Have you ever thought about going into business for yourself? Whether or not you’re employed, maybe it’s time to branch out on your own, either full- or part-time. Here’s what you need to know.
Maybe it was a lucky break, or maybe it was his entrepreneurial spirit that led Michael Roberts to his newest venture.
Just a few years after starting his first enterprise, Roberts met Louanne Dunlap, whose father had developed the classic Travel Bingo game in the 1950s. The young entrepreneur saw potential. In 2011, he and Dunlap started a new company and bought the rights to make and sell Travel Bingo. A few months later, Roberts bought the rights to produce the classic gyroscope Whirl-O, along with other assets from bankrupt toy company Rocket USA.
In the process of buying Travel Bingo and its related assets, Roberts developed a careful business plan, financial projections and legal documents that helped him to re-launch the toy company as Regal Games LLC. With help from toy industry insiders, friend Bart Lynam, his accountant father, and other family members, Roberts built upon his lifelong dream.
“Growing up, I always said I’d rather go broke three times than work for someone else,” says Roberts, now 31 and finalizing a deal on his next classic toy. “I liked the client list and the staying power. These products have passed the test of time.”
Like Roberts, many dream of being their own boss, and many look past the substantial risks, focusing instead on the rewards of business ownership.
Despite major hurdles in today’s economy, self-employment is still a viable option for many. Just ask the 3.5 million American small businesses with four or fewer employees. You may not be the next Henry Ford, but with local resources and some hard work, you too can launch a successful enterprise.
Step 1: Do Your Homework
The critical first step is research. Develop a business plan that establishes what your business will be and how it will operate. Kristi Patterson, coordinator at the Illinois Small Business Development Center (ISBDC) at McHenry County College in Crystal Lake, helps potential business owners to hone in on the basics.
“When I’m talking with clients, it always comes down to this: I need you to have a plan, because I need you to know where you’re going and how you’re getting there,” she says. “And, we’re measuring our progress toward that goal, so it’s very strategic in goal-setting. All of our work comes out through the strategic planning process.”
A successful business plan sizes up every facet of the business. Describe the company and its products and services, establish a marketing plan and organizational structure, map out a financial plan, and create contingencies – your best- and worst-case scenarios.
“A lot of times, we see where they get two, three years down the road, and they have no money, but they worked hard,” says Catherine Jones, executive director of the college’s Shah Center, which houses ISBDC. “What could they have done in the first six months if they’d known what this scenario looked like, and could have corrected the course before the investment was gone?”
Your marketing plan sizes up your product/service, your potential customers and your potential competitors. Don’t cast a wide, vague net, says Patterson. Establish a specific niche and customer profile. Look for key demographics – age, race, income – and geographic traits. Census data offers a starting point.
“Some of it is your feet on the street,” says Patterson. “You want to know how many restaurants are in Crystal Lake that are within five blocks of the train station? It’s a beautiful day – walk it. Some of your research is sweat equity you’ll have to do yourself.”
Some research also comes from firsthand knowledge. Those who have industry experience are more likely to succeed, says Patterson, because they already understand the inner workings. For those without that inside connection, Patterson recommends a “strategic internship,” a job that puts you on the inside. Take, for example, the person who wants to open a pizza joint.
“I want you to be strategic about what you learn,” she says. “What pizza oven do they use? What’s the supplier relay? When that supplier truck drives up, what’s that look like, what’s coming off that truck? In the process of doing your job, you turn it into an educational experience, and you walk away from it having learned something.”
And don’t forget the other details, the things most visible from a customer’s perspective.
“Some people think I’m crazy when they tell me they have a location and I ask, ‘What’s it look like at dark?’” says Patterson. “In the wintertime, it’s dark at 4 p.m. If I’m a mom and I’m walking with my child at night, I prefer it to be lit nicely. Get down to that detail, so that you understand what the business looks like at all times of the day and night.”
Inevitably, some businesses will fail. To get startups on the right track, organizations like the ISBDC and Shah Center are ready to help. The latter features non-credit courses and seminars on business skills and entrepreneurship.
