Easy Steps to Startup
Everything has its place, especially when launching a biz. But what comes first? Here's what the experts say.
The year 2000 was a good year for Joshua Feinberg, an ITconsultant in West Palm Beach, Florida. A flurry of Y2K projectsand other work led to "a tremendous year," he says.
But there was a problem: Feinberg had established his businesstwo years earlier without the help of an accountant, and moneymatters were suddenly an issue. Once he finally did meet with anaccountant that December, he had to spend his New Year's Everunning around to mail an application for a new tax plan that wouldsave him several thousand dollars. Everything worked out, but hecould 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 yourbusiness before it gets off the ground, or at the very least costyou in money, time and frustration after it's already up andrunning. Donna Holmes, director of the Small Business DevelopmentCenter at Penn State University in University Park, Pennsylvania,has seen entrepreneurs make many of these mistakes, such as runningup thousands of dollars in personal credit card debt assuming abusiness loan will come through, only to be denied. "You haveto make sure things are done in an order that's not going tohurt you in the end," Holmes says.
But what should you do first, and what should be last on thelist? How do you find order in all the chaos of starting a companyand avoid backtracking and wasting time? Here's some advicefrom the experts, as well as entrepreneurs in different industrieswho have been there, done that.
Business Order 101
Like parenting, what to do-and when to do it-is a learned skillin starting a company. "Once you've done it three, four orfive times, everything's just automatic," says Bruce J.Lynskey, a professor at the Owen Graduate School of Management atVanderbilt University in Nashville, Tennessee, as well as anentrepreneur who has started six technology companies. Today,he's the CEO of Nashville software startup Visual RiskTechnologies. "You just do it instinctively."
The first time around, however, is anything but instinctual.Lynskey has watched beginning technology entrepreneurs backtrack totake care of patenting and trademarks or create agreements toprotect their companies from liability if bugs in their softwareruin clients' computer systems. "Somehow, the company gotup and running, and they're going backward now to do theseformation things that should have already been done. At that point,it can become a little messy," Lynskey says. "It could bethe end of the business."
Spending money on a knowledgeable intellectual property attorneywas Eric Sieczka's first step as soon as he had an idea and abusiness plan for his second technology startup, Pixel VelocityInc. A bootstrapped digital imaging hardware and software companyin Ann Arbor, Michigan, that's developing Department of Defenseproducts for commercial use, Pixel Velocity needed help patentingthe company's main idea, registering a trademark andincorporating in July 2001. "It's a prudent step, becauseotherwise you could invest a lot of time and energy in somethingthat ends up not being yours or puts you in a position where youhave to defend it in court, which can kill a small company,"says Sieczka, 32, Pixel Velocity's co-founder, president andCEO. "Spending money on good legal advice early is a smart useof money."
The company secured a Web domain, and a few months after gettinglegal advice, Sieczka hired a CPA to help Pixel Velocity set up itsbooks for tax purposes. Then the company kept a low profile,building its product slowly and deliberately behind the scenes withvery little capital. The company's six employees worked parttime and for equity. Hiring full-time sales and marketing peopleand buying risk management insurance wasn't a priority untilthe company launched products late last year.
"We didn't want to create a lot of visibility until wehad something to show," he says. "The timing is reallyimportant, to make sure you're not putting yourself out therebefore you're ready." Think about what naturally makessense at what time, he suggests, and don't rack up debt thatrequires you to create early cash flow before you're ready.
"To me, it's logical. You can't sell somethinguntil you have it, and you don't have it until you know thatwhat you're going to create, you own," Sieczka says."You have to take the steps to make sure you're notwasting time, energy and money in the wrong places."
Timing Is Everything
Lynskey suggests you make a list of everything you need to dobefore opening your doors. Then just start backing up from thatpoint, he says. A list makes you put things in order, and it willgrow longer as you write it.
"This doesn't take a rocket scientist. There's anobvious order to most of the items on the list," he says."You'll see lots of dependencies, that clearly this itemneeds to be done before that one. Build potential problems intoyour opening day."
