Don’t Even Think About Starting a Business Until You’ve Answered These 7 Questions

Opening your own business is one of the smartest things you can do in today’s economy. Millions of people are out of work, corporate job opportunities are on the decline, and people from across all socio-economic groups are fed up with working for others and want to begin building their own dreams.

Don't Even Think About Starting a Business Until You've Answered These 7 Questions. Image: ShutterStock
Don’t Even Think About Starting a Business Until You’ve Answered These 7 Questions. Image: ShutterStock

That’s why so many people have decided to take the plunge and open their own business. And according to the 2015 Kaufman Index, last year the nation saw the first rise in startup activity in 5 years, which was the biggest year-over-year increase in the past 20 years. The report shows that every month in 2015, 530,000 people started new businesses. That a lot of new business owners who decided to pursue their dreams.

Content Summary

Question Number One: Why Do You Want to Start a Business?
Question Number Two: Have You Researched Your Business Idea?
Question Number Three: Have You Found a Local Mentor?
Question Number Four: Do You Have a Legal Structure?
Question Number Five: Do You Have a Business Plan?
Question Number Six: Do You Have Enough Money?
Question Number Seven: Do You Have a Marketing Plan?

But all that recent business activity comes with a warning: unless new businesses are started the right way, they have a high chance of failing. In fact, the Small Business Association estimates that 90 percent of new business fail, and in 2013, Forbes estimated that more small businesses with employees shut down each month than started up.

No, don’t get me wrong. Working for yourself is one of the smartest things you can do. I’ve been self-employed for years and wouldn’t dream of working for someone else. Self-employment allows you to set your own hours, determine how much income you’ll earn by the number of hours you work, and it gives you an autonomy that is impossible to get when you punch a clock.

But there are risks, and many people don’t make it.

Fortunately, there are some specific questions you can ask yourself before launching your new business that will exponentially increase your chances of success. I’ve outlined seven of the most important questions in this PDF, and if you read them and apply them to your own business venture, you’ll be miles ahead of other people who decide to start their own business.

So, let’s get to it, huh? Here are the seven questions you absolutely must be able to answer before you’re ready to open your new business doors.

Question Number One: Why Do You Want to Start a Business?

Believe it or not, the reason you want to open your own business will help determine how successful it is. You should give this question some serious thought and be honest with yourself when answering because a lot rides on it.

Below I’ve listed the top ten reasons people have for starting businesses, but I’ve broken them down into two sections. The first is a list of five great reasons to dive in. If your reason for starting your own business falls into this section, you’ve passed the first test and your chances of success are improved. But if you find yourself in the second section, you might want to think a little more before taking the leap.

Here are some of the reasons you may have for opening your own business.

The Top 5 Great Reasons for Starting a Business

  • You have no choice. Literally. What I mean by this is that you lie awake at night thinking about your idea, and your friends and family are all bored to tears with it because it’s all you talk about. You live and breathe your business idea and the thought of not getting to do it is almost enough to stop your heart. If you fit into this category, congratulations-you are likely going to succeed in your new business venture.
  • You want to increase your income. This is also a great reason for starting a business because if you do it right, you will indeed begin earning more income. But this can also be a trap, because if you think starting and running your own business is going to be easy money, you’ll quickly find yourself disappointed.
  • You want to grow. If personal and career growth is your motive for starting your own business, you’re on the right track. There is nothing that will mature a person faster, and because you’ll be in charge of every aspect of your business, your learning curve will be quick. Starting and running your own business is a sure way to challenge yourself to get up to speed on every area of business management. And once you begin the journey of growth, you’ll likely continue it your entire life. It’s what happened to many of us serial entrepreneurs—once you get a taste of it, you never want to stop.
  • You want to be the boss. Sure you’ll have clients and deadlines, and if you don’t treat them with respect, your business will surely suffer. But ultimately? You’re the boss. And that means you get to decide which products or services you sell, whether you work from home or rent an office or store, who to hire, how much to charge, and how many hours a day you’ll work. Don’t confuse this with someone who refuses to listen to others or won’t treat their customers as the boss. If you think like that, you’ll have a difficult time succeeding as a business owner.
  • You have a problem to solve. Some of the greatest business owners in the world started their business because they saw that consumers had a problem that wasn’t being solved by the marketplace. For instance, Chipotle knew that fast food is unhealthy, and that was the driving force behind the startup. If you see a problem that isn’t being met and you want to start a business to solve that problem, the odds are in your favor for success.

