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"MUST reading for every entrepreneur. Save thousands of dollars and hundreds of hours." Brian Tracy, international sales and management consultant and trainer.

"Practical, tactical guide for making your American dream a reality."

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"Comprehensive guide that walks you through all the basics and much more."

Pamela Willis, Executive Director, San Diego Business Innovation Center.

Please visit the following web site to obtain updated information on legal, tax, and business issues and to subscribe to Severance & Associates’ monthly Law/Tax eZine: http://www.severance.com/

BUSINESS START-UP GUIDE

How to Create, Grow, and Manage Your Own Successful Enterprise

2^nd Edition: Revised, Updated, Expanded

Tom Severance

Tycoon Publishing

Vista, California

BUSINESS START-UP GUIDE

How to Create, Grow, and Manage Your
Own Successful Enterprise

2^nd Edition: Revised, Updated, Expanded

by
Tom Severance

Published by		Tycoon Publishing
		c/o Severance & Associates, Inc.
		1252 Melrose Way
		Vista CA 92081

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the author, except for the inclusion of brief quotations in a review.

This book is designed to provide general information on starting and running a business. It is sold with the understanding that the publisher and author are not engaged in rendering specific legal, tax, accounting, or other professional advice or services. If legal or other expert assistance is required, seek the services of a competent professional.

The purpose of this guide is to educate and entertain. It is designed to complement, amplify, and supplement other texts. you are encouraged to read all the available material, learn as much as possible about business and entrepreneurship, and to tailor the information to your individual needs.

Every effort has been made to make this book as complete and as accurate as possible. However, there may be mistakes both typographical and in content. Therefore, this text should be used only as a general guide and not as the ultimate source of business information. Furthermore, this book contains information on business only up to the printing date.

Copyright © 1998, 2002 and 2011 by Tom Severance

eBook available on the Internet: ISBN: 0-9653212-1-5

CD-ROM format: ISBN: 0-9653212-3-1

ABOUT THE AUTHOR

Tom Severance is an Attorney at Law and Certified Public Accountant. His legal and tax practice, Severance & Associates, Inc., based in Vista, California, specializes in business, real estate, tax, and estate planning issues. Tom has prior legal, accounting, and tax experience with Pricewaterhousecoopers CPAs and the Internal Revenue Service.

Tom is also Chairman of the Business & Public Service Department and a full-time Business Instructor at MiraCosta College in Oceanside, California. He is in charge of all management, marketing, law, tax, entrepreneur, and international business courses.

Tom is a frequent speaker in the business community. He teaches classes and presents seminars on entrepreneurship, marketing, finance, accounting, law, and tax.

Tom is originally from Rochester, Minnesota. He received his BS degree in Business Administration from Arizona State University, in Tempe, Arizona, and his JD and MBA degrees from the University of Minnesota, in Minneapolis, Minnesota. Tom currently resides in Vista, California.

He may be contacted at:

Severance & Associates, Inc.
1252 Melrose Way
Vista CA 92081
TEL: (760) 419-7080
EMAIL: tseverance@severance.com
WEB: http://www.severance.com

TABLE OF CONTENTS

INTRODUCTION

Congratulations! Starting and running your own business can be the culmination of the American dream. Success requires careful planning and execution. Applying the principles in this book is a great start.

This book synthesizes the best information and ideas from my teaching, counseling, and business ownership experience. it also blends the best ideas from the substantial business literature that I reviewed and studied.

Read, review, and ponder the information and ideas in this book. Apply the practical exercises at the end of each chapter to really learn and drive home the points.

This Updated and Expanded Second Edition adds:

More than 40 Links to Valuable Web Sites

Valuable Information on Internet Issues

An Appendix Chock-full of Helpful Checklists and Sample Agreements

Please visit the following web site to obtain updated information on legal, tax, and business issues and to subscribe to the monthly Law/Tax eZine: http://www.severance.com/

1. ARE YOU AN ENTREPRENEUR?

Money, security, confidence, peace of mind, and a strong sense of accomplishment are all yours as you relax on the beach and enjoy the tropical wonders of the Bahamas. Of course, you worked very hard to start and grow your business. You followed a well-thought-out business plan. It wasn’t easy, but no one said it would or should be. You can now enjoy a well-deserved vacation, knowing the business is still making money for you back home. You’re here to relax and enjoy the fruits of your labor with your family. Who knows? You might even come up with some creative new business ideas to implement when you return home. Just let your mind take you where it wants.

Is this fiction or reality? You could be in exactly this position within a few years if you really want to start and grow a business, and if you will plan properly and work hard. You certainly may be able to improve your financial status. Nevertheless, remember it’s the intangibles that make running your own business such a joy.

This chapter will help you make the important decision of whether you should start your own business. You’ve probably made your mind up already, but still go through the analysis suggested here. It will help you make or confirm a well-reasoned, rational, unemotional decision.

Why Start a Business?

