How to Choose a Business to Start: A 5-Step Guide

Choosing a business to start can be both an exhilarating and frustrating experience—there are many options to choose from and paths to explore. To settle on an idea, examine your skills, experiences, and firsthand knowledge. Also, look at what businesses are trending. Before choosing, get a cost estimate required to start the business and ensure you can make it happen. By the end of this article, you’ll know the exact strategies to determine your ideal business to start.

Step 1: Brainstorm Business Ideas

When coming up with a business idea, it’s helpful to first look inward at your skills and experiences and what you can offer that has value. Additionally, starting a business in a trending industry or emerging field may provide an early boost in demand that leads to success. We’ll look at more trends and tips below.

Look at Your Skills, Knowledge & Experiences

Many business startups are inspired by the business owner’s existing skills and experiences. For example, before opening a marketing agency, someone may have spent over 20 years in the industry building relationships, creating marketing plans, and mastering marketing pitches. Or, someone could work in a trade such as plumbing for many years, learning the ins and outs of the industry, and how to handle customers before ever deciding to open their own business.

In both cases, the time spent developing skills, experience, and reputation would give the new entrepreneurs the foundation needed to successfully establish their own businesses. When assessing your own skill base and business potential, think:

• What type of business could you create with the knowledge you have?
• What product could you create?
• What service could you provide?

Follow the Trends

Think of a trend as a quickly growing customer need. For example, if solar panel installation costs are low, there could be a large demand from homeowners who want to save money on electricity costs.

Business trends also depend on the area you live in. For example, cannabis farms and retail stores have grown quickly in states that have legalized marijuana.

The best way to spot trends is to listen to new problems that family, friends, and you may have. Apart from problems, pay attention to new interests as well. For example, gamification in retail—which can manifest in ways such as using virtual or augmented reality in retail stores or mobile apps—is performing well as a means to create and maintain customer engagement.

According to IBISWorld, some examples of fast-growing or profitable industries in the US that are viable as small businesses include:

• Peer lending
• Tourism operators
• 3D printing and manufacturing
• Portfolio management and investment advice
• Software publishing / App development

“Scratch Your Own Itch”

If you are unsure how to decide what business to start, you can always try scratching your own itch. This is common lingo with startup businesses, and is when you create a solution for a problem you have experienced yourself. If you watch the show Shark Tank, you’ll see many people who create a product inspired by a problem they experienced. For example, Under The Weather Pods were created because its owner was tired of getting rained on during his kids’ soccer games.

Solving your own problem is a great way to test a product and improve it before attempting to sell it to the public. Also, consider this: The experience of solving your own problem makes for a compelling story of why you started the business. A compelling story helps attract investors and wholesalers (retail businesses willing to sell your product).

Consider Your Target Audience

Determining your target audience is another crucial step when thinking about a profitable business to start, and it’s a good move to do this even before choosing a product or service to provide. Before you start thinking in too much detail about what kinds of products or services you will be selling, consider the following questions about your future buyers:

• How many potential customers will I have?
• Where are these customers, both physically and online? How easy or difficult would it be to reach them?
• What are their shared pain points, interests, and values? What trends are they interested in? What is important (and not important) to them?
• What level of income do these potential customers have? What level of profit should I expect or aim for?

When thinking about your target customers, it’s best to be as specific as possible. Consider their age, gender, geographical location, interests, values, and spending power. Defining the traits of your ideal customer is part of creating a customer persona, which will help define the most suitable buyer types for your business and let you craft the most effective lead generation and marketing materials possible.

Make these questions and their answers your guide when crafting a product or service for your business. Remember: it’s better to find a specific need and then build something that satisfies it, rather than building something first and then hoping that someone out there will buy it.

Step 2: Browse Business Idea Lists

If you’re still unsure about what type of business to start, we’ve got several business idea lists that you can look through for inspiration.

• For general ideas, take a look at options for the 19 best business to start
• If your starting budget is tight, you can check out the best businesses to start with less than $500
• Get options for low-cost franchises
• If you’re jugging familial responsibilities and work, read this list of mompreneur business ideas
• Get inspiration from our list of home business ideas if you want to work remotely

Step 3: Decide Whether to Buy a Business or Franchise, or Start From Scratch

Once they know what type of business they want to start, aspiring business owners will often have to decide whether to purchase an existing business, buy into a franchise, or create a business from scratch. Each option has its advantages and disadvantages. When deciding, you’ll want to look at the cost, financial risk, and creative freedom within each option.

