The flash of inspiration is one of the greatest things about starting a new business. One day you wake up and have the simple solution to the most annoying problem; and you cannot believe no one else has figured it out! So you rush to the garage or computer and start researching your idea. For many of America's most iconic brands, from Ford to Apple, that is just how these businesses got their start.
Not every business happens intentionally. Some people simply start providing a service (like offering rides to neighborhood kids) or pursuing a hobby (like photography) and then find out that there might be a big enough market to turn the pursuit into a full-time business.
In either scenario, there are certain things you need to consider before jumping in with both feet. Here are 13 issues to think about before starting a new business.
It is one of life's daily struggles: you are out for a walk and suddenly it is pouring down with rain. You reach for your umbrella and find that it will not work. There are so many reasons the umbrella fails. It gets jammed and will not open it flips inside out; it breaks.
In all of these scenarios, you find yourself wet and miserable.
So let's say you came up with a great idea to fix the umbrella problem once and for all. You built a prototype and even sold a few over the Internet and the feedback was fantastic. Do you have a business yet?
The answer is no. Among the crucial steps you have not yet taken is thoroughly investigating your idea.
You may believe that your idea to fix the umbrella is novel, but is it really? What if someone else already beat you to market? What if someone had a similar idea and failed? In testing your idea, ask yourself the following questions:
Investigating the idea from all angles will help you refine your idea into a business—or make you decide to shelve the project entirely.
Another prerequisite to getting your umbrella business up and running is defining your target market. Most people would simply say, "the target market is every adult and child in America!" But this target is way too general. It is the same as saying, "the target is anyone interested in my services."
You will not have the resources to market your new and improved umbrella to everyone in the world. That is why you need to define your target market. All people in America are not equally likely to buy the umbrella. To find that perfect target market, you should think about which markets and people are most likely to be receptive to your message and buy your umbrella.
Who is most likely to really need your umbrella? Consider all the different people who depend on having a working and reliable umbrella the most:
Now that you have some idea of your demographic, remember to ask what your competition is doing:
How does your product differ from the standard umbrellas that can be purchased at the drugstore? How does it differ from higher-end umbrellas? Does it offer new features?
These variables will help you define your target market.
In this era, it is faster than ever to start a business. All you need is Twitter, Facebook, Square, and PayPal; right? The answer is yes and no. While it is true that many people rush right into the business formation process, it does not mean doing so is guaranteed to bring success. In fact, you could be setting yourself up to crash and burn quickly.
People who are selling their creations on Etsy probably do not need a long written plan for how to grow their business. However, nearly every other type of business will do themselves a favor by writing a business plan.
The antipathy toward business plans is based on several misconceptions.
Are you planning on taking on a business partner, or even multiple partners? Having business partners is a good thing, but first you need to ensure that they are a good match for your venture. Working with family and friends presents another set of complications. In either circumstance, you must have the legal documents to protect your interests.
Here are some important things to think about when you are considering partners:
How will you have enough money to fund your umbrella business? You need to consider financing right away. It can be intimidating to focus on money, but going through the numbers at the start will literally pay dividends later. In some cases, you need very little overhead and can get by without taking a loan. If your business requires a bigger investment, be sure to create all legal documents necessary to protect investors and yourself. Even if you are taking a loan from family or friends, you still must get it in writing. Use a loan agreement to define repayment terms, interest rates, cosigners, and other factors.
Many first-time and new business owners have never had any experience managing people. Learning how to manage people is an art, and it is essential to the success of every business. Fortunately, there is plenty of great advice on management; you just need to know where to look.
Your local small business management centers can help you avoid basic mistakes and even connect you with employees who are a good fit for your vision. Read books by successful entrepreneurs and management specialists, and seek advice from others.
Learn to communicate your expectations clearly and concisely. Drafting an employee handbook can help inexperienced owners feel more confident. The employee handbook sets out the company's policies and procedures, outlines benefits, describes a discipline policy, and sets the tone.
Starting a business is complicated and it is easy to become overwhelmed with minutia. Now, don't get me wrong, being obsessed with every last detail is not necessarily a bad thing. It can serve you very well when you begin a new business. The key is making sure you focus as much of your attention on the $1,000 an hour tasks as possible, outsourcing the duties that would pay you less.
