Have you ever thought about going into business yourself? Whether or not you’re employed, this may be a good time to branch out on your own. Here’s what you need to know about becoming your own job creator.
Crystal Douglas had always dreamed of starting her own business. With two daughters out of the house, and her son soon to move out, the stay-at-home mom sought a new pursuit. In 2010, she opened Wired Café, 414 E. State St., Rockford.
It wasn’t supposed to be so easy. A cousin helped her craft a business plan; an attorney helped her to lease a former coffee shop and buy the store’s equipment. An accountant and a banker helped her to arrange her finances. She’s made her share of rookie mistakes, but two years later, the business is going strong.
“I really lucked out,” Douglas says. “Everything just flowed. I didn’t do it like you’re supposed to do it.”
That’s the beauty of owning your own business – there’s no set formula. Each business and owner face unique circumstances and challenges, but their work drives the American economy. Business ownership isn’t without its risks, but success brings many rewards.
Despite major economic hurdles in today’s economy, self-employment is still a viable option for those who are determined to succeed. Just ask the 3.5 million American small businesses that have four or fewer employees. You may not be the next Steve Jobs or Henry Ford, but with our local resources and some hard work, you, too, can launch a successful enterprise. Here are a few things to help you get started.
Step 1: Do Your Homework
The critical first step is research. Craft a business plan that articulates what your business is, what it’ll accomplish and how. Ronald “Bud” Gayhart, director of the Small Business Development Center (SBDC) at University of Wisconsin-Whitewater, helps startup owners to refine and research their business plans.
“Eighty percent of businesses fail in their first year, but those that fail quickly do so because they don’t have a business plan,” says Gayhart. “Sixty percent of businesses don’t have any business plan. How much better could they do if they had that plan in hand?”
A successful plan outlines every facet of the business. Detail the company description, outline products and services, and craft a marketing and operational plan. Then, think about the structure. Establish a management hierarchy, forecast your revenue and expenses, and demonstrate your own financial investment. Be prepared to refine your details.
“The business plan helps individuals to determine what it looks like and how to differentiate from those playing in the sandbox today,” says Gayhart. “Sixty percent of your business plan is focused on the marketing side.”
The marketing plan should size up competitors, customers and industry trends. Is the industry growing, flat or in decline? Do customers fit certain demographic traits – geography, income, education, age, ethnicity – or psychographic traits – motivation to buy, issues connected to buying – that might inform your marketing? Also, who are your competitors, and can you fill a niche they can’t? Often, the answers come from personal experience.
“They have to know the business they’re going into and the best way to start is by going into something they understand,” says Gayhart. “They already understand the industry, the customers and the suppliers. They’ve spent significant time working for others and they’ve already learned those best practices.”
Thorough research uncovers even more detail. Gayhart suggests sizing up competitors by browsing local advertisements and visiting local or regional trade shows. Pose as a customer, he says, to understand prices, sales pitches and products. Use U.S. Census data to find customers, and use the free resources available at public universities, such as the University of Wisconsin.
“We’ve got databases the university subscribes to and they will provide you with all of the information you need to understand your competitors and your audience,” Gayhart says.
As a longtime entrepreneur and head of UW-Whitewater’s SBDC, Gayhart is one of many resources available to first-time entrepreneurs. SBDC is a regional center for entrepreneurs in south-central Wisconsin, with 12 sister hubs across the state. The center’s Illinois cousin is housed at EIGERlab, in Rockford, along with other business services. Both locations offer workshops, mentoring and online classes.
“As an entrepreneur, I don’t have a lot of people to talk to, and I need people with experience,” says Gayhart. “I’m not always willing to take advice from someone, but sometimes, if they can share their experience and how they approached it, then I can think about how it applies to my situation.”
Case Study: Helicopter Specialties
Jim Freeman, owner of Helicopter Specialties, 4746 S. Columbia Dr., Janesville, is a SBDC cheerleader. When launching his helicopter maintenance and fabrication business in the early 2000s, he turned to Gayhart for advice. Using university resources, Gayhart connected Freeman to college students and other entrepreneurs. In college classes, students used their educations to aid strategic planning and business diversification for Freeman’s company. In peer groups, Freeman swapped solutions with other small-business owners.
“That’s pretty invaluable, because you get to meet other entrepreneurs and CEOs,” he says. “You don’t go to CEO school.”
