Questions to Ask Before Starting a Business

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 everyday, yet history shows that a majority of them fail because of a flawed business concept, inadequate financing or poor management. Consider these questions before taking that big step.

Do you have the psychological make-up to start a business?

Risk of failure – Starting a business is risky, both from a financial and mental point of view. Do not let the excitement and thoughts of success blind you to the facts that you may lose money or your business may fail despite a lot of hard work. If you cannot accept these risks, you will probably be better off continuing to work for someone else.

Risk of rejection – Every business must generate sales, and during that sales process, it is inevitable that some (or most) potential customers will not buy your product or service. You must be able to deal with others not wanting what you are offering. 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 of how you 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. You may be surprised what you can find readily available.

Find a line of business that matches your skills, experience and interests. If you are considering starting a personal service business, it can be nice to start off with at least one existing customer. Whatever type of business it is, be sure you like 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.

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 that 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 that you 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.

If you choose to have a partner, you may also want to discuss how your relationship can 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 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 quickly. One of the most common causes of business failures 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 the Small Business Administration. The SBA programs offer a number of types of loans, but can be time consuming and frustrating.

The final observation on needed capital is to 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.

How will you structure your business? 
You need to choose a business form (sole proprietorship, partnership, corporation, sub-chapter S corporation, limited liability company). While this may sound complicated, it is much easier to decide upon than issues discussed above. Each business form has attractions and drawbacks. Your attorney can be very helpful in evaluating the options and drafting any documents you need.

Are there additional things you should consider?
Your personal financial and tax situations may also change when you become a business owner. You may lose the predictability of a monthly paycheck and the other benefits found with a larger company. You may have to pay for your medical insurance and fund your retirement account.

 

Summary
The entrepreneurial spirit is alive and well in America. As you consider your future, remember that being in business for yourself can be risky as well as rewarding. Taking some key steps early in the process, hard work, a good idea, using sound business practices and maybe a little luck can make all the difference.

Financial articles provided by WestStar Bank are for information purposes only and are not to be construed as tax or investment advice. Please consult with a tax and/or investment professional if you have any questions or doubts about any of the information contained in the articles.

Products: Business Loans

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