People start businesses for many different reasons. The two most common are:

1. To be independent, to be their own boss, and to have more control over their destiny

2. To have unlimited upside earning potential

Additional reasons include:

To gain recognition and respect from others

To be able to use their creativity

To build a family business with their name

To turn a hobby into a paying business

To be able to work until they want to retire

To take a risk on their abilities and interests

To do something they enjoy

To grow and develop skills and abilities

To work on the days and hours they desire

To supplement the family income

To avoid being laid off or terminated by an employer

You might question the wisdom or truth of some of these reasons. The above list may or may not reflect your own motivations. However, recognize that the reasons listed above reflect only the positive side of starting a business. There are also many reasons why 80% of the working population doesn’t start a business. Whatever your motivating factors are, be sure to match your desires with a successful business idea using the steps discussed in Chapter 2.

Even if you have been content working for others as an employee, you may soon need to become an entrepreneur. You may be marketing a product you’ve developed or marketing your own services as a self-employed person because of “downsizing,” “right-sizing,” “restructuring,” “reductions in force,” or “cutbacks.”

William Bridges, author of JobShift, claims that the “late, great job” is rapidly disappearing. The old rules are gone. The new rules according to Bridges are:

-Everyone is a contingent worker with their continued employment contingent on the results they produce.

-Workers need to demonstrate their value to the organization in each successive situation.

-Workers need to see themselves as “in business for themselves” with their tasks outsourced to them by the organization.

-Workers need to take primary responsibility for their career-long self-development, compensation, and benefits.

-Workers must be able to work in project teams and be able to shift their focus rapidly from one task to another.

-Workers must be able to work without clear job descriptions and to work on several projects at once.

-Long-term employment is a thing of the past for most workers.

To see the advantages and disadvantages more clearly, use the Ben Franklin method for making a rational decision. Take out a clean piece of paper and draw a vertical line down the middle. On the left side, write “Advantages” at the top. On the right side, write “Disadvantages” at the top. Seriously think and reflect on the benefits and concerns that relate specifically to you. This is a great exercise for group brainstorming. You will discover benefits and concerns you didn’t think of on your own.

Subdivide each section into “Personal and Family,” “Financial and Tax,” and “Career and Social.” In each of these categories list advantages and disadvantages of starting and running a business. After listing all you can by yourself or with the help of others, how does the analysis look? Have you listed more advantages or more disadvantages? Which are the most important to you? What is the most logical decision to make? If you plan to go ahead with a business, can you eliminate or minimize some of the disadvantages?

To help you start, here are some typical responses for each of the six categories:

	ADVANTAGES	DISADVANTAGES
PERSONAL AND FAMILY	1. Being my own boss 2. 3. 4.	1. Loss of recreational and family time 2. 3. 4.
FINANCIAL AND TAX	1.Unlimited earning potential 2. 3. 4.	1. Loss of corporate fringe benefits 2. 3. 4.
CAREER AND SOCIAL	1. Ability to use and develop new skills 2. 3. 4.	1. Less people contact (with few or no employees) 2. 3. 4.

Be realistic in your expectations. You will very likely work harder and longer hours in your own business. You will likely earn less money in the short term than you would working for someone else. Make sure the intangible benefits and the long-term financial outlook override these probabilities.

Entrepreneur Myths and Traits

There are many misconceptions about who entrepreneurs are and how they function. Jeffrey Timmons, author of New Venture Creation, cites the following fifteen myths and the reality behind them:

Myth 1: Entrepreneurs are born, not made.

Reality: While entrepreneurs are born with certain native intelligence, a flair for creativity, and energy, these talents by themselves are like unmolded clay or an unpainted canvas. The making of an entrepreneur occurs by accumulating the relevant skills, knowledge, experiences, and contacts over a period of years. It includes large doses of self-development. The creative capacity to envision and pursue an opportunity is a direct descendant of at least ten or more years of experience.

Myth 2: Anyone can start a business.

Reality: Entrepreneurs who recognize the difference between an idea and an opportunity, and who can visualize potential, start businesses that have a better chance of succeeding. Luck, if involved, requires good preparation. Starting the business is often the easiest part. Surviving, sustaining, and building a venture so its founders can realize the reward is often the hardest part. Perhaps only 5% to 10% of all new businesses that survive five or more years produce an eventual capital gain for the founders.

Myth 3: Entrepreneurs are gamblers.

Reality: Successful entrepreneurs take carefully calculated risks. They try to influence the odds, often by getting others to share risk with them and by avoiding or minimizing risks. They often slice the risk into smaller, quite digestible pieces. Only then do they commit the time or resources to determine if that piece will work. They do not deliberately seek to take more risk or unnecessary risk. However, they do not shy away from unavoidable risk.

Myth 4: Entrepreneurs want the whole show to themselves.

Reality: Owning and running the whole show effectively puts a ceiling on growth. Solo entrepreneurs usually make a living. It is extremely difficult to grow a higher potential venture by working single-handedly. Higher potential entrepreneurs build a team, an organization, and a company. Remember that 100% of nothing is nothing. Rather than taking a large piece of the pie, work to make the pie bigger.

