Entrepreneur Startup Model Step 1:
Self Assessment & Research


A. Define Your Idea

If you are thinking about starting your own business, one of the first steps is to carefully define your product or service as well as the mission of your company.

It may seem obvious but it’s worth emphasizing that every great business concept needs to be defined as specifically as possible. This task involves more than simply describing the product or service you intend to deliver. Successful entrepreneurs and their companies follow a carefully crafted mission statement as their guiding principle.

Often no more than a few sentences, a mission statement sums up the company's main commodity and its core set of values and goals. The mission statement is a clear expression of purpose that allows each employee to understand the product that is being delivered and what the business hopes to accomplish. The vision and inspiration for this statement starts with you!

Writing a mission statement is perhaps the shortest step in the Business Startup Model, but it ranks as one of the most essential. As you proceed through the Model, it may be necessary to refer back to your initial concept and mission. You may decide to revise or rethink them along the way.

Points to consider: 
Should you start your own business? Should you purchase (or become involved in) an existing business? 

Answer these questions before you proceed any further:

What is your core product or service? 
Can you describe it succinctly? 
Have you established a mission statement of your company's vision and values? 

Assess Yourself

Is Entrepreneurship For You?
There is no way to eliminate all the risks associated with starting a small business. However, you can improve your chances of success with good planning and preparation. A good starting place is to evaluate your strengths and weaknesses as the owner and manager of a small business. Carefully consider each of the following questions:

 Are you a self-starter?
It will be up to you - not someone else telling you to develop projects, organize your time and follow through on details.

How well do you get along with different personalities?
Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers and professionals such as lawyers, accountants or consultants. Can you deal with a demanding client, an unreliable vendor or cranky staff person in the best interest of your business?

How good are you at making decisions?
Small business owners are required to make decisions constantly, often quickly, under pressure, and independently.

Do you have the physical and emotional stamina to run a business?

Business ownership can be challenging, fun and exciting. But it's also a lot of work. Can you face 12 Hour our work days six or seven days a week?

How well do you plan and organize?
Research indicates that many business failures could have been avoided through better planning. Good organization of financials, inventory, schedules, and production can help avoid many pitfalls.

Is your drive strong enough to maintain your motivation?
Running a business can wear you down. Some business owners feel burned out by having to carry all the responsibility on their shoulders. Strong motivation can make the business succeed and will help you survive slowdowns as well as periods of burnout.

How will the business affect your family?
The first few years of business start-up can be hard on family life. The strain of an unsupportive spouse may be hard to balance against the demands of starting a business. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living or put family assets at risk.

Success in business is never automatic. It isn't strictly based on luck - although a little never hurts. It depends primarily on the owner's foresight and organization. Even then, of course, there are no guarantees.

I. Why Small Businesses Fail

In his book Small Business Management, Michael Ames gives the following reasons for small business failure: 

     1. Lack of experience
     2. Insufficient capital (money)
     3. Poor location
     4. Poor inventory management
     5. Over-investment in fixed assets
     6. Poor credit arrangements
     7. Personal use of business funds
     8. Unexpected growth

     Gustav Berle adds two more reasons in The Do It Yourself Business Book:

     9. Competition
    10. Low sales

These reasons aren't meant to scare you, but to prepare you for the rocky path ahead. Underestimating the difficulty of starting a business is one of the biggest obstacles entrepreneurs face. However, success can be yours if you are patient, willing to work hard, and take all the necessary steps.

II. On The Upside

It's true, there are a lot of reasons not to start your own business. But for the right person, the advantages of business ownership far outweigh the risks.

• You get to be your own boss
• Hard work and long hours directly benefit you, rather than increasing profits for someone
• Earning and growth potential are far less limited
• A new venture is exciting
• Running a business will provide endless variety, challenge and opportunities to learn 

 Points to consider:

Why do you want to go into business for yourself?
What experience do you have in running the business you propose?
What relevant education do you have?
What do you know about the industry that you seek to enter?
Do you have the needed personal characteristics and skills?
What are your financial and non-financial goals of business ownership?

 Answer these questions before you proceed any further:

Given your personal strengths and weaknesses, should you proceed to go into business? In what areas will you need to supplement your skills with internal staff or outside advisors?

