? How will I distribute my product or service from these particular sites?

• What help can I get from trade associations? From Chambers of Commerce or state or county business development agencies? Which advisors can offer me good advice and recommendations?

Analyze the Competition

Goal: Understand the strengths and weaknesses of your competition.

By now, you have garnered information, opinions, observations and facts about the business you want to start. You have identified the specific market you want and selected potential sites. Now it is time to investigate and analyze another factor that can determine your success or failure — the competition. You need to know how the competition positions and prices their products and services and how they approach your potential customers.

Survival as a business sometimes requires that you outperform your competitors in the eyes of your customers. You cannot do this without really understanding how your competition operates, how they are positioned in the minds of their customers and prospects, and why their customers choose to do business with them.

This education begins with a visit to every competitor you may face in the marketplace that handles products or delivers services similar to the ones you plan to sell. A visit can be made in person, to their website or through their advertising. Talk to anyone who may have done business a competitor. Keep a file on each competitor and use the information to differentiate your business from theirs.

These are four critical areas in any business of any size: operations, sales, marketing, and financial management. To the extent that you can, profile the strengths and weaknesses of each of your competitors on these four dimensions. Then, do the same thing on your own idea. This will help you identify factors that distinguish your business, and assist greatly when you develop your business plan.

You don’t want to plan only in response to your competition, but you certainly need to factor them in as you develop your own positioning, pricing and marketing strategies.

Questions to ask:

• What is the competition? What about future competition? Is there a competing service or product emerging (such as e-mail was to fax machines)?

• Who are the leaders in the business? Why are they special? On what basis do they compete? Quality? Price? Service? Convenience? Guarantees? What else?

• How does my business compare?

• How broad a service or product line does my competition offer? Are they strong in all areas? Strong in some, weaker in others?

• How do they display, advertise or promote their products or services? Why do they do what they do?

• How do they handle customers? How do they present themselves to customers?

• What image does their advertising or website convey? Who do their messages speak to? How do they motivate people to buy? What kind of expectations does their message strategy create?

• What are some competitive weaknesses I can exploit? What will make my business stand out? How will my business have to be positioned and perceived to succeed?

Determine the Legal Structure of the Business

Goal: You have a name, a structure, and have begun protecting yourself.

No matter how large or small your venture, you need to determine the right legal structure for your business. In general, there are four forms of organization to choose from: sole proprietorship, partnership, corporation, or limited liability company (LLC).

Many business owners choose the simplest organizational structure, a sole proprietorship. It is easy to file for and gives you the right to do business using whatever name you select. Although this is the least complex and least expensive business structure to establish, there may be tax disadvantages and liability issues.

Another form of organization is a partnership, although it is used less today than it has been in the past. In this form you share responsibility for the business with other owners. This type of structure can be complex both personally and legally.

A common form of organization is a corporation. A corporation is the most expensive and can be difficult to dissolve, but there may be advantages to the extra work and expense, depending on the type of business you are establishing. Research the different types of corporations, including subchapter S corporations and the LLC. The IRS and the SBA offer helpful information.

You may want to secure other rights, permits and licenses. You will need to conduct a name search and secure the rights to use the business name you have selected. And you may wish to seek legal protection for such elements as trademarks, logos, slogans and proprietary products.

Consult an experienced attorney to advise you on the legal structure, liabilities, and protections, and an accountant to help sort through the tax implications of each structure.

Questions to ask:

• Do I understand the advantages and disadvantages of the various business structure options?

• If incorporating, have I explored the different types of corporate structures and evaluated the pros and cons of each?

• Have I come up with a name for the business, tested it in the marketplace, secured the rights to use it, and registered it with local, state of federal authorities?

• Do I have a list of the permits and licenses I will need to secure to do business legally, such as a tax identification number, state and municipal licenses, state or municipal sales tax and resale tax certificates?

• Am I fully aware of local zoning restrictions in the area?

• Have I applied for copyrights, trademarks or patents to protect my business ideas, products, brand names, and marketing slogans?

• Have I identified experts who I trust to help me sort through these issues?

Prepare a Detailed Implementation Schedule

Goal: Work up a pre-opening checklist, and check it out with others.

While your business plan outlines the overall strategy for your business, the implementation schedule is more the tactical component. It lays out precisely what must happen, and when it must happen, in order for you to open as planned. In some cases, the implementation schedule can also be part of or an addendum to the business plan.

Some people like to work with several lists, one for marketing and promotion, one for staffing, one for setting up the physical space, and so on. This can be a good way to organize detailed steps, but a master Milestone list of the major events and activities is also important. It consolidates key required actions and their sequence on a single spreadsheet or two. Purchasing some project management software to help do all this could be a smart move. See the suggestions listed at the end of this Step.

