Lou Davenport: I’m delighted to be here, Ron.
Ron Johnson: Is it true the secret to starting a successful business is to find a need and fill it?
Lou Davenport: Yes, it is, Ron. There are many needs and many potential businesses available. However, before you invest a lot of time and energy and money in starting a new business, you need to ask yourself several key questions.
One, is the business idea practical and will it fill a need? And that’s a simple statement, but there’s a lot of importance to it. I surprise my clients from time to time when I say to them in a very real way I don’t care what you think about the fantastic business that you are aspiring to create. All I really care about is what the prospective clients or customers might think.
The old adage is that it doesn’t matter what the dog food looks like, what it smells like, how it’s packaged, how it’s priced. If the dogs won’t eat the dog food, you don’t have a good business. So you need to figure out whether the target market really has a need that you can fill better than the competition. That’s another key question. Can you outperform your competition?
In today’s world, you really need to have one or more competitive advantages in order to establish a very successful business. If you’re entering into a business that’s simply like everybody else and you don’t have competitive advantages in terms of products and prices and services, then arguably you’re going to have a tough time and could end up on the trash heap of also-rans. So a critical competitive advantage is another key question that you have to ask yourself.
And finally, can you make a profit? That’s to say, can you sell your products or services to enough people at a price that not only covers your overhead expense, that provides a fair wage for your management services to the business, and still leaves a profit in terms of return on investment for the risk capital that you’ve invested as an owner.
Ron Johnson: In business, there are no guarantees. You cannot eliminate the risks associated with starting a small business, but you can improve your chances of success with good planning, preparation, and insight. You can also improve your chances of success by understanding and avoiding some of the pitfalls or the problem areas encountered by others.
Lou, what are some of the problem areas encountered by entrepreneurs?
Lou Davenport: Inadequate planning is probably my number one. There is really no substitute for good planning and due diligence and the process of developing your business idea. If you put 100 existing small business entrepreneurs in a room and asked them what would you do differently if you had to do it all over again.
And I’ve done this – the first thing that they would all agree on is, that they would have developed and executed a comprehensive written business plan. And so, planning is absolutely essential to future business success.
I like to say to clients that the first plan that you ever create is not going to be the one that leads you to nirvana. It is not going to be the one that leads you to the Promised Land. It’s the second, third, fourth, fifth, fifteenth iteration of that plan, and, as you constantly work to revise the plan and bring it closer to reality and bring reality closer to the plan, then maybe that’s going to lead you to the Promised Land.
Another pitfall is lack of specific experience. Just because a particular business seems like it might be fun to operate, it doesn’t mean you have the necessary skills to be successful. And you really should work in a business similar to the one that you plan to start before actually starting it, and, of course, on the job training will give you a good foundation for that.
Again, a good example is if somebody comes to a bank and says I want to start a restaurant business, and I’ve been working in the business for 10 or 15 years, and I’ve done everything from being a waiter to a busboy to hostess with the mostest, to bartender and chef and managing the business for six months a year while the owner is in Florida, and now I’m ready to start and run my own business, then you’ve got the ingredients of specific experience that perhaps you need for success. But simply saying no, I don’t know anything about the restaurant business, but I’ve eaten in a lot of them doesn’t really cut it.
Thirdly, insufficient capital. Many businesses fail because they have not adequately planned and made preparations to have available funds to operate the business over an extended period of time. It’s not unusual at all for a startup business to lose money for the first one to two years, and so, in planning your capital resources, you not only have to look at how much money you may need to start the business, but how much money you’re going to need in addition to that to sustain the business over the first one to two years where you may be incurring operating losses until the business starts to turn a profit and produce a positive cash flow.
And there are other things, Ron, poor location. You certainly can’t underestimate the advantage of a good business location and the disadvantages of a poor one, especially for retail businesses. Location is not necessarily a critical issue for every business, but it often is in a retail-type business.
A couple of others are inadequate market understanding. It really is all about the customer. It’s important that you fully understand who your customers are and what they want in terms of product and services. And at the end, probably marginal customer service is a pitfall to avoid. Poor customer service can be a recipe for failure while incredible customer service can certainly be a ticket to success.
Ron Johnson: Okay, you’ve made a decision to become an entrepreneur. The next step is deciding whether to start from scratch or buy an existing business. Lou, what are some of the advantages and disadvantages to both approaches?
Lou Davenport: Starting a business from scratch, let’s look at that one first, Ron. One advantage is certainly that everything is new. There’s a sense of birth or new beginning in a business without a history or a predisposed image. It’s arguably easier to be more creative with a business in one that is being built up from scratch rather than one you purchase or inherit. But there are certainly disadvantages.
There is greater risk in starting a brand new business. It’s often much more difficult to raise money for a new business that doesn’t have any type of a proven track record. In terms of getting bank financing, if all you have is promise and expectations without any type of a proven track record, then the old adage is talk is cheap, and it’s arguably much harder to get financing for a business that doesn’t have a significant track record. And like anything else, it takes time to work out the bugs in a new business, and that’s why often startup businesses have some losses in the first one or two years until they reach that point of profitable success.
If you look at buying an existing business, there certainly are some advantages. It’s arguably easier to buy a turnkey business than it is to start something new. It’s also arguably easier to look at a franchise-type business opportunity because the franchise concept is that the business model is very, very well established, and all you have to do is come in and operate it the way the business model has been built. And so, that’s a type of existing business that you could look at.
Another advantage is that cash flow is going to be more immediately available in an existing business because you have established customers, you have existing inventory, and it may be easier to raise new capital for a business with a proven track record. And the customer goodwill of the preexisting customers is certainly a leg up in getting a good start in a business that you might be purchasing.
Ron Johnson: As part of your decision making process, you should also consider what equipment or supplies will you need, what insurance coverage will be needed, and how much money will it cost to start your business. Will you need financing or what are your resources and how will I compensate myself? To help answer these questions, remember to check out the Small Business Training Network at
www.sba.gov/training. There you will find more than 25 free online training courses.
SBA also offers many resources to assist you with starting or growing a small business. These resources include more than 60 district offices with at least one office in every state, more than 10,000 SCORE counselors just like Lou who will provide free business counseling. You’ll find also over 1,000 small business development centers and more than 90 women business centers.
To learn more about SBA’s resources, contact our website at
http://www.sba.gov/. I’d like to thank our guest, Lou Davenport, for sharing the valuable information on selecting a business that fits. And that’s it for another edition of SBA’s Small Business Training Network.
I’m Ron Johnson.
[end of interview]
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A __________ from the National Oceanic and Atmospheric Administration found that cargo, __________ and cruise ships __________ about two million pounds of sooty particulate pollution each year. That’s about half of what all the nation’s cars produce, and it’s all concentrated within _____ miles of shore.
