Home Business

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Creating an Exit Plan

Next in this section, describe specifically at what point it would be financially impractical to run the business. At what point would you say, “I’m not making enough money?” Or, at what point would you be making enough money, but not enough to justify the hassle, sacrifice, or hard work? For many people, money and

logistics will be tied together. In other words, perhaps at breaking even, you would not be willing to put up with as much sacrifice as you would if you were making six figures a year. These are the lines in the sand that provide your best dreams and worst nightmares. How long are you willing to work (or how long can you work) and not make enough to meet basic expenses? What if you cannot reach your financial goals? Would your business still be worth running? What if you met your financial goals - but never got a weekend free? n this section, you’ll determine your financial limits.

You might determine, for example, that you will have to close shop if you make less than $30,000 per year for two years. Also consider contingencies under which those limits might flex. For example, given the preceding scenario, could you continue to run your business if your children received scholarships paying part or all of their school expenses? Also in this section, consider at what point would it be financially or logistically impractical to run the business from your home.

To make this determination, ask yourself at what point you would consider moving to a separate location, outside your home. How many, and what type, of customers would justify a separate office, retail, or industrial space? You might decide to move the business outside your home if you have more than 30 customers (for example, the maximum you think you could handle without hiring at least one employee). This type of expansion is discussed later in the website.

Defining Your Financial Assumptions and Contingency Plans

First within this section, you must answer the question, “What assumptions have you made in order for your financial projections to work? What happens if those assumptions are incorrect?” Are you assuming that your spouse will continue to work at his job, where he can obtain sufficient health insurance? Then that assumption goes here. Along with that assumption, write a contingency plan. What if he changes jobs? How much extra would you need to pay for health insurance? (Granted, he might leave his job five years from now, but you should have some idea of the cost of any alternatives.) What happens if your rent is raised higher than you anticipate? What if your homeowners association raises its rates beyond the expected $10/month?

Defining Marketing and Logistics Assumptions and Contingency Plans

Next, answer the question, “What assumptions have you made in your marketing and logistics? What happens if those assumptions are incorrect?” If you find that you cannot use the space you set aside - say a lengthy construction project starts on that side of your home as soon as you set up an office - where else in your home would you place your business? If you believe five of your current clients will come with you when you leave your employer, what happens when only three of them actually do? What you need to do here is think of the obvious assumptions you are making and come up with a plan that addresses, “What if it isn’t like that, after all,” as outlined in these scenarios:

• You’re assuming that you will work out of an area in your home. What happens if construction, noise, or natural disaster strike? What if you had to sell?

• You’re assuming that you will have health insurance coverage for your family through your spouse or partner’s employer. What if your spouse or partner were laid off?

• You’re assuming that you can work and watch your children. What if you can’t do that? What if you need to work and they need to be at violin lessons - at the same time? List, one by one, all the assumptions you are making. This can be difficult - because the very nature of an assumption is that we just “assume” and don’t think about other options or disruptions to the plan. To be sure that you address all of your major assumptions, visualize a day in the future - your ideal business day.

What do you do, during that day, step by step? These are your assumptions. They are right there - from assuming that the time you get up will be 7 a.m. to assuming that the phone will be quiet until your project is finished to assuming that you can get your work done before the kids return home from school at 3 p.m. Yes, this is a little like taking your dream and looking at it through nightmare-focused lenses, but that is how you unearth assumptions and consider alternate solutions in the event that those assumptions are incorrect.

Planning the Financial of Your Business

• How much money do you need to start this business (Day 1)?

• How much money do you need, monthly, to operate the business?

• How much money do you need, monthly, to live on? Where will this money come from during times of little or no business (such as during startup or down times)? Will this come from savings, partner’s/spouse’s income, parttime job, or other source?

• How much money can you reasonably expect to make from the business initially? (Take the going rates from the Marketing section of your business plan and expand them here.) What variables exist in pricing? What is the maximum income you can generate?

• What can you reasonably expect to earn from the business during the first year? Second? Third? Fourth, Fifth? Years Six through Ten? Although you will “crunch numbers” in the next article, as you prepare information for this section of the business plan, think about where you want to be in 5, 10, and 20 years. Knowing what life you want to be living in the future can help you make decisions about what services you offer and how much you work today.

Describing Your Assumptions and “What Ifs”

This section of your business plan performs two separate tasks:

1. It clarifies what assumptions you have made.

2. It provides you with objective measurements for closure and expansion.

In this section of the plan, you’ll need to answer these questions:

• What assumptions have you made in order for your financial projections to work? What happens if those assumptions are incorrect?

• What assumptions have you made in your marketing and logistics? What happens if those assumptions are incorrect?

• At what point would it be impractical to run the business? At what point financially would you decide to throw in the towel - that is, how much money would you have lost (or risk losing), and for how long? If the business made money, would there be other factors that would make you consider closing or selling the business? (For example, your business is profitable, but will come under greatly increased regulation if you continue to operate it in to the next 3–5 years. Or your business is profitable, but requires you to be available weekends and evenings—something, perhaps, that you didn’t realize at the time you started the business.)