This is especially important if you're opening a retailstore, where a target opening date can be pushed back three monthsbefore you know it. It took Rebecca Velasco, 40, founder and ownerof Muse, a women's apparel store in Newport, Rhode Island, morethan one year of planning before her store opened this past April.Even with a background in women's retail, one of the firstthings she did was seek out a business advisor at her localSBA office.
"Without his insight, I probably wouldn't have beenable to foresee all the things I had to do," Velasco says."I wanted to do everything right because I didn't want tobacktrack, open wrong and get penalized."
Velasco spent all of 2001 writing her business plan, and spokewith an accountant to learn more about tax laws and settingprojections. Ultimately, her business hinged on landing about$50,000 in outside financing. Her parents lent her $25,000, but itdidn't cover all the start-up costs. "It was the veryfirst thing I had to think about because I didn't have themoney," she says. "Your whole plan changes based on yourfunding issues."
Velasco held off on large expenses until she had securedadditional financing. When she received a $15,000 loan through thecity of Newport last February, things started falling into placequickly. She signed a two-year lease on a 500-square-foot retailspace after hiring an attorney to read it, contacted a merchantservices company to set up credit card processing, purchased usedclothing racks and ordered her first inventory. Her approachwasn't without beginner's mistakes, however. She opened herbusiness account where she did her personal banking withoutrealizing the rates were astronomical. "I had to close thataccount and open another one later," she says. "I wouldhave saved a lot of money if I hadn't acted soquickly."
Make sure you're set with the state in terms of licenses andpermits, then think about what you need to operate, Velascosuggests. Muse projects 2003 sales of $250,000.
First Things First
Your order will depend in part on your chosen industry andpersonal situation. But no matter what your business, don'tthink you know how to structure everything without someprofessional help. Based on his own experience, Feinberg suggeststalking to a CPA first. "It's a good place to start, agood resource," he says.
To keep your costs down, do some homework to target yourquestions to cut the time you spend with professionals who bill bythe hour, Feinberg says.
What if the business you're starting is homebased? WhenStacey Cohen founded her Mt. Kisco, New York, marketing and PRcompany, Co-Communications Inc., in late 1997, her plan was to growher homebased business slowly and strategically for five years. Shehad very little overhead and wasn't dependent on outsidefinancing. Instead of writing a business plan, the first thing shedid was invest $6,000 in a logo, embossed letterhead and businesscards.
"In the launch stage, I needed something to speak volumesabout my company, and I spent a ton of money on it," saysCohen, 42. "Some people would first look at the bottom lineand ask how much revenue I was going to produce, what targetmarkets I was going after. I knew I had to do that, too, but firstI had to set the tone, the image of the company."
Obtaining a business license, setting up a bank account as asole proprietor, registering the Web site www.co-communications.com and starting to networkvigorously all followed in quick succession. "I put myself outthere with those gorgeous-looking business cards and passed themaround," she says. She bartered early on with a graphicdesigner to create her Web site in exchange for PR services. Whenclients came calling six months into the business, Cohen felt itwas time to outsource a bookkeeper.
"The billing in advertising and marketing is verycomplicated. 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 morethan $1 million in sales for 2003.
The best thing you can do in the early stages of your businessis to create a timetable for how you'll take care of thebasics. "Things are always thrown in our path to take us offour timeline," Cohen says. "But if you can stick to it asclosely as you can, you're guaranteed success. And successbreeds success."
Do's & Don'ts
Cover your bases and get these decisions right the firsttime:
- DO consult with an accountant and an attorney beforeyour business opens to choose your business structure and take careof any necessary papers.
- DO get your state licenses and ID numbers before takingcare of mechanics such as setting up your business bank account andseeking insurance coverage.
- DO protect your company from product liability beforeyou start selling. This is particularly important in the technologyfield.
- DON'T sign a lease before you've securedfinancing and done your due diligence on a location'sdemographics and foot traffic.
- DON'T assume banks will finance debt you've runup on your personal credit cards in starting your business. Banksaren't keen on financing credit card debt.
- DON'T staff up with expensive employees, such as afull-time human resources, marketing or accounting person, beforeyou can afford them. Outsource this expertise.
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