Entrepreneurship is a fundamental part of the American Dream. From colonists to homesteaders to later immigrants, so much of what it means to be an American is to take advantage of new economic opportunities. We’ve done this to improve our quality of life and the lives of others. In the modern era, one of the best ways to take advantage of economic opportunity is to start a small business.
The ability to work in your local community, create your own hours, and provide a product or service that you passionately believe in is a dream for many people. Not only does it have the potential to create capital and passive income, but lifestyle changes and challenges can be incredibly fulfilling. Creating a brand identity of excellent service and exceptional product, challenging yourself to become an expert and learn the intricacies of an industry, becoming a community leader and employer are all things that can fuel and reward your drive to become a successful business owner.
Many small businesses are in great situations to hire and support local families, participate in the Chamber of Commerce and influence community governance and events, and provide growth and mentorship opportunities to young workers. Big businesses harming communities is a popular subject of documentary films, and serve as a lesson on the impact companies can have. In contrast, the presence and personality of locally owned businesses help define the character of a town in a much more positive way than corporately owned national brands.
So You Think You’ve Got a Business Idea?
A spark of creativity came to you while you were brushing your teeth. Something came up in conversation at lunch that stuck in your brain. You were driving home from your dreary job and had a realization… This idea could be a business!
It doesn’t have to be a novel idea. It could be as straightforward as recognizing the absence of a specific type of franchise. Opening a franchise can be a way to blend small business ownership with the help of a larger template of proven success.
The first step is market research. Before investing too much time and effort into creating a business, some crucial questions need to be answered. First up is the competition.
- Are there any other companies in the area that offer this product or service? How many?
- How successful are these companies?
- What are the consumer opinions of these companies?
- If there aren’t any companies currently filling this niche, why not?
- Was there a company that did, and then left or failed?
After determining that there is an opening in the market for a new business, the next questions are about the bureaucratic hoops that need to get jumped through, the red tape and paperwork. What types of permits do you need? If you want to open a restaurant, what steps do you need to fulfill to get a liquor license, or be approved by the health inspector? If you are planning on building a store or office location, is your building commercially zoned? This will also include registering your business with state and possibly federal governments, as well as understanding how to set up tax details. Those tax details are very much dependent on how you structure your company, which will be addressed later on.
Map the Action
Before setting out on the exciting path of starting a business, it is vitally important to create a business plan. A good business plan acts as a troubleshooting tool to forecast potential problems or pitfalls and make sure that you have logical pathways of growth and expansion. Additionally, when seeking funding for the initial startup, potential investors (whether private or a bank) need to see that you’ve done your due diligence and can sell them that your business idea has legs and you are the right person to take their money and build something with it.
A thorough business plan that will appeal to angel investors and the local bank would include:
- Title page: start with the name of your business. This can be tricky because a good name reflects the service the company will provide and creates some level of branding or personality. It’s better for a business name to be short, and you should be careful with including a geographic reference in the name because that limits any later growth outside the region. Lastly, you need to make sure no one else is using this name!
- Executive Summary: works as the abstract, or quick summary. This provides the quick hits, a macro survey of the market opportunity and how this business will serve that consumer need, with a plan for growth.
- Market Analysis: what is your target clientele? How large is it? What amount of their budget do they spend on products or services like the one you will offer?
- Competitor Analysis: how do you intend to differentiate your product from that of your competitors? What do they do well that you can emulate, and what will you do better or different than what they are doing?
- Development Plan: where is your expertise for your new business coming from? How do you plan to enhance and expand your product? Is there a system for institutional learning and refinement?
- Operations: what do the day-to-day functions of your business look like? How is it carried out, and by who? What is the hierarchy of management? Who is responsible for customer-facing interactions, who is responsible for performing the service or creating the product? What procedure or guidelines will give structure to those duties?
- Financial Details: how will this get started? How much seed money is needed? What are the projected costs? What is the anticipated timeline for turning a profit? For paying off loans or investors?
This level of detail is not needed for every type of business plan, but it will go a long way towards showing banks or investors how seriously you are taking this project and persuading them to help you start your dream business.
One last thing that is useful to consider is an exit plan. What contingencies would have to happen for the new company to fold? The grim reality is that the market is competitive, and even a well-conceived idea may fail due to factors outside your control. It is essential to have internal discussions covering what would constitute enough success to continue, and what warning signs will convince you to pack it up and cut your losses. You don’t want to lose too much of your own time and savings pursuing a goal that may, unfortunately, be at the whims of more substantial factors, such as a sweeping recession due to global pandemic.