Freeman first dreamed of opening his company around the mid-’90s, when he tried to persuade his then-employer to help him launch a satellite office for helicopter manufacturing and maintenance. When those plans didn’t succeed, Freeman independently contracted his own projects, a venture that quickly snowballed into his current company. Today, Helicopter Specialties modifies and services aircraft for medical centers and the federal government.
As he discovered through his continuing work with SBDC, research is essential. He advises other businesses to do their homework, too. “If you’re lucky enough, locate in a business-friendly environment,” says Freeman. “Find out which city and state governments are willing to help. We ran into a lot of roadblocks.”
Step 2: Legal Protections
While crafting a business plan, it’s important to remember the legal matters surrounding a business. Formation of a business entity, operation space, zoning, permits and liability are important issues.
“Once you’ve prepared a business plan, you need to talk with a lawyer about forming a business entity,” says Ian Linnabary, a partner specializing in business law at Reno & Zahm, 2902 McFarland Road, Rockford. “There’s much more to it than filing the appropriate paperwork with the Secretary of State.”
There are three common types of business entities: a partnership, a limited liability company (LLC) and a corporation. Each entity brings its own financial and legal ramifications for a business owner and investors. When determining an appropriate entity, Linnabary considers a wide range of factors. First, he examines the type of business, number of owners, their possible management roles and number of employees. Then, he considers financial liability, including trade liability (creditors, suppliers), employee liability (taxes, insurance, injury), and lender financing. Risk is inherent, but corporations and LLCs can protect business owners from personal liability for the business’ debts and obligations.
“From a lawyer’s perspective, the primary function of a business entity is to shield the individual from personal liability associated with business operations,” he says.
Attorneys like Linnabary also consider regulatory issues, especially at state and municipal levels. After 10 years of advising Rockford-area clients, he’s become familiar with business agreements, regulatory requirements, zoning laws, permitting and other legal hurdles for startups.
“Early coordination with a good business lawyer is worth the money spent,” Linnabary says. “Answers to many typical questions will be right at hand, and they will be quick to find answers to those not so readily apparent.”
Take, for example, a client who’s opening a bakery. Linnabary can point out ideal locations, Rockford’s food and beverage-related permits and health department requirements. He can also help to negotiate contracts for things like equipment and supplies.
“I can spend 30 to 60 minutes with most clients and give them a good idea of where to start and what they need,” he says.
It’s impossible to be fully insulated from risk, so it’s important to take precautions. Get everything in writing, he says, especially if there are multiple owners. Clear roles and relationships create healthy businesses.
“One of the most common questions I face when talking with a client starting a new business is, ‘What is my exposure – what do I stand to lose?’” Linnabary says. “That’s a good question. Although people don’t like to think about it, we absolutely have to contemplate and plan for worst-case scenarios. People ask, ‘What is my personal liability if things don’t work out?’ Unfortunately, the answer is quite fact-specific. It depends primarily on the nature of the liability and how it came about. The answer is rarely simple, so it’s tough to determine without talking to a good business lawyer.”
Case Study: Wired Café
Douglas, of Wired Café, confesses that she probably could have asked Linnabary more questions. The two worked together on setting up an entity, drafting a lease and writing an agreement to buy equipment, but Douglas didn’t realize until later that she could have discussed inspections and utility contracts with Linnabary, among other issues.
“I just stepped out on blind faith, which Ian will tell you is so wrong,” she laughs. “But I hit something right.”
In the early phases, Douglas realized she’d have to pay for health inspections, a grease collector for the kitchen, fire inspections and water district inspections. Today, she struggles with more complex issues, such as employee mentoring.
“Other than money, the thing I have the hardest time with is finding a balance with my employees, between being a friend and being a boss,” says Douglas. “That’s my biggest challenge, because I want to mom everybody. I’m a mom and a caretaker, and so I have to find that balance. You want to get the most out of them, but you want to be fair.”
Step 3: Know Your Taxes and Manage Your Numbers
No startup can escape its taxes. An attorney and accountant, working together, can help an entrepreneur estimate and reduce tax liability.
“If you were in compliance with every rule, it could be very overwhelming,” says Jennifer Wood, tax partner and director of international tax services at Sikich LLP, 6815 Weaver Road, Rockford. “There are taxes for state and federal government, but there are also local taxes, city taxes, that you may be responsible for.”