In the book '80/20 Sales and Marketing' by Perry Marshall, he explains how people spend their work days. All of us spend some hours doing tasks that are worth $8.00 an hour, and some tasks that are valued at $1,000 an hour. The problem is that the $8.00-an-hour tasks still need to get done, even if they take five hours of your day. Many people get sidetracked when they start putting together a business, devoting too much time to things like designing a logo, picking out stationery, and writing blog posts. According to Marshall, people should outsource those tasks—whether that means delegating them to a family member, hiring someone locally or paying a freelancer on Upwork or PeoplePerHour—and save their own time for those $1,000 tasks.
What are the $1,000-an-hour tasks? If you are going to start an umbrella business, attending a sales meeting, meeting with manufacturers, talking to the bank about a loan, negotiating a lease, or interviewing potential employees are all high-value activities. Administrative work is important, and it enables you to get the business running and profitable faster. But if you can outsource those tasks and give yourself more time to work on the big stuff, your chances of success will grow dramatically.
It is easy to overlook a legal entity when there are so many moving parts to starting a business. However, consider the pros and cons of legal entities carefully.
In a sole proprietorship or partnership, the owners of the business will report income on their personal tax. This may be attractive in some circumstances, but this also means you have liability toward the company and responsibility for its debts. The downside to this is that your personal assets could be at risk.
A Limited Liability Company (LLC) has the same basic tax structure as a sole proprietorship, but in most jurisdictions gives some of the benefits of a corporation. An LLC gives you more protection against liability. Using an operating agreement defines the rights and duties of ownership.
A C corp is a taxable entity, so it is taxed on its income, and the owners are not taxed personally. In some scenarios, this could put your company and your personal income into a tax bracket. However, C corps are often subject to double taxation when dividends are paid to shareholders. Shareholder agreements should be used to safeguard the company owners and their dividend distribution rights, voting rights, management rights, and responsibilities.
With S corps there is tax savings since there are no self-employment taxes on profits. At the same time, they must pay owners who are also employees an actual salary, which is subject to Social Security and Medicare taxes. S corps will receive bigger savings when the company makes a significant profit. Like C corps, S corps should make sure they have shareholder agreements, a certificate of incorporation, and stock certificates to protect all parties.
All businesses need a place to call home. Many home-based businesses can operate efficiently out of a home office or garage. There are other options as well. Many cities offer virtual offices, which give you an official address, accept mail, provide printing, and offer rooms for rent.
There are services that provide the businesses with a registered agent for a minimum fee. If your business relies on direct marketing, there are corporate mail services that can efficiently manage your back office.
If you need more space, consult with a local realtor about finding office space. Be sure to negotiate the best terms possible and document the agreement with a commercial lease agreement.
When starting a new business, you do not need to be in the wilderness. There are support opportunities through government and nonprofits that are willing to provide assistance, training, and even funds.
The Small Business Administration (SBA) has a mentor-protégé program and training modules to help you win government contracts. It also has an information-packed website.
Are you a veteran? If so, you may qualify for special loans, tax breaks, and assistance. Hiring veterans can also give your business qualified and expert employees and qualify you for a special tax break.
Federal and state governments help minority-owned businesses grow and prosper with management and technical assistance as well as access to grants and loans.
Making the decision to start your own business is one of the hardest decisions you have to make. If you are still employed, you will need to determine whether you should quit your job.
Make sure you understand the risks and have run the numbers before you quit your job.
A related question is whether you can afford to pay yourself right away. The more money you invest in the business, the faster it will grow. If the business is profitable quickly, you will need to determine how much to reinvest and whether you or your partners should begin paying yourselves from the profits. If you do not pay yourself enough to cover your expenses, your family could be at risk. Finding the right balance is important, especially during the early days of your company.
Although this would appear to be self-evident, there is a difference between wanting to make a product or perform a service and running a business.
Owning an umbrella business is about more than having a great idea. You will have to manage manufacturing, order supplies, handle customers, hire employees, and keep the books—and that is just a fraction of the duties you will have as a business owner. If this sounds horrible to you, then you might want to reconsider.
Some people are inventors. Their primary interest is in making an innovative product. If this sounds like you, selling the umbrella, or licensing it to another company, might be the better course of action.
Get started by creating the proper legal documents that your business will need. Create your business formation documents now.