Myth 5: Entrepreneurs are their own bosses and completely independent.

Reality: Entrepreneurs are far from independent. They have to serve many masters and constituencies, including partners, investors, customers, suppliers, creditors, employees, families, and those involved in social and community obligations. Entrepreneurs, however, can make free choices of whether and when they care to respond. Moreover, it is difficult and rare to single-handedly build a business beyond $1 million to $2 million in sales.

Myth 6: Entrepreneurs work longer and harder than managers in big companies.

Reality: There is no evidence that all entrepreneurs work more than their corporate counterparts. Some do and some do not. Working long days and working on weekends are typical for all successful business people.

Myth 7: Entrepreneurs experience a great deal of stress and pay a high price.

Reality: Being an entrepreneur is stressful and demanding. However, there is no evidence that it is any more stressful than numerous other highly demanding professional roles. Entrepreneurs find their jobs very satisfying. They have a high sense of accomplishment, are healthier, and are much less likely to want to retire than those who work for others. Three times as many entrepreneurs as corporate managers say they never plan to retire because they enjoy their work so much.

Myth 8: Starting a business is risky and often ends in failure.

Reality: Talented and experienced entrepreneurs pursue attractive opportunities and attract the right people and the necessary financial and other resources to make the venture work. Businesses fail, but true entrepreneurs do not. Failure is often the fire that tempers the steel of an entrepreneur’s learning experience and street savvy.

Myth 9: Money is the most important start-up ingredient.

Reality: If the other pieces and talents are there, the money will follow. However, it does not follow that an entrepreneur will succeed if he or she has enough money. Money will definitely not guarantee success. Nevertheless, ensure you have sufficient funds or access to funds to survive the start-up phase. Chapter 13 discusses this issue. Money is to the entrepreneur what the paint and brush are to the artist -- an inert tool that, in the right hands, can create marvels. Money is also a way of keeping score, rather than just an end in itself. Entrepreneurs thrive on the thrill of the chase. Even after a true entrepreneur has made substantial money, he or she will often work incessantly on a new vision to build another company.

Myth 10: Entrepreneurs should be young and energetic.

Reality: While these qualities may help, age is no barrier. The average age of entrepreneurs starting high potential businesses is in the mid-30’s. There are also many examples of entrepreneurs starting businesses in their 60’s. What is critical is possessing the relevant knowledge, experience, and contacts that greatly facilitate recognizing and pursuing an opportunity.

Myth 11: The quest for the almighty dollar is the sole motivation for entrepreneurs.

Reality: Entrepreneurs seeking high potential ventures are driven more by building enterprises and realizing long-term capital gains than by instant gratification through high salaries and perks. A sense of personal achievement and accomplishment, feeling in control of their own destiny, and realizing their vision and dreams are other powerful motivators. Entrepreneurs view money as a tool and a way of keeping score.

Myth 12: Entrepreneurs seek power and control over others.

Reality: The quest for responsibility and achievement, rather than power for its own sake, drives successful entrepreneurs. They thrive on a sense of accomplishment and outperforming the competition, rather than a personal need for power expressed by dominating and controlling others. By virtue of their accomplishments, they may be powerful and influential, but these are more the by-products of the entrepreneurial process than a driving force behind it.

Myth 13: If an entrepreneur is talented, success will happen in one or two years.

Reality: An old maxim among venture capitalists says it all: The lemons ripen in two or three years, but the pearls take seven or eight. A new business rarely establishes itself in less than three or four years.

Myth 14: Any entrepreneur with a good idea can raise venture capital.

Reality: Venture capitalists fund only 1% to 3% of the ideas submitted to them.

Myth 15: If an entrepreneur has enough start-up capital, he or she can’t miss.

Reality: The opposite is often true. Too much money at the outset often creates euphoria and a spoiled-child syndrome. The accompanying lack of discipline and impulsive spending habits often lead to serious problems and failure.

There are a variety of tests that help assess your potential entrepreneurial success. Most calculate a numerical score that you can then compare with what “typical” or “successful” entrepreneurs score. These are fun and entertaining, especially if you score well. The answers that tend to indicate entrepreneurial ability are usually quite obvious so it is important to answer the questions without trying to guess the preferred response. Of course, the test merely compares your results with what the author believes are the best entrepreneurial responses. It is not scientific, and there are certainly many exceptions to the standard. Take the tests. They’re interesting and you may learn something. However, don’t take the results too seriously.

