Providing Answers for Would-Be Entrepreneurs

PAUL J. FEELEY, a Santa Cruz consultant, specializes in launching small businesses

As a business start-up consultant for 15 years, I've found that new clients keep asking the same questions. For the sake of those considering taking the entrepreneurial plunge, here are some answers:

Q. I've been thinking of starting my own business. What type of business do you recommend?

A. Starting your own business takes lots of time and energy, so I recommend that you do something you really enjoy. If your new business is something you would do as a hobby, then the long hours will be easier to take. If you enjoy the work, then you will consider yourself successful if you simply are able to support yourself adequately. You should also make sure that you are good at the essentials of the new business. If you're not familiar with everything you need to know, try to get a job in the industry. It's better to have on-the-job training provided by an established business while you are a paid employee than to get your training the hard way, when you are on your own.

Q. We have developed a unique method of making a product, but we have nothing that is a true invention--that is, we have nothing that will qualify for a patent. What should we do to protect ourselves while we are trying to get our firm started?

A. Keep your new process proprietary, do not disclose details of the process to people who don't have a genuine "need to know." Obtain a "non-disclosure" statement from everyone you deal with before you divulge any proprietary information. Many firms carve niches for themselves without patent protection--just look at all of the different soup, soap and candy companies.

Q. I'm in the process of starting a new venture. Should I quit my present job and devote full time to this new venture?

A. While preparing your business plan and assembling a team of founders, you obviously have to survive. It is generally recommended that entrepreneurs provide for a minimum of nine months' living expenses before leaving their current jobs. But if your spouse or parents can cover living expenses, then you might take advantage of the opportunity to devote full time to your new enterprise right away and speed up its development.

Q. I need money for my start-up, but everyone tells me that I'll have to give up a part of my company. Why can't I get a loan?

A. A start-up is a high-risk venture and private citizens are limited in the amount of interest they can collect. A bank won't give you a loan on your start-up, although you might be able to get a personal loan. Equity participation--in other words, gaining an ownership interest--is the only way most non-relatives will invest in a start-up. You will need a business plan to determine your money needs and you will have to calculate the number of shares per dollar that provides a fair return for investors. Don't be surprised if it takes quite a bit of negotiating to reach an acceptable agreement.

Q. Why are banks reluctant to lend money to a new business?

A. Banks generally are not out to take high risks. Banks have a fiduciary responsibility to their depositors. They charge relatively low interest rates, and investors and financiers demand high interest payments from new businesses. But banks will help you if they are adequately protected. They can transform your illiquid assets, such as a home or land, into cash through a personal loan. It's best to establish rapport with a banker early in the life of your business, long before you expect to need the service. Ask the banker to review your business plan, keep him or her advised of the fluctuations you encounter. Build trust and you will find that you become "bankable" earlier than you expect.

Q. I'm going to have a very small company. Why do I need a business plan?

A. Even if you are in the unusual position of needing neither investors nor co-founders, you owe it to yourself to know whether or not you are on target for important milestones. If you are like most start-ups and need both money and co-founders, you will find that few will invest unless they are convinced that you know where you are going and have a plan showing how you will get there. The business plan is your bible.

Q. What does a business plan have to include?

A. The minimum requirements would be: 1) An executive summary. 2) A historical description of your company. 3) A description of the industry you are entering, including an examination of your competition. 4) Market research and an accompanying marketing and sales strategy. 5) A detailed history of your management team. 6) The anticipated timing for reaching key business milestones. 7) Financial projections for the next five years. 8) If in a technical field, research and development. 9) The structure and amount of proposed financing.

The order and detail of these sections of the plan will vary according to the nature of the business. And keep your plan readable--it shouldn't sound like a doctoral thesis. The language should be simple, free of jargon.

Q. What should an executive summary contain and how long should it be?

A. The summary should cover how the company was founded, its activities to date and highlights of the management team's experience. It should also contain summaries of projected sales and profits, distinguishing characteristics of your product or company and other pertinent data that will help sell your company. The summary should be no more than three pages long. These three pages may well determine whether your company flourishes or never gets off the ground.

Q. What is the advantage of incorporating?

A. Limited liability--meaning that the owners can lose only what they invest, nothing else--is the principal advantage. But you are entitled to limited liability only if your business acts like a corporation. In other words, among other things, you must keep minutes, have the required meetings, have a corporate bank account and execute all documents as a company officer. Incorporating also can make it easier to get start-up capital and to sell part of the business, because most people don't want to get involved in partnerships.

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