The Feasibility StudyThe Business Plan

Cash Flow RequirementsLegal Issues

PermitsEmployee & Contract Labor

Financing OptionsTax Responsibilities

Texas Roadmap to Starting a Business

TEXAS ROAD MAP TO STARTING A BUSINESS

The Texas Road Map to Starting a Business contains directions to get your business off theground and help strengthen our state economy along the way. This booklet covers eight steps tostarting a new business:

TABLE OF CONTENTS

CHAPTER 1: THE FEASIBILITY STUDY ................................................................................ PAGE 2

CHAPTER 2: THE BUSINESS PLAN ................................................................................... PAGE 17

CHAPTER 3: CASH FLOW REQUIREMENTS ........................................................................ PAGE 28

CHAPTER 4: LEGAL ISSUES ............................................................................................. PAGE 32

CHAPTER 5: PERMITS ..................................................................................................... PAGE 37

CHAPTER 6: EMPLOYEE AND CONTRACT LABOR ............................................................... PAGE 40

CHAPTER 7: FINANCING OPTIONS .................................................................................... PAGE 43

CHAPTER 8: TAX RESPONSIBILITIES ................................................................................. PAGE 47

It is important that you follow the directions found on the first page. Start at the begin-ning and work your way from chapter to chapter. Do not jump ahead or skip chapters. Whenyou finish, you will have completed the background work necessary for starting a business.

While every effort has been made to ensure the reliability of the information presented inthis publication, the publisher does not guarantee the accuracy of the data contained herein.Errors brought to the attention of the publisher and verified to the satisfaction of the publisherwill be corrected in the future editions.

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Chapter 1: The Feasibility Study

The first step on your road to starting a businessis the feasibility study. This first step helps you, theprospective business owner, determine the practi-cality and viability of your business idea. Aftercompleting the feasibility study, you will have anindication of market opportunity and growthpotential. You want this information now, beforeyou risk valuable time and money.

The feasibility study can help you analyze thepossible risks and rewards of your concept andincrease the probability of your success. Duringthis exercise you will gather information on currenteconomic conditions and the state of the industryin which you want to start a business. You willconduct a detailed analysis of your competitors andpotential customers. After you have gathered this

information, you will be able to decide if your ideais worthy of more time and money.

Overview—The Feasibility Study

The feasibility study helps you examine yourideas objectively from several viewpoints. The flowchart below indicates the process you will follow.

Every feasibility study begins with an idea. Thisidea can be for a product or service. A marketanalysis, which thoroughly investigates the indus-try, competition, economic environment and targetmarkets, will help you decide if the idea canbecome a profitable business. This exercise alsohelps you make an informed decision by identify-ing the requirements for starting a particular

The Feasibility Process

Idea Market Analysis Requirements Decision Go Business Plan

Definition Industry Experience/Knowledge NoCompetition

Objectives Market Time Re-evaluateLegalFinancing

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business, such as experience, time, and legal andfunding issues.

A feasibility study can take weeks or evenmonths to complete, but the process puts you at anadvantage and increases your chances for success. Ifyou move forward and start your business, thefeasibility study will serve as the basis from whichto develop a comprehensive business plan. If youdecide to put your venture plans on hold, you canapply the knowledge to other possible ventures, orit could prompt you to adjust or re-evaluate youroriginal idea.

Your Idea: Defining Your Business

Your first step is to define your business idea andthe opportunity you envision. Include a descrip-tion of the product or service you will provide,your reasons for starting the venture and the typeof business you plan to establish (for example,manufacturing, wholesaling, retailing, exporting/importing or service). Consider these areas, whenwriting a working definition of your business.

Customer Viewpoint: You must adopt yourcustomers’ viewpoint because if you fail tosatisfy your customers’ needs, your business willfail. Briefly describe the products/services youwill sell and how customers will use them.

Ask potential customers, how they woulddefine your product or service. Their perspectivecan give you important insight into how yourproduct or service will actually be used. Keep anopen mind. If someone uses your product/service in a new way, it may be a benefit you canadd to your marketing strategy.

Product/Service: Specify the line of product orservice you will offer and look for secondaryopportunities. For example, are there servicesyou can provide in association with your prod-uct, or are there products that result from theservice you will provide?

Customers: Describe your typical customer interms such as age, sex, income, education,

occupation, marital status and lifestyle. Whatneeds will your product or service satisfy? Whatbenefits will your customers gain from usingyour product or service? What results will yourcustomers achieve from having purchased yourproduct or service?

Remember, customers buy based onbenefits and results, not product specifications—for example, a specification of a life insurancepolicy is that it is term or whole life. A benefit isthat it pays a sum of money upon your death,but you purchase life insurance for the results—peace of mind that your survivors will be takencare of financially.

Competitive Edge: Define your product’s orservice’s unique qualities. What stands out aboutyour product or service to entice buyers to buyfrom you? Is it quality, price, convenience orexpertise that makes your product or servicepreferred by consumers?

Personal and Business Objectives

Defining your short- and long-term businessand personal goals establishes the criteria forjudging the feasibility of your idea. Ultimately,your decision to start a business should be based onwhether it can achieve your business and personalgoals.

Personal Goals: List the goals that satisfy yourpersonal needs. Why are you starting thisbusiness? What motivates you? What do youwant to accomplish? Are you more interested ina lifestyle change than in monetary reward? Aperson starting a part-time business may havedifferent personal goals than someone who viewsthe business venture as a primary income source.

Business Objectives: Where do you want yourbusiness to be in the next few years? What areyour financial objectives? State these goals insuch terms as annual sales volume, market share,growth rate, personal income, etc.

Now review the two lists and describe in 25words or less how your business will satisfy your

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business and personal goals. This becomes yourmission statement. Do your personal and businessobjectives match? Is there a good fit with yourbusiness idea? If not, you may need to re-evaluateyour venture. Otherwise, you’re ready to start yourmarket analysis.

Market Analysis: Is Your Ideaa Market Opportunity?

Begin your market analysis by examining trendsin your industry and collecting information aboutthe size of your market segment and target market.Your research can help you identify and learn aboutyour primary customers and major competitors.Analysis of the information you gather will revealmarketing strategies for successfully selling yourproduct or service.

Your business will exist in a world constantlyreshaped by changing social and cultural values,economic conditions, political and legal restric-tions, competitive strategies and advances intechnology. You must keep alert to these trends anddetermine how they influence your business.

Your research will also lend a more completeunderstanding of established business practices,competitive developments and industry perfor-mance standards.

Here are some questions to consider as youconduct your industry analysis.

What is your industry, type of business andgeneral product or service category?

Is your industry growing? Maturing? Declining?Stable?

What are the current trends and outlook foryour industry?

Does your industry have any special characteris-tics? Is it seasonal? Is it cyclical?

Who are the key players in the industry?

Where are you positioned in the distribution

channel? For example, are you a manufacturerselling to a wholesaler, to a retailer, or to theend user?

Who holds the power in the distribution chan-nel?

Identify and evaluate how significant changes inthe following conditions could affect your business:

Social or lifestyle changes

Economic changes

Political and/or legal changes

Technological changes

Population (demographic) changes

Any other change in the business environment

Conducting Your Research

You can gather your information from existingdata (secondary sources) or from new data (primaryresearch).

To access secondary sources, start at your locallibrary. Many public and private organizationscollect and publish data on population and indus-tries, which is often available at public or collegelibraries. For example, trade associations maintainindustry statistics and projections. Federal, state,county and city governments also gather data. Justabout every regulated industry has an agency thatcollects data on it. Don’t forget that the Internet isalso a good source.

Another resource is real estate agents—they cansupply information for specific locations in termsof competitors, suppliers, demographics, zoningregulations, local economic outlook, rental spaceand costs. Banking and financial offices can some-times provide relevant financial data about yourindustry. Additionally, local radio and televisionstations can provide valuable information about theaverage customer, purchasing patterns and use ofmedia.

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Be inquisitive. Investigate any resource thatmight offer pertinent information. You’d be sur-prised at the information you can gather by talkingwith former employees of competitors, consulting

Secondary Research Sources

LibrariesPublicColleges/Universities

Trade AssociationsIndustry information, statistics, projectionTrade publicationsTrade shows

Chambers of Commerce and Area EconomicDevelopment OrganizationsAssociationsBusinessesResources

Federal Departments and AgenciesSmall Business AdministrationService Corps of Retired ExecutivesCongressional officesRegulatory agencies: FDA, OSHA, EPA, etc.

State Departments and AgenciesTexas Department of Economic DevelopmentCongressional officesState Comptroller’s officeState regulatory agencies: Texas Railroad

Commission, Texas EmploymentCommission, Texas Education Agency, etc.

City and County GovernmentCity, county and regional planning commissionsRegional information and communicationexchangesCounty Clerk’s office

Banks and Financial Institutions

Realtors

Local and Regional Utility Commissions

Small Business Development Centers

Local radio and television stations and newspapers

Sources of Business and Marketing Information

Books on How to Conduct ResearchCompetitor Intelligence—How to Get It, How to

Use It by Leonard M. Fuld. Deals with ways togather information on competition. Covers sec-ondary sources, corporate intelligence, statisticalsources, trade and business magazines and data-bases. Also includes a section on gaining access toforeign intelligence from U.S. sources and provideslistings of many directories and source books.Published by John Wiley & Sons, 1994

How You Can Buy a Business Without Overpayingby Eugene Merfield and Gary Schine. Published byConsultant Press, 1991

Your Texas Business by Richard Alderman andTom Oldham. Published by Gulf Publishing,1993.

The Start-up Guide by David Bangs. Publishedby Upstart Publishing, 1998

Starting and Operating a Business in Texas byMichael Jenkins and Donald Sexton. Published byOasis Press, 1991

Demographic Know-How edited by PenelopeWickham. Covers how to find, analyze and usedemographic information. Details approximately600 resources. Authorities in the market researchfield discuss how demographic information canimpact a business’ bottom line. Published byAmerican Demographics, 1988.

firms, market research firms and labor unions. Youcan also gain insight by inspecting public filings,classified ads and buyers guides.

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Guides and Company Information

Business Information, by Michael LavinBusiness Information Sources, by Lorna DanielsDirectory of Corporate AffiliationsDirectory of Industry Data Sources, by HarfaxDirectory of U.S. ExportersDun & Bradstreet Billion Dollar Directory;

America’s Corporate FamiliesDun & Bradstreet Business Information ReportsDun & Bradstreet Million Dollar DirectoryDun & Bradstreet Principal International

BusinessesEncyclopedia of Business Information Sources,

edited by Paul WassermanEncyclopedia of Small Business Resources, by David

E. Gumpert and Jeffry A. TimmonsFinancial Analyst’s Handbook, by Sumner LevineMacMillan Directory of Leading Private Compa-

niesMoody’s Manuals, such as Moody’s Industrial

ManualStandard & Poor’s Corporation RecordsStandard & Poor’s Register of Corporations,

Directors and ExecutivesThomas Register of American ManufacturersValue Line Investment SurveyWard’s Business Directory of U.S. Private and

Public CompaniesWorld AlmanacOverviews and General Industry InformationCensus Information, U.S. Department of

CommerceCounty Business Patterns, U.S. Department of

CommerceCurrent Industrial Reports, U.S. Department of

CommerceForbes Annual Report on American IndustryIndustry Surveys, Standard & Poor’s Corp.Inside U.S. Business, by Philip MatteraMoody’s Investors Industrial ReviewStandard & Poor’s Industry SurveysU.S. Industrial Outlook, U.S. Department of

CommerceThe Wall Street Transcript

Statistics and Financial and Operating Ratios.Industry statistics are listed under the subject,statistics, in library catalogs, and under StandardIndustrial Classification (SIC) code numbers inpublications (see the Standard Industrial Classifica-tion Manual). Such information can also be ob-tained from trade associations. There are alsoguides to statistics, general collections of industrystatistics, and sources of composite financial andoperating ratios such as:

Almanac of Business and Industrial FinancialRatios, published by Prentice-Hall

American Statistics IndexAnalysts Handbook, Standard & Poor’s Corp.Annual Statement Studies, Robert Morris

AssociatesPredicasts BasebookCompetitive assessments of certain industries in

the United States by the U.S. InternationalTrade Administration

County Business Patterns, U.S. Bureau of theCensus

Economic IndicatorsEncyclopedia of Business Information Sources,

edited by Paul WassermanIndex to International StatisticsIndustry Norms and Key Business Ratios, Dun &

Bradstreet Corp.Market Share ReporterStatistical Abstract of the United States, U.S.

Bureau of the CensusStatistical Reference IndexStatistical Service, Standard & Poor’s Corp.Statistics SourcesStudies of media and markets

by Simmons Market Research Bureau Inc.(New York, N.Y.)

Summary of Trade and Tariff Information, U.S.International Trade Administration

U.S. Bureau of the Census publications oncertain industries

Projections and Forecasts. Listed under the subjectin library catalogs and publications, such as:Predicasts F&S Index

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Market Data. An overall guide to sources of dataon consumer and industrial markets can be foundin such publications as:

Predicasts BasebookData Sources for Business & Market Analysis,

Scarecrow PressFindex (Cambridge Information Gap)

Consumer Expenditures DataEditor & Publisher Market GuideSurvey of Buying Power, published by Sales

Management Inc.U.S. Census Reports (Business, Housing, etc.)

