According to the Small Business Administration (SBA), 80% of businesses survive the first year, but almost half of the businesses fail by year five, so it’s a progressive downslide from year one.
However, successful entrepreneurs are increasingly encouraging new generations to start a business. Entrepreneurs and professionals that support small businesses are building a community of legally savvy entrepreneurs, sharing legal knowledge and information that entrepreneurs need to know right from the start and at every stage of their business development.
Source of Failure
To prevent failure, it’s important to know what can cause it. The reason that many small businesses fail is first and foremost inadequate business planning.
One aspect of planning is understanding the market. An entrepreneur comes up with what they believe to be a wonderful idea, and whether it’s by execution or otherwise, they find that people just don’t want it. Therefore, one reason why small businesses fail includes no market need.
Not enough capital is another concern.
Not having the right team is another source of failure. Many business partnerships come together through friendships. Individuals believe that they’ll be able to work together but don’t analyze their skill sets. The person that entrepreneurs go into business with is not always the best person from a business perspective. What makes a good friend does not necessarily make a good business partner.
Competition is another reason why small businesses fail. Conducting a realistic competitive analysis is really critical. Sometimes entrepreneurs and small business owners get hit by competition that they didn’t fully expect or prepare for.
Lastly, lack of or inadequate pricing structure is another source of failure for a business. Pricing structures need to be developed and implemented in a business relative to the expenses—the capital expenses that are required to run the business.
The Business Plan
The business plan is not something that you put together at the beginning of the business and then put on a shelf and not look at it again. It is important to look at regularly. The business plan is a roadmap to the business’ success. This is the basis—the foundation—for creating a business that will beat out those SBA statistics, that will survive beyond year one and beyond. The business plan is a roadmap; it’s a guideline.
Another purpose for the business plan is for potential investors or venture capital. People who are looking to invest their dollars are going to be asking for an exhaustive business plan. Whether it’s a bank financing or investment capital, those institutions will provide you with what they are looking for in a business plan. They will, for the large part, dictate to you what you are going to need in your business plan for their purposes.
A traditional business plan includes an executive summary—a big picture description of the business—and the company description. This answers the questions: what are you trying to accomplish? What problem are you trying to solve? What is your vision for the future?
Market analysis is a section of a traditional business plan. Many entrepreneurs are so excited about an idea of what they think the market needs, but what may sound like a good idea may not be timed right for the market. That’s why entrepreneurs need to take the blinders off and approach the market with wide-open eyes and see who the competitors are.
Many entrepreneurs and business owners focus on a product or service, but need to create a competitive analysis first before focusing in-depth on what the product or service is going to be. The product or service may be determined by the competitive analysis of what’s in the marketplace. After conducting a competitive analysis, it may be determined that a product or service creates more value in the marketplace and can be priced higher than a competitor.
Another topic within the business plan is organization. Management organization relates to legal structures, organizational structures, and management. The owner is the management team, the CEO of the company. If there is a business partner (such as a spouse), look at their skillset and determine what they are truly good at. Is there a skill set that is going to benefit the business? Are they able to contribute for that purpose? This is the beginning of the management team.
Entrepreneurs do not plan enough for the legal aspects of their business, they are focused on building a product or service. They are focused on marketing of the product or service, but not necessarily on creating a successful business structure. They need to build a foundation for a successful business and a foundation is found in a business structure.
A recommended business structure is a limited liability company—an LLC—as opposed to a small business corporation. Many times entrepreneurs will hear online and in the business space that a S corporation is needed. An S corporation is a tax election more than anything else and is not related to the structure of a business. So, one can have a corporation, or have an LLC taxed as an S corporation. One of the reasons for business failures is not starting with a business structure such as an LLC. They miss out on the opportunity to build corporate credit that can help them in the later stages of the business. Between years three and five, when most businesses are failing, a business that has formed an LLC from the start and begun to build that corporate credit may have more lending options for the business.
The management team will be reflective in the business structure by stating who is going to be in charge of the day to day operations of the business, which is typically the primary executive manager, CEO, or manager of an LLC. The team may include a third party, someone hired on an outsource basis, or employees hired to provide services for the business.
From the legal perspective, it’s recommended to be aware of laws that apply to hiring and having independent contractors. If someone that you hire is providing a service that is within the product or services that you provide, that person may very well be an employee, which is presumed to be an employee by the IRS and local administrative organizations.
And lastly, financial projections are critical for the business plan. Too many entrepreneurs are just not comfortable with the numbers. Having a CPA, or someone to help with bookkeeping and business accounting, is really great for entrepreneurs. Working with an accountant is a good way to come up with the needed financial projections. When looking to nail down business numbers, a good reference is the SBA website. Additionally, score.org provides useful free resources for business owners to put projections down in writing, which is critical to the success of the business.
The knowledgeable team at Chase Law Group, P.C. is always available to answer questions and provide consultation for small businesses. Find a free report about building a fortress around your business at DAnnchase.com to download. Our exclusive newsletter provides legal services when necessary for entrepreneurs and small business owners. Sign up in the upper right corner on any page on this site.