The Top 5 Bad Reasons for Starting a Business

  • Now for the flip side. If you find yourself on this list, it’s probably a good idea to reevaluate your situation and do some more research, reading or investigation before taking the leap.
  • You want to get rich quickly. If you’ve read any of my books, you know how I feel about this often touted lie. Yes, there are entrepreneurs who hit it big quickly, but they’re rare. For most of us who are starting and running businesses, it takes time to turn a profit. If you believe that you’re going to strike it rich as soon as you open your doors, or worse, get rich by hardly doing anything, you are not ready to take the plunge.
  • You want to get famous. Some people decide to go into business for themselves to help build their personal brand or to get name recognition. But the truth is that every new business owner sends pitches to the media and most of the time, they’re ignored. In order to get the kind of publicity you’ll need to get famous, it will take a lot of money and PR to call attention to yourself or your brand. This is definitely not a good reason to start a business.
  • Someone wants you to. Another horrible reason to start your own business is because someone else wants you to. For example, a close relative or friend has an idea for a startup and tries to convince you to be their partner in the endeavor. My advice? Run. If the only reason you’re considering starting a business is because someone else wants you along for the ride, just say no. In the end, if you’re running a company for someone else’s dream, you won’t be able to maintain the drive and passion it takes to truly succeed in a new business venture.
  • You want more time. It’s a misconception that when you run your own business, you’ll have more time for yourself and your family. In fact, the opposite is true. Studies have shown that small business owners work many more hours more than people who work for others. That’s because you’ll wear many hats and have to run all aspects of your business. And guess what that takes? You guessed it—time.
  • You’re running from something. If you’re stuck in a dead end job, or work for a boss who makes your life miserable, you should do something to change your circumstances—but starting a business may not be the best move. When you launch a business, you should be striving for something, not running from something. Also, make sure you don’t confuse your desire to get away from a problem with a passion for a new business.

Question Number Two: Have You Researched Your Business Idea?

If you’ve determined that your reason for starting a new business is a good one, your next step is to ask yourself whether or not you’ve conducted the right amount of research for the project. Now, let’s clarify what I mean by research.

Research is NOT asking friends and family if they think your idea for a new business is a good one.

You remember the statistics I quoted at the beginning of this PDF, right? By some estimates, 90 percent of all startups fail. And you know what one of the most common reasons for failure is? Taking a product or service to market where there is no demand. It doesn’t matter how great of an idea you think you have, or how brilliant your friends and family say it is. If consumers don’t want it, your business doors won’t be open for long.

So, how can you determine whether or not your idea will fly? It’s simple—you ask the consumers. Here’s a quick rundown on how to best go about this.

  • Identify your ideal customer. Before you can ask consumers if they would purchase your product, you’ll need to first identify what type of person will buy your product. To do this, make up a list of all the benefits your product or service offers, and then describe the type of person that needs those benefits. For example, if you want to open a home-based cupcake business that caters to moms, your ideal customers would be busy moms who don’t have a lot of spare time, moms who throw birthday parties for their kids, and moms who can’t bake well.
  • Form a local focus group. Now that you understand who your ideal customer is, it’s time to connect with the people who fit into that category. The best way to do that is to form a local focus group made up of people you don’t know who are similar to your ideal customers. Our cupcake entrepreneur could run an ad on Craigslist or persuade friends to find local women who fit into the category to be a part of a focus group. This group would hear a presentation about the business idea and taste samples of the cupcakes. In the end, the group would give feedback about what they did and didn’t like about the idea, and even offer suggestions for improvement. If it’s not possible to form a local focus group, you can do it online at places like Survata.com and InsideHead.com. Finally, if all else fails, use sites like SurveyMonkey.com to take your idea to social media and ask for feedback.
  • Listen. Perhaps the most important step in getting feedback from potential customers is to listen to what they have to say. Some entrepreneurs are so sure their idea is great, they fail to listen when they get feedback from focus groups saying just the opposite. Remember, you don’t want to launch a business unless there is significant consumer interest in your product or service.