Market Studies of particular industries and prod-ucts available from such companies as:

Arthur D. Little Inc. (Cambridge, Mass.)Business Communications Co. (Stamford,

Conn.)Frost & Sullivan Inc. (New York, N.Y.)Morton Research Corp. (Merrick, N.Y.)Predicasts (Cleveland, Ohio)Simmons Market Research Bureau (New York,

N.Y.)Theta Technology Corp. (Wethersfield, Conn.)

Data Services and Databases

CompuServe Information Service Co. (Colum-bus, Ohio)

Dialog Information Service Inc. (Knight-RidderInc.)

Dow Jones News/Retrieval Service (Dow Jones& Co.)

Lexis, Nexis, Mesis (Reed Elsevier)AOL (Vienna, VA)Newsnet (Bryn Maw, PA)Prodigy (Medford, MA)Data Star (Night Ridder, Inc.)Internet

Magazine and Newspaper Articles published bytrade associations, government agencies andcommercial publishers. Lists can be found byconsulting periodical indexes and directories, such

as:Applied Science and Technology IndexBusiness Periodicals IndexThe Directory of DirectoriesEncyclopedia of Business Information SourcesGuide to Special Issues and Indexes of PeriodicalsNew York Times IndexPredicasts F&S IndexPublic Affairs Information Service BulletinStandard Periodical DirectoryThe Wall Street Journal Index

Internet Resources

www.biztalk.com

www.businesstown.com

www.onlinesoho.com/soho_links.htm

www.businessownersideacafe.com/starting_business/index/php

www.powerhomebiz.com/vol18/scratch/htm

www.RhondaWorks.com

www.inc.com

www.entrepreneurmag.com

www.tded.state.tx.us

www.bcentral.com

www.morebusiness.com

Other Sources

Ayer Directory of Newspapers, Magazines andTrade Publications

Books and other material listed in librarycatalogues under the industry name

Brokerage house reportsCIRR: Company & Industry Research ReportsCongressional Information ServiceEncyclopedia of Trade AssociationsFinancial Studies of the Small Business

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Library of Congress—suggested headings: smallbusiness management, new business enter-prise, entrepreneurship, entrepreneurs,management, marketing strategy, businessethics, and corporations.

NASA Industrial Applications Centers andseveral universities, such as SoutheasternOklahoma State University, the University ofNew Mexico, the University of SouthernCalifornia, and the University of Pittsburghprovide technically oriented reports, studiesand literature searches

National Trade and Professional Associations ofthe United States and Canada and LaborUnions

Small Business SourcebookThe Source Book of Demographics and Buying

Power for Every Zip Code in the U.S.A.The Sourcebook of Zip Code DemographicsYellow Pages

BiographicalDun & Bradstreet Reference Book of Corpora-

tion ManagementsStandard & Poor’s Register of Corporations,

Directors and ExecutivesWho’s Who directories

Source: New Venture Creation, Entrepreneurship inthe 1990s, by Jeffry A. Timmons with Leonard E.Smollen and Alexander L.M. Dingee Jr. Publishedby Irwin.

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Generally, secondary research sources do notprovide all the information you need, and you willhave to collect new data. Primary sources rangefrom networking to formal surveys. They includecustomer and supplier surveys, networking, focusgroup discussions and interviews with customers,competitors and suppliers. Talking to competitors,suppliers, and customers also constitutes primaryresearch. Primary research is particularly necessarywhen trying to determine your target market andin developing client profiles. Also, primary researchhelps you learn about your customers’ buyinghabits and opinions of your product or service.

You don’t need a degree in market research tosucceed in collecting primary data. Consult theserecommended publications for information onconducting primary research.

Practical Marketing Research by Jeffrey Pope. Anexcellent introductory resource for conductingprimary research. Discusses various researchmethods, writing a questionnaire and interview-ing guidelines. Also includes a section on solvingspecific marketing problems, including newproduct research, advertising research, simulatedsales testing and product positioning research.

Published by AMA COM, a division of theAmerican Management Association, 1993.

Mail and Telephone Surveys—The Total DesignMethod by Don A. Dillman.

Provides step-by-step instructions to conductingand implementing mail and telephone sur-veys. Also includes a section on developingeffective cover letters and increasing responserates. Published by John Wiley & Sons, 1978.

Your Competitors

The next step in your market analysis is toidentify your direct competition. Describe thedifferences and similarities between your opera-tions and theirs. Discuss their business concept.

What are their target markets? How do they reachthese markets? Describe their strengths and weak-nesses, and rate their performance in criticalcompetitive categories. Is their business growing ordeclining?

Learn all you can about your competition. Youcan use many of the same secondary resourceslisted on page 5 - 9. Review financial ratios for theindustry as discussed in Robert Morris AssociatesAnnual Statement Studies, pricing strategies andrevenues of similar businesses. Assume the role of apotential customer and “shop” your competition. Ifthis is difficult for you, send a friend. Interview theowner of a similar business in another city or tradearea. Talk to your competitors’ customers andsuppliers.

Compile a competitor profile using the informa-tion you’ve gathered. Who are they? How longhave they been in business? Where are they lo-cated? What is their product or service? What aretheir prices? What is the quality level of theirproduct or service? When are they open?

You also want to investigate significant substi-tutes for your product or service. Customers mayprefer to satisfy their needs in other ways withother types of products.

Use the grid on the following page to help youorganize your data.

Your Competitive Strategy

Now that you’ve learned about your competi-tion, compare how your operation differs fromtheirs. Develop strategies for gaining your share ofthe existing market by answering the followingquestions.

What market niche will you fill?

How will your product or service be differentand better than your competition?

How do you plan to compete? How will youdefend against your competitors’ strengths?

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How are you going to price your product orservice compared to your competitors?

How will you gain market share?

How will you take advantage of your competi-tors’ weaknesses?

Your Suppliers

Knowing your suppliers and how they candeliver is critical to your competitive strategy. Ifone or two suppliers dominate the market it mayaffect your ability to negotiate favorable terms. It isimportant to know about unreliable suppliers orthose that face a financially precarious situation.

You can investigate your future suppliers bycalling the Better Business Bureau, performing acredit check, collecting information sheets fromsuch companies as Dun & Bradstreet, or askingother entrepreneurs who have used them how theywould rate the supplier. By performing this duediligence on your supplier, you will be able toanswer the following questions.

How big are they?

How long have they been in business?

Where are they located?

What are their hours?

What is the company’s reputation? Who aretheir customers?

Do they work with small businesses? Are theyinterested in working with you?

Your Market

To be successful, your business cannot be every-thing to all consumers. You must identify thosemarkets that can most value your products orservices. Your market can be segmented based ondemographics, geographics, buying history, per-sonal characteristics, or almost anything that ties agroup together.

Your first step is to define your trade area, thegeographic area that your business will serve. Isyours a neighborhood business that operates in alocal area with one or a few zip codes? Or do youplan to service a city, county or several counties?Do you require a statewide or national market?

Describe the current business conditions in yourtrade area. Is your trade area in a growth patternwith existing businesses expanding, new businessesgrowing, and commercial and residential construc-tion booming? Or is your trade area experiencing acontraction with employees losing jobs and con-struction equipment idle?

A key question is whether or not your productor service is already available in your trade area.This could signify a good market opportunity, or itcould be a warning flag that others have tried youridea and found the area unsuitable for lack ofmarket demand, political reasons or legal issues.

Your next step is to define your target market,the market segment that offers the most opportu-nity for your product or service.

A typical business makes 80 percent of its salesto 20 percent of its customers. By identifying thatcritical 20 percent, you can focus your efforts andexpenditures on the consumer group that will giveyou the most return on your investment. In re-searching this target market, you will learn aboutyour primary customers’ needs and how to satisfythem. You should also study this group’s buyinghabits to learn how to reach them with yourpromotional message.

Customer profile. Describe your selected cus-tomer market in terms of physical characteristics,needs and lifestyle. Place a face on your typicalcustomer. What specific benefits does he or sheseek? What personal needs or results will yourproduct satisfy?

You also need to know about the individualswho make buying decisions. The person who buysyour product and the one who uses it may bedifferent. A good example: Adults buy breakfast

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cereal, but children eat it and thereby may controlthe buying decision.

If you are selling a product or service to aconsumer, the following are typical questions to askin developing a customer profile.

Who is your primary customer? Male? Female?Both? Business? Government Agency? etc.

Why do they buy?

How do they buy? Cash? Credit? Charge?

When do they buy? Daily? Weekly? Monthly?Occasionally?

What customer services do they value most?

How much do they buy?

Why will they buy from you?

What is their income or revenue?

What is their age range?

Where are they located?

What is their profession or industry?

Target Market Preferences. Most consumersmake purchasing decisions based on how theyvalue convenience, service, quality, price or exper-tise.

Most small businesses stand out because theowner gives personal service. Customers valuesomeone who makes a courteous and personaleffort to provide special items or timely service.Small businesses have an advantage here becauseoften they can provide this more efficiently thanlarge companies.

It may be difficult for small businesses to com-pete on price because larger, established competi-tors usually have economies of scale and deeperpockets. Large businesses can typically outlast the

MarketingProgram

OtherLocationServicePriceQualityProduct/Service

YourBusiness

Competitor#1

Competitor#2

Competitor#3

Comparative Competitor Analysis

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new entrant in a price war. It is also hard for a newbusiness to successfully offer products or services atthe highest price levels because this requires anestablished reputation to qualify the “status” or“value” of the offering. Most small business ownersfind it easier to compete on a medium price level.Look at your situation carefully and select thepreference that your potential clients consider themost important.

Market Demand. Determining market demandis critical because if demand is lacking, you need toreevaluate your business idea. To estimate the totaldemand for your product or service, consider thecurrent sales volume and growth potential for yourproduct or service. Knowing the answers to thefollowing questions will help you determine marketdemand for your product or service.

How many competing firms are located in yourtrade area and how much business do theydo?

What are their sizes?

Are these businesses stable? Growing? Shrinking?

What are the population characteristics of yourdesignated trade area?

How many consumers are there?

What is their buying capacity?

What is their need for your product or service?

What percent of the market will you have?

What is your market’s growth potential?

Your research may show that the market is toosmall to support another business or it is shrinkingor growing faster than you thought. You may needto readjust your strategies.

The Marketing Mix

From time to time, review your original businessdefinition. It may need refining based on the

information you’ve gathered and the marketingmix framework.

Marketing Mix: The Four P’sProduct

PricePromotion

Place

These elements must be “right” for your businessto be successful. That is, you must offer the rightproduct or service at the right price using the rightpromotional efforts at the right place and time.

Price. To pinpoint the right price, you need acombination of experience, market knowledge andgood judgment. Study your competitors’ pricingand estimate your costs. Can you price yourproduct or service competitively and still covercosts?

Consider the following factors to determine thebest price for your product or service.

Are prices in your industry stable or do theyfluctuate?

Must your clients buy from you or is it just aseasy to buy from your competitors?

How much are your potential customers willingto pay?

Remember, your customers ultimately determinepricing. They will be willing to buy from youwithin a specific price range. If your costs exceedthis price range, don’t assume that you can pass thedifference onto your customers.

Place. How will you distribute your product orservice? Will it be direct or through wholesalers orother intermediaries? Where will your business belocated? What are the traffic counts at the location,and is this important for your business?

For some businesses, location is all-important,and the wrong location can undermine an other-wise sound business. On the other hand some

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businesses don’t need a fancy, expensive location ifcustomers buy from distributors or other outletsand never see the office. If location is critical toyour business, invest the time and effort to find thebest location you can afford. Realtors know aboutcommercial property, but they may be unfamiliarwith your business needs, so don’t rely on theirrecommendations alone. Talk to other advisors.Consider these questions: Where are your custom-ers located? How will they get to your place ofbusiness? What are the traffic and pedestriancounts for the location?

Promotional Strategy. Your advertising andpromotional strategy affects both your ability tosell and your business or cost structure. You don’tneed a full blown promotional plan now, but itwould be helpful to review the following questions.

How will you tell your customers about yourproduct or service?

Will you need to educate your customers aboutthe benefits of your product or service?

Based on your target market’s demographics andbuying habits, what are the best ways to reachthem?

What will gain your customers’ interest andhold their attention?

Which advertising media will maximize thereturn per dollar spent?

How do your competitors promote their prod-uct or service?

What are the pros and cons of their methods?

How much promotion can you afford and forhow long?

Key Success Factors. Many businesses, althoughfounded on good ideas and sound objectives, failbecause they lack critical success factors necessaryto survive in their market segment. These factorsvary in each industry and market segment. Whatdoes it take to make it in your market? Some key

factors might be:

Quality Capital Precise product orService Technology service identificationPrice Advertising Precise marketExpertise Suppliers identificationLocation Distribution

Personal Skills Analysis

Your next task is to define the many resourcesyou may need to start your venture. These rangefrom particular technical skills or managementexperience to legal requirements and start-up coststo sources of funding.

Technical Skills. These skills are unique to eachtype of business. For example, printers need toknow how to operate a printing press, and oil welldrillers need to understand geology. Do you havethe skills to produce the product or render theservice? Businesses are often founded on anentrepreneur’s technical strengths.

Experience and Knowledge. Describe threecritical skills or knowledge areas necessary to runyour business. How much experience do you havein this type of venture? Do you have the experienceand ability necessary to make good operatingdecisions?

Every successful business needs a complex mix ofmanagement skills in many business areas, includ-ing marketing, financial analysis, operations,purchasing and personnel. Do you have the man-agement skills to successfully lead a businessventure? Keep in mind that no one can be a perfectmanager, but most new businesses fail because ofpoor management so it’s important to be honestwith yourself. Consider your managementstrengths and weaknesses, then decide if you needto gain additional experience or knowledge orshould hire someone whose strengths balance yourweaknesses.

