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How to Start a Business
Welcome to the world of entrepreneurship! The following detailed guide contains all the steps needed to set up and start a new business. When embarking on the adventure of starting your own company, you want to make sure that you build a solid foundation so that your fledgling enterprise has a fighting chance. The business climate continually evolves, but certain basics always remain important.
Crafting your business plan requires detailed market research, analyzing your competitors, and studying your target customers’ demographics, among other things. You might need to run focus groups, send out surveys, and research important SEO keywords and public consumer data relevant to your product or service offerings.
Before you even open your business doors, start building your brand by getting your name out there via a website, press releases, social media postings, and other forms of advertising. You’ll need product prototypes and marketing materials to show your potential customers. Once you open your doors for business, you’ll have pent-up demand and a great customer following!
Coming up with a name for your new business, while important, is just the tip of the iceberg as far as the amount of work you’ll need to get through to establish your venture. Instead of running off in different directions, not knowing what to do first, we’ve assembled a detailed guide for you with 10 key steps to getting your business established. As you read through it, you’ll see various business structure options and financing methods, for example, so this guide will work regardless of your business type.
Now it’s time to get started on your new, exciting journey with the following 10 steps to start a business.
1. Start with Competitive Research
You don’t need to reinvent the wheel to have a successful business product. All you have to do is offer the same thing as your competitors, with one change. Take note of the problems with their product, and solve those problems with yours. You might start by checking out each of your potential competitor’s websites, looking at their product details, price point, quality of materials, accessory options, and other relevant details. Spend some time on shopping sites with lots of customer reviews, such as Amazon. Read all the negative reviews for products like yours and see how you can answer these complaints with a “better mousetrap.”
Find out who the leaders are in your particular industry – they are doing something that customers like. Learn from this and see how you can deliver a product that’s even better or unique somehow. Maybe you have a less expensive way to manufacture or access to better pricing on raw materials. Once you determine how your product is different and better, you’re ready to start writing up your business plan.
Get Clear on Why You Want this Business
Many people have gone into business because they had a hobby product that others loved, so they wanted to try selling to a larger audience. Others saw a need in the marketplace for a certain product and wanted to fill that need. It’s important to be clear on why you want to start your business. If your company exists because of a personal desire to run a business or make jewelry all day, your prospects might be somewhat limited. Conversely, if you start your business to answer a specific market need, that demand will help you grow your company larger and keep it going for the long haul.
Consider a Franchise
Perhaps you want a business and the personal control that comes with it, but you have no previous operational experience. Consider starting with a franchise so that you can learn from a company that already has a proven business formula. The failure rate for new businesses is about 80 percent after five years, while franchises’ failure rate after five years is only about 7 percent.
Research Business Names
Once you decide to move forward with your business idea, make sure you have really nailed down your idea’s value. Does it have long-term prospects? A viable customer base? A market that isn’t overly saturated? Choosing your company’s name is one of the fun tasks, but without a solid business first, a name won’t get you very far, regardless of its cleverness or cool factor. If your product is already a solid seller, a good company name can make your marketing and advertising campaigns more effective.
Define Your Ideal Customers
No matter how much you love your product, you won’t have a business unless you find people who want it and pay you a price that allows for a reasonable profit. If you have a ton of passion for your idea, others likely feel the same way, but you need to get the word out to them. If the market is hungry for the product you’re making, congratulations! If one or both of these conditions don’t exist for your product, though, you probably need to consider other business ideas.
Ask yourself why you want to serve a particular niche of customers. Is it because you enjoy creating products or services that help people or solve their problems? Do you enjoy creating artwork that beautifies your environment? Give some deep thought to how you want to provide value to your customer base and bring them a solution that they want enough to pay your asking price.
2. Write Your Business Plan
Writing a business plan might feel tedious or overwhelming, but you can choose to think of it as a planning tool that will greatly increase your chance of success. A thoughtful, well-prepared business plan discusses where your business is going, how you will handle difficult times, what resources you will need to sustain it over time, and what happens if you choose or need to leave the business.
Once you have selected your business idea, start fleshing out your business plan with answers to the following questions:
• What is your company’s purpose?
• Who is your customer?
