How to Start a Business Workshop

Normally this is presented orally, but in order to assist as many entrepreneurs as possible, the Greater Knoxville SCORE Chapter decided to develop a text version and place it on our web site.

If you are truly serious about starting a business, your best bet is to obtain one-on-one counseling from a SCORE counselor. It is free of charge and confidential. The Greater Knoxville SCORE chapter counsels in many locations: Knoxville, North Knoxville, the Townview Learning Center, Farragut, Loudon, Maryville, Oak Ridge, Madisonville, Clearfork or Claiborne County. We also provide evening counseling. You can call (865) 545-4203 to set up a counseling appointment at the downtown Knoxville office or to obtain the telephone number of the counseling location nearest you.

All SCORE counselors have considerable business management experience. To provide an example of the types of individuals that are Greater Knoxville SCORE volunteers go to Members on this web site.

The Three Phases of Starting a Business

There are three phases that an entrepreneur goes through in starting a business:

Idea phase - this is where you first have the idea of starting a business. You mention it to your mother, father and other relatives. Often the response is: A You're crazy. This is why you should be talking to a SCORE counselor about your idea, as you will obtain an unbiased, impartial opinion. That doesn't mean we won't say: A You're crazy as we will if we believe it is but, for the most part, we do our best to help you determine whether your idea is feasible.
Feasibility phase - the most difficult phase of all. This is where you determine whether your idea is feasible or not. Will spend a lot of time on this phase as it is the >decision-making phase.

Let me start with an example. A SCORE client wanted to start a used car washing business. During his feasibility phase he went to used car dealers and offered to wash their car for the price he wanted to collect. They felt he was too high. He asked for a car to show them what he could do. After he went back to the dealer with the car, the dealer indicated he would give him 150 cars a month once he started his business. In addition, due to the fact his car washing solutions were an environmental waste problem, the location options he had to locate all need to permit disposing of the waste without any major cost. There was much more that this entrepreneur did, but this gives you an idea of what is involved.

Another client wanted to start a parrot sitting business. This was one where the SCORE counselor might initially say A You're crazy but it didn't take much more listening to learn that it might be feasible. She had already lined up all the veterinarians and pet stores to distribute her literature. She had 7 years experience handling parrots. She indicated parrots are VERY valuable birds and owners are reluctant to go on vacation and leave them with someone without the proper training. In addition, she had a distribution agreement with a parrot toy manufacturer. The SCORE counselor learned that parrots are extremely destructive and destroy a toy almost monthly. Learning from clients is one of the reasons SCORE volunteer work is so interesting.

So what do you need to do in your feasibility phase? The number one place to go if you are in Knoxville, Tennessee is to go to the Lawson McGhee Library. (See the handout on this web site for their address). They have an outstanding Business Resource Center. Everything described here is available free of charge. There you can:

Find out if the name for your business is registered in the state of Tennessee. This is important because if you start printing up business cards, brochures, letterheads, etc. and then find out someone else already registered that name, you have just lost a lot of money.
Look in the Small Business Sourcebook. This is an extremely expensive book and, as a result, not too many libraries have this book. It contains a list of almost every industry and when you look up your industry, it contains:

A list of articles and books with information on how to start a business in that particular industry.
Associations and Other Organizations for that industry. For example, there was a SCORE client who wanted to open a Christian Book Store. The association for Christian Book Stores gave her a one week course on how to open a Christian Book Store. Another client who made homemade jewelry wanted a wholesale source for buying stones. One of the associations provided her with this information. Some of these associations charge an annual fee but many will provide you with details on sources of supply, expected profit levels, etc.
Reference works for that industry. For example for Cooking School, one of the reference works is A The Food Professional=s Guide and another is AThe Guide to Cooking Schools.
Trade Periodicals for that industry. For Cooking School one of the periodicals was A Cooking for Profit.
Trade Shows and Conventions for that industry.
Consultants, Computerized Databases, and Libraries for that industry.

Look in the Business Plan Handbook, which is even more expensive, and contains actual business plans for 200 different industries. Business plans are a must if you need bank financing. Studying actual business plans and possibly one in your industry or one that is similar will be of great assistance when you prepare your business plan.
Look in the American Business Disc, which is extremely expensive. It contains information on your competitors and potential business customers as it contains data on all business geographically, by business size and by kind of business. One of the key questions asked in your business plan is >Who are your competitors? This is an excellent place to find the answer to that question.

Needless to say that most libraries have many other books that may be of assistance. For example the book Starting & Operating a Business in Tennessee - a step-by-step guide is also available at the Lawson McGhee Library.

Business Plan Phase

Many entrepreneurs have a lot of difficulty preparing a business plan. Mostly this is because they try to write their business plan before completing the feasibility phase. If you have done a thorough job in the feasibility phase, writing your business plan will be a Apiece of cake.

You need to decide what format you are going to use to prepare your business plan. There are many computerized business plans available. Most cost about $100. The advantage of preparing your business plan on YOUR computer is that it is easy for you to continually update. This is important as your business plan needs to be kept current. Many Small Business Development Centers have a resource center where business plan software has been installed that is available to use free-of-charge. In addition they usually have someone available to assist you with preparing your business plan.

