You keep hearing that owning a business is an American dream, but at the same token, the data from Small Business Administration shows that 95% of businesses fail within the first five years.
I have owned my own business for years and dealt with so many small business startups and I have seen most of those businesses go out of business. But I’m not writing this to disappoint you about starting your own business. Owning your own business gives you the freedom, independence and you will have control over your own destiny.
I’m writing this article to provide you with some important points based on my years of being in business and seeing which businesses failed and which ones succeeded.
Please also read my article on “The key factors in business success” in order to get my input on what it takes to have a successful business.
Important points to consider when starting a business:
- There is no such a thing as a get rich quick business opportunity, unless you’re already a rich business person.
- You will need to have extreme motivation and drive. The best motivation is when you’re in a bind and you need to change your bad financial situation or make a big change in your existing situation in life.
- You will need to make your business a priority for several months. You will need to put in a lot of time initially to start and setup your business, products and services.
- You will need to be patient and understand that it will take time and you may loose money initially, but you should be profitable after a few months if your execution is good.
- If you’re in a business for two-three years and you’re still not profitable, then you would need to do some assessment as to why you’re not profitable; for example: Is your competition taking all of your customers? Are you not providing a value to your customers? Are there quality issues with your products and services? Are your prices too low or too high? Are your brand and marketing done skillfully? Are your employees / labor cost too high and your employees are not producing as expected? Are you not managing your time or are you not putting the necessary time and efforts?
It doesn’t make sense to stay in a business that does not make profit for several years.
Important items about business formation, liability and possible partnership:
- If you’re going to start a business as partners, it is great because two driven individuals are going to work together and make the business grow faster; however, it is very important for each partner to write down and agree to the type and level of contributions so there is no future conflict between the partners about unfair business contributions of one partner.
- Talk to a tax accountant and attorney about which business formation is best for you. Usually S-Corp formation protects the owners against liability if the formation and books are done properly and there are tax benefits for being an S-Corp when the annual profit exceeds certain amounts. If your annual profit is low and there is low business liability risk, then the sole prop or partnership would be better.
- If your business is a type of business that there is a possibility of being sued, purchase business liability and professional (error and omission) insurance. For example, if you establish a corporation, and get sued, you cannot defend yourself in court, you must hire a litigation attorney to defend your business, litigation attorneys charge between $400 to $800 per hour, and lawsuits can take 2-4 years to litigate so the cost of litigation can easily run into hundreds of thousands of dollars. And if you’re a corporation or LLC and you have not kept your books and business formation up to par, then you personally can be sued and liable for your business.
Important items regarding business planning, brand and marketing execution:
- Make sure you have a business plan in place, know your competition, set goals (for example, by a date, let’s say six months from start of your business, plan to have a gross sales of $$$ p/month and profit of $$ p/month.)
- If you are planning to be in business long-term (which most people should), you want to make sure your business has a value in the future. In order for you to build a good business valuation, you will want to build a brand, so either learn about branding and marketing yourself or hire an expert to help you with your business, product and services brand and marketing.
What type of business you should start?
- You have a better chance of building a successful business if you have experience or skills in the field of your business.
- Try not to get into a highly competitive business or a declining business or a business with high liability.
- If you like to keep things simple, start a business that doesn’t require skilled employees because cost of hiring highly skilled employees are very high.
- In my opinion, a good business to start these days are the type of business where you can contract out most of the work to other companies and you can focus on sales and marketing or selling the product or services through e-commerce.
For example, Amazon is the largest e-commerce company and over 50% of all e-commerce sales are through Amazon. You can open an Amazon Seller Central account using Amazon Fulfillment by Amazon (FBA); with this type of e-commerce business, you initially put in a lot of time coming up with an innovative product, and brand name, then you sell your product on Amazon. In this case, Amazon is doing all of the marketing, bringing customers to you and handles all e-commerce transactions, fulfillment, shipping, customer service and returns and all you have to do is to have a quality branded product that is in good demand.