Common sense and experience should persuade you that successful entrepreneurs have certain traits. You would likely describe the prototype, “perfect” entrepreneur as follows:

_ A goal setter who writes down clear, realistic, challenging, attainable objectives

_ Tenacious, determined, and patient enough to complete the job

_ Honest, fair, optimistic, cooperative, and tactful

_ A straightforward and effective verbal and written communicator

_ Self-confident and self-directed

_ Driven to compete and succeed against self-imposed standards

_ Not afraid of failure; able to deal with and learn from it

_ A moderate risk-taker who takes carefully calculated risks with a strong chance for success

_ A decision-maker who takes the initiative

_ A hands-on learner

_ Has a strong drive and energy level maintained through good diet and exercise habits

_ A smart worker as well as a hard worker

_ Open-minded with a tolerance for ambiguity and uncertainty

_ Exercises practical judgment with good critical thinking skills, problem-solving ability, and creativity

_ Aware of personal strengths and weaknesses and the appropriate use of outside resource people

_ Has specialized technical knowledge within the business

_ Has good numbers sense and strong analytical ability

_ Has a healthy respect for money and the ability to use it effectively and appropriately

Suggestions for Success

The E Myth: Why Most Small Businesses Don’t Work and What To Do About It, by Michael E. Gerber, brings a unique perspective to entrepreneurship. The myth is that a “technician,” who is skilled in performing every-day tasks in the business, will succeed in running that same business.

Gerber points out that many people go into business only when stricken with an “entrepreneurial seizure.” This often occurs just after getting into an argument with the boss or after working on a weekend project without appropriate rewards and enjoyment. Suddenly, these employees, who perform the technical work of the job very well, decide they can do even better starting and running their own business. This is very dangerous thinking. The fatal assumption of many prospective entrepreneurs is that “if you understand the technical work of a business, you understand a business that does the technical work.” These are two totally different skills that many do not realize until it’s too late.

The three skills of “technician,” “manager,” and “entrepreneur” are in everyone, but to different degrees. The technician is the doer who lives in the present. The manager is the pragmatic problem-solver who craves order and lives in the past. The entrepreneur is the visionary and dreamer who lives in the future. Ideally, one starting a business would have a good balance of each. However, experience indicates the typical small business owner is more likely to be 10% entrepreneur, 20% manager, and 70% technician.

Develop and run your business as a “franchise prototype.” Treat your business as if you will eventually franchise it, even if you have no such intentions. This mindset allows you to develop a “turnkey” operation that will eventually run by itself. Work on your business, not in it.

Systematically set and apply appropriate strategy to all the decisions in your business. Continue learning and improving in all aspects of the business through innovation, quantification, and orchestration. Think of potential new ideas or approaches in all parts of your business, determine ways to test the ideas, and if they work, implement them. Continue until you find a better, more effective way. Always be on the lookout for improvements and for better, more effective methods.

Entrepreneurs often overlook three other important items. You need to confront several issues if you are leaving an employment position. You must discuss long-term business goals with any other owners or major participants. You may also need to address the issues raised by business involvement of family members.

If you are leaving regular employment and the security of W-2 income, here are some suggestions:

*Check your employment contract for any competition restrictions.

*Consider health insurance continuation under applicable federal and state laws.

*Consider obtaining or increasing liability, disability, or term life insurance.

*Arrange for credit and loans before you discontinue the secure W-2 income that bankers love.

*Conserve cash by planning appropriately, postponing expenditures, and using credit judiciously.

*If you plan to operate out of your home, make sure you can legally operate with the necessary licenses.

*Open a separate business checking account and start keeping complete and accurate business records.

*Socialize and meet people by becoming active in professional organizations and other groups.

Long-term goals of individual business owners must be clear. For businesses with more than one owner, the goals of all owners should be clear and consistent with each other. Many believe that everyone who starts a business automatically wants to grow the business as large as possible, and to make as much money as possible. While this is certainly true of some, it by no means is true of all. It is probably not true of most entrepreneurs.

It is helpful to classify new businesses as one of three types: “Lifestyle,” “Mid-Size,” or “High-Growth.” Each has its advantages and disadvantages. The important point is to realize which type you are and want to be. Ensure that all owners understand and agree.

The two major factors that determine the classification are the projected sales and the projected number of employees. You often must use and leverage money and people to grow a business. The proper use and management of money and people can be the biggest advantage in growing a business. The improper use and management of money and people can be the biggest disaster.

A “Lifestyle” business is the most common type started, although not always intentionally. Entrepreneurs who want to maximize independence, autonomy, and control often start lifestyle businesses. Neither large sales nor large profits are important, beyond providing a sufficient and comfortable living. Lifestyle entrepreneurs don’t want the headaches that come with growth and the need for more employees and capital. They need minimal outside financing and utilize few employees. A self-employed business consultant working out of the home is a good example of a lifestyle business.

A “Mid-Size” business usually employs larger assets and more employees to earn higher profits. Profit is more important than sales. The owner relinquishes some autonomy and control. The owner needs to deal with banks and employment issues, but is still able to maintain 100% ownership. There is rarely a need for outside investors or venture capitalists. The local fast food restaurant is a good example of a mid-size business.

A “High-Growth” business shoots for the stars. Initially, sales are more important than profits. Later, profits also become important. The goal is to build a nationally or internationally known enterprise. There will be problems and opportunities with banks and employees. Investors and venture capitalists may insist on taking over ownership and control. Apple Computer and Microsoft are good examples of high-growth businesses.

