- The Washington Times - Friday, July 17, 2009

OPINION/ANALYSIS:

In the last several months, there have been devastating unemployment reports and horrible jobless claims data. While the vast majority of economists expect the unemployment rate to tick higher in the ensuing months, the worst part of the situation is that the number of people who have exhausted their unemployment benefits before finding a job has soared.

Per the Department of Labor, as of May roughly 49 percent have exhausted those benefits compared to 37 percent a year ago. At the same time, the notion of a jobless economic recovery is making the rounds following comments made by Sen. Richard C. Shelby, Alabama Republican, per CNBC. With the backdrop of unemployment reports and jobless claims, keep in mind that small businesses defined as companies and organizations comprised of less than 500 employees provide 70 percent of the countrys jobs.

On the one hand we can wonder how small businesses will fare in the current economic environment characterized by weak consumer spending, rising gas prices, and dismal unemployment and jobless statistics. On the other, given the combination of entrepreneurial spirit and creative ingenuity, there is a select group of people that has recently found itself unemployed and is likely to take the current bull by the horns and embark on a new business.

Daunting? Maybe. Scary? Could be. For the faint of heart? No. I say that because while 637,100 new employing firms were created in 2007, per data from the U.S. Small Business Administration (SBA), 560,300 were closed that same year. The SBA also points out that two-thirds of new employer establishments survive at least two years, 44 percent survive at least four years and 31 percent survive at least seven years.

One step in helping ensure that your new business goes the distance is to build a solid foundation on which to build that business. In somewhat simple terms, that means understanding the business, asking tough questions and challenging the underlying assumptions to determine not only how good of an idea the business is, but whether or not its merely an idea or an idea that could grow into a sustainable business.

There are several online resources that can give guidance including the SBA (www.sba.gov), The U.S. Chamber of Commerce (www.uschamber.com), Entrepreneur.com, Business.gov and a host of others. There are several essential issues and common mistakes you must avoid that can lead to a faulty foundation filled with cracks. After all, if you are considering starting a new business youll be investing your money and time, not to mention opportunity cost associated with the venture.

Some questions that should be asked before you start your own business include: What is the business you are undertaking? What is the core product or service? Will customers want your product or service on a recurring basis? How is it different than what is already available? What are the strengths and opportunities? At the same time, what are the weaknesses and competitive threats? Is there an underlying trend that the business can capitalize on or is there one that will challenge the business? How does the business make money? Can it do so in a sustainable and repeatable fashion? What kind of partners and suppliers will you need and on what terms will they work for with your company?

Once these questions along with a host of others are answered, the beginning of understanding the nature of the business is occurring. At the same time, there are other structural issues that need to be addressed from who are the owners and what are their respective ownership stakes and the operating agreement between them to what is the best business structure for the entity. Background on the various business structures including partnerships, corporations and limited liability companies can be found at www.irs.gov.

You should also consider seeking the legal advice of an attorney. Not only will the attorney be able to give you sound advice on the proper business entity for your needs, they will set up the business for you with the state as well as provide other documents that may be necessary for your business such as an operating agreement.

In my experience the next few steps are where the rubber meets the road more often than not. These steps include having a well thought out business plan, making sure the company is well capitalized if you are planning on opening a business that requires a substantial amount of initial capital. The business plan forces the owners to explain in painstaking detail the nature of the business and to scrutinize not only their strategy but also their financial assumptions. Capitalization is key and often the best advice is taking the amount of money you think you need and double it. The first step in capitalization is to boot strap it as long as you can. By that I mean funding the development of the company through internal cash flow and friendly capital - family, friends and relatives. The longer a company can boot strap itself and build a successful business, all else being equal, the owners stand to have a larger ownership position after they take on other investors.

For some businesses a solid and well-rounded board of advisors is essential. These should be people that have built and run businesses if possible or have some related experience. One local group that has a really has a grasp on start-up businesses and could serve as your board of advisers is LaunchBox Digital, which focuses on helping entrepreneurs get through those challenging early days by bringing capital, advice, and practical guidance to help early stage businesses succeed.

All in all, launching your own business can be challenging and difficult at times but rewarding should you identify and capitalize on the right opportunity and have the proper business foundation in place. Just another way, to think about utilizing your money.

Chris Versace is the director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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