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Starting Your Business
Businesses are born from dreams. For some, those dreams are of economic freedom and the goal of financial security. These individuals aren't so much interested in developing a new idea as they are in finding the opportunity that will provide them with the greatest chance for fulfilling their dream of financial independence. For others, those dreams lie within the passion of their idea and the gradual genesis of that idea into a business entity. Whatever the dream, starting the business and forging it into an organization that meets the entrepreneur's goals takes a great deal of hard work and dedication.
Part I of the Entrepreneur Small Business Advisor provides the necessary information to take those first steps that will lead you from your dreams into a new world wrought with new challenges. The chapters in Part I include:
Chapter 1 Personal Evaluation. Taking an inventory of personal and professional skills, goals, and objectives prior to starting a business is important. This chapter contains information on risk assessment and how to determine the amount of personal capital available to commit to a new business.
Chapter 2 Ideas and Trends. The advantages and disadvantages of starting a business using your own ideas, as well as where to find information that could form the foundation of a new venture. There will also be a discussion regarding how to evaluate business ideas and perform test marketing.
Chapter 3 Market Research. The importance of market research, the different types of information that need to be gathered, methods used to acquire market data, and what's involved in building an information network.
Chapter 4 Legal Forms. The different legal forms under which a business can operate as well as a discussion regarding the advantages and disadvantages of each type.
Chapter 5 Licensing. The various factors involved in applying for a business license as well as other special permits your business may require. County and state licenses will also be discussed along with the circumstances under which you'll need them. Finally, federal requirements will be covered.
Chapter 6 Location. The importance of location to a business and the factors that will need to be considered such as selling zones. Also the location requirements for retail, service, wholesale, and manufacturing operations will be covered.
Chapter 7 Leasing. The advantages of leasing over other financing options. The different types of real estate and equipment leases. How to choose a leasing company.
Chapter 8 Developing a Business Plan. The importance of a business plan, not only from a financing standpoint but also for strategic purposes. The components you need to include in an effective business plan as well as a standard structure that can be used. Complete sample business plans.
Chapter 9 Sample Business Plan.
Chapter 10 Buying a Business. How to evaluate a business you are considering buying, including methods used to value a specific business. What is involved in the investigation of a business for sale as well as common mistakes made by buyers.
Chapter 11 Franchise Opportunities. Why franchising has exploded in popularity and the benefits it has to offer. Requirements of franchisers under the FTC Rule including elements that need to be disclosed in the UFOC. The importance of a thorough investigation of any franchise being considered and the type of information you should acquire, as well as important questions you need to ask.
Chapter 12 Business Opportunities. The difference between a business opportunity offering and a franchise opportunity. How the FTC defines a business opportunity. What is involved in evaluating a potential business opportunity.
Chapter 13 Start-Up Financing. Evaluating your personal financial condition to determine your financing requirements. The items lenders and investors will consider when evaluating your business. Plus debt and equity financing sources.
Chapter 14 Small Business Administration Loans. Prerequisites required by the SBA before an application will be considered. Guidelines used for guaranteed loans. The different types of lenders the SBA uses in its loan guarantee program. How to apply for an SBA loan.
Why do you want to be in business for yourself? This is a valid question, whether or not you've already entered the entrepreneurial world. Surprisingly, money isn't the primary motivating factor for many people; freedom is often ranked first. Whatever your purpose, you will want to review your reasons so you can best determine what type of business you want to enter.
Before embarking on your own business, you must take the following factors into consideration:
- Your primary reason for being in business for yourself
- Amount of risk capital available
- Amount of credit available to you
- Your skills
- Your likes and dislikes
- Amount of effort you are willing to expend
- Your financial goals
- Whether you can begin full or part-time
- Inventory of business management experience and knowledge
- Capacity for meeting new challenges and following through on commitments
Businesses don't fail, people do. Sure, businesses are affected by strategies employed by competitors, market saturation, and so forth, but planning and adjusting to market conditions are all functions of the people running the business. A business is merely an extension of the people managing it and mirrors their abilities. If the individuals running the business are strong in one area and weak in another, the business will reflect this. This correlation is even more apparent in small businesses.
