Owning and operating a small business can be rewarding. It can also be brutal.
Small refers to an enterprise with a limited number of employees and relatively low sales volumes that is privately owned, with the profits going to the owner. Small businesses can be product-based, service-based, or hybrid (selling both products and services). Small businesses can be location-based, mobile, and/or online.
Due to their small size, start-ups often have difficulty gaining traction and capturing market share. Consequently, when starting up a small business, it is advisable to stick with the fundamentals.
Start-up fundamentals include the business model, business math, market research, competitive analysis, legal structure, planning and funding, brand image, and risk management.
The first step in transforming a concept or idea into an actual business is to develop a best-fit business model.
The business model can be used to vet the concept or idea and determine if it is a good fit with the owner (and investors).
Best fit refers to the alignment between the investor and the business model, while alignment is sharing a commitment to the mission, values, and time horizon required of the business model.
For example, if the business model is full-service, the requirements are to operate with the heart of a servant, guarantee satisfaction, and typically work long hours. If the entrepreneur isn’t aligned with these requirements, full-service is probably not a good fit as an investment.
The business model should address value proposition, market segment, revenues and margins, value chain, and competitive advantage.
The value chain, for example, is the series of consecutive steps required to produce and deliver a finished product or service. The goal of a value chain is to create a competitive advantage by increasing productivity while keeping costs reasonable.
Consider Washé a mobile app-based small business that allows people to order a mobile car wash service wherever the customer is located. It accomplishes this through a digital network of experienced, independent mobile washers and detailers.
Business ownership requires more than the skill to create a product or the talent to provide a service. Small business owners must know their numbers.
Math skills are required to determine prices, calculate earnings, provide estimates, make sales projections, manage inventory, and other activities. Entrepreneurs must be able to add, divide, subtract, multiply, and work with percentages.
In addition to math, there are basic accounting and financial principles that start-ups must become familiar with. This includes the income statement, balance sheet, break-even point, debt service coverage, return on investment, churn rate, benchmarking, and economic value.
Market research allows a company to define its target market and get opinions and other consumer feedback about their interest in a product or service. Research may be conducted by the start-up or a third party that specializes in market research.
For example, the International Carwash Association’s National Consumer Study contains information on consumer attitudes and behaviors. Research aims to determine the demand for the product or service and market size. For instance, the demand for a $10 exterior car wash is quite large, whereas the demand for a $1,500 ceramic clearcoat is not.
Market size is the number of people who could potentially become customers. The trade area for a car wash in urban areas may be quite small, whereas, in rural communities, it often covers a major portion of the town or even an entire city.
If a mobile business, market size would depend partly on how far the business operator is willing to travel to service customers.
Competitive analysis is the process of sizing up the competition to determine if the start-up can identify a competitive edge that creates sustainable revenue.
Analysis should identify competition by product class, service type, and market segment. Typical characteristics assessed are the number of competitors, size, product selection, prices, operating hours, brand, reputation, and market share.
The analysis aims to identify an opportunity to fill the gap. This is the practice of using any means possible to exploit the opportunity gap in a marketplace. For example, if all that is being built in an area are conveyor washes with self-serve vacuums, there are probably opportunities for a full-service, detail shop, or mobile service.
The most common small-scale business structures are sole proprietorships, partnerships, and limited liability companies. Another form of legal structure is incorporation.
Corporations can be a good choice for medium or higher-risk businesses, those that need to raise money, and businesses that plan to go public or eventually be sold.
Business structure can affect tax rates, the ability to raise money, the amount of paperwork to file, and personal liability. Consequently, the business’s legal structure should be evaluated and selected with the assistance of an attorney with experience in small business and a certified public accountant.
Planning begins with the conceptual phase, when the entrepreneur formulates a vision, business concept, or idea. It continues with developing a best-fit business model and market research to confirm an opportunity’s validity and the business’s legal structure.
The next step is to develop a formal plan that describes how the owner will operate and grow the business. However, estimating the total cost to start the business is necessary before creating a business plan.
Start-ups must make certain capital expenditures to make the business commercially viable. Start-up expenses are usually divided into hard and soft costs.
Hard costs include the building, equipment, inventory, and real estate. Soft costs are professional fees, permits, loan processing fees, and working capital.
Working capital is extremely important because most small businesses do not come out of the gate like a racehorse. It can take two years or more for some small businesses to ramp up from launch to mature sales volumes. Consequently, it is advisable to have sufficient working capital to cover operating expenses until the business becomes cash flow positive.
It is also a good idea to build some fat into the estimates of start-up expenses and borrow a little more than needed. The excess can be used to pay down a loan if the actual cost is less than planned.
The most common business plan follows the traditional format and is used for family and friends funding or obtaining a bank loan. The most critical aspects are briefly explored below.
An executive summary explains the mission statement, goals and objectives, leadership team, financial information, and growth plan.
