This article is part of a larger series on Starting a Business.
Choosing a business to start can be both an exhilarating and frustrating time—there are so many options. 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.
Come Up With a Business Idea
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 trending business may provide a boost in demand that leads to early success.
Look at Your Skills, Knowledge & Experiences
As mentioned above, most businesses start with 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.
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 like a quickly growing customer need. For example, now that solar panel installation costs are low, there is a large demand by 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 are growing quickly in states that have legalized marijuana.
COVID-19 has flipped the economy on its head. New trends may arise that weren’t considered in early 2020. The best way to spot trends is to listen to new problems family, friends, and you may have. For example, both residential and commercial cleaning companies may see a spike in demand for deep disinfectant cleaning.
Scratch Your Own Itch
Scratching your own itch—common lingo with startup businesses—is when you solve a problem for yourself. If you watch the show Shark Tank, you’ll see many people who create a product that was 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.
Scratching your own itch is a great way to test a product and improve it before attempting to sell to the public. Ultimately, the public will let you know if your product is a solution they need by purchasing it.
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).
Browse Business Idea Lists
If you’re still unsure about what type of business to start, browse our business idea lists for inspiration:
- 12 Best Business To Start in 2020
- Best Businesses To Start With Less Than $500
- Mompreneur Business Ideas
- 20 Home Business Ideas
- Small Farm Business Ideas
- Low-cost Franchises
Additionally, you may want to browse “how-to start a business” guides to learn more about a specific business idea:
- Lawn care
- Personal training
- Food truck
- FedEx routes
- Clothing boutique
- Lifestyle blog
- Sell stock photography
- Coffee shop
- Online T-shirt business
- Food blog
Buy a Business, a Franchise, or Start From Scratch?
An important decision many aspiring business owners have to make is if they should purchase an existing business, get 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 a new business owner path with the least risk. And because it has the least risk, it is also the most expensive.
No one can guarantee future success in business. However, by purchasing an existing business, you’re also buying customers, business systems, and trained employees. You’re removing the majority of the risk that comes with starting a business from scratch.
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, and 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, which is typically around 4% of profits.
In addition to the cost, another downside I’ve witnessed 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. I’ve known several franchisees who were frustrated with the quality of their website, and clunky customer relationship management (CRM) software, but were unable to do anything about it.
Start From Scratch
When you start a business from scratch, you get to make all the decisions: location, employees, branding, software, and business systems. The challenge is figuring out how to do all those things, plus create 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), 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.
While there are less risky businesses than others—stable accounting industry vs unstable restaurant industry, there is no way to eliminate risk and guarantee business success completely.
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. This cost range will narrow down your business ideas. Businesses tend to be more expensive to start than people think.
As a business consultant, I’ve spoken with 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.
The fact is, even if you have a high credit score, a bank will not lend to a startup business owner. Before lending, the bank requires 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.
Another common mistake new entrepreneurs make is thinking they will find an angel investor to invest in their company. This financing option is certainly possible, especially if you’re well networked. However, an angel investor is likely looking to invest under $50,000 into a business—not hundreds of thousands, especially if it’s your first business.
If it’s likely you can’t get a traditional bank loan or find an angel investor, how do they start a new business? Typically, business owners tap into other funding options:
- Family and friends
- Credit cards
- Personal loan
- ROBS 401(k) loan
- Home equity loan or 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, costs specific to your industry, and 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, consider startup costs, such as:
- Legal entity registration: This is required to secure your personal assets from business liabilities. Depending on your state, expect to pay around $40 to over $500.
- LLC Taxes: Expect to pay around 20% 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.
- Marketing: You may want someone to design a logo and develop branding, plus a website and physical materials—budget around $1,000 for startup marketing costs.
- Software: Depending on your type of business, software expenses can be quite high—budget around $200 per month.
- 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 $40 a month.
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. I’ve met several businesses that operated from home, such as pest control, marriage therapist, marketing agency, hairstylist, and a personal trainer.
- Start in a Coworking Location: This is a shared office space with other entrepreneurs and remote workers. Expect to pay $299 for a dedicated desk to over $499 for a small office.
- Open Your Own Location: Plan to earn at least $100,000 in revenue per year for a low-overhead business in a mid-size city. Larger, more expensive cities will require more revenue. So will high overhead businesses such as restaurants and dental offices—rent, insurance, equipment, salaries increase expenses substantially.
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.
Study What Businesses Succeed 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 type of business in your city. 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 supports, 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.
Some 43 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 available, purchase a Book of Lists to learn more about what type 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 Meetup groups.
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.
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.