People make the difference in a company’sperformance. Good employees can make a mar-ginal business better, and poor employees can

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destroy an excellent business.

Time Commitment. Owning a business can bea wonderful opportunity to be your own boss, totake charge of your financial future and to workseven days-a-week for nearly 24-hours-a-day withno one to hand you a paycheck at the end of theweek. Are you prepared for the personal demandsand sacrifices of running your own business? Usethe following questions to decide if this is a goodtime to become a business owner.

Are you willing to work long hours and sacrificeleisure time?

How much time will the business require? (Mostbusiness owners work at least 60 hours aweek.)

How much time can you spend on your busi-ness?

How long before you make a profit?

How long before you draw a salary?

Do you have personal family circumstances thatwould prevent you from totally focusing onyour business now?

In answering these questions, you might findthat you’re not ready to start a business. Don’t bediscouraged. Although the time may be wrongnow, you might be prepared in six months or ayear.

Legal Issues. You must consider numerous legalissues when starting a business. You may needlicenses, permits or certifications. Do you havewhat you need? If not, can you meet the require-ments to get them?

You’ll have to decide how to structure yourbusiness (sole proprietorship, partnership, corpora-tion, etc.). Additionally, you should secure protec-tion for proprietary products or services, such aspatents, trademarks and copyrights. For detailedinformation about legal issues, see Chapter 4 ofthis workbook.

Financing Needs

Your next task in the feasibility study is todetermine how much money you will need to startand operate your business until it is profitable.Begin by estimating your start-up costs and howmuch money you need to operate your business fora year. Make a list of special equipment needed andthe cost to buy or lease it. Also list one-timestart-up costs, including real estate purchase,furniture, fixtures, equipment, starting inventory,utility and lease deposits, equipment installationcharges and grand opening promotions. Don’tforget to include your insurance expenses as well.Insurance needs to be discussed with an insuranceprofessional with specific industry knowledge.

Insurance OptionsMandatory: AutomobileEssential: Liability, fire, product liability, and

workers compensationDesirable: Crime, health, business interrup-

tion, key personnel, disability andbonding

Consider the pros and cons of purchasing all orpart of an existing business. Sometimes, thisalternative can make some aspects of starting abusiness easier or less expensive.

Sales/Revenues. Forecast your estimated sales/revenues for each month during the first year. Youmust forecast sales, costs and profits using assump-tions drawn from your market research. Put theseassumptions in writing.

Break-Even Analysis. Use the following formulato calculate the amount of sales and/or revenueneeded to cover your business’ total fixed andvariable costs for the first year. The break-evenpoint is where there is no profit and no loss.

Break Even = Fixed CostsSelling Price - Variable Costs (per unit)

orRevenue - Costs & Expenses = $0

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Fixed costs are those costs that must be metregardless of the sales level. They include suchitems as rent or mortgage payments and mainte-nance expenses; utilities and telephone; salaries,benefits and payroll taxes; insurance payments;licenses; legal and accounting fees; office supplies;and depreciation and interest payments.

Variable costs fluctuate with sales and includesuch costs as sales commissions, advertising andmarketing expenses, and raw materials.

Using the figures you’ve gathered, calculate yourcompany’s break-even point and when it will bereached.

Cash Flow Analysis. A schedule showing re-ceipts, disbursements and net cash for your com-pany over a specified period of time could behelpful at this point. A cash flow analysis estimatesby month how much cash your business will needfor expenses (when you pay your bills) and fore-casts when cash will come into your business(payments from customers ). Keep in mind, morebusinesses fail because of poor cash flow than forlack of sales. For detailed instructions on preparinga cash flow analysis see Chapter 3.

Financing Your Business. Finding funding is achallenge for every new business owner, but thereare several sources to consider.

Personal Savings: Most new businesses get 90 to95 percent of their cash from personal savingsand family and friends.

Continued Employment. Some businesses start ona part-time basis, permitting the owner tocontinue working full-time for another companyuntil the new business becomes profitable.

Friends and Relatives. Many entrepreneurs lookto private sources such as friends and familywhen starting a business. The money is oftenloaned at low interest, which can be beneficialwhen getting started.

Banks and Credit Unions. Most commercial

banks are cautious and consider start-up ven-tures risky. Others usually require at leastone-third equity investment plus additionalcollateral to cover the loan balance. If you havethe required equity, some banks may consideroffering you a loan guaranteed by the U.S. SmallBusiness Administration.

Venture Capital Firms. These firms are usuallynot interested in start-up situations. However,start-ups that have the market potential to growto $25 million to $50 million in five to sevenyears have been known to receive venture capitalfinancing. Such arrangements will normallyrequire you to give up an ownership percentageto the venture capital firm.

Private investors. Some individuals will invest instart-up businesses, especially if they are knowl-edgeable about the industry.

Your Decision

It’s now time for you to examine your completedfeasibility study to determine if this businessventure can be profitable. Review your missionstatement. Does your market analysis, competitiveanalysis, personal skills analysis and financingneeds indicate that your idea could be profitable?Will these analysis factors allow you to achieveyour mission statement?

A “Go” Decision. If all these analyses are posi-tive, then start organizing your business. Turn toChapter 2 and begin by compiling your marketand industry information into a business plan.

A “No” Decision. If one or more of your analy-ses displays negative results, your idea is not fea-sible at this time. Various conditions cause anegative decision. For example, a market may notexist or is too small. Perhaps the costs are greaterthan projected revenues. It is also possible thatthere is too much competition for your product orservice or that profitability may be difficult toaccomplish.

You might feel disappointed with a “no” decision15

but it is much better to learn this now before youspend additional money and time on an idea thatwon’t be profitable for you.

Time to reevaluate. Your analysis might showthat your idea is not feasible, but only temporarily.Perhaps you don’t qualify for a needed license, butyou could get the permit with additional special-ized training.

Be careful when you reevaluate. It’s your moneyat risk. If the projected financial picture looksbleak, the real one won’t be any better. Successfulbusiness people know when to walk away. Look forother opportunities or modify your current idea.

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After you complete your feasibility study anddecide to proceed with your business opportunity,your next step is to develop a sound business plan.Before you start, however, keep in mind the follow-ing general principles.

First, your goal in writing a business plan is tocreate an organized view of your business ideas—aroad map to follow. The length of your businessplan itself is inconsequential. The key is quality,not quantity. By formalizing your ideas on paper,you often identify weaknesses to be considered andanticipated. Most important, the business planguides you to your company’s future and lendsfocus and direction to your ideas.

Second, although the final document can beused to generate investment interest and financing,the business planning process is primarily anexercise to help you conceptualize your businessand set reasonable and achievable goals and objec-tives. Theodore Roosevelt once said, “If you aim atnothing, you’ll hit it every time.” The business planhelps you visualize your target and guides you inhitting your mark.

Third, allocate time to think about the variousissues you should consider during the planningprocess. Ask others to brainstorm with you, too. Ifyou have a management team, get them involved.

Keep in mind, a small business owner’s planningresponsibility is to maintain control over thedirection of the plan and, ultimately, the business.A business plan should reflect your vision of amarket opportunity and serve as a blueprint for thefuture.

Fourth, consider these guidelines for brainstorm-ing sessions.

• Follow an agenda with time constraints, andlimit interruptions.

• Don’t grasp the first idea that comes to mind,but generate a long list of possibilities.

• Don’t let anyone dominate the planning session.Involve the entire management team and createan environment for the free exchange of ideas.

• Conduct the sessions in an informal, relaxedsetting.

• Don’t rely solely on past experiences for ideas.Stretch your imagination.

• Don’t be timid or self-conscious about yourideas. Encourage spontaneity and withholdjudgment or criticism of ideas until later.

Cha

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2: T

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Chapter 2: The Business Plan

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Fifth, don’t be discouraged if you meet unex-pected obstacles. In fact, obstacles are the one thingto count on. Put yourself and your business at anadvantage by anticipating and planning for diver-sions. When outsiders like prospective bankers andprivate investors read your plan, they consider youraptitude as a small business owner. You will earncredibility by candidly identifying obstacles andyour strategies for overcoming them.

Finally, your business plan is a dynamic docu-ment that you should review regularly to determinewhether or not you are meeting your goals andobjectives. It should be adjusted as market condi-tions change. The plan is not something you writeonce and file away. Follow market conditions andrevise your business plan accordingly.

Content

The length of a business plan varies from com-pany to company depending on the type of busi-ness and market it serves. What is more importantthan length is the clarity and substance of the ideasset down on the pages. Your business plan mustexpress various issues in a relatively straightforwardand logical manner. Use the following componentsas a guide.

I. Table of Contents

II. Executive Summary

III. Introduction

IV. Environmental Analysis

V. Market Analysis

VI. Marketing Strategy

VII. Operations

VIII. Management Plan

IX. Financial Data

Remember, you are the business owner and theplan must reflect your ideas and goals. By thor-

oughly stepping through the planning process, youcan identify the strengths and weaknesses of youroperation. This should allow you to take advantageof your strong points, while giving you the oppor-tunity to gather resources to counterbalance yourweak areas.

With all this in mind, let’s get started.

Section I: Table of Contents

A table of contents is essential if you intend touse your business plan to seek financing. Eachinvestor or banker will read the text from theperspective of their background and experience.Number the pages of your business plan andinclude a table of contents to make it easier forreaders to find what interests them. This willincrease the chance that they will read your plan.

Section II: Executive Summary

The Executive Summary should capture thereader’s attention and entice them to read further.It should be limited to two pages and summarizethe business plan’s key points. Although the Execu-tive Summary appears at the front of your businessplan, it should be the last section you write. TheExecutive Summary must reflect your completeunderstanding of your business idea. You won’tachieve this understanding until you’ve written thedocument’s main body. If the reader questions abroad statement made within this summary, thedetail of subsequent sections should provide thenecessary support.

Your summary should include, but not belimited to, the following components.

• Description of your business idea and prod-uct or service, explaining how it stands outfrom the competition.

• Generic discussion of the target market andthe competitive environment.

• Review of the management team and keypersonnel, emphasizing their credentials andspecific functions.

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• Identification of capital requirements neededand the general use of these funds.

• Summary of potential financial results.

Section III: Introduction

The introduction should give a detailed descrip-tion of your product or service. The informationyou developed and refined during your feasibilitystudy will be useful as you write this section.

In the introduction bring up any distinctions orunique qualities of your product or service, such asa more convenient location or better service.Additionally, outline any proprietary positions thatgive you a competitive edge. These can be patents,copyrights or trademarks. If your product has anysensitive or critical characteristics—such as fireresistant treatment—list these attributes. Yourreaders will also be interested in learning aboutfeatures that can positively influence the results ofyour marketing strategy. Be sure to also includeyour experience, special expertise or knowledge ofthe product or service.

Section IV: Environmental Analysis

The environmental analysis should include threekey components: 1) a discussion of current busi-ness conditions in the area where you plan to dobusiness, 2) an industry analysis, and 3) an evalua-tion of your competitors.

Economic Conditions—International, Na-tional, Regional, Local. You don’t have to be aneconomist to run a business, but you should bemindful of key economic indicators that can affectyour company’s ability to conduct business. Reces-sion trends, high interest rates, declines in retailsales and high unemployment are a few of thefactors to consider when starting a new business.

Examine the economy to spot events or trendsthat could influence your business decisions.Concentrate on local business conditions andidentify key opportunities and threats to yourcompany. For instance, a large skilled local laborpool could provide you with high quality personnel

at reasonable wages. On the other hand, lowunemployment could make it difficult to attractpersonnel. A new business owner may have troublecompeting against larger, established firms thathave the financial resources to compensate theiremployees.

Do not overlook international market trendsthat might affect your industry. For example,although you plan to sell your product or servicelocally, you could encounter competition frominternational sources. Be aware of these factors andplan for them.

Several resources could help you identify andfollow these trends. The National Trade Data Bankof the Bureau of Census lists all overseas importsby commodity. Individual competitors can beinvestigated by reviewing annual reports or check-ing with such firms as Dun & Bradstreet.

Industry Analysis. By completing the feasibilitystudy in Chapter 1, you gained an in depth under-standing of your industry and market. This sectionof your business plan should focus on the results ofyour investigative efforts. Your research and analy-sis will provide you with the necessary tools tomake informed decisions on market opportunity,to analyze industry trends and to understand theirinfluence on your business.

Competition. During your feasibility study, youconducted a thorough examination of your compe-tition. You learned about their strengths, weak-nesses and performance in competitive categories.You identified their target markets, market shareand strategies, and prepared a comparative com-petitive appraisal using key characteristics. Recountyour findings in this section of your business plan.

Identify your key direct competitors and providea profile of each. The goal is to demonstrate thatyou analyzed the competitive environment andhave developed defensive strategies. Explain yourmarket niche, your competitive strategies and thetactics you will use to capture market share.

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Additionally, you must address your competi-tors’ reaction to your entry into the market. Youalso should consider how other entrants couldaffect your business.

Section V: Market Analysis

This section should provide a description of thecurrent market and future opportunities. Yourresearch during the feasibility study phase shouldhave provided you with the data to support yourbusiness endeavor. Include-this information as wellas a discussion of the following.

Geographical Trade Area. Discuss your primarytrade area. State whether you will operate locally orplan to compete within your state, nationally orinternationally.

