NEW VENTURE GUIDE
by the UALR Arkansas Small Business Development Center
Step 1: Examine your motivation for business ownership
Although businesses are started each day, owning and operating a business is not for everyone. If you open a business without an honest evaluation of your motives, you may find yourself unhappy and disillusioned. Please consider:
Your Personal Objectives
Have you defined your personal needs and your financial objectives? Why do you think you will be happy as a business owner? Are you mainly interested in money, power, or flexibility? Have you examined your family needs?
Do you have special skills or education in a particular industry? How will these talents help you in the development and operation of your own business? Do you like to sell? Can you sell? You will be required to sell yourself, your company, and your products and services.
Your Personality Traits
Are you an authoritarian or a team player? How will this affect your relationship with employees, customers, and suppliers? Can you handle the stress of time deadlines from customers? Can you live with yourself if you have to fire an employee? Are you willing to risk everything you own? Will you be able to live with the fear of failure? Will your family?
Answering questions such as these is the first and one of the most important steps in your decision-making process to enter the world of business ownership.
Step 2: Choose a business suitable for you
A question often asked is "What kind of business should I start?" No one can answer this question for you. Businesses of all types are both successful and unsuccessful. A business generally succeeds or fails based on the customer market, the skills of the owner(s) and workers, and the quality of the products, not because of the type of business.
Personal Areas to Consider When Choosing Your Business
Your experience is most important when you are considering starting a new business or buying one because past experience in that particular industry will help you understand your customer market and avoid costly mistakes. It is less important when buying a proven franchise because your purchase should include a developed technical support system.
Step 3: Evaluate the feasibility of your chosen business
At this point, you have examined your personal motivation for business ownership and chosen an interesting possibility. Most likely, you are anxious to run to the bank, get a loan, and open your business. STOP!
A common mistake made by many people is to blindly begin a business without evaluating whether it is feasible. A feasibility evaluation will allow you to make a more informed "go" or "no go" decision. It involves a detailed examination of financial, personal, and market realities. A sampling of topics that should be honestly appraised includes:
Do you have enough money to start your business without going into debt?
If you need to borrow money, do you have some cash and own other pledgible assets?
Are you willing to risk these assets to borrow money?
If not, where are you going to get your money?
Can the business generate enough cash to pay its expenses as well as your desired level of owner profit?
Are the rewards from the business, both monetary and personal, worth the effort and investment you will make?
Are your management skills adequate to oversee and develop the business operation?
Is there really a demand for your product or service?
Have you researched market demand or have you just assumed that people need or want your product or service?
What is the worst thing that could happen if you go into business for yourself?
Are you capable and willing to deal with the worst possibility if it occurs?
You need to know if your idea is feasible before you progress to the next step.
Step 4: Consider start-up requirements and common pitfalls
You have completed the three preliminary steps and have decided you still want to continue. You have decisions to make that will affect the development of your business. Please be aware that there are many common errors people make because they act out of haste or without thinking about future consequences.
Many New Venture Requirements Are Ahead of You
Learn about the legal forms of organization you may choose and what steps you must take to establish a legal business entity.
Learn which permits, licenses, rules and regulations are applicable to your proposed business.
Determine the types of records you will have to keep for tax purposes and for management and control.
Consider your professional needs, such as legal, accounting and tax, insurance, and banking.
Some of the Common Pitfalls to Avoid:
Thinking others will do your work for you. You should not expect or depend upon others to write a business plan. This is your business, not theirs. Once you have your basic plan in writing, seek outside evaluation of it.
Entering into verbal partnership agreements. Partnerships should be entered into with caution and legal guidance. You may be in general agreement now, but future events can cause serious problems. Prepare a written partnership agreement, identifying each partner's responsibilities. Be specific in the way a break-up of the partnership will be handled.
Paying licenses and fees before you have adequate funds to start the business. Your business may be legally established, but you may be unable to obtain financing.
Entering into contracts before securing funds to open the business. Do not legally commit yourself to any contracts before you are certain you have the funding to begin. You will be responsible for contract performance regardless of whether you actually open your business or not. In some instances, it may be possible to make an agreement contingent upon obtaining business financing.
Thinking it will cost less and take less time to get into business than it actually will. It will cost more and take longer than you imagine.
This discussion by no means covers all start-up requirements that you must be prepared to handle or all the common errors we see potential business owners make. Be cautious, be prepared, and be flexible.
Step 5: Develop your business plan
Many people talk about a business plan when they really mean a financing request. If you are seeking significant private investment, the two documents will require much of the same information. If you will seek traditional commercial financing, which is much more likely, the financing request will usually be less comprehensive.
A Business Plan Is:
a strategic plan for development and operation of your business.
for your internal management use.
A Financing Request Is:
a document to raise money.
A Business Plan is a Management Tool You Should:
use to help you think through the development of your business and ensure that you have considered options and anticipated potential difficulties.
use to evaluate progress against your business goals.
update and modify for operational and strategic planning purposes as the business environment changes.
use in the development of financing proposals.
Some of The More Obvious Differences Between the Two:
your business plan should contain more detailed information than will be required for a financing request.
your business plan is for managing your business. A financing request is for providing information to a lender.
Step 6: Develop your financing request and obtain initial capital
In reaching this step, you have determined you have personal money to cover a "down payment" or the "full cost" of starting your business. If you did not do an honest analysis of your financial position in Steps 3 and 5, you have probably invested a lot of time only to learn that you will not be able to borrow the money to start your business.
If you skipped the other steps (which is common), there are facts you should know about borrowing money to finance your business. You should also go back to Step 1.
Most businesses are started with money from personal savings, family, or friends.
Only about 20% of new business owners start their business with money borrowed from commercial lenders.
No conventional lending source, private or governmental, will make a commercial loan for 100% of the funds you need to start your business.
As a rule of thumb, you will need to provide a minimum of 25-30% of personal investment toward the total start-up costs of your business. If you have less than this, your chances of obtaining outside financing are not good.
Your "sweat equity" will not be considered relevant by the lender.
As a general rule of thumb, you will need $1.50 in quality collateral for every $1 you want to borrow.
Although you may think your collateral's true worth is its appraised value or its original cost, its worth to the lender will be far less than either of these values.
Your financial projections must show that any loan proceeds plus interest and other business expenses can be repaid from business revenues. The assumptions that you base your financial projections on will be examined carefully for reasonability. When the lending decision is being made, having adequate collateral will not override the business's inability to generate positive cash flow.
Acquiring a loan will be more involved and time-consuming than you think. In the best of circumstances, it will normally take 60-90 days to close a loan. If you have a complex situation or if the lender needs additional information, the time span may be significantly longer.
Caution: Be realistic. Do not assume your loan request will be approved. Lenders are in the business of making money, not buying ideas.
Step 7: Finalize all start-up requirements
You have completed your planning and have acquired the funding needed to start your business. Now is the time to sign contracts and lease agreements, pay various licenses, permits, and fees, obtain utility services and complete all other requirements.