They say the best predictor of business success is the number of businesses you’ve started. The experience makes all the difference. And that’s great news if you’re a Silicon Valley serial entrepreneur with good buddies in venture capital, but, for most would-be startup owners, it’s just another item on a long list of daunting aphorisms and nervous warnings that you’re going to hear.
So what should you do? Rely on somebody else’s knowledge. That’s why we brought together seven experts in the fields you’ll need to know the most about (but probably need some brushing up on): law, accounting, marketing, financing, and more. These pros sat down with us here in our office to tell us—and you—all about those little things that most new business owners have to learn “the hard way,” to say nothing of the big issues that could make the difference between you succeeding and hitting the job search again next year.
Wondering what loan officers are looking for, how long your business plan should be, or what kind of website you need? Then read on to find out the answers to those questions—and lots of others.
Robert Schork: We have a premise we are going to kick off with: Harry is a Westchester resident. He’s a successful professional in his career, but he has always dreamed of owning his own widget factory in Tarrytown. How do we get Harry from concept to opening day?
Louis Scamardella: I would say it all starts with the business plan. I find that [often] people with ideas have not thought out the product and how to deliver it to a customer in an efficient way at a reasonable price that you could make money on.
Joseph McCoy: I agree. I think the business plan provides a good road map to help guide you through the process. It outlines, obviously, a vast array of aspects of starting out the business—your competition, what your goal is, where you see yourself in the future, your projections.
Robert Schork: So how detailed of a business plan should Harry have? How long should it be, and what are its essential components?
Louis Scamardella: I would say it’s a rational story of how you would deliver this product to a customer and make a profit on it. Seven to ten pages, I think, is sufficient. I like to see [prospective entrepreneurs] differentiate themselves. I think that many startup businesses think of themselves as defeating the competition. But they should ask, ‘What is my niche in this competition?’ And also, ‘How is the competition at delivering those goods and services? What can we learn from that?’
Jeanne Goulet: I think what he needs to do is determine if he has a good product-market fit. So if he wants to develop a widget, he would need to see if there are customers who are interested in that widget. Frequently, an entrepreneur starts out wanting to do a particular product, and then finds that customers are interested not in this product, but maybe in a twist on it. Then they can do their business plan, which, for an entrepreneur who’s just starting out, is basically not a profit-and-loss statement or a balance sheet, but more a ‘cash burn’: How much cash does he need to develop a product, get it out there, and start to generate revenue? How long will it take before he can generate revenue?
Carolyn Mandelker: I think entrepreneurs get into trouble when they try to do everything themselves. Whether it is to negotiate a lease or create a marketing campaign or advertise or throw a launch party, they do need professional help. It will save them money and grief in the long term.
Robert Wyker: One of the reasons we [at SCORE Westchester] are in existence is to provide that kind of help. But what I believe is the very first thing that anybody needs to do is research, to figure out where they might fit in the market. This is really a marketing study.
Michael Rao: I am a big fan, before business planning, of life planning. I see so many people who have bad habits start businesses: going through divorces, financial issues, drugs, alcohol. These are things that prohibit people from starting their business or taking it to that next step. I think that before you even start a business, you need to look at yourself in the mirror and say, ‘Am I really a person who could be an entrepreneur?’
Susan Corcoran: And really, what we are talking about is how to protect your assets before jumping in. It is not only what business assets you are looking to develop, but also taking a step back and looking at your personal assets before you create your business. There may be certain agreements and other things we may want to put in place so we are protecting [ourselves].
Robert Schork: It sounds like being ill-prepared is the single biggest pitfall that would-be entrepreneurs fall into.
Joseph McCoy: Absolutely.
Robert Wyker: Amen. Also, they frequently have never done what they are now saying they are going to open a business to do. They’ve done something like it, but they have never really been in the industry at a level where they can see what the big picture is.
Louis Scamardella: What I had found is that people in Harry’s situation came to me during this crisis with a lot of experience and technical knowledge—like a mechanic who knows how to put a car together and take it apart—but they did not know how to sell their services. Frequently, they try to educate their customer rather than sell the product. They are more a pusher of information than a creator of dialogue.