Buy an Existing Business

Buying a business that is already successful and profitable is typically the new business owner path with the least risk. You’re removing the majority of the risk that comes with starting a business from scratch. You’re also buying customers, business systems, trained employees, and even the business’ reputation. Reputation and brand awareness are important because they can make it much easier to do things like obtain financing, attract new customers, and retain existing ones.

However, no one can guarantee future success in business. Along with the good stuff, you’ll also be buying any problems or sticking points that the business may have under the surface. This could include outdated or sub-optimal processes and technology, staffing issues, and more. It can also be difficult to predict how staff, management, and customers will react to the new ownership. And of course, because buying an existing business is the option with the least risk, it is also often the most expensive path.

The cost to purchase an existing business depends on several factors. An easy (although overly simplified) method to estimate a business’s price is a multiple of earnings. For example, if a well-established small business earns $100,000 in profit a year, expect to pay between four to six times profits, which would be around $500,000.

Buy Into a Franchise

When you purchase a franchise, you’re buying an established brand, business systems, and a specific territory. Many quality franchises also offer hands-on training, ongoing mentorship, and inventory at a discount.

Franchises are typically more expensive than starting from scratch but may be less costly than purchasing an operating business. Before opening a franchise, you’ll have to pay a one-time fee and an ongoing royalty fee (typically at least 4% of profits).

In addition to the cost, a potential downside is the inability of franchise owners to operate the business “their own way.” For example, franchisees (the owners) may have to stick with the established brand, website, and software of the corporate franchise.

Start From Scratch

When you start a business from scratch, you get to make all the decisions: location, employees, branding, software, business systems, and when and how much to scale. The challenge is figuring out how to do all those things, plus creating a product or service that customers want and will pay for.

Typically, starting a business from scratch is more affordable than buying an existing business or buying into a franchise. Additionally, you can save money by doing tasks yourself, such as creating your logo and website.

The main downside of starting a business from scratch is the high risk of failure. Not only will you have to create the product or service, but you also have to navigate the complexities of how to sell it. You will have to learn new software, craft contracts, and determine sales scripts.

Unless you are already well-known in the industry in which you are starting your business, it will also be necessary to develop a good reputation, build professional relationships, and attract new customers who have no idea who you are. These are usually slow and effort-intensive processes. And as with any type of business venture, there is no way to eliminate risk and completely guarantee business success.

Step 4: Determine How Much Money You Need

A crucial step when deciding on a business to start is determining how much money it will take to open the business—and if you can afford it. Generally, businesses tend to be more expensive to start than people think. This cost range (and what you can afford) will naturally narrow down your business ideas. And this isn’t a bad thing; you want to avoid vagueness or wishful thinking, and focus on what’s realistically achievable.

There are many ambitious people who have little capital and want to open a business that will cost hundreds of thousands of dollars. While the big dream is great, it is unlikely to happen. Below, we’ll help you calculate a realistic estimate of how much you’ll need to get started.

Funding

The fact is, even if you have a high credit score, most banks won’t lend to startups minus a significant amount of collateral to offset the loan. For example, before lending, banks typically require the borrower to have the amount of the loan in an accessible liquid bank account, such as a CD (certificate of deposit). Ultimately, the bank wants to recover its funds if the business fails.

Since it’s unlikely you’ll be able to get a traditional bank loan, how can you get the money you need to start a new business? Typically, here are some of the top options available to fund your business idea:

• Outside investors (passive or active)
• Small Business Association (SBA) startup loans
• Credit cards
• Personal loan
• Crowdfunding
• ROBS 401(k) loan
• Equipment loans
• Savings or investment accounts
• Home equity loan or some other personal line of credit

Business Startup Costs

At this point in your starting a business journey, you need to get a rough estimate of your startup costs. This exercise will help you determine if it’s feasible to begin the type of business you’d like to start.