For a retail operation, the implementation schedule might include actions such as:

• choosing a location

• negotiating the lease

• organizing space

• selecting and ordering a computer system

• selecting vendors

• ordering initial inventory

• designing a logo and marketing materials

• developing the website

• ordering and installing signs

• hiring and training employees

• ticketing and setting out merchandise

Then several actions may be sub-divided. For example, under organize space, you might list the following:

• hook up utilities

• design and renovate space

• install telecommunications and computers

• install security system

• purchase fixtures, displays and furniture

• organize inventory area

Adapt this list appropriately if you’re not in retail.

Be as thorough as possible in creating this list, documenting every activity you must complete before you are ready to open the doors. If possible, review it with someone who has experience in the same kind of business.

You’ll now want to put together your implementation plan.

Questions to ask:

• Have I defined implementation steps for each key piece of my business plan?

• Have I set target dates for each major action and sub-action?

• Do the different elements of my implementation plan dovetail appropriately? Have I established a sequence of events that’s effective and efficient?

• If I am leasing space, when should I take possession? How can I put off paying rent on the space until late in game, and still be ready to open on time?

• How many action steps can I manage concurrently?

• Have I identified people who can review my implementation schedule and comment on it?

Commit Your Resources

Goal: You’re working away on your implementation plan.

Having arrived at this juncture, with your business plan and implementation schedule in hand, it is time to take a deep breath and ask yourself if you still want to start this business. If your answer is yes, the time has come to begin making your implementation schedule a daily reality, and to begin committing your financial, physical, and personal resources to the tasks ahead.

Before you invest in equipment or make commitments to employees, you must act on the research you did in Step 4 and line up the financing necessary to start your business. Secure the loan, credit line or investment you have selected and, with the money in hand, you can begin to make every dollar count.

This is when you negotiate your final lease agreement, begin to renovate your space, and arrange for the inventory and equipment you need to operate your business. Even with a home-based business, you may need to acquire office equipment, software, a telephone system, supplies, and possibly support services. This is also the time to establish all of the systems for your business — accounting, sales, inventory, personnel, legal, customer relations, etc.

If you need to hire people, you’ll need some understanding of employment laws. In larger start-ups, assembling a management team comes into play, although initial selection would have been done early on (and included in the business plan, Step 9).

Selecting the right people — from the person who greets the customers to your vice president of marketing — requires their commitment to your business vision. In addition to selecting personnel, you must take some time to educate them about the business, how you want it run, and establish mutual expectations.

Questions to ask:

• Do I want to commit my resources to this business?

• Have I secured the financial capital I need to take care of expenses up to the opening day?

• Do I have the financial resources to fund the first year or two of operation, given a worst case scenario? Do I know where to turn for these resources?

• Have I identified and secured appropriate space?

• Have I selected the necessary equipment, supplies and services?

• Am I using the advice, support and connections of my board of advisors as well as the business community at large to make sure that I am making good decisions?

• Have I considered my exit strategy for what I will eventually do with the business? Sell it? Close it? Leave it to my children? Take it public?

Launch Your Business

Goal: You are the proud owner of your own business and have hung up the sign, Open for Business.

Now that you have committed resources, you have to realize that each day that goes by without revenue coming in is actually costing you money. Whether it is inventory sitting on a shelf, lease payments on yet-to-be-used space, or interest on a $3 million loan, you are incurring expenses against nonexistent revenue.

This is where a carefully constructed implementation plan pays off. You drafted that plan to minimize costly downtime. Now you need to implement it as efficiently as possible to start generating revenue.

Even with the best business and implementation plans, things sometimes go awry. Lease arrangements fall through. Your telecommunications system is inoperable. The wrong inventory assortment arrives. But when you have a thorough plan, such events cause plan revisions, not total disasters.

Somewhere down at the bottom of your implementation plan is the line: OPENING DAY. While the day is different in different businesses, it is always a major landmark and requires its own special preparation. You probably have many people you would like to share this day with, but the most important people are your customers.

Opening day is almost always an excellent opportunity for special advertising, promotion and public relations. While retail businesses are well known for opening day flags, banners and specials, any business should launch its promotional and sales effort as rapidly as possible — usually well before opening.

If you have prepared carefully, you’ll be ready to go. It is unlikely that everything will go according to your plan, but the initial plan provides a starting point. Then it’s up to you.

Congratulations to you, and best of luck in your new venture!

Questions to ask:

• Can I accelerate certain steps on my implementation plan? Can I run things concurrently?

• Now that I’m into it, does the plan need revision? What contingencies are affected?

• Which parts of the plan offer promotional or public relations opportunities? Can I generate free publicity before opening day?

• Should I have a PR firm or ad agency help me with my pre-launch, launch, and post-launch activities?

• Is a website important? Are signs important?

• Is my opening day an opportunity for free publicity that will reach potential customers? Even if they do not see it, can I use it to mail or e-mail to them?

• How soon after the launch will I have customers? How will I measure this?