Funding the Fun
Businesses don’t just arise from ocean foam, gently pushed to shore by the Zephyr like Aphrodite. It takes financial capital to be able to strike out and jump into action. Where that money will come from is a massive hurdle that prevents many people from pursuing their dream and starting a business.
But that money can come from many different sources! A magical lottery ticket is not the only method to acquire the necessary backing to get the ball rolling. Here are some of the ways to feel financially primed for success:
- Bootstrapping: financing it yourself! This option requires a ton of personal sacrifice and self-discipline, but it gives you complete control over your project. This is the riskiest proposition since all of the money comes from you. But starting by bootstrapping may be necessary at first to prove to investors or banks that your idea has merit and you’re the right person to execute this plan.
- Government Grants: The Small Business Administration helps local business owners apply for money in the form of government grants. This is competitive and not a simple process, but it is an awesome option because it doesn’t demand you give up any equity in your company.
- Crowdfunding: the reach of digital crowdsourcing platforms like Indiegogo, Kickstarter, or GoFundMe could attain viral fame. With some snarky writing, clever branding, and tiered rewards for contributors, you could retain full control over the project and create a powerful marketing buzz before you even open.
- Angel Investors: from either networking in your local area or through web services like Gust, you could find investors who are seeking a higher risk/reward threshold than many other forms of investment. These types of relationships could likely cost you chunks of ownership, or they could offer their business acumen in return for some decision making control. Frequently Angel Investors focus more on growth than immediate profit.
- Venture Capitalists: function in a very similar way to Angel Investors, except they usually pursue companies that are slightly more developed, and focus on expanding the reach and increasing profits. They do not use their own money, unlike Angel Investors, but use funds pooled from multiple people or investment firms. They tend to require a higher rate of return (ROI) than Angel Investors.
- Bank Loan: the most common way to get a business started. This still allows you to retain full control of your new endeavor but adds additional pressure of needing to make loan payments. To get a loan, you will surely need a business plan, an expense sheet, and financial projections. It is highly recommended that you shop around and compare offers from various banks to find the one with the best terms for you.
For some of these, having a detailed and robust business plan will be essential. Success in applying for grants or loans, or pitching Angel Investors and Venture Capitalists, very much depends not just on your idea’s originality but also on your level of detail and research showing that you can pull it off.
In addition to the plan of action, depth of research, and financial forecasting, it will be crucial to have a strong elevator pitch. To get these funds to finance this new business, you need to be able to sell them, clearly and efficiently, on a narrative of growth. They need to believe that you are the best vehicle to earn a profit and that your experiences and personality are just right to guide this project into profits. A strong pitch has the following qualities:
- Strong opening- first impressions are lasting impressions
- Passionate and Positive
- Practiced- make sure you’ve done it before to avoid unfortunate flubs
- Brief- a 60 second pitch with time for questions afterwards
- Keep the language accessible- avoid industry jargon
- Highlight the opportunity you see
- Emphasize how your idea targets that opportunity
Before giving the pitch, make sure that the audience already has your supporting documents. Ideally, you should send it as a PDF to avoid formatting issues from operating system to operating system, and you should send it a day or two before you are scheduled to deliver the pitch so that they can do their research if they so desire.
Picking the Right Type of Company
Deciding what type of company structure your business will have is very dependent on how many people or organizations have equity in the new project. So what your funding is will have a significant impact on which one you end up filing as. Additionally, the way you register the company guides how you will file taxes on both a state and federal level. How you want business’s taxes to be conducted should influence how you register your new company.
- Sole Proprietorship: the simplest company form. There is one owner, and the owner IS the business. It is useful because of how easy it is to start, its streamlined structure, and simple decision making. It carries significant risk, however, because any business debt or liability is directly attached to the owner. Profits from this business are paid as income tax.
- General Partnership: any business owned by two or more individuals. A slightly more complex arrangement than a sole proprietorship, it has many of the same strengths, except with several decision-makers that need to come to a consensus versus just one. It has the same liability risk as a sole proprietorship, except that all partners share liability for any other partner’s actions and the same tax situation (their share of company profits goes on income tax). The main additional pitfall is that multiple partners may disagree on what acceptable risk is, and the partnership may collapse because one person wants to pull the plug.
- LLP: Limited Liability Partnerships use legal documents to provide some separation between partners and the business. It requires the approval of the secretary of the state. It is still relatively lean, which aids decision making, but is less risky for all the involved partners. It is still susceptible to failure because of mismatched goals or risk thresholds from partners.