As an entrepreneur, you have to know your strengths and weaknesses so you can compensate in some way for the areas where you will not be proficient. You can determine your strengths and weaknesses by evaluating the major accomplishments in your personal and professional life and the skills required to complete these tasks. To perform this evaluation, you should do the following:
- Create a personal resume. Start by listing your professional experience. For each job you've held, write short descriptions of the various duties you were responsible for and the degree of success you experienced. Next, list your educational background and any extracurricular activities you participated in during your scholastic career. Finally, write down your hobbies.
- List your personal attributes. Are you personable? Do you feel comfortable around other people? Are you self-motivated? Are you a hard worker? Do you possess common sense? Are you good with numbers? Do you have effective verbal and written communications skills? Are you well organized?
- Detail your professional attributes. Write down the various management roles and tasks within a business such as sales, marketing, financial planning, accounting, advertising, administrative, personnel management, and research. Beside each function, write down your competency level-- excellent, good, or poor.
By putting together a resume and quickly listing your attributes, you will have a fairly good idea of your likes and dislikes as well as your strengths and weaknesses. Once you identify these characteristics, you will have a good idea of the qualities you will bring to the business and the areas that may require training or assistance.
If you don't think that knowledge is important, think again. Areas of expertise and track records of yourself and any partners play an important part in assessing your strengths and weaknesses in business in general and specifically in the opportunity you are researching. These areas also contribute to your success when approaching lenders and investors. Gerald Benjamin, president of International Capital Resources, a venture capital firm in San Francisco, says private investors invest in people as much as they do the business concept. If you don't have the type of expertise you need to effectively start and operate the business, you should definitely recruit that help.
Many people go into business to meet personal goals they've established for themselves. For some people, it's as simple as having the freedom to do what they want, when they want, without anyone telling them otherwise. For other people, achieving financial security is a major personal goal. Whatever your goals, setting specific personal objectives is an integral part in the selection of a business that is going to be right for you. The Entrepreneurial Evaluation Checklist (p. 7) will help you identify your entrepreneurial potential.
When you form goals, whether personal or business-related, they will work best when you break them down as follows:
- Specific and detailed. Whether your goal is to start a business, raise capital, or lose weight, you must be very specific (size, shape, color, location, and time).
- Positive and present tense. A financial goal is not to pay bills or get by, but to be financially secure. This is set with a specific minimum or dollar amount in a given period.
- Realistic and attainable. If you set a goal to earn $100,000 a month and you've never earned that in a year, this goal is not very realistic. You should begin with a first step; a percentage increase you feel comfortable with that represents reality. Once you meet your first goal, you can project larger ones.
- Short term and long term. Short-term goals should include the preceding characteristics and be attainable in a period of weeks, months, or one year. Long-term goals can be much greater but they should still be realistic. The only one who can set these parameters is you. You must decide what is a realistic time frame and what is not.
After establishing parameters, you have to decide what exactly you want to achieve by going into business for yourself. Most people set objectives according to specific areas in their life that are crucial for survival and self-satisfaction. These areas usually include:
- Be your own boss. One of the foremost reasons people go into business for themselves is that they have what they think is a great idea and are tired of working for someone else. Because they've built up certain areas of expertise, they want to "call the shots." Generally, this reason centers around control issues. If you are the type of person who likes to have complete and total control over the direction of the business, you need to consider this issue when determining management responsibilities, especially if you are dealing with partners.
- Income. Many entrepreneurs go into business to obtain financial security, not only for themselves, but for their families as well. When setting financial goals, consider what you would like to make during the first year of operation and each year thereafter, up to five years.
- Lifestyle. This encompasses several areas related to your personal assets and life including travel, physical labor, work hours, investment of personal assets, and location. When setting lifestyle goals, you need to consider whether or not you want to do a lot of traveling, whether physical labor is a priority or even something you can do, what hours you want to work, the amount of personal assets available for investment in the business (such as your house or car), and how close to the business you want to be located.
- Type of work . It's no secret that the more you like your work, the greater satisfaction you will derive from your efforts and the more successful you'll be. When setting goals for type of work, you need to determine whether you like working outdoors, in an office environment, with computers, on the phone, with a great number of people, and so on.
- Ego gratification. Let's face it, many people go into business to satisfy their egos as well as their bank accounts. Owning a business can be very ego gratifying because of the perception other people have of you. You need to decide how important ego gratification is to you and what industries will fill that need.
Once you've set your personal goals, you can prioritize them according to the importance you place on each. This will help you examine your entrepreneurial desire and how it relates to other important aspects of your life.
