What You Need To Know Starting A New Business
Since the pandemic, there has been an explosion of new businesses across the country, with the rate of business formation setting a record in the first year of the pandemic, and continuing at a strong rate since. Entrepreneurs are responding to the tectonic changes occuring in the economy, which are presenting them with immense opportunities. From the shift to digital, to the movement away from fossil fuels, entrepreneurs are operating in a time of a number of generation-defining trends. If you too are looking at the economy today, and see the potential it holds, then this is your guide to starting a new business.
Source: U.S. Census Bureau
- Define Your Value Proposition
Decades ago, business management guru, Peter Drucker, said, “the purpose of a business is to create and keep a customer”. That principle is eternal. To create and keep a customer, you have to provide a product or service that they cannot get elsewhere. That seems basic, but in reality, many businesses that are formed offer products and services that customers can easily get elsewhere. Consider the restaurant business: the National Restaurant Association estimates that one in three restaurants will close within the first year. Failure characterizes the industry. Why? Because restaurants have no pricing power. Restaurant A can’t double the price of its burgers to become profitable, because no matter how good that burger is, it will never be THAT good that customers won’t accept an inferior one for a more reasonable price. What you want is to offer something where you have a clear competitive advantage. If you have a competitive advantage, then you will have more freedom to raise prices and achieve profitability. To get a competitive advantage, you have to find, not just a pain point, but one that really hurts your potential customer. Here’s an analogy: I may not like Windows, but that doesn’t mean I will try out Linux. It has to be something that is really important for people, something for which they are willing to pay to get free. If you have the right product, you will have product-market fit, and your customers will want your product so much you will struggle to keep up with demand. That will define your success or failure.
- Avoid Competition
In addition, industry economics defines what is possible. So you have to study your value proposition in the context of the industry. You want to be in an industry that is hard to get into, or where you feel you can close the door once you’re in. For instance, before Google, there were a number of search engines competing for dominance. However, Google had such a superior search engine they understood that the market would shift in their favor and as more people used their search engine, the search engine would get better, attracting more users. Today, Google controls nearly 93% of the market. The idea of being inside an industry that’s hard to get into means that you will not easily face competition. Competition erodes profits because it turns everyone into price takers. You need barriers to entry.
- Draft a Business Plan
Yoru business plan is your map, guiding you from concept to execution. The business plan explains your value proposition, the market economics, the kind of business model you will employ, your path to profitability, and other essential aspects. Even if you are not raising external capital, having a business plan is important for clarifying your thinking. If you want external capital, you simply cannot get it without a business plan.
- Define What You Stand For
If you’ve ever opened an old iPhone, you will see that it is made with the same care and attention for the aesthetics of the product, as the outside of the phone. This is so even though Apple knows that most customers will never see the inside of their phones. You have to have clear values around which absolutely everything revolves. These will be organizing principles of your business. For instance, if you own a flower shop, you should care about how absolutely everything in your business reflects the floral theme of your business. If you send an email, it should be a beautiful email, because your business is about beautiful things. Your values should be reflected in everything you do. Without coherence, your business will seem inauthentic and a bit “off”, and that will limit your brand power. Your values are so important that even if nobody is looking, they should determine everything you do. When you are clear about this, drill it down to a simple mission and vision statement. For example, Google’s mission is “to organize the world’s information and make it universally accessible and useful”, and their vision is, Google vision statement is “to provide access to the world’s information in one click.” The mission defines what they want to do every single day, and their vision distills what their end game is. Everything they do, from acquisitions to product design, stems from this core. The rest of their values are aligned toward realizing Google’s mission and vision.
- Choose a Business Name
Now that you have a concrete idea of the kind of profitable enterprise you want, you will have to give your business a name. You want a name that’s simple and reflects your business and its values. Don’t spend too much time here. Your business name can always change.
- Pick the Right Business Structure
Your business structure should make it easy to achieve your stated aims. The most common business structures are sole proprietorships, partnerships, corporations, S corporations, and limited liability companies (LLC). Each business structure comes with its own tax and legal protections and obligations. In some instances, if you are a professional, such as a lawyer, or doctor, you will have to choose a professional LLC. This depends on the state’s laws, as LLCs are defined under state statute. Think with an end in mind. For instance, if you intend on listing, a corporation is your best bet. It’s also important to find the right state for your corporation. Look at the best states to domicile your business. Typically, you will need a registered agent to set up a business. These should be states where it’s easy to open a business, where corporate taxes are low to non-existent, and where regulations favor your business. So for instance, if you want to set up a business in Florida, you can contact the registered agent here who will file your papers and receive service of process on your behalf.
In setting up your business, you will need to obtain an employee identification number (EIN) from the Internal Revenue Service, which allows you to pay taxes, open bank accounts, and conduct business. It’s your company’s social security number. You will also need to obtain any business licenses and permits that are needed to operate your business. This depends on your state, so you should speak to the Secretary of State, for more information.
