How to Start a Business: Step-by-Step Guide
According to the U.S. Small Business Administration, the number of small businesses has increased 49% since 1982 – but if it is true anyone can start a business, it is also true that it can be difficult to build your own empire from scratch. Starting a business goes beyond being entrepreneurial, it involves researching, planning, making financial decisions, and going through a series of legal procedures. To help you in your self-made journey to business ownership, we have put together a thorough step by step to guide you along the way.
1. Choose a business idea
Start by deciding which business you want to start. This is a very important step that will define your entrepreneurial journey, so take the time to think, explore and listen to your intuition before making a decision. If you are in need of inspiration, some of the best industries to start a business in now are:
- Retail e-commerce: the percentage of digital buyers grows every year, and eMarketer projects an increase of e-commerce sales to $4.058 trillion in 2020.
- Personal care services: this is one of the fastest-growing industries, and according to Statista, this industry will be worth $21.78 billion in 2024.
- Street food: consumer eating habits are changing, and this includes eating more meals from food trucks. According to IBISWorld, the food truck industry was worth $2.7 billion last year, and is expected to continue growing.
Look at different perspectives
If you want to start a profitable business, you have to adopt a rational model of decision-making, Look at your business idea from 4 different perspectives:
- Company. Think about the products/services your company will sell; its personality and message; and the benefits it will bring to customers.
- Customer. Analyze your potential customers – from purchasers, who will buy the product or service; to influencers, who will influence the purchasing decision; and to users, who will ultimately interact directly with your product or service.
- Competitor. Identify competitor companies and how often your business will compete with them – how will you tailor your company message to stand out from competitors?
- Collaborator. Identify associations, media and other organizations that will have an interest in your success, without being directly rewarded by it. A collaboration is a powerful tool that will help your business grow, regardless of the industry.
Do a SWOT analysis
A SWOT analysis identifies the strengths, weaknesses, opportunities and threats of a company, and will help you check the viability of your business idea. Strengths are the resources that support a successful outcome; weaknesses work against that success; opportunities are what the company can capitalize on or use to its advantage; and threats are factors that could damage the company’s success. The strengths and weaknesses are internal, while the opportunities and threats are external to the company. To conduct a SWOT analysis you have to ask yourself several questions – remember to base your answers on facts instead of opinions.
What does your business do well? Focus on assets; what makes you stand out from competitors; your customer base; skilled labors; your experience in the industry; your advantages compared to rival businesses.
What can your business improve on? Look at areas of improvement; where your competitors have an advantage on; your knowledge gaps; the amount of investment you need to start your business; realistic profitability expectations; how well your competitors are doing.
What can your business take advantage of? Identify ongoing trends; which changes can bring you opportunities; what the market is currently missing; if you can provide to customers what your competitors are failing to.
What does your business need to avoid? Possible threats can be negative aspects in the market; potential businesses that can be competitors in the future; obstacles your business is currently facing; changes in consumer trends; government regulations that might affect you; political and economical instability.
Try different approaches
There are different approaches you can take when choosing the right business idea. You can take advantage of your skills and set up a business doing what you know; you can draw inspiration from other businesses that interest you and take a chance at emulating them by doing what others do; or you can solve a problem if you identify a gap in the market and want to sell a service or product to fill that gap.
The easiest way to come up with a business idea is to solve a problem. You can solve your own problem or someone else’s. Look at your frustrations and the frustrations of those around you in day-to-day life, and try to identify the right service or product to deal with them. You are not expected to invent the wheel, but rather come up with an innovative solution to a common problem. If you have experience in a particular industry, take advantage of your insight to identify ongoing issues that you might be able to solve. Just remember that every problem is an opportunity to create a new product or service.
Think about where you spend most of your money and ways you could lower those expenses, and consider the input from those around and what they would like to buy at a cheaper price. Think about the modern basic needs and how you could reduce their cost: food, utility bills, transportation, healthcare, education, and clothing. And think smaller rather than bigger – energy-saving light bulbs help reduce the electricity bill, for example.
How can you make people’s lives easier? By trying this approach you can easily take an existing product or service and introduce a new benefit to improve it. Can you think about an action, chore, product or service that could be adapted to make people’s lives easier? Small things often matter, so look at what is around you and ask yourself how you could make it easier – more straightforward, more interactive, more productive, less unpleasant, less stressful.