If you’ve been diligent about surveying and listening to people who are like your ideal customers and have receive positive and encouraging feedback, it’s time to move on to the next question. Are you ready?

Question Number Three: Have You Found a Local Mentor?

I know, you just want to take your idea and run with it, but keep in mind that launching a new business is one of the most important things you’ll ever do and you should do everything in your power to ensure that you’re in the 10 percent of people who make it—not the 90 percent who don’t.

And one of the best things you can do to ensure your success is to find a local mentor who will answer your many questions and steer you in the right direction.

Start by thinking about the people in your life. Do you know any entrepreneurs who have achieved success? If so, ask if they would consider mentoring you. If you don’t know any successful business owners, you might approach a non-competing business owner in your local area who you know to be successful. Many community minded local businesses are open to helping new business owners get off on the right foot.

And if you don’t know anyone who could act as your mentor, check into the resources listed below.

  • SCORE. Affiliated with the Small Business Association, The SCORE Association provides free business mentors to aspiring and new entrepreneurs. These mentors have years of experience and can help you in the early planning stages of your business. There are thousands of volunteers throughout the nation, and you can find one near you by going to the SCORE website.
  • Courses. If you just can’t squeeze in the time to meet with a mentor (You really should try), then you can take some on-demand courses offered by SCORE to help you get up to speed. The courses cover all aspects of starting a business and you can take them online and according to your schedule.
  • Workshops. Finally, you can also take workshops put on the organization, and even meet up with mentors at your local SCORE office. Just click on this link to find a complete list of offices and look for one in your area.

Remember, there are people who have been in the exact same place as you are right now and are willing to talk to you about their successes and failures. It only makes sense to find a mentor who will look out for you as you begin this exciting phase in your life. People, don’t let pride get in your way of this one!

Next, you need to ask yourself what the best legal structure is for your business. As a new entrepreneur, you’ll have a few to choose from, but the decision you make will greatly impact the financial future of your business.

I’m not a financial advisor, and so I recommend that you meet with a business attorney before making this decision, but here are the basic ways you can legally structure your new business—along with the pros and cons of each.

Sole Proprietorship

This is the easiest and most commonly used business entity for home-based businesses. As a sole proprietor, the business owner is the head of the business and doesn’t have to answer to anyone else before making decisions. All types of businesses use this entity type.

Pros

  • It’s easy to start because there is no paperwork involved.
  • There are no fees associated with this type of entity
  • You will file a personal return, and net business losses can be deducted on your taxes.

Cons

  • If someone sues your business and wins, you can be held personally responsible.
  • You will pay personal income tax on the business’ net profits.

General Partnership

If you want to go into business with someone else, you can form a general partnership, which means the business would be owned and operated by both of you.

Pros

  • This type of business entity is also easy to start
  • There are no fees associated with this type of business
  • If the partnership experiences net business losses, they can be deducted from the partner’s personal taxes.

Cons

  • The partners will pay income taxes on the business’ net profits.
  • The partners will be personally liable if the business incurs debts or other liabilities.
  • Partnerships have the highest failure rate of all the business types.

Limited Partnership

In these types of partnerships, not all partners get to operate and manage the business. This entity is made up of partners who do manage the business, and those who solely act as investors. Only the managing partners assume personal liability for the business’ debts and liabilities while the investor partners only assume a minimum risk.

