You’ve made the huge decision to start a business. As you probably know, most efforts to start a business end in failure. Fortunately, there are things you can do to guard against wasting time and money and improve your odds. While every business is unique and comes with its own set of problems and opportunities, there are some basic steps — writing a business plan, proving the concept, raising capital, choosing a legal structure — to consider when getting started. Let’s take a look:
Test your business idea by creating a list of potential customers — and then call them. Will they buy what you want to sell?
Prove your concept by trying it out before you launch.
The Business Plan
Writing a business plan seems like a chore, but it’s critical. It doesn’t have to be formal or long — just a few pages is fine. But try to cover the basic sections, especially if you expect to make a pitch to investors or lenders. These sections should include an overview of the business, industry background, the product or service, the business model (how will you make money?), the strategy and the team. For guidance, take a look at Score’s business plan template.
Think of the process as a way to better understand the opportunity and the risks. It may even show you that the business is too tough. If that’s the case, you want to know it as soon as possible.
Try to answer the following in the business plan:
1) Who is the customer?
Try to focus on a defined market segment. In some cases, it should be easy. Perhaps you are aiming at lawyers. But if your product applies to virtually anybody, you need to narrow things. Look at Amazon. At first, the Web company focused on books. Once it built a strong business there, it moved into other categories.
So, where to start? Try to find the customer segment that is experiencing the most pain or is willing to bet on new ideas.
2) What’s happening with your market?
Immerse yourself in the market. What are the major trends? How will they help or hurt your venture? Along with doing Google searches, you should also check out trade publications and association Web sites.
If your business is in retail, look at ZoomProspector, which provides helpful information on local economic trends (population, income and demographics). Visit Yelp.com and see how many competing retail outlets you’ll be facing. Is the market too crowded?
Finally, make a list of your competitors and update it regularly.
3) What are the start-up costs?
Be realistic. Entrepreneurs often underestimate the time and expense of starting and operating a company. Put together a detailed start-up budget as well as a forecast (Score’s template offers a worksheet).
As you put things together, look for ways to minimize costs. Some ideas: shopping for used equipment on Craigslist, bartering your services, using free or inexpensive online applications like Skype (for free calling), Web.com (to setup a Web site) and VistaPrint (for printing business cards and brochures). Always ask for discounts.
O.K., you’ve got a plan.
Prove the Concept
Once you’re satisfied with the business plan, the next step is to test it. This means answering the question: Do customers really want to buy what you intend to sell?
It’s a brutal question, but you need to be realistic.
One idea is to talk to potential customers, but avoid your friends; instead, identify a list of likely customers and call them. The good news is that there are many free lists on the Internet. They include sites like CPAdirectory.com, Lawyers.com, Dentists.com and so on.
While the calling is not glamorous, you’ll eventually get a sense of whether there’s demand. You will also get new ideas to refine your product, and you will build valuable sales skills, which is critical for anyone starting a business.
Next, you can conduct a survey using an online service like Zoomerang, which has a panel of about two million people. You can designate groups with up to 500 attributes (industry, age, gender, income and so on). This is a quick way to get feedback on your business idea.
Or, you can set up a free Web site and try selling your product. This was the approach for Sneaky’s BBQ, which set up a blog at sneakysbbq.blogspot.com. Believing that there were few good places for authentic barbecue in San Francisco, Patrick Wachter started to cook up his recipes in his backyard and put out free ads on Craigslist. It was a hit as word-of-mouth spread, helped along by review sites like Yelp. “We can’t even eat our own barbecue anymore,” Mr. Wachter said. “It’s already spoken for by the time we pull it off the smoker.”
Here’s another example: Megan Calhoun saw that it was difficult to use online services to find other mothers. Deciding she wanted to “be fast, be cheap and see where it takes you,” she registered TwitterMoms.com, and instead of building a Web site, she used the free service Ning.com, which allows you to build your own social network. On the first night, four mothers joined, and from there, it grew and grew. Now she has 15,000 members and has attracted advertisers like Lands’ End, Children’s Place and even José Cuervo. The total cost to launch? Only $50.
This is time-consuming and can distract your attention from the business. It can easily take six months to get your first investment. Investors are naturally hesitant and want to see proof that the business is viable.
That means you will probably need to bootstrap. This is not easy but it does have the advantage of allowing you to keep more control and a larger equity stake.
You can do things like: borrow against your 401(k), life insurance and house; use credit cards; and even do consulting projects.
Next, you can reach out to your friends, family and colleagues. Even though they may trust you, it’s important that you have a convincing business plan and investor contracts. To this end, check out Virgin Money. This online service provides the necessary legal documents, administers the loan payments and makes reports to credit agencies (which will help build a credit history for the business).
It’s tempting to seek financing from banks, angel groups and venture capitalists, but those sources usually look at more established businesses.
Choosing a Legal Structure
If you are bringing on investors or partners or signing contracts, it’s a good idea to set up a legal structure for your venture. Here are the main alternatives:
Sole Proprietorship: You are the sole owner. There is little red tape or expense. But there is a big downside: unlimited liability. If the business is the target of a lawsuit or owes a large debt, the owner’s personal assets are exposed to seizure.
A sole proprietorship is known as a “pass through” entity. This means that the income is taxed on your personal return.
Partnership: There is more than one owner. And as with the sole proprietorship, there is little paperwork involved and it is a pass-through entity for tax purposes. Unfortunately, partnerships also have unlimited liability exposure.
Corporation: The fees can easily range from $200 to $1,000. Even though you can use cost-effective online services to help out, such as LegalZoom, it’s still a good idea to have a lawyer review the documents and filings. You can find a qualified attorney by visiting sites like Avvo.
The main benefit is limited liability protection. This means that the business owner risks only the investment in the company.
Keep in mind that there are different flavors of corporations, which are often based on how taxes are paid. For example, a limited liability company (L.L.C.) and S-Corp are pass-through entities. On the other hand, a C-Corp is taxed — and so are the dividends. Before making a decision, consult a certified public accountant. It can be a big money saver.
Regardless of the legal structure, business owners should also think about the legal issues of the company name. It’s a good idea to find a name that is memorable and distinctive, but that is no easy task. Anders Heie, the founder of KaDonk said: “When thinking of a name, I hit my head against the wall and the sound it made was kadonk, kadonk, kadonk. Our lawyers loved it. It was unique, and had nothing to do with our product, so we grabbed all the domains and went with it.”
A lawyer can help with the process.