Customer Identification. This section shoulddescribe your selected customer market. Who areyou targeting? Develop a customer profile thatillustrates their physical characteristics, needs andlifestyle. What is their buying capacity, habits anddecisions for buying? What do they value? Discussthe need for your product or service. In this sectionyou must prove that a market exists in your se-lected geographic area and show the number ofpeople in the area that match your customerprofile.

Competitive Position. Discuss your competitiveadvantage. Why will customers buy from you?What is unique about your product or service? Listat least three key advantages you have over yourcompetitors and describe how you plan to capital-ize on them. You must also recognize your weak-nesses and how to compensate for them. List threedisadvantages and discuss the strategies to secureyour company’s competitive position.

Section VI: Marketing Strategy

The marketing plan is one of the most impor-tant sections of the business plan. It outlinesstrategies for selling your product or service. Yourgoals and benchmarks for the operation shouldreflect a realistic, credible guide supported by yourmarketing analysis.

Target Market. Review your market analysisperformed in Section V. Your target market willconsist of those individuals who will most likelybuy your product or service. Keep in mind—youcan’t be all things to all people. This translates intofocus. Your marketing plan must focus on yourtarget market and the strategies you will use toreach these potential customers.

These strategies should reflect the habits andlifestyle of your customers.

Sales Organization. Outline your sales strategy.Do you plan to use a professional sales force? Willyou use internal sales, outside sales or both? Willyou sell through a retail operation, a wholesaleoperation or through mail order catalogs?

Design your compensation scheme. Will youpay commissions, salary or a combination of both?Or will you utilize bonuses or some other form ofincentive compensation?

Promotion. Discuss how you will generatepotential customers’ attention. What will capturetheir interest? What benefits does the customergain from buying from you? What attractivecustomer service or conveniences will you offer?For example, you might offer free delivery, freealterations or discounts on first purchases or certaindollar amounts.

Marketing/Advertising. As part of your market-ing efforts, you can implement various advertisingactivities. Advertising consists of any activity thatattracts attention for your product, service orcompany.

There are a range of advertising options toconsider. Some advertising has direct costs, such asprinting or production costs, postage or the cost topurchase space in a magazine. The most commonforms of advertising include:

• Direct mail, such as flyers

• Brochures, handbills

• Ads in magazines, newspapers, yellow pages,20

trade publications or on radio and television.

• Trade shows, exhibitions

• Sample giveaways

You should also consider other public relationsactivities. These include:

• Publicity, such as press releases and articlessent to newspapers, radio and television, tradejournals or magazines

• Networking

• Seminars, speeches, classes

• Civic involvement

• Contacts/referrals

Advertising activities can offer short- and long-term benefits. Discuss your advertising approachand strategies to achieve specific marketing objec-tives. You want to confine your efforts to yourtarget market. Select media that will most likelyreach your target markets. These could be newspa-pers, trade journals, television or radio. Set anadvertising budget based on how much you canafford and how much income you expect the ads togenerate.

To decide which medium to use, compare thecost to use a specific medium with the sales resultsyou expect it to generate. Keep your target marketin mind and how often that target market uses thatparticular medium.

An advertising plan should be developed withinyour budget constraints. For an existing business,this amount can be a percentage of sales—forexample, five to 10 percent of sales. If you are astart-up business, your advertising dollars will be acombination of a percent of potential sales andearmarked start-up capital.

You must commit to some form of advertisingwhen introducing a new product or attracting thecustomer’s attention. To develop a position in the

customer’s mind you should address customerneeds with consistency and frequency. Checkindustry norms for averages and use the data as afoundation. You may have to do a great deal ofestimating in this part, and it’s not unusual for youto change your strategy often, especially in thebeginning.

Keep in mind that the easiest and most recogniz-able forms of advertising—television, newspaperand radio—are the most expensive. Select thesemedia only if it’s appropriate for your product/service and your target market. If you are compet-ing with existing successful companies, you mustmake up in elbow grease what they can do withmoney.

When preparing a marketing/advertising plan,list the various activities you plan to use andestimate their costs for the next 12 months. Again,the cost of the plan must be reasonable comparedto the income it produces. For example, it isseldom reasonable to spend $10,000 on an ad thatgenerates $5,000 in sales.

When you’re ready to implement your market-ing/advertising plan, purchase a notebook ororganizer to hold a calendar. Chart your market-ing/advertising schedule, list the chosen mediumand note how, when and where you plan to adver-tise. Include information about every ad youintend to place, speeches you will give or network-ing events you will attend. Keep daily statistics ofyour sales by product line, the number of custom-ers that walk through your doors and other relevantinformation. Track customer response to ads andpromotional activities by asking them where theylearned about your company, product or service.These accumulated facts will help you makeeffective decisions for your future marketing/advertising plans.

Pricing Strategy and Sales Terms. As discussedin the feasibility study, correct pricing is essential.How do you plan to price your products or ser-vices? Your strategy should reflect the cost toproduce your products or to provide your services aswell as your overall financial goals and objectives.

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What industry markup, discounts or othermethods will you use? How will your price struc-ture compare to the market? Why is it different?Will you give trade credit or any other induce-ments to attract new customers? Will you acceptcustomer credit cards?

Your business’ revenue equals the unit pricemultiplied by the unit volume of products sold orservices provided (Revenue = Price x Volume).Price, particularly the “right price,” is therefore anessential component of your financial strategy.

To arrive at the “right price,” you need a combi-nation of experience, market knowledge and goodjudgment. As a starting point, calculate the cost toproduce your product or service. This is yourminimum price. To calculate your maximum price,add an amount to the minimum price that reflectsconsumer demand and your competition’s pricing.The “right price” falls between your minimum andmaximum price.

Prices for most products and services are marketdriven. That is, the maximum price you can chargeis determined by what typical buyers might pay fora like product or service at that time and place andunder similar circumstances. Prices are said to bemarket driven because the market for products orservices is based on the amount potential custom-ers are willing to pay, not necessarily the price thatyou might like to set.

To determine the right price, you must considervarious characteristics related to your product/service and your business and personal goals asoutlined during the feasibility study. These factorscan relate to your target market position and wayof doing business, your competitors, your clients,the current and forecast market, distributionchannels, regulations and state of the economy.

You should also consider how your answers tothe following questions could affect the price youestablish.

Does your firm lead pricing decisions or followcompetitors?

Are prices in your industry stable or erratic?

How do your sales policies and terms compareto industry practices? For example, do youdeliver?

How do the features and benefits of your prod-ucts/services compare to those offered by yourcompetitors?

Can you reduce unit costs as unit volumeincreases, or are your costs fixed?

Do your clients have to buy from you or couldthey just as easily buy from one of yourcompetitors?

Who needs your product or service? How manypotential customers? Who are they? Whereare they located?

How much are these potential customers willingto pay?

Are these customers generally aware of the“going prices” for products and services suchas yours?

Is there a distinctive aspect of your product orservice that will induce customers to pay ahigher price?

Are these customers motivated by price, productquality, service, a combination of each or byprice alone?

How do these customers view your firm com-pared with your competitors? What mightcause them to shift their loyalties?

What size quantities or contracts do thesecustomers usually purchase? What are theaverage annual purchases of these customers?

Do these customers commonly “shop” orrequest bids to find the best price?

How do you sell your products or services?What distribution channels do you use?

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Do you incur different costs for different cus-tomers because of their size, type or location?

Do you have a single product/service or do youoffer a range of complementary or alliedproducts or other inducements to attractbuyers?

How will your competition react to changes inprices?

What is the general availability of similar prod-ucts or services from your competitors?

Are there any unique factors in the market? Forexample, must you provide delivery or iscredit expected?

Your answers to these questions can help youidentify some of the internal and external forcesthat could affect the prices you establish.

Characteristics related specifically to yourproducts or services can also help you pinpoint theright price.

Product type. Consider a lower price if you areselling a commodity readily available fromyour competitors. Charge a higher price onlyif your product is patented, unique or customdesigned.

Production type. If your product ismass-produced with lower costs for highervolumes, you might charge a lower price thanfor products that are individuallycustom-built or require a great deal of specialexpertise.

Product Life. Products with a short life may sellat a lower price than a similar product with alonger life.

Distribution Channel. Products or services solddirectly to the end user or consumer couldhave a lower price than the same product orservice sold through distributors.

Market Coverage. Products or services with broad

applications and used in a range of circum-stances usually hold a lower unit price thanproducts that cover narrow areas and have lesscompetition.

Desired Market Share. Selling at a lower pricethan competitors is one way to increaseoverall market share, but at the expense of alower margin. On the other hand, you couldcharge a higher unit price if market share isnot a concern and you’re targeting a largermargin.

Stage of Market Development. Prices tend to belower in a mature market with establishedcompetition and maximum economies ofscale. Prices tend to be higher in a new ordeclining market where volumes are notestablished or are declining.

Related Services. Product prices tend to be lowerif sold without any additional services, such asdelivery, training, installation, maintenanceand repair.

Product Turnover. Products with a fast turnovercan be sold at a lower price, compared withproducts with a low turnover.

Marketing Expense. Some products and servicesrequire a high degree of advertising, salespromotion and other marketing expenses.These could warrant a high price.

Profit Potential. Prices tend to be lower if theproduct or service brings a short-term profitor if the profit can be made over a long periodof time.

How do you know if your price is too high ortoo low? Prices may be too high if:

• No one buys the product or service and thesales volume is low or nonexistent.

• Your competition offers comparable goods orservices (based on an objective opinion) at alower price.

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• A slight price reduction significantly increasessales.

Prices may be too low if:

• You’re easily selling 100 percent of yourcapacity or output and your clients/customerswould pay more.

• Your price is below your cost. An exceptionto this is when you have deliberately pricedlow as a loss leader to attract more people andexpose them to your other products.

New products or services can bring up anotherset of considerations. When pinpointing a price fornew products or services, ask yourself the followingquestions. Is this a totally unique product or servicefor which there is no current competition? Is theproduct or service new to you, but similar tosomething already offered by others? Is it identicalto products or services already on the market?

New or unique products and services are diffi-cult to price for several reasons. No competitiveinformation is generally available for price com-parison. There may be no industry information,trade association, established terms of sale orestablished market. In a situation like this, deter-mine how consumers currently achieve the resultsof the new product or service. Then, determinewhat it costs them to achieve these results now.Can you provide consumers with the same resultsat a competitive price?

When introducing new products, you may incurhigher marketing and promotional costs and maywant to set a higher price to allow you to rapidlyrecover those costs. If this strategy doesn’t work,you can easily and rapidly lower prices.

Another school of thought suggests that you canset a lower price to gain rapid attention for a newproduct or service, then raise the price as marketshare grows.

Some products or services might be new to youor to a market but compete with similar items. Youcould use the similar product/service as a guide for

setting your price, either adding or subtractingfrom theirs based on any differences in product/service characteristics or functions.

For identical products/services the price shouldbe close to those of competitive products or ser-vices. The exception is if there is something specialabout your product that supports a higher price.

Discounts

Business owners often use discounts to inducecustomers to buy. For example, some sellers basediscounts on cost savings they realized on highvolume purchases. Others may offer a discount forearly payment. In some industries, discounts arecommon and it would obviously hurt sales if othersellers did not follow suit.

Cash Discounts. Cash discounts are most oftengiven to customers who pay within a certain periodof time—a savings of two percent, for example, forpayments made within 10 days. The discountshould be large enough to encourage buyers to payearly or at least earlier than payables without adiscount.

Cash discounts could bring about two results.First, the average customer might not take advan-tage of the discount. In these cases, the discountmay not be effective or is set too low to encouragepayment. Second, some customers may take thediscount, even if they don’t pay within the qualify-ing payment period. For example, you decide tooffer a two percent savings on payments received in10 days. The customer, however, pays in 30 daysand takes the discount anyway. If this happens, youmust decide to either allow the discount or ask thecustomer for full payment.

Volume Discounts. Volume discounts are basedon the unit quantity purchased and are offered toencourage larger purchases. For example, a tiresupplier may choose to sell two tires at $50 each orfour tires at $40 each. Volume discounts can beoffered as a normal business practice or for limitedperiods.

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Volume discounts have several advantages. First,large orders can reduce associated marketing costsfor selling, shipping, packaging and delivery. Thesecosts can then be passed on or shared with thecustomer. Second, if a seller offers a range ofproducts, discounts on the entire range can encour-age sale and turnover of less popular products.Third, special discounts can reduce stocks of slowmoving, low turnover inventory. Fourth, sellersmay take advantage of the discount and purchaselarger quantities.

Volume discounts can present problems, whichcan be remedied with advance planning. Forinstance, customers may ask for a discount eventhough their purchase falls below the qualifyingdiscount level. Another situation may arise wherecustomers purchase a large quantity at the lastminute, which causes inventory shortages orproduction scheduling problems.

Trade Discounts. Trade discounts also may becommon in some industries. For example, distribu-tors may receive five percent off a manufacturer’slist price or some other published price list. Tradediscounts also may be combined with volumediscounts.

Advertising Allowances. Advertising allowancesare promotional discounts that suppliers offer inreturn for some action by the buyer. An example ofthis is when a manufacturer offers a retailer a fivepercent discount in exchange for a specified typeand amount of advertising.

Section VII: Operations

Discuss operational activities in this section ofthe business plan. Address these key points if theyapply to your particular business.