Every business venture, regardless of timing, products, personnel, and capitalization has some inherent risks. The first task you should complete is assessing those risks; then you can begin taking steps to reduce them.
Here are some techniques for assessing risks:
- Research similar businesses. Look at their locations, advertising, staff requirements, and equipment. These will be your competition, so you will want to know what you will be up against.
- Research the current market trends. What seemed like a hot idea over the past few months may have been a fad. Find last year's phone book and call several new businesses. Are they still around? (If you live in a small community or want to expand your research, your local telephone company may have a library of phone books from other cities.)
- Know your strengths and preferences. Does this type of business fit you? Is it too physical? Not physical enough? Does your staff have experience to handle the areas that you have little or no expertise in?
- Create a family budget.How long can you live without a paycheck in case you need to put it all back in the business? What other income can you reasonably expect while you're in the start-up phase? Make sure your family understands what you are doing and engage their support. Since they are also sharing in the risk, they will be more willing to assist you if they understand exactly what you are doing.
- Know how changes in the economy will affect your business. Is this the type of business that could be damaged if inflation rose by two points? What's its history during various economic trends?
- Establish a business plan. Once you are serious about starting, this will be your blueprint. It can be simple or complex, depending on the type of business, number of investors, and so on that you may be dealing with. But it is necessary if you want to increase your entrepreneurial odds of success. See Chapter 8 for a detailed description of how to write a business plan.
THE IMPORTANCE OF PLANNING
When you are starting a business, proper planning and research are absolutely necessary. There is no way of getting around these tasks. Many people get into business, put up the money, and then fail without ever really knowing why. So they say to themselves, "I know what I did wrong. I'm going to change A, B, and C, and go back and try it again." So they go back and try it again. And the same thing happens.
It is almost predictable. If you don't take the time to analyze the prospective business concept, you'll probably find yourself confronted by one of the following situations:
- Insufficient capital requirements
- Optimistic market opportunities resulting in an overestimation of projected sales
- Saturation of the market by the competition
- Poor access to markets due to a bad location
- Inadequate equipment projections
Don't let this happen to you. Do the required market research as detailed in Chapter 3 and form the necessary plans.On a personal scale, however, your first research and planning step is to assess your start-up requirements so you will know how much income you are going to need to get your business off the ground.
How Much Money Will You Need to Start?
There are a great many philosophies regarding the actual start-up costs associated with a business. We've talked with many entrepreneurs who have begun successful operations on a minimal budget, often using bootstrap financing techniques, as discussed in Chapter 21. There is nothing wrong with this approach if you're willing to sacrifice yourself and invest a great amount of time and energy into making the business work. But it is also true that under-capitalization is one of the primary reasons for business failure. For instance, if it is going to cost you $500,000 to cover all your start-up costs, and you only spend $100,000, chances are you are going to fail. It is less a question of "How much?" than of "Is it enough?"
To make this determination, you must account for all your start-up costs--not just opening expenses, but initial operating expenses as well. Although different businesses have different costs associated with them, the main start-up costs include the following:
- Rent. Under many lease agreements, you will be expected to provide the first month's rent plus a security deposit. Many lessors also require the final month's rent.
- Phone and utilities. Some telephone and utility companies require deposits, while others do not. A deposit may not be required if you own real estate or have a previously established payment record with the company. Telephone deposits are determined by the number of phones and the type of service required. Unless you need a large number of phones and lines, the deposit is likely to range from $50 to $200. Deposits for gas and electricity (when required) will vary according to your projected usage. It is possible to lower them by not overestimating your initial consumption of these utilities.
- Equipment. Equipment costs will vary from operation to operation depending on how equipment intensive they are. At a minimum, most businesses need office equipment, signage, and security systems. To determine your costs, list all of the equipment you must have to operate your business efficiently. Next, price those items by obtaining quotes or bids from several vendors. Three quotes would be a good minimum to start with. Use the quotes you receive to estimate your start-up equipment costs.
- Fixtures. This broad category includes items such as partitions, paneling, signage, storage shelves and/ or cabinets, lighting, checkout counter( s), and all shelves, tables, stands, wall systems, showcases, and related hardware for product display. The cost of fixtures depends on a number of variables including the store's location, its size and present condition, the type of merchandise to be sold, what kind of image you want it to project, and whether you are purchasing new or used fixtures.
- Inventory. Like equipment, inventory requirements change from business to business. Some businesses, such as retail stores, are inventory-intensive whereas others, such as personal shopping services, don't require any inventory at all except office supplies.