C. Conduct Market Research

How does your product or service compare to those of your competitors already in the market?

Investors and lenders will insist that you know your target market so well that you can recognize a customer walking down the street. You gain this knowledge through market research. This is the link between your mission statement and your marketing strategy. You’ll need to demonstrate a familiarity with your competitors, their products and overall industry trends. You’ll need to ascertain lifestyle issues, motivations and buying habits of your target market as well as potential customers. You'll need to understand age groups, income ranges, education levels, geographic locations and other factors. Analyze your business proposal by creating a "SWOT" list of Strengths, Weaknesses, Opportunities and Threats. The more you know, the better you'll understand whether your idea is on the mark or needs adjustments. Many companies hire market research professionals so you may want to identify research expenses up front.

Points to consider:

What makes your product or service unique?
Who would buy your product? How often? What quantity?
Who is your competition?
What are industry trends and the size of potential markets?
Do market findings indicate a need to change the product or service you offer?
When do customers buy? Is your product or service a seasonal one?
Are there international opportunities to sell your product or service?
Are there Internet opportunities to sell your product or service?
How will clients access your products or service?

 Answer these questions before you proceed any further:

Is there sufficient demand for your product or service given the marketplace and competition?

Does your market research indicate a need to change the product or service you offer? Should you continue pursuing your business idea? Should the idea be adjusted?

D. Finding a Niche

A market in its entirety is too broad in scope for any but the largest companies to tackle successfully. The best strategy for a smaller business is to divide demand into manageable market niches. Small operations can then offer specialized goods and services attractive to a specific group of prospective buyers.

There are undoubtedly some particular products or services you are especially suited to provide. Study the market carefully and you will find opportunities. As an example, surgical instruments used to be sold in bulk to both small medical practices and large hospitals. One firm realized that the smaller practices could not afford to sterilize instruments after each use like hospitals did, but instead simply disposed of them. The firm's sales representatives talked to surgeons and hospital workers to learn what would be more suitable for them. Based on this information, the company developed disposable instruments which could be sold in larger quantities at a lower cost. Another firm capitalized on the fact that hospital operating rooms must carefully count the instruments used before and after surgery. This firm met that particular need by packaging their instruments in pre-counted, customized sets for different forms of surgery.

While researching your own company's niche, consider the results of your market survey and the areas in which your competitors are already firmly situated. Put this information into a table or a graph to illustrate where an opening might exist for your product or service. Try to find the right configuration of products, services, quality, and price that will ensure the least direct competition. Unfortunately, there is no universally effective way to make these comparisons. Not only will the desired attributes vary from industry to industry, but there is also an imaginative element that cannot be formalized. For example, only someone who had already thought of developing pre-packaged surgical instruments could use a survey to determine whether or not a market actually existed for them.

A well-designed database can help you sort through your market information and reveal particular segments you might not see otherwise. For example, do customers in a certain geographic area tend to purchase products that combine high quality and high price more frequently?
Do your small business clients take advantage of your customer service more often than larger ones? If so, consider focusing on being a local provider of high quality goods and services, or a service-oriented company that pays extra attention to small businesses.

If you do target a new niche market, make sure that this niche does not conflict with your overall business plan. For example, a small bakery that makes cookies by hand cannot go after a market for inexpensive, mass-produced cookies, regardless of the demand.

E. Buying an Existing Business versus Franchising

I. Buying an Existing Business

Many find the idea of running a small business appealing, but lose their motivation after dealing with business plans, investors, and legal issues associated with new start-ups. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.

Advantages

The main reason to buy an existing business is the drastic reduction in start-up costs of time, money, and energy. In addition, cash flow may start immediately thanks to existing inventory and receivables. Other benefits include pre-existing customer goodwill and easier financing opportunities, if the business has a positive track record.

Disadvantages

The biggest block to buying a small business outright is the initial purchasing cost. Because the business concept, customer base, brands, and other fundamental work has already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be non-collectable. Good research is the key to avoiding these problems.

II. Buying a Franchise

An important step in the small business start-up process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision. Because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

One of the biggest mistakes you can make is to hurry into business, so it's important to understand your reasons for going into business, and to determine if owning a business is right for you.

If you are concerned about the risk involved in a new, independent business venture, then franchising may be the best business option for you. But remember that hard work, dedication, and sacrifice are essential to the success of any business venture, including franchising.