Pros

  • The fact that investing partners don’t assume liability makes it easier to attract seed money for the business.
  • Investor partners (also called limited partners) won’t disrupt the business if they decide to leave because they’re not involved in the operations.

Cons

  • It costs more to form this type of business entity.
  • The general partners assume all liability because they manage the business.

Corporations

It is trickier to set up this type of business entity, and what makes it more so is that each state’s rules are different. A corporation is a separate entity from its owners, and there are many rules and regulations that must be followed.

Pros

  • If the owner shares the business profits, it can lower taxes.
  • In some cases, owner benefits can be claimed on taxes as a deduction.
  • The owner isn’t fully responsible for the business’ debts and liabilities.

Cons

  • It’s more expensive to set up
  • A corporation requires legal paperwork to be filled with the appropriate state.
  • Since the corporation is a separate entity, it must pay taxes.

S Corporation

In this type of business structure, the profits and losses of the business are passed on to its shareholders.

Pros

  • The business owner’s responsibility for the business’ debts and liabilities is limited.
  • Owners report the profits and losses of the business on their personal income taxes.

Cons

  • This type of business structure is more expensive to set up.
  • If you own a smaller share in the business, you’ll receive less of the profits.

Limited Liability Company (LLC)

This type of business entity is a combination of a partnership and a corporation because it gives owners protection from liability and eliminates the need to pay double taxes.

Pros

  • Owners maintain control over the business while limiting their exposure to liability
  • All owners share equally in profits and losses.
  • The business can be taxed as either a corporation or a partnership.

Cons

  • An LLC can be expensive to set up.

As you can see, you have many choices when it comes to setting up your business, and you shouldn’t open your doors until you’ve done it. Think about the pros and cons of each type of business structure, and talk to an attorney if you feel it’s necessary.

Question Number Five: Do You Have a Business Plan?

My gosh, I can hear the groans all the way over here. I know, creating a business plan isn’t on your “Things I Want to Do” list, but believe me, trying to start a business without one is like taking off to drive across country without a map. You need a business plan, pure and simple.

It will help you visualize your business in the beginning stages and catch potential problems you haven’t yet thought of, and at the same time, it will create a vision map for you of your business’ future. Trust me, if you haven’t created a business plan, you’re not ready to launch your business.

But it doesn’t have to be that complicated, depending on how you plan to finance your business. Since you’re opening a home-based business, chances are you’re bootstrapping and using your savings or borrowing from friends and family. In that case, you won’t need an elaborate plan. You can create a 1-3 page plan using bplans.com’s simple template.

If you plan to pursue financing and need a more in-depth plan, I recommend talking to your mentor and asking them to help you with the process. In addition, you can find templates for every type of industry for free at this link.

Here are the most commonly used chapters in a business plan, broken down into the simplest of terms:

  • Executive Summary. This is a 1-2 page chapter that gives the reader an overview of your business idea and the plans you have to open it.
  • Company Overview. This is a brief synopsis of your business’ legal structure and location.
  • Products or Services. Here, you’ll describe the need in the marketplace and how your product or service will fill it.
  • Target Market. Describe your ideal customer. Include details of why you believe this segment of the population will buy your product or service.
  • Marketing and Sales Plan. Tell the reader how you will reach the market. What advertising methods will you use?
  • Milestones and Metrics. If you’ve reached any milestones, such as forming a focus group or finishing the prototype of your product, mention it here.
  • Management Team. Here, you will describe the members of your management team. If you still need to hire members of the team, describe the type of person you intend to hire.
  • Financial plan. You’ll need to create a financial forecast for your business. This shows potential lenders that you’ve meticulously thought about how you plan to make the business a success.

Question Number Six: Do You Have Enough Money?

Can you guess what the number one reason is for new business failure? If you guessed a lack of money, you would be right. The truth is, many newbie business owners go into business with a shortage of cash because they believe that they’ll start selling right away and can make up the difference.

