Easy Steps to Startup
The year 2000 was a good year for Joshua Feinberg, an IT consultant in West Palm Beach, Florida. A flurry of Y2K projects and other work led to "a tremendous year," he says.
But there was a problem: Feinberg had established his business two years earlier without the help of an accountant, and money matters were suddenly an issue. Once he finally did meet with an accountant that December, he had to spend his New Year's Eve running around to mail an application for a new tax plan that would save him several thousand dollars. Everything worked out, but he could have saved time and money by getting it right the first time. "It would have been less of a panic," says Feinberg, 30. "It was kind of a last-minute stretch."
Taking care of the basics out of order can wreak havoc on your business before it gets off the ground, or at the very least cost you in money, time and frustration after it's already up and running. Donna Holmes, director of the Small Business Development Center at Penn State University in University Park, Pennsylvania, has seen entrepreneurs make many of these mistakes, such as running up thousands of dollars in personal credit card debt assuming a business loan will come through, only to be denied. "You have to make sure things are done in an order that's not going to hurt you in the end," Holmes says.
But what should you do first, and what should be last on the list? How do you find order in all the chaos of starting a company and avoid backtracking and wasting time? Here's some advice from the experts, as well as entrepreneurs in different industries who have been there, done that.
Business Order 101
Like parenting, what to do-and when to do it-is a learned skill in starting a company. "Once you've done it three, four or five times, everything's just automatic," says Bruce J. Lynskey, a professor at the Owen Graduate School of Management at Vanderbilt University in Nashville, Tennessee, as well as an entrepreneur who has started six technology companies. Today, he's the CEO of Nashville software startup Visual Risk Technologies. "You just do it instinctively."
The first time around, however, is anything but instinctual. Lynskey has watched beginning technology entrepreneurs backtrack to take care of patenting and trademarks or create agreements to protect their companies from liability if bugs in their software ruin clients' computer systems. "Somehow, the company got up and running, and they're going backward now to do these formation things that should have already been done. At that point, it can become a little messy," Lynskey says. "It could be the end of the business."
Spending money on a knowledgeable intellectual property attorney was Eric Sieczka's first step as soon as he had an idea and a business plan for his second technology startup, Pixel Velocity Inc. A bootstrapped digital imaging hardware and software company in Ann Arbor, Michigan, that's developing Department of Defense products for commercial use, Pixel Velocity needed help patenting the company's main idea, registering a trademark and incorporating in July 2001. "It's a prudent step, because otherwise you could invest a lot of time and energy in something that ends up not being yours or puts you in a position where you have to defend it in court, which can kill a small company," says Sieczka, 32, Pixel Velocity's co-founder, president and CEO. "Spending money on good legal advice early is a smart use of money."
The company secured a Web domain, and a few months after getting legal advice, Sieczka hired a CPA to help Pixel Velocity set up its books for tax purposes. Then the company kept a low profile, building its product slowly and deliberately behind the scenes with very little capital. The company's six employees worked part time and for equity. Hiring full-time sales and marketing people and buying risk management insurance wasn't a priority until the company launched products late last year.
"We didn't want to create a lot of visibility until we had something to show," he says. "The timing is really important, to make sure you're not putting yourself out there before you're ready." Think about what naturally makes sense at what time, he suggests, and don't rack up debt that requires you to create early cash flow before you're ready.
"To me, it's logical. You can't sell something until you have it, and you don't have it until you know that what you're going to create, you own," Sieczka says. "You have to take the steps to make sure you're not wasting time, energy and money in the wrong places."
Timing Is Everything
Lynskey suggests you make a list of everything you need to do before opening your doors. Then just start backing up from that point, he says. A list makes you put things in order, and it will grow longer as you write it.
"This doesn't take a rocket scientist. There's an obvious order to most of the items on the list," he says. "You'll see lots of dependencies, that clearly this item needs to be done before that one. Build potential problems into your opening day."