Give some thought to your goals and objectives in starting, running, and growing a business. Realize that these three classifications are a continuum and not exact positions. Knowing what you and others want, and realizing the advantages and disadvantages, is very important.

Family businesses can be a source of great joy and togetherness. They can also be the source of numerous conflicts. Understand that families and businesses have different purposes, goals, and values. The participants also play different roles in each.

The family system is emotion-based, with caring and sharing, and there is a lifetime membership. The business system is unemotional, task-based, with performance rewarded. There is a “perform or leave” approach. It is impossible to prevent all overlap of family and business systems. Nevertheless, try to minimize the overlap. Too much overlap can cause conflict when the systems have such radically different goals and values.

Arthur Pine, author of Your Family Business, lists these basic principles for family harmony on the job:

Really love the business. Truly enjoy it.

Really love being together. Connect well at home before you consider working together in the office.

If your dream is to bring family into the business, tell them. Talk openly about the possibilities.

Be sure there is a mutual willingness to work together. If the ability is there, let the younger generation make the final decision.

Take the view that working together is an opportunity, not an obligation.

Pinpoint your motives for working together and confirm that they are beneficial for the business and yourself.

Treat each other as valued partners in the business.

Respect all the years of success and hard work that went before you entered the family business.

Respect the good ideas each member of the family will generate in the years to come.

Give the space and freedom necessary for a new generation to find its own niche, its own style of doing business.

Divide responsibilities fairly, according to talents.

Treat family members as who they are, not whom you wish they would be.

Do not take away responsibilities once you have delegated them.

Actively listen to each other.

Solicit opinions. Common sense knows no age and often provides the most obvious solutions.

Keep politics out of the family business.

Openly and mutually establish a trial basis for working together, with competence the sole criterion.

Distance personal emotions from business decisions. In the office, put the business first.

Confront conflicts, work to resolve them, and then let them go.

Avoid taking sides when others in the family fight. Try to let them work together to resolve their conflict.

Show no favoritism among family members in the firm.

Treat relatives as fair job candidates first and as family second.

Give space to let family members develop a personal life.

Pick your battles carefully.

Keep and cultivate a sense of humor.

Admit when you are wrong.

Be flexible, open to change, and open to criticism.

Welcome criticism and suggestions for improving work style.

Communicate on everything. Keep each other up-to-date.

Be open and willing to ask questions, and to answer them.

Give honest compliments to each other. Seek out areas and actions to compliment.

Champion each other’s success in the business. Support each other.

Determine that your mutual goals for the business are compatible.

Do not expect perfection. There is no such thing.

Do not set unrealistic goals for family members that you would not set for others.

Treat family with the same respect and trust that you do other valued employees.

Treat non-family employees as you would family.

Keep your temper in check.

Avoid blaming each other for making mistakes. Ask not what you did wrong, but what you can do to make it right.

Don’t try to change each other’s work habits if the business is thriving.

Don’t search out each other’s faults. Search for and acknowledge each other’s strengths.

Be open with trusted non-family members about the future and where they stand in the company.

Keep your privileges, but let the younger generation know they too will earn them someday.

Call on trusted non-family to help resolve business debates and conflicts. Implement what is best for the business.

Hold no grudges.

Put more value on intelligence than on age.

Plan together for the future well-being of the business when the family first becomes involved.

Establish a financial plan for succession, and make it clear to everyone in the firm what the line of succession will be.

Post the official credo of the American Entrepreneurs Association on your bathroom mirror. Reading it enthusiastically is a great way to start your day. It will be especially motivating when times are toughest.

Here is the Entrepreneur’s Credo:

I do not choose to be a common person.

It is my right to be uncommon—if I can.

I seek opportunity—not security.

I do not wish to be a kept citizen, humbled

and dulled by having the state look after me.

I want to take the calculated risk;

to dream and to build,

to fail and to succeed.

I refuse to barter incentive for a dole;

I prefer the challenges of life

to the guaranteed existence;

the thrill of fulfillment to the stale calm of Utopia.

I will not trade freedom for beneficence

nor my dignity for a handout.

I will never cower before any master

nor bend to any threat.

It is my heritage to stand erect,

proud and unafraid; to think and act for myself,

to enjoy the benefit of my creations

and to face the world boldly and say:

This, with God’s help, I have done.

All this is what it means to be an Entrepreneur.

Chapter 1

Action Items

ARE YOU AN ENTREPRENEUR?

1. Complete your own Advantages and Disadvantages List for starting your business.

2. Determine whether you plan to operate a “lifestyle,” “small high-profit,” or “high growth” business, and explain your rationale.

3. Explain your philosophy for having or not having family members involved in your business.

2. FINDING AND EVALUATING BUSINESS IDEAS

Trailblazing into undiscovered territory with a new business is very exciting. However, think through your decision before jumping in head first. Don’t let the excitement of this new beginning prevent careful planning and analysis. This chapter will discuss the two distinct topics of finding and evaluating potential business ideas.

Finding Business Ideas

Three different types of students attend entrepreneurship classes. Some are ready to start a business very shortly, and they know exactly what they want to do. Others want to start soon, but they have no firm business idea in mind. Others are dreamers who have no ideas and no time frame.