- Corporation: not the most common for a single business. It takes a bit more paperwork and registration but has the benefit of setting up the business as its legal entity. This protects the owners (shareholders) from most debt and legal liabilities. There are two layers of taxation: the company pays taxes on profits, and the shareholders pay taxes on their returns. Lastly, Corporations tend to be slower at making decisions because the director has to get the approval of the majority of shareholders.
- S-Corp: a slight modification on a corporation for tax purposes. Operates the same way and has the same benefits (limiting liability) and drawbacks (harder to set up, slower decision making), with one major change. Taxes do not apply to company profits and get levied on the shareholders’ profits as income tax. Also, the taxes on sales of stock are designed to incentivize being a long term stockholder.
- LLC: Limited Liability Corporations are a blend between a corporation and a partnership. It is its legal entity and can own property, sue, or be sued. The single layer of taxation happens not at the company level, but on the business owners’ income taxes. They are easier to set up than a Corporation and provide legal protection for the owners. It does require more capital than a General Partnership or Sole Proprietorship.
The nuanced differences between these can end up being vital in case of some accident, but as the company grows it can take on different, more appropriate forms.
You can’t escape it. In this modern world, a strong social media presence can be the difference between drowning in debt and being delivered a deluge of dinero. As mentioned in the Funding section, a snappy crowdsourcing campaign propelled by social media can generate buzz and consumer excitement before your company is operational. That means deciding upon a brand personality and image before you get started is essential.
Having a clean website that is mobile friendly explaining the fundamentals of what you do and crafting a narrative for why customers should choose you is vital. The design needs to be uncluttered, user friendly, and use professional photography to capture key junctions in your service in a positive light. Layering search engine optimization (SEO) keywords in your website will help it reach the top of Google results. It is probably worth paying for placement bumps when you do grand openings or new product rollouts.
A website doesn’t need to have the day-to-day or week-to-week updates for your company. It requires the fundamentals, the origin story, and the contact details. If you are a consumer-facing business, any marketing, specials, announcements should be made through social media, specifically Facebook and Instagram. Creating engagement and getting users familiar with seeing your name pop up is vital to building the kind of repeat clientele that sustains small businesses. Following, commenting, and supporting local events and organizations is a subtle but essential way to keep your business in a positive light.
Hiring Your First Employees
These are the people you will be spending most of your time with, and you bet on them to grow your business and make you more money. Not only is your sanity, but your financial well-being is dependent upon them. You need to ensure you are hiring high character people who will buy into your brand vision, fit your expectation for behavior and customer interaction, and have the specific skills you need to fill the needs of the business and complement their coworkers.
Having a clearly defined business plan helps identify what you need from your first crew of employees. Avoid entering any oral agreements that could be misremembered or misconstrued. As much as possible, formalize the employment contract and have clear mutual expectations for what you will expect from them and what they can expect from you in terms of pay and benefits. Many startups and new businesses have a culture of flexibility in the workplace and a norm of people fulfilling multiple responsibilities, but as much as possible you need to make people accountable for specific aspects or duties.
This includes having job titles and clear paths of promotion. People want to work for organizations that make them feel valued and feel that they have room to grow. It may also be of use to have employees sign non-compete or confidentiality agreements if you think you are innovating within your industry.
Depending on your industry, you may need to take steps to protect your intellectual property(IP). Whether through patents, trademarks, copyrights, or confidentiality agreements, if you are creating brand value or giving unique support to clients with proprietary institutional knowledge, you need to make sure that value is legally protected. Doing this early on can create passive income streams if you choose to license out that IP, give you a more persuasive sales pitch when meeting with prospective partners, and help close deals with potential clients.
Starting Your Own Business in Conclusion
We hope you’ve found this guide helpful and informative. Here at Great Business Schools we’re committed to helping you in your business education and career. Throughout this guide we’ve linked to some of the best content we have to offer. For many aspiring entrepreneurs and business professionals, a successful career starts with a business education. To that end, here are some rankings of business degrees to get you on your way:
- 10 Fastest Online Business Bachelor’s Degrees for 2020
- 15 Best Online Business Bachelor’s Degrees for 2020
- 25 Best Business Bachelor’s Degrees for 2020
- 10 Most Affordable Online MBA Degree Programs for 2020
- 10 Fastest Online MBA Degree Programs for 2020
- 15 Best Online MBA Degree Programs for 2020
This is just a small sampling of the work we’ve provided on business degrees. Please check back frequently to find updated content that will help you in myriad ways throughout your education and professional life. Best of luck!