Uncommon advice for starting a new business
by Tony Novak, CPA, MBA, MT
,last updated on 11/21/2011
If you are thinking about leaving your current job to start a new business, there are obviously many issues you need to consider. This article lists nine “trouble spots” that tend to be inadequately addressed by other business planning resources. The quality of the planning you invest in these nine issues can easily make or break your new business venture.
1. Seek out contrary advice. Our natural human tendency to look for compassionate and supportive comments on our plans can undermine a businesses success. How many times have you noticed an obvious business blunder and wondered how the business manager could have ignored an issue that was so evident to almost everyone else? Look for tough advice and criticism of your business plan. Hire an experienced adviser to give a list of “what could go wrong”. You want to find someone as fearless as Simon Cowell in “American Idol” to critique your business plan. Do not undercut the time or budget you allocate to this step.
2. Consider the price/value relationship of the help you seek in starting your business. In business planning, free advice is usually worth what you paid for it. The local SBA offices and Small Business Development Centers have their place, but they do not warrant the trust of your future livelihood. It is amazing how many small business owners accept advice on important business issues from sources advertised in unsolicited e-mail advertisements or flyers posted in phone booths or telephone poles. Entire scams industries have been built that prey on self-employed people who do not seek a “second opinion” before making purchase decisions. Online business support groups provide excellent advice at very little cost. The collective wisdom of your peer group is often more valuable than any single professional resource.
3. Do not overload on legal issues. New businesses tend to spend too much upfront on copyrights, patents, corporate formations, etc. when they do not really have any product of real value to protect. The money is usually better spent marketing efforts in these early stages to build real value in your business. Consider how you can differentiate the business so that it would not be possible for another firm to steal your livelihood. Marketers call these “barriers to entry”. Strategic barriers to entry are far more effective than legal barriers for protecting a small business. This might require some “outside the box” thinking that can be enormously profitable in the long run and might be the biggest single factor that affects your success as a new business.
4. Do no believe what you read about the advantages corporations and limited liability companies. In most cases these legal forms will not provide any significant financial or legal protection to a small start-up business but they do add to the start-up and operating costs.
5. Look for alternatives to COBRA health insurance. This will save you thousands of dollars each year if you qualify for the best programs. Surveys of small business owners consistently point to finding affordable health insurance as being one of their most troublesome ongoing issues. Many corporate employees underestimate the difficulties they will face in this area. Understand clearly that the cost of health coverage will be both one of your largest business expenses as well as the most rapidly rising cost of operating your business. Expect health care costs to rise at least twice as fast as any other cost of operating your business. COBRAplan.com provides answers to frequently asked questions.
6. Consider government assistance. Some states now provide unemployment compensation benefits to individuals who leave a company to start their own business, although there may be strings attached. Check with your local Unemployment Compensation office. A listing on a state-by-state basis is included at Freedom Benefits.
7. Have a clear picture of your tax situation. Most newly self-employed people allow themselves to be confused simply because they did not seek out the appropriate information or they were willing to accept mediocre professional help. This error directly translates to thousands of dollars wasted by many small businesses. Tax planning for new businesses should be a simple and concise issue. Do not accept anything less. Do not excuse yourself by taking the attitude “this stuff is too complicated for me”. Demand that your tax adviser explain your tax situation in one or two sentences that you understand perfectly. If you have any level of discomfort or uncertainty, get a second opinion. This is not an area where you should allow anything but the best available support.
8. Buy in small increments. Test the waters and limit your risk by buying services in small quantities. You will be more successful hiring ten marketing services or advisers at $500 each, for example, than hiring one marketing firm at $5000. Sure, there are lots of arguments for taking “big bold steps” in business, but these are not suitable for most start-up ventures.
9. Adhere to the “acid test”. Take the total amount of expected business start-up costs and double it. Take the total amount of time you expect until your business turns profitable and double it. Now look at the business plan again. Can you survive based on these new assumptions? If your business plan still looks attractive after you adopt these new assumptions, go for it! If not, go back to the drawing board and do not proceed until your business plan passes this acid test.
Editor’s note: The author was formerly an adviser with the Small Business Development Center and now has a private interest in the other resources mentioned in this article.
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