There is an advantage to knowing what business you want to start, assuming it matches the criteria discussed in the next section. However, there is also an advantage to having an open mind in deciding what type of business to start. If you are open to ideas, you can let the market decide for you, at least initially. It’s much easier to find a need and fill it than to insist on selling a certain product or service and hoping the market will buy it.

Even if you have a general idea of the type of business you plan to start, be flexible as to your market niche. Not only is this wise when starting the business, but it is necessary as you grow the business. The pace of change in most areas today is so rapid that a successful entrepreneur needs to be flexible and receptive to such changes.

It’s important to clearly distinguish the concepts of “finding an idea” and “evaluating an idea.” Finding possible ideas should be freewheeling, creative, and open-minded. Evaluating ideas requires a more structured and practical approach.

“Brainstorming” is a very effective way to generate ideas. Evaluation comes later. The basic rules to effective brainstorming for you and your group are:

Forbid judgment and criticism.

Welcome wild, crazy, off-the-wall, freewheeling ideas.

Strive for quantity of ideas rather than quality of ideas.

Combine, improve, and build on others’ ideas.

Make sure all participants understand the rules.

Have a non-participant record every idea.

Keep your eyes, ears, and mind alert and open as you proceed through your daily routine. There are business possibilities everywhere. Instead of seeing problems and becoming upset when something doesn’t work or when you can’t find something, think of it as a business opportunity. There are likely many others who have the same need.

Here’s a great list of ways to stimulate idea creation:

Read your local and metropolitan newspapers.

Read USA Today.

Read the Wall Street Journal and New York Times.

Read the popular consumer and news magazines.

Join associations that serve the industry you’re considering.

Review the fiction and nonfiction best-seller lists.

Visit the public library and browse.

Review government and consumer publications.

Subscribe to relevant trade periodicals and magazines.

Attend industry conventions and trade shows.

Get on-line and keep up with the latest information.

Browse through phone book yellow pages.

Watch and review the top ten prime-time TV shows.

Pay attention to commercials.

Visit a good business library and browse.

Review Standard Rate and Data Service (SRDS).

Review the Thomas Register of American Manufacturers.

Review the Encyclopedia of Associations.

Browse through the magazine section of a bookstore.

Walk through your local mall with analytical eyes.

Visit your local Small Business Association (SBA) office.

Visit your local Chamber of Commerce.

Analyze whether your hobbies are a potential business.

Look for obvious needs and wants that aren’t being satisfied.

Read the latest Occupational Outlook Handbook, published by the US Department of Labor.

Check out the business opportunity ads in the classifieds.

Visit a business broker.

Visit a career counselor and take the interest and aptitude tests.

Obtain a part-time job in an industry that interests you.

Visit and talk with those in the industry you’re considering.

Attend interesting business seminars and workshops.

Review your past experiences, interests, and successes.

Management guru Peter Drucker, author of Innovation and Entrepreneurship, discusses seven specific sources for innovative opportunity. Keep these sources in mind. They may trigger a great idea.

The first four sources lie within the enterprise, and are visible primarily to people within that sector. These four highly reliable indicators of changes are:

The unexpected—the unexpected success, the unexpected failure, the unexpected outside event

The incongruity—between reality as it actually is and reality as it is assumed to be or as it “ought to be”

Innovation based on process need

Changes in industry structure or market structure that catch everyone unaware

The three sources that involve changes outside the enterprise or industry are:

Demographics (population changes)

Changes in perception, mood, and meaning

Scientific and nonscientific new knowledge

Use an idea-generating checklist to solve a problem or to spark new ideas and insights.

Specifically, when assessing a product or service, ask yourself:

Can it be put to other uses? Are there other ways to use it as is? Are there other uses if modified?

Can it be adapted? What else is like this? What other idea does this suggest? Does the past offer a parallel? What could I copy? Whom could I emulate?

Can it be modified? New twist? New meaning, color, motion, sound, odor, form, shape?

Can it be magnified? What to add? More time? Greater frequency? Stronger? Higher? Longer? Thicker? Extra value? Duplicate? Multiply? Exaggerate?

Can it be minimized? What to subtract? Smaller? Condensed? Miniature? Lower? Shorter? Lighter? Omit? Streamline? Split up? Understate?

Can something be substituted? Who? What? Other material, process? Other power, place, approach, tone of voice?

Can it be rearranged? Interchange components? Other pattern, layout, sequence? Transpose cause and effect? Change pace, schedule?

Can it be reversed? Transpose positive and negative? How about opposites? Turn it backward, upside down? Reverse roles? Change shoes? Turn tables?

Can it be combined? Blend, alloy, assortment, ensemble? Combine units, purposes, appeals, ideas?

Evaluating Business Ideas

Ideas are a dime a dozen. People who put them in practice are priceless. You need to go beyond dreaming. Nevertheless, evaluate all business ideas carefully before taking action.