What is Franchising?

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards.

Franchising is based on mutual trust between the franchisor and franchisee. The franchisor provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisees bring to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:

Product/trade name franchising and Business format franchising. In the simplest form, a franchisor owns the right to the name or trademark and sells that right to a franchisee. This is known as "product/trade name franchising." The more complex form, "business format franchising," involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

F. Types of Business Organizations: Considering a Legal Entity

One of the first decisions that you will have to make as a business owner is how the company should be structured. This decision will have long-term implications, so consult with an accountant and attorney to help you select the form of ownership that is right for you. In making a choice, you will want to take into account the following:

• Your vision regarding the size and nature of your business.
• The level of control you wish to have.
• The level of "structure" you are willing to deal with.
• The business's vulnerability to lawsuits.
• Tax implications of the different ownership structures.
• Expected profit (or loss) of the business.
• Whether or not you need to re-invest earnings into the business.
• Your need for access to cash out of the business for yourself.

I. Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.

Advantages of a Sole Proprietorship

• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law, may make  decisions as they see fit.
• Sole proprietors receive all income generated by the business to keep or reinvest.
• Profits from the business flow-through directly to the owner's personal tax return.
• The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

• Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
• Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).

Federal Tax Forms for Sole Proprietorship (only a partial list and some may not apply)

 • Form 1040: Individual Income Tax Return
• Schedule C: Profit or Loss from Business (or Schedule C-EZ)
• Schedule SE: Self-Employment Tax
• Form 1040-ES: Estimated Tax for Individuals
• Form 4562: Depreciation and Amortization
• Form 8829: Expenses for Business Use of your Home
• Employment Tax Forms

II. Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed;. Yes, it’s hard to think about a "break-up" when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc.

 Advantages of a Partnership

• Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners' personal tax returns.
• Prospective employees may be attracted to the business if given the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner

Types of Partnerships that should be considered:

There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions, as well as their own.

General Partnership:

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.

Limited Partnership and Partnership with limited liability:

"Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.

Joint Venture:

Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

A Partnership Agreement should include the following:

• Type of business.
• Amount of equity invested by each partner.
• Division of profit or loss.
• Partners’ compensation.
• Distribution of assets on dissolution.
• Duration of partnership.
• Provisions for changes or dissolving the partnership.
• Dispute settlement clause.
• Restrictions of authority and expenditures.
• Settlement in case of death or incapacitation

Federal Tax Forms for Partnerships (only a partial list and some may not apply)

• Form 1065: Partnership Return of Income
• Form 1040-ES: Estimated Tax for Individuals
• Form 1065 K-1: Partner's Share of Income, Credit, Deductions
• Form 4562: Depreciation • Form 1040: Individual Income Tax Return
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax

III. Corporation

A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

C-Corporation:

The entity pays its own taxes while shareholders report any actual dividends on their own returns. Subchapter S Corporation: A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Advantages of a Corporation

• Shareholders have limited liability for the corporation's debts or judgments against the corporations.
• Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
• Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

 Disadvantages of a Corporation

• The process of incorporation requires more time and money than other forms of organization.
• Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice.

Federal Tax Forms for Regular or "C" Corporations (only a partial list and some may not apply)

• Form 1120 or 1120-A: Corporation Income Tax Return
• Form 1120-W Estimated Tax for Corporation
• Form 8109-B Deposit Coupon
• Form 4625 Depreciation
• Employment Tax Forms
• Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

 Federal Tax Forms for Subchapter S Corporations (only a partial list and some may not apply)

• Form 1120S: Income Tax Return for S Corporation
• 1120S K-1: Shareholder's Share of Income, Credit, Deductions
• Form 4625 Depreciation • Employment Tax Forms • Form 1040: Individual Income Tax Return
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax
• Form 1040-ES: Estimated Tax for Individuals
• Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

IV. Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

Federal Tax Forms for LLC

Taxed as partnership in most cases; corporation forms must be used if there are more than two of the four corporate characteristics, as described above. 

Points to consider:

How will you finance your new business?
How can you minimize taxes?
What risk (liabilities) are you undertaking?
How will control of the business be shared?
What are the costs in forming your business?
Will you retain profits (to grow the business) or distribute them to owners?