Once you begin to prepare your business plan, SCORE counselors are available free-of-charge to review and make suggestions.

Financing

The next area to be covered is financing your new business. The first question usually asked is A Can I obtain free money? SCORE is continually investigating the many, many claims that there is all kinds of free money available for entrepreneurs. Unfortunately we have only identified four sources of free money:

PASS (Plan for Achieving Self Support) a Social Security Administration Program. Details on this program are available in the Library on this web site. You need to be handicapped (eligible for SSI) and have income that makes you ineligible to receive disability payments. About $9,000 can be obtained that you do not have to pay back if you are eligible.
Vocational Rehabilitation - Once again you have to handicapped to be eligible. The process is lengthy. A business plan is required. Reimbursement for self-employment costs up to about $10,000 is available. Details on this program are also available in the Library on this web site.
Heifer Project - This is for farmers and enables the farmer to obtain funds to purchase a pig, cow, etc. The amounts are small and you have to be a member of an organized group to obtain funding.
SBIR - (Small Business Innovation Research) Each year, 10 federal departments and agencies are required by SBIR to reserve a portion of their R&D funds for award to small businesses. These agencies designate R&D topics, and accept proposals on these topics. After the proposals are submitted, agencies make SBIR awards based on small business qualification, degree of innovation, technical merit, and future market potential. Details on this program are available in the Library on this web site.

Now that most of you know that you are not eligible for free money, what other financing is possible? One of the reasons for one-on-one counseling with a SCORE counselor is to determine the best approach. It is dependent on many factors, such as: your credit status, the amount of equity you are going to provide (to obtain a business loan you MUST provide at least 20% yourself), the available home equity you have available, your business background, the amount of money you need, how long do you need it, etc.

Generally, SCORE recommends talking to your current bank first. In other words, discuss with them your situation, don=t just go in and ask for a loan application. They will quickly provide you with some indication of what they will be able to do for you. Your bank knows you - your credit status, your banking history, your banking funds, etc. This generally means if your bank is not willing to take a chance on you, other banks will be even less receptive.

Since 50% of all small businesses with employees close their doors in 3 years and 50% of all those without employees close their doors in 2 years, you can understand why banks are generally reluctant to make small business startup loans. That is why the SBA developed guarantee programs for small business loans. The SBA does not make the loans, they simply guarantee a certain percentage of the loans and you are charged for this guarantee. Generally speaking an SBA guarantee loan is the most expensive loan you can obtain.

For very small business loans there is an SBA Microloan Program. This is described in detail in several handouts in the Library on this web site. The maximum loan is for $35,000. The minimum equity requirement is 20% . Start-up businesses will be considered only with submission of a complete business plan and financial statements. The maximum term of a note is 6 years. Repayment terms are tailored to each loan. As of the date this was prepared an interest rate of 11.575% is being charged on loans under $7,500; the rate on loans $7,500 and over is 10.825%. There are no application fees, but borrowers are responsible for all fees related to closing of a loan.

For loans up to $250,000 there is the SBA Prequalification Program. This is described in detail in the Library on this web site. Generally, loan maturities are 5 to 10 years for working capital, up to 10 years for machinery and equipment, and up to 25 years for real estate construction. SBA establishes the maximum interest rate allowed; depending on maturity date, it may be 2.25% or 2.75% over the Wall Street Journal Prime Rate. Within this guideline, borrowers negotiate their own rate with the lending bank.

To be eligible for the Pre-Qualification Loan Program:

The business must be at least 51% owned, operated, and managed by women, minorities, veterans, of a specific ethnic origin, or disabled Americans
The applicant(s) must have good credit and a minimum of 20% equity in the business
The business should be for-profit and have average annual sales less than $5 million
The business must employ less than 100 people, including affiliates.

There are programs for loans over $250,000 but these are not going to be described. Details on all SBA loans and application forms are contained on this CD. A SCORE counselor will assist you if this is the amount of funding required.

Legal Forms of Business

The next subject is the legal form of businesses. Details on the advantages and disadvantages of each is covered in the Library on this web site. In addition, the publication Braving the Waters: A Guide for Tennessee=s Aspiring Entrepreneurs, has an excellent section on the legal forms of business. You can see this on the UT web site: http://www.tsbdc.org/sartwell.pdf

In general, most new entrepreneurs select sole proprietorship because it is the simplest and least expensive form of business. All control of the business is in the hands of the owner and your income or loss from the business is reported on your personal Federal Income Tax return. Most entrepreneurs wonder if they shouldn't select another legal form of business to protect their personal assets. If you believe your business has a good chance of failing, you probably shouldn't start your business. In addition, if you are negligent, you can be personally sued whether you tried to protect yourself by forming a partnership, corporation or limited liability company.

If you are concerned about potential liability claims, you should contact your insurance agent regarding the cost of an umbrella policy to cover such situations. The cost is often a lot less than forming another form of ownership.

Another reason for not selecting sole proprietorship is when you need financing and can only obtain it by selecting a partner who will do the financing or by selling stock in a corporation.

