Wednesday, June 24, 2015

Legal issues to consider when starting a business

We have been discussing questions a potential business owner should ask and answer before starting a business.  This week we will tackle legal issues.

Most small business owners are operating on a tight start-up budget and do not like to pay for accounting or legal help, but hiring a good accountant and a good attorney can be crucial to the success of the business.  Here are a just a few situations which using an attorney is advisable:

  1. Determining and implementing the proper business structure.  Should you be an LLC or an S-Corp or a C-Corp?  If you have partners, have you put together an operating agreement?  Do you need a buy-sell agreement?  
  2. Do you have Intellectual Property?  Do you need a trademark, copyright or patent?
  3. Do you have employees?  Do you need employment contracts, non-disclosure agreements, non-compete agreements?
  4. Do you have independent contractors?  Do you need contracts for them (including non-disclosure)?
  5. Do you need contracts for your customers?
  6. If you have a storefront, are there zoning issues you need to consider before signing a lease or purchasing the property?
  7. If you are leasing property or equipment, do you understand all the elements in the lease?
  8. Do you know what licenses and business registrations your type of business/industry requires?
This is just a short list of issues that an attorney can assist a small business owner with.  We have seen several instances where a business failed because the partners didn't have a detailed operating agreement and the lack of one effected their ability to run the business successfully.  We have seen people sign leases without understanding what triple net meant (which greatly underestimated the cost of the lease) or the actual length of the lease (required renewal periods).  Finding a lawyer specializing in business law can insure that your business is set up properly from the start and that you understand everything you are signing before you sign the document.

Next week we will discuss whether you need a partner in your business start-up and things to consider when choosing a partner.

Monday, June 15, 2015

How much money do I need to start a business?

We have been working our way through a list of 14 questions an entrepreneur should ask before starting a business.  Today, we are tackling how much money you will need to start your business.

If you read last week's article, you know that you will need to create a business plan for your start-up and the creation of this plan will answer this week's question: how much money do I need?  Most business plans produce a monthly Profit & Loss for year one and two and an annual P&L for year three.  These pro-forma statements, as they are called, are basically budgets for starting your business.  The more effort you put into researching what things will cost, the more accurate the budget or pro-forma P&L will be.

How do you get the information you need?  Go through the process you would take to actually purchases the things you will need for your business:
1. Price out rent if you need a physical space.
2. Call insurance agents to see what types of insurance you will need and what it will cost (and what the timing will be: all upfront or is there a payment plan?).
3. Put together a list of all furnishings, fixtures and equipment you will need and shop around to see what this will cost.
4. Figure out what you need for telephones/communication devices and price that out/
5. Determine what kind of website you will need and find the right developer for that process.
6. Contact your state to determine what kind of licenses or permits you may need and what the cost will be.
7.  If you will have employees, contact an appropriate service provider to help you determine what the cost will be to process payroll and handle payroll taxes.  Do not attempt to handle payroll on your own if you have never been an employer before.
8. "Shop" for office supplies so you know ahead of time what all the paper, toner, pens, envelopes, business cards, notepads, etc. will cost.  This adds up much faster than most people realize!
9. Meet with an advertising expert if you will need assistance with advertising and marketing help to develop the budget for this portion of the business.

If you are manufacturing a product, you will need to go through another process to determine the costs to produce your items so you can price them appropriately.  You will also need to put together a sales forecast so you can determine how fast the money will be coming in from sales compared to how fast it will be going out for the items listed above!

Remember to take into consideration any terms you may have to offer customers.  If you aren't going to collect payment at the time of sale or service, you will need more working capital for cash flow.

A final caveat:  it always takes longer to get to breakeven than entrepreneurs anticipate so make sure you do a worse case scenario when creating your business plan so you have enough working capital to get to that key point in your start-up.

How much money do you need to start a business?  It varies widely-service based businesses need much less than product based.  Taking the time to create a detailed and accurate business plan will answer this question and give you a better chance at success.

Tuesday, June 9, 2015

Do I need a business plan?

We have been talking about the questions a potential entrepreneur needs to ask and answer before starting a business.  Last week we discussed the keys to success for any business.  This week we will be talking about the need for creating a business plan before starting a new endeavor.

Do you need a business plan?  Yes.  That is the only correct answer.  How elaborate a plan is the only question needing an answer.  If you are going to a bank or a venture capitalist or crowd funding, then you will most likely need a full blown business plan.  If you are self funding, then you won't need a full plan, but you still need the pro-forma statements and the marketing plan.  I can't tell you how often small businesses fail because the revenue comes in much slower than anticipated and they lack adequate working capital to make it to the break even point.

A detailed and specific marketing plan is needed to help determine exactly how you expect customers/clients to find your new business.  Your target customer needs to be identified and the proper method of reaching them determined.  You may need some expert assistance in determining this and creating a business plan will help you realize this.

The pro-forma financial statements are key to insuring that you know how much money you will need for your start-up.  We recommend creating one version which is your best estimate of what will happen, another which is the worse case scenario (revenue comes in at half the pace you expect) and another which is best case (revenue comes in much faster than anticipated).  The best case scenario can become a worse case if you haven't planned for it and lack the working capital to fulfill orders.

Do I need a business plan for my start-up?  Absolutely.  Can I create it myself?  Perhaps-there are numerous software programs which you can use to do so.  We are fortunate in our area to have a class offered which walks potential small business owners through the process of writing a business plan.  We often are contacted by participants of this class who have written most of the plan and just need assistance getting the financials finished.

Next week, we will delve into how to determine how much money you need to start-up a business.

Wednesday, June 3, 2015

Keys to succeeding as a small business.

We are talking about the questions a potential small business owner should ask and answer before launching a new enterprise.  Last week we tackled what skills a person needs to be a successful small business owner.  This week we will talk about what the keys are to succeeding in a small business.

The first thing any business needs, large or small, is leadership.  The person in charge, whether the CEO of a Fortune 100 corporation or the owner of a Mom and Pop diner needs to be able to lead the business effectively.  That doesn't mean the leader doesn't seek advice from others, it just means the buck stops with him/her.

If the business has more than one owner, the next key to success is to properly manage the partnership.  We have talked in previous articles about the need to put together a comprehensive and detailed operating agreement.  Having a lawyer review the operating agreement is also very important to make sure the language will hold up in court.

The third key to success is the underlying concept of the business itself: what problem does the new business solve?  Is the concept full thought out and properly described so customers/clients understand what problems you can solve for them?

After verifying that the concept is sound, a successful enterprise will have a good business plan which includes a detailed and specific marketing plan.  Having a good product or service will do the owner no good if there isn't adequate working capital to make it through the start-up phase or if the marketing isn't sufficient to allow customers to find you.

Another important element to consider is risk management.  This is more important for a small business than a large, I would argue.  Who will run your business if you become ill or injured?  We have written articles previously about how to set up a proper emergency plan for your small business and this should ideally be done before the doors even open and then refined as the business grows and changes.

So what are the keys to succeeding as a small business?  Having an effective leader, managing the partnership properly, founding the business on a sound concept, creating a detailed business plan which includes a well thought out marketing plan and making sure you are prepared for any emergency.

Next week, we will talk about the business plan.