Plan Capacity and Production Scheduling. Inthis section, manufacturing concerns shoulddiscuss the range of their facilities, includingproduction strengths and weaknesses. Also, includea diagram of the shop floor, develop a productionschedule and identify capacity on a unit basis.Indicate if you plan to subcontract any portion orall of your work and describe how you will select

subcontractors. Additionally, include a completelist of necessary equipment and the cost of each.

Cost and Inventory Controls. Develop andexplain inventory control procedures in this sec-tion. How will you track the flow of goods fromraw materials to finished product? Have you clearlyidentified the costs associated with your inventorylevels? Do you have alternative suppliers for criticalmaterials? If some materials are price sensitive,what is the projected impact on costs to producethe goods?

Invoicing and Collections. Produce a policiesand procedures manual for invoicing customersand collecting payments. Outline methods forestablishing the credit worthiness of customers,invoicing for goods delivered or services rendered,and collecting payments.

Personnel Requirements. Discuss your staffingrequirements. Clearly outline job descriptions,specific training needs, salary schedules and perfor-mance evaluations. Develop a personnel policiesmanual that clearly addresses issues related to yourbusiness’ daily operations, such as absenteeism,overtime, vacation and smoking.

Section VIII: Management Plan

A management plan is critical to your businessplan because it gives you a clear understanding ofyour management team’s strengths and weaknesses.The bottom line is that “people make the differ-ence.” Your management team needs the skills,experience and chemistry to successfully andprofitably guide your business. Review your team’sexpertise. Determine if they lack key managementtraits and outline plans to acquire the missingexpertise.

Organizational Structure. Draw an organizationchart outlining all full-time personnel and their jobtitles. This section should also include job descrip-tions, qualifications and compensation for allpositions.

Key Managers and Functions. Describe theduties and responsibilities of key personnel and

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management executives. Include detailed resumesthat explain pertinent business experience andexpertise. Also include a salary schedule and payperiods. Summarize the strengths and weaknessesof the management team. If appropriate, list theboard of directors and explain their level of in-volvement and contribution.

Section IX: Financial Data

The final section of your business plan will befinancial statements for your business. Thesefinancial statements integrate all your research intoreasonable, realistic numbers. You must demon-strate that you have fully tested the numbers basedon the assumptions and data you’ve collected. Thestatements you develop will demonstrate howthoroughly you have examined and researched yourideas. The focus of this section is to put togetherpro forma numbers (projections) that directly reflectthe market demands for your product or serviceand your costs to deliver it to the market.

You may want to develop three different finan-cial statement scenarios to illustrate your forecastperformance: the best case, worst case and mostlylikely case. Follow these guidelines to composeeach scenario (see Chapter 3: Cash Flow Require-ments for more information on calculating financialdata):

• Prepare your financial projections based onrealistic and credible assumptions. Thesecould include sales forecasts based on yourmarketing plan and materials costs andexpenses, such as advertising, taxes andinsurance.

• Discuss funding requirements to start yourbusiness, the sources of these funds and howthe proceeds will be used. These costs are inaddition to operating costs. They are notdeductible but are usually amortized over afive year period.

• List the equipment you plan to purchase andthe cost for each.

• Develop pro forma financial statements andprepare balance sheets for at least three years.Complete income statements (also known asprofit and loss statements) operating and cashflow projections on a monthly basis for thefirst year, quarterly for the next two years andannually thereafter.

• Review the break-even analysis you con-ducted in your feasibility study to determinehow much you must sell to cover your ex-penses or costs with no profit or loss.

• Calculate key business ratios based on ex-pected performance.

To develop your scenarios, you need to under-stand income statements, cash flow statements andbreakeven analyses (also discussed in Chapter 1:The Feasibility Study). Each serves a differentpurpose.

An income statement shows money transactionsover a definite period of time, one month or oneyear for example. It shows how much money camein (revenues) and how much money was paid out(expenses).

A cash flow statement presents a business’ cashposition by showing when money is collected andspent. The form Monthly Cash Flow Projection,produced by the U.S. Small Business Administra-tion (SBA Form 1100, 3-93), is an excellent tool. Acopy of this form is included in the back of thebook.

A break-even analysis determines the point wheresales and expenses are equal. It identifies the saleslevel or the volume of units you must sell to coveryour fixed and variable costs. If you exceed yourbreak-even point, then you are “in the money,”whereas if you fall below your forecast break-even,you are in a loss position.

The balance sheet gives a snapshot of the firm’sfinancial position. It shows your assets (what youown), your liabilities (what you owe) and your

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owner’s equity (your investment in the business).At any given time, your total assets should equalthe sum of the total liabilities and owners’ equity.That is:

Total Assets = Total Liabilities + Owner’s Equity

Key business ratios give insight into thecompany’s financial health. Ratios provide youwith data to evaluate your business’ liquidity orsolvency, activity efficiency and profitability. Thecurrent ratio measures the business’ ability to meetits current obligations. It is calculated by dividingcurrent assets by current liabilities. For example, acurrent ratio of 2.0 means that there is $2 incurrent assets for every $1 in current liabilities—orto say it another way, you have $2 available forevery $1 you owe.

Key business ratios also can be used for compari-son. You can evaluate the financial performance ofyour firm against its past performance, compareyour financial data with that of similar firms ormeasure your company’s performance againstindustry norms.

If you have thoroughly estimated your sales andexpenses, you should be comfortable with theresults derived from your scenarios. If your bottomline says that your business will be unprofitable,then re-check your figures. If, after re-evaluatingthem, the numbers still reflect problems, thenconsider this a warning signal. Remember, it’s yourmoney at stake. If the projected financial picturedoesn’t make sense on paper, more than likely thereal one won’t be any better. That doesn’t mean youshould abandon your quest to run your ownbusiness, but you ought to back away from thecurrent idea and look for other opportunities.Remember these words from the wise and experi-enced: To be successful, new entrepreneurs mustdevelop one essential skill—knowing when to walkaway.

Final Considerations

When packaging your business plan, you maywant to include a cover sheet and cover letter.Every business plan should begin with the business’and owner’s name, address and telephone number.If you intend to mail the plan to someone—to aprospective investor, for example—prepare anaccompanying cover letter. The letter should beshort, state your purpose and identify the resultsyou desire.

You should also consider visual aids. Charts andgraphs will make your business plan visuallyappealing and easier to read.

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Now that you’ve identified your product orservice, assessed your customers and competition,and established sales goals using a marketing/advertising plan, it’s time to test these ideas byconverting them into numbers. The test is called acash flow analysis.

The cash flow analysis helps you determinewhether your business will generate enough cash topay its daily, monthly and yearly expenses. It’simportant for this exercise to produce a positivefinancial outlook. If your planned numbers don’tpresent a favorable outlook, most likely the actualones won’t either.

The cash flow analysis is a planning tool. It helpsyou decide how much capital you need to launch,expand and maintain your business. The cash flowanalysis is commonly used to take snapshots ofwhere a business is headed financially. Even thesmallest business needs to know how well it isfaring at any given moment. Many businesses havea great deal of cash, yet may still be in financialtrouble. Others may be making a terrific profit, butcan be cash poor. The cash flow analysis alerts youto these and other financial conditions.

To see how a cash flow analysis can work as aplanning tool for your business, pull out the copy

of the cash flow form in the back of the book. Itwill be your guide.

This form, SBA Form 1100 (3-93) MonthlyCash Flow Projection is handy because it has aspreadsheet on one side and a complete set ofguidelines for completing the form on the reverseside. You can get additional copies from your localSmall Business Administration office.

Cash as used here refers to actual currency ormoney in your bank account on which you canwrite a check. It does not include accounts receiv-able (products or services sold, but unpaid).

Your first task is to identify all your sources ofcash. For a start-up business, this usually includessales, the owners’ investment (equity), bank loansand loans from owners or lenders. For existingbusinesses, funding sources may also includecollection of accounts receivable, sales of assets andrefunds from suppliers or vendors.

Completing the Form

Find line 1 under Pre-Start-Up and enter anycash your business has on hand. Now, in either thePreStart-Up position or under the appropriatemonth, enter the amount of cash you think you

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will receive on lines 1, 2(a), 2(b) or 2(c).

For instance, if you plan to invest $20,000 inyour business and make this money available toyour business in the first month of operation, thenput $20,000 under month 1 on line 2(c). If youplan to have cash sales in the second month of$8,000, then put $8,000 under month 2 on line2(a), and so on.

Note: The first time you perform this exercise,don’t include the money you plan to borrow. Thisexercise helps you determine what amount, if any,you should borrow.

After you have identified all sources of existingand incoming cash and placed the amount in theappropriate columns, add and complete lines 3 and4 to show Total Cash Receipts and Total CashAvailable. At this point, you should know howmuch cash you plan to have in each of the 12months from all sources. You’ll also know the totalreceipts expected from each source.

The next job is to identify how you plan tospend this money. Under Cash Paid Out (Item 5 inthe description area), write each category of expen-diture on the appropriate lines. Start with the itemsthat remain the same each month. These are yourfixed expenses and should be entered in Items 5(a)through (q). Fixed expenses include rent, wages,loan payments and insurance.

Next fill in the expenses that will vary directlywith sales revenues (variable expenses). For a retail,manufacturing, or wholesale company, inventoryplanning is most important. For service companies,payroll expenses, payroll tax expenses, and em-ployee benefits are most important. Considercontacting numerous suppliers of your inventory.Discuss payment terms (accounts payable), earlypayment discounts, and volume discounts. Forexample, 2% discount before 10 days; net 30 daysdiscount can substantially lower your cost ofinventory, thus increasing your bottom line profit-ability. 2/10 N 30 means that if you pay yoursuppliers within 10 days, your save 2% of the costof the inventory, but if you pay between 11 and 30

days, you must pay full price. Managing accountspayable is extremely important in order to receivequality merchandise in a timely way. Planning foryour inventory needs also allows you to obtainvolume discounts. For example, you can achieve a$15.25 cost savings by purchasing 100 units at $10each versus purchasing 101 units at $9.75 each. Ifyou are selling services to the public, planning yourtime and developing a personnel schedule allowsyou to minimize payroll expenses and taxes, whilestill having the ability to generate sales. For eachtype of service your company offers, estimate howmany man-hours are required to perform qualitywork. Multiply man-hours by hourly wage orsalary to calculate gross payroll. Payroll taxes arecalculated based on federal and state percentages ofgross payroll. Variable expenses like cost of inven-tory and payroll expenses are the largest cost ofdoing business, therefore estimating carefully willincrease your chances of profitability and success.

Other expenditures are your final type of cashoutlay for consideration. These occur on a moreinfrequent basis than fixed or variable expenses andshould be entered on lines 5(s) through 5(w).Other expenditures include such items as deposits,installation charges, leasehold improvements, officefurniture and equipment.

Monthly fixed and variable expenses can offerclues to many of these other expenses. As anexample, think about your office or store front.Although there is a monthly rent or lease associatedwith occupying this space, you will probably becharged a deposit and may need some additionalmoney for leasehold improvements.

The telephone is another example of how oneitem carries many cash requirements. There areseven basic costs associated with using this requiredbusiness tool:

1) Line costs (fixed monthly cost)

2) Long-distance costs (variable monthly cost)

3) Telephone equipment rental, lease or pur-chase (could be a fixed monthly cost or aone-time expenditure)29

4) Initial service deposit (one-time expenditure)

5) Line installation costs (one-time expenditure)

6) Wiring costs (one-time expenditure)

7) Name listing costs in yellow pages, etc. (fixedmonthly cost)

The cash flow analysis helps you examine yourbusiness idea and determine associated costs. Mostpeople can identify the cash that comes into thebusiness, but some people overlook the many wayscash is spent. To make the cash flow statement auseful management tool, be thorough in gatheringthis information.

If you don’t know what to expect, call a fewpeople. For example, call the telephone companyand ask what costs you can expect. From thisconversation, you can easily determine the linecosts, required deposits, an estimate of your instal-lation and wiring costs, your listings and yellowpages costs, and the various options availableregarding telephone equipment. Once you havethis information, you can decide to either rent,lease or purchase the telephone equipment.

Finally, some guesswork is necessary to estimateyour monthly variable costs, such as long distancecharges. Remember, as your business grows, someof your expenses will also grow. Don’t estimate thatyour business will double its volume while keepingvariable expenses constant. This not only consti-tutes poor planning, but doesn’t reflect well whensomeone—like a banker—reviews your cash flowstatement.

After you’ve identified your cash outlays (fixed,variable and other expenditures) and placed theamounts in the appropriate columns, completeItem 6 Total Cash Paid Out. Add your expendituresfor each month, and don’t forget the 14th columnTotal. Add the numbers in each row to create atotal for each expense type.

Next, subtract the Total Cash Paid Out (Item 6)from Total Cash Available (Item 4) to arrive at CashPosition (Item 7). Do this from left to right because

the ending cash position of one month becomesthe Cash-On-Hand (Item 1) for the followingmonth.

After you calculate the amount for each column,look at the line titled Cash Position (Item 7). If thenumbers are all positive, then you’ll have enoughcash on hand to pay your expected obligations forthe year. If any of the numbers are negative, thenyou plan to spend cash you don’t have, and you’llneed additional capital to stay open for business.Consider this negative number as the minimumfunding amount, because rarely are reality and yourcash flow statement identical. Additionally, manybusinesses cannot sustain a cash flow great enoughto pay their own way within the first year, so itwould be wise to evaluate years two and three aswell.