You can always open your own e-commerce site in conjunction with Amazon FBA. This way you build your own branded domain and website and you showcase your product and link to your product on Amazon; this way you let Amazon handle the transaction and fulfillment for you. There is an advantage to linking to your product on Amazon, it raises your product’s ranking on Amazon.
One big advantage of using Amazon FBA is that Amazon ships so much product that Amazon has the lowest cost of shipping and can quickly ship your product to your customers. Amazon even has the same day shipping available for some products at a very low rate. If you ever decide to get your own delivery account with FedEX or USPS or UPS, it will almost be impossible to get the kind of shipping rates that Amazon gives you. So, Amazon FBA makes sense just for the fact that you will save so much on shipping and Amazon has built the amazing trust with its prime members. Amazon’s prime members are getting products shipped to them free. You won’t be able to compete with Amazon’s shipping options.
It is important to note that Amazon marketplace has been becoming very competitive and many Chinese wholesalers are joining the Amazon marketplace so you will need to build a quality product and brand in order to compete in Amazon marketplace.
You will be most successful if you could come up with an innovative custom product that solves a problem or fulfills a need and if you can, get patent on the product, this way, you won’t have to compete with Chinese wholesalers, if you have a patent on your product and anyone tries to sell your patented product on Amazon, you just let Amazon know and show the proof of your patent and Amazon will take down the scammer who tried to copycat and sell your patented product.
- Also, try to get into a niche product and focus on selling in that niche industry. If you loose the focus and try to sell in too many different industries, you will loose on branding and you may not get ranked as high on your products. So, don’t try to be a man of all trades and sell too many different products.
Important items regarding customers:
- Put a lot of focus on gaining good customers and keeping them happy. I have seen companies who put so much focus on gaining new customers that they forget about their good old customers. Always try to focus on selling to your existing customers and keeping them happy, then going after gaining new customers.
- There would always be the “difficult” customers, customers with low emotional intelligence who expect you to loose money in order to keep them happy. Try to stay away from those types of difficult customers and focus on gaining customers with high emotional intelligence level.
Important items regarding employees:
- Having employees can become a very expensive proposition for your business, payroll cost is usually the most expensive expense of any business. And with today’s inflation, higher minimum wages, shortage of good employees, state and federal complicated payroll tax, benefit and employee pension requirements, having and maintaining employees will be the most challenging part of running any business, so if you could find and run a one-man business, then you will avoid having a huge employee cost, liability and you will avoid having to deal with complicated labor laws and payroll taxes. That is why I mentioned earlier that you should try to establish a business like an e-commerce business, where you outsource most of the tedious work by using Amazon FBA.
- Good employees would help you succeed and employees with low emotional intelligence can drain your bank account very quickly, so be very careful when hiring employees.
- Employment laws are very complicated, try to get an advice of an attorney to create an Employee Handbook for your business.
An employee handbook is an agreement between you and your employee and the agreement suppose to protect you and you will not be in a position when later your employee sues you for misunderstanding of his/her employment,
for example, your employee may have thought you’re hiring based on permanent employee, but your employee handbook can clear up the type of employment, benefits and business policies.
- Doing payroll and calculating payroll taxes is very complicated and time consuming, there are so many online payroll companies that provide payroll services, you’re better off using a Payroll Service company that handles all your payroll, including all required payroll tax filings, etc..
- You must have Workers' Compensation Insurance as it requires by law. Before hiring any employees, make sure you sign up for Workers' Compensation Insurance.
- Some US states have mandated retirement plans, meaning you must provide retirement savings for your employees. Contact your state officials or go to their website about the program or use the company that provides you payroll services to help you set up mandated retirement plans for your employees.
- Under Affordable Care Act, if you’re an employer with 50 or more employees, you must provide health insurance to 95% of your full-time employees or there will be a hefty IRS penalty.