Are You Starting A Business? What To Know Before You Go!

One of the very first questions I ask business owners is do you understand your market segment? For most owners, their gut tells them to instinctively respond YES! But when I start to dig a little deeper with some more investigative questions, the conversation can sometimes get a little awkward. Some of the questions I like to ask are: Is your segment growing, is it shrinking or is it overcrowded and If so, what is your competitive advantage? Is it service, price or a product differentiator? I like asking these questions not because I enjoy putting my business owners on the spot, I'm asking because I am curious and I hope that my curiosity sparks in internal dialogue that transforms the way they see their business.

Having a competitive advantage doesn't have to always be something so overt, I think that a competitive advantage can be something more subversive like, maybe you are the first of a kind in a particular segment (whether age, race or thought process). Small nuances like that can generate the innovation necessary to disrupt a market space and make you stand out.

If you find yourself considering starting a business, I'd also ask myself this, do I have the expertise and necessary connections to this industry to be successful? Because, let’s face it, your friends are probably not going to be your customer or repeat customers unless the product you provide directly benefits their lifestyle so you need to ensure you have connections to the segment you want to break into because that’s where you can start to grow your customer base. If you don’t have connections to the segment, you need to consider a grassroots strategy like Facebook groups, LinkedIn, Twitter or dare I say it, even Tiktok.

If you suck at networking or marketing ask yourself, can I afford to hire a trained expert or intern to assist? If you can, do it. If you can't look at your strengths to determine a strategy that works for you. Where and how are you comfortable marketing your business? Online, print advertising, door to door sales, are you a good writer, are you a good speaker, or do you just love connecting with people? Figure that out first and then plan accordingly.

If you are a service business, do you know your top 3 competitors? To ensure you do ask yourself this, who are my competitors, what do they sell, how much do they sell it for, am I selling the same thing? If so, have I already purchased their product ? What did I like or not like about it? Have I asked a friend or relative to give me some advice about their product and how it could be better? I wouldn't skip this step!

If you are starting a non service business, you still have to ask yourself the above questions but you also have to ask, How am I going to finance inventory, how much do I need upfront and where am I going to store it? Am I going to borrow from my 401k or from a family or friend?

If you plan to borrow to finance inventory, the above steps mentioned are critically important because 20 percent of business fail in the first year and by year three 50 percent are gone. By year five 70 percent of all businesses have completely disappeared so be very sure about the investment you are making before before making it. Once you pull the money from your 401k its gone forever and if you can't return that capital with its unrealized capital gains, you could be robbing your future forever. If you have kids, consider how your life change might impact their future as well.

If you are borrowing from family or friends, you need to have a promissory note to set clear expectations on the terms and conditions of the loan. This will also come in handy when you want to secure bank financing. If you choose the option of relying on a bank to finance your dreams, here are some rules of the road:

• Banks usually like to lend to a particular type of borrower. Their ideal borrower is in business for at least 2-3 years, can produce 3 years of Business Tax Returns, 3 Years of Personal Tax Returns, Interim Financial statements (for example, Jan - June of a Fiscal Year or June - Dec of a Fiscal Year). They also want an Accounts Receivable Report which is a list of customers who owe you money. The list of Accounts Receivable tells the bank whether your customers pay with 30, 60 or 90 days terms. The report also identifies any concentrations and helps the bank to asses write off risk. Any customer paying in more than 90 days is a potential red flag for the Bank. They will also use this info to decide how much of a line of credit to give you and to will use it as collateral in most instances. The same goes for an Accounts Payable report, while it isn't used for collateral, it does help the bank assess your ability to pay your bills on time.
• They will also want a PFS which lists your personal assets and liabilities. They want to make sure that if the business hits a hiccup, you have the financial wherewithal to sustain your business.
• If you want more than 1 million dollars or if your company generates more than 20 million in sales, the bank may also want compiled or reviewed financial statements in lieu of tax returns. You should see a CPA about these kinds of statements because they are more involved.
• If you have a brilliant idea but you don’t have money at all, ask yourself, have I done a business plan? Can I sell my idea? If so, who would I sell it to? Do I have evidence based projections ? If not, you are not ready just yet to start a business and may need to consider doing some more networking with someone who has the capital and might be willing to invest for a portion of the ownership. If you've seen the movie The Social Network, it alludes to the fact that Mark Zuckerberg did the exact same thing. He borrowed money from his friend and in return gave up a shares of ownership. He now owns a multiple billion dollar global company. Jeff Bezos of Amazon did the exact same thing as well and he is now headed toward trillionaire status! Don’t be afraid to find the right strategic partners.

Another question is how are you going to manage your accounting software/systems? Do you have a collections infrastructure in place? Some businesses fail or struggle because they don’t know how to manage the money properly. You have to invest in a system like QuickBooks or consider hiring a CPA firm or bookkeeper to manage that aspect for you. You need to know how the money is coming in and going out, you need someone who will collect on your behalf and who will take action on customers who try to stiff you. It is not uncommon for some customers to even dispute charges or say they never received the product. So ask yourself do I have a solid return policy in place? Is it explicitly stated? Am I going to issue contracts with clearly defined client terms and expectations? If not, you could be making a costly mistake.

And finally, you have to be prepared to hustle, like really really hustle. Everybody talks about the "no days off mentality" but running a business gives you an entirely different perspective on the term. There is a lot of work involved and you have to be patient with yourself during the process.

So before you start, build a solid foundation and have a solid team behind you. And even if no one else is, I'm certainly rooting for you!

Good Luck! And don't forget to

#followtheunicorn