This is especially important if you're opening a retail store, where a target opening date can be pushed back three months before you know it. It took Rebecca Velasco, 40, founder and owner of Muse, a women's apparel store in Newport, Rhode Island, more than one year of planning before her store opened this past April. Even with a background in women's retail, one of the first things she did was seek out a business advisor at her local SBA office.
"Without his insight, I probably wouldn't have been able to foresee all the things I had to do," Velasco says. "I wanted to do everything right because I didn't want to backtrack, open wrong and get penalized."
Velasco spent all of 2001 writing her business plan, and spoke with an accountant to learn more about tax laws and setting projections. Ultimately, her business hinged on landing about $50,000 in outside financing. Her parents lent her $25,000, but it didn't cover all the start-up costs. "It was the very first thing I had to think about because I didn't have the money," she says. "Your whole plan changes based on your funding issues."
Velasco held off on large expenses until she had secured additional financing. When she received a $15,000 loan through the city of Newport last February, things started falling into place quickly. She signed a two-year lease on a 500-square-foot retail space after hiring an attorney to read it, contacted a merchant services company to set up credit card processing, purchased used clothing racks and ordered her first inventory. Her approach wasn't without beginner's mistakes, however. She opened her business account where she did her personal banking without realizing the rates were astronomical. "I had to close that account and open another one later," she says. "I would have saved a lot of money if I hadn't acted so quickly."
Make sure you're set with the state in terms of licenses and permits, then think about what you need to operate, Velasco suggests. Muse projects 2003 sales of $250,000.
First Things First
Your order will depend in part on your chosen industry and personal situation. But no matter what your business, don't think you know how to structure everything without some professional help. Based on his own experience, Feinberg suggests talking to a CPA first. "It's a good place to start, a good resource," he says.
To keep your costs down, do some homework to target your questions to cut the time you spend with professionals who bill by the hour, Feinberg says.
What if the business you're starting is homebased? When Stacey Cohen founded her Mt. Kisco, New York, marketing and PR company, Co-Communications Inc., in late 1997, her plan was to grow her homebased business slowly and strategically for five years. She had very little overhead and wasn't dependent on outside financing. Instead of writing a business plan, the first thing she did was invest $6,000 in a logo, embossed letterhead and business cards.
"In the launch stage, I needed something to speak volumes about my company, and I spent a ton of money on it," says Cohen, 42. "Some people would first look at the bottom line and ask how much revenue I was going to produce, what target markets I was going after. I knew I had to do that, too, but first I had to set the tone, the image of the company."
Obtaining a business license, setting up a bank account as a sole proprietor, registering the Web site www.co-communications.com and starting to network vigorously all followed in quick succession. "I put myself out there with those gorgeous-looking business cards and passed them around," she says. She bartered early on with a graphic designer to create her Web site in exchange for PR services. When clients came calling six months into the business, Cohen felt it was time to outsource a bookkeeper.
"The billing in advertising and marketing is very complicated. There are commissions and markups," she says. "I had to make sure everything was in line."
In 1999, Cohen moved her business into a downtown office space. Sales in 2002 were around $750,000, and she's projecting more than $1 million in sales for 2003.
The best thing you can do in the early stages of your business is to create a timetable for how you'll take care of the basics. "Things are always thrown in our path to take us off our timeline," Cohen says. "But if you can stick to it as closely as you can, you're guaranteed success. And success breeds success."
Do's & Don'ts
Cover your bases and get these decisions right the first time:
- DO consult with an accountant and an attorney before your business opens to choose your business structure and take care of any necessary papers.
- DO get your state licenses and ID numbers before taking care of mechanics such as setting up your business bank account and seeking insurance coverage.
- DO protect your company from product liability before you start selling. This is particularly important in the technology field.
- DON'T sign a lease before you've secured financing and done your due diligence on a location's demographics and foot traffic.
- DON'T assume banks will finance debt you've run up on your personal credit cards in starting your business. Banks aren't keen on financing credit card debt.
- DON'T staff up with expensive employees, such as a full-time human resources, marketing or accounting person, before you can afford them. Outsource this expertise.