• How will you cover your startup costs?
• What are your ultimate financial and business goals?
• What is your exit strategy?
By considering and answering these questions before you start operations, you could find out that there isn’t a substantial customer base or that the business requires significantly more startup cash than you have available. Don’t worry about having a perfectly worded write-up. Just get your honest thoughts on paper and use them as guidance on how to move forward.
Do More Market Research
The market research section is a key component of your business plan, especially if you want to provide your business plan to investors to raise capital. Get in-depth research on your industry, product or service, competition, and the general market landscape by using focus groups, surveys, publicly available data, keyword searches, and even informational interviews with other businesses in your industry or niche.
The point of market research is to learn exactly who your customer is and what they prefer, how they behave, their age, gender, income levels, and other important characteristics. Your product or service then needs to be geared toward matching each of these criteria. You also need detailed information on your competitors and how you plan on stacking up against them, and demographics for the overall market you plan to enter.
With this data, you can successfully differentiate your offering from your competition and communicate the unique value that your product or service offers.
Consider Adding an Exit Strategy
This valuable exercise can help you think through your company’s life cycle and your plans for the longer term. Maybe you intend to stay in your business and operate it for the next 40 years, but you could also decide that you only like the startup phase and want to sell the business once it hits three to four years old. Either way, having a predetermined exit plan can give you peace of mind and more control over your operations.
Having a carefully considered exit strategy means that your business could continue as you have planned if anything were to happen to you. It also means that if you get approached by an investor looking to buy your business, you already have everything in place and can readily hand over the business if the price is right.
3. Review Your Business Finances
Your new business will need money to get off the ground, and part of your upfront planning involves figuring out how to finance your startup. You might already have savings to invest in, or perhaps friends and family will lend you money. Some people put money aside while still working their regular job. No matter how you plan on coming up with the money, it’s important to have enough cash to cover your startup costs, your living expenses and sustain your company and yourself financially until the business turns a profit. In some cases, this could take a few years, so planning is critically important.
Many new companies fail because they run out of capital before making enough to turn a profit and become self-sustaining. It’s wise to overestimate the amount of startup money you will need. Give your business a fighting chance to make it past the startup phase.
Calculate Your Break-Even Point
Start calculating how much money you need by figuring out the cost to produce your product before making any profit. This breakeven analysis is an important part of your startup’s financial planning and can help you see your baseline costs and when your product or service will become profitable.
Use this basic formula:
Break-even point = Fixed costs / (Average product cost – Variable costs)
Fixed costs = Rent, utilities, and any other costs that stay the same, regardless of how much you sell; often called “overhead.”
Average product cost = the average cost to produce your product or service
Variable costs = Costs that increase or decrease in tandem with sales, such as raw goods or labor hours
The formula answer will be zero if you are operating at the break-even point.
Find Your Profit Point
Analyze your fixed and variable costs to determine the amount of revenue you need to generate each month to cover all of your company’s expenses. Start by considering the price point for each product. You will need to cover your per-unit fixed and variable costs for that product, plus a reasonable profit while keeping current market prices in mind. You also need to factor in how your competitors price their similar products.
Build this up with specifics for each product you plan to offer since not all products will likely bring in the same amount of profit or have the same amount of costs. You might sell some of your products for very little profit as “loss leaders” to attract customers to your other offerings. Remember that you will likely need to group all of your fixed costs into a lump sum and allocate them on a per-unit basis to each product.
Don’t forget to include the cost of labor in your variable costs, which should include the cost of your raw goods and any other inputs to manufacturing your products that aren’t accounted for in your fixed costs.
Analyze Your Cost Data
Keeping a continual eye out for ways to cut and streamline your fixed and variable costs can pay off in many ways over the life of your business. Look for ways to increase sales as an ongoing process as well. Some business owners become lax about their costs when sales are doing well – resist falling into this trap because if sales slow down suddenly and for an extended time, your costs might be too high, such as an expensive office lease that you cannot get out of, and cause the company to struggle financially.
Stay Vigilant with Expenses
When launching a new business, you might find that you have so much to do that you can’t find the time to shop around and keep your costs low. Bargain-hunting takes effort, whether it’s negotiating a better warehouse lease, buying raw goods in larger quantities for bulk pricing, or finding ways to streamline processes to reduce the number of labor hours on your production line.