Carolyn Mandelker: You can be a creative person, you can be inventive, you can come up with an ingenious product. But those are very different from actually being in business—very different. I don’t want to discourage anybody. It is terrific to be in business. It is just that you need to be prepared.
Joseph McCoy: Having that team [that we] mentioned before—whether it is an accountant or an attorney or an advisor—is really paramount to help guide that person to be successful.
Robert Wyker: Sometimes it also means bringing along somebody as a partner who you can work with who’s got the skills that you don’t have…
Joseph McCoy: …To complement each other.
Jeanne Goulet: I think that’s right. There’s a big chasm you have to cross between starting a product and starting a business. One of the aspects of that chasm in the tax and accounting area, for example, [is that] many entrepreneurs feel that if they have losses at the beginning, they don’t need to bother filing. That is a big mistake. Secondly, there is a sales tax that has to be collected, and if you do not collect it, then you become personally liable for the sales tax. There are many other areas.
Susan Corcoran: So often individuals are misclassified as independent contractors when they should be classified as employees. Once entrepreneurs start utilizing other individuals, they start getting into employment-related concerns. They need to be prepared to interview. There are just so many things that you want in place, and yes, you need other individuals—whether it is a consultant or another owner or whoever—who are the right persons to oversee that part of the business because the owner may not necessarily have the right skills.
Robert Wyker: And even if he can do it, it is sometimes better not to do it because that is really not what he’s got to offer. If you can get the help outside and you can focus on what you and only you can do, you are a lot better off than [if you were] trying to do it all. I want to go back to what Michael Rao was talking about earlier, which is, ‘Who are you as an individual and what can you do?’ One of the things we try to stress is that, if you are going to run your own business, forget about hours. Now you are going to be working twelve, fourteen, sixteen hours a day—six, seven days a week at times—in order to try and make this thing work. So you have got to have the willingness to do that. If you think you are going to do this on a 9-to-5 basis, forget it.
Carolyn Mandelker: When you are a business owner, it is not just your own life. You have a conscience. You are actually responsible for putting bread on the table of the people who work for you, and that is an added layer of responsibility many entrepreneurs don’t even really think about, because, until you are in that position, you don’t think about it.
Robert Schork: Well, assuming that Harry has clarified his business plan and his niche, now he has to establish the business itself. What’s next? Financing? HR?
Robert Wyker: If he’s got a business plan, part of that plan is going to show him how much money he needs from a startup point of view and how much money he is going to need on a continuing basis. From that, he can start to say, ‘Well, have I got it? If I haven’t got it, how am I going to raise it?’
Carolyn Mandelker: Anything that he is going to want to develop—his product, his marketing, whether he needs an accountant or an attorney—he must be properly capitalized.
Michael Rao: The first thing I did, before I even opened my business, was to reach out to ten brokers and owners in different marketplaces to create mentorship.
Louis Scamardella: And there are a lot of programs where similar entrepreneurs get together and talk.
Robert Wyker: Start with chambers of commerce that almost every town has. And then there are trade shows. You certainly want to call on as much knowledge as you can find from people who have anything to do with your industry, because nobody can know it all.
Carolyn Mandelker: And at whatever level you are at, try to hire the very best people you can get for whatever you can afford. Don’t try to cut corners, because you’ll pay for it in the long run.
Robert Schork: What goals should Harry be setting for himself in terms of measuring his success?
Robert Wyker: You have to have some kind of a concept of success: ‘I have to get to this point by this date in order to feel that I am on track.’ A milestone, a test. If I am going to start a marketing program—I am going to advertise in 914INC., for instance—what kind of results am I going to get? This kind of testing has to happen in every aspect of business to see that you are on the right track. [You also have] to know that, if you are not meeting your goals, you have to go look for different paths to take.
Carolyn Mandelker: I want to just [add]: ‘How long do I advertise in 914INC.?’ The outlet may be the right outlet for you, but the ad you run may be awful, or it may be a great ad in the wrong place.