Do what you love
If you already have something you are passionate about and actively do on a regular basis, the choice should be easier to make. Consider taking your ongoing hobby to the next level by turning it into a business. This way, it will be easier for you to start a business and the process will be less intimidating, since you will simply be doing more of what you already know.
2. Do market research
Customers are key to any successful business, so before you start your own business, do market research to understand their needs and habits, so you can fulfill them with your product or service. After conducting interviews and polls targeting your audience, plus analyzing reports and studies relevant to your business, you should be able to answer 4 crucial questions about your customer base.
Who are your customers?
Your business needs to have a target group of customers you can focus your marketing strategy on. You need to know your customers well, so you can adapt your strategy according to age, gender, occupation, income, lifestyle, education, etc. By understanding your customer base, you will also be able to estimate the size of the market you are targeting, which will come in handy when you need to analyze the competition.
What do your customers buy now?
Analyse buying habits related to your product or service, bearing in mind consumer shopping behavior can be influenced by cultural, social and personal factors. You need to know the quantities they buy, their favorite suppliers, the features that attract them and the predominant price range. Answering this question will also reveal where your customer base is, so if you are looking to open a physical store you will know which location to target.
Why do your customers buy?
Put yourself in your customers’ shoes – this way you will understand the reasons why they will buy what you are trying to sell. Think about your product or service and its uses. How does it benefit the customer? Which need does it satisfy? If you find the answer to these questions you will be on the right path to identify exactly what your customers require, and be able to decide early on if you will be targeting different customer groups based on different requirements. For example, if your product can be either eat-in or take-out you will need to split your customer base according to the different requirements each option fulfills.
What will make customers buy from you?
There is no straightforward answer to this question. Look at relevant market insights, sales figures and consumer buying motivations to find what customers are buying, what the competition is offering, and, therefore, find out how you can make your business stand apart from competitors. Odds of success will be higher if you know exactly what other companies are selling – you will be one step closer to outselling them.
3. Write a business plan
Before you find out how to start a business, you have to know how to write a business plan. The first rule is to think carefully about what makes your business unique and how it differentiates from others. Secondly, remember to keep it short and straight to the point – no one will read a 50-page plan, no matter how well it is written. Lastly, a business plan is ongoing, so it should be updated on a regular basis to reflect goals, forecasts, projections, challenges and solutions – this way you can easily track progress. Think of it as the tool you will use to run and grow your business.
According to research done in 2017 by the University of Edinburgh Business School and RWTH Aachen University, entrepreneurs who write business plans are 16% more likely to succeed in their business.
Key things to include in a business plan:
Describe the business’ goals and how they will be achieved. Start your plan with an executive summary that gives a high-level view of your business. Briefly explain the product or service you plan to sell; the structure of your business; the conclusions drawn from your market analysis; your customer target groups and how your business will fulfil their requirements.
Describe in detail the market gap your business plans to fill. Start this chapter by explaining the problem that resulted in a business opportunity. Clearly identifying the problem your potential customers have is crucial to having a viable business concept. Follow with an explanation of the subsequent solution you will provide to customers – this will be the product or service you will provide. You need to clearly describe what it is, how it will solve the problem, and how the customers will interact with it.
This is the chapter where you explain how you will turn the opportunity into a business. It should cover your marketing and sales plans, detailing everything from how you plan to sell to your pricing strategy; how your business is positioned compared to competitors; and what is your promotional strategy, detailing the different ways you will communicate with your potential customers. On an operational level, it should also cover the logistics and technology of your business – here you can mention the solutions you plan to offer to improve customer experience, such as omnichannel payments and secure payment processing.
Explain how the business will operate. Write about the team you will need to hire; disclose information about any advisors or consultants working alongside you; provide a concise overview of the business’ location, and legal structure and ownership. Take advantage of this chapter to also project your business growth according to a certain amount of funding or revenue.
This is where your financial forecast comes in. Usually, a financial plan covers projections for the first 12 months, followed by annual projections for the next 3-5 years. This plan should include a sales forecast, where you write down the sales projections of each product or service you offer, plus their production costs. It should also include information about how much you plan to spend on personnel; a profit and loss statement; and a cash flow statement. You should close this chapter by describing your exit strategy – the plan to eventually sell your business, identifying the companies that might be interested in buying it if it is successful.
