Are You Ready to Start Your Own Business?

Ready to start a business?

Last Updated Jun 24, 2011 5:59 PM EDT

We've all hatched potential escape plans from our desks, and if you're reading this, you're one of those people who want to get past the daydreaming phase. Look, if you have a great idea (that part is up to you) and do a bit of smart planning (we'll help with that), starting your own company within the year isn't as out of reach as you might think.

Charley Moore
Take Charley Moore. Through his experiences advising small business owners as a corporate lawyer and later selling a software product called Family Lawyer, he noticed a vast, unmet need in the marketplace in 2007. New startup founders urgently needed help with preparing documents like incorporation papers and business contracts for employees — but couldn't afford to hire a lawyer for every legal task.

So six months later with his own capital, he launched Rocket Lawyer, a website that helps small business owners prepare legal documents based on templates created by attorneys. The key to launching quickly, he says, was a small team and a well-defined project. The five-employee startup took off, and quickly attracted the attention and $3 million in funding from a small group of investors and Lexis Nexis. The company now does about $10 million in annual revenue.

Moore isn't the only one who's been busy launching, recession be damned. In 2009 the number of new startups reached its highest level in 14 years — even exceeding the startup boom peak of 1999-2000. And 2011 brings new advantages: Washington's renewed focus on small business has helped bring about a $30 billion federal loan fund and incentives for banks to start lending again to small businesses, a new tax break that could let you deduct health insurance costs for yourself and your family from self-employment taxes, and a host of other benefits for startup founders.

So will 2011 be the year you become your own boss? Let's get down to the nitty gritty details as to how you can make it happen, both personally and financially. Read on for some key questions to ask yourself:

Even if your business grows quickly, you're probably going to have to forgo a salary in the beginning so that you can reinvest your earnings in the business. Unless you rely primarily on a spouse or partner's income, you may have to make some tough choices that affect everything from your social life to your children's education.

When Sara Morgan left her corporate career as a Web developer five years ago to start her own Web consulting firm, the divorced mother had three children to support, private school tuitions to pay and a mortgage. To give herself the financial freedom she needed, she sold her house in Baton Rouge and bought a cheaper one in a small town with good public schools, so she didn't have to pay tuition. She now pays herself 60 to 70 percent of her former salary but has more time with her children and says she'd never go back to corporate America. "In some ways, I feel I would rather go to jail," says Morgan, who loathed the office politics and stress.

It may seem pessimistic to list potential threats to your business and look for ways to mitigate them before they've even happened. But blind optimism is not your friend now. This exercise, known as a risk analysis, is essential for successful business ownership, says Nat Wasserstein, a crisis manager with Lindenwood Associates.

He recently worked with a company that leases the coin-operated amusement rides that sit in front of many stores. When the owners did a risk analysis, they realized that the greatest potential threat to their business was a poor relationship with any of the store managers who controlled the turf in front of the stores. Result: The owners made it part of their business plan to keep the managers happy by, for instance, volunteering to move the rides any time a sidewalk sale was planned. Today, the business is thriving.

It's one thing to ask a spouse to become the primary breadwinner for a while or to take on more childcare, if necessary. But the bigger question to ask is if he or she will back your "plan B" in a worst-case scenario — like, say, raiding your joint retirement savings in a cash-flow crunch. "People often focus too much on the business plan, and there's not enough alignment with the life plan," says Andrew Sherman, a partner at Jones Day who advises many small business clients. 

Be realistic about how much you'll need to live on — and run your business during the pre-revenue phase — and make sure you have at least that much money saved before you get started. Many business owners have to close up shop earlier than planned because they're undercapitalized and don't anticipate likelihoods like customers who pay them late. You don't need the stress of wondering where next month's mortgage payment is going to come from.

It's easy to underestimate how much this will cost you (in some states, a monthly family policy may cost as much as a typical mortgage payment), so contact an insurance broker for advice. Six months out is not too soon to start asking questions.

You may want to reinvest them in safer vehicles, like bonds, CDs or fixed income securities. Your risk is this new business.

When women's fashion designer Gaby Basora got an order from Barney's and then a slew of other retailers who wanted to sell her clothes five years ago, she had to quickly borrow $320,000 from friends and family. The bold move paid off. She now generates $4.5 million in sales and released a collection, Tucker by Gabby Basora, in Target in September. Better yet, she isn't up to her ears in debt, thanks to a decision to keep operations lean. "I have paid back most of those loans," she says. 

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