Your best chance for success depends on several factors. If you can honestly answer yes to the four following questions, you’ve probably found the business for you. Answering yes to three of four is still encouraging. However, if you answer yes to only one or two, the odds of success and happiness dwindle.

Question 1: Do you love the business?

Question 2: Are you skilled at the business?

Question 3: Do you have experience in the business?

Question 4: Is the business “on trend”?

As far as “loving” the business, would you still start and operate this business if there was no monetary compensation? Imagine you just won $10 million in the state lottery or you just inherited $10 million. You don’t need to work another day in your life. Of course you take some time off to celebrate and enjoy your winnings. It might be a week, a month, a year, or more. Regardless, there comes a time when you want to do something productive. Would this be the business? If you can honestly answer yes, congratulations! You love the business.

Make sure you are skilled at what you do. You have unique abilities and talents to use in your life. Are those talents and abilities useful and appropriate to the business? Are you putting your skills and talents to their best use? Strive to be the best in your field and an acknowledged expert in the subject area.

Experience can come through working in a similar business or through education in your industry. Any work in the business, even if low-level or part-time, is very valuable. Learn as much as you can about the business and all employment positions. Always be thinking about what you could improve on if and when you are in a business ownership position.

Carefully analyze each new business, new product, and new idea to determine whether it is “on trend,” “off trend,” or “neutral.” Trends change over time, and people differ in their assessment of trends, so use an updated trend list that is consistent with your opinions when doing this analysis. Run the business or idea through your personally developed list of major trends. Use a little imagination to determine if it is consistent with each of the trends. If it supports at least four trends, you’re on the right track. More than four is a bonus and should be even more encouraging.

Check the current business and marketing literature for current trends. Faith Popcorn’s books, The Popcorn Report and Clicking: 16 Trends to Future Fit Your Life, Your Work, and Your Business, and John Naisbitt’s books, Megatrends and Megatrends 2000, are good starting points.

Megatrends was one of the first books to identify major trends. Many of these still apply. If your business is consistent with them, your chances for success expand.

Naisbitt’s ten “megatrends” are:

1. Although we continue to think we live in an industrial society, we have changed to an economy based on the creation and distribution of information.

2. We are moving in the dual directions of “high tech” and “high touch,” matching each new technology with a compensatory human response.

3. No longer do we have the luxury of operating within an isolated, self-sufficient, national economic system; we now must acknowledge that we are part of a global economy.

4. We are restructuring from a society run by short-term considerations and rewards in favor of dealing with things over a much longer time frame.

5. In cities and states, in small organizations and subdivisions, we have rediscovered the ability to act innovatively and to achieve results—starting from the bottom and moving to the top.

6. We are shifting from institutional help to more self-reliance in our lives.

7. We are discovering that the framework of representative democracy has become obsolete in an era of instantaneously shared information.

8. We are giving up our dependence on hierarchical structures in favor of informal networks.

9. More Americans are living in the South and West, leaving behind the old industrial cities of the North.

10. From a narrow either/or society with a limited range of personal choices, we are exploding into a freewheeling multiple-option society.

(Reprinted by permission of Warner Books, Inc., New York, U.S.A., from Megatrends, by John Naisbitt, copyright © 1982. All rights reserved.)

Trends will change over the years but the process of analyzing your business as on-trend or off-trend remains. Apply it to your business. Update and personalize the listed trends, and use your own critical analysis and judgment to coincide with the current times.

Think through your ideas carefully before going forward. Get outside opinions, but don’t be discouraged by negative comments if you objectively and honestly believe in the business or product. Weigh the pros and cons, sleep on any substantial ideas before taking action, and minimize your down-side risk.

Idea Checklists

Use these three checklists to analyze your business and product ideas:

Seven Primary Criteria:

1. Is it effective? (Does it work?)

2. Is it efficient? (Is it an improvement over status quo?)

3. Is it compatible with human nature?

4. Is it compatible with your goals?

5. Is the timing right?

6. Is it feasible? (Can we do it, and is it worth it?)

7. Is it simple?

Value Engineering Principle:

1. What is it?

2. What does it do?

3. What does it cost?

4. What else will do the job?

5. What does that cost?

US Navy Checklist:

1. Will it increase production—or improve quality?

2. Is it a more efficient utilization of staff?

3. Does it improve methods of operation, maintenance, or construction?

4. Is it an improvement over the present tools and machinery?

5. Does it improve safety?

6. Does it prevent waste or conserve materials?

7. Does it eliminate unnecessary work?

8. Does it reduce costs?

9. Does it improve present methods?

10. Will it improve working conditions?

Maintain the proper perspective in all this. You need to love your work, be an expert in it, and have some experience and education related to it. You must also ensure there is a market for what you sell. You need a sustainable competitive advantage over others in the same market.