Next, build a reasonable cushion of funds in caseyour plan doesn’t work as expected. By combiningthis cushion—the minimum funding amount andany cash shortfall in years two and three—you canidentify the additional investment or borrowedfinances you need to give your business a fightingchance. Most banks will allow you to add a 3% to5% cushion to your minimum funding require-ment.

This exercise may seem complicated, but youneed to work through it alone. If you need somehelp, contact your local Small Business Develop-ment Center or see a certified public accountant.But do the work yourself.

Why is it important for you to complete thecash flow statement on your own? First, it’s yourbusiness and this tool helps you better understandyour financial position. You need to learn the cashflow statement inside and out. Review the cashflow statement at least twice each month. It shouldbe reviewed at the beginning of each month to seethe goal. Then it should be reviewed at mid-monthto determine if you are on target with the projec-tion. Update and use it constantly. It allows you tosee your business’ future while you still have timeto change it.

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Second, as a small business owner, you need toget used to doing things on your own. Until yourbusiness becomes profitable, you must be conserva-tive about how you spend your money. Thismeans, at least for a while, you’ll have to wear thehat of president, planner, accountant, operationsmanager, sales executive, delivery person andalmost every other job in your company.

The cash flow statement can also be convertedinto a break-even analysis by playing some what ifgames with the revenues and variable expenses. Bymanipulating these numbers to make youryear-end additional cash required total close tozero, you can define your company’s minimumsurvival level.

The cash flow statement can also double as abudget. By continually comparing what actuallyhappened to what you expected, you not onlyimprove your ability to predict the future, but youalso gain insight into those areas that are “out ofcontrol.”

If you have additional questions about the cashflow statement, check the guidelines on the reverseside of the SBA Form 1100. If you need extracopies, check the Miscellaneous section at the endof this booklet for the SBA office nearest you.

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The next step in starting your business is toselect the best legal form for your new businessventure. The choices include sole proprietorship,partnership, limited liability partnership, C Corpora-tion, S Corporation and limited liability company.

Sole Proprietorship

Most new businesses are sole proprietorships forseveral reasons: 1) It’s normally the easiest and leastcostly way to organize, 2) It does not requireformal legal papers, and 3) It does not require aseparate tax return (profit and loss are reported ona separate schedule within your personal taxreturn).

In many cases, a sole proprietorship is a goodway to get started—but this business form hasserious drawbacks. Under a sole proprietorship,business ownership is nontransferable and the lifeof the proprietorship is limited to the lifetime ofthe proprietor. Additionally, this business formmakes no legal distinction between your personaland business debts.

The latter point can be financially devastating.Without legal separation, the business’ assets andliabilities are also the proprietor’s personal assetsand liabilities. Consequently, anything the propri-

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etor owns of value (with some exceptions) is up forgrabs against outstanding debts and other liabili-ties.

Partnership

The next step up the ladder of complexity andexpense is the partnership or general partnership. Apartnership can exist when two or more people orbusinesses join together to operate a business. Thisbusiness form may be more costly than a soleproprietorship if the partners require a writtenpartnership agreement.

The partnership agreement’s sole purpose is toestablish the rules and regulations by which thepartners can conduct business. Although it is notmandatory, an attorney’s help in this endeavor maybe useful. The agreement does not determinewhether a partnership actually exists, but commonlaw and the IRS asserts that if a business looks,smells and feels like a partnership, then it probablyis one.

Besides the additional costs of establishing apartnership, you should carefully consider theconcern of unlimited liability. Under the generalpartnership a separate business entity does exist,but creditors can still look to the general partners’

Chapter 4: Legal Issues

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personal assets for satisfaction. And even worse, insome cases, a claim against one general partner maybe satisfied with the personal assets of the othergeneral partner.

Limited Liability Partnership

The limited liability partnership is an alternativebusiness form. It is attractive for certain profes-sional businesses because of the concern overunlimited liability for all partners in a generalpartnership. The limited liability partnership issimilar to the general partnership, but eachpartner’s unlimited liability may exclude obliga-tions resulting from the professional mistakes madeby or malpractice actions against the partners. Thepartners are generally responsible for all claims andliabilities resulting from all other partnershipactivities.

To ensure that all legal requirements are satis-fied, it’s a good idea to consult an attorney toorganize this type of partnership and prepare theappropriate documents.

Corporation

The corporation is the most complicated andcostly business form. Yet, the expense, complexityand extra work are often well worth the effort. Theprimary advantage of incorporating lies in the areaof liability—a corporation has its own legal iden-tity,—one completely separate from its owners. Thecorporation safeguards the business owner’s per-sonal assets, and this protection alone justifies theadditional expense and paperwork.

The corporation does have some negativeaspects, however. First, it is more costly, partiallybecause it is wise to seek guidance from an attor-ney. Second, you must obtain a charter (approval)from your state to operate a corporation. Addition-ally, the owners must deal with numerous local,state and federal regulations and reports duringdaily business operations.

An attorney normally files the forms required bythe state to obtain your charter. Your attorney can

also provide other necessary documentation.

Remember, you must keep a corporation in goodstanding every year by submitting the requiredminimum documentation and fees. If not, yourcorporate shield can be stripped away, leaving youindividually vulnerable.

From a taxation standpoint, you need to con-sider several points regarding corporations. Thereare two corporate forms to consider: 1) C Corpora-tions and 2) S Corporations.

The original corporation business form is aCorporation. A few of its characteristics are:

• Its maximum tax rate is significantly lowerthan for an individual.

• The shareholders (owners) are not taxedpersonally for profits, nor do they benefitfrom any losses.

• The owners pay personal taxes on any salariesand dividends. The bad news is that divi-dends are taxed twice—once to the corpora-tion and again to the individual.

Many small businesses solve this dividendproblem by electing to be an S Corporation. Thecharacteristics of this business form include:

• Profits and losses are treated as if it were apartnership.

• Distributions to share holders are generallyfree of tax.

• There is no added cost to the incorporationprocess or filing of Tax Form 2553.

The S Corporation allows you the protection ofa corporation with some of the financial flexibilityof a partnership. The election is relatively simple tomake, but it needs to be timely, otherwise yourpocketbook may be hit seriously. If you thinksomeone is handling this for you, here are a fewwords of warning: Don’t rest easy until you actuallysee both the election request and a letter from the

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IRS authorizing the S Corporation. And don’tforget to include both your signature and that ofyour spouses’ on the election form.

In the long run, the key to your decision is theadditional cost and paperwork burden of incorpo-rating in comparison to the liability and separateentity issues of other business forms.

Limited Liability Company

The Texas Legislature recently created a newlegal form, the Limited Liability Company (LLC).This business form provides owners with theliability protection of a corporation and, if properlyestablished and operated, the federal income taxbenefits of a partnership.

The LLC is formed in a similar manner as acorporation. The owners must file articles oforganization with the Texas Secretary of State andpay the required filing fee. The name of the com-pany must include the words Limited, L.C., LLC,or Ltd. The company’s owners are called members,not shareholders, and the directors are calledmanagers.

The major advantage of the LLC is that theindividual member or manager is usually notpersonally liable for the LLC’s debts, obligations orliabilities. The LLC, like the corporation, is alwayssubject to attempts to pierce the liability shield andhold the individual member or manager personallyliable.

To ensure that you satisfy all legal requirements,hire an attorney to organize the LLC and preparethe appropriate documents.

Additional Legal Paperwork

Regardless of the legal business form you select,you must complete and file IRS Form SS-4.

The Assumed Name Certificate legally permitsyou to conduct business under a unique nameother than your birth name or your corporatename. To obtain the certificate, go to your county

clerk’s office and ask for How to Register YourBusiness Name in Texas, produced by the TexasDepartment of Commerce. It not only tells youhow to proceed, but also answers many commonlyasked questions.

The IRS requires an SS-4 form, which issuesyour business a tax identification number. You willfind an explanation of the requirements and theuse of this form in IRS Publication 583. Aftercompleting the form, you can expedite the processby calling the IRS in Austin. An IRS agent will askfor the information over the phone. If the informa-tion is complete and you are an authorized agent ofthe business, an identification number will beissued immediately.

Note: If you need a copy of other IRS forms, call800/829-3676 or drop by any IRS location.

License and Permits

Your business may also require certain profes-sional or occupational licenses to operate. Forinformation on those that may apply to yourbusiness, contact the Texas Marketplace, BusinessInformation and Referral Specialists at 800/888-0511. Ask for a free copy of A Guide to TexasBusiness Licenses and Permits.

Patents

A patent is a right of ownership granted by agovernment to an inventor. In the United States, itexcludes others from making, using or selling thepatented invention or name for a limited period oftime. Existing patents may restrict those rights. Ifpatent protection is desired in other countries, theinvention must be patented in each of thosecountries.

Besides having the right to exclude others frommaking, using or selling the invention, the U.S.patent owner has other rights, such as grantinglicenses of the patent right to others, filing alawsuit to enforce the patent rights, assigning orselling the patent and transferring the patent to abeneficiary under a will.

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In the U.S., there are three different types ofpatents: utility, design and plant patents. The mostcommon is the utility patent, which grants a17-year exclusionary right for new and usefulinventions. Design patents cover new, original andornamental designs. Plant patents are directedtoward distinct and new plant varieties. Any personwho invents or discovers any new and usefulproducts, machine or composition of matter, orany new and useful improvements thereof, mayobtain a U.S. utility patent. A patent may also beobtained for the conception of an invention.

Obtaining a U.S. patent is a two-step process.First, a search should be made to see if the inven-tion is patentable. Second, a formal patent applica-tion must be submitted. The search, if performedwell, will indicate patentability, reveal conflictingsituations, help plan the scope of the patent protec-tion sought and, in general, be critical to draftingthe patent application itself. This need for anexpertly done search suggests the inventor shouldseek a patent attorney.

Some inventors may wish to make a preliminarysearch of patents already granted to see if someoneelse has patented what they are considering beforeseeking expert legal advice. A system of PatentDepository libraries throughout the U.S. facilitatessuch searches. Information, forms and fees relatedto the submittal of a patent application and otherinformation about patents and patent publicationscan be obtained by writing the U.S. Department ofCommerce, Patent and Trademark Office, Wash-ington, D.C. 20231.

There is filing fee for a basic utility patentapplication. Additional charges are made forclaims, depending on the number in the applica-tion, and for patent application revisions. A utilitypatent issuing fee is required when the patent isgranted. In addition, maintenance fees are due in 31/2, 7 1/2 and 11 1/2 years, respectively, after theutility patent is issued to keep it in force. Nearly allthese fees are reduced by 50 percent when theapplication is a small entity, such as an indepen-dent inventor or a small business.

Trademarks and Service Marks

The field of trademarks and service marks is anarrow area of the law that is frequently overlookedand often plagued by popular misconceptions.

It is commonly believed that filing an “assumedname” or “d/b/a/” with the county clerk willreserve and protect a trademark or a service mark.It is also generally assumed that incorporation of abusiness with the secretary of state protects a tradename. These acts performed by the county clerkand secretary of state are irrelevant to the trade-mark protection. A trademark cannot be reserved;trademark rights can only be acquired throughactual use.

Without exception, every business uses somekind of brand name or logo design as a means ofidentification, even though these words and sym-bols may not be formally recognized as a trademarkor service mark. Trademarks, also called brandnames, are used by merchants and manufacturersto identify goods.

Service marks identify services rather thangoods. If a business is not manufacturing a prod-uct, it will typically be offering some type ofservice.

The law that protects trademarks and servicemarks is designed to prevent customer confusion,and to prevent unfair competition by a competitorwho capitalizes on the goodwill and reputation ofanother.

If a federal registration has been issued by theUnited States Patent and Trademark Office, theletter R enclosed-within-a-circle should appear as asuperscript adjacent to the mark to obtain the fullmeasure of federal protection. It is possible toregister a mark under the trademark laws of each ofthe 50 states. However, state registration alone doesnot confer the right to use the R-within-a-circlesymbol. The superscripts TM and SM serves as awarning to others that the user considers the markto be exclusively his or hers.

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A Texas trademark registration and a federalregistration are constructive notice of theregistrant’s claim of ownership. A federal registra-tion provides coast-to-coast protection. A Texasregistration only provides protection within thestate. Federal registration improves with age; if atrademark has been in continuous use for fiveconsecutive years after issuance and if the appropri-ate affidavits have been filed, the mark becomesincontestable as a matter of law.

If a mark is registered and a third party is think-ing of using a similar mark, the third party willtypically locate the registered mark during its initialtrademark search. Selection of a new trademark isan exciting, but sometimes frustrating, experience.In most situations, several potential marks will beunder consideration for ultimate selection as thenew trademark.

In Texas, a trademark application will typicallybe examined within 30-90 days after it is receivedin the secretary of state’s office. The examiner willconduct their own search to determine if there isany conflict. It currently takes an average of 13months to get a federal registration.

For more information on trademarks in Texas,contact:

Secretary of StateState of TexasCorporate SectionP.O. Box 13697Austin, TX 78711Phone 512/463-5770www.sos.state.tx.us

For more information on federal trademarkregistration, contact:

The Public Service Center at the Patent andTrademark Office

Phone 800/786-9199www.uspto.gov

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During your feasibility study you considered thevarious licenses and permits you may require tooperate your business. The Texas Marketplace,Business Information and Referral Specialists at theTexas Department of Economic Development canassist you in obtaining the appropriate permits tooperate within Texas.

The State of Texas defines a permit as “anylicense, certificate, registration, permit or otherform of authorization required by law or by stateagency rules to be obtained by a person in order toengage in a particular business but does not includea permit or license issued in connection with anyform of gaming or gambling.”