Wood helps clients around the world to pinpoint national, state and local tax liabilities. If commerce crosses borders, she says, things get tricky – each state or nation wants its piece of the pie. She’s helped an Irish client balance separate European and American businesses. She’s also helped businesses near state lines realize they could pay two states’ unemployment and income taxes, if employees live across the border.
“How would you know this without advice?” she asks. “Taxes are a trap for the unaware. I’ve seen hundreds of thousands of dollars assessed in tax penalties.”
Identifying a business entity is Wood’s first target, because it’s an easy way to maximize profit and minimize tax. She asks: Are there equipment write-offs that could “wipe out” your income? What are your long-term goals, and do they involve rapid growth? How will your employees and management structure be taxed, and when will you pay those taxes?
Be prepared to keep careful, complete records, and ask your accountant which accounting methods make sense. Yes, even your accounting procedure can influence when and for how much you’ll be taxed.
“Initially setting record-keeping practices is crucial,” says Wood. “I could tell you nightmares about startups. Record-keeping usually falls by the wayside. Stay organized, buy an appropriate software package and have a plan for the future.”
There are serious consequences for not maintaining good records. Wood says she’s seen business owners pay hundreds of thousands of dollars when an Internal Revenue Service audit turned up sloppy record-keeping or tax avoidance.
“As an employer, you’re required to file income and sales tax,” she says. “It comes out of employees’ paychecks but you’re a collection agent and you need to submit those payments to the state. People get busy or have cash flow issues and say they’re going to use it to shore up their cash flow. The person signing that tax form to the IRS can be held personally liable if that money isn’t paid.”
She’s seen it happen, too. That’s why it’s essential to get your facts straight with an accountant, she says. “I always tell clients: If you don’t know what you don’t know, it’ll bite you.”
Step 4: Finance Your Business
Once you’ve formulated a business plan, it’s time to review how you’ll pay for it.
About 30 percent of businesses are funded by personal savings, while about 20 percent start with credit cards or bank financing, according to U.S. Census data. Some startups use investments from friends, stockholders, or venture capitalists. Still others benefit from government loans or government-guaranteed loans, both of which start with a bank.
At Alpine Bank in Rockford, assistant vice president Gary Binicewicz is specially certified in the latter. He’s spent a decade connecting clients to loans through the federal Small Business Administration (SBA). Typically, SBA loans share risk between a bank and the government, which makes lower interest rates and longer payment terms possible.
“Startups are very risky,” says Binicewicz. “With that risk, if we want to offer our traditional lending to them, we need to have some backup.”
Always aware of risks, Binicewicz wants to see specific details in a business plan, and he’s turned down businesses that didn’t measure up. In some cases, the client didn’t understand the market. In other cases, the business concept was too unusual. The best plans, he says, make realistic assumptions, backed by thorough research.
“The very best plans come from those who have industry experience,” he says. “They know what they’re talking about. They can back up assumptions with their knowledge as well as their industry data, and those assumptions translate into very reasonable projections.”
Projections matter. Strong budgets and cash flow statements help Binicewicz to understand his future relationship with a client. Ideally, clients need to map out three years of data, he says, with detailed estimates for revenue, expenses and cash gaps. Forecasting can uncover unexpected issues with pricing, wages and business cycles.
“Planning is really the first exercise you need to go through, because you might find, as you’re digging through the data, that the margins just aren’t there like you thought they’d be,” he says. “And no one gets in business to lose money.”
Budget conservatively, Binicewicz says. Add a cushion in case things change, and be realistic. Expecting 50 percent growth in the first year is probably too aggressive, he says, but stashing your cash – working capital, if you will – is a winning strategy. Working capital should cover at least 12 to 18 months of expenses, but is one of the most overlooked parts of the planning process, he says.
“You’re going to run into unexpected expenses,” says Binicewicz. “You’re going to run into slower sales. You’re going to run into things that you just were not expecting, and if you saved three months of working capital and it’s gone in 30 days, then next thing you know, you’re coming back to the bank and asking for more money. That never works.”
Risk is an important factor in a business startup, especially when it comes to bank financing. Binicewicz wants to see a client’s own financial house in order, a good omen for responsible bookkeeping. Above all, he wants to see “skin in the game.” Don’t expect to pull out your investment right away, he says. Rather, demonstrate a willingness to go “all in.” Understand the difference between risk and reward.