4. Fund your business
How to fund your business is one of the most important choices you will have to make. Once you have written your business plan you will know exactly how much money you need to start your business. If you don’t have the financial capacity yourself, that capital can either be raised or borrowed.
According to data compiled by Fundable, 57% of startup businesses are funded by personal loans and credit, while 38% are funded by family and friends.
6 ways to fund your business:
1. Invest in yourself
Go in alone. You can choose to fund your own business with personal capital. This will win you the freedom to manage the company how you see fit, as you will not have to answer to anyone. Although, starting a business with minimal capital can involve a few risks, especially if the business fails to succeed – without a substantial capital injection the progress of your business can be slow, your company might fail to build scale and, therefore, miss several opportunities for growth. Entrepreneurs who fund their business with their own cash should first focus on selling their product or service, and then use the proceeds to further develop the company.
2. Ask your family and friends
The ones closer to you will want to see you succeed, so asking family and friends to fund your business is a smart approach. They are unlikely to demand ridiculous interest rates or a structured payment plan, which can allow you to repay the money lent once you have generated enough revenue. Just bear in mind you should establish from the start if the investors are just loaners or are entitled to shares in the company.
3. Get a bank loan
Bank loans are the traditional lending way to fund a business startup. You can choose between different types of loans and between different banks – research banks that particularly enjoy working with small businesses for better odds of getting your loan request accepted. Remember when you choose to fund your business through a bank loan you have to think long-term. And you should also research the different types of bank financing available before making a choice.
4. Find an angel investor
Angel investors are high net worth individuals who specialize in investing in startup businesses in their early stages, in return for an ownership stake. The benefit of funding your business via angel investment is that the investor will always bring more than just money to the table – angel investors are business experts with the knowledge and contacts necessary to scale your business growth. On the other hand, angel investors are generally interested in a management position that entitles them to run your business. Remember the more ownership you give an angel investor, the more control you will lose over your business.
5. Go after venture capital
Venture capital is when a group of private investors finances a startup business based on its long-term growth potential, in exchange for partial ownership. Even though these investors can usually also provide valuable guidance on financial and human resource management, they are often very particular on how the business operates as they expect it to eventually be sold.
6. Try crowdfunding
You can try to attract public loans or investment through crowdfunding. This takes place in an online platform where you setup a page with your business proposition and the amount of funding you need. There are different models of fundraising: donation-based, rewards-based, loan-based, or equity investment-based. Funding your business through crowdfunding is a good idea, especially if you are unable to fund it through other means. It is also a smart marketing strategy, has you have access to the wider public and can, therefore, promote your business too.
5. Choose your location
Whether you are setting up an office or a shop, having a physical presence is important, and choosing your business location is more than just choosing a building. You have to take different factors into account, and look at the location of your business not only from your perspective as a seller, but also from the perspective of customers, suppliers and competitors.
Consider your customers and the importance of their proximity to your business location – this is where the profile of your target market should come in to help you make a decision. If your customer base is local, you have to know if a sufficient part of the population matches your customer profile, and if that community is stable economically, in order to support your business.
The accessibility of the location you choose is also an important factor, especially if your business relies on regular deliveries and customer footfall. You can consider the lower cost benefits of setting up your business out of town and away from commercialized areas, but bear in mind there should be good transport links, that make your business accessible to suppliers, customers and employees.
You don’t want your business location to be next door to a competitor’s. Find which competitors have a physical presence in your area and what they are offering, so you can make an educated decision on the right location for your business. If there’s a strong competitor presence, you might have to choose a different location where your business can more easily succeed. Although, if you study the competitors’ offering and conclude your products or services have a unique or innovative element that will make them stand out, establishing your business in a competitive location is the right choice.
Estimate the living cost of the location before making a decision. You have to consider common costs such as rent, bills and taxes, but also extras like paid parking, for example. Remember cash flow determines the viability of a business, so you have to choose an affordable location.
Does the location you chose have potential for business growth? Moving premises is expensive and time-consuming, so one of the first decisions you have to make in regards to your business location is if it is a short-term or long-term solution. The ideal location should be flexible enough to accompany your business’s growth and meet different business needs.