Learn about typical startup costs for a business and costs specific to your industry, and then calculate a rough estimate. To do this, you’ll want to estimate every single cost it will take to start your business. The total amount varies widely depending on many factors, such as:

• Legal entity registration: This is required to secure your personal assets from business liabilities. Depending on your state, expect to pay around $50 to over $2,000.
• LLC Taxes: Expect to pay between 10% and 37% of taxable income (income after expenses) for business taxes.
• Payment processing: The company you use to accept credit cards is your payment processor. Expect to pay around 3.5% of all payments in processing fees.
• Startup marketing: You may want someone to design a logo and develop branding, a website, and physical marketing materials. Budget around $1,000 for startup marketing costs. (See our article detailing dozens of small business marketing materials for inspiration.)
• Advertising: How will you let your target audience know about your new business? Even if you’re on a small budget, you’ll likely need to advertise your business via paid social ad channels like Google Ads, on social media channels like Facebook, with business signage, and more.
• Software: Depending on your type of business, software expenses can be significant. You’ll need software and other tools for crucial business functions like accounting, marketing, operations, website building, team management, and productivity.
• Equipment: Your equipment needs will vary widely depending on the type of business you plan to start. This includes any equipment needed to operate your company (such as lawn care equipment for a landscaping business) as well as equipment needed to run your company, like a computer, point-of-sale (POS) system tablet, and so on.
• Physical location needs: If your business has a physical location, you’ll likely need to invest in furnishings, equipment, and potentially even renovations before opening your new business. Plus you’ll need to outlay money for your lease or rent (or to purchase a building).
• Supplies: Startup business supplies could entail everything from pens and paper clips to shipping supplies and uniforms.
• Hiring and payroll: Expenses for recruiting, the cost of hiring an employee, payroll, benefits, and related costs could represent a significant startup cost for your business.
• Utilities: You’ll need to factor in expenses to connect utilities like water, sewer, electricity, natural gas, internet, and so on.
• Insurance: If you’re in a business that could cause harm to a customer or damage to a property, you’ll need insurance. General liability insurance protects bodily injury and property damage—expect to pay at least $40 a month.
• Legal fees: Ideally, you will have a lawyer assist with items like legal entity paperwork as well as any third-party agreements like rent or lease contracts, investor contracts, and so on.

Location Costs

Location costs are likely the most expensive variable cost (a cost that can change) in your business. You may believe you need to open a physical location for your business to succeed. Challenge that assumption. For some businesses, a customer-facing location is a must; for others, it’s only a preference.

Consider the options below to get your business up and running in an affordable location:

• Work from home: If possible, start your business from home. It will save you tens of thousands of dollars in overhead. Several businesses can be operated from home, such as pest control, counselor or therapist, marketing agency, photographer, or personal trainer. The exact costs will depend largely on what type of business you start; for example, offering a resume-writing service will cost much less than starting a pest control service, which requires investing in equipment.
• Start in a co-working location: This is a shared office, warehouse, or other working space. Expect to pay at least $200 per month for a dedicated desk, and around $400 per month for a small office.
• Open your own location: A third option is to open your own business location, which you can do by either renting/leasing, or buying. The space could be fully constructed and ready to use, or it could be a lot that needs development—for which you will need to budget building or construction costs. The costs of opening your own location can vary greatly, depending on factors like location and the amount of further construction or renovation required. Larger, more expensive cities will require more revenue to offset higher costs. So will high-overhead businesses such as restaurants and dental offices—insurance, equipment, and salaries increase expenses substantially, and that’s on top of the costs of renting or buying the location.

If your dream is to one day open a business with a physical location, consider getting creative to start small with lower overall costs. For example, if you’d like to one day open a restaurant, start a catering business first. This will lower your overhead cost, allow you to perfect your recipes, and build a loyal customer base before you financially commit to opening your own standalone restaurant.

If retail is more up your alley, try reselling new or secondhand items from your home. This will give you valuable practice with managing inventory, deliveries, and supplier relationships before you go all-in with opening your own retail store.

Step 5: Study Successful Businesses Near You

If you’re a first-time business owner, choose a business to start that already has a strong demand in your area. It’s not always wise to be the first business in a particular industry within your city, as the demand for your product or service is unknown.

Additionally, it’s helpful to start a business in a city with a government that provides support and resources for your type of business. If the government doesn’t support your industry, you may have an uphill climb. For example, two freelance engineering entrepreneurs I consulted with started a business renting out their engineering equipment to local STEM-related freelancers—a unique and creative idea.