- Leasehold improvements. These non-removable installations, either original or the result of remodeling, include carpeting and other floorings, insulation, electrical wiring and plumbing, bathrooms, lighting, wall partitions, windows, ceiling tiles, sprinkler system, security systems, some elements of interior design, and sometimes heating and/ or air-conditioning systems. Because the cost of improvements can vary tremendously, you must investigate this carefully.
- Licenses and tax deposits. Most cities and counties require business operators to obtain various licenses or permits to show compliance with local regulations. Licensing costs will vary from business to business in conjunction with the particular start-up requirements. In addition to these fees, you'll also need start-up capital for tax deposits. Many states require a deposit against future taxes to be collected.
- Marketing budgets.Most businesses require a strong grand opening push to get their ventures off the ground and build a customer foundation.Most companies determine their first year's advertising budget as a percentage of projected gross sales. Many businesses peg their ad budgets at 2 to 5 percent of their projected gross sales.
A word of caution when estimating these costs: If there is ever a time for conservative realism, exercise it when planning these costs. To assure your company's success, a cushion of excess money that can support start-up costs is better than the dilemma of insufficient capital.How Much Income Will You Need?
To determine just how much money you have to invest in a business, you must evaluate your finances on the credit and debit sides using the personal balance sheet (see Figure 1.1). Begin by listing all your assets and their value in the top portion of the form: house, car, jewelry, and so on. Next list all your debts in the bottom portion: credit cards, mortgage, bank notes, personal debts, auto loans, and so on. Now compute the ratio between total assets and total liabilities to determine your net worth or degree of indebtedness. This ratio is assets:liabilities, or line A;line B. The ratio will look something like 2;1, or if you are like most people, 1;2. This is generally referred to as the acid-test ratio or quick ratio. If your assets exceed liabilities, you should be able to keep the creditors from knocking on your door.
Evaluating the Business
The final phase of evaluating yourself for business is to determine just what type of business would be most suitable for you given all the variables such as the amount needed to start the business and the income available to support it. To evaluate a business, you must first develop a list of possibilities. In Chapter 2, we discuss how to find suitable ideas for businesses.
Once you have a list of businesses to choose from, you should audit them to determine which one would be the best for you. This test simply determines whether or not you feel comfortable with a particular business as you read down the list. The goal is to narrow down your list of opportunities to three or four that elicit the most excitement based on your audit. Then you need to screen this small group of opportunities according to your personal objectives, experience, and lifestyle. This procedure is described in detail in Chapter 2.
Much has been written about business failures. Every year, thousands of businesses fail-- small, medium-size, and big. While business failures know no size boundaries, for years the statistic that four out of five small businesses fail during their first five years has been accepted unquestioningly. But no one is sure where that figure came from-- and some think the truth is far more promising.
Why do businesses fail? Most small business surveys show that the primary reasons for failure lie in the following areas:
- Inefficient control over costs and quality of product
- Bad stock control
- Under-pricing of goods sold
- Bad customer relations
- Failure to promote and maintain a favorable public image
- Bad relations with suppliers
- Inability of management to reach decisions and act on them
- Failure to keep pace with management system
- Illness of key personnel
- Reluctance to seek professional assistance
- Failure to minimize taxation through tax planning
- Inadequate insurance
- Loss of impetus in sales
- Bad personnel relations
- Loss of key personnel
- Lack of staff training
- Lack of knowledge of merchandise
- Inability to cope adequately with competition
- Competition disregarded due to complacency
- Failure to anticipate market trends
- Loose control of liquid assets
- Insufficient working capital or incorrect gearing of capital borrowings
- Growth without adequate capitalization
- Bad budgeting
- Ignoring of data on the company's financial position
- Inadequate financial records
- Extension of too much credit
- Over-borrowing; use of too much credit
- Bad control over receivables
- Loss of control through creditors' demands
The last quarter of the twentieth century has witnessed the twin phenomena of more new businesses being started and more failing, year by year. This suggests that while business owners may display a good deal of confidence and enthusiasm in opening their businesses, they also experience a high mortality rate. A careful examination of the preceding list reveals that a lack of planning is the principal or underlying cause of business difficulty. All of these problems, including money-related reasons for failure, are indicators of poor planning. Other things being equal, planning can make the difference between success and failure in business, and that starts with choosing the right business.