“You need to be willing to change your standard of living,” says Binicewicz. “If you’re going from a steady job to a startup and you’re putting everything in to get it going, and you’re living on a $10,000 monthly salary or $5,000 wages, chances are you can’t pull that amount of money out of the business right away. So you need to match up your new reality.”
Patience is an important part of the planning process, says Binicewicz. Plans won’t be perfect at first, which is why he keeps industry research and other resources handy.
“It’s not uncommon for a potential business owner or startup to approach multiple banks and be turned down multiple times,” says Binicewicz. “There could be many reasons, but if a person is serious about wanting to go out and start that business, they’ll start asking those questions. They’ll ask the tough questions and get the tough answers, and they’ll fine-tune their business plans.”
Case Study: Veterans Floors
Larry and Mary Clucas spent years preparing to run their own business, anticipating that Larry’s uncle would eventually pass down his floor refinishing business. The couple was shocked when, in January 2011, the uncle announced that he’d sold to someone else.
“Larry decided he didn’t want to work for somebody else, that he could do the work just as well himself,” says Mary. “So, we started plans to open our own floor refinishing company.”
Two years earlier, the couple had taken a community college course on entrepreneurship. Mary built a business plan from the course textbook and library books. Larry used his experience to locate suppliers and customers. After nine months of planning, the couple opened Veterans Floors, in Rockford.
For all of their experience and careful planning, the couple had to make adjustments, especially as their young business hit its peak season this summer. The company landed clients it hadn’t anticipated, and business picked up more than expected. When things changed, Binicewicz was there to help.
“We were approved for a line of credit, but we didn’t think we needed such a high amount,” Mary says. “So we took less than we were given. Gary [Binicewicz] helped us with the paperwork to increase our line of credit.”
This past summer, about nine months into the business, Mary quit her full-time job to become the full-time bookkeeper for Veterans Floors. Each big step has brought new risks, but Mary has no regrets.
“If you have a dream, you have to be courageous and just do it,” she says.
There are many rewards of successful self-employment, but getting there takes hard work, personal cash and a good deal of patience. Risk lurks in the shadows, never far away.
For entrepreneurs who can’t stomach an all-in commitment, Gayhart recommends a “soft startup.” One client’s part-time enterprise is nearing $500,000 in annual revenue, after several years juggling entrepreneurship and a separate career. This client must soon decide if it’s time to assume full-time entrepreneurship.
“I see a lot of successful businesses start that way, where they had one job and used that to support them while they started the business,” says Linnabary. Be prepared to operate lean.
If your business requires heavy capital, you may want to find investors, rather than bank financing. “We want your personal resources focused on your business,” Binicewicz says. “We’re not going to allow you to finance a part-time business and work somewhere else. It’s just not going to fly. That’s part of the skin in the game.”
Douglas, of Wired Café, understands the scary position of skin in the game; she’s risked the family farm. Despite her fear of failure, she’s not looking back.
“Besides raising my kids, this is the most fun I’ve ever had – it really is,” she says. “I’ve made some really great friends, and it’s exciting to be part of downtown Rockford.”
Resources for Business Startups
Here are some local resources to help you get started. Links are below.
Wisconsin Small Business Development Center Network
Locations in Platteville, Whitewater, Madison and nine more University of Wisconsin extensions. Provides resources, advice and assistance to small businesses.
605 Fulton Ave., Rockford
Business incubator offering offices and resources to small businesses. Also houses local SCORE and Illinois SBDC chapters.
Illinois Business Development Center
Like Wisconsin SBDC, offers resources, advice and assistance to small businesses located in Illinois. Locations in Rockford and suburban Chicago.
SCORE (Northern Illinois Chapter)
Located at EIGERlab in Rockford.
Local branch of the national nonprofit that provides mentoring, workshops and business tools, connecting retired business executives with entrepreneurs.
Rockford Local Development Corporation
120 W. State St., Ste. 306, Rockford
Nonprofit with SBA certification, offering resources and long-term loans. Usually partners with SBDC.
Rockford College Family Business Center
Inside Rockford College, 5050 E. State St., Rockford, Ill.
Supports family-owned businesses with services, networking, training and resources, including programming and curriculum.
Northern Illinois Minority Companies Association
Nonprofit offering resources and networking opportunities for women and minority business owners.
Small Business Administration
Internal Revenue Service