Specifically, the Business Information andReferral Specialists:

• Refer you to appropriate federal, state andlocal agencies. It can also facilitate contactbetween you and state agencies responsible forprocessing and awarding permits.

• Provide a research library of resources onstate agency regulatory procedures.

• Furnish a 25-day turnaround permit packagethrough the comprehensive application. This

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is designed for businesses requiring multipleapplications for Texas licenses or permits. Ittargets the agencies the applicant needs tocontact and the type of information requiredto process the application.

Operating in Texas

A non-Texas company currently doing businessin other states may obtain the right to transactbusiness in Texas by contacting the Office of theSecretary of State. Companies have the option offiling domestic incorporation papers or obtaining aCertificate of Authority. For more informationcontact:

Office of the Secretary of StateP.O. Box 12697Austin, Texas 78711-2697Phone 512/463-5770Fax 512/475-2761www.sos.state.tx.us

A Texas business that chooses not to incorporatemust file a fictitious name statement ordoing-business form with the county of recordwhere the business is conducted.

Here are some of the other available permits,37

examples of their applications and offices to contact.

Agricultural PermitsThese vary depending on each specific business

activity and industry. If you plan to produce seed,contact:

Texas Department of AgricultureSeed Quality OfficeP.O. Box 629Giddings, Texas 78942Phone 409/542-3691www.agr.state.tx.us

Business PermitsIf you are in the debt collection business, contact

Federal Trade CommissionDallas Regional Office1999 Bryan St. Suite 2150Dallas, Texas 75201-6808Phone 214/979-0213http://www.ftc.gov

If you need to register your weight or measuringdevice, contact:

Texas Department of AgricultureMetrology Labs / Weights and Measures119 Cumberland Rd.Austin, Texas 78704Phone 512/462-1441Fax 512/475-1642

A Guide to Texas Business Licenses and Permitsproduced by the Texas Department of EconomicDevelopment offers detailed information aboutbusiness permits.

Environmental, Industrial, Manufacturing andCommercial Permits

There are certain permits necessary to operatemanufacturing, industrial and commercial busi-nesses. For instance, to obtain a registration for arecycling facility contact:

Texas Natural Resource ConservationCommission

Municipal Solid Waste Div.12100 Park 35 CircleAustin, Texas 78753Mailing Address:P.O. Box 13087Austin, TX 78711-3087Phone 512/239-1000Fax 512/239-6717http://www.tnrcc.state.tx.us

If you need a construction permit for a facilitythat emits air contaminates, contact:

Texas Natural Resource Conservation Commis-sion Operating Permit Division

12100 Park 35 CircleAustin, Texas 78753Mailing Address:P.O. Box 13087Austin, TX 78711-3087Phone 512/239-1334Fax 512/239-1070http://www.tnrcc.state.tx.us

For a brewer’s permit, distiller’s license foralcoholic beverages, rectifier’s permit ormanufacturer’s permit, contact:

Texas Alcoholic Beverage CommissionLicensing Permits DivisionP.O. Box 13127Austin, Texas 78711-3127Phone 512/206-3333Fax 512/206-3399www.tabc.state.tx.us

Professional PermitsThere are a large number of professional permits

issued by an equally large number of agencies. Forexample, to obtain a permit as a licensed dietitian,contact:

Texas State Board of Examiners of DietitiansTexas Dept. of Health Dietitians Licensing1100 W. 49th St.Austin, Texas 78756-3183Phone 512/834-6601

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Fax 512/834-6677www.tdh.state.tx.us/yellow/d.htm

To obtain a social worker certificate, you canapply by first contacting:

Texas State Board of Social Workers Examiners1100 West 49th StreetAustin, Texas 78756-3183Phone 512/719-3521Fax 512/834-6677www.tdh.state.tx.us/yellow/s.htm

Transportation PermitsThere are numerous offices to contact for

transportation permits, depending on the specificpermit you need. For a specialized motor carriercertificate, a commercial vehicle registration(including all tow trucks) or a broker’s license,contact:

Texas Department of TransportationMotor Carrier DivisionP.O. Box 12984Austin, TX 78711-2984Phone 512/463-8585Fax 512/465-3521http://www.dot.state.tx.us

For a permit to transport used and scrap tirecontact:

TNRCCMunicipal Solid Waste Management Div.12015 Park 35 CircleAustin, TX 78753Mailing Address:P.O. Box 13087Austin, Texas 78711 -3087Phone 512/239-1000Fax 512/239-6717

There are many more permits required forbusinesses. Refer to Texas Department of Eco-nomic Development, or Business Information andReferral Specialists at:

Texas Department of Economic Development

Business Information and Referral SpecialistsP.O. Box 12728Austin, Texas 78711Phone 512/936-0082Fax 512/936-0440Phone 800/888-0511www.tded.state.tx.us

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When your business begins to grow, you mayneed to expand your staff. Your first questions willbe: Do you hire full- or part-time employees or doyou hire subcontractors to perform specific projectson an as- needed basis?

Contract labor requires less paperwork, but keepin mind, there are important distinctions betweencontract labor and employees. If you incorrectlyclassify your workers, you may end up paying somebig dollars to the IRS and the Texas WorkforceCommission (TWC).

Employee/employer relations typically displayone or more of these traits:

• Job training is necessary

• Employer holds supervision and payrollresponsibilities

• Employer sets work hours

• Workplace is restricted (that is, employeemust work on site)

• Employer defines employee’s work priorities

• Wages are paid by the hour or some type ofsalary arrangement

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• Employer pays expenses incurred on the job

• No risk of loss is applicable to the worker.(This refers to the recourse an employer hasregarding work performance. While anemployer can fire an employee for inadequatework performance, an employer can’t legallyforce an employee to work without pay. Witha contractor, if the work is not performedaccording to specification, the contractorcould face legal action for breach of contract.)

Most jobs are categorized as employer/employeerelationships. From TWC’s perspective, anyonewho provides services for a business is presumed tobe an employee until proven otherwise. Therefore,when you classify someone as contract labor, youare almost guilty of misclassification until proveninnocent. The following guidelines can help yousubstantiate that your workers are independentcontractors.

A contractor usually:

• works by the project

• determines the tasks to be accomplished andthe order in which they will be accomplished

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• establishes work hours

• also works for others

• has own trade or business name

• is responsible for paying taxes resulting fromcompensation.

Besides these rules, answering this questionshould help you distinguish a contract laborer:Does an employee within the company perform thesame job? If the answer is yes, then the worker ismost likely an employee. It is irrelevant thatsomeone only works part-time or that the job onlylasts for a specific period (such as six weeks). Forexample, if a female employee is on maternity leaveand someone is hired to fill-in during her absence,that person is an employee, not a contract worker.You can’t have two people doing the same workand classify them differently.

As you can see, the distinction between being anemployee or a contractor is not black or white.Additionally, it’s not the theoretical relationshipdescribed on paper that determines the correctstatus (employee or contractor), but the actualday-to-day practice of the work.

It’s not a good idea to classify independentcontractors as employees to avoid risk. And it’s anequally bad idea to classify employees as indepen-dent contractors to avoid paperwork. If the TWCand IRS determine that your contractors areemployees, both agencies will quickly beat a pathto your door to assess applicable back taxes, penal-ties and interest.

You can file Form SS-8 with the IRS, and theywill classify the individuals in question.

Forms

For contract labor you must complete IRS Form1099-MISC. Refer to IRS Form XX for a descrip-tion of contract labor.

If you decide to hire full- or part-time employeethe forms you will complete and file include:

• TWC Forms C-1 and C-3

• IRS Form W-4 for each employee

• INS Form I-9

• IRS Forms 941, 8109, 940 and W-2

TWC Form C-1TWC uses the Employer Status Report to

determine if your business has incurred liabilityunder the Texas Unemployment CompensationAct. Every person or employing unit that operatesa business organization in Texas must file an initialC-1. TEC requires subsequent filings if the busi-ness entity significantly changes its legal structure.It is a fairly easy form to complete. Keep a copyhandy because much of the information will berequested on other forms.

TWC Form C-3This quarterly report notifies TWC of the

amount of taxable wages for each employee and thetotal state unemployment taxes due. This taxpayment is made payable to TWC and is sent withthe completed form. To fill out the form, you willneed each employee’s name, social security numberand total wages paid during the quarter.

Form W-4Ask all your employees to sign a completed and

dated W-4. Keep these with your personnel files asa record of each employee’s proper name, addressand social security number. The W-4 also tells theemployer how many exemptions to consider whenwithholding federal income tax. This form is alsohelpful should there be a dispute with the IRS orthe employee.

INS Form I-9Another item for the personnel file is the Immi-

gration and Naturalization Services Form I-9. Thispaperwork ensures that employers do not hireillegal aliens. The form is not difficult to fill out,but it must be completed within three workingdays after the employee begins work. Additionally,if you cannot obtain all the necessary documenta-tion on the hire date, it must be submitted within

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21 days. This information can include any one ofthe following.

INS Support DocumentationU.S. Citizen

United States PassportOR

Certificate of citizenshipOR

Certificate of NaturalizationOR

State issued driver’s license, ID or other officialdocument with a photo

PLUS—original social security card

OR—birth certificate with seal.

Foreign NationalsAlien Registration card with photo

ORUnexpired foreign passport with attached

authorizationOR

Unexpired INS Employment Authorization, PLUS—a state issued driver’s license

OR—ID or other official document with photo.

The penalties for failing to comply with thisrequirement are high. The possibility of incurringthousands of dollars in fines certainly justifies theextra trouble of compliance.

IRS Form 941This quarterly report details the wages, federal

income tax and social security tax applicable toyour company’s payroll. It tells the IRS what yourpayroll tax liability was for the quarter and when itwas due for payment.

NOTE: Your payroll deposits should be madepayable to your bank using IRS Form 8109. Youwill find the schedule for making these deposits onthe back of IRS Form 941.

IRS Form 940This annual report to the IRS computes the

total year’s federal unemployment tax (FUTA)liability for your company’s payroll. It differs fromthe TWC report in that wages are submitted intotal, not per employee. Payment for FUTA ismade to your bank using IRS Form 8109. Gener-ally, you can take a credit against the FUTA tax foramounts you have paid into the state unemploy-ment fund, but this credit is limited to 5.4 percentof taxable wages.

IRS Form W-2You’ve probably been on the receiving end of

this form. As an employer it is now your responsi-bility to report payroll information annually to theSocial Security Administration and to your em-ployees.

NOTE: Owners of sole proprietorships andpartnerships cannot be classified as employees.Owners of corporations can, however, and youshould send these forms at the end of the year tothe Social Security Administration, not the IRS.

Other IRS FormsIf you need copies of other IRS forms, call 800/

829-3676 or visit the IRS website at http://www.irs.ustreas.gov and if you need tax assistancecall 800/829-1040. For hearing impaired call 800/829-4059. To order a CD ROM with current yearand prior year tax forms call 212/512-1800 or visithttp://www.access.gpo.gov/su_docs

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As discussed in Chapter 2, after preparing a proforma income statement and filling out a cash flowstatement, you should know if you need additionalfunding to pay your business bills.

Additional capital can come from private inves-tors or loans. Friends and relatives are also a pos-sible source for funding because they know andbelieve in you and can be convinced of the worthi-ness of your idea. If you still need money afterexhausting this avenue, the two possible sources ofcapital are:

• A traditional commercial loan, or

• A bank loan guaranteed by the Small Busi-ness Administration.

Working with your FinancialInstitution

Before you get excited about borrowing money,realize that financial institutions are not in thebusiness of taking risks; consequently, they havesome conservative and basic guidelines. For ex-ample, a general rule about how much money afinancial institution lends is: the owners/investorsmust supply one-half of the needed capital.

What this means is that if your business needs$50,000 in start-up capital, a financial institutionexpects you to invest at least $25,000. That waythe lender knows that you have a great deal to loseif the business fails.

Assuming that you and your investors/partnerscan come up with at least 50 percent of the money,you must then satisfy some common loan criteria.They are known as the Five C’s: Capacity, Collat-eral, Credit, Character and Conditions.

Capacity represents the customer’s ability torepay the loan based on the business’ cash flow.Capacity should be demonstrated on a historical(financial statements, tax returns, etc.) and pro-spective (projections) basis. (Start-up businessesobviously don’t have historical information toconsider.) Other areas can influence capacity aswell, such as the state of the current economy,industry trends and any anticipated industrygrowth. These factors give credence or add skepti-cism to the projection viability.

Collateral is a familiar term. As defined byWebster’s, it is “property pledged by a borrower toprotect the interests of the lender.” This covers thegamut from your business’ operational assets (suchas accounts receivable, inventory and equipment)

Chapter 7: Financing Options

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to certificates of deposit (CDs)—all of which maybe used as security against borrowed money.

Credit answers the question: Does and will thecustomer pay bills on time. Lenders normallyinvestigate both the company’s and the owner’s pastcredit history. Both need to be spotless. If there areblemishes, lessen the impact by warning the loanofficer and giving a logical, defendable explanationup-front. No one likes to be surprised with thiskind of information.

Character may be the most subjective ingredientwithin the formula. It encompasses the lender’sperceptions and analysis of the borrower’s reputa-tion and integrity, background and experience, andfinancial sophistication, involvement and persis-tence.

Here’s one formula you can count on: Loans aremore likely to be made even on marginal transac-tions if the lender believes in the customer.