The ISBDC is part of a statewide network, based in community colleges, that offers a resource library, hands-on advice and mentoring, and connections to the federal Small Business Administration (SBA).
Before joining the McHenry County ISBDC three years ago, Patterson spent 20 years in corporate operations and project management, and 16 years running an annual event for her family’s business. Because of her experience, she knows the hard questions to ask.
“[Business specialist Brian DiBona] and I are extreme realists, and when we work with clients, we’re brutally honest with them about what they have ahead of them,” says Patterson. “We want to do our best to bring everything out in front so that with every decision they make, they have as much information as possible.”
Case Study: Myers Counseling Group
Mark Myers needed advice in 2004, when he first visited the ISBDC at McHenry County College. After five years of running his mental health and substance abuse counseling practice in Gurnee, he and his wife were opening a second clinic in Crystal Lake, closer to where they live.
Within a few years, Myers was back at the ISBDC with a new challenge: The new clinic, Myers Counseling Group, 300 Memorial Dr., was too popular.
“I was torn,” he says. “There wasn’t enough of me to go around. How do I make it all work? The answer was, I couldn’t. Through the business center, we stepped back and made decisions by looking through both practices.”
With his business coach, Myers crunched the numbers and established a business plan. Ultimately, he closed the Gurnee office. As a commission-based professional, he was already comfortable working for every dollar. But it didn’t make the jump into entrepreneurship any easier.
Despite the risks and challenges, he still looks forward to every long day at the office. “That’s my name on the building,” he says. “That’s me. I feel the independence. Now, the only people I have to answer to are my wife and kids.”
Step 2: Legal Protections
With a fleshed-out business plan, it’s time to examine the nuts and bolts. Don’t forget the lawyer.
“Normally, when we see problems, it’s because the owners didn’t go to see the lawyer first,” says Tom Gosselin, an attorney specializing in business with Brady & Jensen LLP, 2425 Royal Blvd. in Elgin. “They tried to do too much on their own, and they didn’t do it correctly. And, maybe they don’t have the protection of their personal assets.”
Risk is inherent to business; there’s no way to fully insulate yourself. However, a good lawyer can help to define your liabilities and agreements. Mike Deutsch, an attorney and registered CPA and partner at Brady & Jensen LLP, wants to see everything in writing, especially if there are multiple owners.
“Two people can use the same word and mean something completely different,” says Deutsch. “You say, ‘Well, I’m a hard worker.’ Well, a hard worker to me might mean eight hours per day, and to my partner, 12 hours per day. So, the more detail you can put in the business plan, as to what each is going to bring to the table, the better.”
It’s also important to consider the business entity. In general, there are four types: a proprietorship, a partnership, a corporation or a limited liability corporation (LLC). Each brings its own legal and financial ramifications for a business owner and investors.
“The type of entity has distinction, both from a tax perspective and from a legal perspective, because a partnership or sole proprietorship have no individual liability protection,” says Deutsch. “Your house is on the line, whereas a corporation and a limited liability company both provide comparable liability protection.”
Working with an accountant, attorneys can recommend which entity is the best fit. While the accountant focuses on taxes, attorneys are focused on legal issues. Some of the most common, say Deutsch and Gosselin, include injuries because of products and services, poorly managed property, and inadequate safety.
How do you protect yourself from potential lawsuits or fines? For starters, get maximum insurance for both the business owner and the organization, says Gosselin, who spent 10 years in title insurance before entering law.
“For the business, you want to make sure there’s plenty of insurance there, and then for yourself, you want to make sure that you have an umbrella policy,” he says. “Increase your liability up from maybe $1,000 to $1 million, so that if anything does sneak through somehow, you’re personally insured enough so that your assets are as safe as possible.”
And, adds Deutsch, get everything in writing. Create an employee manual that dictates company policies for things like vacation, sexual harassment and injuries. Trademark the business name, if it’s special or unique. Require confidentiality and noncompete agreements with your key employees.
In case of trouble, these rules offer protection, by limiting responsibility. That’s why, for some businesses, its important to have a comprehensive agreement with customers.
