Alex Willen was contemplating whether to launch a business selling frozen dog treats, so he decided to do some market research. He wanted to answer two basic questions: Were there enough people interested in buying frozen treats for their pups, and were they willing to pay more to purchase a premium product?
Rather than spending hours online searching for answers, Willen sought out the opinions of potential customers. “I was able to bring some to dog parks and talk to dog owners about them,” says Willen, who lives in San Diego. “It cost me nothing, but I got useful feedback.”
In fact, the feedback from dog park visitors was encouraging enough that Willen opted to launch Cooper’s Treats, which sells the mixes and molds to make frozen “pupsicles.” Willen understood something elemental to the success of all entrepreneurs: Testing the viability of a business idea with actual customers is a critical step before investing the time, money and passion required to get any company off the ground.
Taking that vital first step of coming up with a business idea and then road testing the concept (or, even better, the actual product) is one way to up the chances that your new company will be a success. It’s challenging to launch and maintain a thriving small business. Around 400,000 small businesses open up each year in the United States, but the Bureau of Labor Statistics reports that about 20% of small businesses fail in their first year of operation and about half have closed after five years in business.
Upping your chances of being able to start a business and keep it going for as long as you want requires a mix of good planning, preparation and some amount of good fortune. Here are some helpful steps to follow.
Start With a Business Plan, but Remain Flexible
Once you’ve vetted your idea and are confident there is a potential market of paying customers, the next step is to write down how your actual company will be structured, the products and services it will offer, who its main competitors are and how it will operate. This is your business plan.
Business plans generally contain an executive summary, an overview of the business and its objectives, a description of market opportunities and a financial analysis. “A business plan can be as simple or as complex as you want it to be,” says Dirk Mersch, managing director of Cambridge Innovation Consulting. “The best way to think of it is as thinking out loud, just on a piece of paper. Write down exactly what you think your business does and more importantly what is the genuine value you add to your clients.”
Some entrepreneurs suggest keeping business plans very basic or skipping them altogether. Thomas Mercaldo, president of Aquinas Consulting, has helped start seven successful startups and has never written a business plan. “A business plan can be a useful tool to a new entrepreneur to detail an approach and to help with fundraising,” he says. “But in nearly every business I started, early in the life cycle of the company we made a radical shift in direction based on what we learned in the startup phase. It is the ability and willingness to react and get away from what might have been the original plan that often determines the success of a business.”
Plan for Short- and Long-Term Costs
The excitement (and the terror) of starting a business flows out of the many unknowns, like whether your idea will resonate with enough customers. But costs are not something you want to be a surprise, because not planning for them can sink even a great business idea. Take the time to calculate and prepare for taxes, fees, permits, lawyers, accountants, equipment, marketing and rent.
Alex Willen of Cooper’s Treats suggests looking at examples of companies similar to yours to estimate expenses. “Figure out what you need, find suppliers and call them to get rough estimates,” he says. “Same with employees and subcontractors. Figure out what needs to be done and who you’ll need to hire, then spend some time researching market salaries to know what you’ll have to pay them.”
Watch Out for Hidden Fees
Not all of the fees and expenses involved with starting a business are obvious. In most cases, you will have to pay to incorporate your business. Because the process and fees involved with incorporation vary from state to state, take the time to research what is required where you live. Also remember to account for administrative costs and shrinkage, which are losses associated with everything from shoplifting, employee theft, paperwork errors and fraud.
Insurance is also important to account for, even if you don’t need it when you first start your company. “The need for different insurance plans grows over time,” says Derin Oyekan, co-founder of Reel Paper, a maker of sustainable toilet paper. “There are many insurance plans that provide many options for small companies, such as liability protection, protection against accidents and omissions, health insurance of employees, property insurance and cyber insurance.”
Be Ready for Issues
The average startup costs for a business are around $30,000. For some, that is a reasonable amount to save, while others may want to take out loans to fund their venture. In either case, it is smart to have a reserve fund to cover any unexpected expenses.
Another way to approach starting a business is to do it while continuing to work at your current job. “Business does not have to be this big thing you dream about starting some day and hope to save enough money for. This is how people lose their savings,” says Mersch of Cambridge Innovation Consulting. “Instead, start small, learn and, when you see it working, dedicate gradually more resources to it until it becomes so big you need to do it full-time.”
A former editor at Los Angeles magazine, Chris Warren has had work appear in publications ranging from Institutional Investor and Forbes to National Geographic Traveler, Oxford American and Greentech Media.
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