If you are considering something besides sole proprietorship, we strongly suggest obtaining a lawyer. For a partnership be sure your agreement covers all aspects of what might happen: the death of a partner, one partner wanting to buy out a partner, etc.

Accounting Systems

Many entrepreneurs can handle all aspects of managing a business but have difficulty with their recordkeeping. There are many options available:

Computerized easy-to-use bookkeeping systems. This is the best choice generally, but if you are not computer oriented or own a computer, this is not an option
Using a CPA. Most CPAs are willing to discuss free of charge what they will charge to handle your accounting, your payroll (if you have employees) and your tax returns. Generally this is worth doing just so you can understand what the cost would be, whether you choose this option or not. If you cannot afford to hire a bookkeeper, this is the best choice for larger businesses.
One simple bookkeeping system for sole proprietorships is to:

Use an envelope for each of the expenses you will have that is listed on Schedule C of the 1040 Federal Income Tax. This is the schedule you need to complete at the end of each year. For example you take a large envelope, 8 2 by 11 inches, and mark on the outside of the envelope the name of the expense, such as AAdvertising.@ Then whenever you incur an advertising expense, such as the purchase of business cards, you write on the outside of the envelope the amount and put the receipt in the envelope. You never look inside the envelope again. At the end of the year you add up the amounts on the envelope and place the total amount on the Advertising line on Schedule C.
Maintain a record of the business usage of your vehicles by keeping a book that has three columns: Date, Number of Miles and Reason. For example going to SCORE for business counseling is business usage. You would put the date of your counseling in the first column, the miles to and from the SCORE office in the second column, and ASCORE@ in the third column.

The IRS has many excellent publications for business owners. During your feasibility phase go to your local IRS office (often SCORE offices have these available) and obtain the following:

Tax Guide for Small Business - Publication 334
Business Use of Your Home - Publication 587
Starting a Business and Keeping Records - Publication 583
Circular E, Employer=s Tax Guide - Publication 15
Travel, entertainment, Gift, and Car Expenses.

One special note: During your first year of operation the IRS permits you a deduction of $24,000 for the purchase of equipment, like computers and furniture. This is called Section 179 expense. You need to complete a special schedule to take this deduction. This is described in Publication 946, How to Depreciate Property..

Home Businesses

In the previous section we listed IRS Publication 587 which pertains to home businesses. Many business owners do not realize that their business does not need to be conducted entirely in the home to be able to deduct certain home expenses. If you set aside a place in your home to do your record keeping, or if you store material in your home that is needed in your business, you are eligible for home expense deductions. For example, suppose you have set aside a room where you have a computer on a desk, and files that are solely used for your business, and this room is 100 square feet. If your home/apartment is 1,000 square feet, you can deduct 10% of your rent/mortgage interest, utilities, telephone, property taxes, and insurance as a business expense. This is detailed in IRS Publication 587, Business Use of Your Home.

The Web

The web has become a major player with regard to many, many businesses. One aspect of establishing a web site is that you now have international readership. When the Greater Knoxville SCORE Chapter established a web site for the 17 counties in East Tennessee, they obtained queries from Israel and Russia during the first month. Several examples of how the web site has affected SCORE clients. One crafts person, that did wood carving in his basement, called 6 months after establishing their web site and indicated he was going out of business and canceling their web site as he couldn't handle the volume. Another client was going to offer free shipping until SCORE indicated they could get orders from anywhere in the world.

There are several handouts in the Library on this web site that provide tips on how to set up your web site. In general, make sure your domain name is meaningful. If a potential viewer makes a search on the web, will he/she get your web site? This is critical. Domain names cost only $35 annually, but you usually have to pay for 2 years in advance. The Greater Knoxville SCORE Chapter purchased 5 domain names and linked them so that if you do a search on any of the domain names you are sent to www.scoreknox.org. In addition, be sure your home page comes up in about 8 seconds. This means you should minimize the use of photos and graphics. Remember not everyone has an extra speedy modem.

Another key to remember is that viewers usually go to the web because they have a problem. Your home page should affirm to the viewer that you not only know the problem but have a solution. Your home page is the key to whether or not the viewer decides to look further or go to another web site.

Many SCORE chapters, like the Greater Knoxville SCORE Chapter, will evaluate your web site free of charge.

Marketing

There are three major reasons why most small businesses fail:

1. Lack of financing

2. Lack of customers

3. Lack of management expertise/experience

Financing was covered previously. What type of marketing will be best for your business is VERY dependent on the type of business. Most SCORE chapters have one or more counselors who specialize in providing marketing assistance. To assist him/her and you, you should complete the marketing plan provided on this CD and on our web site. With regard to the lack of management expertise/experience that is where SCORE counselors can help.

SCORE is ready to assist you with all your business problems. Not only is one-on-one counseling available but you can e-mail: counseling@scoreknox.org any business question and a reply will be sent via e-mail, usually within 48 hours. Our Knoxville telephone number is (865) 545-4203.

George Hannye, Author Janet Beman - Editor

Greater Knoxville SCORE Chapter 435 volunteers