Unfortunately, within a year, their business closed due to an overall lack of customer demand. The owners also believed that the city could have done more to promote their business to the STEM and science community in their city. They ended up moving to a city that had more customer demand and government support for tech.

The takeaway? Understand what industries your city residents and government support, which could be tech, logistics, banking, arts, or hospitality.

Here’s how to determine if your city is advantageous to the type of business you’d like to start:

Look to Local Resources

The U.S. Chamber of Commerce is an organization that supports local businesses. There are over 4,000 Chambers all over the US. Use resources at your local Chamber to learn more about what industries are succeeding and trending in your city.

More than 40 cities have newspapers dedicated to local business coverage called Business Journals. These newspapers produce a product called the Book of Lists that lists top businesses in various industries. If possible, purchase a Book of Lists to learn more about what types of businesses are thriving in your city.

If your city doesn’t have a Chamber of Commerce or Business Journal, seek other business networking groups where you can talk to other small business owners. Consider subscribing to the local paper and studying the business section for industry trends. Look for small business Facebook Groups in your city and other groups online that provide avenues for members to network and discuss business ideas.

Review Your State’s Advantages

State governments will often support specific industries with tax breaks and loan programs. For example, Georgia provides tax credits for entertainment-related businesses, child care facilities, and recent parole hires. Visit your state’s official business website or the Department of Economic Development website to learn more.

You’ll also want to learn other non-government-related advantages your state has for business. For example, you may find that the state you live in is advantageous for female entrepreneurs or cannabis-related businesses.

Review Your City’s Advantages

In addition to the state, review benefits your city may provide to certain types of businesses. For example, Invest Atlanta provides low-interest loans for creative businesses, resources for women entrepreneurs, and tax credits for Opportunity Zones (which are areas where local governments are trying to redevelop and revitalize).

In combination with government benefits, learn about your city’s natural advantages. Some cities have a strong tourism industry, whereas others thrive on their local port.

For example, if you’re knowledgeable and passionate about coffee, in one city it may be a good idea to open a coffee shop driven by tourist customers. Whereas in another city with strong international shipping, it may be wise to start a business roasting coffee beans to ship around the world.

Benefits of Starting Your Own Business

As you go through the journey of how to find the right business idea, you might begin wondering why you should bother with starting a business at all. The venture can be complicated, intimidating, and it’s not without risk. But becoming an entrepreneur can be massively rewarding, and not just financially. Starting (or even just attempting to start) a business can provide the following benefits:

1. Unlimited earning opportunity: As an employee, your earning power is fixed by your salary. While you can certainly earn more by working harder, you will also need to convince company management that you are worth the additional money. As an entrepreneur, the only people you need to impress are your customers. If you provide what they want, they will reward you directly with additional income (as well as improved reputation).
2. Disconnecting income from time and effort: Whether you are an employee with a fixed salary or a freelancer earning by the hour or by the number of tasks completed, your income is still limited by your employment contract or by the number of hours in a day. But if you can get a successful business up and running, your customer base will provide you with income that has no restraints or limitations on it. In the long-term best case scenario, you may even be able to build a business that runs smoothly and without tons of effort due to clever and efficient processes, while still providing value to many customers—and giving you back the financial rewards.
3. Learning and personal fulfillment: It’s been said that you learn more about business in one year of running your own than in five years of working for someone else. Whether true or not, there’s no doubt that a bona fide attempt at entrepreneurship will quickly teach you the nuts and bolts of branding, product development, marketing and advertising, creating and revising business processes and systems, handling customer feedback, managing people, and much more. You may even find that the journey becomes fulfilling in a more personal manner—that your business is your own way of making the world a better place.

Frequently Asked Questions (FAQs)

While choosing a business to start can seem like a complicated process with many factors to consider, you can avoid feeling overwhelmed by starting with the basic questions and answers below.

What kind of business should I start?

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What are the 5 steps in selecting a business idea?

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What other things should I consider when starting a business?

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Bottom Line

If you’ve gone through the above steps and are still having a difficult time choosing a business, that’s OK!  After doing some research and deep thinking, take a break for a few weeks. Take note of which business idea keeps popping up in your head. Write it down. Also, take note of which idea gets you excited and gives you energy. That may just be the right one.