Chapt 1 Starting a Business in Michigan

Welcome to Starting a Business

• The Michigan Economic Development Corporation (MEDC) and the Michigan Small Business Development Center (MI-SBDC) are focused on helping businesses launch and grow.
• The Michigan SBDC provides small business assistance across Michigan, offering counseling, training, and research.
• This guide outlines steps, responsibilities, issues, and challenges for entrepreneurs.
• The guide covers topics such as starting, organizing and business plans.
• It also covers complying with tax obligations and basics related to management, hiring, and marketing.
• The guide is informational, not a substitute for legal or financial advice, and aims to simplify starting and operating a business in Michigan.
• The online version of the guide is periodically updated if significant changes occur, accessible at michigansbdc.org/not-yet-in-business/guidetostarting.
• Besides the guide and professionals at the Michigan SBDC, there are other resources available for starting and operating a business in Michigan.
• The resources available are the U.S. Small Business Administration (SBA), Michigan Economic Development Corporation (MEDC), local economic development organizations, trade associations, chambers of commerce, schools, community colleges, universities and public libraries
• The Michigan SBDC can be contacted for more information or to find offices around the state at michigansbdc.org.

Personal Assessment: Are You Ready to Start a Business?

• Self-employment isn't for everyone although being your boss is exciting.
• A self-evaluation can help determine personal, professional, and financial readiness for self-employment.
• It will help assess your reasons and qualifications for starting a business.
• It will also help you to set personal and business goals.
• It will help you determine if you have the freedom, flexibility, and resources to start a business.
• You will be able to evaluate your health and stamina as well as how to balance family and business obligations.
• Bring answers from the self assessment questions to Michigan SBDC consulting sessions, which will help make the most of your time.

Step 1: Self Assessment Questions

• Why do you want to start or continue growing a business?
• What kind of business do you want to launch or expand?
• Why do you think you can make this type of business work and why is it sustainable?
• Do you have the necessary education, skills, and experience to succeed in this industry?
• Are there additional qualifications you should obtain before you begin?
• What is the true purpose/goal you hope to accomplish via this business?
• What is the financial goal are you seeking to achieve?
• Will you need financing, and eligibility for financing based on credit score, assets, collateral and history?
• What are your personal and professional strengths and weaknesses?
• How would you describe your physical, mental, and emotional health and stamina?
• What knowledge and skills do you have in order to start and manage the daily business operations?
• Do you know and understand the technology necessary to be competitive in the industry?
• Do you generally have good judgment in people and ideas?
• What are the sacrifices and risks you are willing to take to be successful?
• How will you balance your personal life and business demands?

Steps to Starting a Small Business

• 10 actions can be taken, the first of which is the self-assessment.
• Following this are selecting a business idea and performing market research.
• Refining or reconsidering your business idea is also important.
• Analyzing startup costs is also crucial.
• Write your business plan and secure financing as well as completing the start up checklist.
• Each of these steps are outlined in detail in this document and the checklist given will summarize these steps.

Step 2: Select a Business Idea

• The type of business needs to be decided and questions need to be asked.
• What are you good at and what do you love to do?
• What skills do you have that you can capitalize on, and what problems can you help to solve?
• What unmet needs do you see, and how can you help address them?
• Make a list of 5-10 distinct business ideas and check which ones fit with the personal assessment just created to determine best opporunities through market research.

Step 3: Perform Market Research

• Determining the feasibility of a business idea is an important first step.
• Market research involves collecting facts and statistics to make informed decisions about the market potential.
• This is crucial at your business's start and as it evolves.
• Determining who the primary customer will be is also crucial, and businesses fall into two categories as a result.

Business-to-Consumer (B2C) Companies

• Sell products and services directly to consumers
• Grocery stores, art galleries, hardware stores, lawn service providers, and pizza parlors are examples.

Business-to-Business (B2B) Companies

• Sell products and services to other businesses
• Suppliers, parts manufacturers, marketing agencies, and technology companies are examples.
• Some businesses may do a bit of both; farms that sell produce to restaurants (B2B) and at farmers markets (B2C).
• Michigan SBDC Consultants can assist with secondary research.

Industry Research

• Industry research is useful to understanding the big picture of what is happening in relation to the business type.
• Questions may include how many pizzas get sold in different area size scales each year, and if the sales have been increasing or decreasing.
• What trends exist related to specialty pizzas, healthier alternatives, changes in sizes, packaging, etc.?
• How many pizza parlors are opening or closing in recent years?

Researching Market Size and Customers

• The market includes consumers/businesses interested in service/product, customers are those who actually buy.
• Specific groups of customers are within a market that represent the biggest percentage of sales and are defined by common characteristics.
• These groups that share characteristics are called market segments,
• An important consideration is how many people are buying ingredients from the area or location.
• How often are they buying food and which segments are most likely to buy, and how big are they?
• Market potential is determined through the number of likely customers by their purchasing frequency and by the price of their purchases.
• For instance, 100 local customers ordering 20 pizzas, costing $15 is $30,000 in revenue.