• At what point would it be impractical to run the business from your home? For instance, at what point would you need to hire so much additional help that you could no longer operate from home legitimately? At what point would you have to purchase so much additional equipment that working out of your home would be impractical?

Outlining Home Business Equipment Needs

In this section of the home business plan, list what equipment your business will need and whether you currently own or must purchase that equipment. Many home businesses require a computer, printer, fax machine, business phone line, and office supplies, as well as letterhead (including envelopes) and business cards. Your business might have other equipment needs, as well. Also in this section, describe the necessary supplies you’ll use in your business.

Imagine the complete cycle of meeting your ideal customer, convincing him to hire you, performing work for him, and being paid. What supplies do you need at each step? What about software? Beyond word processing and spreadsheets, you will probably need software to store and manage client contact information, invoices, and orders. You might also need special software to perform the services you offer, such as database, graphic design, and/or presentation software.

Defining Relationships with Outside Vendors Finally, within this section, answer the question, “What arrangements have been/need to be made with other businesses in order to provide the product(s) and/or service(s) offered by the business?”

Particularly if you offer “one-stop” shopping, you might need to subcontract with other businesses. For instance, if you are a writer and offer finished newsletters, you will need to work closely with a printer. Have you made that connection? Talk with any potential subcontractors and discuss how you will do business. Will you need to advance them a deposit when work is ordered, or will they bill for their services? Will you include the cost of their services on your invoice to the end client, or will they send a bill to the end customer separately? Come to a formal, written agreement, involving an attorney to finalize the contract.

Defining Your Customer Base

The second question in this section of the business plan asks “Who or what does the business provide these service(s)/product(s) to? Are there specific industries or geographic locations services are provided to, or are they offered to the public? Is the entity Business to Business, Business to Consumer, or both?” Using the final two questions from the previous section, as well as the description of services you wrote for this section, provide a detailed description of your ideal home business customer.

This doesn’t mean that you cannot have customers who don’t fit this description, but you should have some idea of your target market. You will probably have more than one target customer (or market segment), and it is important to provide details for each segment. For instance, as an attorney, you might provide services to individual clients as well as small businesses. Your individual clients might be people specifically concerned with estate planning, whereas your small business clients might have a need for succession planning (for example, who buys, operates, or inherits a business).

What arrangements have been/need to be made with other businesses in order to provide the product(s) and/or service(s) offered by the business? The following sections explain how to answer these questions.

Describing the Geographic Area and Allocated Space for your Work From Home Based Business

You must first answer the question, “Where is the business located? How much space is rented/allocated?” You’ve already stated that the business will be in your home, but here, you should describe your home’s location. What is your neighborhood like? Will clients be able to take public transportation (and will you)? Are coffee shops, restaurants, and other amenities nearby? Is there something you wish were close by, but isn’t? How does that affect your business? Next, describe where your office will be located within your home. Do you need a separate workshop space, too; if so, where is that? (Ideally, a workshop and office would be located right next to each other, but the layout of many homes would make this impractical.)

Describing What Need Your Business Fulfills

The final question in this section of the business plan asks, “What needs or wants of customers are being met?” (Give a brief overview of who you are serving and why.) The information you add here should flow directly from the information you offer to the previous question in this section. If your unique ability to perform graphics work and provide printing services distinguishes you, for example, your target customers might be people who want “one-stop shopping” and want to save time and money by using you for both services.

Describing What the Home Business Does or Provides

To answer the first question in the Business Overview section, list all the services your business will provide. Be specific. For example, if you are starting a bookkeeping business, you might be providing bookkeeping, tax preparation, audit assistance, and financial records organization services.

Offering more than one service provides your business with an advantage. You will draw more customers, and you can often cross sell services - originally gaining a customer because of one service and selling him others as your relationship grows. However, you will want to refrain from offering too many services. Aim for three to five separate services. Fewer than three, and customers are less likely to come to you. More than five, and prospective customers might not believe that you can do everything you say, or might feel that you do so many things because you do nothing well.

As an example, let’s say that you offer sales consulting. Now, if you also offer computer repair, writing, and graphic design, you will be sending a message to clients that you aren’t focused - these services don’t mesh well together, and there appears to be too many of them. In the preceding example, it would be wise to jettison the computer repair. You could then recast the writing, graphic design, and sales consulting as a “one-stop marketing shop,” or a sales-boosting business. The writing and design continue to be offered, but only for sales-related materials for your clients. This pulls your business in to a cohesive offering. Instead of four disparate, unfocused services, you are now offering one, cohesive, inclusive service - building credibility and attracting more clients.

This means that

• All partners are willing to disclose their current financial positions and ability to contribute to the partnership financially.

• All partners are willing to fully disclose the skills and experience they bring to the partnership, as well as any potential liability.

• All partners are willing to provide other partners with a credit report, background check, or other documentation supporting their viability to be involved in the business.

• All partners are willing to formalize who does what, when they do it, and why, in a partnership agreement. Why is this so important? Business partners generally all agree to pay the debts of the partnership. So, if one partner runs up debt and disappears, the remaining partner(s) is left repairing the financial situation and the reputation of the business. Having a partner is a great way to split the risk and the work, but it can be a headache if you don’t know the other partner(s) well.