That’s a huge mistake.

There is simply no way to predict how quickly a new business will begin turning a profit, and if you guess wrong, you’ll sadly have to close your doors.

So, what is the right amount of money?

Once you create your business plan, you will understand what your expected fixed and variable expenses are. Now, add in your personal expenses, because those will need to paid, too, and lump the monthly sums together.

Ideally, you would start your business with a minimum of two years of both business and personal expenses.

That’s a lot of cash, isn’t it?

Yes, but think about it. As you’re growing your business, you will have to pay both the bills and liabilities of the business, plus continue to pay your own bills. And there is just no way a new business can support those types of obligations.

But if you don’t have that kind of cash laying around, don’t worry. You’ll have all sorts of options when it comes to financing your home-based business. Here are a few of them:

  • Friends and family. This is a common way for entrepreneurs to get the financing they need, but if you’re going to approach people you know for a loan, you should do so professionally and offer to put the agreement in writing. Treat it as a business proposition to avoid any potential disagreements that could hurt your relationship down the road.
  • Credit cards. If used wisely, credit cards are an easy way to get the cash you need to start your business. Pay attention to interest rates, and try to use a card with the lowest rate you can get, and then pay off the cards as soon as you can.
  • Use Your 401K. You’ll pay fees on the transaction, but if there is no other way to get the cash you need, you can borrow it from your 401K.
  • Cash out your whole life insurance policy. If you have a whole life insurance policy (not a term policy), you can borrow money from the payout, and you don’t even have to pay it back. Remember that your beneficiaries’ payout will be less than you originally planned.
  • Use your home. If you own your own home, it’s possible to take out a second mortgage on it and use the money to fund your business.
  • Get a bank loan. These are hard to come by these days, but if you have a good relationship with your local bank, approach them and ask for a business startup loan.
  • Consider alternative financing. All kinds of alternative lenders have popped up since banks have reduced the amount of loans they give, but you have to be careful when approaching one of these lenders. Check out places like Kabbage to talk about a loan for your business.

Don’t be tempted to launch your business without sufficient funds to carry you through for at least two years. And if you are, please keep in mind that the 90 percent of business owners who failed last year probably also gave in to that temptation.

Question Number Seven: Do You Have a Marketing Plan?

Finally, we’ve come to the last of our important questions, and it’s a big one. It’s not enough to know that you have a great product that people want. You also have to have a plan in place to get that product or service to them.

If you haven’t yet designed a marketing plan that will get your business in front of potential customers, you’re not yet ready to launch.

Your marketing plan should consist of the following elements:

  • Situation analysis. In this section, you’ll need to define what makes your business unique and what benefits people will receive when using your products or services. This is called a unique selling proposition (USP) and it should be at the heart of our marketing plan.
  • Target Audience. You already know who your target audience is because you had to think about that when you created your business plan. Describe them again here.
  • Goals. What are you marketing goals? What type of return on investment do you expect from your marketing expenditures? How much market share do you hope to win in the first year of business? Write down the answers to these questions in this section.
  • Strategies. In this section, you’ll need to outline all the ways you intend to reach your customers. Include plans for reaching both new customers and those who have made contact with your business but didn’t buy for some reason. Include your plans for social media marketing in this section.
  • Budget. In this section, you’ll need to determine how much of your budget will go towards marketing. This is typically a percentage of gross sales, but when you’re starting out, you’ll need to use the cash you’ve set aside for expenses.

So, how’d you do? Were you able to answer all of the questions affirmatively? If so, great! That means you’re ready to launch your business and begin building your dreams.

But even if you didn’t have an answer for all of the questions, you at least now have a roadmap that will get you closer to your launch. Just do me (and yourself) a favor and don’t skip any of these important steps. I want you to be in the 10 percent of entrepreneurs who build a successful and profitable business that lasts for years.

But you can’t do that if you don’t first put in the work.

By Sam Kerns

Silvia Emma Published by Silvia Emma

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