6. Pick a business structure
The structure of your business defines its legal organization framework. It will influence business operations, taxes, legal protections and benefits; so it is important to make the right decision here. There are different types of business structures you can choose from, and you need to consider liability, taxation and record-keeping when making that choice.
- A sole proprietorship gives you complete control of your business. On the other hand, you are also personally liable for all financial obligations, and getting funding from a bank loan can be difficult, as banks are often hesitant to lend to sole propriertorships. This structure is ideal for low-risk business ventures.
- A partnership involves two or more people, where each partner is personally liable for for the business financial obligations. All partners share both profits and losses, and those “pass through” the business to the partners, who individually pay tax on their share of the profits or deduct their share of the losses. This structure is a good choice for businesses with multiple owners or professional groups.
- A corporation is separate from its owners, and created with the sole purpose of conducting business. Corporations can make profit, be held legally liable and be taxed, but are independent from their shareholders. The pros of choosing a corporation structure include the avoidance of personal liability, the fact that a shareholder can leave the company without affecting the business, and the benefit of being able to raise funds through the sale of stock. On the other hand, corporations can suffer from double taxation – on company profit and dividends paid to shareholders, and cost more to be created than other structures, as they require extensive record-keeping and operational processes. This structure is appropriate to medium-high risk businesses, and businesses that plan to “go public” or be sold.
- A limited liability company (LLC) is a combination of a corporation and a partnership, where owners can limit their personal liabilities, and enjoy the tax and flexibility benefits of a partnership. Personal assets are separated from company assets, and profits and losses can be “passed through” to owners without taxation of the business itself. An LLC is a good choice for medium-high risk businesses where owners have significant personal assets they want to protect, and what to pay lower tax rates.
- A cooperative is formed by user-owners, that become a part of it by buying shares. it is operated for the benefit of those using its services, which are the ones who own it. A cooperative is run by a board of elected directors, and profits and earnings are distributed between the members.
7. Register your business name
Choosing a business name can be a complicated process, but it is an important step as it can influence the success of your business. But when it comes to naming your business, experts have different opinions: some believe the name you choose is not as important as the image, while others think the name should tell the customers right away what your business is. On the other hand, some prefer names with made-up words and think they are easier to remember, while others believe made-up words are more forgettable than real words. There is not a formula to create a successful business name, but there are key characteristics you can focus on – your business name should be:
- Easy to pronounce
And, most importantly, your business name should be available, so you can register it. Once you have chosen the name, you need to protect it, and the registration type(s) you choose will depend on what is legally required according to your business structure and location.
4 ways to register your business name:
Registering your entity name protects your business at a state level, preventing other business in the state to operate under the same name. The entity name is how the state will identify your business, and registration rules change from state to state.
A trademark protects your business name, products and services at a national level. It prevents other businesses in the same industry from using your trademarked name(s). Check your prospective name against the United States Patent and Trademark Office database.
Doing Business As (DBA) Name
In some occasions, depending on your business structure and local government laws, you might be required to register a DBA name with the state, county or city your business is located in. A DBA name let’s you run a business under a different identify from the formal entity name.
If your business will have online presence, you need to register a domain name, so you can protect your online brand presence. There are several domain registration options available, with different prices and options.
8. Register your business
Finally, you need to register your business to make it a legal entity. If your business is not registered, you might not be entitled to personal liability protection, legal and tax benefits. If you are starting a small business, the only registration required might be of its business name with local governments; but it all depend on the business structure and location.
You can register your business with federal agencies by applying for a federal tax ID. Small businesses often register this way for trademark protection or tax exempt status.
You need to register with state agencies if your business is a partnership, corporation or LLC. If you have physical presence in a state, regular client meetings, significant revenue coming from that state or employees working there – you have to register your business locally. The cost should be up to $300, as fees vary depending on business structure and state. The information you usually need is: business name, business location, ownership, number and value of shares (corporation only).
Usually you don’t need to register with local agencies such as counties or cities to officially start your business. But if you are a partnership, corporation or LLC, you might need to file for local licenses or permits.
According to the U.S. Small Business Administration the survival rate of small businesses in their first year is 80%.
Turning your business idea into a reality is possible if you think, research, plan and register. Business survival rates are in your favor, so take advantage of them!