The company description details the location, customers served, organization, and competitive advantage. Market analysis explains results from the market research such as industry outlook, target market, and anticipated sales turnover.
Organization and management explains the legal structure and who will be responsible for day-to-day operations and administration. Products/services describe what is being sold and what prices. Marketing describes the promotional strategy and tactics that will be used to attract customers.
Funding describes how much money is required to start up the business and what the money would be used for. Financial projections include annual income statements, balance sheets, cash flow statements, break-even analyses, and capital expenditure budgets.
Entrepreneurs should write their own business plans. Not only is this a good mental exercise, but it also helps start-ups become familiar with every nook and cranny of their business venture.
The three ways to fund a start-up small business are self-funding, venture funding, or a business loan.
Self-funding can include money from family and friends, personal savings, retirement accounts, and even credit cards (not advisable).
Venture funding or an angel investor is usually obtained by small businesses that can grow very rapidly so the investor can get a great return within a short time period, such as three to five years.
Since most small and small-scale businesses can’t meet these criteria, start-ups often rely on external funding from a bank or combination such as family and friends funding and a bank loan. One of the most common ways is obtaining financing through the U.S. Small Business Administration loan programs.
Regardless of the source of funds, lenders will expect the borrower to meet certain criteria such as credit score, personal financial statement, business plan, etc.
Lenders will not cover the total project costs. Lenders have loan-to-value criteria and collateral requirements as part of their risk management. For example, a bank may only be willing to lend 80 percent of the total investment meaning the borrower will be responsible for the other 20 percent out of pocket.
In lending agreements, collateral is a borrower’s pledge of a specific asset, such as property, to a lender to secure loan repayment. It may be necessary to pledge the equity in a home as collateral. If something bad happens to the business and the owner defaults on the loan, the bank can foreclose on the home to recoup its money.
This underscores some of the inherent risks involved in borrowing money to start a small business.
Branding is a promise of trust. Many businesses will offer a satisfaction guarantee. If the customer is not happy with the quality of the product or service, the business makes good on the problem.
On the other hand, image is how customers perceive or view the business. For example, what image is conjured up when seeing the golden arches of McDonald’s? Most likely burgers and fries.
Like business reputation, the brand is intangible and results from a combination of factors. For instance, every business needs a name. A small business may need an entity name, trademark, doing business as (dba), and domain name. Sometimes, the business name may need to be registered with a government agency.
Most small businesses will develop a logo to give customers some sense of the company’s character and values. Another step in imaging is choosing an appropriate color scheme to apply across the exterior and interior of the building and marketing materials.
Most small businesses will create a website (virtual store) to provide general information about the company or a direct platform for e-commerce. Social media, such as a Facebook page, allows small businesses to increase brand awareness and facilitate customer service. Credentials like a professional organization membership and certifications can help increase business stature.
A lot goes into creating and establishing a brand that customers can trust, and it also takes time.
Marketing strategy should include advertising, promotional tactics, and public outreach.
The most common form of promoting a small business is through customer loyalty. Offering discounts or free products to customers helps to ensure repeat business if customers are satisfied with the products or services.
Subscription programs have proven very successful in the car wash industry. Here, the customer pays one monthly price and gets to wash their car whenever they want (once daily).
Although we may live in more of a digital world, word of mouth is still an important factor in creating a distinct brand/image and cultivating it amongst customers and employees.
Small business start-ups are in danger of capital loss, which is a function of investment ownership and business operating risks. Will the business generate sufficient gross sales? Can adequate staff and management be provided to ensure a customer-centric operation?
Start-ups need to understand these risks and gain assistance in mitigating them instead of trying to go it alone. One way to do this is the team approach.
Here, the start-up puts together a group of trusted advisors willing to help with technical matters and provide guidance. For example, every business needs insurance. So, the team should include an insurance agent to help identify risks and determine the right insurance options and amount of financial coverage.
An attorney with small business experience should be included to help establish a business entity and review legal documents and contracts. If renovations or construction is involved, the team should include a real estate agent, architect, and general contractor.
Another method to mitigate risk is to consider a franchise. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original business. It sells the right to use its name and idea.
The franchisee buys this right to sell the franchisor’s goods or services under an existing business model and trademark. Franchisees have to pay a licensing fee for this right and royalties based on a percentage of monthly gross sales.
The upside to a franchise is a ready-made business formula to follow, market-tested products and services, and, in some cases, established brand recognition. The downside is heavy start-up costs, ongoing royalty costs, and no deviation from how the franchise is to be operated.
The Internet is full of guides on “how-to-start” a small business (i.e., car wash) in 10 easy steps (or more). Quite frankly, there is no one set way to do it, and it certainly takes more than 10 steps.
This guide provides a general framework to start a small business based on the fundamentals and principles that apply to any new project or venture.
Bob Roman is a car wash consultant and can be reached at firstname.lastname@example.org.