Competition Research

• Competition is made up of direct competitors who sell product or service very similarly to yours, and indirect competitors who sell alternatives.
• Asking where other pizza shops are located, what they're like, and what other food/options exist is crucial.
• Important to consider why prospective customers would buy your pizza and not choose other options.
• Is there a need unmet where you are establishing your business and are you offering something totally unique in that space?
• Are potential customers dissatisfied with other choices for a reason that you can improve upon?

Market Research: Information Sources

• Information isn't all in one place and so you'll likely need to invest time and energy into the research phase.

The Library

• Still best for market research since locations have librarians and business reference materials.
• Look for information in sources and references related to the type of business such as trade journals, economic census, and government statistics.

The Internet

• You can find helpful tools and resources online by defining search terms precisely and being aware of what keywords you use, as well as dupliacte effort.
• Save time by visually scanning search results.
• If a site is beneficial, print out materials to cite later.
• Using websites that provide insight into competitors is crucial.

Primary Sources

• Industry Experts and Successful Business Owners: Talking to industry people can provide valuable insights.
• Mentors: Consider a mentor who owns a successful business like the one you want to start, not a direct competitor, and operates outside your intended area.
• Surveys: Gather information from businesses or potential customers by conducting a survey or focus group.

Visit Potential Competitors

• Observe your closest competitors from a customer's perspective to see insight the market.
• Analyze their business model to identify strengths, which require hard work to overcome, and weaknesses which can be your business's opportunities.
• Study competitor's websites and marketing efforts to identify what you can do to stand out.

Paid or Hired Research

• Companies conduct market research for a fee and are found online; high quality research costs a lot.
• Instructors looking for "real world" projects for their students at business courses, are another option.
• Michigan SBDC Consultants can introduce you to professors; this may take many months.
• Good market research is a valuable business skill to acquire, regardless of where you get your information.

Market Research Checklist

• Includes industry research, B2C/business customer research, an competition.

Industry Research Checklist

• Considers size of the industry, potential growth, historical trends and professional associations within the industry.
• Considers other related industries, distribution channels, opportunities and threats.

B2C Customer Research Checklist

• Size of the population, gender, age, ethnicity, education level and income level
• Covers occupation or job titles and debt
• Considers home ownership, car ownership, marital and family status, and pets (type and number)
• This checklist also covers customer preference and perception and their associated impact on sales.

B2B Customer Research Checklist

• Industries, markets or segments, products or services and number of employees
• length of time in business, geography and location(s), purchasing patterns and process
• outsourcing patterns and local, national or international purchasers
• economic factors that influence the market and government policies that influence the market

Competition Research Checklist

• Considers direct, indirect and potential future competitors
• Covers annual sales and revenue, marketing methods and results, the geography and location
• Aspects like outsourcing policies and sources for items are considered
• Business strengths, weaknesses and opportunities are identified

Step 4: Refine and Reevaluate Your Business Idea - Is It Viable?

• It must be decided based the data from research whether to refine it or not.
• Is there a need or opportunity in the marketplace for your products or services?
• Who are your most valuable customers, and what problems do your products or services solve for them?
• What is your value proposition (definition on pg. 70)?
• Why would a customer buy from you instead of a competitor or alternative provider?
• Revenue projections must be made for your business, and you must construct a pricing menu for your products or services.
• If you charge $80 an hour as an electrician with an additional $60 for subsequent hours and expect 10 visits per month (6 for 1 hour and 4 for 2 hours) you can create such a plan and budget.
• Based on revenue projections, you will know if your small business will generate suitable sales to make your personal and business goals reachable.
• All aspects must align with the facts, not your thoughts or feelings.

Step 5: Analyze Your Startup Costs

• Financial struggles are responsible for many business failures.
• The failure occurs because business owners may fail to estimate the true start up cost and discover that it will cost more to get the business running than originally intended.
• Unrealistics expectations can cause business owners to overestimate available resources, as grants, tax incentives and business loans can be difficult to obtain.
• Also, there may be the misconception that immediate money will come to the new business, when it mostly needs cash to float for the first period.
• The best avoidance is a well researched estimate of what it will cost to start the business you have in mind.
• A business can be gradually built up, using a “bootstrapping” method.

Startup Cost Analysis Summary

• Summary breakdown covers land and buildings (down payment or lease costs), equipment (furniture), materials and supplies
• Also markets the image and branding, operation fees and expenses, personal living expenses, and cash reserve and contingency funds.
• Individualized list for each and must be specific.

Funding Your Business

• Finding funding options to secure the small business is crucial.

Personal Financial Resources

• Evaluation of person finances to understand financial situation.
• Resources include cash in checking/savings, asset potential from selling, funds received from friends/family as a gift or investment and home equity.
• Credit and life insurance, as well as income from a job, are also included.
• Using your financial resources is risky, and you must dedicate time and energy into refining your business to offset any issues.

