Americans started more than 4.4 million businesses in 2020, according to a Peterson Institute for International Economics study, a 24 percent increase from 2019. Prior to the first year of the pandemic, the rate at which Americans were starting companies had been declining.
As a firm that often works with startups and entrepreneurs, we have seen firsthand the preparation and research it takes to be successful with new businesses. If you, too, have been bitten by the entrepreneurship bug and are in a position to make your dream a reality, here are seven things you should consider as you evaluate your business idea:
1. Ensure you have an audience that wants your product or service. Conduct real market research with the help of experts to determine whether you’ve identified a legitimate market for your product or service. It’s only when you know who your audience is that you will be able to set sales goals, assess your competition, and properly evaluate your product or service. Talking to friends and family is not enough. It’s easy to get caught in an echo chamber, so we recommend sharing your business idea as much as possible for proof of concept before spending the cash to approach the entire market. For example, if you’re considering starting a BBQ restaurant or food truck, perhaps try catering parties or events to test your food and service (and to make sure you enjoy the work).
2. Check out the competition. Having competitors does not mean your idea won’t work, it just means that you will need to differentiate your business from what’s already out there. What are the most compelling aspects of your competition’s products? What do people like and dislike about what they’re getting from your competitors? What is their pricing strategy? Do focus groups, comb through reviews, and test products yourself. The more you know about what clients are currently getting and what they might want, the better positioned you will be to carve out a niche for yourself in the market.
3. Determine your advantage. Once you understand who the competition is and what the target audience gets from them, you will be better able to assess what makes you better. Identify your competitive advantage and use that as the marketing hook around which you build all your branding and messaging.
4. Gauge the financial feasibility of the venture. Consider startup costs, funding sources, ongoing expenses (rent, utilities, supplies, transportation, shipping, software, etc.), and potential profit. Make a plan for how you will survive financially in the time period between starting the business and making enough profit to pay yourself.
5. Structure the business appropriately. As most people know, starting any new venture is very risky. There are financial risks like losing money or adding debt, and market risks like competition and economic fluctuations. Many financial considerations can be hedged by working with a CPA and attorney prior to opening your doors. Ensuring you have the proper structure, solid financing or funding, and a sound operating agreement can prevent serious headaches down the line.
6. Consider tax implications and incentives. A CPA can help answer questions like: What’s the best entity type for my business? What’s the best way to fund my business? Can I admit new partners now or in the future? How can I take advantage of any losses in the first few years (which are very common)? There are many tax (and legal) implications to structuring new businesses and it’s much easier to plan if advisers are brought in before any decisions are made or paperwork is signed. This is more important than ever, because right now there are many new and evolving tax provisions that can greatly benefit a startup business, from payroll tax credits to government loans.
7. Ask for help. Most entrepreneurs don’t excel at every aspect of running a business — instead, they are good at delegating and outsourcing the tasks that aren’t in their wheelhouse so they can focus on what they are good at. We work with many business owners who completely outsource their accounting, tax, and legal functions to enable them to focus 100% on building their brand. While this comes with an added cost, there is peace of mind knowing you have a team of experts to help your business succeed.
We love helping businesses in our community get off the ground and succeed. If you are considering starting a business and would like the advice of a CPA, reach out to us at info@sbfcpa.com.