Robert Schork: Sorry, we only run great ads!
Carolyn Mandelker: There is one very important thing to remember in all marketing, and that is this: It is not about you, even though it is about you. And what I am really saying is: You must use each of these tools to reach out to people and bring them in, and in order to bring them in, they need to understand the value-proposition, because what they are thinking is, ‘What is in it for me?’ So [good advertising] is putting yourself in someone else’s shoes. Mistakes that non-professionals make: They create ads that have too many words and no value-proposition. The other piece of advice that I would give is: We are in the digital age. Some people are very afraid of social media, but social media is very important. It’s really about developing relationships with your customers and having conversations.
Robert Wyker: Social media is very important today, and it is going to be ten times more important in a few years. So if you are not there yet, you darn well better get there because that is where the world is going.
Carolyn Mandelker: Your ads also need to drive your audience to your website. You don’t need a vast website. You can have a micro-site—as long as it is effective, as long as the design is good, the navigation is good, the message is good. And make sure whoever is designing your website uses software so it can be converted to a mobile phone or an iPad.
Ben Brody: Carolyn and Michael, you both started your own business. Can you talk about your experience?
Michael Rao: When I first started my business, I was twenty-three, and I left a very large brokerage firm, Cushman & Wakefield. Everyone thought it was a big joke when I left. So when I would call a big landlord at such a young age, they would never take me seriously. And that was the hardest part—proving myself, that I knew the market, I knew the tenants, I knew the owners, I knew how to make deals. And little by little, the smaller deals led me to the bigger deals. But it took a good two to three years to show people, ‘I am here, I am doing this for life.’
Robert Schork: Did you have trouble being taken seriously in terms of getting initial financing as well?
Michael Rao: When I started my business, obviously, I needed startup money. I took seventeen thousand dollars out of my savings account, and that was the last time I took money out of my personal savings account. [But before that,] I made sure my personal money was secure. I gave myself a two-year bracket not to earn one dollar out of the gate, meaning if I didn’t make a dollar, I would still be okay to pay my bills.
Jeanne Goulet: That is smart.
Michael Rao: When I was twenty-three, I lived at home. I knew I was going to be leaving Cushman, so I went to my parents and I said, ‘I’m starting my own company,’ and they said, ‘Go for it.’ They knew my work ethic. That is all it takes. If you have good work ethic, everything else comes into place.
Robert Wyker: Mike, I think you’re downplaying yourself. It takes a work ethic for sure, but it takes a lot more than that.
Michael Rao: Sure, but I think in order to get where you need to be, you just gotta keep moving. You gotta struggle. One of the hardest things, something that took me a very long time to get accustomed to, is failure. You really have to build a tolerance level for failure, and, the bigger you get, the bigger deals you lose, so your tolerance level has to get that much bigger.
Robert Wyker: You have to see those things as opportunities rather than problems, what you can learn from that, how can you use that to go forward.
Carolyn Mandelker: So Michael’s challenge was people taking him seriously because he was twenty-three years old. I recognized that I would face a challenge being a woman and owning a business. That did factor [for instance] into the name of the company. I decided that I wanted a name that was generic, a name that seemed to have a quality of branding. I chose ‘Harrison Edwards’ because they’re family names, and I put them together to overcome that idea that ‘maybe this firm is not going to be taken seriously enough because it is owned by a woman.’ But that was twenty-five years ago, and I think times have changed. And, in fact, the firm has expanded, and we have men and women working in the firm.
Robert Schork: What about when it comes to the money, Joe? What do they need to do to be taken seriously and how can entrepreneurs maximize their chances of being approved for financing?
Joseph McCoy: A lot of what has been discussed here: We like to see, obviously, a business plan in place, having the right type of advisors helping you along the way, having work experience in the past within the business you are trying to create, looking at a lot of different avenues of trying to get financing other than just banking. Obviously the [Small Business Association] (SBA) is a great resource, and certainly for a start-up, a bank like ours—a commercial bank—would be looking for SBA support to help with some of the financing, because traditionally commercial banks are looking for past business-operating experience and collateral. And a start-up business obviously doesn’t have a lot of those things, so the SBA can help bridge that gap. The SBA doesn’t necessarily come in directly from a loan perspective, but they may be able to provide a guarantee.
