Starting a New Business?
August 31, 2012
Starting a business and being your own boss can be exciting, and for many it is the professional goal of a lifetime. Thousands of new businesses are started every day, yet history shows that a significant percentage fail because of a flawed business concept, inadequate financing or poor management. Starting a new business can be risky, but rewarding. Here are items to consider before starting your new venture.
What type of business makes sense for you?
Hundreds of thousands of ventures are started each year in all lines of business. Starting a business from scratch, buying an existing business or entering into a franchise arrangement all present opportunities and risks.
Be sure to do your homework. Consider the current and potential markets for whatever business you are considering. Examine the strengths and weaknesses of competitors. The Internet and trade associations can be great sources of valuable information. You may be surprised what you can find readily available.
Find a line of business that matches your skills, experience and interests. If you are considering starting a personal service business, it can be nice to start off with at least one existing customer. Whatever type of business it is, be sure you like it. If you are successful, you may spend many years or several decades in that business. There are few things worse than not liking your job.
If you are considering purchasing an existing business investigate it thoroughly. While it may be attractive to step into a business that already has existing operations, learn why the current owner wants to sell. Buying someone else’s failing business is significantly different than buying a successful business from an owner that is retiring. Have a professional look at the financial statements and any contracts you may be signing.
Are you starting alone or should you have a partner?
This can be one of the most challenging issues you face. Running the business yourself gives you the opportunity to make all the decisions, but you must live with the results. A partner can bring skills, experience and capital, however, you should be confident that you work with that person for an extended period of time.
If you choose to have a partner, be sure to define the responsibilities and authorities of each party. How will decisions be made regarding capital contributions, spending, operations, hiring of personnel and all the hundreds of other issues that will arise. The more you can structure the decision-making process, the more you reduce the risk of having major operational problems as the business faces difficulties or grows.
If you choose to have a partner, you may also want to discuss how your relationship can be ended. While everyone has good intentions at the beginning, things can and often do change. Having a buy/sell agreement or a contractual agreement may avoid difficulties and hard feelings later.
Where will you get the financing you need?
Starting and growing a business takes money. Consider the funds you may need for office space, equipment, inventory, marketing and working capital. You will need funds for your normal living expenses as well and remember that not all customers pay quickly. One of the most common causes of business failures is inadequate capital. Create a spending plan that covers everything you think you may need and then build in a contingency amount.
Arranging that needed capital should be undertaken early in the start-up process. Once the business is operational, you will probably want to focus on running it and not have to constantly be looking for funds. Speak with your financial institution about what they may be looking to lend to a new business (See Getting Ready to Borrow). They also can help explore a loan through the Small Business Administration. The SBA programs offer a number of types of loans, but can be time consuming. Your Business Banker will be a great resource to explore the best option for your business.
The final observation on needed capital is to consider setting a limit on how much you are willing to risk or lose before shutting the business down and accepting failure. While this may be difficult to consider when starting out, having a contingency plan for failure is prudent.
What are some of the other legal, financial and tax issues to consider?
After addressing all the other aspects, these will probably seem easy. You need to choose a business form (sole proprietorship, partnership, corporation, sub-chapter S corporation, limited liability company). Here is a chart that provides some details on various types of business structures.
Each business form has attractions and drawbacks. Your attorney can be very helpful in evaluating the options and drafting any documents you need.
Your personal financial and tax situations may also change when you become a business owner. You may lose the predictability of a monthly paycheck and the other benefits found with a larger company. You may have to pay for your medical insurance and fund your retirement account.
The entrepreneurial spirit is alive and well in America. As you consider your future, remember that being in business for yourself can be risky as well as rewarding. Taking some key steps early in the process, hard work, a good idea, using sound business practices and maybe a little luck can make all the difference.
Home Federal Business Bankers are available at 800.244.2149 to help you get started.
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