These things pay off repeatedly with increased profits and the ability to weather difficult times or slow seasons. It’s easier to monitor costs constantly and cut as needed rather than waiting until a crisis hits and trying to frantically cut costs once the ship is already taking on water.
Review Options for Funding Your Business
You can find more than one way to raise money for your business, and choosing the best way depends on several different factors. Consider the amount you need, your business creditworthiness, ability to repay, and available financing options, such as the following:
• Business loans: Try for a commercial loan from a business bank, although you will probably need solid credit and a good amount of assets and receivables for collateral. If you don’t have success directly with a bank, go through the Small Business Association (SBA) to apply for a guaranteed loan. You can also investigate alternative lenders such as online crowdfunded loans.
• Grants for small businesses: This is money that you do not have to pay back. Not surprisingly, grant money is hard to get due to heavy competition. Like a loan, grants typically have stipulations such as performance metrics that your company needs to meet to receive or maintain the grant. Try for grants that have a close fit with your business, such as those for women or minority-owned businesses and federal government grants.
• Investors: Your startup will probably require some cash to get up and running, and this could range from a few hundred thousand dollars to a few million or more. Many investors will give you the funds in exchange for equity in your company, but they will also want to play an active role in how your company operates going forward. This can work well if you have investors with a depth of experience in your industry or business type.
• Crowdfunding: Instead of getting funded by just one party, you can get smaller loans from hundreds or potentially thousands of small lenders through online crowdfunding platforms. Many crowdfunding sites exist, so look for one that reflects your business or industry type. You need to set up your campaign, tell people about your company and what you plan to do with the borrowed proceeds.
Choose a Business Bank that’s Right for You
Size matters when selecting a business bank because smaller or startup companies will probably get turned away by big banks. The larger banks usually rely more on your business credit score, which you might not yet have established.
On the other hand, smaller community banks want your business and work with you based on other factors, such as your character, business profile, and local market conditions. Smaller banks make decisions at the branch level, unlike big banks, which means they’re more responsive. Community banks want to have a personal relationship with you and your business, and if you have trouble with a payment, they are there to help.
Your specific banking needs will ultimately determine your choice of banks. Spend time meeting with several small banks in your community to discuss your list of needs and how they can help you.
4. Choose Your Company’s Legal Structure
When setting up your business, you need to choose a legal structure, such as an LLC, corporation, or sole proprietorship. The type of structure you choose has repercussions on many things, such as taxes and your personal liability in the event of a problem. Each of these legal types is discussed below.
Sole Proprietorship: Choose this legal structure if you plan to do business on your own and own the entire company. You will have full responsibility for all debits and other business obligations. Note that this structure can put your personal credit at risk.
Partnership: If you and a buddy decide to go into business together and split the ownership, the profits, and everything in between, set your business up as a legal partnership. You both get a share of the profits in exchange for your hard work, and you both assume responsibility for the company’s debt and other obligations.
Corporation: To protect your personal assets and credit, you can set your business up as a corporation. Doing so legally separates your business entity from you, which keeps your personal assets safe in the event of any business-related legal or financial problems. Several different types of corporations exist, such as an S-Corporation or C-Corporation. Each has its differences, but the overall purpose remains the same. The corporation can directly buy real estate and other property, pay its own taxes, enter legal contracts, sue others, or be sued. If you hope to get venture capital funding or take your company public someday, a c-corporation is the preferred legal structure.
Limited Liability Corporation (LLC): Many small companies choose the LLC formation because it has a hybrid structure. You can get the legal protections that come with a corporate structure and the tax benefits you would get with a partnership structure.
If you are not familiar with each structure’s financial, tax, and legal implications, speak with an attorney or business adviser that specializes in small business setups.
6. Purchase Business Insurance
Buying insurance for your business may seem like money that could be better spent elsewhere until you have an incident, get sued by a disgruntled customer, or have your business interrupted by unforeseen circumstances outside your control. Various insurance types can cover everything from property damage and theft to workers getting injured on the job. Businesses often purchase the following types of insurance policies, depending on their individual needs:
• Workers compensation: This covers medical expenses and lost wages for employees who sustain an injury on the job.