A corporation is an entity that is completely separate from any person. In fact, corporations file their own taxes and have many rights and obligations, just as individuals do. Corporations offer some distance between you (an officer in the corporation) and the entity itself, which might be helpful when dealing with liability. (However, these rules have changed in response to scandal, and vary from state to state, so you will need to talk to an attorney to understand any benefits and limitations.) There are many types of corporations, and an attorney will be needed to advise you on the best corporation type for your business.

Some forms of corporation can be one person, so check the corporation laws in your state to determine if this is the best organization for you. As with partnerships, your city or county might restrict or forbid this type of business from operating from a private residence. There are also some hybrid forms of business, which are not truly and entirely like a typical partnership or standard corporation.

Those include

• A Limited Liability Company (LLC), which mixes the decreased direct liability of a partnership with tax advantages more common to a corporation.

• A Professional Corporation, again, mixing some aspects of a partnership and a corporation. This corporation type is usually available only to certain types of businesses, however, and often limited to high-risk occupations such as doctors, lawyers, and accountants.

• An S Corporation is a corporation that has formed a standard corporation (as described previously) but filed proper forms with the IRS to have the business’ profit taxed as if the business were a sole proprietorship. (Standard corporations are often also referred to as “C” corporations.) For more information on business structures and considerations, visit AllLaw.com. If you are uncertain which business entity is the right type for you and your business, check with an attorney. It is not unusual to start a business as a sole proprietorship and expand it to a partnership or corporation as the business grows, or as liability and other issues become more serious. Incorporating is an additional expense that, as a new business owner, you might not be able to justify until your income from the business can easily cover such costs.

Work At Home Business Form

You also must state whether your business will be a sole proprietorship, partnership, or corporation. A sole proprietorship is you, by yourself, owning and running the business. This is the simplest and most common form of business organization. Your income and

expenses from the business are reported as part of your federal tax return on Schedule C, and you don’t need to file incorporation papers to “form” your business. The simplicity of this form of business is a distinct advantage, but it offers some disadvantages, as well. The chief disadvantage is that liability flows directly to you. This means that a customer can sue you directly for failing to perform the services you agreed to provide. Your home and other assets could be at risk. You can mitigate this risk by purchasing liability insurance (or errors and omissions insurance). If you own few assets (and rent, rather than own, your home), the liability issues might not be as important.

The more assets you have, and the more people who know you have liability insurance, the more likely you are to be sued. The nature of your business is also a key factor. Are you offering services in which safety could be a factor, such as a building contractor who has to be sure that a staircase doesn’t fail? Are you offering services that could greatly impact someone’s life if done incorrectly, such as accounting or legal advice? What happens if you don’t perform as promised? The greater the potential fallout to the client, the more likely someone could be injured or killed, and the more likely someone could be financially ruined, the more likely you are to be sued. A partnership is a formal partnering of you with at least one other person. Forming a partnership generally requires an attorney. As a home business, you might not be allowed to form a partnership unless it is with your spouse or domestic partner (depending on regulations of home businesses in your area). But this could make a partnership the ideal business structure. If you and your significant other are going to share in the work and expenses anyway, this might be a way to formalize that agreement.

Forming a partnership with someone not living with you is a bit trickier. But this is the twenty-first century—the era of the virtual company. If this is someone you know you can trust, and zoning regulations allow it, there’s no reason why two people in different cities - or even different states or countries—can’t use this business form. (With more than one state or country, however, bear in mind that you might have to report income or file forms twice - once in each jurisdiction.) Whether your partner is in the next room or the next country, however, always consider such an arrangement carefully. Ask yourself whether you really know the person you are partnering with for this business. And no matter how well you think you know him or her, treat it as any other professional transaction.

We will tell you what this home based business form means in the next post!

Business Name

As your first task in this section, you need to state the business name. When naming your business, be sure to choose a name that does not conflict with an existing business. If your name is truly unique, consider making it a trademark. Visit the website of the Patent and Trademark Office, www.uspto.gov. A visit to this website will not only provide information about the trademark process, but also help you make a decision whether you need the help of a lawyer.

If you decide to hire a lawyer, contact your local bar association and ask for a referral to an intellectual property (IP) attorney. Whether you choose to trademark your business name or not, check business licenses filed with your local government, Fictitious Business Name statements filed with your local or state clerk’s offices, as well as phone directories and other public sources for existing businesses in your area. Avoid any name that might be confused with another business. In most instances, you will need to file a Fictitious Business Name Statement.

To verify the Fictitious Business Name requirements where you live, check with your city or county planning and development offices. In most cases, your city or county government will provide you with a consolidated checklist of all local requirements for a business. These checklists can be very helpful, and often provide additional information, such as how to do business with the city, county, or state.

Home Business Overview

The Business Overview section of your plan will include answers to these questions, as described in the subsections that follow:

• What does the business do or provide?

• Who or what does the business provide these service(s)/product(s) to? Are there specific industries or geographic locations that services are provided to, or are they offered to the public? Is the entity Business to Business (B2B), Business to Consumer (B2C), or both?