Grants

• It is rare for grant funding to come directly to individuals and businesses, and it's more likely that this money flows to local and state organizations.
• Government grants spend tax dollars, therefore stringent compliance and reporting is necessary.
• Business loans can be obtained through state and local programs and nonprofits.
• Grants are not necessarily "free money" and may require funding on the recipients side.

Loans

• Lending institutions use specific criteria to assess business loan requests.
• History, cash collateral are the keys to lenders.
• Lenders look for reliable borrowers who demonstrate high credit score of around 650 over a period of 3-5 years to obtain credit history.
• Lenders expect a business owner to invest 20-30% of the total startup cost as cash or cash/investment with collateral pledged to secure the loan.
• "Purchase value" isn't "resale value" to lenders, so the expectation is that banks will discount brand new equipment to what they can get.

Community Development Financial Institutions (CDFIs)

• These are private financial institutions providing loans to entrepreneurs that might not qualify for traditional financial institutions.
• Serve low-income, underserved communities and certified by the U.S. Department of Treasury.

SBA Loans

• The SBA does not directly provide loans itself.
• However, a variety of guarantees and programs exist through lenders.

Crowdfunding

• Form of raising money to support ideas/projects via contributions from individuals/interested through a network and public platform.
• Supporting artists/journalists, political, charitable, new inventions, entrepreneurship and research causes.
• Must seek professional advice from financial adviser.

Three Primary Types of Crowdfunding

• Donation-Based: Contributors receive zero return and reserved for disaster relief and help people pay medical.
• Rewards-Based: Contributors get reward like service/product of receiving company, yet risks come into play (will you meet reward commitments?).
• Equity-Based: Investors become owners of business, receive return/dividends based on share of profits and federal level has SEC.

Step 6: Refine and Reevalute Your Business Idea - Is It Feasible?

• Data must be assessed for associated starting costs to determine a data driven position.
• Is there a need to further refining of the idea based on the financial situation?
• Potential questions consider if investing in your business will put you in financial jeopardy, and value of the potential.
• Can you justify financial risk for value idea, and can you generate enough sales to offset launching costs in timeframe.
• After analysis, most owners will usually scale their idea back/decrease especially when they estimate expenses higher.

Step 7: Write Your Business Plan

• A complete business plan provides information needed so you can obtain lenders and investors.
• Ideas aren’t plans, the act of putting the plan together consolidates your thoughts.
• It acts as a virtual simulation which helps you see it in its entirety.
• It provides benchmarks and milestones to measure business success and keep everything on track.
• Almost all entrepreneurs need help, and that assistance comes as SBDC Consultants.

Step 8: Complete the Start Up Checklist

• Completing tasks in relation to forming/finalizing your business structure and entity is important.
• Making sure a potential market exits before moving forward can protect one's business from losses and suffering.
• After completing the research and business plan, one can start the business's logistics.

If Needed, Purchase an Existing Business

• If this is the path you're heading on, it is crucial to understand what is being sought before purchasing.
• One should require detailed information on operations and finances, and even a portion of a business may make you responsible for previous debts.
• The seller must provide proof of no existing or hidden liabilities, and that there are not tax clearance issues, so they can complete Form 5156.

Develop Your Business’ Image and Branding

• Developing the branding is important as it attracts customers, so consideration for its staying power is required.
• The value of a business comes from brand recognition and reputation.

Name and Legal Structure

• The name must be carefully considered and there is something legal entity that must be chosen.
• Selection of a structure depends on other business factors and it is best to consult to best inform the decision.

Licensing

• Licenses are required for certain activities and may be required by the state/local government.
• Licencesearch must be consulted.
• Entity registration is not a license.

Food Business Licensing

• Food establishments are government by the Michigan Food law and Michigan Modified FDA Food Code.
• There are various categories of business such as mobile and special transitory, and establishments must be licensed via health departs.
• Cottage Food Law also allows a certain type of food for sale in unlicensed home kitchens.

State and Federal Tax Registration

• Resources exist to determine how business goes about their registration (tax and more), and is dependent on business structure and number of employees.

Zoning and Local Requirements

• Startups/expansion require checking space complies with local laws and regulations as licenses may change, so one must check with locality.

Employee Considerations

• Owners have added responsibilities on state and federal levels if employees are hired, so one must reach out to other business consultants for more information.

Intellectual Property (IP): Patents, Trademarks, Service Marks, Copyrights, etc.

• These are important rights and marks to consider for business.
• The patent is the right to enforce a property right, the trademark/service marks indicate logo symbol and design used for production or company in the united states.
• One must contact the business consultants.

Business Insurance

• One must contact insurance advisor to determine the rates/insurance covers as it varies based on insurance.

Step 9: Secure Financing for Your Business

• One must begin visits to lenders as soon as business plan has been completed, and a State Development Business consult is recommended.

Step 10: Start Your Business

• Perseverance has paid off and hard work begins.
• If you are targeting a B2B customer, then Michigan ED Corporation's (MEDC's) Pure Michigan Business Connect (PMBC) is another one the best value recourse.
• This is free recourse for connection/supply to corporation and the PMBC can help with connection for more growths.