• Property: Covers property loss or damaged due to theft, fire, and other common perils such as water damage. This policy also covers the contents of your business.
• Liability: Covers medical costs and legal fees for lawsuits brought by customers regarding a defective product or service error
• Business Auto: Standard commercial auto insurance for vehicles used by employees as part of your business operations
• Umbrella: This insurance covers everything that is not captured under your company’s other liability policies.
Depending on certain factors, you might be able to purchase a Businessowner Policy (BOP) that bundles together the most common types of insurance for your specific business.
7. Assemble Your Workforce
Unless you have decided to work as a solo entrepreneur, you will need to hire a team of great people to help get your business off the ground. This might seem like an easy task, but it’s important to give your people selection and job descriptions the same amount of attention you give to your products or services.
Since you need to rely on your people to build and provide your product or service, put together a team that addresses your company’s needs and chooses employees who can work together as a cohesive team.
Be very clear and specific about job descriptions, roles, and responsibilities for each employee. Discuss these with all of your employees present. Your team will run smoothly once every member knows where their job responsibilities begin and end.
8. Partner with Reliable Vendors
Operating a business requires so many different skill sets, and you will inevitably need to hire outside business service providers for certain tasks. You will also likely have outside vendors that supply raw goods if you manufacture products. Third-party businesses exist to help you with everything from outsourced payroll and temporary production employees to tax services and custom software design and implementation.
When selecting your business-to-business (B2B) partners, choose them carefully as they will most likely have access to your important, confidential business data. Additionally, outside vendors could become a critical part of your business process, so you can’t afford untrustworthy or unreliable vendors. Prepare a list of vendor interview questions, ask about their other clients, the vendor’s length of time in business, and whether they have done your specific type of work successfully for other customers.
9. Create Your Brand and Advertise
Before you get started selling your products or services, design your brand with a great logo and build up the “buzz” and customer awareness for your products so that you will have pent-up demand and good sales on your first day open. Your initial marketing plan and an ongoing marketing effort are key to keeping your current customers engaged and finding new customers.
Devise a marketing plan that includes various channels or ways to reach your customers. This could include a company website and blog, email newsletters, opt-in forms for future emails (to announce sales, new products, discounts, etc.), and social media such as Facebook, Instagram, and Twitter.
Integrate the following steps into your overall startup marketing strategy.
Logo: Design or contract out a logo design that customers can easily identify with your company brand. Use it consistently on all business cards, letterhead, and product labeling, and add it to your other communication platforms.
Your Website: Build a website that showcases what products or services you have to offer. Think of your website as an online catalog and an investment in educating your customers. When people hear about you through other channels, they can visit your website for more product information, pricing, special offers, and most importantly, purchase your products. You can add blog posts that educate your customers about how your products can work for them, developments in your field, and other relevant topics that help you keep interactions going between you, your current customers, and new ones.
Social Media: Many social media platforms exist, and you might have to conduct some due diligence to see which platforms your specific customers frequent. You can use social media sites such as Instagram and Facebook to offer promotional discounts, product updates and to introduce new products. Aside from leading customers to your website, you can also run very targeted advertising and sell products through social media platforms, which makes them even more useful.
Email and Opt-Ins
Customers have become overwhelmed by so many emails these days, and you risk alienating them if you bombard them with even more emails without their permission. As you establish your company’s brand, ask your customers if they would like to receive your emails about upcoming news, discounts, promotions, and new products. The best way to do this is by using an “opt-in” form. This form of customer consent authorizes you to contact customers directly through email on an ongoing basis.
When you give your customers a choice about whether they want to receive your monthly newsletter and coupons, you are giving them respect and building trust. Opt-in forms are also required by law. The Federal Trade Commission enacted the CAN-SPAM Act of 2003 to stop the volumes of throwaway emails being sent to customers without their approval. Legally, you are required to get a customer’s permission to send any email messages which have the primary purpose of commercial advertisement or promotion of a commercial product or service. Each email sent without customers opting in and consenting to receive emails from you is subject to a fine of over $40,000.