“By limiting, a business basically agrees with its customer that this is what it’s responsible for,” says Deutsch. “In other words, the things you’re responsible for are the only things you can be negligent for, and the agreement should clearly indicate what you’re not responsible for.”
A good lawyer can also evaluate lease agreements, regulations, zoning and licensing. Many city governments require licenses for business operation, certain professions and signage. Businesses may also need to pass employee safety regulations, guarantee ample parking space or protect their location from competition. And, says Deutsch, beware of local plans for road construction.
“I’ve had clients that started and all of a sudden, there’s major road repair outside, and business has slowed beyond their worst-case scenario projections, because they’re limited by the construction,” he says. “It’s hard enough to get a business off the ground, without adding those types of unforeseen challenges.”
Case Study: Lynn Mitchell & Associates
A sole proprietorship entity was suitable for starting Lynn Mitchell’s leadership development coaching company. But as she considers growing her two-person team, Mitchell is considering new protections as an LLC.
When she started her coaching venture in 2009, she had 20 years of practice in corporate leadership and sales/marketing consulting. Now armed with a new master’s degree in counseling and a certificate in coaching, she could fill a unique niche for her previous clients and their neighbors. But narrowing her customer base was tricky. When she connected with ISBDC’s Patterson at a networking group, a relationship was born.
“I look to her for advice all the time,” says Mitchell. “She’s always someone to validate what I’m doing. When you go into business, you don’t know if you’re going down the right path. She’s always there to back me up.”
With Patterson’s help, Mitchell connected with local business executives and honed her marketing message. Today, her schedule is full, and she’s ready to add new leadership coaches with different expertise.
“These are skills my clients need, so I’m trying to satisfy their demand,” says Mitchell.
Step 3: Know Your Taxes, Manage Your Numbers
No startup can escape its taxes. An attorney and accountant, working together, can help an entrepreneur to 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, a business consulting company headquartered in Naperville. “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 IRS 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 the plan for a business, 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. But before you visit the banker, make sure your business plan is fleshed out.
“‘I would like to make ice cream,’ they say, or ‘I would like to produce this product,’ and that’s as far as they’ve gotten,” says Brian Monson, vice president and commercial relationship manager at STC Capital Bank, 460 S. First St., St. Charles. “Unfortunately the track record for those is not good, because they haven’t done their homework. The 10 percent that have done the homework – those are the ones that succeed.”
A good business plan has a full “dashboard” of indicators, including costs and income (projections), how and when you’ll pay your costs (cash flow), and how you’ll cover the gaps (working capital, lines of credit). Ideally, this dashboard should cover three years’ worth of data, and should account for many what-if scenarios, says Monson.
The first step is projecting your potential revenue and expenses. Evaluate your fixed costs – the things that won’t change, like wages, rent and equipment. Then, add in your variable costs – the things that can change – and compare the totals with your possible revenue.
“Let’s say I’m projecting a $400,000 revenue and a $100,000 loss,” says Monson. “I have to figure out how to fund that loss for a period of time.”
When there isn’t enough cash to cover those gaps, bank products such as loans or lines of credit can create an effective bridge.
Of course, many of these numbers are based on assumptions, which must be detailed in the business plan. While industry experience often informs accurate assumptions, Monson also offers supporting industry data. Thanks to groups like Dun & Bradstreet and First Research that provide inside information, Monson can tell if someone did their homework.
“If you’re saying your revenue is going to be $5 million and your variable costs are going to be 30 percent and your gross profit margin’s going to be 70 percent, then I can go to that data and say, ‘Under this revenue level in this industry, gross profit level isn’t 70 percent, it’s 20 percent, for 4,000 other companies in this market,” says Monson. “I have a tough time believing your company is going to be ahead of the game this far in advance.”
Financial plans should also include contingencies, a what-if scenario in case things change – for better or for worse.
“Bankers love when you think of contingencies, because all we dream about, all we think about, all we sleep about, is what can possibly go wrong with this,” says Monson. “That’s what we’re thinking about, but the business owner’s job is to think about, if that happens, here’s how we mitigate that risk.”