Louis Scamardella: The interest rate on SBA’s now is 2.75 percent plus Wall Street Journal prime and variable quarterly or monthly. That would be the 7A loan, which is the primary SBA vehicle for lending. [Today that translates] to 6 percent.
Jeanne Goulet: That is not expensive capital!
Joseph McCoy: No, it’s not at all. I also believe in getting involved in local organizations like the Westchester County Association [WCA] and the Business Council [of Westchester (BCW)]. They provide great resources and can really help you contact the people that might be able to provide you with financing. Because there are alternatives out there to the SBA and commercial financing too.
Louis Scamardella: Also it should be noted, as they say, you have got to have a ‘dog in the fight.’ There are no one-hundred-percent financers. You are the first financer of your business.
Joseph McCoy: And if you cannot go the SBA route, the bank is going to look for a lien on your home, personal-cash collateral, personal assets that you can pledge that are going to give the bank a certain level of comfort.
Jeanne Goulet: That is a tough row to hoe—to pledge your house or whatever—seeing how many fail.
Joseph McCoy: ‘How many fail’ is also why the bank is looking to take those kind of assets.
Louis Scamardella: I also think it is very important to discuss with entrepreneurs that, you know, a lot of businesses don’t start with a two-million-dollar loan from a bank. Be realistic.
Robert Schork: Let’s say Harry keeps plugging along for many months and is not yet profitable. He is still in the red. He is draining his savings or he is using his line of credit. At what point does he conclude that it is time to throw in the towel and cut his losses?
Robert Wyker: I would say that the most important thing you can do is get somebody that you respect to take a look at your numbers and plans and tell you what they think. You’re so into it that you’re likely to be looking through rose-colored glasses, and it never looks like you’re not going to make it. So get somebody who you really respect—who is going to keep whatever information you give them totally confidential—to look and see if you could sell them that this is still a viable business. If you can’t, it is perhaps time to fold your tent.
Jeanne Goulet: It’s important that you collect the necessary metrics on your business. That will help you create a dashboard that will help you to see where you are going, how fast, how much traction you have, how much customer acquisition.
Ben Brody: In an alternate universe, Harry has successfully gotten through his first year. What would you tell him about the switch from start-up to growth?
Robert Wyker: Is there a [customer-] continuity concept? The classic example is a frequent-flyer program. You want to figure a way to have people come back again and again. It is a lot easier to keep a customer, generally, than it is to go out and get a new one. Know the ‘Eighty-Twenty Rule’: Eighty percent of your profits come from twenty percent of your customers. And you better know who those twenty are and you better see to it that the service that you give to them is superb.
Susan Corcoran: You have to make sure that your employees, likewise, feel that they are valuable.
Robert Wyker: And to keep the people on your staff motivated by knowing that they are going to share in your success, so they feel that they are in effect, partners—even if they are not legally partners—in terms of the profits, that they are going to get a share that is commensurate with their importance to you because you recognize that, without them, you don’t have those profits.
Susan Corcoran: Although I would be careful about that because you don’t want to create expectations that you may not be able to fulfill, and those employees may not necessarily still be there in a year from now if you don’t meet your financial goals.
Jeanne Goulet: As your company begins to transition, you need to start paying more attention to cash flow through tax savings and if there are ways in which you can accelerate expenses to offset some of your income or ways in which you can arbitrage your rate to get a capital-gains rate and so on. What you save in taxes you are then able to reinvest in your business.
Carolyn Mandelker: I would say that the thing to keep in mind are that everything changes, that you should keep abreast of the change within your own industry. Even though the product may be more or less the same in three years, the marketplace may change. We grew up with tap water, right? Somewhere along the line, somebody got the idea: ‘Gee, let’s bottle it and sell it for two bucks.’ So this, to me, is the perfect example of change in a very short period of time.
For more wisdom from our experts on starting a business, go to westchestermagazine.com/webexclusives