People often debate the major causes of business failure. The following list from a Dun and Bradstreet survey is a good summary of specific causes:

Deficiency	Percentage of Failures
Inadequate sales	39.0
Competitive weakness	21.2
Excessive operating expenses	11.2
Collection difficulties	9.3
Inventory difficulties	4.2
Excessive fixed assets	3.6
Neglect	2.8
Poor location	2.6
Disaster	1.4
Fraud	1.2
Other	1.4
Reason unknown	2.1

Condensing the findings in the list, the two major reasons for business failure are:

1. Inadequate market research before starting the business

2. Poor planning and management

Don’t let these problems defeat you. Investigate, plan, and implement on paper before going forward.

How long will you last in your business? If you are curious, check the following list compiled by the US Department of Labor:

Ideas are important, but it’s also important not to focus all your energy on finding that one “great idea” if you want to be a long-lasting visionary company.

In their ground-breaking book, Built to Last: Successful Habits of Visionary Companies, James Collins and Jerry Porras present the results of six years of research on what they called “visionary companies.” The companies they chose to study were selected according to the following criteria:

Premier institution in its industry

Widely admired by knowledgeable businesspeople

Made an indelible imprint on the world in which we live

Had multiple generations of chief executives

Went through multiple product or service life cycles

Founded before 1950

What distinguishes these companies is an important lesson for all entrepreneurs to learn about vision. Many entrepreneurs tend to focus all their efforts and energies on “the great idea,” often to the exclusion of building a company. They lose focus and can’t answer fundamental questions such as “What business are we in, and why?”

Collins and Porras found that very few of the visionary companies started with a great idea; in fact, most did not find entrepreneurial success early on at all. Other characteristics they discovered:

1. Visionary companies did not have charismatic leaders at their origins. They had entrepreneurs who wanted to build a great and enduring company.

2. The driving force in these companies is not shareholder wealth or profit maximization but, first and foremost, adherence to their purpose and core values, the company’s unique ideology.

3. Visionary companies zealously preserve their core values while striving for state-of-the-art products and processes.

4. These companies have not been afraid to take great risks when warranted. They often avoid strategic planning to go with their instincts.

5. Visionary companies are so firm in their beliefs and culture that only people who believe in their vision completely will be able to work for them.

6. Most CEOs of visionary companies came up through the ranks of the organization.

7. The primary competitor to a visionary company is itself. The visionary company is in a constant state of improvement.

8. They resist trade-offs that force them to compromise on quality in any area of the business. For example, instead of choosing between quality and low cost, they find a way to achieve both.

Collins and Porras suggest three tests that each entrepreneur should consider when starting and building a business. The most important test is “what you stand for” or the “core values” that will drive you. Focus on what is really important to you in your life and in the world; think not of what you “do” do, but of what you “could” do. The second test must answer the question “what are we good at?” and the third test must answer the question “will people profitably pay us for this?”

Imagine a model consisting of three overlapping circles to show how the three tests relate. What you’re after is the choice that falls inside the intersection of those three circles – the option that passes all tests.

Once you’ve determined what you stand for and what business you will pursue, they stress that you should develop a strong “core purpose,” which has the following five characteristics:

1. It absolutely has to be inspiring to those inside the company.

2. It has to be something that could be as valid 100 years from now as is it is today.

3. It should help you think expansively about what you could do but aren’t doing.

4. It should help you decide what not to do.

5. It should be truly authentic to your company.

Your core purpose should not be confused with specific goals or business strategies which could change many times over the years, and it should not describe current product lines or customer segments. The following list shows some examples of strong core purposes of some of several truly visionary companies:

COMPANY	CORE PURPOSE
3M	To Solve unsolved problems innovatively
Cargill	To improve the standard of living around the world
Fannie Mae	To strengthen the social fabric by continually democratizing home ownership
Hewlett-Packard	To make technical contributions for the advancement and welfare of humanity
Pacific Theatres	To provide a place for people to flourish and to enhance the community
Mary Kay	To give unlimited opportunity to women
Merck	To preserve and improve human life
Nike	To experience the emotion of competition, winning, and crushing competitors
Sony	To experience the joy of advancing and applying technology for the benefit of the public
Wal-Mart	To give ordinary folk the chance to buy the same things as rich people
Walt Disney	To make people happy

For more helpful information related to this chapter, go to:

Appendix A-2 Nondisclosure Agreement

Chapter 2

Action Items

FINDING AND EVALUATING BUSINESS IDEAS

1. Uncover two possible business ideas this week as you go through your daily routine with your eyes wide open. Then evaluate one of the ideas or your current business idea by asking yourself the four key questions. How did you score?

2. Pick ten current trends and run your business through the analysis. How did you score?

3. Think about “what you stand for” and develop a “core purpose” statement for your business.

3. BUSINESS START-UP OPTIONS

Start from scratch, buy a business, or buy a franchise? Once you’ve decided to start a business and have a good idea of what kind of business, you have these three basic start-up options. Each has advantages and disadvantages. The remainder of this chapter will highlight many of these factors. Analyze and weigh the factors, and then make a final decision.

Starting a Business

Most entrepreneurs start their business from scratch. Why is this so? Many do not even consider the two other options.

Here are a few of the most common advantages to starting your business from scratch:

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