Protect against risk by maintaining backup capital, either working capital from the company’s savings account, or new investments. Plan to keep as much money in the company as possible during its first few years.
“No. 1, make sure you have enough capital in the business to start with,” says Monson. “That goes back to knowing your costs, your shortfalls, and whether you have enough capital to cover it. Before I even turn the lights on, I want to make sure I have enough capital somewhere.”
Case Study: Regal Games
Toymakers Roberts and Dunlap funded Regal Games LLC through personal investments, so Roberts didn’t visit a bank until his business acquisition was nearly complete. Once his new operation began, it became obvious he’d need some help “filling the gaps” in payments. That’s when he started working with Monson on a line of credit.
Instead of buying the 60-year-old equipment from Dunlap’s former business, Roberts shaved costs by outsourcing some work to a local manufacturer, and the rest to China. But when he places an international order, he receives thousands upon thousands of bingo cards. Holding that much inventory takes extra support from his line of credit.
“It takes a huge leap of faith to buy that much product at one time,” he says.
Roberts lacks experience in the toy industry, but his main sales manager, Mike Caffrey, is a former Duncan yo-yo sales executive, who first sold the toy at age 18. With Caffrey as chief of sales, Regal developed new retail customers. Today, the product is found in places such as Cracker Barrel, Michael’s and Gander Mountain.
“Mike brought in all the experience we needed,” says Roberts. “Regal hadn’t brought in a new customer in 15 years, and its base was shrinking. With Mike, our travel bingo sales are up almost 50 percent, because he built a network of new customers.”
There are many rewards of 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 those who can’t stomach the risk, franchising may be a useful alternative. Often, national companies, such as McDonald’s or Subway, will provide information, training and resources to get you started.
There’s some indication, say Deutsch and Gosselin, that franchises actually fail less frequently, because of extra support from the parent corporation.
Monson suggests that franchise resources should inspire a personal business plan and financial road map.
“They might have information targeted to your market, so they may put some geographical information in there,” he says. “It’s good information because they’ve probably started up multiple locations over the past year. But it’s not custom-tailored to you. You have to outline how it applies to you.”
While business ownership ultimately depends on your comfort with risk and reward, some individuals are dedicated to taking a chance, no matter the results.
Though it’s still early, Roberts, of Regal Games, says his holy grail of classic toys is the Duncan yo-yo. If he keeps buying new toys, there’s no telling where he can go.
But to this dynamic, fun-loving young entrepreneur, success is measured in the little accomplishments.
“The joke with all of my friends is that I took too literally the old saying, ‘He who dies with the most toys wins,’” he says, laughing. “You see that on bumper stickers, and it usually refers to snowmobiles or Ski-Doos. I just bought a lot of classic
Resources for Business Startups
Here are some local resources to help you get started. We’ve placed more information online, at NorthwestQuarterly.com
Illinois Small Business Development Center
A statewide network of resource centers for small businesses located in Illinois. Includes research, advice and assistance. Services available at nearly 20 Chicago-area locations, including College of DuPage, College of Lake County, Elgin Community College, McHenry County College, Harper College and Waubonsee Community College.
Shah Center for Corporate Training
4100 Shamrock Lane, McHenry
An extension of McHenry County College, this unique center includes business counseling, networking opportunities, training seminars, a resource library and McHenry County’s local ISBDC.
SCORE (Fox Valley Chapter)
1444 N. Farnsworth Ave., Aurora
Local branch of the national nonprofit that provides mentoring, workshops and business tools, connecting retired business executives with entrepreneurs.
Elgin Entrepreneurs Network
Gail Borden Library, Elgin
Networking for local business owners and prospective owners, meets first Tuesday of the month at 7 p.m.
Aurora Hispanic Chamber of Commerce
Provides resources and business connections for Hispanic entrepreneurs in Aurora and the Fox Valley.
Black Chamber of Commerce of Lake County
1020 Glen Flora Ave., Waukegan
Nonprofit encouraging economic opportunities for people of color, and a resource connecting business owners and suppliers within the county’s black community.
Small Business Administration
Internal Revenue Service