Customer Relationship Manager (CRM) Software
You can use CRM software to set up an email advertising campaign, store your customer’s marketing data, issue and track opt-in forms, maintain your customer email list, and send out marketing and advertising emails. A well-planned and executed email campaign can work wonders for reaching your target customers and connecting with your audience.
10. Grow Your Venture
Once you launch your venture and gain some sales traction, you might want to sit back and rest on your laurels. Not so fast, though. To keep business flowing and maintain or increase profits, you need to have an ongoing system to grow your business. Like many other things in life, what you put into your business is what you get out.
Building and maintaining a presence doesn’t have to be costly, but be prepared to give products or your services as part of getting more exposure to potential customers. For example, you could collaborate with a more established brand in your industry and ask them to promote you in exchange for giving free products or services to their customers. Consider partnering with a local charity or a cause that’s relevant to your business, volunteer your services or products, and then mention the charity and your work on your website, blog, and social media pages. If you are in food service, target local businesses and organizations and offer discounts for members of local groups, companies in need of catering, and lunchtime deals for employees from local businesses.
Even if you integrate all of the above ideas, be prepared for things to go awry. No matter how thoroughly you build your plan, perfect plans don’t exist in the world of business. It’s important to stay flexible and have some backup plans ready.
Counter this reality with a willingness to adapt quickly and apply good problem-solving skills. As an entrepreneur, effective problem-solving is part of what makes you valuable. This skill could be in your own business or as a service provider helping clients solve their problems.
Location, Location, Location
How do you intend to run your business? Do you plan to work out of your own home office, or are you seeking retail or warehouse space for your business? Consider the rent, utilities, and overall investment required for your business along with its location before launching. Location matters when it comes to foot traffic, especially when you are running a local brick and mortar business. It is also important to consider whether purchasing a property outright or simply signing a short-term lease is best for your business when starting out from the ground up.
How To Start a Business in Each State
Frequently Asked Questions (FAQs) about Starting Your Business
How do you start a business when you have no money?
Starting up a business doesn’t always require a ton of money upfront. If you want to use your own funds, you can always keep your day job and work on your business plan on your off time. While you’re still working, save up some money to fund your new venture. Take the plunge once you have enough savings to fund your idea, and your living expenses, for at least the first year of business.
You can also use your business plan to pitch your idea to investors. You can get funding in exchange for equity in your new business. Many people have raised money through online crowdsourcing platforms such as Kickstarter and IndieGoGo. These sites supply the platform and expose your business to millions of viewers, but you may also need to do some of your own marketing to get more people to find out about your campaign and help you raise money.
The Small Business Association (SBA) has programs to help you get a small business loan, or you can try approaching your bank or credit union for a loan. You can also apply for a loan from one of the crowdsourced online lending platforms, such as Prosper or Lending Club.
What type of business is the easiest to start?
If you just want to get down to starting a business without tons of upfront work and money, look for business ideas that require little to no money to start. These typically involve providing services, such as home repair, dog sitting, bookkeeping, and selling products online.
Consider starting whichever of these types of businesses suits your background, or look for another idea that requires minimal training. If you choose to sell products online, you can avoid spending any money upfront for inventory by starting a dropshipping business. Search online for manufacturers and distributors that will pack and ship their products directly to customers after making the sale. Design your own website and populate it with various products from dropship companies in your niche. You don’t buy inventory until after making a sale to your customer. Once you forward the order to your dropshipping company, they do the picking, packing, and shipping to your customer.
What’s the best time to start my business?
This varies by person, but the following considerations can help you decide. The first consideration is to start only when you have the time and resources to dedicate to starting and growing your business. This business will be your baby, so prepare to give it the time and attention it needs to grow.
If you’re planning a venture that is busier during certain seasons, such as a toy business that will go crazy at Christmas time, get your business up and running one quarter, or three months, ahead of the season. For non-seasonal businesses, try launching in spring or fall. People vacation during the summer, which could impact your startup sales effort. Avoid starting at the end of the year as well, since it’s expensive to form your LLC or corporation, and you’ll want to get the benefit of setting it up for a full year of business before paying another round of annual taxes or fees.