Despite the poor economy or in some cases, because of it people are continuing to open new businesses. But with so many things to consider, an entrepreneur should never go it alone.
“Starting a business is difficult and unpredictable, and having the right advice every step of the way is critical,” says Rich Gunn, a partner in the tax practice group at Burr Pilger Mayer. “Entrepreneurs have the intelligence to do all the things associated with starting a business, but they don’t always have the experience to consider all the variables, and that is what outside advisers bring to the table.”
Smart Business spoke with Gunn about why now might be a good time to start a business and how an adviser can help guide you through the process.
Why would someone start a business during a recession?
Some people wake up with a new product or service idea, and they’re passionate about it and ready to go regardless of the economy. Others do it reluctantly. They’ve been out of work a long time and they do it out of desperation.
The third type of person is opportunistic; the cost of doing business in a down economy is lower, rents are lower, professional services cost less and there are talented people willing to work for less. There’s a big opportunity for someone willing to take the plunge.
Once you decide to jump in, what do you need to consider?
You need to look at the marketplace for your product or service or idea, formulate a business plan, and look at who your audience is as well as who the competition is.
It’s also really important to focus on finances. Think about what type of entity your company is going to be. Are you going to have partners, do you need to bring in money from other people, or are you going to self-start this business?
Seek out help. While there are free resources, such as volunteer organizations, to guide you through the process, the better choice is to hire advisers who will make you their primary concern.
Consult with both an attorney and a CPA, ideally in the same room having the same conversation at the same time, because each is approaching it from a different angle. Bring these advisers into the process as soon as you make up your mind that you’re ready to start. You need to do it before you put out your shingle and say you’re in business, because you want to get it done correctly right from the get-go.
Your attorney and your accountant are going to give you 100 percent of their attention. They’re going to give you value and they’re going to help you think through the implications of your decisions. That could be anything from what kind of image you are giving yourself if you decide to be a sole proprietor to what type of employee benefits can be had through different types of entities.
How can a new business owner determine what type of entity is best for the company?
There is no single entity, no one-size-fits-all that works for every new business. There are so many things to consider, such as how much money do you need to start, where is that money going to come from, do you need to bring in outside investors or lenders and, if so, what type of entity those might demand. Are you going to have co-owners, because if you are, you can’t be a sole proprietor. And people who are putting money into the business but not working in it may have different expectations than someone who is going to be a working partner. Those types of things will shape the type of entity you choose, but you also have to consider things such as exit strategy.
It’s difficult to think about an exit strategy when you’re just getting started, but if your ultimate exit plan is to be bought out by a large public company, you may lean more toward being a corporation so that you can facilitate a tax-free acquisition, which other entities cannot do.
It’s something you should rethink fairly often, as often as you think about your finances or your marketing plans, because your needs may change over time.
What advice would you give someone who’s on the fence about opening a business?
I would say, ‘Think about how passionate you are about it because it’s going to be very difficult in ways you don’t expect.’
People wake up with a great idea or are very engaged in client service or product development, and they forget about the day-to-day things, like struggling to make payroll, and the risks they have to take, like not being able to sign a lease without personally guaranteeing the rent. The compliance, HR issues and accounting issues are often lost in the excitement of developing the product and serving the customer. If you don’t have a passion from the get-go, you can get bogged down and sidetracked and deflated with the day-to-day activities of really running a business.
Talk to other people who own their own businesses and find out what their worst nightmares have been running the business. Then ask yourself if you could live through that and still be happy with having your own business. If you go in with your eyes wide open, you’ll have a much better chance to succeed.
Rich Gunn is a partner in the tax group at Burr Pilger Mayer. Reach him at (415) 288-6218 or RGunn@bpmcpa.com.