Conditions are the terms of the loan and include:

• loan amount, amortization and renewal dateif you are seeking a revolving or short-termloan

• interest rate (if floating, based on what andadjusted when)

• credit policies established by the financialinstitution. For example, advances on ac-counts receivable may not exceed 75 percentof the current amount receivables balance(those less than 60 days old).

To help the lender evaluate your Five C’s, youshould prepare a loan request that builds an objec-tive case as to why your business will succeed. Itshould also offer a logical reason as to why thelender should make the loan.

Your business plan is a good starting place. Itgives an in-depth explanation of your business andwhy it will be successful. Discuss the type or typesof financing you need. Assets such as cash, ac-counts receivable, and inventory should be fi-

nanced with short term debt. Assets such as equip-ment, vehicles, and real estate should be financedwith long term debt. A term note is most often 1to 7 years of length and requires monthly paymentsof principle and interest. Financing cash andinventory with long term debt increases yourinterest expense, and financing high dollar amountequipment on a line of credit makes your monthlypayments of principle and interest very large. Togive a logical reason for making the loan, describehow you will use the loan proceeds.

The Loan Request Package

Your loan request should also describe how youwill repay the lender. This is best illustrated withcurrent financial statements and projections. Yourloan request package should include balance sheetsand income statements for the past three years,company tax returns and your personal financialstatement.

If you are starting a business, you should createpro forma financial statements (projected balancesheet and income statements) for at least three fullyears of operation. When forecasting a pro formafinancial statement for an existing company or aprojection for a new company, you should showthe business’ breakeven point (as discussed inChapter 2).

Your request can also gain credibility if youprepare best- and worst-case scenarios. This showsthe lender that you have considered all aspects ofyour loan request. Supporting documentation forthe pro forma financial statement or projectionswill also help.

Your loan request should also include:

• articles of incorporation, bylaws, corporateresolutions, partnership agreements and/orassumed name certificates

• resumes of business’ owners and managers

• business plan

• current financial statements for the past 9044

days and the past three fiscal years

• tax returns for the past three years

• a clear description of the loan’s intendedpurpose

• a list of the company’s assets and debts and alist of assets that can be used as collateral

• current financial statements of any relatedbusinesses in which the business owners areinvolved

• owner’s financial statements and those ofanyone who is guaranteeing the loan

• list of the top three major customers orprospective customers

• list of at least three current suppliers andthree current creditors or credit references

• appraisals on fixed assets and real estate

• photographs of the operating facility andmajor equipment

• copies of current contracts

• accounts receivable aging for all accountsreceivable, noting any potential bad debts

• listing and valuation of any inventory listedon financial statements.

NOTE: The less information the lender mustask for, the more “character” (Five C’s) you earn.

Environmental issues are a growing concern, andmany financial institutions expect you to addressthe disposal of environmentally sensitive productsor waste. This is especially true when real estate isinvolved. If you default on the loan and the lendertakes over property, the lender may not onlybecome responsible for its clean-up, but also maybe held liable for damages associated with thecontamination.

After you assemble the supporting paperwork,tie the loan package together with a cover letter.This letter should be a synopsis of the loan requestand basically propose the transaction to the lender.Clearly state your plans and how this loan willallow you to succeed.

Now you are ready to make appointments withfinancial institutions. Don’t choose just one lender.Talk to several. Remember, when selecting yourlender, you are also selecting your banker. You wantto choose a banker you are comfortable with andwho has the products and services you need foryour business.

Don’t be discouraged if the first banker turnsyou down. If you have a start-up business or ayoung company, many lenders may be uncomfort-able with your loan proposal. Most likely, you willhave to contact several lenders before you find onethat meets your needs.

SBA Guaranteed Loans

A bank loan guaranteed by the U.S. SmallBusiness Administration is similar to a traditionalcommercial loan. Both loans are processed andfunded by and repaid to financial institutions, butthey differ in that the government guaranteesrepayment of some percentage of an SBA loan. Ifthe debtor defaults on an SBA loan, the govern-ment pays the guaranteed portion after liquidatingthe assets you pledged.

An SBA loan gives the bank a second source ofrepayment. However, the financial institution oftenuses the same or similar loan criteria for both SBAloans and traditional commercial bank loans.

A financial institution avoids making loanswithout collateral. The borrower must have a goodidea, good credit and a demonstrated ability torepay the loan. With an SBA loan, however, afinancial institution may relax some portion of itslending criteria. For example, the financial institu-tion may offer a longer term for an SBA guaran-teed loan.

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A financial institution may recommend a loan tothe SBA if the business has had an irregular earningpattern. An SBA loan may also be recommendedwhen a business’ collateral differs from what theinstitution normally lends against or if the amountof equity in the company is less than the lendinginstitution’s typical criteria for granting the re-quested loan amount.

An SBA guaranteed loan is advantageous for thefinancial institution because it does not countagainst its reserve requirement. As a result, thefinancial institution can make more SBA loansthan traditional commercial loans.

It is important to understand, SBA guaranteedloans are not government grants or giveawayprograms. Financial institutions recommend theloans and the SBA approves them. Two approvalsmust be received before the SBA loan can close—one from the financial institution and one from theSBA.

Other Financing Resources

Many counties and cities in Texas have fundingsources that may be available to you. Your eligibil-ity for these funds depends on many variables, suchas your business’ size, industry and the productsyou produce or services you provide. For moreinformation, contact your local county or cityofficials or the local chamber of commerce.

Lists of sources of capitalU.S. Small Business AdministrationRegional Office Phone: 800/827-5722

Department of AgriculturePhone: 202/720/27911400 Independence Ave. SWWashington, DC 20250www.usda.govwww.rerdev.usda.govwww.usda.gov/mission.rd.htm

Texas Department of AgricultureTexas Agricultural Finance AuthorityPhone 877/428/7848

Mailing Address:P.O. Box 12847Austin, TX 78711http://www.agr.state.tx.usType of Program: Linked Deposit Program,

Young Farmer Loan Guarantee Program,Farm and Ranch Program, Rural Develop-ment Finance Program and the Rural Devel-opment Finance Program: Municipal FinanceOption.

EX-IM BANKSouthwest1880 South Dairy Ashford II, Suite 585Houston, TX 77077Phone 281/721-0465Fax 281/679-0156

www.exim.gov

Type of Program: Export-related working capitalloans

Venture CapitalThere are several directories of institutional

venture capital firms in the United States and thetypes of investments they seek. One or more ofthese may be available at your local library. Ex-amples of these are Pratt’s Venture Capital Guidepublished by Venture Economics Inc. and theVenture Capital Directory published by OnlinePublishing.

Private InvestorsThe network listed below provides a

cost-effective method for small businesses to gainexposure for their business investment opportuni-ties. It is composed of investors seeking opportuni-ties in small businesses in Texas.

The Capital Network3925 West Braker Ln., Suite 406Austin, Texas 78759Phone 512/305-0826Fax 512/305-0826www.thecapitalnetwork.com

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One of the responsibilities of starting or operat-ing a business is determining the type of taxes yourbusiness should pay. Many federal, state and localtaxing authorities exist and you should consultwith several agencies to obtain complete informa-tion. This booklet cannot present an entire list ofpotential taxes, but a summary of major state andfederal organizations and key taxes is presentedbelow. Local taxes are not addressed because eachlocale holds different taxing requirements. Toclearly understand your tax liabilities, call taxingauthorities in your area.

Federal

Federal Income Tax. Every business must file anannual return with the Internal Revenue Service.Separate forms or schedules apply depending onthe type of business. The IRS has excellent, easy toread publications to help you understand the taxsystem. For more information call the local officeslisted in your phone book or 800/829-1040.

Federal Self-Employment Tax. This tax appliesto self-employed workers and is their contributionto Social Security. It is generally paid by soleproprietors, self-employed farmers and members ofa partnership. Explanatory publications are avail-able from the IRS.

Federal Employment Taxes. Any business thathas employees usually pays these taxes. Theyinclude federal income tax withholding, socialsecurity (FICA), Medicare taxes and federal unem-ployment taxes (FUTA). The IRS has specific rules,regulations and guidelines regarding the collectionand payment of these taxes. When contacting theIRS, ask for Publication 15, Circular E (Employer’sTax Guide) and Publication 15-A Employer’sSupplemental Tax Guide.

Federal Excise Taxes. These taxes are collectedfrom manufacturers and sellers of certain products.Several common taxes include environmental taxeson crude, petroleum products and certain chemi-cals; taxes on telephone communications and airtransportation; fuel taxes on gasoline, diesel andgasohol; and taxes on certain luxury items, alcohol,tobacco and guns. Ask the IRS for a complete listof excise taxes and specific information and litera-ture.

Tax identification number. Each businessrequires a tax identification number. This numbershould appear on all federal business tax returns.Instructions for acquiring a tax identificationnumber are given in Chapter 4 under the headingof “Additional Legal Paperwork.”

Chapter 8: Tax Responsibilities

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State

State Sales Tax. Most products and manyservices are subject to sales tax. Each business mustcollect the tax and file a sales tax return on aregular basis. To obtain a sales tax permit and filinginformation, contact:

Comptroller of Public AccountsLBJ State Office Building111 East 17th StreetAustin, Texas 78714

The comptroller also has offices in major citiesCall 800/ 252-5555 for more information.

State Franchise Tax. A state franchise tax appliesto all corporations with representation in Texas.The tax is calculated based on taxable capital assetsand taxable earned surplus, paying the greater ofthe two. To obtain information, contact the comp-troller of public accounts listed above.

Unemployment Tax. Most businesses in Texasare liable for state and federal unemployment taxbased on a formula that uses employee wages as akey factor. Start-up entrepreneurs should contactthe TWC for state reporting requirements and theInternal Revenue Service for federal information.

Local

All business owners, regardless of the company’slegal form, should contact their local CountyAppraisal District soon after beginning operations.Most businesses will be liable for taxes on bothpersonal and real property. The taxes are assessedby individual taxing units (county, city, schooldistrict, etc.) based on information maintained bythe appraisal district. If your county does not havean appraisal district, contact various local taxingunits.

Independent Certified Public AccountantsAssistance A certified public accountant can be agreat resource to the small business person. CPA’scan prepare all federal, state, and local tax returnsrequired by the government. CPA’s can also help

with bookkeeping services to ensure that you paythe lowest required income and payroll taxes.Businesses that have difficulties paying taxes canreceive expert, professional advice on how tobecome current on tax liabilities. Based on yourbusiness plan, CPA’s can estimate your futurepayroll and income taxes, as well as your personaltax liability. Taxes affect your cash flow significantlyand thus to truly control your business finances,tax planning is very important.

IRS Workshops

In addition to assistance from its local office, theIRS sponsors tax workshops to help theself-employed and the small business owner. Theworkshops explain how federal taxes relate toindividual businesses.

Topics include:

• an overview of the IRS and the kinds ofinformation and help it provides small busi-nesses.

• an orientation to business taxes and how toidentify the relationship between businessorganizations and federal taxes.

• a discussion of record keeping with anemphasis on the importance of tracingbusiness income and expenses.

• an in-depth review of the employer’s respon-sibility for withholding income, social secu-rity and federal unemployment taxes, and adiscussion of the appropriate tax returns.

• how to deposit federal taxes using Federal TaxDeposit Coupons.

• employer-employee relationship.

For more information regarding these work-shops, call or write the office below:

Houston8701 S. GessnerStop 6610H-ALHouston, Texas 77074Phone 281/721-7070or 800/829-3676

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The UH SBDC Network serves 32 counties in Southeast Texas. The UH SBDC Network is a program of the UH CT Bauer College ofBusiness and a resource partner of the US Small Business Administration. Funded in part through a cooperative agreement with the U.S.

Small Business Administration. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarilyreflect the views of the SBA. SBDC programs are nondiscriminatory and available to individuals with disabilities. The University of Houston

is an EEO/AA institution. Reasonable accommodations for persons with disabilities will be made if requested at least two weeks in advance.

Directory of Services1 University of Houston

Small BusinessDevelopment Center713/752-8400www.sbdc.uh.edu

SPECIALTY ASSISTANCEGovernment ProcurementProcurement Technical Assistance Center713/752-8477

SBDC Network2 Angelina College SBDC,

Lufkin936/633-5400www.angelina.edu/sbdc/cs

3 Blinn College SBDC, Brenham979/830-4137www.blinn.edu/sbdc

4 Brazos Valley SBDC, Bryan/College Station979/260-5222www.bvsbdc.org

5 Brazosport College SBDC,Lake Jackson979/230-3380www.brazosportcollegesbdc.com

6 Galveston County SBDC409/933-1414www.gcsbdc.com

7 Lamar University SBDC, Beaumont409/880-2367www.lamar.edu/sbdc

8 Lamar State College SBDC,Port Arthur409/984-6531www.portarthur.com/sbdc

9 Lee College SBDC, Baytown281/425-6309www.lee.edu/sbdc

10 University of Houston Coastal Plains SBDCMatagorda and Wharton Counties979/244-8466

11 Lone Star College System SBDC832/813-6673www.sbdc.lonestar.edu

12 Sam Houston State University SBDC, Huntsville936/294-3737www.shsu.edu/~sbd_www/

13 San Jacinto College SBDC,East Harris and NorthernBrazoria Counties281/485-5214www.sanjac.edu/sbdc

14 University of Houston Fort Bend SBDC 281/499-9787

15 Prairie View A&M UniversitySBDC 936/261-9242www.wallercountysbdc.org