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 majority of them fail because of a flawed business concept, inadequate financing or poor management. Starting a new business can be risky. Here are some issues to consider before taking that first big step.
Do You Have the Psychological Makeup to Start a Business?
- Risk of failure – Starting a business is risky, both from a financial and psychological point of view. Don't let the excitement and thoughts of success blind you to the possibilities that you may lose money or your business may fail despite a lot of hard work. If you cannot accept these risks, you may want to rethink your decision.
- Risk of rejection – Every business must generate sales, and during the sales process it is inevitable that some (or most) potential customers will not buy your product or service. If rejection will cause extreme mental anxiety or deter you from making the next sales call, working for yourself may not be right for you.
- Risk to your lifestyle – Starting a business involves long hours, constant distractions, choices on how to focus your attention and sacrifices. These things will affect you and those around you. Be sure to consider the impact of your actions on your family and others.
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 potential pitfalls.
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.
Find a line of business that matches your skills, experience and interests. If you are considering starting a personal services business, it can be nice to start off with at least one existing customer. Whatever type of business it is, be sure that you have an affinity for 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—especially if it's one of your own choosing.
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 who 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 in your ability to 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.
You may also want to discuss how your partnership should 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, legal complications 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 promptly. One of the most common causes of business failure 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. Be sure to speak with your financial institution about what they may be looking for before they would be willing to lend to a new business. You may also want to explore a loan through Small Business Administration (SBA) programs, which offer a number of types of loans. Be advised, however, that the process can be time consuming and frustrating.
Finally, 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?
In addition to the above-mentioned aspects, you will also need to choose a business structure (such as sole proprietorship, partnership, corporation, sub-chapter S corporation or limited liability company).
The following chart provides some details on various types of business structures.