Starting the Right Business
From the Nolo Legal Center
Your business should have a solid chance at profitability — but it should also suit your particular skills and strengths.
If you want to work for yourself, but don’t have a particular business in mind, you’re probably wondering what kind of business you should start. Fortunately, the answer is always the same: Start a venture you know intimately.
Know the Ins and Outs of the Business
Don’t fall into the trap of starting a particular business just because someone tells you, “It’s a sure thing.” Potential customers will part with their hard-earned money only if you convince them that they’re getting their money’s worth, so you’ll need to know what you’re doing, no matter what the task.
Choosing a Business You Know
Starting a business in which you already have experience has many advantages: You can use your knowledge about the industry, your training and skills, and your network of contacts, who might help you find financing, suppliers and customers.
For ten years Steve worked for several different construction companies — first as a journeyman carpenter and then as a project manager. When he got the itch to start his own business, it made perfect sense for him to start a small contracting business specializing in home-improvement. He knew the industry well, including the best places to buy supplies and what he could charge for services, and he had the required skills, such as how to estimate and bid jobs — and it didn’t hurt that he knew how to pound nails as well. The contacts he had developed over the years were glad to talk to him about running a small contracting business, and many customers he had worked with in the past told him they’d be willing to hire him if he were working on his own.
If you’re interested in turning something you know and love into a business, talk to people you’ve worked with about what it takes to run that kind of business. Learn all you can about start-up costs, overhead and expenses and how much revenue you can expect to make. If you have several interests, but aren’t sure which would make the best business, consider how you can translate your strengths, education and skills into business opportunities, and research the marketplace to see which types of business are presently needed in your area.
Starting a Business in an Unfamiliar Industry
Unfortunately, the lure of quick profits convinces many people to start businesses in areas they know little or nothing about. This is a sure recipe for failure.
Leo opened an upscale nursery and garden supply outfit at a time when, seemingly, such a business “couldn’t miss.” Leo knew a good deal about running a small business, had a personality well suited for it and could borrow enough money to begin. However, the business never took off, and it cost him two years and $30,000 to get rid of it.
Why? In his hurry to make a profit, Leo overlooked several crucial facts. The most important was that Leo, a self-described “brown thumb,” knew virtually nothing about plants and didn’t really want to learn. Not only was Leo unable to chat with customers about what types of flowers grow well in partial shade or how to get rid of various garden pests, he didn’t even know enough to properly hire and supervise salespeople. In short, Leo made a classic mistake — he started a business in a “hot” field because someone was foolish enough to lend him the money.
If you don’t know much about the business you want to start, but are set on it, be prepared to spend enough time learning it before you begin.
Research and Evaluate Your Business Idea
Here’s a step-by-step guide to evaluating whether you and your chosen business are a good fit.
1. Try it out. Before you start a business of your own, get some experience in the industry or profession that interests you — even if you work for free. Learn everything you can about every aspect of the business. For example, if you want to start a pasta shop, but don’t know ravioli from cannelloni, go out and get a job with a pasta maker. After a few months, you should be an expert in every aspect of pasta prep, from mixing eggs and flour to flattening the dough and slicing it into strips.
Talk to Entrepreneurs in the Same Field
If you’re not familiar with the business you want to start and you’re unable to find work in the field, talk with others who provide the product or service that interests you. To increase your chances of getting interviews and reliable answers to your questions, it’s best to do this in a different locale from the one in which you plan to locate. Small business owners are often quite willing to share their knowledge once they are sure you will not compete with them.
2. Evaluate whether you enjoy the work and excel at it. If not, find a new venture. It’s a lot harder to make a success of a business you don’t like, and it’s unlikely you’ll like something you’re not good at. If you enjoyed the work and determined you were skilled enough to base your own business on it, go on to the next step.
3. Judge your ability and desire to handle every aspect of the business. If you don’t want to or can’t pitch in wherever and whenever something needs to be done — whether it involves manufacturing a product, dealing with customers or keeping the books — you should think twice about starting that kind of business.
4. Determine whether the business has a solid chance of turning a profit. After working in the field for a few months, you should have a good idea of whether the business is a potential moneymaker. To be sure, you should analyze your market and conduct a break-even analysis, a preliminary financial projection that shows you the amount of revenue you’ll need to bring in to cover your expenses (this amount is called your break-even point). If you’re able to bring in more revenues than your break-even point, you’ll be in the black (that is, you’ll make a profit).
5. Evaluate the risk this particular business requires. Even the best-laid plans can sour if you pick an unusually risky business. For instance, the following businesses have higher than average failure rates:
- computer stores
- laundries and dry cleaners
- used car dealerships
- gas stations
- trucking firms
- infant clothing stores
- bakeries, and
- grocery and meat stores.
If your business idea is on this list, don’t despair — it doesn’t mean you should automatically abandon it. However, you’ll need to be more critical and careful with the numbers when preparing your business plan.